Reference no: EM133119711

Question - On January 1, 2021, an entity entered into a 5-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. The entity knows that the lessor expects an 8% implicit rate on the lease. The entity has a 10% incremental borrowing rate. The equipment is expected to have a useful life of 10 years. In addition, a third party has guaranteed to pay the lessor a residual value of P500,000 at the end of the lease. The present value of an ordinary annuity of 1 for 5 years is 3.99 at 8% and 3.79 at 10%. The present value of 1 at 8% for 5 periods is 0.68 and at 10% for 5 periods is 0.62. On December 31, 2021, what is the principal amount of the lease obligation?