Reference no: EM133434301

Question: The machinery that makes the microwave oven has been in use for 20 years and is due for replacement. QEM has the option of buying the machine or leasing it. Currently, QEM is leaning toward leasing the machine since it is expensive to buy and funds would have to be borrowed from the bank. After much negotiation with the leasing company, the following terms were agreed upon and written into the lease agreement.

• Porter Limited would manufacture and lease to QEM a unique machine for making the barbeque equipment.
• The lease would be for a period of 12 years.
• The lease payments of $150,000 would be paid at the end of each year.
• QEM would have the option to purchase the machine for $850,000 at the end of the lease term, which is equal to the expected fair market value at that time; otherwise, the machine would be returned to the lessor.
• QEM also has the option to lease the machine for another eight years at $150,000 per year.
• The rate that is implicit in the lease is 9%.

The new machine is expected to last 20 years. Since it is a unique machine, The lessor has no other use for it if QEM does not either purchase it at the end of the lease or renew the lease. If QEM had purchased the asset, it would have cost $1.9 million. Although it was purposefully omitted from the written lease agreement, there was an understanding that QEM would either renew the lease or exercise the purchase option.

Required:

Adopt the role of the company's auditors and discuss the financial reporting issues for the 2024 year end. The company is a private company but would like the statements to be prepared in accordance with IFRS. If applicable, include the journal entries to explain the accounting implication.