Reference no: EM132946013
Questions -
Q1) On July 1, 2021, Pink Corporation signed a 5-year non-cancelable lease for a machine with Best Company. The terms of the lease called for Pink to make annual payments of P150,000 at the beginning of each year starting July 1, 2021. The machine has an estimated useful life of 6 years and a P50,000 guaranteed residual value at the end of the five-year lease term. The machine reverts to the lessor at the end of the five-year lease term. Pink uses the straight-line method of depreciation for all of its plant assets and adopts the calendar year. The rate implicit in this contract, which is known to Pink, is 10%.
The present value of an annuity due of 1 at 10% for 5 periods is 4.1699. The present value of an ordinary annuity of 1 at 10% for 5 periods is 3.7908. The present value of 1 for a single payment at 10% for 5 periods is 0.6209.
How much is the interest expense for year ended December 31, 2021 and December 31, 2022?
Q2) Black Corporation leased equipment to Red Company on January 1, 2021. The lease is for an eight-year period expiring on December 31, 2028. The first of eight equal annual payments of P900,000 was made on January 1, 2021 and subsequent payments will be made every January 1 thereafter.
Black Corporation had purchased the equipment on December 29, 2020 for P4,800,000. Black paid P150,000 in connection with negotiating and arranging the lease. The lease is appropriately accounted for as a dealer's lease by Black. The present value on January 1, 2021 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000.
What is Black Corporation's net investment in the lease on December 31, 2021?
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