Reference no: EM132965408

Practice Problem - Cat Emporium Corp. (CEC) reports its financial results in accordance with IFRS. On January 1, 2020, CEC entered into an agreement to lease equipment for five years. Details of the lease follow:

The lease is payable annually in five equal instalments of $10,000. The first payment is due on January 1, 2020, the commencement date of the lease.

The lease includes an option to purchase the equipment at the end of the lease term for $20,000.

The useful life of the equipment is nine years.

At the inception of the lease, the estimated fair market value of the equipment at the end of the lease term was $30,000; the estimated residual value at the end of its useful life was $0.

CEC uses the straight-line method to depreciate all its right-of-use (ROU) assets.

CEC's incremental borrowing rate for transactions of this type is 6%. The implicit rate in the lease is not readily determinable by CEC.

CEC exercised its option to purchase on January 1, 2025.

CEC's year end is December 31.

Required -

a) Prepare lease liability amortization schedule for the life of the lease using Excel.

b) Show an asset depreciation schedule, using Excel, that covers the useful life of the equipment.

c) Prepare the journal entry on January 1, 2020, to recognize the ROU asset and lease liability.

d) Prepare the journal entry on December 31, 2020, to record interest and depreciation expense for the year.

e) Prepare the journal entry on January 1, 2021, to record the lease payment.

f) Prepare the journal entry on January 1, 2025, to record the exercise of the option to purchase, the derecognition of the ROU asset and lease liability, and the recognition of the owned asset.

g) Prepare the journal entry on December 31, 2025, to record depreciation expense for the year.