Reference no: EM132964293
Question 1 - On January 1, 2020, All Construction Corp. (ACC) purchased a specialized piece of construction equipment for $115,000 from Building Corp. (BC) and immediately leased it to Short Construction Ltd. (SCL). The equipment could not be used elsewhere without significant modification. Pertinent details follow:
The lease term is 10 years.The guaranteed residual value at the end of the lease is $22,000.
The economic life of the equipment is 12 years.
The expected payout on the residual value is $5,000.
ACC's required rate of return for transactions of this nature is 10%, which is noted in the lease agreement.
SCL will make annual payments, with the first payment due on January 1, 2020.
All companies have December 31 year ends.
The required payment is $19,199 per annum.
What should SCL, the lessee, record as the cost of the ROU asset at initial recognition?
a) $131,694
b) $119,897
c) $112,495
d) $138,248
Question 2 - Catalogue Corp. (CC) is a national electronics leasing company. On January 1, 2020, Lemon Law Firm LLP (Lemon) enters into a new lease agreement with CC. The lease is to be effective immediately and is for a 10-year term at an implicit rate of 6%, which is not known to Lemon. Lemon has an incremental borrowing rate (IBR) of 7%. Annual payments will be $15,163, due at the beginning of each year. The equipment has a fair value (FV) of $125,000 and a useful life of 12 years. The FV of the equipment at the end of the lease is $30,000. CC has offered Lemon the option to purchase at the end of the term of the lease for $12,000.
Lemon follows IFRS for financial reporting. Which of the following is the most appropriate journal entry for Lemon to record at the inception of the lease?
a) CR Lease liability $98,790
b) CR Lease liability $120,054
c) CR Lease liability $119,031
d) CR Lease liability $104,891
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