Question

On July 1, 2023, Carla Vista Corp., which uses IFRS, signs a 4-year, non-cancellable lease agreement to lease a equipment from Sunland Ltd. The following information concerns the lease agreement. 1. The equipment's fair value on July 1,2023 is ($ 267,000). 2. The agreement requires equal rental payments of ($ 59,50).00 beginning on July 1,2023 . 3. The equipment has an estimated economic life of 5 years, with an unguaranteed residual value of ( $ 86,600 ). Carla Vista Corp. depreciates similar equipment using the straight-line method, with no residual value. 4. The lease is non-renewable. At the termination of the lease, the equipment reverts to Sunland. 5. Carla Vista's incremental borrowing rate is 5 per year. The lessor's implicit rate is not known by Carla Vista Corp. 6. The vearly rental payment includes ( $ 7,126,37 ) of executory costs related to insurance on the equipment.

Answer 1

The financial details of the lease agreement between Carla Vista Corp. and Sunland Ltd. are analyzed according to IFRS guidelines. The present value of lease payments is calculated by discounting the annual payment, reduced by executory costs, at Carla Vista's incremental borrowing rate. The equipment will be depreciated using the straight-line method with no residual value considered.

Step-by-step explanation:

The lease agreement between Carla Vista Corp. and Sunland Ltd. involves analyzing various financial aspects under the International Financial Reporting Standards (IFRS). To calculate the present value of the lease payments, it is necessary to subtract executory costs from the annual payment. Thus, the annual payment for the lease itself is ($59,500 - $7,126.37). This difference must then be discounted using Carla Vista's incremental borrowing rate of 5% per year over the four-year lease term.

Since the equipment has an estimated economic life of five years and an unguaranteed residual value, and Carla Vista Corp. is accustomed to using the straight-line method of depreciation without residual value, the company should depreciate the right-of-use asset over the lease term. It should also recognize interest expense on the lease liability annually using the incremental borrowing rate.

The fair value of the equipment and its future return to Sunland upon lease expiration are also relevant details, particularly for accounting disclosure purposes but do not directly affect the lease payment calculations or recognition of expenses under IFRS.