Question

On Jan 1, 2017, Mickey Inc enters into a 7 year, non cancellable lease with Minnie Ltd for machinery having an estimated useful life of 9 years, and a fair value of $4,300,000. Minnie's implicit rate is 6%. Mickey using the straight-line depreciation method to depreciate assets. Mickey will make annual lease payments on Jan. 1 of each year. The lease includes a guarantee by Mickey Inc. that Minnie Ltd will realize $100,000 for selling the asset at the expiration of the lease. Both companies adhere to IFRS 16.

Required:

1. Calculate the lease payment Minnie Ltd. will charge Mickey (assuming no mark-up on the machinery from fair value). Round to the nearest dollar.
2. Calculate the present value of the lease payments. Round to the nearest dollar.
3. What kind of lease is this to Mickey Inc.? Why?
4. Present the journal entries that Mickey Inc. would record during the first year of the lease. Round to the nearest dollar.

Answer 1

Presnt value of lease payments fair value of machinery(ie no markup)

So, Let Lease payment be X,

So, X* ( 1 + PV factor @ 6%, 6 years ) +100000*(PV 6%, 7th year) ie salvage guranteed value = 4300000.

ie, X (1 + 4.917) + 100000(0.6651) = 4300000

so, x = 715479.

a) Lease Payment = 715479.

b) present value of lease payments = 4300000.

c)Finance lease. Since it covers up most of the life of asset and nature is non-cancellable lease.

d)

1-1-17	Right of use asset a/c Dr	4300000
	To lease liability		4300000
	(lease liability agreed for)
1-1-17	Lease liability Dr	715479
	To cash a/c		715479
	(first lease payment made)
31-12-17	Interest expense a/c Dr (4300000-715479)*6%	215071
	To Interest payable a/c		215071
	(interest accrued)
31-12-17	Depreciation expense (4300000/7) Dr	614286
	To Right of use asset		614286
	(depreciation charged)