Question

Maker Corp. manufactures imaging equipment. Easy Leasing purchased an MRI machine from Maker for $1,060,000 and leased it to Imaging Group, Inc. on January 1, 2021.

Lease description:
Quarterly rental payments	$	63,555: beginning of each period
Lease term		5 years (20 quarters)
No residual value; no bargain purchase option
Economic life of MRI machine		5 years
Implicit interest rate and lessee’s incremental borrowing rate		8%
Fair value of asset	$	1,060,000
Present value of an annuity due of $1: n = 20, i = 2%		16.6785

Required:
1. How should this lease be classified by Imaging Group and by Easy Leasing?
2. Prepare appropriate entries for both Imaging Group and Easy Leasing from the beginning of the lease through the second rental payment on April 1, 2021. Depreciation and amortization are recorded at the end of each fiscal year (December 31).
3. Assume Imaging Group leased the machine directly from the manufacturer, Maker Corp., which produced the machine at a cost of $760,000. Prepare appropriate entries for Maker from the beginning of the lease through the second rental payment on April 1, 2021.

Answer 1

	As per IFRS 16, the following conditions to be satisfied to qualify as a lease and lease accounting treatment
	Particulars	Status
	Is there an identified asset	Yes ,Imaging equipment
	Do the supplier- lessor has the right to substitute the asset	No
	Do the lessee has substantial economic benefits out of the asset	Yes , 5 years
	Do the lessee directs the use of the asset	Yes
	Do the lessee has the right to operate the asset with lessor changing the operating conditions	Yes
	Contract contains a lease
	Accounting in the books of Imaging Group Inc.,
	Lease Liability
	Fixed payments for 5 years	318,275
	Less : service component for cleaning	-
	Variable payments	-
	Amount guaranteed by Lessee	-
	Purchase options	-
	Total	318,275
	Right of use asset
	Lease liability (Refer amortisation schedule)	274,488
	Lease payment made before commencement date	-
	Direct costs	-
	Costs of dismatling in future	-
	Total	274,488
Year	Journal entries- Imaging Group Inc.,	Debit	Credit
Year 1	Right of use asset	274,488
	Lease liability		274,488
	To record right of use asset and lease liability
Year 1 to 5	Depreciation	54,898
	Right of use asset		54,898
	To record depreciation on Right of use asset for 5 years
Year 2	Finance costs	16,867
	Lease liability		16,867
	To record finance costs for Year 2
Year 3	Finance costs	13,124
	Lease liability		13,124
	To record finance costs for Year 3
Year 4	Finance costs	9,081
	Lease liability		9,081
	To record finance costs for Year 4
Year 5	Finance costs	4,715
	Lease liability		4,715
	To record finance costs for Year 5

Amortisation schedule
Year	CF	Discount factor @ 8%	Disc. CF	Accretion $ 8%	Year end balance
1	63,655	0.0000	63,655	-	210,833
2	63,655	0.9259	58,940	16,867	164,045
3	63,655	0.8573	54,574	13,124	113,514
4	63,655	0.7938	50,531	9,081	58,940
5	63,655	0.7350	46,788	4,715	-                0
Total	318,275		274,488	43,787

Particulars	Status
Type of lease for Maker Co.,	Sales type leases
Accounting in the books of Lessor
PV of lease receivable ($ 63655*16.6785)	1,061,670
Add: Lease payment received at commencement date	-
Less: carrying value of leased asset	-               760,000
Selling profit	301,670
Journal entries in the books of Maker	Debit	Credit
Lease receivable	1,061,670
Cost of goods sold	760,000
Property, Plant & equipment		1,061,670
Revenue		760,000
To record lease asset and revenue at commencement date