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

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...

See similar textbooks

Related questions

Concept explainers

Question

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

Expert Solution

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.