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Question - On December 31, 2020, Alba Co. leased a machinery with the following terms:

Annual rental payable in advance on December 31 of each year P70,000

Estimated residual value at the end of the lease term 50,000

Residual value guaranteed by the lessee 30,000

Lease term 4 years

Useful life of the machinery 6 years

Interest rate implicit in the lease 7%

Included in the annual rental is an amount of P3,000 to cover reimbursement for insurance paid by the lessor. As per the lease contract, the machinery will revert back to the lessor at the end of the lease term.

Required -

1. What is the initial measurement of the right to usage of machinery on December 31, 2020?

2. How much is the interest expense for the year 2021?

3. What is the depreciation expense for the year 2021?

4. What is the lease liability on December 31, 2021?

5. Assuming the fair value of the machinery at the end of the lease term is P22,000, how much is the loss to be recorded by the lessee?

Reference no: EM133189706

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