In your audit of XYZ Co., you noted a P1,100,000 balance under the rent expense account which was recorded on December 31, 2021. Upon examination of the lease contract, you found that this pertains to an 8-year lease contract with a lessor beginning January 1, 2021. The payments are due every December 31 of each year beginning December 31, 2021. The asset is expected to be sold for P500,000 after its estimated useful life of 10 years. The lease contract provided the lessee an option to purchase the underlying asset for P200,000 at the end of its lease term. Based on assessment, there is reasonable certainty that the option will be exercised by the lessee. Furthermore, the annual payments include P100,000 reimbursement to the lessor for maintenance costs incurred on behalf of the lessee. The lease has an implicit rate of 8% which was known to the lessee. Required: a. Prepare a working paper showing computations for (a) initial measurement of the lease liability and right of use asset, (b) depreciation expense, (c) interest expense and (d) carrying amount of the right of use asset and lease liability at the end of the lease term. b. Provide all the necessary proposed journal entries. c. Also, provide also the 'should be entries" to record the exercise of the option at the end of the lease term.
In your audit of XYZ Co., you noted a P1,100,000 balance under the rent expense account which was recorded on December 31, 2021. Upon examination of the lease contract, you found that this pertains to an 8-year lease contract with a lessor beginning January 1, 2021. The payments are due every December 31 of each year beginning December 31, 2021. The asset is expected to be sold for P500,000 after its estimated useful life of 10 years. The lease contract provided the lessee an option to purchase the underlying asset for P200,000 at the end of its lease term. Based on assessment, there is reasonable certainty that the option will be exercised by the lessee. Furthermore, the annual payments include P100,000 reimbursement to the lessor for maintenance costs incurred on behalf of the lessee. The lease has an implicit rate of 8% which was known to the lessee. Required: a. Prepare a working paper showing computations for (a) initial measurement of the lease liability and right of use asset, (b) depreciation expense, (c) interest expense and (d) carrying amount of the right of use asset and lease liability at the end of the lease term. b. Provide all the necessary proposed journal entries. c. Also, provide also the 'should be entries" to record the exercise of the option at the end of the lease term.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:12:08
In your audit of XYZ Co., you noted a P1,100,000 balance under the rent expense
account which was recorded on December 31, 2021. Upon examination of lease
contract, you found that this pertains to an 8-year lease contract with a lessor beginning
January 1, 2021. The payments are due every December 31 of each year beginning.
December 31, 2021. The asset is expected to be sold for P500,000 after its estimated
useful life of 10 years. The lease contract provided the lessee an option to purchase the
underlying asset for P200,000 at the end of its lease term. Based on assessment, there
is reasonable certainty that the option will be exercised by the lessee. Furthermore, the
annual payments include P100,000 reimbursement to the lessor for maintenance costs
incurred on behalf of the lessee. The lease has an implicit rate of 8% which was known
to the lessee.
Required:
a. Prepare a working paper showing computations for (a) initial measurement of the
lease liability and right of use asset, (b) depreciation expense, (c) interest
expense and (d) carrying amount of the right of use asset and lease liability at
the end of the lease term.
b. Provide all the necessary proposed journal entries.
c. Also, provide also the "should be entries" to record the exercise of the option at
the end of the lease term.
Scenario Analysis:
Scenario #1: What would be the effect on the answers if there was residual value
guarantee in lieu/instead of the option to purchase (same amount)? Provide all the
necessary proposed journal entries. Provide also the "should be entries" to record the
return of the asset to the lessor a the end of the lease term.
Scenario #2: What would be the effect on the answers if the leased asset is classified
as investment property under the fair value model?
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