Reference no: EM132965134

Question - Oceanic Company is engaged in leasing equipment. Such an equipment was delivered to a lessee on January 1, 2014 under a direct financing lease with the following provisions:

Cost of equipment 3,500,000

Unguaranteed residual value 200,000

Initial direct cost 100,000

Indirect cost 50,000

Useful life and lease term 8 years

Implicit interest rate 10%

Present value of an ordinary annuity of 1 for 8 years at 10% 5.335

Present value of an ordinary annuity of 1 for 7 years at 10% 4.868

Present value of 1 for 8 years at 10% 0.466

The annual rental is P700,000 payable at the beginning of each year. The equipment will not revert to the lessor upon the lease expiration. (Round-off to whole peso)

REQUIREMENTS -

1. If the entity uses Direct Finance Lease, what is the net income(loss) on December 31, 2014?

2. If the entity uses Sales-type Lease, what is the net income(loss) on December 31, 2014?

3. If the asset will revert back to the lessor and the fair value at the end of the lease term is P50,000, what is the net income(loss) of Oceanic Company under Direct Finance Lease in 2021?

4. If the asset will revert back to the lessor, what is the cost of sales under Sales-type Lease?