Pierce Inc. owns a building in downtown Halifax. Pierce enters into an agreement with Mattenay Corporation whereby
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Pierce Inc. owns a building in downtown Halifax. Pierce enters into an agreement with Mattenay Corporation whereby Mattenay sells the building—but not the land on which it sits—to Mattenay and simultaneously leases it back. The details are as follows: • The original cost of the building was $12,200,000. The accumulated depreciation is $5,900,000. • The fair value of the building is $7,860,000 and represents the amount that Mattenay agrees to pay to Pierce. • Pierce agrees to lease the building back from Mattenay for 15 years. The building’s estimated useful life is 20 years. • The lease terms are as follows: - The lease term commences 1 May 20X4. - Annual lease payment due at the beginning of the period: 644,000. - There is no guaranteed residual value. - Pierce will pay the building’s operating, maintenance insurance costs, and property taxes. • Pierce’s incremental borrowing rate is 8%; Mattenay’s rate implicit in the lease is unknown to Pierce. • Pierce uses straight-line depreciation for its buildings. • Pierce has a 31 December year-end.
Required: 1. Determine whether the lease should be classified as either capital or operating under ASPE. Include an evaluation of all guidelines. 2. Record all journal entries for the 20X4 fiscal year.
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Requirement 1 Is it likely that the lessee will obtain ownership of the leased property at the end o...View the full answer
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A journal entry is an act of keeping or making records of any transactions either economic or non-economic. Transactions are listed in an accounting journal that shows a company\'s debit and credit balances. The journal entry can consist of several recordings, each of which is either a debit or a credit