An entity sells cargo vessels through leasing. The entity constructed a cargo vessel for a customer at P8.5 million.

The terms provide for annual advance payment of P2.5 million to be paid over 10 years with the ownership transferring to the lessee at the end of the lease term. At that time, the estimated residual value of the cargo vessel is P1.6 million.

Lease payments began at the beginning of the current year. The entity incurred initial direct costs of P500,000 for this lease. The sales price of the cargo vessel is P14,875,000.

Implicit rate is 14%.

Use PV factor of up to 2 decimals.

Prepare journal entries for the transactions on the books of the lessor in the current year.