Reference no: EM132947776

Questions -

Q1) On January 1, 2021, Red Company sold a piece of machinery to Black Company for P2,400,000. Because of the entity's commitments to its customers to provide their needs for the next three years, Red Company simultaneously leased back the machinery.  The transfer of the asset to the buyer qualifies to be accounted for as a sale under IFRS 15. Information relating to this transaction follows:

Fair value of machinery- P2,200,000

Carrying amount of machinery- P1,700,000

Remaining useful life of the machinery- 8 years

Lease term- 3 years

Annual rent payable at beginning of each year, starting on January 1, 2021- P500,000

Market rate of interest- 10%

PV of an ordinary annuity of 1 at 10% for 3 periods is 2.4869

PV of an annuity due of 1 at 10% for 3 periods is 2.7355

What is the amount recorded by Red Company for the right-of-use asset on January 1, 2021?

Q2) On July 1, 2021, Pink Corporation signed a 5-year non-cancelable lease for a machine with Best Company. The terms of the lease called for Pink to make annual payments of P150,000 at the beginning of each year starting July 1, 2021. The machine has an estimated useful life of 6 years and a P50,000 guaranteed residual value at the end of the five-year lease term. The machine reverts to the lessor at the end of the five-year lease term. Pink uses the straight-line method of depreciation for all of its plant assets and adopts the calendar year. The rate implicit in this contract, which is known to Pink, is 10%. 

The present value of an annuity due of 1 at 10% for 5 periods is 4.1699.  The present value of an ordinary annuity of 1 at 10% for 5 periods is 3.7908. The present value of 1 for a single payment at 10% for 5 periods is 0.6209.

How much is the lease liability recorded on July 1, 2021, after the first annual payment?