Reference no: EM133111969

Question - CORONA Co., a lessor of office equipment, purchased a new equipment for P1,000,000 on December 31, 2017. The equipment was delivered the same day to Charlie Co., the lessee.

The following information relates to the lease transaction:

The leased asset has an economic life of ten years.

At the expiration of the lease, the equipment will revert to CORONA, at which time it is expected to have a residual value of P120,000 (none of which is guaranteed)

CORONA's implicit interest rate is 12% which is known by Charlie

Charlie's incremental borrowing rate is 14% at December 31, 2017

Lease rentals consist of seven equal annual payments, the first of which was paid on December 31, 2017.

CORONA properly accounts for this lease as a direct financing lease and as a finance lease by Charlie. Both lessor and lessee are calendar year corporations and depreciate all property, plant, and equipment on the straight line basis.

The present value tables show the following present value factors:

Present value of 1 for seven periods at 12% 0.4523

Present value of 1 for seven periods at 14% 0.3996

Present value of an annuity due for seven periods at 12% 5.1114

Present value of an annuity due for seven periods at 14% 4.8387

Required -

How much is the annual lease payment?

How much unearned interest income should be recognized by CORONA at the commencement of the lease?

What is the amount of depreciation expense that Charlie should record for 2018?

What is the amount of interest expense that should be recorded by Charlie for 2018?