Lease Problem
Creative Transportation Company (CTC) entered into a lease on January 1, 2009, with Wagon Builder, Inc. (WBI) for a customized horse-drawn carriage. WBI will provide a carriage to CTC that has CTC's logo molded into the iron work of the frame, carved into various areas of the woodwork, and painted on the side of the doors. Additionally, WBI will provide custom-made pulling devices on the carriage to accommodate CTC's rare Mecklenburger horses. Following are the terms of the lease arrangement:
• Fair value of the carriage at the inception of the lease is $10,000.
• Three-year term.
• Estimated residual value (unguaranteed) is $3,951.
Lessee does not absorb any gains or losses in the fluctuations of the fair value of the residual value.
• End-of-term purchase option is $4,000
• Remaining economic life of five years.
• Depreciation policy is the straight-line method.
• Ownership is not transferred at the end of the lease term.
• The lease may not be extended.
• Annual lease payments of $2,500 at 6% implicit interest rate, due on December 31.
• Present value of minimum lease payments is $6,682.
Required: Determine whether CTC should record this lease as an operating lease or a finance lease under (a) IFRS and (b) U.S. GAAP. Prepare journal entries for 2009 under IFRS.