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Please provide solution and explanation

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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Michelle Company enters a 12-year lease of an office unit of a building, with an option to extend for an additional 6 years for an annual rental of P 1,000,000, payable in advance. The contract specifies that the lease payment will increase every 3 years based on increase in the Consumer price index from the preceding three years. The CP1 at the commencement date is P 125. The rate implicit in the lease is not reliably determinable. Michelle's incremental borrowing rate is 5%, which reflects the fixed rate at which Michelle could borrow an amount similar to the value of the office unit, in the same currency for the twelve-year term and with similar collateral. At the beginning of the 4th year, the CP1 is 135. REQUIRED: a.) Journal entry at the commencement of the lease b.) Journal entry at the end of the first year of the lease term (and financial year) c.) Journal entries at the beginning and at the end of the fourth year
Transcribed Image Text:Michelle Company enters a 12-year lease of an office unit of a building, with an option to extend for an additional 6 years for an annual rental of P 1,000,000, payable in advance. The contract specifies that the lease payment will increase every 3 years based on increase in the Consumer price index from the preceding three years. The CP1 at the commencement date is P 125. The rate implicit in the lease is not reliably determinable. Michelle's incremental borrowing rate is 5%, which reflects the fixed rate at which Michelle could borrow an amount similar to the value of the office unit, in the same currency for the twelve-year term and with similar collateral. At the beginning of the 4th year, the CP1 is 135. REQUIRED: a.) Journal entry at the commencement of the lease b.) Journal entry at the end of the first year of the lease term (and financial year) c.) Journal entries at the beginning and at the end of the fourth year
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