On January 1, 2020, a machine was purchased for $400,000 by Younger Leasing Co. The machine is expected to have a 10-year life with no salvage value. Similar machines are depreciated on a straight-line basis by Younger. The machine was leased to Juniper Inc. for 3 years on January 1, 2020, with annual rent payments of $69,560 due at the beginning of each year, starting January 1, 2020. The machine is expected to have a residual value at the end of the lease term of $260,000, though this amount is unguaranteed. Assume an incremental borrowing rate of 8% and an implicit rate of 6%. The present value of a $1 for 3 periods at 6% is 0.83962 and at 8% is 0.79383. The present value of an annuity due for 3 periods at 6% is 2.83339 and at 8% is 2.78326. Following IFRS, what amounts will Juniper report on the Balance Sheet (any assets and liabilities) and Income Statement (any revenue or expenses) prepared on December 31, 2020, regarding this lease? Please clearly indicate whether the expense reported in Income Statement, if any, is lease expense, interest expense, and/or amortization expense. Also clearly indicate the gross and net amount of assets reported, if any, in the Balance Sheet.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2020, a machine was purchased for $400,000 by Younger Leasing Co. The machine is expected to have a 10-year life with no salvage value. Similar machines are
Assume an incremental borrowing rate of 8% and an implicit rate of 6%. The present value of a $1 for 3 periods at 6% is 0.83962 and at 8% is 0.79383. The present value of an annuity due for 3 periods at 6% is 2.83339 and at 8% is 2.78326.
- Following IFRS, what amounts will Juniper report on the Balance Sheet (any assets and liabilities) and Income Statement (any revenue or expenses) prepared on December 31, 2020, regarding this lease? Please clearly indicate whether the expense reported in Income Statement, if any, is lease expense, interest expense, and/or amortization expense. Also clearly indicate the gross and net amount of assets reported, if any, in the Balance Sheet.
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