Question

The following facts are for a non-cancellable lease agreement between Ivanhoe Corporation and Russell Corporation, a lessee:

Inception date		July 1, 2020
Annual lease payment due at the beginning of each year, starting July 1, 2020		$	20,585.16
Bargain purchase option price at end of lease term reasonably certain to be exercised by Russell		$	4,500.00
Lease term			5 years
Economic life of leased equipment			10 years
Lessor’s cost		$	41,000.00
Fair value of asset at July 1, 2020		$	90,200.00
Lessor’s implicit rate			9%
Lessee’s incremental borrowing rate			9%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. The lessee assumes responsibility for all executory costs. Both Russell and Ivanhoe use IFRS 16.

Calculate the amount of gross investment at the inception of the lease for Ivanhoe Corporation, the lessor.

Answer 1

Gross Investment is calculated as under (Minimum Lease Payments x Discounting Rate) - $80,056

Discount Rate - 9%
Annual Lease Payment	Yearly Amount	9% Discount Rate	Present Value of Future Receivables
Y1	20,585	0.917	18,877
Y2	20,585	0.842	17,333
Y3	20,585	0.772	15,892
Y4	20,585	0.708	14,574
Y5	20,585	0.65	13,380
Gross Investment	1,02,926		80,056
Y5 - Unguaranteed Bargain Price	4,500	0.65	2,925
Net Investment	1,07,426		82,981

Lessors cost of $41,000 will have to be recognised prorata as expense in the next 5 years amounting to $8200 each year