Reference no: EM133130324
Question - On January 1, 20x1, Sunset Co. leased a machine from April, Inc.
Information on the lease is as follows:
Annual rent: P200,000
Lease Term: 10 years
Useful Life of machine: 12 years
Implicit interest rate: 10%
Lessee's incremental borrowing rate: 11%
Use the fact pattern above except that the lease term is only three (3) years (i.e., 20x1 to 20x3). Additional information is as follows:
Lease payments are due at the end of each year.
The P200,000 annual rent increases by P30,000 every year starting in 20x2.
April, Inc. grants the first three months in the lease as rent-free. This will reduce the payment due for 20x1.
Sunset Co. pays April, Inc. a lease bonus of P20,000 at contract inception.
Sunset Co. agrees to pay an additional rent equal to 5% of its excess sales over P8,000,000. Sunset Co.'s sales for 20x1 and 20x2 are P9,000,000 and P10,000,000 respectively. The additional rents for 20x1 and 20x2 were paid on Dec.31 of those years.
Under the recognition exemption for low-value assets, what amounts should Sunset Co. report in its December 31, 20x2 financial statements in respect of the lease?
a. P389,321 right-of-use asset and P478,910 lease liability
b. 73,922 depreciation expense and P98,230 interest expense
c. P40,000 rent payable and P220,000 rent expense
d. P40,000 rent payable and P320,000 rent expense
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