PROBLEM 4Sushi Co., a lessor of equipment, purchased a new equipment for ₱1,000,000 on December 31, 2020. The equipment was delivered the same day to Mooncake Co., the lessee. The following information relates to the lease transaction:The leased asset has an estimated useful life of seven years, which is also the lease term.At the expiration of the lease, the equipment will revert to Sushi, at which time it is expected to have a residual value of ₱120,000 (none of which is guaranteed).Sushi’s implicit interest rate is 12%.Mooncake’s incremental borrowing rate is 14% at December 31, 2020.Lease rentals consist of seven equal annual payments, the first of which was paid on December 31, 2020.Sushi properly accounts for this lease as a direct financing lease and as a finance lease by Mooncake. Both lessor and lessee are calendar year corporations and depreciate all property, plant and equipment on the straight-line basis. Questions: (Round off present value factors to 4 decimal places):How much is the annual lease payment?How much unearned interest income should be recognized by Sushi at the inception of the lease?What is the amount of depreciation expense that Mooncake should record for 2021?What amount of interest expense should be recognized by Mooncake for 2021?

Answered: PROBLEM 4 Sushi Co., a lessor of…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...

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PROBLEM 4

Sushi Co., a lessor of equipment, purchased a new equipment for ₱1,000,000 on December 31, 2020. The equipment was delivered the same day to Mooncake Co., the lessee. The following information relates to the lease transaction:

The leased asset has an estimated useful life of seven years, which is also the lease term.
At the expiration of the lease, the equipment will revert to Sushi, at which time it is expected to have a residual value of ₱120,000 (none of which is guaranteed).
Sushi’s implicit interest rate is 12%.
Mooncake’s incremental borrowing rate is 14% at December 31, 2020.
Lease rentals consist of seven equal annual payments, the first of which was paid on December 31, 2020.
Sushi properly accounts for this lease as a direct financing lease and as a finance lease by Mooncake. Both lessor and lessee are calendar year corporations and depreciate all property, plant and equipment on the straight-line basis.

Questions: (Round off present value factors to 4 decimal places):

How much is the annual lease payment?
How much unearned interest income should be recognized by Sushi at the inception of the lease?
What is the amount of depreciation expense that Mooncake should record for 2021?
What amount of interest expense should be recognized by Mooncake for 2021?

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