Reference no: EM133178982

Question - On January 2022, BB Company (lessor) entered into a contract with AA Company (lessee) that conveys the right to use an asset (office building) for a period of 5 years in exchange for annual lease payments of P2,000,000 payable every January 1 of each year beginning 2022. AA Company paid the first lease payment due on January 1, 2022, annual executory costs of P50,000 and initial direct costs of P200,000.

Other information:

Estimated useful life of the building-8 years

Restoration costs-P300,000

Purchase option-P800,000

Implicit rate of the lease known to both parties-10%

8 years P300,000 P800,000 10%

Ownership of the building will be transferred to AA Company by the end of the lease term.

Required -

1. At what amount should the lease liability be initially recognized?

2. At what amount should the right-of-use asset be initially recognized?

3. What is the carrying amount of the right-of-use asset at December 31, 2022?