Problem 12-3 (AICPA Adapted)

Letty Company leased a machine on January 1, 2017 with the following provisions.

Annual lease payment in advance at the beginning of each year, starting January 1, 2017 1,000,000

Lease term 10 years

Useful life of machine 15 years

Implicit interest rate in the lease 12%

PV of an ordinary annuity of 1 at 12% for 10 periods 5.650

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 an option to purchase the machine on January 1, 2027 by paying P200,000. At the commencement

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

Required:

Prepare journal entries on the books of Letty Company for 2017 and 2018.