Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process of preparing its financial statements for the year ended June 30, 2020.

 

The following leases were entered into:

Lease 1: On February 1, 2020, the company entered into a lease contract in respect of plant and machinery for a production line. The details are as follows:

 

12 quarterly rental payments	$ 11,000 (first payment on April 30, 2020)
Period of contract	3 years (from February 1, 2020)
Fair value of equipment (cost to FFL)	$200,000
Guaranteed residual value — end of lease term	$ 60,000
Estimated residual value — end of useful life	$ 20,000
Economic life	8 years
Implicit rate	12%

 

Lease 2: On April 1, 2020, the company entered into a lease contract in respect of a fleet of distribution vehicles. This lease involves the following payments:

 

Initial rental payment	$ 30,000 (due April 1, 2020)
10 quarterly rental payments	$    6,000 (first payment due on July 1, 2020)
Period of contract	3 years (from April 1, 2020)
Fair value of equipment (cost to FFL)	$190,000
Unguaranteed residual value — end of lease term	$120,000
Estimated residual value — end of useful life	$ 60,000
Economic life	6 years
Implicit rate	12%

 

FFL depreciates all its equipment on a straight-line basis.

 

Required:

 

1. Evaluate the leases and determine whether FFL (the lessor) should account for these leases as operating or capital leases.
2. Prepare the journal entries relating to these leases and the underlying equipment for the year ended June 30, 2020, from the perspective of FFL (the lessor). It is not necessary to record journal entries pertaining to the initial acquisition of the equipment.

Answer rating: 100% (QA)

A To be classified as capital lease any one of below conditions should be met transfer of ownership ... View the full answer