Reference no: EM132587525

Question - HIJ4 Limited (a publicly traded company) is looking to invest in vehicles to deliver meals to schools as a part of their community outreach program to help with vulnerable populations. On January 1, 2020, after getting quotes in the market they opted to use LeaseCo (a publicly traded company) and entered into an agreement to lease a standard model delivery van for the next 3 years. HIJ4 will guarantee that when the van is returned on January 1, 2023 that it will have a residual value of $3,100 and would provide another 2 years of life to the next owner. The lease was set to provide an agreed upon return for LeaseCo of 8% (the assumed incremental borrowing rate). Given that this lease was for a charitable cause, LeaseCo set the lease payments based on the carrying value of the van at $21,000. Annual executory costs were set at $10 per month to cover basic maintenance and storage provided by LeaseCo.

Additional Information:

- Both companies use straight line depreciation for assets

- Executory costs are guaranteed even if LeaseCo sees an increase in materials and labour

- Collection is reasonably assumed through the life of the lease and the first lease payment is due January 1, 2020. There will be 3 payments in total made via e-transfer.

- LeaseCo is not responsible for any costs beyond maintenance and storage

- Both companies have a December 31st Year End

1. Prepare Journal Entries on the following dates for both parties:

- January 1, 2020

- December 31, 2020

- January 1, 2021

2. Discuss the return on January 1, 2023 (when the vehicle is returned) using hypothetical numbers to prepare journal entries.

3. Discuss the nature of leasing and how IFRS and ASPE would differ on this treatment of the lease.