Premises lease
Topango Corporation entered into a leasing agreement for a small industrial building on October 1,2015. The landlord had offered to sell the unit to Topango, but Ethan felt the price was too steep ($850,000 including $300,000 for the land and $550,000 for the building). Ethan wanted to ensure the location was suitable before he purchased. Instead, he agreed to a 4 year lease, with payment of $9,350 due on the first of each month.
Printing press lease
The digital printing press, with high speed scanning and online editing, is a state-of-the-art machine with a list price of $420,000. The press is built to last, with an estimated useful life of 15 years, even though obsolescence will be a concern within 5-10 years. Topango has agreed to lease it for 6 years, and it was installed on October 1, 2015. Annual payments of $72,200 + 13% HST are due on October1, starting October 1, 2015. In order to close the deal,Topango had to guarantee a residual value of $50,000.
Task #1:
For both the premises lease and the printing press leases, explain how the leases will be classified for accounting purposes, and why. Show the journal entries required at the initiation of the lease.
Task #2:
Show how the premises and printing press leases will be reflected on the balance sheet and income statement for Topango’s first fiscal year end on February 28, 2016. Note: Only lease-related accounts need to be shown (i.e. accounts indirectly affected by the lease transactions (such as cash) need not be shown).