Reference no: EM133178445
Question - On January 1, 2022, Morgan Inc. entered into a lease contract of machinery to another entity and properly classified it as operating lease (as part of the exception of PFRS 16 as low value asset). The machinery with a carrying value of P2,000,000 and remaining useful life of 8 years will be rented for annual lease rental of P450,000 for the first two years and will be adjusted accordingly for a total of five-year lease term. Furthermore, the escalation clause section of the contract calls for 3% increase in annual rental fee every year. Agreement between parties also states that 2% of annual revenue from use of the machine will be paid as additional rent. The summary of total revenue and expenses reported by Morgan from use of the machine in 2022 and 2023 were:
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2022
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2023
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Total revenues
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P5,000,000
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P6,450,000
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Total expenses
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(3,770,000)
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(4,125,000)
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Net Income
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P1,230,000
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P2,325,000
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Required - How much is the total rent expense in 2023 and balance of prepaid rent (rent payable) as of December 31, 2023?
a. P524,322 and P14,322 rent payable
b. P613,842 and P39,844 prepaid rent
c. P606,822 and P42,144 rent payable
d. P535,823 and P43,124 prepaid rent
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