Question

Ivanhoe Corp. agreed to lease property from Swifty Corp. effective January 1, 2017, for an annual payment of $24,963, beginning January 1, 2017. The property is made up of land with a fair value of $108,000 and a two-storey office building with a fair value of $182,000 and a useful life of 23 years with no residual value. The implicit interest rate is 7.5%, the lease term is 23 years, and title to the property is transferred to Ivanhoe at the end of the lease term.

Prepare the required entries made by Ivanhoe Corp. on January 1, 2017 and at its year end of December 31, 2017. Both Ivanhoe and Swifty use ASPE.

(To record inception of lease) (To record first lease payment) (To record accrued interest) (To record depreciation)

Answer 1

Since there is a provision that the title to the property is transferred to Ivanhoe at the end of lease term, it is Capital/finance lease.

Lessor : Swifty Corp.

Lessee : Ivanhoe Corp.

Journal entries in the books of Ivanhoe Corp

1) To record inception of finance lease.

January 1, 2017

Property A/c Dr. $269767

To lease liability A/c $244804

To Cash A/c $24963

Note: Sine Future value of property is $290000, the present value is $269767, for 23 years @7.5%

2) To record Interest and depreciation

December 31, 2017

Interest:

Interest Expense A/c Dr. $1872

To Interest payable A/c $1872

Note: Interest = 24963×7.5% = $ 1872

Depreciation:

Depreciation A/c Dr. $7913

To Accumulated Depreciation A/c $7913

Note:Depreciation is not charged on land.

On building charged on straight line basis for 23 years

3) To record first lease payment

January 1, 2018

Lease liability A/c Dr. $23091

Interest payable A/c Dr. $1872

To Cash A/c $24963