In: Accounting
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:
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.
US GAAP: What will Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease?
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.
IFRS: What will Juniper report on the 2017 Balance Sheet and Income Statement regarding the lease?
Summarize the differences between US GAAP and IFRS illustrated in this specific problem.
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:- | ||||||