Chapter 18, Problem 18.16E

Classification as Finance or Operating Lease, Lessor, Journal Entries, Discount Rates, Annuity Due, Nonlease Components, IFRS. Using the information provided in E18-15 assume now that Stewart Standard and Kane Kite are IFRS reporters.

Required

1. a. Determine the lessor s classification of the lease.
2. b. Measure the right-of-use asset and the lease liability at January 1, 2019 and prepare the lessee s amortization table
3. c. Prepare the journal entries for Stewart Standard for 2019

E18-15 Classification as Finance or Operating Lease, Lessee, Lessor, Journal Entries, Sales-Type Lease, Discount Rates, Annuity Due, Nonlease Components. On January 1, 2019, Kane Kite Company leased a nonspecialized fabric-cutting machine from Stewart Standard, Inc. Under the terms of the lease Kane Kite must pay $200,000 on January 1 of each year, starting in 2019, over a 9-year term. The lease terms do not contain a transfer of ownership, and there is no purchase option. There is also no residual value specified in the contract. The cutting machine has a useful life of 9 years and Kane Kite depreciates similar equipment that it owns using the straight-line method. Kane Kite’s incremental borrowing rate is 9%, and the implicit rate of 8% in the lease is known to Kane Kite. The machine cost Stewart Standard $1,300,000 to manufacture and it has a selling price of $1,349,328. Stewart indicates that collection of the annual lease payments is reasonably certain. Kane is required to pay $5600 at the end of each year for maintenance to independent third parties, which it records as general and administrative expenses. Neither party to the lease incurs initial indirect costs.

Required

1. a. What type of lease is this for both the lessee and lessor?
2. b. Prepare the lease amortization table for the lease term
3. c. Prepare the journal entries necessary for Stewart Standard on January 1, 2019, and on December 31, 2019.
4. d. Prepare the journal entries necessary for Kane Kite Company on January 1, 2019, and on December 31, 2019.