Reference no: EM132886857

Question - Royal Leasing Company (RLC) (which adopts IFRS) leased a machine under contract to Superior Manufacturing Inc. (SMI) (which adopts ASPE). Both companies have the same year ending on December 31. The following information pertains to the machine and lease contract and is known by both parties.

LEASED MACHINE:

Inception of lease May 1, 2019

First annual payment due May 1, 2019

Purchase option price at end of lease $1,000

Lease term 6 years

Economic life of leased equipment 10 years

Lessor's cost $16,250

Fair market value of asset at May 1, 2019 $22,500

Lessor's implicit rate 11%

Lessee's incremental borrowing rate 9%

Fair market value of machine at end of lease $16,000

Additional information:

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs. Depreciation method is straight-line for all machines.

REQUIRED -

1. Calculate the annual lease payments under the lease contract.

2. Prepare the journal entries (if any) for both the lessor and the lessee on May 1, 2019 for the lease contract.

3. Prepare all the 2020 year-end entries (December 31) for both the lessor and the lessee for the lease contract.