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Calculate the lease liability and ROU Asset

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Reference no: EM132617743

Question - On September 1, 2019, Bugsy Corporation negotiated a lease for new machinery. The machinery has a fair value of $600,000 and an expected useful life of 8 years. The lease term is 3 years and requires an annual lease payment of $106,700, including maintenance, payable at the beginning of each lease year. Based on relative stand-alone prices, the lease component is $104,300 and the non-lease component for maintenance is $2,400.At the end of the three years, Bugsy has the option to renew the lease for two more years, after which the machinery returns to the lessor. The annual lease payment for the renewal term is $84,700 per year including $1,800 for maintenance costs based on relative stand-alone prices. Bugsy plans to take advantage of this renewal option, as the rental cost will be significantly less than the anticipated market rate. Bugsy's incremental borrowing rate is 4%, and the lessor's implicit interest rate is unknown. Bugsy follows IFRS, has a December 31 year-end and depreciates its machinery straight line with partial year's depreciation.

Required -

1. Calculate the lease liability and ROU Asset. Show your calculations and round your answer to the nearest dollar.

2. Show how all amounts relating to the lease will appear on the statement of financial position as of December 31, 2019.Segregate the debt between its current and long-term portions. Show all calculations. Round to the nearest dollar.

3. Assume that Bugsy followed ASPE instead. Identify and explain how Bugsy would classify this lease.

Reference no: EM132617743

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