Reference no: EM132755830

It is December 2020 and although the accounts of TCL Corporation have been closed for the October 31, 2020 year end, you have been asked to review a few items. Specifically you note that TCL Corporation signed a lease agreement on November 1, 2019 to lease equipment from Rex Limited. The non-cancellable lease term is 5 years at which time the equipment is expected to have a residual value of $7,000. This value has not been guaranteed by TCL. The equipment's fair value at the start of the lease is $80,000 with an economic life of 7 years. The asset will revert to Rex Limited at the end of the lease term. The agreement requires equal annual payments of $18,143 beginning when the lease is signed. The lessor's implicit rate is 10% and is know to TCL. TCL has a borrowing rate of 12%. TCL has recorded this an operating lease and expensed the payment when the lease was signed. TCL has an October 31st year end and reports using ASPE standards.

Problem 1: Has an accounting error been made? Support your answer.

Problem 2: If yes, what is the impact of this error on the Income statement and the SFP for the year ended October 31, 2020. Be specific and show your calculations. (You may ignore the effect of income taxes.)