What is the carrying amount of the right to use asset

Reference no: EM132829667

On January 1, 2020, Highland Company closed a lease contract for newly constructed terminals and freight storage facilities. Although the terminals have a composite life of 10 years, the lease runs for 5 years with a transfer of title to the lessee upon expiration of the lease. The annual lease payment is P1,000,000 payable at the end of each year starting December 31, 2020. The lessee must also make an annual payment at the end of each year starting December 31, 2020. The lessee must also make an annual payment of P75,000 for taxes and P125,000 for insurance. The lessee incurred initial direct cost of P150,000 including P50,000 commission paid to the broker that arranged the lease. As an incentive to the lessee, the lessor agreed to reimburse the lessee for the commission of P50,000. The contract was negotiated to assure the lessor a 10% rate of return. The present value of an ordinary annuity of 1 at 10% for five periods is 3.79. The present value of an annuity of 1 in advance at 10% for 5 periods is 4.17.

Problem 1: What amount is the lease liability recognized upon the inception of the lease.

a. 3,790,000
b. 3,169,000
c. 3,000,000
d. 4,680,000

Problem 2: Using the data in no. above, what is the carrying amount of the right to use asset to be used on December 31, 2020 as a basis for recognizing depreciation?

a. 3,790,000
b. 3,890,000
c. 3,940,000
d. 3,700,000

Reference no: EM132829667

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