On April 1, 2019, Britania Company entered into a ten-year non-cancelable lease requiring payments of P1,000,000 every March 31 starting March 31, 2020. The lessor's implicit rate which is known to Britania is 10% while Britania's incremental borrowing rate is 12%. PV factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%. On the same date, Britania paid initial direct cost of P200,000 in negotiating and securing the leasing agreement. Ownership of the property remains with the lessor at expiration of the lease. There is no purchase option. The leased property has an estimated economic life of 12 years.

1. What amount should be initially capitalized as cost of the right of use asset? A. 5,650,000 B. 5,850,000 C. 6,145,000 D. 6,345,000

2. What amount should be recognized initially as lease liability? A. 5,145,000 B. 5,650,000 C. 6,145,000 D. 6,345,000

3. What is the annual depreciation of the right of use asset? A. 528,750 B. 585,000 C. 614,100 D. 634,500

4. What is the carrying amount of the right of use asset on December 31, 2020? A. 5,076,000 B. 5,234,625 C. 5,287,500 D. 5,419,687.50

with solution