Question

Sandhill Corp., which uses IFRS, signs non-renewable, non-cancellable lease agreement to lease robotic equipment from Xiu Inc. The following information concerns the lease agreement.

Inception date		January 1, 2020
Lease term		5 years
Fair value of equipment Jan. 1, 2020		$140,000
Economic life of leased equipment		7 years
Annual rental payments starting Jan. 1, 2020		$23,829
Option to purchase at the end of the term		none
Depreciation method		Straight-line
Residual value		none
Sandhill’s incremental borrowing rate		6%

Using (1) factor tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the right-of-use asset and lease liability.

The amount of the right-of-use asset

$

Prepare the initial entry to reflect the signing of the lease agreement. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2020

Prepare an amortization schedule for the term of the lease to be used by Sandhill. Use Excel. (Round answers to 0 decimal places, e.g. 5,275.)

Sandhill Corp. Lease Amortization Schedule (Lessee)
Date		Annual Payment		Interest on Unpaid Liability		Reduction of Lease Liability		Balance of Lease Liability
								$
January 1, 2020		$				$
January 1, 2021				$
January 1, 2022
January 1, 2023
January 1, 2024

Prepare the journal entries on Sandhill Corp.’s books to record the payments related to this lease for the years 2020 and 2021 as well as any adjusting journal entries at its fiscal year ends of December 31, 2020 and 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020 Jan. 1, 2021 Dec. 31, 2021
	(To record depreciation)
Dec. 31, 2020 Jan. 1, 2021 Dec. 31, 2021
	(To record interest)
Dec. 31, 2020 Jan. 1, 2021 Dec. 31, 2021
Dec. 31, 2020Jan. 1, 2021Dec. 31, 2021
	(To record depreciation)
Dec. 31, 2020Jan. 1, 2021Dec. 31, 2021
	(To record interest)

Answer 1

Computationof amount of the right of use of asset :

The ‘right of use asset’ would also include the following amounts, where relevant:

• Any payments made to the lessor at, or before, the commencement date of the lease, less any lease incentives received.
• Any initial direct costs incurred by the lessee.
• An estimate of any costs to be incurred by the lessee in dismantling and removing the underlying asset, or restoring the site on which it is located (unless the costs are incurred to produce inventories, in which case they would be accounted for in accordance with IAS 2 – Inventories)

However, in this case there are such costs incurred by the lessee.

Therefore right of use of the asset would be lower of the following :

a) Fair value of the asset = $140,000

b) Present value of lease payments = $106396 (as calculated in the above table in excel sceenshot)

Therefore, the right of use of asset = $106396

Depreciation Expense = value of asset - residual value / Useful life

= $106396-0 / 7 = $15199

Carrying amount of right use asset at the end of year 1 = $106396 - $15199 = $91197

Therefore Lease liability at the end of year 1 = $82567

Initial Journal Entry for signing of the lease agreement :

Date	Account Titles	Debit	Credit
Jan 1 2020	Equipment on lease	$106396
	To Xiu Inc (lessor)		$106396
	(Being equipment taken on lease)

Journal entries in Sandhill Corp.’s books to record the payments related to this lease:

Date	Account Titles	Debit	Credit
	To Record Depreciation
Dec 31 2020	No Entry
Jan 1st 2021	No entry
Dec 31 2021	Depreciation A/c	$15199
	To Equipment on lease		$15199

Date	Account Titles	Debit	Credit
	To Record Interest
Dec 31 2020 (Year 0)	No Entry
Jan 1st 2021 (Year 1)	No Entry
Dec 31 2021	Lessor A/c	$18875
	Interest cost A/c	$4954
	To Bank A/c		$23829
	(Being instalment and interest paid)
Dec 31 2021	Statement of P/L	$20153
	To Depreciation		$15199
	To Interest cost		$4954