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Part 2 (Application) On January 1, 2017, a machine was purchased for $400,000 by Younger Leasing...

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.   

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

  1. 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.

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

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

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Expert Solution

ekkarill92 answered 2 years ago
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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:-