Use the information for Escapee plc from BE21.18. Assume the same facts, except Escapee guarantees a residual
Question:
Use the information for Escapee plc from BE21.18. Assume the same facts, except Escapee guarantees a residual value of £9,000 at the end of the lease term, which equals the expected residual value of the machinery.
(a) Does this change your answer from BE21.17?
(b) Does your answer change if the expected residual value at the end of the lease term is £5,000 and Escapee guarantees a residual of £9,000?
BE21.17
Rodgers Corporation agrees on January 1, 2022, to lease equipment from Packers, Inc. for 3 years. The lease calls for annual lease payments of $12,000 at the beginning of each year. The lease does not transfer ownership or contain a bargain purchase option, and it is not a specialized asset. In addition, the economic life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare Rodgers’ journal entries on January 1, 2022 (commencement of the operating lease), and on December 31, 2022. Assume the implicit rate used by the lessor is 8%, which is known to Rodgers.
BE21.18
On December 31, 2021, Escapee plc leased machinery from Terminator Group for an agreed-upon lease term of 3 years. Escapee agreed to make annual lease payments of £17,000, beginning on December 31, 2021. The expected residual value of the machinery at the end of the lease term is £9,000, though Escapee does not guarantee any residual value to Terminator. What amount will Escapee record as its lease liability on December 31, 2021, if its incremental borrowing rate is 6% and the implicit rate of the lease is unknown?
Step by Step Answer:
Intermediate Accounting IFRS
ISBN: 9781119607519
4th Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield