Reference no: EM133104907

Question - ABC leases an asset from XYZ, a lease financier, with the following terms:

Lease term - 5

Annual rental - P250,000

Exercise price of purchase option - P50,000

Initial direct cost - P40,000

Executory cost - P8,000

The asset leased by ABC is economically useful for 8 years. The asset will revert to the lessor by the end of the lease term. The purchase option provides that ABC can purchase the leased asset from XYZ at a price that is significantly lower than the fair value. The initial direct cost is shouldered by the lessor as well as the executory cost inherent to the ownership of the property, which will be settled every end of each year. The first rental payment will be made by ABC at the end of the year the lease commenced January 1, 2021. During that year the interest rate implicit to the lease is 12%. An improvement was built on the leased property which amounted to P200,000 which is a necessary structure for ABC's operation in the property. It's estimated to be useful for 10 years with expected scrap value of 10% of its cost. The permit to the improvement was approved by the lessor with the condition that ABC shall restore the leased property whether or not ABC will vacate the premises after the lease term. The expected restoration cost is P150,000, 5 years from now, and 12% is the effective interest rate. The lessor is neither a manufacturer nor a dealer of properties. At lessor's point of view, the new effective interest rate is 10.37% after making an adjustment to net investment for initial direct cost.

Required -

1. At XYZ's perspective, the total financial income to be recognized for the entire term of the lease is?

2. Assuming the lessor is a dealer of the property being leased to ABC, the initial amount of the lease receivable is?

3. At XYZ's perspective, the total or amount of income to be recognized in the profit or loss for 2022?