Reference no: EM133187771
Questions - Finance Lease
Q1. ANA Company leased an equipment from a lessor on January 1, 2020 under a lease with the following pertinent information:
Annual rental payable at the end of each year P500,000
Lease term 8 years Useful life of equipment 10 years
Implicit interest rate 12%
ANA Company has the option to purchase the equipment on January 1, 2028 by paying P400,000 which is significantly less than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that ANA Company shall exercise the option. On January 1, 2020, ANA Company incurred initial direct cost of P300,000.
What is the initial cost of the equipment?
Q2. On January 1, 2020, EDU Company leased two automobiles for executive use. The lease requires EDU Company to make five annual payments of P1,000,00 beginning January 1, 2020. At the end of the lease term, December 31, 2024, EDU Company guaranteed the residual value of the automobiles at P500,000. The lease is considered by the company as a finance lease. The interest rate implicit in the lease is 10%.
What is the principal lease liability on December 31, 2021?
Q3. On January 1, 2020, GARRY Company entered into a six-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. GARRY Company knows that the lessor expects a 10% return on the lease. GARRY Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a residual value of P400,000 at the end of the lease.
In the December 31, 2020 statement of financial position, what is the principal amount of the lease obligation?
Q4. DAR Company leased machinery for 10 years, its useful life, with effect from January 1, 2020. At that date, the fair value of the machinery was P4,900,000. Annual rentals of P700,000 are payable in advance on January 1 and the interest rate implicit in the lease is 9%. The first rental payment was made on January 1, 2020.
What is the total lease liability (principal and interest) which DAR Company should recognized in its statement of financial position on December 31, 2020?
Q5. On December 31, 2020, TEK Company leased equipment under a finance lease. Annual lease payments of P400,000 are due December 31 for 10 years. The equipment's useful life is 10 years, and the interest rate implicit in the lease is 10%. The lease obligation was recorded on December 31, 2020 at P2,700,000 and the first lease payment was made on that date.
What amount should TEK Company include in current liabilities in relation to the finance lease in its December 31, 2020 statement of financial position?
Q6. On January 1, 2020, LEE Company entered into a five-year finance lease for an equipment. LEE Company accounted the transaction as a finance lease at P5,000,000, which includes a P200,000 bargain purchase option. At the end of the lease, LEE Company expects to exercise the bargain purchase option. The expected fair value of the equipment is P400,000 at the end of its eight-year useful life. The company is using straight-line depreciation.
What amount of depreciation should be recognized by LEE Company on the equipment for 2020?
Q7. On January 1, 2020, MENDOZA Company entered into an eight-year lease for an equipment. MENDOZA Company accounted for the acquisition as a finance lease for P5,000,000 which include a P200,000 guaranteed residual value. At the end of the lease, the asset will revert back to the lessor. It is estimated that the asset's fair value at the end of its 10-year useful life will be P100,000. MENDOZA Company regularly uses the straight-line depreciation on similar equipment.
For the year ended December 31, 2020, what amount should MENDOZA Company recognize as depreciation expense on the leased asset?