Tiny Buds Co. enters a 10-year lease of a floor of Noel building , with an option to extend for 5 years. Lease payments are P100,000 per year during the initial term and P110,000 per year during the optional period, all payable at the beginning of each year. To obtain the lease, Tiny Buds incurred initial direct costs of P50,000, of which P30,000 is paid to former tenant occupying the building floor and P20,000 is paid to the real estate agent as commission for arranging the lease. As an incentive, the lessor agrees to reimburse to Tiny Buds the real estate commission of P10,000 and Tiny Buds leasehold improvements of P5,000. At the commencement date, January 1, 2020, Tiny Buds concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines the lease term is 10 years. Tiny Buds Inc. expects to consume the right-of-use asset's future economic benefits evenly over the lease term and, thus, depreciates the right-of-use asset on a straight-line basis. The interest rate implicit to the lease is not readily determinable. Tiny Buds incremental borrowing rate is 5% per annum, which reflects the rate at which Tiny Buds could borrow an amount similar to the value of right of use of asset, in the same currency, for a 10 year term and with the same collateral. During 2025, Tiny Buds Co. acquires Mama Tales Inc., which is leasing a floor in Jonald building. The lease entered into by Mama Tales Inc. contains a termination option that is exercisable by Mama Tales Inc. Following the acquisition of Mama Tales Inc, Tiny Buds will need two floors in a building suitable for the increased work force. To minimize the cost, Tiny Buds enters into a separate 8-year lease of another floor in the Noel building that will be available for use at the end of 2026 and Mama Tales Inc. will terminate the lease in Jonald Building that will take effect at the beginning of 2027.//aaca2 final examination committee |Page 7 Tiny Buds Co.'s incremental borrowing rate at the end of 2025 is 6% per annum which reflects the fixed rate at which Tiny Buds could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a nine-year term, and with similar collateral. Determine the following as a result of your audit: 31. How much should the right of use of asset be initially recognized on January 1, 2020? a. P812,174 b. P822,174 c. P860,782 d. P850,782 32. How much should be the carrying value of lease liability on December 31, 2021? a. P636,072 b. P678,637 c. P536,072 d. P578,637 33. How much is the carrying value of the lease liability on December 31, 2025 after adjustments, if any? a. P748,186 b. P783,721 c. P756,347 d. P372,325 34. How much is the carrying value of the right-of-use asset at December 31, 2025 after adjustments, if any? a. P724,335 b. P708,892 c. P788,007 d. P728,335 35. How much is the total expenses recognized in profit or loss related to the lease for the year ended December 31, 2026? a. P124,459 b. P98,694 c. P120,113 d. P119,863