Reference no: EM132624548
Question - On January 1, 2020, Dufferin Corp. enters into a 10-year non-cancellable lease with Pine Ltd. to lease equipment with an estimated useful life of 11 years and a fair value of $6,000,000. The borrowing rate on the lease is 8%. Dufferin uses the straight-line method to depreciate assets. The lease contains the following provisions:
1. Semi-annual lease payments of $438,000 (the payments include $38,000 for property taxes), payable on January 1 and July 1 of each year.
2. A guarantee by Dufferin Corp. that Pine Ltd. will realize $200,000 from selling the asset at the expiration of the lease.
Both companies adhere to IFRS.
Instructions -
1. Calculate the present value of the minimum lease payments over the life of the lease. Round to the nearest dollar.
2. What kind of lease is this to Dufferin Corp.? Why?
3. Provide a lease amortization schedule for the full lease. You should write schedule using Excel and copy it into your Word document. The lease amortization schedule provides you an opportunity to check that your present value calculation is correct.
4. Prepare the journal entries for Dufferin for the first year of the lease.
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