On 1 January 2020 Click acquired an asset at its fair value and immediately leased it out to Network for 4 years under the following lease terms:

Annual payment $40000 at the beginning of lease contract

Residual value of asset as guaranteed by the lessee $15000

Fair value of the asset $151958

Interest rate implicit in the lease 10%

Direct cost incurred by the lessor at the start of the lease $1000

Click’s policy for similar items of property, plant and equipment is to depreciate them at 40% per annum on a declining balance method.

Requirements:

a) What type of lease is this to Network? Why? 

b) Calculate present value of the minimum lease payment for Network. 

c) Prepare necessary journal entries on the books of Network on January 1, 2020

d) Prepare necessary adjusting entries to record interest expense on 31 December, 2020 

e) Prepare necessary adjusting entries to record depreciation expense on the books of Network on 31 December 2020 

f) Prepare a lease amortization schedule

Answer rating: 100% (QA)

a Answer It is a finance lease for Network According to IFRS on lease there are 5 criteria and if any one of them is satisfied the lessee should classify the lease as a finance lease On of the criteri... View the full answer