Answered: What amount should be capitalized…

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, Dan Co. entered into a ten-year noncancelable lease lease requiring year-end payments of P 1,000,000. Dan's incremental borrowing rate is 12%, while the lessor's implicit interest rate, known to Dan, is 10%. PV factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650 at 12%. On the same date, Dan Co. paid initial direct cost of P 200,000 in negotiating and securing the leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should be capitalized initially as cost of the leased property?

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