Lessee Accounting On June 1, 2020, Halifax Corporation leases equipment from Thunder Bay Manufacturing Ltd. The lease agreement indicates that Halifax can purchase the equipment at the end of the lease term for a specified price. Assume that both companies follow ASPE. Details pertaining to the lease agreement follow: Price at which Halifax can purchase the equipment at the end of the lease term $ 25,502 Annual lease payment, due at the beginning of each year $ 25,683 Halifax's incremental interest rate 8% Interest rate implicit in the lease 10% Leased asset's estimated fair value at the end of the lease term $ 89,169 Estimated useful life of equipment (in years) 12 Lease term (in years) 10 Fair value of the equipment at the inception of the lease $ 217,761 Estimated residual value of equipment at end of asset's useful life $ - Halifax uses the straight-line method to depreciate all similar equipment that it owns. Required: a) Calculate the present value of the minimum lease payments. b) What kind of lease is this to Halifax? Why? Your answer should address all criteria that may be used to determine the type of lease. c) Prepare an amortization schedule covering the first 3 years of the lease. d) Assume that Halifax has a year end of December 31. Prepare any journal entries required on each of the following dates: June 1, 2020 December 31, 2020 June 1, 2021
Lessee Accounting
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On June 1, 2020, Halifax Corporation leases equipment from Thunder Bay Manufacturing Ltd. The lease agreement indicates that Halifax can purchase the equipment at the end of the lease term for a specified price. Assume that both companies follow ASPE. Details pertaining to the lease agreement follow: |
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Price at which Halifax can purchase the equipment at the end of the lease term |
$ 25,502 |
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Annual lease payment, due at the beginning of each year |
$ 25,683 |
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Halifax's incremental interest rate |
8% |
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Interest rate implicit in the lease |
10% |
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Leased asset's estimated fair value at the end of the lease term |
$ 89,169 |
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Estimated useful life of equipment (in years) |
12 |
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Lease term (in years) |
10 |
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Fair value of the equipment at the inception of the lease |
$ 217,761 |
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Estimated residual value of equipment at end of asset's useful life |
$ - |
Halifax uses the straight-line method to depreciate all similar equipment that it owns.
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Required: |
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a) |
Calculate the present value of the minimum lease payments. |
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b) |
What kind of lease is this to Halifax? Why? Your answer should address all criteria that may be used to determine the type of lease. |
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c) |
Prepare an amortization schedule covering the first 3 years of the lease. |
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d) |
Assume that Halifax has a year end of December 31. Prepare any required on each of the following dates: |
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June 1, 2020 |
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December 31, 2020 |
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June 1, 2021 |
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