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On January 1, 2020, Edgar Company entered into a six-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. Edgar Company knows that the lessor expects a 10% return on the lease. Edgar Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a residual value of P400,000 at the end of the lease. In the December 31, 2020 statement of financial position, what is the principal amount of the lease obligation?

On January 1, 2020, Edgar Company entered into a six-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. Edgar Company knows that the lessor expects a 10% return on the lease. Edgar Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a residual value of P400,000 at the end of the lease. In the December 31, 2020 statement of financial position, what is the principal amount of the lease obligation?

FINANCIAL ACCOUNTING
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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On January 1, 2020, Edgar Company entered into a six-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. Edgar Company knows that the lessor expects a 10% return on the lease. Edgar Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a residual value of P400,000 at the end of the lease. In the December 31, 2020 statement of financial position, what is the principal amount of the lease obligation?
Transcribed Image Text:On January 1, 2020, Edgar Company entered into a six-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. Edgar Company knows that the lessor expects a 10% return on the lease. Edgar Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of six years. In addition, a third party has guaranteed to pay the lessor a residual value of P400,000 at the end of the lease. In the December 31, 2020 statement of financial position, what is the principal amount of the lease obligation?
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