Letecia Company leased an equipment from a lessor on January 1, 2020 under a lease with the following pertinent information: P500,000 8 years 10 years 12% Annual rental payable at the end of each year Lease term Useful life of equipment Implicit interest rate Letecia Company has the option to purchase the equipment on January 1, 2028 by paying P400,000 which is significantly less than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that Letecia Company shall exercise the option. On January 1, 2020, Letecia Company incurred initial direct cost of P300,000. What is the initial cost of the equipment?

Letecia Company leased an equipment from a lessor on January 1, 2020 under a lease with the following pertinent information: P500,000 8 years 10 years 12% Annual rental payable at the end of each year Lease term Useful life of equipment Implicit interest rate Letecia Company has the option to purchase the equipment on January 1, 2028 by paying P400,000 which is significantly less than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that Letecia Company shall exercise the option. On January 1, 2020, Letecia Company incurred initial direct cost of P300,000. What is the initial cost of the equipment?

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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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

Letecia Company leased an equipment from a lessor on January 1, 2020 under a lease with
the following pertinent information:
P500,000
8 years
Annual rental payable at the end of each year
Lease term
Useful life of equipment
Implicit interest rate
10 years
12%
Letecia Company has the option to purchase the equipment on January 1, 2028 by paying
P400,000 which is significantly less than the expected fair value of the equipment on the
option exercise date. There is reasonable certainty that Letecia Company shall exercise the
option. On January 1, 2020, Letecia Company incurred initial direct cost of P300,000.
What is the initial cost of the equipment?

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