Not Ordinary Drones (NOD) , Inc., a lessor, leased a drone to Worldz Information Network, Ltd., [WIN], a lessee, on January 1, 2019. The following information relates to the leased asset and the lease agreement:

Fair value of leased drone $Undisclosed

Lease 10 years

Useful life 15 years

Payment Due January 1

Payment frequency Annual

Annual Instalments starting January 1, 2019 $33,000

Estimated residual value at end of the lease, [as stated in the problem] $23,600

Interest rate implicit in the lease [unknown to the lessee] 7%

Interest rate incremental to the lessee 8%

Ownership of drone reverts to lessor at end of lease term

Year end for both companies December 31

Amortization method Straight line

Accounting standards used - NOD ASPE

- WIN IFRS

REQUIRED: Select the one best answer to each of the questions listed below and input it in the computer.

Assume below that the residual value of the leased asset was not guaranteed.

1) assume that NOD classifies the lease as a capital lease. Determine the fair value of the drone leased.

a.

$330,000.

b.

$353,600.

c.

$495,000.

d.

$518,600.

e.

None of the above.

2)

assume that NOD classifies the lease as a capital lease. The company operates at a 20% gross profitability rate and sells the drones in the market at a price of $260,000 each. Further assume that the estimated residual value amounting to $23,600 was not guaranteed. Under these assumptions, the journal entry prepared by NOD to record the lease contract on January 1, 2019 would be

a.

DEBIT-Lease Receivable [$353,600]; DEBIT-Cost of Goods Sold [$196,003]; CREDIT-Sales Revenue [$248,003]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$93,600].

b.

DEBIT-Lease Receivable [$330,000]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$70,000].

c.

DEBIT-Lease Receivable [$260,000]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000].

d.

DEBIT-Lease Receivable [$353,500]; DEBIT-Cost of Goods Sold [$208,000]; CREDIT-Sales Revenue [$260,000]; CREDIT-Inventory [$208,000]; CREDIT-Unearned Interest Revenue [$93,600].

e.

None of the above.