Reference no: EM132956912
Question 1 - On January 1, 2019, Mess Company entered to a ten-year non-cancelable lease agreement to lease a building from Keep Company. The agreement required equal annual payments at the end of each year. The fair value of the building at the beginning of the lease is P3,949,500, while the carrying amount to Keep Company is P3,458,000. The building has estimated useful life of 10 years. The title of the building will be transferred to Mess at the end of the lease. The incremental borrowing rate of Mess Company is 12%. Keep Company set the annual rental to insure 10% rate of return. The implicit rate of the lessor is known by the lessee. The annual lease payment includes P35,000 executory costs.
Required -
1. What is the minimum annual lease payment?
2. What Is the total annual lease payment?
Question 2 - Angel Company entered into a finance lease on January 1, 2018. The lessee guaranteed the residual value of the asset under the lease estimated to beP1,200,000 on January 1,2023,the end of the lease term.
Annual lease payments are P1,000,000 due each December 31, beginning December 31,2018.The last payment is due December 31,2022.
The remaining useful life of the asset was six years at the commencement of the lease.
Both the lessor and the lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62,and the PV of an ordinary annuity of 1 at 10% for 5 periods is. 3.79.
Required -
1. What is the net lease receivable of the lessor at the commencement of the lease?
2. What is the gross investment in the lease?
3. What is the total unearned interest income?
4. What is the interest income for 2018?
Question 3 - An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor.
On January 1, 2019, an equipment is leased to a lessee with the following information:
Cost of equipment to the entity 3,500,000
Fair value of equipment 5,500,000
Residual value - unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2019
Required -
1. What is the gross investment in the lease?
2. What is the net investment in the lease?
3. What is the total financial revenue?
4. What amount should be recognized as interest income for 2019?
5. What amount of cost of goods sold should be recognized in recording the lease?