Lightening Inc. is a private company that follows IFRS. Its year end is December 31. During 20X2, it entered into two new leases as follows.
1. On January 1, 20X2, Lightening entered into a 12-year lease for specialized machinery with a fair value of $650,000 and a useful life of 15 years. Annual lease payments are $76,000, paid on January 1, with the first payment due on January 1, 20X2. At the end of the lease, Lightening has the option to pay $20,000 to purchase the machine at which time title will transfer.
The estimated fair value of the machine at that time will be $80,000. The implied interest rate in the lease is 7.2%; however, this is not known or determinable by Lightening. Lightening’s current borrowing rate for a loan of similar term and risk is 7.5%. Lightening incurred legal costs of $15,000 related to this lease arrangement. These costs have not yet been recorded. Lightening uses the straight-line method to depreciate this asset, and the residual value is estimated to be $0 at the end of its useful life.
2. On August 1, 20X2, Lightening entered into a three-year lease for a new computer with a fair value of $1,500. The monthly payments are $50 which are due at the beginning of the month. The implicit interest rate in the lease is 0.70% each month, which is known to Lightening. Lightening elects to adopt the practical expedient available to it for low-value assets.
Required:
a) Prepare all journal entries related to the first lease for January 1, 20X2, December 31, 20X2, and January 1, 20X3.
b) Prepare the journal entries related to the second lease at the commencement date of the lease (August 1, 20X2).
c) If Lightening followed ASPE, review the required criteria and conclude how the lease for the specialized equipment in the first lease would be recognized. No journal entries are required.
