Reference no: EM132947792

Questions -

Q1) 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 sum-of-the-years' digits 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 depreciation expense of the right-of-use machine for the year ended December 31, 2021?

Q2) On January 1, 2021, Blue Company acquired a machine by signing a five-year lease. Annual rentals of P1,000,000 are payable at the beginning of each lease year starting January 1, 2021. The machine is expected to have an unguaranteed residual value of P600,000 at the end of the lease term. The machine's useful life is 6 years, at the end of which the machine's residual value is expected to be P300,000. Blue uses the straight-line method to depreciate this asset.

The lessor's implicit interest rate is 10%, which is known to Blue. Blue appropriately recorded the machine and the related liability on January 1, 2021. Blue Company follows the calendar year as its accounting period.

PV of 1 at 10% for five periods is 0.6209

PV of an annuity due of 1 for 5 periods is 4.1699

What is the capitalized cost of the Right-of-Use Machine on January 1, 2021, and the depreciation expense for the year ended December 31, 2021?