Practice Set in Liabilities Bonds Payable and Lease

YZ Corporation, reported the ff balances on the liability portion of its Statement of Financial Position as
of Dec 2019:

Noncurrent Liabilities:
Note Payable, Bank 10% 4 500 000.00
Bonds Payable, 12% 3 231 652.00
Finance Lease Liability 2 200 000.00
Additional Information:
a. The note payable to the bank was originated on September 1, 2018 and is due annually at the
rate of P 1.5 Million every Aug 31 starting 2019. Interest which is based on the outstanding
balance of the loan is also payable every August 31. Interest is yet to be accrued on the note by
the balance sheet date. Payments on the note and interest during the current year had been
recorded appropriately.

b. The 5 year, 12% bonds payable (with a face value of P 3 Million) were issued on January 1, 2019
at the prevailing market rate of interest which is 10%. Interest on the bonds are payable semi-
annually every June 30 and December 31. The entry made by the client to record the issuance
was to debit cash and credit bonds payable for the total cash consideration received.

c. The Lease Liability is in relation to XYZ’s purchase of a machine on December 31, 2018. The
machine was delivered the same day to the company. The lease stipulates that annual payments
will be made for 5 years starting December 31, 2018. At the end of the 5-year term, the
company may purchase the machine. The estimated economic life of the machine is 12 years.
Your further investigation revealed the ff terms of the transaction:
Annual lease payments 550 000.00
Purchase option price 250 000.00
Estimated fair value after 5 years 750 000.00
Implicit rate 10%
Borrowing rate 12%
Entry made:
Equipment 2 750 000.00
Cash 550 000.00
Finance Lease Liability 2 200 000.00
Payment on December 31, 2019 is yet to be recorded.
Required:
1. Amount to be capitalized as an asset for the lease of machinery.
2. Carrying value of the leased asset as of Dec 31, 2019
3. Correct total noncurrent liab to be reported in the 2019 Statement of Financial Position
4. Correct total current portion of long-term debts to be reported in the 2019 Statement of
Financial Position
5. Total interest expense to be re reported in the 2019 Statement of Financial Position

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