Three different lease transactions are presented below for Manitoba Enterprises. Assume that all lease transactions start on January 1, 2021. Manitoba does not receive title to the properties, either during the lease term or at the end of it. The yearly rental for each of the leases is paid on January 1 starting on January 1, 2021. Manitoba Enterprises prepares its financial statements using ASPE.

Instructions

a. Which of the above leases are operating leases and which are capital leases? Explain.

b. How should the lease transaction for each of the above assets be recorded on January 1, 2021?

c. Describe how the lease transaction would be reported on the 2021 income statement and balance sheet for each of the above assets.

Taking It Further

For each of the leases, prepare any required adjusting journal entries on December 31, 2021. Assume that Manitoba Enterprises would pay 8% interest if it borrowed cash and purchased the asset instead of leasing it.

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Manufacturing Equipment 5 years 15 years $14,000 Vehicles Lease term Estimated economic life Yearly rental payment Fair market value of leased asset Present value of lease rental payments Office Equipment 3 years 6 years $ 3,900 6 years $14,981 7 years $98,000 $5,000 $74,800 $17,500 $ 9,500