AEI Company is in the business of leasing new sophisticated equipment. At the beginning of current year, an equipment was delivered to a lessee under a direct financing lease with the following provisions: Cost of equipment 3,390,000 Annual rental payable at the end of year 600,000 Useful life and lease term 10 years Implicit interest rate 12% Present value of an ordinary annuity of 1 at 12% for 10 years 5.650 Present value of an ordinary annuity of 1 at 11% for 10 years 5.889 The entity incurred and paid initial direct costs of P143,400 in negotiating and arranging the lease. The equipment will revert to AEI Company at the end of the lease. Required: 1. Compute the total financial revenue to be recognized over the lease term. 2. Determine the new implicit rate that will be used in computing interest income. 3. Prepare journal entries on the books of AEI Company for the current year.
AEI Company is in the business of leasing new sophisticated equipment.
At the beginning of current year, an equipment was delivered to a lessee under a direct financing lease
with the following provisions:
Cost of equipment 3,390,000
Annual rental payable at the end of year 600,000
Useful life and lease term 10 years
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for 10 years 5.650
Present value of an ordinary annuity of 1 at 11% for 10 years 5.889
The entity incurred and paid initial direct costs of P143,400 in negotiating and arranging the lease.
The equipment will revert to AEI Company at the end of the lease.
Required:
1. Compute the total financial revenue to be recognized over the lease term.
2. Determine the new implicit rate that will be used in computing interest income.
3. Prepare
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