On September 1, 2017, Wong Corporation, which uses ASPE, signed a five-year, non-cancellable lease for a piece of equipment. The terms of the lease called for Wong to make annual payments of $13,668 at the beginning of each lease year, starting September 1, 2017. The equipment has an estimated useful life of six years and a $9,000 unguaranteed residual value. The equipment reverts back to the lessor at the end of the lease term. Wong uses the straight-line method of depreciation for all of its plant assets, has a calendar year end, prepares adjusting journal entries at the end of the fiscal year, and does not use reversing entries. Wong's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown.
Instructions
(a) Using time value of money tables, a financial calculator, or Excel functions, calculate the present value of the minimum lease payments for the lessee.
(b) Explain why this is a capital lease to Wong.
(c) Prepare all necessary journal entries for Wong for this lease, including any year-end adjusting entries through September 1, 2018.
(d) Would this also be a capital lease if Wong reported under IAS 17?
(e) Prepare all necessary journal entries for Wong for this lease, including any year-end adjusting entries through September 1, 2018, assuming Wong followed IAS 17.