Reference no: EM132610711

Downtown Custom-works Limited (DCL), a December 31 year-end public company, manufactures specialized machinery for light manufacturing companies in the lower mainland. DCL normally sells this equipment outright but is developing leases to customers as a means of expanding business.

DCL has just finalized the following lease to a client, White Rock Limited (WRL), for specialized equipment. The terms are as follows:

Lease term: 5 years; annual payments at anniversary date

Estimated useful life: 8 years

Lease start date: June 1, 2018

Guaranteed Residual Value at the end of the lease term: $88,000

Rate of return priced into the lease by DCL: 5%

Normal selling price of the equipment: $415,000

Manufactured cost to DCL: $360,000

Insurance policy covering the equipment at an annual cost of $3,600, payable at the beginning of each lease year. DCL records these receipts from multiple clients to an insurance expense recovery (credit) account.

Question 1: What type of lease is this in the hands of DCL Leasing?

Question 2: Calculate the minimum lease payment that DCL will quote to the WRL.

Question 3: Record the entries for DCL, with supporting calculations, on the following dates: June 1, 2018 and December 31, 2018.

Question 4: What would be the amount of the lease quote by DCL if there were no other commercial arrangements (GRV, BPO, Unguaranteed GRV)?

Question 5: Make a partial balance sheet presentation, in good form, of DCL as at December 31, 2018 arising from entering into this lease. Show supporting computations where required.

Question 6: What is the total pre-tax effect (one figure) for the year ended December 31, 2018 as a result of DCL entering into this lease agreement?