On January 1, 20X1, ABC Co. entered into a 4-year lease agreement with DDD Inc. for machinery. Lease payment is P 100,000 payable annually starting on January 1, 20X1. ABC knows that the lessor expects a 10% return on the lease. ABC has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of 5 years and a residual value of P 25,000. The lease agreement contained a purchase option at P 50,000 exercisable at the end of the lease term. It is reasonably certain as of the inception of the lease that ABC will exercise the option in the future. ABC uses the straight-line method of depreciation.

Requirements:

a.Provide the journal entries

b.Determine the carrying amounts of the right-of-use asset and a lease liability on December 31, 20X1.