Melodies and Riffs ltd. Is a company that manufactures premium electric guitars for music retailers. M&R recently entered into a lease agreement for manufacturing equipment. The lease agreement contains the following information:

• The lease term is for four years, with beginning of year payments starting May 1, 2021.
• At the inception of the lease, the equipment had fair market value of $350,000.
• Legal fees of $5000 were paid by M&R to its lawyers on May 1, 2021 for professional fees associated with setting up the lease.
• The lease is renewable for an additional two years at the option of the lessee. Annual payments for the first term are $64,000 and this includes $4000for the nonlease component of maintenance. Annual payment for the second term are $42,000 and this includes $2000 for the non-lease component of maintenance.
• Annual maintenance fees are paid on the same day as the lease payment and are recorded separately from the lease as a prepaid asset until later adjusted at yearend for the amount of benefits that have been used up
• The lease payments are close to market rate for the first term but for the second term, the rates are significantly lower than the market.
• At the end of the lease term, the asset will go back to the lessor. There is an unguaranteed residual value of $20,000 that the lessor hopes to recover. M&R has no obligation to pay any residual value deficiencies.
• Estimated useful life of the leased asset is 8 years. Economic life is also 8 years.
• The straightline depreciation method is used for the leased asset.
• M&R is a public company that uses IFRS and has a December 31 fiscal yearend
• M&R’s incremental borrowing rate is 10%. The implicit rate for the lessor is 8% and this is known by the lessee.

Required

1. Prepare the journal entries for the first year of the lease (May 1, 2021 and including any entries on May 1, 2022).
2. Prepare only the initial journal entry to records the ROU asset and lease liability on May 1, 2021 if there was now a bargain purchase option to purchase the asset at the end of the lease
3. What amounts relating to the lease liability will appear on M&R December 31, 2021 Statement of Financial Position (current and long-term)?

Answer rating: 100% (QA)

Answer depreciation Schedule for the aj Straight line depreciation Cost 216000 disp... View the full answer