It is now January $15,2025.$ You, CPA, were recently hired as an accounting manager for Excellent Print Shop Ltd $($EPS$).$ One of your staff has provided you with selected financial information and notes for your review to finalize the financial statement for year ended as December $31,2024$ prepared in accordance with accounting standard for private enterprise $($ASPE$).$ You tell the staff member that you will review the financial information and provide them with feedback regarding any accounting issues and potential adjustments.

Financial Information Note Provided by the Accounting Staff

During $2024,$ a long$-$term client of EPS, Urban Life, a local magazine publisher, agreed to trade the use of printing service provided by EPS for advertising in its magazine. The advertising ran in the spring of $2024$ and would have cost $$43,500.$ The magazine used the printing services of EPS. The total printing services would have been $$42,000$ in total. The transaction was not recorded in the financial statements.

EPS has the option of either buying or leasing a new specialized printing machine. EPS is leaning toward leasing rather than buying the machine since it would be very expensive to purchase and would require a loan from the bank. The company$$s debt to equity ratio is currently marginal and would be further eroded by any additional borrowed funds. In the beginning of $2024,$ after a lengthy negotiation, the following terms were agreed on and written into the lease agreement:

The lessor would manufacture and lease to EPS a unique printing equipment for specialized printing services.

The lease would be for a period od $12$ years.

The lease payments of $$150,000$ would be paid at the end of each year.

EPS would have the option to purchase the machine for $$850,000$ at the end of the lease term, which is equal to the expected fair market value at that time; otherwise, the machine would be returned to the lessor.

EPS also has the option to lease the machine for another eight years beyond the original lease period at $$150,000$ per year.

The rate that is implicit in the lease is $9\%.$

The new machine is expected to last $20$ years. Since it is a unique machine, the lessor has no other use for it if EPS does not either purchase it at the end of the lease or renew the lease. If EPS purchased the asset, it would have cost $$1\mathrm{.}9$ million.

Although it was purposefully omitted from the written lease agreement, there was an understanding that EPS would either renew the lease or exercise the purchase option.

Due to complexity, the accountant would like to know how to account for this transaction.

Instructions

Adopt the role of the company$$s accounting manager and discuss the financial reporting issues.

Note: Marks are only awarded to the analysis of relevant financial reporting issues.