Simulation (20 minutes) Popular Props Ltd. (PPL) is a privately owned business that provides costume pieces, set design, and other props to the film industry in Vancouver. Given significant growth over the past three years, the company identified a need for additional space to store its props between filming contracts. As a result, PPL entered into an agreement with Storage-4-U Inc. for additional warehouse space starting on January 1, 2021. PPL follows ASPE for reporting purposes. The following documents are attached: Appendix I: Email from the PPL chief financial officer Appendix II: Excerpts from agreement with Storage-4-U Complete the tasks in the Excel Task file. Appendix I: Email from the PPL chief financial officer Subject: Storage-4-U Agreement : : CPA. PPL FROM: Chief Financial Officer. PPL , I have provided excerpts from the new agreement with Storage-4-U for the analysis of the appropriate accounting treatment (Appendix II). I also reached out to a building appraiser regarding the warehouse space to obtain additional information. They informed me that the fair value of the warehouse is currently estimated at $1,575,000 and that the expected value of the warehouse on December 31, 2030, is $130,000. They also noted that a warehouse of this style and age is expected to have 15 years of operation before significant repairs and maintenance would be required. I also spoke with our bank and confirmed that our borrowing rate remains at 6%. Regards, Chief Financial Officer, PPL Appendix II: Excerpts from agreement with Storage-4-U AGREEMENT WITH STORAGE-4-U THIS LEASE AGREEMENT is made effective as of the 1st day of January 2021 between: Storage-4-U Inc. (the "lessor") and Popular Props Ltd. (the "lessee") LEASE TERM The term of the lease will be 10 years from the effective date of this agreement. LEASE PAYMENTS Monthly lease payments will be made in the amount of $16,000, with payments due on the 1" day of each calendar month. The first payment is due on January 1, 2021, at the commencement of the lease. PURCHASE OPTION If, at the termination date of this lease agreement, the lessee wishes to purchase the leased warehouse, the lessee may do so at a price of $135,000. 4. Task 1 5 Using the information provided in Appendixes I and II, analyze the classification of the Storage-4-U lease using the criteria provided in the table below. 6 7 8 Instructions: In Column B, indicate whether each criterion in Column A is met by selecting "Yes" or "No" from the drop-down list. 10 In Column C, select the best rationale from the drop-down list to support your conclusion in Column B. 12 13 14 A B Criterion met? Rationale 15 16 1 Handbook guidance From the point of view of a lessee, a lease normally transfers substantially all of the benefits and risks of 2 ownership to the lessee when, at the inception of the lease, one or more of the following conditions are present: (a) There is reasonable assurance that the lessee will obtain ownership of the leased property by the end of the lease term. (b) The lease term is of such a duration that the lessee will receive substantially all of the economic benefits expected 4 to be derived from the use of the leased property over its life span. 17 18 (c) The lessor is assured of recovering the investment in the leased property 5 and of earning a return on the investment as a result of the lease agreement 19 C3 drop-down options The lease term is more than 90% of the remaining useful life of the warehouse. The lease term is less than 90% of the remaining useful life of the warehouse. The lease agreement includes a bargain purchase option. The lease agreement includes a transfer of ownership The lease agreement does not include a transfer of ownership to the lessee or a bargain purchase option. C4 drop-down options The lease term is more than 90% of the remaining useful life of the warehouse. The lease term is more than 75% of the remaining useful life of the warehouse. The lease term is less than 75% of the remaining useful life of the warehouse. The lease term is less than 90% of the remaining useful life of the warehouse. The lease agreement includes a transfer of ownership The lease agreement does not include a transfer of ownership. C5 drop-down options The lease term is more than 90% of the remaining useful life of the warehouse. The lease term is less than 90% of the remaining useful life of the warehouse. The present value of the minimum lease payments exceeds 90% of the fair value of the leased warehouse. The present value of the minimum lease payments exceeds 75% of the fair value of the warehouse. The present value of the minimum lease payments does not exceed 75% of the fair value of the warehouse. The present value of the minimum lease payments does not exceed 90% of the fair value of the warehouse