On January 1, 2022, Yencay, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Thol Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. The fair value of the building on January 1, 2022 is P4,000,000; however, the book value to Holt is P3,300,000. The building has an estimated economic life of 10 years, with no residual value. Yencay depreciates similar buildings on the straight-line method. At the termination of the lease, the title to the building will be transferred to the lessee. Yencay's incremental borrowing rate is 11% per year. Thol Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yencay, Inc. The yearly rental payment includes P10,000 of executory costs related to taxes on the property. The agreement requires equal rental payments at the end of each year. 1.)From the lessee's viewpoint, what type of lease exists in this case? a. Sales-type lease b. Sale-leaseback c. Capital lease d. Operating lease 2.) From the lessor's viewpoint, what type of lease is involved? a. Sales-type lease b. Sale-leaseback c. Direct-financing lease d. Operating lease 3.) What is the amount of the total annual lease payment? a. P250,981 b. P640,981 c. P650,981 d. P660,981

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 2022, Yencay, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Thol Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.

The fair value of the building on January 1, 2022 is P4,000,000; however, the book value to Holt is P3,300,000.
The building has an estimated economic life of 10 years, with no residual value. Yencay depreciates similar buildings on the straight-line method.
At the termination of the lease, the title to the building will be transferred to the lessee.
Yencay's incremental borrowing rate is 11% per year. Thol Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yencay, Inc.
The yearly rental payment includes P10,000 of executory costs related to taxes on the property.
The agreement requires equal rental payments at the end of each year.

1.)From the lessee's viewpoint, what type of lease exists in this case?

a. Sales-type lease

b. Sale-leaseback

c. Capital lease

d. Operating lease

2.) From the lessor's viewpoint, what type of lease is involved?

a. Sales-type lease

b. Sale-leaseback

c. Direct-financing lease

d. Operating lease

3.) What is the amount of the total annual lease payment?

a. P250,981

b. P640,981

c. P650,981

d. P660,981

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