Answered: On January 1, 20x1, Entity X (Customer)…

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, 20x1, Entity X (Customer) enters into a 4-year lease of equipment with Entity Y (supplier). The annual rent is P220,000 payable at the END of each year. The equipment has a remaining useful life of 10 years. The interest rate implicit in the lease is 10% while the lessee’s incremental borrowing rate is 12%. Entity X uses the straight-line method of depreciation. The relevant present value factors are as follows: PV of an ordinary annuity of P1 @ 10%, n=4 3.16987 PV of an ordinary annuity of P1 @ 12%, n=4 3.03735 Requirements: 1.How much is the lease liability to be recognized by Entity X on initial recognition? 2.How much is the annual depreciation on the right-of-use asset? 3.Assume the lease is a finance lease. How much is the net investment in the lease to be recognized by Entity Y on initial recognition? 4.Assume the lease is an operating lease. How much is the lease (rent) income in 20x1? 5.Assume the lease qualifies for accounting as a lease of “low-value asset.” How much is the lease (rent) expense in 20x1? 6.Assume the lease qualifies for accounting as a lease of “low-value asset.” How much is the lease liability to be recognized by Entity X on initial recognition? (Round final answers to the nearest whole number)

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