Reference no: EM132669697

Pina Company leased an asset from Colada Corporation on July 1, 2020. The following information is available concerning the lease:

Lease term                                                   6 years
Annual payments                                             $10,085
Date of first payment                                  July 1, 2020
Estimated residual value at end of lease term       $5,000
Estimated residual value of end of useful life              Nil
Estimated useful life of asset                               10 years
Fair value of asset at July 1, 2020                         $53,502
Rate implicit in lease                                               8%
Pina's incremental borrowing rate                            10%

Pina knows all of the values given above. There is no uncertainty as to the collectability of the lease payments and no unforeseen costs are associated with the lease. The residual value at the end of the lease term is unguaranteed and there is no bargain purchase option. Both companies follow IFRS.

Required:

Problem a) What kind of lease is this to Colada Corp?

Problem b) Prepare all journal entries for Colada Corporation for 2020 and 2021.

Problem c) Calculate the amount of the right-of-use asset and prepare the entries for Pina Company on July 1, 2020 and December 31, 2020.

Problem d) Calculate the annual payment required to earn an 8% return for Colada if the residual value was guaranteed