Question

On January 1, 2020, Oriole Corp., which uses IFRS, signs a 10-year, non-cancellable lease agreement to lease a specialty lathe from Liu Inc. The following information concerns the lease agreement.

1.		The agreement requires equal rental payments of $89,432 beginning on January 1, 2020.
2.		The lathe’s fair value on January 1, 2020, is $610,000.
3.		The lathe has an estimated economic life of 12 years, with an unguaranteed residual value of $16,000. Oriole Corp. depreciates similar equipment using the straight-line method.
4.		The lease is non-renewable. At the termination of the lease, the lathe reverts to the lessor.
5.		Oriole’s incremental borrowing rate is 9% per year. The lessor’s implicit rate is not known by Oriole Corp.
6.		The yearly rental payment includes $2,229.93 of executory costs related to insurance on the lathe.

Assume that Oriole’s fiscal year end is May 31. Prepare the journal entries on Oriole Corp.’s books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the calendar years 2020 and 2021. Oriole does not prepare reversing entries.

1/1/20	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment.)
5/31/20	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	(To record depreciation expense.)
5/31/20	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount
	(To record interest.)
12/31/20	enter an account title to record expired insurance	enter a debit amount	enter a credit amount
	enter an account title to record expired insurance	enter a debit amount	enter a credit amount
	(To record expired insurance.)
1/1/21	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	enter an account title to record lease payment	enter a debit amount	enter a credit amount
	(To record lease payment.)
5/31/21	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	enter an account title to record depreciation expense	enter a debit amount	enter a credit amount
	(To record depreciation expense.)
5/31/21	enter an account title to record interest	enter a debit amount	enter a credit amount
	enter an account title to record interest	enter a debit amount	enter a credit amount
	(To record interest.)
12/31/21	enter an account title to record expired insurance	enter a debit amount	enter a credit amount
	enter an account title to record expired insurance	enter a debit amount	enter a credit amount
	(To record expired insurance.)

Answer 1

Answer
Date	Account titles and explanation	Debit $	Credit $
01-01-2020	Right-of-Use Asset	610000
	Insurance Expense (2229.93*5/12)	929.14
	Prepaid Insurance (2229.93*7/12)	1300.79
	Lease Liability		522797.93
	Cash		89432
	(to record payment of lease and insurance)
5/31/2020	Depreciation Expense (610000/10*5/12)	25416.67
	Accumulated Depreciation —Right-of-Use Asset		25416.67
	(to record depreciation)
5/31/2020	Interest Expense (610000-87202.07)*9% = 47051.81*5/12	19604.92
	Lease Liability		19604.92
	(to record accrued interest)
12/31/2020	Insurance Expense	1300.79
	Prepaid Insurance		1300.79
	(to record insurance)
01-01-2021	Interest expense (47051.81-19604.92)	27446.89
	Insurance Expense	929.14
	Prepaid Insurance	1300.79
	Lease Liability (balancing figure)	59755.18
	Cash		89432
	(to record payment of lease and insurance)
5/31/21	Depreciation Expense (610000/10)	61000
	Accumulated Depreciation —Right-of-Use Asset		61000
	(to record depreciation)
5/31/21	Interest Expense ((610000-87202.07-(87202.07-47051.81))*9% = 43438.29*5/12	18099.29
	Lease Liability		18099.29
	(to record accrued interest)
12/31/21	Insurance Expense	1300.79
	Prepaid Insurance		1300.79
	(to record insurance)
Please Like ( Positive rating )