Reference no: EM133041452

Question - Oriole 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 Oriole 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 $18,000. Provincial Airlines will make annual payments of $25,100 at the beginning of each year and pay for all maintenance and insurance. Oriole incurred costs of $105,000 in manufacturing the equipment and $7,000 in negotiating and closing the lease. Oriole 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?

b) What difference, if any, would occur in the classification of the lease if Provincial were using IFRS 16?

c) Using time value of money tables, a financial calculator, or Excel functions, calculate the amount of the initial obligation under capital leases.

d) Prepare a 10-year lease amortization schedule for the lease obligation using Excel.

e) Prepare 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 (e) again, assuming that the residual value of $18,000 was guaranteed by the lessee.

g) Prepare the entries in part (e) again, assuming a residual value at the end of the lease term of $45,000 and a purchase option of $18,000.

h) Prepare a schedule highlighting the differences in the journal entries prepared in part (e) which assumes an unguaranteed residual value of $18,000 and part (g) which assumes a guaranteed residual value of $18,000.