Reference no: EM132947197

Questions -

Q1) 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 P5,280,000, which is equal to its fair value. Black paid P150,000 in connection with negotiating and arranging the lease.  The lease is appropriately accounted for as a direct finance lease by Black. What is Black Corporation's net investment in the lease on January 1, 2021?

Q2) On December 31, 2020, Pink Company signed a five-year, non-cancelable lease for a machine with Best Company. The terms of the lease called for Pink Company to make annual payments of P800,000 in advance starting on December 31, 2020, and every December 31 thereafter. The machine has an estimated useful life of six years and a P400,000 guaranteed residual value at the end of the five-year lease term.  The machine reverts back to the lessor at the end of the five-year lease term.  Pink Company uses the straight-line method of depreciation for all of its depreciable assets.

The rate implicit in this contract, which is known to Pink Company, is 12%. The present value of an annuity due of 1 at 12% for 5 periods is 4.037. The present value of 1 for a single payment at 12% for 5 periods is 0.567.

What are the balances of the lease liability on December 31, 2021, and December 31, 2022, respectively?