On December 1, 2021, Pierre A. Ltd. (PAL) leased a car from Hondo Inc. (HI) with a fair value of $37,500. HI manufactures, sells, leases and finances vehicles.

On December 1, 2021, Pierre A. Ltd. (PAL) leased a car from Hondo Inc. (HI) with a fair value of $37,500. HI manufactures, sells, leases and finances vehicles. Terms of the lease were as follows:

• The lease term is 54 months, non-cancellable, and requires equal monthly lease payments made on the 1^st of each month with the first payment payable on the commencement date of the lease.
• HI’s gross margin on the sale of cars is 55%.
• The car has an estimated residual value at the end of the lease of $14,500. The lease contract specifies that PAL has the right to purchase the asset at the end of the lease for this amount. On occasion, PAL has purchased leased assets under similar transactions in the past.
• The car has an estimated economic life of 8 years with an estimated residual value of nil at the end of the useful life.
• HI’s required rate of return (excluding any initial direct costs) is an annual yield of 5% and sets lease payments accordingly to yield this rate.
• PAL’s annual incremental borrowing rate is 6% and the implicit rate in the lease is not known to PAL.
• PAL and HI both have December 31 year-ends and prepare financial statements in accordance with IFRS, PAL and HI both depreciate similar assets using the straight-line depreciation method.

Required:

Prepare ALL necessary journal entries for 2021 for both the lessor AND lessee.

• Please make sure to indicate the DATES of the journal entries!

Please clearly mark: LESSOR’s entries / LESSEE’s entries!

PART B (2 marks):

Using the facts in PART A, please indicate:

1. how this transaction would differ if both PAL and HI reported their financial statements using ASPE AND, if applicable
2. how these differences in treatment would impact potential users of the financial statements.

If there is no difference, please clearly indicate: NO DIFFERENCE. For any differences in accounting treatment,