Problem 1At the beginning of the current year, Red Velvet Company entered into a ten-year noncancelable leaserequiring year-end payments of P1,000,000. Red Velvet's incremental borrowing rate is 12%, while thelessor's implicit interest rate, known to Red Velvet, is 10%,Present value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%. On thesame date, Red Velvet's Company paid initial direct cost of P200,000 in negotiating and securing theleasing arrangement. Ownership of the property remains with the lessor at expiration of the lease.There is no purchase option.The lease property has an estimated economic life of 12 years.1. What amount should be capitalized initially as cost of the right of use asset?2. What amount should be recognized initially as lease liability?3. What amount should be recognized as annual depreciation of the right of use asset?

Red Velvet Company- Leasee lease payment 1000000 lease period 10 years Economic…

1. What amount should be capitalized initially as cost of the right of use asset? 2. What amount should be recognized initially as lease liability? 3. What amount should be recognized as annual depreciation of the right of use asset?

1. What amount should be capitalized initially as cost of the right of use asset? 2. What amount should be recognized initially as lease liability? 3. What amount should be recognized as annual depreciation of the right of use asset?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Problem 1
At the beginning of the current year, Red Velvet Company entered into a ten-year noncancelable lease
requiring year-end payments of P1,000,000. Red Velvet's incremental borrowing rate is 12%, while the
lessor's implicit interest rate, known to Red Velvet, is 10%,
Present value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%. On the
same date, Red Velvet's Company paid initial direct cost of P200,000 in negotiating and securing the
leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease.
There is no purchase option.
The lease property has an estimated economic life of 12 years.
1. What amount should be capitalized initially as cost of the right of use asset?
2. What amount should be recognized initially as lease liability?
3. What amount should be recognized as annual depreciation of the right of use asset?

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