Question

Carla Vista Steel Corporation, as lessee, signed a lease agreement for equipment for five years, beginning January 31, 2020. Annual rental payments of $45,000 are to be made at the beginning of each lease year (January 31). The insurance and repairs and maintenance costs are the lessee’s obligation. The interest rate used by the lessor in setting the payment schedule is 9%; Carla Vista’s incremental borrowing rate is 10%. Carla Vista is unaware of the rate being used by the lessor. At the end of the lease, Carla Vista has the option to buy the equipment for $3,300, which is considerably below its estimated fair value at that time. The equipment has an estimated useful life of seven years with no residual value. Carla Vista uses straight-line depreciation on similar equipment that it owns and follows IFRS 16.

1. Calculate the PV of the lease obligation.

2. Prepare the lease amortization schedule for the lease.

3. Prepare the journal entry that should be recorded on January 31, 2020, by Carla Vista.

4. Prepare any necessary adjusting journal entries at December 31, 2020, and the journal entry or entries that should be recorded on January 31, 2021, by Carla Vista. Carla Vista does not use reversing entries.

5. What amounts would appear on Carla Vista’s December 31, 2021, SFP relative to the lease arrangement?

Answer 1

1.)	Date	Lease Payment & Buy Option	PV Factor @10%	Present Value
	January 31,2020	45,000	1	45,000
	January 31,2021	45,000	0.90909	40,909
	January 31,2022	45,000	0.82645	37,190
	January 31,2023	45,000	0.75131	33,809
	January 31,2024	45,000	0.68301	30,736
	January 31,2025	3,300	0.62092	2,049
	Total	228,300		189,693

Present value of lease obiligation is $ 189,693.

2.)	Date	Lease Payment & Buy Option	Interest Expense	Reduction in lease liability	Lease Liability
	January 31,2020				189,693
	January 31,2020	45,000	-	45,000	144,693
	January 31,2021	45,000	14,469	30,531	114,162
	January 31,2022	45,000	11,416	33,584	80,579
	January 31,2023	45,000	8,058	36,942	43,636
	January 31,2024	45,000	4,364	40,636	3,000
	January 31,2025	3,300	300	3,000	0
	Total	228,300

3.)	Date	Account Titles	Debit $	Credit $
	January 31,2020	Right of use assets	189,693
		Lease liability		189,693
	January 31,2020	Lease liability	45,000
		Cash		45,000
4.)	Date	Account Titles	Debit $	Credit $
	December 31,2020	Amortization Expense	34,777
		Right of use assets		34,777
		( 189,693 / 5 ) x 11/12
	December 31,2020	Interest Expense	13,264
		Interest Payable		13,264
		(189,693 - 45,000 ) x 10% x 11/12
	January 31,2021	Interest Expense ( 189,693 - 45,000 ) x 10% x 1/12	1,206
		Interest Payable	13,264
		Lease liability	30,531
		Cash		45,000

5.)	Balance Sheet
	December 31,2021	Amount $
	Non-Current assets
	Right of use assets	116,923
	(189,693 - 34,777 -37,993)
	Current Liabilities
	Lease Liability	33,584
	Non -Current Liabilities
	Lease Liability	80,578