Question

Ivanhoe Corporation is a machinery dealer whose shares trades on the TSX, and so uses IFRS 16. Ivanhoe leased a machine to Ernst Ltd. on January 1, 2017. The lease is for a six-year period and requires equal annual payments of $24,959 at the beginning of each year. The first payment is received on January 1, 2017. Ivanhoe had purchased the machine for its inventory during 2016 for $100,900. Collectibility of lease payments is reasonably predictable, and no important uncertainties exist about costs that have not yet been incurred by Ivanhoe. Ivanhoe set the annual rental amount to ensure an 12% rate of return. The machine has an economic life of six years, with no residual value, and reverts to Ivanhoe at the termination of the lease.

A)Using time value of money tables, a financial calculator, or Excel functions, calculate the amount of each of the following:

gross investment:

unearned intrest income:

net investment in lease:

B)Prepare all necessary journal entries for Ivanhoe for 2017.

(n =6

rate of return =12%

1.97382)

Answer 1

	Lease amortization schedule
	Year	Equal annual lease payments	PVIF@12%	Present worth	Interest
	0	24959	1	24959	0
	1	24959	0.892857	22284.82	2674.178571
	2	24959	0.797194	19897.16	5061.83801
	3	24959	0.71178	17765.32	7193.676795
	4	24959	0.635518	15861.9	9097.104281
	5	24959	0.567427	14162.41	10796.59311
		149754		114930.6	34823.39
	Gross Investment in Lease		149754
	Unearned Interest Income		34823.39
	Net Investment in Lease		114930.6
Journal entries for Ivanhoe for 2017
			Amount in $
Date	General Journal		Debit	Credit
2017
Jan-01	Cash
Jan-01	Investment in Lease		114930.6
		Leased asset		100900
		Profit on Leased asset		14030.61
	To record the inception of lease
Jan-01	Cash		24959
		Investment in Lease		24959
	To record the receipt of 1st Installment towards lease
Dec-01	Investment in Lease		2674.18
		Interest Income		2674.18
	To record the Interest portion of lease installment.