Case 2 Coco Corporation had the following lease transactions during the period under audit. You ascertained that Coco's accountant classified the following lease as operating lease. The details of the lease agreement were summarized below. Your audit investigation revealed that asset for leased are not considered as low value assets nor the lease term as not short term lease. Lease of equipment Coco Corporation manufactures specialized equipment and offers leasing alternative to its customer who do not have the necessary funds or financing available for outright purchase. The data relative to a typical lease offered to Remember Me Company are as follows: a. The lease is initiated on January 1, 2021. Payments are due on every December 31 for the duration of the lease term. b. The non-cancelable fixed portion of the lease terin is 5 years. The lessee has the option to renew the lease for an additional 3 years for the same rental. The estimated useful life of the asset is 10 years. The lessor desires a return of 12 percent. (Implicit rate). c. The lessor is to receive equal annual payments over the term of the lease and the leased property's title is to be transferred to the lessee at the end of lease term. d. The selling price of the equipment for an outright purchase is P1,707,263. The cost of the equipment to Coco is P1,250,000. The lessor incurs costs associated with the inception of the lease in the amount of P55,000. e. The equipment is expected to have residual value of P150,000 at the end of 5 years and P100,000 at the end of 8 years. f. It is not reasonably certain that the lease will be extended for additional 3 year period.
Case 2 Coco Corporation had the following lease transactions during the period under audit. You ascertained that Coco's accountant classified the following lease as operating lease. The details of the lease agreement were summarized below. Your audit investigation revealed that asset for leased are not considered as low value assets nor the lease term as not short term lease. Lease of equipment Coco Corporation manufactures specialized equipment and offers leasing alternative to its customer who do not have the necessary funds or financing available for outright purchase. The data relative to a typical lease offered to Remember Me Company are as follows: a. The lease is initiated on January 1, 2021. Payments are due on every December 31 for the duration of the lease term. b. The non-cancelable fixed portion of the lease terin is 5 years. The lessee has the option to renew the lease for an additional 3 years for the same rental. The estimated useful life of the asset is 10 years. The lessor desires a return of 12 percent. (Implicit rate). c. The lessor is to receive equal annual payments over the term of the lease and the leased property's title is to be transferred to the lessee at the end of lease term. d. The selling price of the equipment for an outright purchase is P1,707,263. The cost of the equipment to Coco is P1,250,000. The lessor incurs costs associated with the inception of the lease in the amount of P55,000. e. The equipment is expected to have residual value of P150,000 at the end of 5 years and P100,000 at the end of 8 years. f. It is not reasonably certain that the lease will be extended for additional 3 year period.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Chapter 5: Special Audit Considerations
Determine the following as a result of your audit:
CASE A: Assuming that the residual value is guaranteed by Remember
Me Company.
1. How much is the annual lease payment?
2.
How much is the total balance of finance lease obligation (lessee) and
net finance lease receivable (lessor) at December 31, 2021?
Transcribed Image Text:Case 2
Coco Corporation had the following lease transactions during the period
under audit. You ascertained that Coco's accountant classified the
following lease as operating lease. The details of the lease agreement were
summarized below. Your audit investigation revealed that asset for leased
are not considered as low value assets nor the lease term as not short term
lease.
Lease of equipment
Coco Corporation manufactures specialized equipment and offers leasing
alternative to its customer who do not have the necessary funds or
financing available for outright purchase. The data relative to a typical lease
offered to Remember Me Company are as follows:
a. The lease is initiated on January 1, 2021. Payments are due on every
December 31 for the duration of the lease term.
b. The non-cancelable fixed portion of the lease terin is 5 years. The
lessee has the option to renew the lease for an additional 3 years for
the same rental. The estimated useful life of the asset is 10 years. The
lessor desires a return of 12 percent. (Implicit rate).
c. The lessor is to receive equal annual payments over the term of the
lease and the leased property's title is to be transferred to the lessee at
the end of lease term.
d. The selling price of the equipment for an outright purchase is
P1,707,263. The cost of the equipment to Coco is P1,250,000. The
lessor incurs costs associated with the inception of the lease in the
amount of P55,000.
e.
The equipment is expected to have residual value of P150,000 at the
end of 5 years and P100,000 at the end of 8 years.
f.
It is not reasonably certain that the lease will be extended for additional
3 year period.
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