Question

Refer to the question on Alberta Mining: Alberta Mining Company leased equipment from Ontario Leasing Corporation on January 1, 2019. The machine has a fair value of $1,211,205, which is the same as the present value of the lease payments. The lease agreement calls for five equal payments of $300,000 at the beginning of each year. The useful life of the machine is expected to be six years with no residual value. The appropriate interest rate for this lease is 12%. [9 Marks]

A. Prepare the journal entry for Alberta Mining Company at the beginning of the lease.
B. Prepare the journal entry for Alberta Mining Company for the lease payments made on January 1, 2020, and January 1, 2021
C. Prepare the journal entry in the books of Ontario Leasing Corporation at the beginning of the lease.
D. Prepare the journal entry in the books of Ontario Leasing Corporation for the lease payments received on January 1, 2020, and January 1, 2021.

Answer 1

The question focuses on the journal entries required for a lease agreement between Alberta Mining Company and Ontario Leasing Corporation, including entries at the beginning of the lease and for the payments made in the subsequent years.

Step-by-step explanation:

Journal Entries for Lease Transactions

The student's question pertains to accounting for lease transactions in the books of Alberta Mining Company and Ontario Leasing Corporation. For Alberta Mining Company, the initial entry at the beginning of the lease would recognize the leased asset and the lease liability.

Beginning of Lease for Alberta Mining Company (January 1, 2019):
Leased Equipment: $1,211,205

Lease Liability: $1,211,205

Lease Payments for Alberta Mining Company (January 1, 2020, and January 1, 2021):

Lease Liability: $300,000

Cash/Bank: $300,000

For Ontario Leasing Corporation, the initial entry would recognize the lease receivable and the equipment's transfer to a leased asset.

Beginning of Lease for Ontario Leasing Corporation (January 1, 2019):

Lease Receivable: $1,211,205

Leased Equipment out: $1,211,205

Lease Payments for Ontario Leasing Corporation (January 1, 2020, and January 1, 2021):

Cash/Bank: $300,000

Lease Receivable: $300,000

These entries would apply yearly until the lease payments are completed. Note that in practice, interest would also be recognized on the lease liability or receivable, but since the question does not ask for this detail and it mentions that the fair value is the same as the present value of the lease payments, we can assume the payments are structured to include the effect of interest.