Question Description

Westjet Airlines Ltd. filed its 2016 Audited Annual Financial Statements – English with SEDAR on February 7, 2017. Access these financial statements at SEDAR.com, and answer the following questions:

• What GAAP does Westjet apply?
• In Note 1 to the financial statements, Westjet describes its accounting policies for leases, and in Note 2 Westjet indicates that a new accounting standard has been approved for leases. What specific lease accounting standard was applied for the company’s 2016 financial statements? Are most of Westjet’s existing leases operating leases or capital leases? How did you reach your conclusion?
• Calculate the company’s debt-to-equity ratio at December 31, 2016.
• Read the information about Leases in Note 16 to the financial statements. Assuming an 8% discount rate and payments at the beginning of each of the periods given, estimate the amount of capitalized Obligations under Leases if these contracts were required to be accounted for similar to capital leases. Provide your calculations.
• Re-calculate what the company’s debt-to-equity ratio would have been if the lease contracts referred to in part d) had to be capitalized at December 31, 2016. Comment on what difference these recalculations would make to your assessment of the company’s financial position.

Question 2

Refer to the part of the IFRS accounting standard on leases (IAS 17 Leases) that covers the required lessee disclosures for finance/capital leases. (Follow the directions provided in your course outline for how to find specific accounting standards.)

• Identify the paragraph number(s) in IAS 17 that cover this material.
• Locate the 2016 audited annual financial statements (English) of Canadian Pacific Railway Limited filed with SEDAR on February 16, 2017. Make sure you use this specific company name. (i) Identify the December 31, 2016 net book value of the company’s capital assets under lease reported in its assets on the balance sheet. What balance sheet line item are these assets included in?
• For each required lessee disclosure required for finance/capital leases in IAS 17, identify the specific disclosure provided by Canadian Pacific Railway Limited.

(ii) Identify the balance of the company’s lease obligations included on the December 31, 2016 balance sheet, and indicate the balance sheet account(s) where this balance is reported.

Question 3

Midland Corp. (MC), needing an expensive and a very specialized piece of equipment, entered into a lease with lessor Talc Manufacturing Corp. (TMC). Both MC and TMC are public companies and both have December 31 fiscal year ends. Details of this equipment lease contract are as follows:

Lease contract signed September 2, 2016

Lease term 7 years

Expected residual value of the equipment at the end

of the lease term, not guaranteed by MC $100,000

Purchase option at end of lease term $ 30,000

Equipment’s economic life 9 years

Usual selling price of the equipment $615,000

Cost of equipment on TMC’s books $427,500

TMC’s interest rate implicit in the lease, as specified

in the lease contract signed September 2 8%

MC’s incremental borrowing rate at the bank 12%

Executory costs are payable by the lessee, and

are paid to the lessor as part of each annual lease

payment. Estimated annual costs are $12,000 and

this amount is added to each lease payment.

The rental/lease payment is due annually each Sept. 2,

beginning on September 2, 2016. Each payment is

required to include $12,000 to cover the executory costs.

Required: (Please show all calculations and round all amounts to two decimal places.)

• What type of lease is this to Midland Corp., the lessee? Explain fully how you determined your answer.
• Calculate the annual lease payment (before executory costs) TMC would need to charge in order to earn an 8% return. The first lease payment is made on the signing of the lease and on each September 2 for 6 years following that.
• Prepare a lease amortization table for MC, the lessee, covering the entire term of the lease. Use Excel features in developing the amounts for the table.
• Prepare all MC’s entries related to the lease up to and including December 31, 2017. MC does not use reversing entries.
• Identify the accounts related to the lease that will appear on MC’s December 31, 2017 balance sheet. Indicate the correct amount of each account and indicate where on the balance sheet each will be reported.
• What is the effect of this lease on MC’s cash flow statement for the year ended December 31, 2017? That is, indicate the effect it has on each of the (i) cash flows from operations (assume the indirect method is used where the net income is provided), (ii) investing cash flows, and (iii) financing cash flows for the year.
• Prepare the entry MC will make on September 2, 2023, the end of the lease term.
• Determine the amount of income TMC, the lessor, will report as a result of this lease for its year ended December 31, 2016.