Reference no: EM132949818

Questions -

Q1) On March 1, 2021, Black Company leased equipment to Red Company for a four-year period ending February 28, 2025. The equipment cost Black Company P310,000 and has an expected useful life of five years. Annual payments are P109,047, which includes P10,000 executory costs. The equipment's fair value is P400,000. The lessee guarantees the residual value of P80,000. Lease payment is due every March 1 and Black Company made the first payment on March 1, 2021. The lessor's implicit interest rate is 10%.

Black Company incurred P16,000 costs to consummate the lease contract.

Present value of 1 discounted at 10% for 4 periods is 0.68301.

Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.

Present value of ordinary annuity of 1 at 10% for 4 periods is 3.16987.

How much is the gross investment in the lease prior to the first payment?

Q2) On January 1, 2021, Blue Company acquired a machine by signing a four-year lease. Annual rentals of P1,742,174 are payable at the beginning of each year starting January 1, 2021. Blue is given the option to buy the machine for P250,000 on December 31, 2024, when the asset's market price is expected to be P1,250,000. The asset's useful life is 6 years, at the end of which the asset's residual value is expected to be P80,000. Blue uses the straight-line method to depreciate this asset.

With an implicit interest rate of 10%, Blue appropriately recorded the machine and the related liability on January 1, 2022, at P6,245,450.

On December 31, 2024, at the end of the lease term, Blue failed to exercise the purchase option.

How much loss, if any, should Blue recognize as a result of the failure to exercise the purchase option?