On January 1, 20x1, Kating J Corp. leased equipment to Adonis Inc.

The cost of equipment leased was Php 1,322,588

Useful life of equipment is 5 years with the agreed lease term of 4 years

Annual rent payable at the end of each year 400,000

The incremental borrowing rate is 8% while the interest rate implicit in the lease is 10%.

Residual value 80,000

The equipment will revert back to Kating J Corp. at the end of the lease term. The lease is classified as direct financing lease.

a. Assuming the residual value is guaranteed, how much is the gross investment in the lease on January 1, 20x1?

b. Assuming the residual value is unguaranteed, how much is the net investment in the lease?

c. How much is the total interest income to be recognized by Kating J Corp. over the lease term if the residual value is unguaranteed and guaranteed, respectively?