Reference no: EM132611545

Question - On January 1, 20X0, Gidget's Innovations Inc. (GII) leased a machine for eight years. The residual value at the end of the lease term is estimated at $25,000. The economic and useful life of the machine is 15 years. The residual value at the end of the economic/useful life is estimated at $7,500. GII has the option to purchase the machine at the end of the lease for $2,100. GII has also agreed to take the insurance package on the machinery offered by the lessor.

GII has agreed to make annual payments of $8,800 on January 1 every year, commencing on January 1, 20X0. The payment includes the insurance premium of $250 per year.

On January 1, 20X0, GII paid its law firm invoice for $500 to review the lease agreement. GII had not previously accounted for this invoice.

GII is unable to readily determine that the interest rate implicit in the lease is 7.5%. GII's incremental borrowing costs are 8.5%.

The leased equipment will be depreciated by GII on a straight-line basis.

GII and the lessor both report their financial results in accordance with IFRS. Both companies have a December 31 year end.

The lessor's cost to manufacture the equipment was $40,000. Prior to the asset being leased, the lessor included this item in its inventory.

GII has a policy of debiting insurance-related costs to expenses when paid and making whatever adjustments are required at year end.

The lessor has a policy of crediting payments received for the insurance policy to insurance revenue and making whatever adjustments are required at year end

Required -

a) Prepare amortization schedule for the lessee's lease liability formatted as follows: date; lease payment; interest expense; principal; lease liability.

b) Prepare amortization schedule for the lessee's right-of-use asset formatted as follows: date; depreciation expense; accumulated depreciation; cost; net book value.

c) Briefly list what information in the two amortization schedules would be included in the lessee's financial statements or the lessee's notes to its financial statements.

d) Prepare the lessee's journal entries required on January 1, 20X0, the commencement date of the lease, including payment of the legal fees.

e) Prepare the lessee's journal entries required on December 31, 20X0, GII's year end.

f) Prepare the lessee's journal entries required on January 1, 20X1.

g) Prepare the lessee's journal entries required on January 1, 20X8, to record the derecognition of the ROU asset and lease liability.

h) Prepare the lessor's journal entries required on January 1, 20X0.