Fargo Ltd., a private corporation adhering to ASPE, enters into a non-cancellable lease agreement on July 1, 2021, to lease equipment from Wells 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 $ 142,307 are due on June 30 of each year, with the first payment due June 30, 2022.
2. Included in each lease payment are maintenance fees of $15,500.
3. The fair value of the equipment on July 1, 2021, is $ 420,000. The equipment has an economic life of 6 years with no residual value and reverts back to the lessor at the end of the lease term.
4. Fargo depreciates similar equipment it owns on a double declining-balance basis.
5. Fargo’s incremental borrowing rate is 10%. The lessee is aware that the lessor used an implicit rate of 8% in calculating the lease payments.
6. Both companies have a December 31 year-end.

Instructions:

a)Calculate the PV of the future lease payments.

b)Using the ASPE criteria, explain what type of lease this is (i.e. capital or operating). Evaluate ALL of the criteria (there are three) based on the information provided above. structure your response in this way to be eligible for full marks:

• Criteria (this is a copy/paste)
• Indicate whether the criteria are met or not met
• Using information from the above question, explain why it is met or not met.

Once you have completed the evaluation, provide your conclusion as to the treatment (Capital or operating).

c) Using the information you have prepared in parts a and b, prepare the journal entries on Fargo’s books that relate to the lease agreement for the following dates. Show all calculated amounts with two decimal places. Include an amortization schedule as part of your support.

• July 1, 2021
• December 31, 2021 (HINT – you will have to prorate)
• June 30, 2022

Answer rating: 100% (QA)

a 4200001101401142307 b Criteria 1 The term of the lease is for substantially all of the economic li... View the full answer