CASE 2: On January 1, 2020, EF Corp. leased an equipment for 5 years at semi-annual rental of $325,000 payable every June 30 and December 31. The equipment had an estimated useful life of 7 years. EF Corp. has an option to purchase the equipment from the lessor by paying the lessor P200,000 at the lease expiration date. The lessee paid lease bonus amounting to P280,000 and direct lease expense which included installation and commissioning costs amounting to $125,000. The lessor will however reimburse EF Corp. 15% of the direct lease expense as a lease incentive. The annual implicit lease rate on the lease known to both parties at the lease inception was at 10% while the incremental borrowing rate of the EF Corp. was at 12%. The asset had an estimated salvage value of $100,000 after 5 years and P60,000 after 7 years.
CASE 2: On January 1, 2020, EF Corp. leased an equipment for 5 years at semi-annual rental of $325,000 payable every June 30 and December 31. The equipment had an estimated useful life of 7 years. EF Corp. has an option to purchase the equipment from the lessor by paying the lessor P200,000 at the lease expiration date. The lessee paid lease bonus amounting to P280,000 and direct lease expense which included installation and commissioning costs amounting to $125,000. The lessor will however reimburse EF Corp. 15% of the direct lease expense as a lease incentive. The annual implicit lease rate on the lease known to both parties at the lease inception was at 10% while the incremental borrowing rate of the EF Corp. was at 12%. The asset had an estimated salvage value of $100,000 after 5 years and P60,000 after 7 years.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:CASE 2: On January 1, 2020, EF Corp. leased an equipment for 5 years at semi-annual rental of P325,000 payable
every June 30 and December 31. The equipment had an estimated useful life of 7 years. EF Corp. has an option to
purchase the equipment from the lessor by paying the lessor P200,000 at the lease expiration date. The lessee
paid lease bonus amounting to P280,000 and direct lease expense which included installation and
commissioning costs amounting to P125,000. The lessor will however reimburse EF Corp. 15% of the direct lease
expense as a lease incentive.
The annual implicit lease rate on the lease known to both parties at the lease inception was at 10% while the
incremental borrowing rate of the EF Corp. was at 12%. The asset had an estimated salvage value of P100,000
after 5 years and P60,000 after 7 years.
Requirements: If at lease inception, EF Corp. is reasonably certain to exercise the purchase option: (Use a PV
FACTOR rounded off to 4 decimal places)
10. Initial cost of the Right of Use Asset
11. Interest expense on the lease liability for 2020
12. Carrying value of the Lease Liability as of December 31, 2021
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