In your audit of a client in the leasing industry (a dealer of equipment), you were able
Question:
In your audit of a client in the leasing industry (a dealer of equipment), you were able to gather the following information from a contract with one of its major lessees:
Lease term 10 years
Economic life 10 years
Commencement date January 1, 2021
Annual lease payment (beginning December 31, 2021) ₱2,500,000
The residual value of the equipment at the end of the lease term guaranteed by the lessee is ₱360,000
Initial direct costs (shouldered by the lessor) ₱1,062,400 I
The interest rate implicit in the lease (with initial direct costs) is 8.50%
The interest rate implicit in the lease (without initial direct costs) is 10.00%
The fair value of the asset is 15,500,200
Cost of the asset 12,000,000
Based on your audit, the lease contract transfers substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee. Required: Prepare a working paper showing computations for (a) profit on the sale, (b) interest income, and (c) lease receivable (net). Provide all the journal entries for 2021
Scenario Analysis: Scenario #1: What if the client is neither a dealer nor a manufacturer of the equipment, how much would be the (a) interest income and (b) lease receivable (net). Provide all the journal entries.
Expert Answer:
a Determination of profit on sale of lease Profit on sale Factor 85 Present value Lease payments 250... View the full answer
