PROBLEM 2

On January 1, 2020, Lahat Pasado Padin Company leased a Machinery to another entity with the following details, the Lease is treated as Direct Financing Lease:

Annual Rental Payable at the end of each yearP400,000

Bargain Purchase OptionP250,000

Useful Life5 years

Lease Term5 years

Interest Rate8%

PV of Ordinary Annuity of 8% for 5 periods

3.9927

PV of Annuity Due of 8% for 5 periods

4.3121

PV of 1 of 8% for 5 periods

0.6806

Payments starts on December 31, 2020

1.What is the Net Investment?

2.What is the Interest Income for 2020?

3.At the end of the Lease Term, the entity exercised its right to purchase the machinery, the fair value of the machinery at the time of exercise is 400,000, how much is the gain or loss?