Reference no: EM132973217

Not Ordinary Drones (NOD) , Inc., a lessor, leased a drone to Worldz Information Network, Ltd., [WIN], a lessee, on January 1, 2019. The following information relates to the leased asset and the lease agreement:

Fair value of leased drone $Undisclosed

Lease 10 years
Useful life 15 years
Payment Due January 1
Payment frequency Annual
Annual Instalments starting January 1, 2019 $33,000
Estimated residual value at end of the lease, [as stated in the problem] $23,600
Interest rate implicit in the lease [unknown to the lessee] 7%
Interest rate incremental to the lessee 8%

Ownership of drone reverts to lessor at end of lease term
Year end for both companies December 31
Amortization method Straight line
Accounting standards used. - NOD ASPE
- WIN IFRS

REQUIRED: Select the one best answer to each of the questions listed below and input it in the computer.

Problem 1: The journal entry prepared by WIN to record the lease contract on January 1, 2019 would be
a. DEBIT-Right of Use Assets [$342,000]; CREDIT-Obligation Under Capital Lease [$342,000].
b. DEBIT-Right of Use Assets [$250,079]; CREDIT-Obligation Under Capital Lease [$250,079].
c. DEBIT-Right of Use Assets [$239,147]; CREDIT-Cash [$239,147].
d. DEBIT-Right of Use Assets [$330,000]; CREDIT-Obligation Under Capital Lease [$330,000].
e. DEBIT-Right of Use Assets [$239,147]; CREDIT-Obligation Under Capital Lease

Problem 2:  What would be the amount of interest expense for 2019 if the residual value was guaranteed by the lessee? [Round to the nearest dollar]

a. $17,366.
b. $20,799.
c. $26,400.
d. $16,740.
e. $19,032.

Problem 3: The amount to be recorded as depreciation expense for 2019 if the residual value was guaranteed by the lessee would be [Round to the nearest dollar]

a. $23,915.
b. $15,943.
c. $17,333.
d. $22,648.
e. $25,991.

Problem 4:  Working with the assumptions that the residual value was guaranteed by the lessee and that you are now at January 1, 2029. On that date, the fair market value of the equipment was determined to be $9,450. The required journal entry/entries prepared by WIN, to record all the effects of the lease ending would be

a. DEBIT-Accumulated Depreciation - Leased Asset [$226,479]; DEBIT-Loss on Return of Leased Asset [$14,150]; DEBIT-Interest Payable [$1,748]; DEBIT Obligation Under Capital Lease [$21,852]; CREDIT-Right of Use Assets [$250,079]; CREDIT-Cash [$14,150].
b. DEBIT-Loss On Return Of Leased Asset [$14,150]; CREDIT-Cash [$14,150].
c. DEBIT-Obligation Under Capital Lease [$250,079]; DEBIT-Loss on Return of Leased Asset [$14,150]; CREDIT-Right of Use Assets [$250,079]; CREDIT-Cash [$14,150].
d. DEBIT-Obligation Under Capital Lease [$21,852]; CREDIT-Right of Use Assets [$7,702]; CREDIT-Cash [$14,150].
e. No journal entry required.

Problem 5:  Now assume for this Question that the lease agreement contained a bargain purchase option of $18,000 at the end of the lease term instead of a residual value of $23,600. Further assume that WIN recorded the leased asset at $285,488 on January 1, 2019. What would be the amount for depreciation expense which WIN would record in 2019? [Round to the nearest dollar].

a. $26,749.
b. $28,738.
c. $17,833.
d. $19,033.
e. None of the above.