Carnation Company enters into a non-cancellable capital lease agreement on January 1, 2020, to lease equipment from Zinnia Ltd. The following data are relevant to the lease agreement:

1.    The term of the lease is 4 years, with no renewal option. Payments of $17,333 are due at the beginning of each year, with the first one due January 1, 2020.

2.    The payments cover the fair value of the equipment.

3.    The equipment has an economic life of 7 years with no residual value. Carnation depreciates similar equipment it owns on the straight-line basis.

4.    At the end of the lease, Carnation has the option of buying the equipment at the bargain price of $14,000. It is very likely and expected that Carnation will take advantage of this deal.

5.    The lessee is aware that Zinnia, the lessor, used an implicit rate of 10% in calculating the lease payments. Carnation's incremental borrowing rate is 12%.

6.    The collectability of the lease payments is reasonably predictable and there are no important uncertainties about costs that have not yet been incurred by the lessor.

Instructions

CHOICE: In this question, you were not told if Carnation follows ASPE or IFRS. Choose which one and then answer the question accordingly.   

Answer rating: 100% (QA)

ANSWER ATTACHED IMAGE Requirement a Since lessor fixes the annual rental payments the implicit rate ... View the full answer