Question

In: Accounting

Modern Office Solutions Inc. leases most of its office furniture and equipment. On January 1, 2020,...

Modern Office Solutions Inc. leases most of its office furniture and equipment.

On January 1, 2020, Modern entered into a five-year lease for new equipment. The payments are to be made at the beginning of each lease year. Modern has the option of purchasing the equipment at the end of the lease. The present value of the minimum lease payments is equal to the fair value of the equipment at lease inception. Modern follows IFRS.

Other information is as follows:

Fair value of the equipment at lease inception$

$75,000

Expected value at the end of the lease

16,000

Purchase option price (expected to be exercised)

8,000

Interest rate implicit in the lease (known to Modern)

12%

Modern’s incremental borrowing rate

11%

Expected useful life of the equipment

8 years

Residual value at the end of 8 years

$2,000

                Amortization method for equipment                       Straight line

                Lease payments                                                                ?

Show all calculations. Round all amounts to the nearest dollar.

  1. Calculate the annual lease payments required based on the information given above. Round to the nearest dollar.  

  1. Prepare all journal entries required by Modern to account for the lease for the year ending December 31, 2020. Provide a brief explanation for each journal entry.

  1. What amounts relating to this lease and leased asset will appear on Modern’s statement of financial position at December 31, 2020? Be specific about the classifications that should be used.

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