Lazy Company leased an equipment with useful life of 6 years on January 1, 2020 for period of 5 years with fixed annual rental of P600,000 which is to be paid at the end of each year. The lease contract provides that the lessee has guaranteed a P100,000 residual value of the leased asset. The implicit interest rate in the lease is 10%. Assuming that at December 31, 2022, Lazy Company purchased the equipment for P1,300,000. REQUIRED: Prepare table of amortization and journal entries for the entire lease term.
Lazy Company leased an equipment with useful life of 6 years on January 1, 2020 for period of 5 years with fixed annual rental of P600,000 which is to be paid at the end of each year. The lease contract provides that the lessee has guaranteed a P100,000 residual value of the leased asset. The implicit interest rate in the lease is 10%. Assuming that at December 31, 2022, Lazy Company purchased the equipment for P1,300,000.
REQUIRED: Prepare table of amortization and
Given,
Lazy company leased an equipment
Useful life of equipment = 6 years
On January 1, 2020
Lease period = 5 years
Here, lease period is more than 75% of useful life
Therefore, lease is called finance lease
With fixed rental annually = P600000 paid at the end of the year
Guaranteed residual value = P100,000
Implicit interest rate = 10%
Interest amount = Annual rent amount x interest rate/100+interest rate
= P600,000 x 10%/100+10%
= P600,000 x 10%/110%
= P54,545.45
Principle lease amount = P600,000 - P54,545.45
= P545,454.54
Here, principle amount of lease rental is a revenue for the lessor and the amount received as lease amount annually is amortized every year for 5 years only.
Since, the lease contract is a finance lease where lessee purchases the equipment at the end of the lease contract.
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