Blossom Inc., which uses IFRS, manufactures an X-ray machine with an estimated life of 12 years and leases it to SNC Medical Centre for a period of 10 years. The machine's normal selling price is $343,349, and the lessee guarantees a residual value at the end of the lease term of $14,000. The medical centre will pay rent of $50,000 at the beginning of each year and all maintenance, insurance, and taxes. Blossom incurred costs of $205,000 in manufacturing the machine and $13,000 in negotiating and closing the lease. Blossom has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that its implicit interest rate is 10%. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. E1. Identify the amounts to be reported on Blossom's statement of financial position, income statement, and statement of cash flows one year after signing the lease, and discuss what should be included as required and desirable note disclosures. E2. Assume that SNC's incremental borrowing rate is 12% and that the centre knows that 10% is the rate implicit in the lease. Determine the depreciation expense that SNC will recognize in the first full year that it leases the machine. E3. Assuming instead that the residual value is not guaranteed, what changes, if any, are necessary in parts (a) to (d) for the lessor and in part (f) for the lessee?
Blossom Inc., which uses IFRS, manufactures an X-ray machine with an estimated life of 12 years and leases it to SNC Medical Centre for a period of 10 years. The machine's normal selling price is $343,349, and the lessee guarantees a residual value at the end of the lease term of $14,000. The medical centre will pay rent of $50,000 at the beginning of each year and all maintenance, insurance, and taxes. Blossom incurred costs of $205,000 in manufacturing the machine and $13,000 in negotiating and closing the lease. Blossom has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that its implicit interest rate is 10%. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE. E1. Identify the amounts to be reported on Blossom's statement of financial position, income statement, and statement of cash flows one year after signing the lease, and discuss what should be included as required and desirable note disclosures. E2. Assume that SNC's incremental borrowing rate is 12% and that the centre knows that 10% is the rate implicit in the lease. Determine the depreciation expense that SNC will recognize in the first full year that it leases the machine. E3. Assuming instead that the residual value is not guaranteed, what changes, if any, are necessary in parts (a) to (d) for the lessor and in part (f) for the lessee?
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 3P
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Transcribed Image Text:Blossom Inc., which uses IFRS, manufactures an X-ray machine with an estimated life of 12 years and leases it to SNC Medical Centre
for a period of 10 years. The machine's normal selling price is $343,349, and the lessee guarantees a residual value at the end of the
lease term of $14,000. The medical centre will pay rent of $50,000 at the beginning of each year and all maintenance, insurance, and
taxes. Blossom incurred costs of $205,000 in manufacturing the machine and $13,000 in negotiating and closing the lease. Blossom
has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred,
and that its implicit interest rate is 10%.
Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY DUE.
E1. Identify the amounts to be reported on Blossom's statement of financial position,
income statement, and statement of cash flows one year after signing the lease, and
discuss what should be included as required and desirable note disclosures.
E2. Assume that SNC's incremental borrowing rate is 12% and that the centre knows
that 10% is the rate implicit in the lease. Determine the depreciation expense that SNC
will recognize in the first full year that it leases the machine.
E3. Assuming instead that the residual value is not guaranteed, what changes, if any,
are necessary in parts (a) to (d) for the lessor and in part (f) for the lessee?
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