Question

On January 1, 2018 Tuk Ltd., which uses IFRS 16, entered into an eight-year lease agreement for drilling equipment. Annual lease payments are $28,500 at the beginning of each lease year, which ends December 31. Tuk made the first payment on January 1, 2018. At the end of the lease the equipment will revert to the lessor. The drilling equipment is expected to only last eight years, and has no residual value. At the time of the lease agreement, drilling equipment could be purchased for $167,250 (cash). Equivalent financing for the machine could be obtained from Tuk’s bank at 10 %. Tuk’s fiscal year coincides with the calendar year. Tuk uses straight-line depreciation for its drilling equipment.

i. Calculate the present value of the minimum lease payments.

ii. What type of lease is it? Explain your answer.

iii. Prepare an amortization schedule for Tuk

iv. Prepare the journal entries for Tuk’s books for: a. Inception of lease b. Payments and expenses (interest and depreciation) for 2018 and 2019

v. Provide Tuk’s required note disclosure for the lease at December 31, 2018 and 2019 vi. Provide Tuk’s required note disclosure for the lease liability for the fiscal year ending December 31, 2019.

Answer 1