On December 31, 2020, Kid Company leased equipment from another entity. Pertinent lease transaction data are as follows: The estimated seven-year useful equipment life coincides with the lease term. The first of the seven equal annual P800,000 lease payments was paid on December 31, 2020. The implicit interest rate is 12% Kid’s incremental borrowing rate is 14%. Present values of an annuity of 1 in advance for seven periods are 5.11 at 12% and 4.89 at 14%. What amount should be recorded as initial measurement of the equipment? Show your solution.

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A: Formulas:

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Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.