Question

Mariner Corporation, which manufactures sail boats, ordered dry dock equipment from Brown Corporation. This equipment was built for the specialized needs of Mariner, and could not be used by any other company. Instead of purchasing the equipment, Mariner elected to enter into a long term lease agreement with Brown Co. The lease contract was signed on January 1, 2020. It calls for 12 payments of $15,000, with the first one due on December 31, 2020. The lessor’s implicit interest rate is not known. Mariner’s incremental borrow rate is 8%. a. Is this lease a finance or operating lease? Explain. b. Present the journal entry to be made by Mariner when the lease is signed. c. Show the journal entry that Mariner will make for the December 31, 2020 payment.

Answer 1

(a ) The lease will be Classified as Finance Lease because the equipment was built for the specialized needs of Mariner i.e. Lessee & could not be used by another Company. The asset is of specialized nature which satisfy the condition for Finance lease as per IFRS-16.

b.)	Year	Lease payment	PV Factor @8%	Present Value
	1	15,000	0.92593	13,889
	2	15,000	0.85734	12,860
	3	15,000	0.79383	11,907
	4	15,000	0.73503	11,025
	5	15,000	0.68058	10,209
	6	15,000	0.63017	9,453
	7	15,000	0.58349	8,752
	8	15,000	0.54027	8,104
	9	15,000	0.50025	7,504
	10	15,000	0.46319	6,948
	11	15,000	0.42888	6,433
	12	15,000	0.39711	5,957
	Total	180,000		113,041

	Date	Account Tiles	Debit $	Credit $
	January 1,2020	Right of use assets	113,041
		Lease Liability		113,041
		( To record the lease liability )

c.)	Date	Account Tiles	Debit $	Credit $
	December 31,2020	Lease Liability	3,696
		Interest Expense ( 113,041 x 10% )	11,304
		Cash		15,000
		( To record the lease payment)