Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process of preparing its financial statements for the year ended June 30, 2020. The following leases were entered into:Lease 1: On February 1, 2020, the company entered into a lease contract in respect of plant and machinery for a production line. The details are as follows: 12 quarterly rental payments$ 11,000 (first payment on April 30,2020)Period of contract3 years (from February 1, 2020)Fair value of equipment (cost to FFL)$200,000Guaranteed residual value — end of lease term$ 60,000Estimated residual value — end of useful life$ 20,000Economic life8 yearsImplicit rate12% Lease 2: On April 1, 2020, the company entered into a lease contract in respect of a fleet of distribution vehicles. This lease involves the following payments: Initial rental payment$ 30,000 (due April 1, 2020)10 quarterly rental payments$ 6,000 (first payment due on July 1, 2020)Period of contract3 years (from April 1, 2020)Fair value of equipment (cost to FFL)$190,000Unguaranteed residual value — end of lease term$120,000Estimated residual value — end of useful life$ 60,000Economic life6 yearsImplicit rate12% FFL depreciates all its equipment on a straight-line basis. Required: Evaluate the leases and determine whether FFL (the lessor) should account for these leases as operating or capitalPrepare the journal entries relating to these leases and the underlying equipment for the year ended June 30, 2020, from the perspective of FFL (the lessor). It is not necessary to record journal entries pertaining to the initial acquisition of the equipment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Fields Finance Ltd. (FFL), a leasing company that reports under ASPE, is in the process of preparing its financial statements for the year ended June 30, 2020. The following leases were entered into:Lease 1: On February 1, 2020, the company entered into a lease contract in respect of plant and machinery for a production line. The details are as follows: 12 quarterly rental payments$ 11,000 (first payment on April 30,2020)Period of contract3 years (from February 1, 2020)Fair value of equipment (cost to FFL)$200,000Guaranteed residual value — end of lease term$ 60,000Estimated residual value — end of useful life$ 20,000Economic life8 yearsImplicit rate12% Lease 2: On April 1, 2020, the company entered into a lease contract in respect of a fleet of distribution vehicles. This lease involves the following payments: Initial rental payment$ 30,000 (due April 1, 2020)10 quarterly rental payments$ 6,000 (first payment due on July 1, 2020)Period of contract3 years (from April 1, 2020)Fair value of equipment (cost to FFL)$190,000Unguaranteed residual value — end of lease term$120,000Estimated residual value — end of useful life$ 60,000Economic life6 yearsImplicit rate12% FFL depreciates all its equipment on a straight-line basis. Required: Evaluate the leases and determine whether FFL (the lessor) should account for these leases as operating or capitalPrepare the journal entries relating to these leases and the underlying equipment for the year ended June 30, 2020, from the perspective of FFL (the lessor). It is not necessary to record journal entries pertaining to the initial acquisition of the equipment.

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