Castle Leasing Corporation, which uses IFRS, signs a lease agreement on January 1, 2023, to lease electronic equipment to Wai Corporation, which also uses IFRS. The term of the non-cancellable lease is two years and payments are required at the end of each year. The following information relates to this agreement.

1. Wai has the option to purchase the equipment for $13,000 on the termination of the lease, and this option is reasonably certain to be exercised.

2. The equipment has a cost and fair value of $135,000 to Castle Leasing. The useful economic life is two years, with a residual value of $13,000.

3. Wai is required to pay $5,000 each year to the lessor for insurance costs.

4. Castle Leasing wants to earn a return of 10% on its investment.

5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs that have not yet been incurred by the lessor.

Instructions

a. Using (1) time value of money tables, (2) a financial calculator, or (3) Excel functions, calculate the lease payment that Castle Leasing would require from Wai. Round all amounts to the nearest dollar.

b. What classification will Wai give to the lease? What classification will be given to the lease by Castle Leasing?

c. What classification would be adopted by Wai and Castle Leasing if they had both been using ASPE?

d. Prepare a lease amortization schedule for Castle Leasing for the term of the lease. Round to the nearest dollar.

e. Prepare the journal entries on Castle Leasing’s books to reflect the payments received under the lease and to recognize income for the years 2023 and 2024.

f. Assuming that Wai exercises its option to purchase the equipment on December 31, 2024, prepare the journal entry to reflect the sale on Castle Leasing’s books.

g. What amount would Wai capitalize and recognize as a lease liability and corresponding right-of- use asset on signing the lease? Explain.