Lessee Ltd. Case

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Group 4 January 31, 2012 Lessee Ltd. case 1) The junior accountant is incorrect, because to begin with the Lessee Ltd. Is a British company that applies IFRS rules and regulations for preparing their financial statements. The junior accountant used the GAAP standards to prepare the computations and entries with is incorrect. Since he used the GAAP standards for lease accounting, he identified the lease as an operating lease because as he noted in while preparing the journal entries he concluded that “ Since the equipment reverts back to Lessor Inc., it is an operating lease.” Under the IFRS codifications and based on the Lessee Ltd. Case the company has finance lease instead of an operating lease. Moreover the junior accountant used the incremental borrowing rate when implicit rate is known which is also according to GAAP, since they are filing with IFRS regulations, it is wrong. 2) The senior accountant is correct because he is using the IFRS regulation standards. The senior accountant noted on his first step that “The lease term is for three years. The useful life of the equipment is four years. Since the lease term is for a major part of the useful life of the equipment, it is a finance lease.” Under the IFRS standards, a lease is considered a finance lease when: a) The non-cancelable lease term is for “Major Portion” of the expected economic life of the asset. So the lease term was 3 years, and the useful life of the equipment is 4 years. This indicated that the lessee has use the major portion of the expected economic life of the asset. b) The present value of the minimum lease payments is equal to or greater than “Substantially all” of the fair value of the asset. This rule means that since the fair market value (FMV) at the lease inception is $265,000 and the lessee has used the equipment as its lease obligation of $244,370 this

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