Sandhill Corporation manufactures specialty equipment with an estimated economic life of 12 years and leases it to
Question:
Sandhill Corporation manufactures specialty equipment with an estimated economic life of 12 years and leases it to Provincial Airlines Corp. for a period of 10 years. Both Sandhill and Provincial Airlines follow ASPE. The equipment's normal selling price is $210,482 and its unguaranteed residual value at the end of the lease term is estimated to be $15,000. Provincial Airlines will make annual payments of $26,600 at the beginning of each year and pay for all maintenance and insurance. Sandhill incurred costs of $105,000 in manufacturing the equipment and $7,000 in negotiating and closing the lease. Sandhill has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 8%. Provincial Airlines Corp. has an incremental borrowing rate of 8%.
a. What classification will Provincial Airlines Corp. give to the lease?
The lease will be classified as
b. What difference, if any, would occur in the classification of the lease if Provincial were using IFRS 16?
The lease would be classified as
c. Using time value of money tables, a financial calculator, or Excel functions, calculate the amount of the initial obligation under capital leases.
Initial Obligations Under Leases
d. Create a 10-year lease amortization schedule for the lease obligation using Excel
e. Create all of the lessee's journal entries for the first year, assuming that the lease year and Provincial Airlines' fiscal year are the same.
f. Prepare the entries in part (f) again, assuming that the residual value of $15,000 was guaranteed by the lessee.
g. Prepare the entries in part (f) again, assuming a residual value at the end of the lease term of $45,000 and a purchase option of $15,000.
h. Prepare schedule highlighting the differences in the journal entries prepared in part (f) which assumes an unguaranteed residual value of $15,000 and part (h) which assumes a guaranteed residual value of $15,000.
Accounting Principles Part 3
ISBN: 978-1118306802
6th Canadian edition Volume 1
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Kinnear, Joan E. Barlow