Reference no: EM132962718

Question - East Company leased a new machine from North Company on January 1, 2014 under a lease with the following information:

Annual rental payable at beginning of each lease year 400,000

Guaranteed residual value 200,000

Initial direct cost 150,000

Estimated cost of restoration 300,000

Lease incentive received 50,000

Lease term 10 years

Useful life of machine 12 years

Implicit interest rate 14%

Present value of an ordinary annuity for 10 periods at 14% 5.22

Present value of an ordinary annuity for 9 periods at 14% 4.95

Present value of an ordinary annuity for 8 periods at 14% 4.64

Present value of 1 for 10 periods at 14% 0.27

Present value of 1 for 9 periods at 14% 0.31

Present value of 1 for 8 periods at 14% 0.35

East Company has the option to purchase the machine on January 1, 2024, by paying P500,000 which was uncertain. The residual value is guaranteed by a party related to the lessor. On January 1, 2015, the purchase option became certain.

On July 1, 2015, East Company leased a delivery truck from Man-Company under a 3-year operating lease. Lease bonus paid was P90,000. Total rent for the term of the lease will be P360,000, payable every July 1 beginning 2015 as follows:

12 months at P5,000 = P60,000;

12 months at P7,500 = P90,000;

12 months at P17,500 = P210,000.

East Company reported net sales of P2,000,000 in 2014 and P3,000,000 in 2015. Cost of sales was P700,000 in 2014 and P900,000 in 2015.

REQUIREMENTS -

1. What is the carrying amount of the lease liability on December 31, 2014?

2. What is the net income in 2014?

3. What is the interest expense in 2015?

4. What is the depreciation expense in 2015?

5. What is the net income in 2015?