Answered: a) State why this should be classified…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 6C: On October 1, 2019, Grahams WeedFeed Inc. signs a contract to maintain the grounds for BigData Corp....

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On July 1, 2019, Cancer Ltd. signed an 8 year, non-cancellable lease agreement to lease a highly specialized MRI equipment from Aquarius Ltd. The agreement is non-renewable and requires the first payment of $50,397 every July 1, starting in 2019. The yearly rental payment includes $2500 of executory costs related to a maintenance contract on the equipment and at the end of the lease term, the machine reverts to the lessor. The machine has an estimated useful life of 12 years with an unguaranteed residual value of $22,000. Cancer Ltd. Uses the straight-line method of depreciation and the fair value of the machine on July 1 2019 was $300,000. Cancer Ltd. year end is June 30. Additionally, its incremental borrowing rate is 8%. Aquarius implicit rate is 9% which is known to Cancer Ltd.

Requirements:

a) State why this should be classified as a finance lease

b) Prepare the lease schedule. Use online TVM financial calculator

c) Prepare the necessary journal entries for July 1 2019 and June 30 2020

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