Reference no: EM132533923

Question - On January 1, 2019, Camil Company entered into a lease with Pau Company for a new equipment.

The lease stipulates that annual payments of P2,000,000 will be made for five years starting December 31, 2019.

Camil Company guaranteed a residual value of P948,120 at the end of the 5-year period. The equipment will revert to the lessor at the lease expiration.

The implicit interest rate for the lease is 16% after considering the guaranteed residual value.

The economic life of the equipment is 10 years. The present value factors at 16% for five periods are:

Present value of 1 0.4761

Present value of an ordinary annuity of 1 3.2743

Required -

1. Make a schedule of the annual payments showing reduction of liability every year.

2. Prepare journal entries on the books of Camil Company for 2019 and 2020.

3. Prepare journal entry on December 31, 2023, end of lease term, to record the return of the equipment to the lessor. Assume the fair value of the equipment is equal to the guaranteed residual value.

4. Prepare journal entry on December 31, 2023 to record the return of the equipment to the lessor assuming the fair value of the equipment is only P600,000.