Problem 1

On January 1, 2020, AA Company leased a machine with the following provisions.

Annual lease payment in advance at the beginning of each year, starting January 1, 2020

1,000,000

Lease Term

10 years

Useful life of machine

15 years

Implicit Interest Rate in the lease

12%

PV of ordinary annuity of 1 at 12% for 10 periods

5.65

PV of an annuity of 1 in advance at 12% for 10 periods

6.328

PV of 1 at 12% for 10 periods

0.322

The entity has the option to purchase the machine on January1, 2030 by paying P200,000.

At the commencement date, it is reasonably certain that the purchase option will be exercised.

Requirement: Prepare Journal Entries on the books of AA Company for 2020 and 2021.