Matta Leasing Limited, which has a fiscal year end of October 31 and follows IFRS 16, signs an agreement on January 1, 2020, to lease equipment to Irvine Limited. The following information relates to the agreement.
1. The term of the non-cancellable lease is six years, with no renewal option. The equipment has an estimated economic life of eight years.
2. The asset’s cost to Matta, the lessor, is $305,000. The asset’s fair value at January 1, 2020, is $305,000.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $45,626, which is not guaranteed.
4. Irvine Limited, the lessee, assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2020.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties about costs that have not yet been incurred by the lessor.
Instructions
a. Answer the following, rounding all numbers to the nearest dollar.
b. Assuming that Matta Leasing desires a 10% rate of return on its investment, use (1) time value of money tables, (2) a financial calculator, or (3) Excel functions to calculate the amount of the annual rental payment that is required.
c. Prepare an amortization schedule using a spreadsheet that would be suitable for the lessor for the lease term.
d. Prepare all of the journal entries for the lessor for 2020 and 2021 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume that Matta prepares adjusting journal entries only at the end of the fiscal year.
e. Prepare a comparative partial statement of income for Matta for fiscal years 2020 and 2021.
