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What is the depreciation expense on the asset

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Reference no: EM132860308

Question - You are assigned to audit for the first-time financial statements of Fridays Corporation as of and for the period ended December 31, 2016. As you reviewed various significant contracts of the company you come across the following outstanding lease arrangements:

a. A five-year lease contract with Monday Corp. for a piece of equipment. The lease agreement, which commenced on January 1, 2014, required Fridays Corporation to make P250,000 annual payments every January 1 starting the date of inception. Fridays has an option to purchase the asset for P150,000 at the end of the lease term. The asset which had a useful life of ten years had a fair market value of P1,094,451 on January 1, 2014. The incremental borrowing rate on this date was 10% while the implicit lease rate was at 12%. The asset is expected to have a fair value of P150,000 at the end of the lease term.

b. A ten year lease contract with Tuesday Inc. for a building. The lease agreement started on January 1, 2013 and required Fridays to pay P500,000 annually every December 31 starting 2013. Fridays guaranteed the residual value of the building at P400,000 at the expiration of the lease. The asset had a useful life of 12 years. The incremental borrowing rate on this date was 8% while the implicit lease rate was at 10%. The asset is expected to have a fair value of P500,000 at the end of the lease term.

c. On January 1, 2016 Fridays sold to Wednesdays Corp. another piece of equipment (with a remaining life of 5 years and a carrying value of P1,000,000) for P1,500,000. It was immediately leased back to Fridays for a period of 3 years. Fridays is required to pay Wednesdays P359,290 annually every January 1 starting 2016. The implicit lease rate on the transaction date was at 8%. The Fair Market Value of the equipment on the date of transaction was at P1,200,000.

Required -

1. What is the depreciation expense on the asset leased from Monday Corp. for the year ended December 31, 2016?

2. What is the depreciation expense on the asset leased from Tuesday Inc. for the year ended December 31, 2016?

Reference no: EM132860308

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