Reference no: EM132780545

Bulbasaur Co., a lessor of office equipment, purchased a new equipment for Pnp1,000,000 on December 31, 2009. The equipment was delivered the same day to Charmander Co., the lessee. The following information relates to the lease transaction:

(1) The leased asset has an estimated useful life of seven years, which is also the lease term.

(2) At the expiration of the lease, the equipment will revert to Bulbasaur, at which time it is expected to have a residual value of Php120,000 (guaranteed).

(3) Bulbasaur's implicit interest rate is 12%, which is known by Charmander.

(4) Charmander's incremental borrowing rate is 14% at December 31, 2009.

(5) Lease rentals consist of seven equal annual payments, the first of which was paid on December 31, 2009.

(6) Bulbasaur properly accounts for this lease as a direct financing lease and as a finance lease by Charmander. Both lessor and lessee are calendar year corporations and depreciate all property, plant and equipment on the straight-line basis.

REQUIRED:

problem 1: Provide all the necessary journal entries to record the transactions on both the books of Bulbasaur Co. and Charmander Co. for the entire lease term. Provide computations for your answers. Explanations are not necessary.