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.


  1. Calculate the amount of the asset and liability of Lotus Company at the inception of the lease. (Round to the nearest dollar.)
  2. Prepare a table summarizing the lease payments and interest expense.
  3. Prepare journal entries on the books of Lotus for 2010 and 2011.
  4. Prepare a partial balance sheet in regard to the lease for Lotus for December 21, 2010.
  5. 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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