On January 1, Year 1, Dufferin Corp. enters into a 10-year non-cancellable contract to lease equipment from
Question:
On January 1, Year 1, Dufferin Corp. enters into a 10-year non-cancellable contract to lease equipment from Pine Ltd. The equipment has an estimated useful life of 12 years and a fair value of $90,000. The borrowing rate on the lease is 6%. Dufferin uses the straight-line method to depreciate assets. The lease contains the following provisions:
Semi-annual lease payments of $5,800 (the payments include $300 for insurance), payable on January 1 and July 1 of each year.
A guarantee by Dufferin Corp. that Pine Ltd. will realize $5,000 from selling the asset at the expiration of the lease.
Both companies use IFRS.
Instructions
Calculate the present value of the minimum lease payments over the life of the lease. Round to the nearest dollar.
What kind of lease is this to Dufferin Corp.? Why?
Provide a lease amortization schedule for the full lease. You should prepare your schedule using Excel and copy it into your Word document. The lease amortization schedule provides you an opportunity to check that your present value calculation is correct.
Prepare the journal entries for Dufferin, the lesee, for the first year of the lease.