Question

1. On January 1, 2020, XYZ lease an equipment from a lessor with the following pertinent information:

Annual rental payable at the end of each year                                          500,000

Lease term                                                                                                  8 years

Useful life                                                                                                10 years

Implicit rate                                                                                             10%

PV of an ordinary annuity of 1 for 8 periods at 10%                                 5.33

PV of 1 for 8 periods at 10%                                                                     0.47

The entity has the option to purchase the equipment on January 1, 2027 by paying P500,000

There is reasonable certainty that the entity shall exercise the option. On January 1, 2020, the entity incurred initial direct cost of P200,000.

REQUIRED

1. What is the initial cost of right of use asset?    a. 3,100,000    b.0     c.2,900,000    d.2,865,000
2. What is the interest expense for 2019? a. 310,000   b.316,500    c.266,500     d.290,000
3. What is the lease liability on december 31 2019? a. 2,848,500    b.2,690,000    c.2,790,000   d.2,398,500
4. What is the depreciation expense for 2019? a.290,000   b.362,500     c.310,000    d.387,500

Answer 1

Answer:

Initial cost of right-of-use asset	c. 2,900,000
Interest expense for 2019	d. 290,000
Lease liability on December 31,2019	b. 2,690,000
Depreciation expense	a. 290,000

Calculations:

1	Present value of lease payments	2,665,000
	[$500,000 x 5.33 PV of an ordinary annuity of 1 for 8 periods at 10%]
	Present value of purchase option	235,000
	[$500,000 x 0.47]
	Initial cost of right-of-use asset	2,900,000
2	Interest expense [2,900,000 x 10%]	290,000
3	Initial lease liability	2,900,000
	Less: Lease liability in first payment [500,000 lease payment - 290,000 interest]	-210,000
	Lease liability on December 31,2019	2,690,000
4	Depreciation expense [$2,900,000 ÷ 10 years useful life]	290,000