May 1, 2017 payment: May 1, 2017 Rent Expense 14,500 Cash 14,500. (c) The entry would be the same under ASPE.

Transcription

1 Buad 273 Chapter 20 Assignment Solutions Page 1 of 5 BRIEF EXERCISE 20-1 IFRS 16: For right-of-use assets, the lessee uses the rate implicit in the lease whenever it can be reasonably determined; otherwise the incremental borrowing rate is used. In this case, the rate implicit in the lease is 9%. BGN, 30,000 PMT, 6 N, 9 I/Y, CPT PV gives $146, ASPE: For capital leases, the lessee uses the lower of the lessee s incremental borrowing rate and the rate implicit in the lease. In this case, the lower of the lessee s incremental borrowing rate and the rate implicit in the lease is 8%. BGN, 30,000 PMT, 6 N, 8 I/Y, CPT PV gives $149, BRIEF EXERCISE 20-5 (a) Because the term of the warehouse lease is short (10 months), the lease payments will be accounted for by the lessee on a straight-line basis over the lease term, or by another systematic approach (similar to an operating lease under ASPE). Short-term leases of 12 months or less are allowable exceptions to the rule of treating all leases as right-of-use assets under IFRS 16. (b) May 1, 2017 payment: May 1, 2017 Rent Expense 14,500 Cash 14,500 (c) The entry would be the same under ASPE. BRIEF EXERCISE 20-6 BGN, 25,173 PMT, 5 N, 6 I/Y, CPT PV gives $112, Right-of-Use Asset 112,400 Lease Liability 112,400 Lease Liability 25,173 Cash 25,173 BRIEF EXERCISE 20-7 BGN, 112, PV, 5 N, 6 I/Y, CPT PMT gives $25,173 Copyright 2016 John Wiley & Sons Canada, Ltd.

2 Buad 273 Chapter 20 Assignment Solution Page 2 of 5 Interest rate: because IFRS applies, the implicit rate in the lease (8%) is used. 1) Assuming that the lease agreement included an unguaranteed residual value of $1,000, a) The lease will be capitalized as a right-of-use asset as it is not exempt due to either low value or short term. PV of the lease payments: BGN, 10,000 PMT, 3 N, 8 I/Y 0 FV gives $27,833. Prepare a complete amortization schedule for the lease Interest Payment Closing 1 Jan x5 27,833-10,000 17,833 1 Jan x6 17,833 1,427 10,000 9,260 1 Jan x7 9, ,000 - b) Prepare all of Douglas journal entries for 20X5: Right-of-use asset 27,833 Lease obligation 27,833 Cash3010,000 Interest expense 1,427 Lease obligation 1,427 Depreciation exp 27,833/3 9,278 Accum depr right-of-use asset 9,278 c) Prepare all of Douglas journal entries for 20X6: Interest expense 740 Lease obligation 740 Depreciation exp 27,833/3 9,278 Accum depr right-of-use asset 9,278 d) Prepare all of Douglas journal entries for 20X7: Lease obligation is now zero, no more interest expense Depreciation exp 27,833/3 rounded 9,277 Accum depr right-of-use asset 9,277 The fully depreciated asset can now be removed from the books: Accum depr right-of-use asset 27,833 Right-of-use asset 27,833

3 Buad 273 Chapter 20 Assignment Solution Page 3 of 5 2) Assuming that the lease agreement included a guaranteed residual value of $1,000, a) Prepare a complete amortization schedule for the lease BGN 10,000Pmt, 3N, 8I, 1,000FV Cpt PV 28,626 Interest Payment Closing 1 Jan x5 28,626-10,000 18,626 1 Jan x6 18,626 1,490 10,000 10,116 1 Jan x7 10, , Dec x ,000 b) Prepare all of Douglas journal entries for 20X5 Lease obligation 28,626 Interest expense 1,490 Lease obligation 1,490 Depreciation exp (28,626-1,000)/3 9,209 Accum depr right-of-use asset 9,209 c) Prepare all of Douglas journal entries for 20X6 Interest expense 809 Lease obligation 809 Depreciation exp (28,626-1,000)/3 9,209 Accum depr right-of-use asset 9,209 d) Prepare all of Douglas journal entries for 20X7 Interest expense 75 Lease obligation 75 Depreciation exp (28,626-1,000)/3 *9,208 Accum depr right-of-use asset 9,208 Loss on lease contract 500 Cash 500 Lease Obligation 1,000 Acc Deprec, right-of-use asset 27,626 * Rounded to make total 27,626

4 Buad 273 Chapter 20 Assignment Solution Page 4 of 5 3) Assuming that the lease agreement included a bargain purchase option of $1,000, a) Prepare a complete amortization schedule for the lease BGN 10,000Pmt, 3N, 8I, 1,000FV Cpt PV 28,626 Interest Payment Closing 1 Jan x5 28,626-10,000 18,626 1 Jan x6 18,626 1,490 10,000 10,116 1 Jan x7 10, , Dec x ,000 - a) Prepare all of Douglas journal entries for 20X5 Lease obligation 28,626 Interest expense 1,490 Lease obligation 1,490 b) Prepare all of Douglas journal entries for 20X6 Interest expense 809 Lease obligation 809 c) Prepare all of Douglas journal entries for 20X7 Interest expense 75 Lease obligation 75 Lease obligation 1,000 Cash 1,000 Asset 28,626 Accum depr right-of-use asset 3X5,725 17,175 Accum depr asset 17,175

5 Buad 273 Chapter 20 Assignment Solution Page 5 of 5 4) Interest rate: because IFRS applies, the implicit rate in the lease (8%) is used. If ASPE had applied, the lower of the two rates (7%) would have been used. The specialized equipment criterion is not included in the criteria for capitalization under ASPE. BGN, 10,000 PMT, 3 N, 7 I/Y 0 FV, CPT PV gives 28, ,080/29,000 = 97%. It would be a capital lease under ASPE. 5) The PV of the lease payments is $28,080 as calculated in Part 4. The fair value is $27,500. It is not allowed to capitalize an asset at higher than its fair value, so a new interest rate must be calculated to make the present value equal to $27,500. BGN, -27,500 PV, 10,000 PMT, 3 N, 0 FV, Cpt I/Y gives % Complete amortization schedule for the lease: Interest at % Payment Closing 1 Jan x5 27,500-10,000 17,500 1 Jan x6 17,500 1,642 10,000 9,142 1 Jan x7 9, ,000 -