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At the beginning of the current year, Haciendero Company leased an equipment to Tenant Company
At the beginning of the current year, Haciendero Company leased an equipment to Tenant Company. The equipment has an original cost of P6M. The lease term was 5 years and the implicit interest rate on the lease was 15%. The lease is proper classified as a direct financing lease. The annual lease payments of P1,730,541 are made each Dec 31. The equipment is reverted to Haciendero at the end of the lease term, at which time the residual value of the machine will be P400,000. The residual value is not guaranteed. The PV of 1 at 15% for 5 periods is 0.4972 and the PV of an ordinary annuity of 1 at 15% for 5 periods is 3.3522. At the commencement of the lease,
1. What would be the new lease receivable on the part of Haciendero Company?
2 How much is the gross investment in the lease?
3. What is the total unearned interest income and how much is the interest income for the current period
Expert Solution
Lease receivable = PV of Lease Income + PV of Guaranteed Residual value
= PVAF( 15%,5 years) * Lease Income per Year + PVF (15%,5year) *Guaranteed Residual value
= (3.3522*1730541 ) + (400000* 0.4972 )
= $6,000,000
Gross investment = Yearly Lease income * No. of years + Guaranteed Residual Value + Unguaranteed Residual value
= ( 1730541 * 5 ) + 400000 + 0
= $9,052,705
Unearned interest = Gross investment - Lease receivable
= 9052705-6000000
= $3,052,705
Interest income for Current period
=Carrying amount of Lease receivable * implied interest rate
= 6000000 * 15%
= $900,000
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