Assignment- Week 3 PDF

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Assignment Week 3Desiree Company is in the business of leasing new sophisticated equipment. The lessor expects a 12% return on net investment. All leases are classified as direct financing lease. At the end of the lease term, the equipment will revert to the lessor. At the beginning of current year,...

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Assignment Week 3

Desiree Company is in the business of leasing new sophisticated equipment. The lessor expects a 12% return on net investment. All leases are classified as direct financing lease. At the end of the lease term, the equipment will revert to the lessor. At the beginning of current year, an equipment is lease to a lessee with the following information: Cost of equipment to the lessor; 5,000,000 Residual value - unguaranteed; 600,000 Annual rental payable at the beginning of each year; 900,000 Initial direct cost incurred by the lessor; 250,000 Useful life and lease term; 8 years Implicit interest rate; 12% What is the gross investment in the leases? Annual rental payable 900,000 X 8yrs Residual value- unguaranteed Gross investment

7,200,000 600,000 7,800,000

What is the net investment in the lease? Cost of equipment Initial direct costs incurred Net investment

5,000,000 250,000 5,250,000

What is the total interest income over the lease term? Gross investment 7,800,000 Cost of equipment (5,000,000) Initial direct cost (250,000) Total interest income 2,550,000 What is the interest income for the current year? Net Investment 5,250,000 Payment (900,000) 4,350,000 Implicit interest rate X 12% Interest income for the current year 522,000

At the beginning of current year, Eleana Company leased 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 of equipment; 10 years Implicit interest rate; 10% PV of an ordinary annuity of 1 for 8 periods at 10%; 5.33 Present value of 1 for 8 periods at 10%; 0.47 The entity has the option to purchase the equipment on the expiration of the lease term by paying P500,000. There is reasonable certainty that the entity shall exercise the option. The entity incurred initial direct cost of P200,000 What is the initial cost of the right of use asset? Annual rental payable 500,000 X 5.33 = 2,665,000 500,000 X .47 = 235,000 Total lease 2,900,000 Initial direct cost of 200,000 Cost of the right of use asset 3,100,000

What is the interest expense for current year? Implicit interest rate 10% X 2,900,000 Interest expense for current year 290,000

What is the lease liability at year-end? PV of lease liability –Beg. Annual rental payable 500,000 Interest expense (290,000) Principal payment Lease liability at year-end

2,900,000

(210,000) 2,690,000

What is the depreciation for current year? Cost of the right of use asset 3,100,000/ 10 years Depreciation for current year 310,000...