A4 SW7 – 33% Leases and Accounting Changes and

Errors (10%)
Assignment 4 is comprised of three problems worth 100 marks overall. This assignment is worth 10% of
your course grade.

Total 100 marks

A4 Subject Marks
/Out of
Q1 Dallas Corp. Sales Lease 10/35
Under IFRS
Q2 Brussel Corp. 16/40
Q3 Finger Lakes 10/25

- 3mks

 Please label assignment questions Qx (where x indicates which question it is) and then include
the text reference if applicable. If the question is from Moodle you could include the name of
the company if given e.g. Q1 Green Corporation.

 Use Qx as opposed to Question x as I sometimes work on a laptop and screen space is limited.
For this same reason use P for Problem and E for Exercise, CA for Case
For example Q1 CA1-3 shows that the first assigned homework problem Q1 is from the text Case
1-3. Within a question, please use the same numbering as in the text (e.g., if the text uses a) b)
c) please use a) b) c) and NOT 1) 2) 3). While this may seem trivial it helps a great deal to ensure
I am following your work correctly. This line (beginning of a new question) should be formatted
Heading 1 to facilitate use of the Navigation pane.

On to the last one Yahye!

However, first take the time to review this one.
For A5 Q2 (make a note of this now so you do not forget it):
The company reports under IFRS* which means there are some options. In answering this
question
- treat dividends and interest received as operating
 - dividends paid as financing, and interest paid as operating.

Regards,

Keith Whitmore
Faculty - Thompson Rivers University - Open Learning
kwhitmore@tru.ca
(to contact me email me directly and do not use Moodle messaging)
http://kamino.tru.ca/experts/home/main/bio.html?id=kwhitmore
ACCT 3211_T00742115_Yahye Ahmed_Assignment 4

Question 1:
 Please label assignment questions Qx (where x indicates which question it is) and then include
the text reference if applicable. If the question is from Moodle you could include the name of
the company if given e.g. Q1 Green Corporation.

 Use Qx as opposed to Question x as I sometimes work on a laptop and screen space is limited.
For this same reason use P for Problem and E for Exercise, CA for Case
For example Q1 CA1-3 shows that the first assigned homework problem Q1 is from the text Case
1-3. Within a question, please use the same numbering as in the text (e.g., if the text uses a) b)
c) please use a) b) c) and NOT 1) 2) 3). While this may seem trivial it helps a great deal to ensure
I am following your work correctly. This line (beginning of a new question) should be formatted
Heading 1 to facilitate use of the Navigation pane.

[a.] a. This is a finance lease for the lessor, Dallas Corp. because the lease transfers substantially all
the risks and rewards of ownership of the truck to Valley Corp. Dallas Corp. has transferred
ownership of the truck, and Valley Corp. is responsible for all costs associated with the truck,
including insurance and maintenance.

a. For the lessor, Dallas, this is a sales-type (dealer) lease. They manufactured the truck.
- 2mks

Justify your answer in one or two sentences.

They manufactured the truck (reference pages 20-39 & 20-45 13th Edition).

b. PV= 260,000
FV= 0

I= 5

N= 5

PMT= ?

PMT= 60,053
 Payment due at the end of the year. Calculation of lease payment:
n 5
i 5
PV 260,000
FV 0

PMT =$57,193.76 - 7mks

c.
Monthly Lease Interest 5% Reduction of lease Balance Lease
Payments liability Liability
January 1, Year 7 260,000
January 1, Year 7 60,053 13,000 47,053 212,947
January 1 Year 8 60,053 10,647 49,406 163,541
January 1 Year 9 60,053 8,177 51,876 111,665
January 1 Year 10 60,053 5,583 54,470 57,195
January 1 Year 11 60,053 2,859 57,194 1

a.
260,000.00

January 1, Yr 7 57,193.76 202,806.24

January 1, Yr 8 57,193.76 10,140.31 47,053.45 155,752.79

January 1, Yr 9 57,193.76 7,787.64 49,406.12 106,346.67

January 1, Yr 10 57,193.76 5,317.33 51,876.43 54,470.25

January 1, Yr 11 57,193.76 2,723.51 54,470.25 (0.00)

‍
25,968.80

260,000.00

285,968.8
0 285,968.80

d.
Date Account title Debit Credit
January 1, Year 7 Lease Receivables 260,000x
Sales Revenue 260,000

Cash 60,053
 Lease Receivables 47,053
Interest Income 13,000

January 1, Year 8 Cash 60,053

Lease Receivables 49,406
Interest Income 10,647

-16 mks
d.

January 1, Yr 7 Lease receivable 285,969

$57,193.76 * 5 years

Unearned interest 25,969

income
(10,140.31 + 7,787.64 +
5,317.33 + 2,723.51)

Sales revenue 260,000

(PV = 260,000)

January 1, Yr 7 Cost of goods sold ($ 180,000

180,000 cost of
manufacturing)

Inventory 180,000

Must match COGS with

sales.

January 1, Yr 7 Cash 57,194

Lease receivable 57,194

(Entry to record the first

payment, PMT =
57,193.76)
 ‍

December 31, Yr 7 Unearned Interest 10,140

Income

Interest Income 10,140

[(260,000 – 57,193.76)
*5%]

January 1, Yr 8 Cash 57,194

Lease receivable 57,194

(Entry to record the

second payment, PMT =
57,193.76)

December 31, Yr 8 Unearned Interest 7,788

Income

Interest Income 7,788

[260,000 – 57,193.76 –
47,053.45 (57,193.76 -
10,140)] *5% = $
7,787.63

Question 2:
a. PV=?
FV= -10,000

PMT= 9,773.46+400=10,173.46 PMT= -10,173

N= 10*2=20
I= 9%/2=4.5%

PV= 136,476

Reference page 20-22 11th Canadian Edition, Residual Values Guaranteed by the Lessee 20-26

a. Set calculator to begin:

n = 20
i = 4.5
pmt = 9,773.46
FV = 10,000
Present value of lease payments................................................ $ 137,000

- 6mks

Annuity due, so Excel syntax is =PV(0.045,20,-9773.46,-10000,1).

[a.] b. This is a finance lease for the lessor, Brussel Corp. The lease meets the criteria for a finance
lease under IFRS because it transfers the risks and rewards of ownership to the lessee. These
criteria include the present value of lease payments substantially exceeding the fair value of the
asset.

Under IFRS 16, this lease is a right of use lease to Brussel Corp. Why? Brussel Corp (Lessee)
leased equipment from Sprout Ltd (Lessor) on a non-cancellable contract of 10 years.
- 6mks

And does not qualify for short-term or minimal amount exemption.

c.
Monthly Lease Interest 4.5% Lease Liability Balance Lease
Payment Liability
Jan 1 Yr 1 136,476
Jan 1 Yr 1 10,173 6,141 4,032 132,444
Jul 1 Yr 1 10,173 5,960 4,213 128,231
Jan 1 Yr 2 10,173 5,770 4,403 123,828
Jul 1 Yr 2 10,173 5,572 4,601 119,227
Jan 1 Yr 3 10,173 5,365 4,808 114,416
 Jul 1 Yr 3 10,173 5,149 5,042 109,374
Jan 1 Yr 4 10,173 4,922 5,251 104,123
Jul 1 Yr 4 10,173 4,686 5,487 98,636
Jan 1 Yr 5 10,173 4,439 5,734 92,902
Jul 1 Yr 5 10,173 4,181 5,992 86,910
Jan 1 Yr 6 10,173 3,911 6,262 80,648
Jul 1 Yr 6 10,173 3,629 6,544 74,104
Jan 1 Yr 7 10,173 3,335 6,838 67,266
Jul 1 Yr 7 10,173 3,027 7,146 60,120
Jan 1 Yr 8 10,173 2,705 7,468 52,652
Jul 1 Yr 8 10,173 2,369 7,804 44,848
Jan 1 Yr 9 10,173 2,018 8,155 36,693
Jul 1 Yr 9 10,173 1,651 8,522 28,171
Jan 1 Yr 10 10,173 1,268 8,905 19,266
Jul 1 Yr 10 10,173 867 9,306 9,960
Dec 31 Yr 10 10,173 448 9,725 235

c.

Lease amortization schedule for Brussel Corp

Date Cash (PMT) Interest 4.5% Lease liability Book Value

$ 136,999.94

01-Jan-01 $ 9,773.46 $ 9,773.46 127,226.48

01-Jul-01 9,773.46 $ 5,725.19 4,048.27 123,178.21

01-Jan-02 9,773.46 5,543.02 4,230.44 118,947.77

01-Jul-02 9,773.46 5,352.65 4,420.81 114,526.96

01-Jan-03 9,773.46 5,153.71 4,619.75 109,907.21

01-Jul-03 9,773.46 4,945.82 4,827.64 105,079.58

01-Jan-04 9,773.46 4,728.58 5,044.88 100,034.70

01-Jul-04 9,773.46 4,501.56 5,271.90 94,762.80

01-Jan-05 9,773.46 4,264.33 5,509.13 89,253.67

01-Jul-05 9,773.46 4,016.42 5,757.04 83,496.62

01-Jan-06 9,773.46 3,757.35 6,016.11 77,480.51

01-Jul-06 9,773.46 3,486.62 6,286.84 71,193.67

01-Jan-07 9,773.46 3,203.72 6,569.74 64,623.93

01-Jul-07 9,773.46 2,908.08 6,865.38 57,758.55

 01-Jan-08 9,773.46 2,599.13 7,174.33 50,584.22

01-Jul-08 9,773.46 2,276.29 7,497.17 43,087.05

01-Jan-09 9,773.46 1,938.92 7,834.54 35,252.51

01-Jul-09 9,773.46 1,586.36 8,187.10 27,065.41

01-Jan-10 9,773.46 1,217.94 8,555.52 18,509.89

01-Jul-10 9,773.46 832.95 8,940.51 9,569.38

31-Dec-10 10,000.00 430.62 9,569.38 0.00

d.
Date Account title Debit Credit
January 1, Year 1 Right of Use Asset 140,000x
Lease Liability 136,476
Cash 3,524

January 1, Year 1 Interest Expense 6,141

Lease Liability 4,032
Cash 10,173

July 1, Year 1 Interest Expense 5,960

Lease Liability 4,213
Cash 10,173

January 1, Year 2 Interest Expense 5,770

Lease Liability 4,403
Cash 10,173

July 1, Year 2 Interest Expense 5,572

Lease Liability 4,601
Cash 10,173

-12 mks

January 1, Yr 1 Right of use asset 137,000

 Lease liability PV = $ 137,000) 137,000

January 1, Yr 1 Lease liability 9,773

Insurance expense 400

Cash 10,173

July 1, Yr 1 Lease liability 4,048

[9,773 - (137,000-9,773) *4.5%]

Interest expense 5,725

(137,000 – 9,773) *4.5%

Insurance expense 400

Cash 10,173

December 31, Yr Depreciation Expense 12,700

1

Accumulated Depreciation 12,700

($ 137,000– 10,000) ÷ 10

Because there is a guaranteed residual,

you have to deduct it when calculating
depreciation expense.
Same if there is a bargain purchase
option – you would need to deduct the
bargain purchase amount and use years
of useful life, similar to residual value
but a bit different.

Only with no guaranteed residual and no

BPO do you use just the PV divided by
the lease term.
 ‍

December 31, Yr Interest Expense 5,543

1 (137,000 – 9,773 - 4,048) *4.5%

Lease liability 5,543

(or interest payable)

January 1, Yr 2 Lease liability 9,773

Insurance expense 400

Cash 10,173

Or DR Interest payable 5,543

(137,000 – 9,773 - 4,048) *4.5%
and DR lease liability 4,230
[9,773 - (137,000 – 9,773 - 4,048)
*4.5%]

July 1, Yr 2 Lease liability (9,773 – 5,353) 4,420

Interest expense 5,353

(137,000 – 9,773 – 4,048 – 4,230)
*4.5%

Insurance expense 400

Cash 10,173

Question 3:
1- The first situation is a change in accounting policy. The company is deferring revenue related to the
loyalty rewards program. It did not defer to revenue related in previous years. This change is due to the
materiality of the rewards. According to IFRS, changes in accounting policies should require
retrospective application. This means that the financial statements of previous years should be restated
as if the new policy had always been in place.
- 3mks

2- This situation is a change in estimate. It represents a change in the depreciation method. The
company has decided to change its method of depreciating property, plant, and equipment. This
situation does not require a restatement of retained earnings. Therefore, this is a change in estimate.
The company should disclose the nature of the change and the effect of the change on each line item.
- 3mks

3- This situation does have any changes since it is only talking about the increase in net income every
year. It does not contain a correction of error since there are no errors available.
- 5mks
4- This situation is a change in estimate since the change in warranty expense is from 1% to 0.5% which
is based on improvements in year 4. There is no restatement required since this is a change in estimate.
The company should also disclose the change in estimate which has an effect in current period or in
future period.

Yes

5- This is also a change in estimate since the divisional manager is changing the useful lives of asset-
based on better information. The company has obtained better information about the useful life of its
asset. There is no restatement since this is a change in estimate.
- 4mks