Question

Part 2 (Application)

On January 1, 2017, a machine was purchased for $400,000 by Younger Leasing Co. The machine is expected to have a 10-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to Juniper Inc. for 3 years on January 1, 2017, with annual rent payments of $69,560 due at the beginning of each year, starting January 1, 2017. The machine is expected to have a residual value at the end of the lease term of

$260,000, though this amount is unguaranteed.

  

Required:

1. US GAAP: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessarry 2017 journal entries related to the lease for Juniper.   

2. US GAAP: What will Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease?

3. IFRS: Assuming an incremental borrowing rate of 6% and an unknown implicit rate, prepare all necessary 2017 journal entries related to the lease for Juniper.

4. IFRS: What will Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease?

5. Summarize the differences between US GAAP and IFRS illustrated in this specific problem.

Answer 1

ekkarill92

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US GAAP:-	The lease is operating lease for Juniper, as it does have any feature associated with Finance lease.
	Date	Account Titles	Debit	Credit
	January 1, 2017	Prepaid Lease	69,560
		Cash		69,560
	December 31, 2017	Lease Expense	69,560
		Prepaid Lease		69,560
US GAAP:-	Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease
	Income Statement
	Lease Expense	69,560
	Nothing will be reported on Balance Sheet.
IFRS:	Under IFRS for Juniper, the lease will always be Finance Lease.
	Date	Lease Payment	Present Value Factor @6%	Present Value
	January 1, 2017	69,650	1	69,650
	January 1, 2018	69,650	0.94340	65,708
	January 1, 2019	69,650	0.89000	61,988
	Total	208,950		197,346
	Date	Account Titles	Debit	Credit
	January 1, 2017	Right of use asset	197,346
		Lease Liability		197,346
	January 1, 2017	Lease Liability	69,650
		Cash		69,650
	December 31, 2017	Amortization Expense	65,782
		Right of use asset		65,782
		( 197,346 / 3 )
	December 31, 2017	Interest Expense	7,662
		Interest Payable		7,662
		( 197,346 - 69,650 ) x 6%
IFRS	Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease
	Income Statement
	Interest Expense	7,662
	Amortization Expense	65,782
	Balance Sheet
	Assets
	Right of Use asset	131,564
	Liabilities
	Lease Liability	127,696
	Difference between US GAAP & IFRS:-