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Question - Lessee accounting - under IFRS 16
On January 1, 2017, Shrek Inc. enters into a seven-year non-cancellable lease with Fiona Ltd. For machinery having an estimated useful life of nine years and a fair value of $4,300,000. Fiona's implicit rate is 6%. Shrek uses the straight-line depreciation method to depreciate assets. Shrek will make annual lease payments on January 1 of each year. The lease includes a guarantee by Shrek Inc. that Fiona Ltd. will realize $100,000 from selling the asset at the expiration of the lease. Both companies adhere to IFRS 16.
Instructions -
a) Calculate the lease payment Fiona Ltd. will charge Shrek (assuming no mark-up of the machinery from fair value). Round to the nearest dollar.
b) Calculate the present value of the lease payments. Round to the nearest dollar.
c) What kind of lease is this to Shrek Inc.? Why?
d) Present the journal entries that Shrek Inc. would record during the first year of the lease. Round to the nearest dollar.
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