Question

You have just been hired as the new controller of SWT Services Inc., and on the top
of the stack of papers on your new desk is a bundle of draft contracts with a note
attached. The note says, “Please help me to understand if this lease would be best for our situation.” The note is signed by the president of SWT Services Inc. You have reviewed the proposed contracts and asked a few questions.
The equipment and software have a fair value of $487,694 and an expected life of six years. The lease has a five-year term. Annual rent is paid each January 1, beginning in 2020, in the amount of $104,300. The implicit rate of the lease is not known by SWT. Insurance and operating costs of $23,500 are to be paid directly by SWT to the lessor in addition to the lease payments. At the end of the lease term, the equipment will revert to the lessor, who will be able to sell it for $85,000. If the lessor is unable to sell the equipment for this amount, SWT will be required to make up the shortfall. SWT will likely purchase the equipment for $85,000 if any payments are required under this clause of the lease.
SWT follows IFRS 16 and has a December year-end. SWT’s incremental borrowing
rate is 10%. Please prepare accounting entries to understand the cash and profit impact of the lease agreement