Reference no: EM133015636

Question 1 - 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 -

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

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

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.

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

Question 2 - On January 31, 2020, Copperlink Incorporated issued 9% bonds with a face amount of $40,000,000. The bonds pay interest on July 31 and January 31 and mature on January 31, 2026. On the issue date, the market yield for bonds with a similar risk and maturity was 10%. On March 31, 2022, the company purchased $10,000,000 of the bonds in the market and retired the bonds. The market yield appropriate to the bonds was 12% on that date.

Required -

a) Prepare journal entries to record the issue of the bonds and the recording of interest expense for 2020.

b) Prepare journal entries to record the purchase and retirement of the bonds on March 31, 2022.

c) What is the carrying value of the reminding bonds payable on July 31, 2022?