Oakland Inc. signs a contract with Ashton Ltd. on January 1, 2021 to lease equipment to Ashton.
Question:
Oakland Inc. signs a contract with Ashton Ltd. on January 1, 2021 to lease equipment to Ashton. The following information relates to the agreement.
• The term of the non-cancellable lease is five years, with no renewal option.
• The equipment has an estimated economic life of seven years.
• The fair value of the equipment on January 1, 2021 is $500,000.
• The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $100,000, which is not guaranteed.
• Ashton Limited assumes direct responsibility for all executory costs, which include the following annual amounts: $900 to Rocky Mountain Insurance Ltd. for insurance and $1,600 to James Township for property taxes.
• The agreement requires equal annual rental payments from Ashton to Oakland beginning on January 1, 2021.
• The lessee's incremental borrowing rate is 10%.
• The lessor's implicit rate is 8% and is not known to the lessee.
• Ashton Limited uses the straight-line depreciation method for all equipment
• Round all amounts to the nearest dollar.
Instructions
Assume lessee Ashton follows IFRS, what kind of lease is it for Ashton? Why?
Expert Answer:
This is an operating lease for Ashton The equipment will revert to the lessor at ... View the full answer
