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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
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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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?
Transcribed Image Text: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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