The Lotus Corporation signs a lease agreement dated January 1, 2010 that provides for it to lease equipment from Dragon Company beginning January 1, 2010. The lease terms, provisions, and related events are as follows:
The lease is non-cancellable and has a term of five years. The annual rentals are $83,222.92, payable at the end of each year, and provide Dragon with a 12% annual rate of return on its net investment. The Lotus Corporation agrees to pay all executory costs at the end of each year. In 2010, these were insurance, $3,760; property taxes, $5,440. In 2011: insurance, $3,100; property taxes, $5,330. There is no renewal or bargain purchase option.
Lotus estimates that the equipment has a fair value of $300,000, an economic life of five years, and a zero residual value. Lotus’ incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straight-line method to record depreciation on similar equipment.
Required:
- Calculate the amount of the asset and liability of Lotus Company at the inception of the lease. (Round to the nearest dollar.)
- Prepare a table summarizing the lease payments and interest expense.
- Prepare journal entries on the books of Lotus for 2010 and 2011.
- Prepare a partial balance sheet in regard to the lease for Lotus for December 21, 2010.
- If the lease term is three years and the annual payment is $120,000, how would Lotus classify the lease under (a) U.S.GAAP and (b) IFRS?
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