Reference no: EM132762274

Question - On January 1, 2020, Lavery Corp., which follows ASPE, leased equipment to Sandhill Ltd., which follows IFRS 16. Both Lavery and Sandhill have calendar year ends. The following information concerns this lease.

1. The term of the non-cancellable lease is six years, with no renewal option. The equipment reverts to the lessor at the termination of the lease, at which time it is expected to have a residual value (not guaranteed) of $6,600. Sandhill Ltd. depreciates all its equipment on a straight-line basis.

2. Equal rental payments are due on January 1 of each year, beginning in 2020.

3. The equipment's fair value on January 1, 2020, is $152,000 and its cost to Lavery is $111,000.

4. The equipment has an economic life of seven years.

5. Lavery set the annual rental to ensure a 9% rate of return. Sandhill's incremental borrowing rate is 10% and the lessor's implicit rate is unknown to the lessee.

6. Collectibility of lease payments is reasonably predictable and there are no important uncertainties about any unreimbursable costs that have not yet been incurred by the lessor.

Required -

a. Using time value of money tables, a financial calculator, or Excel spreadsheet functions, calculate the amount of the annual rental payment.

b. Draft all necessary journal entries and adjusting entries for Sandhill for 2020.

c. Draft all necessary journal entries and adjusting entries for Lavery for 2020.