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Prepare all related entries for the lease made by the lessor

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Reference no: EM132729132

Question - Neovasc Corp., a lessee, entered into a non-cancellable lease agreement with Accord Ltd., a lessor, to lease special-purpose equipment for a period of seven years. Both companies are listed firms that follows IFRS, and have a December 31 fiscal year end. The following information relates to the agreement:

Lease inception May 2, 2020

Residual value of equipment at end of lease term, guaranteed by Neovasc $100,000

Economic life of equipment 10 years

Usual selling price of equipment $415,000

Manufacturing cost of equipment on lessor's books $327,500

Lessor's implicit interest rate, known to lessee 12%

Lessee's incremental borrowing rate 15%

Annual repairs and maintenance to be paid separately by lessee

to related 3rd parties at the time of lease payment $10,000

The leased equipment can revert to Accord at the end of the lease; Neovasc has an option to purchase it at its expected fair value at that time, and Neovasc is certain to exercise the purchase option.

Present value of $1, 12%, n=7 periods is 0.45235;

Present value of $1, 15%, n=7 periods is 0.37594;

Present value of annuity (due) of $1,12%, n=7 periods is 5.1114.

Present value of annuity (due) of $1,15%, n=7 periods is 4.78448.

Present value of ordinary annuity of $1,12%, n=7 periods is 4.56376.

Present value of ordinary annuity of $1,15%, n=7 periods is 4.16042.

Requirements -

1. Show the calculation how the lessor determines the annual lease payment; and also show how the lessee calculates the present value of its lease payments under the lease, with the aim to measure its lease liabilities and assets.

2. Briefly discuss how the lessor will account for the lease (Justify all the relevant factors and calculation.

3. Prepare all related entries for the lease made by the lessor up to and including December 31, 2020. Do the same for the lessee.

4. Present the balances/classifications of the lease-related items that the lessee needs to report on its 2020 statement of financial position (SFP). Show your calculations for the lease-related liability items.

Reference no: EM132729132

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