iScream, Ltd., manufactures industrial refrigeration equipment using the latest technology. One of its products is the iEzBox, a digitally controlled industrial freezer that it produces at a cost of $195,100 and sells at $210,000 to distributors of vegetable and dairy products. The firm also leases out the same equipment to users on the following terms:

• Annual lease rental installments are $37,282.66 which are due at the beginning of each year and do not include any executory costs. The first installment is to be paid by the lessee upon the signing of the lease contract.
• Annual maintenance is $8,000 and annual property tax is $9,500. The lessee pays both at the end of each year.
• The economic life of the asset is ten years.
• The lease term is seven years.
• iScream has factored a residual value of only $10,000 in determining and charging the lease rental installment.
• The lessor’s 9% implicit rate is known to all lessees.
• iScream uses ASPE for maintaining its accounts. It depreciates (amortizes) similar machinery owned using the declining balance method which more closely approximates CCA (capital cost allowance) allowed for income tax purposes.

On January 1, 2017, iScream leased a new iEzBox to Beenz, Inc., on the terms described above. Beenz amortizes similar machinery owned using the straight-line method, has been using IFRS for maintaining its accounts, has no material uncertainties regarding future costs to be incurred under the lease and collectability is reasonably assured. It’s incremental borrowing rate is 12% .

Required:

1. Determine how iScream (lessor) would classify the lease and briefly state your reasons.
2. Prepare the journal entries required, assuming for this question that the residual value of the

equipment is unguaranteed, to record all the lease transactions in the books of the lessor on January 1, 2017.

3. What would the minimum lease installment be if the leased property was not guaranteed?
4. Prepare the journal entries in the books of the lessor, to record all the effects related to the lease on December 31, 2017.
5. Now assume for this question only that the lessor had some serious doubts about the certainty of the collection of the lease payments from the lessee in the future. Under these circumstances:

1. How would the lease be classified by the lessor?
2. Also prepare the journal entry that the lessee would make to record the payment of the first installment on January 1, 2017, assuming that the lease was to be classified as an operating lease.

For the following Questions (f) - (g), assume that Beenz does not consider the residual value to be a bargain purchase. Further, it also does not guarantee the residual value.

6. Determine how Beenz would classify the lease and briefly state your reasons.
7. Prepare the journal entry required to record just the lease transaction in the books of the lessee on January 1, 2017. Show your computations for determining the cost of the leased property to be recorded in Beenz’s books.
8. Given the assumption in [g] above, prepare the journal entries in Beenz’s books of accounts to record all the effects related to the lease on December 31, 2017.

For the following Questions (i) - (k), assume that Beenz does consider the residual value to be a bargain purchase and has decided to exercise this option.

1. Determine the cost of the leased property to be recorded in Beenz’s books.

10. What would be the amount of the depreciation which Beenz would record for 2017?
11. The lease contract would end on January 1, 2024. Prepare the journal entry required in the books of Beenz to record the settlement of the lease contract on this date.

12. Assume ONLY FOR THIS QUESTION that the residual value was not considered to be a bargain purchase and that the residual value was guaranteed by Beenz at a value of $10,000. What would be the amount of the cost of the leased property which Beenz would record in its books of accounts on January 1, 2017?

Answer rating: 100% (QA)

The journal entries for the lessor would be as follows January 1 2017 Lease Receivable 3728266 Prepaid Maintenance 800000 Prepaid Property Taxes 95000... View the full answer