Royal Leasing Company (RLC) (which adopts IFRS) leased a machine under contract to Superior Manufacturing Inc. (SMI) (which adopts ASPE). Both companies have the same year ending on December 31. The following information pertains to the machine and lease contract and is known by both parties.

LEASED MACHINE:

Inception of lease                                           May 1, 2019

First annual payment due                               May 1, 2019

Purchase option price at end of lease             $1,000

Lease term                                                      6 years

Economic life of leased equipment                10 years

Lessor's cost                                                  $16,250

Fair market value of asset at May 1, 2019     $22,500

Lessor's implicit rate                                      11%

Lessee's incremental borrowing rate               9%

Fair market value of machine at end of lease $16,000

 

Additional information:

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. Depreciation method is straight-line for all machines.

REQUIRED: (Round all numbers to the nearest dollar)

1. Calculate the annual lease payments under the lease contract.

2. Prepare the journal entries (if any) for both the lessor and the lessee on May 1, 2019 for the lease contract.

3. Prepare all the 2020 year-end entries (December 31) for both the lessor and the lessee for the lease contract.

Answer rating: 100% (QA)

To calculate the annual lease payments we need to use the present value of an annuity formula which is Annual lease payment Present value of lease payments Present value of an annuity factor First let... View the full answer