Louis Company leased a machine from Millennium Corporation on January 1, 2010. The first annual payment was made on January 1, 2011. The machine has an economic life of six years. The lease agreement requires four annual payments of P33,000, including P3,000 annual payment for repairs and maintenance. The machine will be returned to Millennium Corporation at the end of the lease term and Louis Company guarantees a residual value of P5,000. Interest implicit in the lease is 10%, which is known to Louis. Assume that on January 1, 2014, the lease payment included an amount of P5,000 for exceeding a limit for machine usage hours specified in the lease agreement. Louis Company would account for this charge as  a. an expense in its 2013 statement of comprehensive income. b. an expense in its 2014 statement of comprehensive income. c. a reduction in the lease liability d. additional executory costs

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A:

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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.