Question

A lease agreement between Lennox Leasing Company and Gill Company is described in IFRS21-10. Refer to the data in IFRS21-10 and do the following for the lessor.

Inception date: May 1, 2017

Annual lease payment due at the beginning of each year, beginning with May 1, 2017: \(18,829.49

Bargain-purchase option price at end of lease term: \)4,000.00

Lease term: 5 years

Economic life of leased equipment: 10 years

Lessor’s cost: \(65,000.00; fair value of asset at May 1, 2017, \)81,000.00

Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10%

The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(a) Compute the amount of the lease receivable at the inception of the lease.

Short answer

Answer

The lease receivable at inception is $81,000.00.

Step-by-step solution

Meaning of Sale-Type Lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets. (b)Recognize net investment.

Computation of lease receivables

Annual rental payment	$18,829.49
PV of an annuity-due of 1 for n = 5,i = 10%	$\times$4.16986
PV of periodic rental payments	$78,516.34

Bargain-purchase option	$ 4,000.00
PV of 1 for n = 5,i = 10%	$\times$0.62092
PV of bargain-purchase option	$ 2,483.68

PV of periodic rental payments	$78,516.34
PV of bargain-purchase option	+ 2,483.68
Lease receivable at inception	$81,000.00

Note:A bargain-purchase option is included in the lease agreement. From the perspective of the lessor, the lease qualifies as a finance lease.

The lease is a sales-type lease since the amount of the sale (which in this case equals the present value of the minimum lease payments, $81,000) exceeds the lessor's cost ($65,000).

The recurrent yearly rentals plus the bargain-purchase option make up the minimum lease payments for this lease. In this lease, there is no residual value that is significant to the lessor's accounting.