Problem 252 (AICPA Adapted) On December 31, 2008, Cey Company hed outstanding 12%, 'P5,000,000 face amount convertible bonds maturing on Devember 81,2013 Interest is payable on June 30 and December 281, Bash P1000 bond is convertable into 50 shares of Cays PIO par valu share capital. On Deoember 31,2008, the unamoftged Balance in the premium on bonds payable account was P300,000. [No equity component was recognized from the orginal issuance tf the convertible bonds. On Docomber 31, 2008, 2,000 bonds ‘vere converted when Cey’schare capital had a market price of Pot per share, Gey incurred P20,000 in connection, with the conversion, Using the bear value method, y's entry to record the conversion should include a credit to shave premium of 1,400,000 4:100,000 e. 1/380.000 1120000 Problem 253 (AICPA Adapted) Spare Company ed wo uss of aecuritize outstanding: share fapital with par value of P50,000,000 and a 12% canvertible ‘ond iecue in the fae amount of P10 000,000, Intorest payment ites of the bond issue are June 30 and December 31. The conversion clause in the bond indenture. entitles the fondholders to recive 40 shares of P20 pat value share epptal imexshange for each P1,000 bond. On Tune 30, 2008, the holder St P5,000,000 face value bonds exerciead the conversion privilege, The market prie ofthe bonds cn thatdate was P1100, per bond and the masket price of the share wag P30. The total Unamortized bond discount at the date of conversion wag 'P500,000, The share premiuin frou cooverson privilege hae a balance of P2,000,000 on June 30, 2008 ow much share premium should be recognized by reason of the conversion of bonds payable into share capital? 2,000,000 2750000 3.000.000 Yre0000 CHAPTER 3 LEASES Definition of lease ‘Uador PAS 17, a lease is defined as “an agresment whereby the lessor convey tothe lessee in getuen for a parmentor series of payments the right to use an asst for an agreed period of time: (Otherwise stated ease nan agreement between ons party called the ester and ancther party called the lasve where the see is ranted the right to use the property owned by the lessr for a Specie period of time in consideration for cortain pavinent in the form of rent, ‘emuntant eeogniz eo hinds oflase nail perating ane and finance or capital lease. “ Operating lease "The operating las ia the popular eosecpt in sesounting fr lore Itis the rerdal approach in tho sence that the pric rental is simply recognized as rent expence on the past of the losee and rent income on the part of the lessor. ‘A lease bonus paid by tho lossee tp the lessor ination to the periodic ental i treated an prepaid rent expense by the lessee. fad unearned rent income by the Issa to be amortized over The Ieee term,Leasehold improvements made by the lessee should be depreciated over the life of the improvements or lease term, ‘whichever ie shorter, The leased property remains as an asset of tho lessor and consequently, the lessor beats all ownership or executory costs such as depreciation of leased property, real property taxes, Insurance and maintenance. However, the lessor may pass on Wo the lose the paymont for tae, insurance and mainte ent Initial direct costs are often incurred by the lessor and include ‘amiounts such as commissions, legal fees and internal costs that ‘are incremental and directly attributable to negotiating and eranging a leas. Initial divct ensts incurred by lessor in an operating lease shall be added to the earrying amount of the leased assot and recognizod as an expanse over the lease torm on the same basis fe tho lease income, This ie an accordance with paragraph 82 of revised PAS 17 Any seeuvity deposit refundable upon the Jease expiration Should bo accounted fo as an assot by the lossoe and. isblity| by the lecor Mlustration ~ Lessee 1. OnJanuary 1, 2008 XYZ Company leased an equipment fom ABIC Company for P900,000 annually for 3 years Rentoxpense anpeo0 ‘Cah ‘00000 2. On January 1, 2008 XYZ Company made a sccutity deposit of P900,000 refundable upon the lease expiration. Rentdepst 200.000, 8 to ABC Campany asa lease bonus on January 1, 2008. Propsitrent 000 0 ‘cath sooo 4 ‘The lease bonus is amostied over 3 years or P20,000 annually Rentexpense 000 Prepaid ent p00 Mlustration - Lessor L On January 12008 Simple Company purchased a machinery forP3,000,000 cashfor the purpose ofleasingit. The machine is expected to have e 10-year life and no residual valve Machinery 3.000.000 ah 000.000 On April 1, 2008 Simple Company leased the machine to snather company for 3 years ata monthly rental of P50,000, payable atthe beginning of every month. cash ,000%9) 30000 Revtiocoe 80.000 OnApril 1, 2008 Simple Company received asocurity deposit of P800,000 to be refunded upan the lease expiration ok 600,000 abi forrent deposit 00.000 In addition tothe rental, Simple Company received from the lessee a Tease bonus of P120,000 on Jantary 1, 2008. cash, 12n00 ‘Unsarned rent noone s2n00 On April 1, 2008, Simplo Company paid initial dinect costs ‘of P400,000, Such coats are disectly attributable to ‘negotiating and arranging the operating lease. Machinery see,0c0 Cash 20000 During the yea Simple Company pid rept and maintenance ‘of P20,000. Repairand maintensice 20000 cast 20.000SS ———————— 1. Th lease bonis mation over 3 years or P4000 annuals: Unearned ratincoe 1,000 "Rent nome (40,000 9/12) 0000 {8 The machinery is depreciated over 10 yearsor POO0 000 annually Deprodation 0.000 ocumalated eproition 00.000 [Note that the depreciation is from the date of acquisition, ‘Senuary 1, 2008 and not fom Api 1, 2008, date of eae. The ‘reason f that the machinery i aoquied for leasing purposes find therefore available fr is intndod se, meaning for renal {Gorn January 1, 2008 Ie in generally aconptd that oven idle property is subject to depreciation ae long a® iti available for its intended use. 19 ‘The initial direct eoste are recoenized as expense over the Tease term. Amortiation omit pct nets 5000 Machiery (40000013972) 300 ‘Unequal rental payments PAS 17 provides that “lease payments under an operating lease ‘call be recognized as an exponce on a straight line basis over the leas term unlsss another systematic basi is representative ofthe time pattern of the user's benefit.” “This simply means that where the operating lease requires {unequal eah payments, the foal eash payments for the leave {erm shall be amortized uniformly on the stright line basis a8 ‘ent expense oF rent income. ‘Mlusteation XYZ Company leased office space t9 ABC Company for athree- Jar pried beginning January I, 2008 Under the terms of the Bperating lease, rent for the frst year is Pi,000,000 and rent {he the next two years, P1,250,000 annually. However, as an {nvdugemont to enter the lease, XYZ granted ABC the fret aix ‘The tal rental for the lease term is determined as follows: 2008 1,000,000x6112 am faa soca moe 4.250000 250.000 ‘hl ental or Syoars ammenae Average nual etal (,000000/3) Books of XYZ Company ~ Lessor 208 Ca Rent resivable Restneome aioe cash Rentincame Hentrecevble od 250,000 entincme for 2008 and 2000 2¢00.000 Henle (50,000 *1,250,000) "so000, Rentreeivable 1000 2010 Cash Tentincome Reneronvable Note that the rent receivable has a zero balance an December 51, 2010 and the recoded rent income ach yeas 1,000,000, Books of ABC Compainy - Lessee 1,000,000Finance Tease ‘The lease term is forthe major port of the economic life ‘of the asset even if title isnot transferred Finance lease is not a lease as'popularly understood but in substance a purchase of property by the lessee from the lessor What percentage represent a “major part" oi 60% Tote of 80%? Ite unfortunate that PAS 1 on leases dos tet provide» slenrntdoinon ea mah pare ASinance lease is actualy a “lease purchase", Under American ‘andard, 9 nance leate is the equivalent of a "capital lease Under American standard, "major part” means at least 15% of the economic life of an asset, It is believed that this should be followed until a clear guidance is provided by Philippine standard or international accountin standard, * Under PAS 11, “a finance lease is a lease that transfer ubstantially al the sks and rewards incident to ownershir Gran set. Title may oF may not eventually be transferred”. ‘Thus, on the part ofthe less, the Rinance lease is conceived as a purchase of an asset and therefore involves tho recognition Scrum asoet and the corresponding liability. Moreover, periodic {deprecation on the leased property is tobe provided, andthe peredie rental payment ia to be treated as payment for the Hisbibty and interest, 4 The present vl ofthe minimum ease payment mounta totubstonnaly lf of he vl of the lensed teat thtInapton othe eas, Under Amery sar stand al tao a leat 90% othe fas val the leased asset aa ad On the part of the lessor, the finance lease is conceived as a ade of property which involves the recognition of a receivable fand a revenue. The excess of tho grose rentals over the cost of the property leased is treated as revente Other criteria Other situations that individually or in combination eo tls end ta a Tease being classified as finance leave ae ‘When is a lease classified as finance lease? Tho lente ste sf out specalied nature that on the lessee can use it without major modification. " ‘Whether lease is finance lease or 1 operating leate depends Shuthe substance of the transaction rother than the form of the contract ‘Unver PAS 17, ameong thers ay f the following situations would pormally ad toa lease being dasied as a finance lease b. I the lessee can cancel the: lease, the lessor's losses associated with the cancelation are borne by the lessee Gain of loses from the Guctuatin in the fae valu of «tol acre ls fr enn, the fe ot arent rebate squlling toot of tho sale proves a ‘the end of the lease. meoveeieet ‘a. ‘The lease transfers ownership of the leased asset to the lessee atthe end of the leace tern by. ‘The lesoo as bargoun purchase eption. This means that the leseee has the option to purchase the asset at a prite Which s expected to be sufficiently lower than the far value ‘tthe aset at the date the option becomes exercisable, and thet ot the inception ofthe leas, itis reaponably ceria that the option will be exercised. 4. Tho lessee has the ability to continue the lease for a secon period at ret thai substantilly lower thanIncepiion of the lease I isthe earlier of the date ofthe lease agrooment and the date tof commitment by the paste t the principal provisions of the Tare, Acsordingly, this is the date: ‘a When a tease is classified as either an operating lease or a Gnence lease 'b, Whon the amounts tobe recognized atthe enmmencement of the lease are determined for a nance lease. Commencement of the le I's the date from which the lessee is entitled to exercise its right tose the leased ascot. It is the date of initial recognition of the assats, liabilities ‘Income of exponses resulting from the lease. Land and building lease a. Whenclassifping lease onland and building an entity normally Considers the land and building laments separately. The land element is acrmally cassie 2a an operat unless title passes to dhe lessee atthe end of the ease ©. The building element ss clasified as an operating or finance lease by applying the classification criteria, 4. ‘The minimum lease payments aro allocated between the land and building elements in proportion to the relative fai value of the leaseh i interests in the land and building tlements at the insepton of the lease Ite lease payments cannot be allocated reliably betweon the two eloments, {he entre lease i classified asa mance Tease, unless itis clear that both elements are operating leases. © Separate measurement of the land and building elements is not required when the lesere’s interest in both land and bhiling 1 clavefied as investment property. ise Query the lease ia classified asa finance lease, how much is the cost, ‘of the aaset and how much isthe loase lability? ‘The Iosae shall record an szct and leas Labity equal to the fir value ofthe leased property at the incoption ofthe leaso or the ‘present value ofthe minimum lease payments, whichever is lower Jn amardance with paragraph 20 of PAS Incaleulating the present value ofthe minimum lose payments the discount factor ia the interest rate inyplicit in the lease, if this is practicable to determine. Otherwise, the Tessee's incremental borrowing rate shall be used. ‘The interest rate implicit in the lease isthe discount rate that causes the aggregate present value of the minimum lease peyments and tho unguaranteed residual value fo equal the fir talue ofthe leased assot and initial direct costs ofthe lessor ‘The lessee's incremental borrowing rate is the rate of interest thatthe lessee would have to pay ona similar lease or the rate that the lessee would incur by borrowing finds to purchase the ageet over a similar term and similse security Minimum lease payments ‘The minimum loase payments aro considored to be the ‘payments tht the lsse is obligated to make or ean be required to make, Those include: ‘a. Rontal payments required during the Iease term, D. Any payment roquired under a bargain purchaes option, © Any guaranteed residual value made hy the lease oe party ‘elated to the lessee in the abeence of bargin purchase option, Guaranteed residual value is that part of the residual vaiue ‘which ia guaranteod by the lescee or by party related to the Teese, the amount of guaraateo being the maximum amount ‘hat could in any event bacome payable atUnguorantecd residual value is that portion of the residual ‘vali of ths leasud asset, the realization of which by the lessor [enol assured or is guaranieed slay by a party related othe eso. Contingent rent and executory costs are not included in the computation of the minimum Tease payments Contingent rent is that porn ofthe ease payment that is not {Seed im amount but is bazod on a factor other than just the passage of time (g, percentage ofsale, amount of usage, price index, market rate of interest) Bxgcutory cos re ownership expenses such as maintenance, tastes and insurance for the leased property. Such executory oats are expense! immediately when incurred Iti direct costs ara often inewrred in cangection witn specific Teasing activities ae in negotiating and securing leasing Such costs identified as directly ottributable to activities ponformed by the lessee for ¢ Finance loase art included a3 Dart of tho amount recognized as an asset under the lease in Eecoedance with pavagraph 24 of BAS 17 ance lease ~ lessee On January 1, 2008, a company leases a machinery for 4 yoars Which isthe same as the uecful ip ofthe machinery at anncal ‘ental of P100,000 payable at the end ofeach year. The lease provides for a ranafer of ownership ofthe leased asset to the [escne atthe end of the lease term. ‘The prosent value of annual payment of P100,000 for 4 years Ting 2 12% implicit interest ate is determined as flows, Present value= P100,000x present value factor of am annuity OFPY foe & yeas at 12% = P190,000%3.0978 = 903,780 “The present vale factor of 8.0873 i derived from the table of| present value and annuity ‘The entry so record the finance lease at the beginning of the Tease sontiact is whiners 03790 eave iaiity ‘3.730 Depreciation of leased asset PAS 17 provides that if there is reasonable certainty that the Tessee wil obtain ownership by the end of the lease term, ‘epreciation is based on the useful life of the leased asset. Otherwise, the leased accet is depreciated over tho shorter of the leave term oF useful lif of the asset. ‘Thus, if the finance tease qualifies under the “transfer of ownership” and "bargain purchase option” criteria, the ‘deprecation is based on the useful ie of the ssct Ifthe finance lease qualifies under the“75" and “80% ener, the leased asset is depreciated over the Tease term or useful life of the asset whichover is shorter. ‘Accordingly, continuing the sate illustration, the annual depreciation of the machinery is recorded as follows: Depreianon ‘re9%2 Rsumulated depreciation 15.82 (308-7907 year) Accounting for rental payment. ‘The annual rental of P100,000 shall be treated as payment for the lease Habiity and he interest thercon. The interest is the Aerencabetwoen the face valu of gros rentals of P400,000 for & ‘sears and the prosont value of P803,790, o P96 270. ‘The interest of PO6.270 ie recognized ab an exponee over the Mase term following the effctveintaret method of amortization: ‘189"The table of amortization for the lesse lability and the interest may appear as follows: Dato Payment Interest Pulncipal Present value Jao. 1.2008 sms, Dee 31,2008 100000 us 2078 Dee 31,2009 10n000 Rea HLT 18200 Dee stand longo zm 20279 Dee 320 Iongo 07s Payment represents the armual rents) Interest is equal to the proceding present value times 12% interest ra. Ths, for 2008, 803,700 times 12% equals P36 448, Principal isthe porsion of the rental payment after deducting {terest Thus, for 2008, P100,000 minus P36, 448 equals PGS.552, Present walue isthe balance ofthe leaae lability after deducting the annual principal payment, Thus on December 31, 2008, 'P903, 740 minus P63,552 equals P240,178, ‘The payment of the annual rental forthe Bret two years is recorded as follows 08 Doe. SI _snteestespease 8 Least 33582 Cad 100,000 Dec. 31 Interestexpense asset easel m9 Cah 00000 It should be pointed that ifn adaition to the annual rental, the lessee is required to pay tho executor costs such as real estate taxee, insurance, and maintenance, the same is recorded by ebiting the proper expense accounts and crediting the cash sccount. Ifa Balance sheet is prepared on December 81, 2008, the machinery would be reported as part of property, plant and equipment as follows: Meet arcen 233 Beckson 708 ‘The lease lability would be reparted as partly current in the amount of P71,179 and partly nonearrent for the remoinig portion of P16s|998, Mlustration ~ Bargain purenase option Lessee Company leased a machine on January 1, 2008 with the following pertinent information: ‘Annual rena payable lth ond ofeach year 4.000000 Teaostarm {years refill of machine 12yeers Incremental borowingrat oflessoe rd Iiplistintered pte oflateor kon toleasoe 2 Protent valu fam ordinary ant of fr 10 perio at 109% 526 a 00 Present valu of for 10periodsat 1% ox70 1% ose Lessee Company has the option % purchase the machine upon the lees expiration on January 1, 2018ky paying P500,000 which is sufficiently lower than the expected far value ofthe machine on January 1, 2018, At the inception of the lease, the bargain purchase option is reasonably certain to be exercised. ‘The capitalized cost ofthe machine is coniputed as follows: Present value crentala (1,000,003 5.68) 5.630.000 Present value of bargain purchase option 600000 $22) "16,000, ‘allen ibility nanohE [Note that the present value factor applicable to 12% is wsod in| computing the present value of the minimum lease payments Incalelating the present value af the minimum lease payments the discount factor is the implicit interest rate if this is practicable to determine. Since the impliit interest rate is Known to the lesee, itis used in the computation, ‘This is in sccordance with paragraph 20 of PAS 17. ‘The pertinent entries for the fret year 2008 are ae fellows: 1. To seoord the acquisition of the machinery under finance lee: Mackinery ssu1c00 Leaot aiy sssu000 2 To eoord the first rental payment on December 31, 2008 Inter expense ors ease laity saes0 Coo 100,000 Leas liabilty—Jonsary 1, 2008 11.000 Paymentn December J, 2008| 1,000,000 Agplonletomierest 12% 581,000) (657830) _ 302650, ‘alanse -Deversber 3, 2008, 50900 8; "To record the annual depreciation: Depreaaton 484250 ‘Accumulated deprosation(,81,000/12) 23120 ‘The asst is depreciated over its useful life because there isa bargain purchase option Exercise of the bargain purchase option 1 accounta are peoparly posted, the table of amortization of the lease lsbility and interest expense will show the balance “the lease liability on January 1, 2018 at P500.00. 162 If the bargain purchaso option is exerted on Jenuaty 1, 2018 Which is the lease expiration, the antry fo record the payment + of the bargain purchase option is: eae iaaity mela 00 However, ifthe bargain purchase option is not exercised, a loss is recognized equal tothe differance between the book value ofthe machinery and the lease Babality on January 12018, alin a crete ie pa 2 = con ee Dhar rey in a recon inancleaie 408500 Mlustration ~ Guaranteed residual value Easy Company leased an equipment on January 1, 208 wi ‘the following information: nce famalrettppaattnendtea lie year 1400000 Vera i ofequipsent Seas Prout van femora anmuty oe Prectvaledf or pads at 10% rd *y Company guarantees a 200,000 residual value on December 21, 2011 tothe lessor. The equipment will revest to fe lessor upon the expiration ofthe lense on Deceber 31‘The eapitalized cost af the equipment is computed as follows: 3. TW record the annual depreciation: Present ator ofrental paynent(,000,000x316087) 160.570 Depreciation 1064704) yet? ‘Picsent alo guareond idl vale 200000 880) _136,009 ‘Bosumlateddprecition sneaz0 oo Tea eae iskity an eal value [Note thet ifther is a guaranteed residual value, there is more cee Faces purchase option because the asset will revert to her Tessor upon termination of the lease. ‘Note snatthe equipment isto be returned by the lessee to the lessor on December 31, 2011 which isthe lease expiration date ‘he table of amostization of the lease liability and interest. ‘oeor gn Decrber 31, 2011 which the expense may appear as follows: 1. To record the final rental payment on December 31, Date Payment Interest Principal sovs0t8 sient Inuretengene 109080 Weis mame sneer eos Troe 2s ovo Leotgin aout ame ro ony Yioon —toooeco keno s1d B00) 2 ‘To swcord the ream ofthe en Aecunlated depreciation ‘December 51, 2008 ‘each ube 0,470 Payment Pee sae 050 The annual depreciation i PPTG6I7, slid by 1 yx aceon mds F066 odes Page a imarve that heparin sifu valu not pal bythe ei ge 8 Be Be iene ts the er crease canna yt scp eo Bo mand by di et ea aang ten Rae oat BB Grentz tees te Note also that the remaining book value oftheasset shoud bbe equal to the guaranteed residual value. However ithe fair value of the leased asset is less than the guaranteed residual value, a "the pertinent entries for tho fret yesr 2008 ate: 1‘ record the acquisition of the equipment under a finance Be is reported for the difference and the lessee must make up forthe diferenoe with a caph paymen! ee 906.70 Tee aii ss06s70 Thus, in the preceding example, if the fair value of the equipment on December 81, 2011 is only P150,000 which 750,000 lower than the guaranteed residual value, aa sidditional entry to reooed the loes ia made ae fallow: 12 ‘To record the fret rental payment on December 31, 2008: icmesgnee agen? User com Long inane eas 0000 cy ‘oor can ae ‘164Actual purchase of leased asset wan ent actualy pushes att ha ta been Shed nclease, the cost of te ant purchased {equal tothe book vale of te lensed met pus cash taser manus the balance ot Teme abit. FFor example, an entity purchased an equipment that it had hheen loasmg under a finanes Tease. The balances of certain accounts om the date of actual purchase are as follows: ‘auipment under finan ase Acsutulted deprecation Tosca babily “The leased ascet was puchased by the entity for P4,000,000 cash, he entry to recctd the acquisition 3s as follows een 0.00 i icant too caren Seoivo *eapmentinde Snel 0000 a nec Cote soxn0 ‘cal copadtn cieia . 000% Cataract ‘taoger Dialentrion “s0000 Teowby Gino Cost ofequipmentpurchaced Finance lease - lessor On the part of the lessor, @ finance Tease is either of the falling: 1: Sales type lease 5. Dineet Snancing lease ‘The main distinction between the bwo isthe presence or absence ofa manufacturers of dealer's probit or lose, Sales ipe lease involves the recognition of a manufacturer's or eler's profit or loss on the transfor of the asset tothe lessee. ‘The lessor inthis esse is actually @ manufacturer or desler who es the lease as e means of facitating the sale of ts produc, ‘The profit or loss recognized by the lessor is the difference between the presen! value ofthe minimom lease payments ot the fair value of the leased asset whichever is lower, and the ost or carrying value ofthe asset in accordance with paragraph HofPAS I. On the other hand, dirt financing lease dave not involve a manufacturers or dealer's profit or fase The lescor inthis case is actually engaged in the financing business. Thus, direct Shain lease san arangoment tween sfianeng company Under a divest financing lease, initil direct cost, such x ‘commissions, legal foes and internal costs are ofton incurred by lessors in negotiating and arranging a lense ‘Such initial direct costa ary included inthe initial measurement of the net lease receivable or net investment in the lease and reduce the amount of income recognized aver the lease term, This sin accordance with paragraph 38 of PAS. 17 In other words, the initial direct costa in a direct financing are added to the earrying amount ofthe leased asset apd this would effectively epread the initial direct costs over thelesce toem and reduce the amount of interest income. Accordingly tho interes rate implicit in the lease is defined in a-such ¢ way that the initial direct costs are include? Automatically in the finance lease receivable. However, under a sales type lease, initial direct costs shall be recognized as expense immediately in the income statement at ‘he commencement of the lease in accordance with paregraph Gof PAS 17, te?Definitions sross investment inthe lease in the aggregate ofthe gross ental vb teen nde aoe ese pl ay nrantsed or unguaranteed enual valus aerung co the Pree Tale gure to actually the amount debited tease receivable ean the gross neared interest ace ia te diferoce be Atettngn i hoe eae rable) dt pre elu aerpeeetinum cae payment sod the unguarantod resi So tan sas tap amount earned finance co Net inset inthe ee gual th ro invent a ieatoed Bnance income. Under a sales type lenses investment is equal to the present value of tho gross ruil plus te present value ofthe residual value whether guorantect or unguaranteed, is equal Jndor a divect financing lease, the not investment is 2a to the cost of the aseet plus any initial direct cost. at ype ease mn the su of he costo the as ‘any initial direct ent Ilustration ~Direet financing lease 1: Janvany 3, 200% Lessor Company leased » machinery & Todos company ith the folowing details of muchinesy eso Shaul pvable atthe end ofeach year 500 Soin etal parable att ve sno fence en ren intact rate 12%, Erle valve of annuity of for 4yoars 212% 9.0313 initia pool on he “hoa wencal i il giv tho loesor a fa ae of return ‘vie fe eal to tho cabt ofthe the act iwestment in the ‘The procedute is to divide the net investment in the lease by resent value factor of an annuity of I fora number of periods sing a desired rat of retin fo get the anual venta. ‘Thus in the given example, i the desired rate of return i 10%, ‘Ake annual rental is computed by dividing the amount of 'P1,618,650 bythe present value factor, 3.0873, ofan anny of | for 4 years at 12%, or P50, 000. Grom rents or lease eivabe (00,000 4years) Present value of gros renal equal tothe act “vestmontin te lass) 2000000 siseso Unenrned intrpt income 481360 ‘The lease is then recorded as follows: eae eosable Machinery Unearnedntreet income 2000 600 1sg660 "81,350 ‘The annual coligetion of the rental is recorded as fellows: coh sooo ease seivable 09000 ‘The uneasned interest incomé of P481,350 is recognized as income over the life ofthe lease fellowang the effective intetert. nethod. The table of amortization may appear es flows Date Paymoiit Interest Principal Presentvaluo i 1,2008| 151860 Dee at 2008 928i ate Toons De: 31 200 iwiior“Ses05 et Dee 31 2010 101999 Samo) 5304 Dee 312012 lee 8304 Paymont roproeents the annual rental Jnferest is equal to recoding present value times tho Interest rate. Thus for 2008, P1,518,650 times 128 equals ) Pea2ae,Principal isthe porta of the ental payment after deducting the intexest, This for 2008, P500,000 minus P182,208 equals 17702 ‘Frese value isthe alanee ofthe present value aftr deducting _Ahe prinipal payment, Ths, on December 31, 2008, PI,518,650 mins P317,762 equals Pi, 200,888, ‘The effective interest method is in accordance with PAS 17, porazraph 99, which states that "the recognition of finance ‘ncome shall he based ona pattara reflecting aconstant periodic rate of return on the leseor'’s net Investment outstanding in rvspect of the finance lease’ Bassd on the preceding table the recognition of interest income Sarthe Bist two years is recorded as follows 1008 se. a1 Unearnedintretincome 1822038 Tntaestncams 2.288 sestincone H4.07 Intestine eae Direct financing - with initial direct eosts Aaséume the saine data in the immediately procedingiustratin xcept that intial divec.costs axe paid by Leesor Company. ‘ngam, the wetaile ave Cost of machinery 118660 ‘nent payable at he end ofeach our ‘sa,000 ‘seer ‘years efi ofmachienry ‘syeers Inlet ncreetrte 2 Present vai of anuity 6 fr 4yoarsa 12% sts On Janvsry 1, 2008, Lascor Company paid initia direct costs of 68,260 in connection with negotiating snd arranging the lense. 170 ‘The initial direct costs are added to the cost of the ‘machinery to determine the net investment in the lase Costofmacninery 1s1geso Intl croton [Netinvestmentintheleass ‘The inclusion ofthe intial direct costs in che net investment in Teas will have the effect of spreading the initial direct costs over the lease torm and reduce the interest income from the finance lease. rosa rentae Netinveatnent inthe lense Unearnea acer incrne Consequentis the anitial divest costs would decrease implicit interest rate in the lease. The problem therefore 1 tha termination ofthe reduced implicit interest rat. The nginal split interest rate of 12 cannot be applied saymare Twcause of the added inital direct cata, ‘The procedure is simply to divide the net inhvextment in the lease by the annual rental to get the "present value factor of annuity of | ‘Thus, P1,584,950 divided by P500,000 equals 2.1699. Then, through the interpolation process, refer to Une mathematical table of persent value and lok forthe interest rate equivalent {0 this factor The table of present value shows that the present value factor of 9.1699 corresponds to 10% for 4 years, Accordingly, the reduced interest rate of 10% is used ih determining the annual interest income. The finance lease is recorded a fallow! Machinery aii direct cots) 300 Cost asco Lose exible 2000000 Macbisry 584800 ‘Unoarned nvéret income “8.080 amTe annual collection of the rental is recorded as fellows: can ‘0000 ‘Lessrecrivale sono ‘The unearned interest income of P415,050 is recognised Income ever the lie of the lease following the effective interest fhethed of amortization. "The table of amortization may appear as flows: Date Payment Interest Principal Presentvalue Jen 1.2008, 184900 Dee sizes tango ness A Tass Dee suno00 ease TG ‘er 785| Dee 2.2010 soyqco grt 1321 1068 Dee S200 sngoe0 54S ‘Payment represents the annual rental. Interest ia equal to the preceding present value simes the interest rate, Thus for 2006, P1,584,950 times 10% equals Piss 490. Prunaipal isthe portion of the rental payment after deducting fhe interest. "Thus, for 2008, P500,000 minus P168,495 equals P5a1.505, Present value is the balanee of the preceding value after Asdueting the principal payment. Thus, on December 31, 2008, 1P1 584,900 minus P541,608 equals P3243, 445. ‘Based on the above table, the recognition of interest inenine for the first Swo years is Fecorded as follows: ‘ns Dec. 1 Unearseintret income 158495, 185 00 Dec. 81 Unearsedintretincome 243d "tree ineme imate 2008, the lease receivable of P1,500,000 would be report ts 2 Seating sauce ‘The current portion is reported as follows: Lasser {ie Uneamed nares nme ise Brokat 275656 ‘The noncurrent portion is reported a8 follows Lease recive {ase Usearned intnetinene Beskvalis ‘The above presentation isin accordance with para AS 1 wach shat see shal ange aces lt ee 4 finance lease in Their balance ahoct and present them ae a Foose aban amount oqel tothe net icesnen tthe lose, Note thatthe unearned intoest income which is rol ln oe yea fom Der, 20082 deed um the ftom the noncurrent leas reelvabie Poo” # Gedusted eared intr dai Lo Renedin oe) {isto Bales, Daener 5,208 258555 Reimtiesst nae Realizable beyond 2009 13291 21 Direct financing - with residual value On January 1, 2068, Lessor Company leased , pany leased & machinery to another entity with the fillowing details: costo machine eimai sasgato eran eoe tora yee Impistintret ria So on———— ‘The machinery will revert to the lessor at the end of the Tease term. Again, tho problem is the determination of the annual rental. Assume the rental is payable at the end ofeach year withthe first payment on December 81,2008. The relevant present value factor are: ofa 10% ford periods sso PVofanordnary annuity of at 10% for periods sia Cost af machinery sioeato Prennt vale oesidul value (600,000x 688) Can300 Netinvestmentto te recovered 2882910 Divideby PV afm ordinary annuity of at efor periods Annairental [Note that the present vaiue ofthe residual vale is deducted from the east ofthe asset because the raachinery will revert to the lescor at the end ofthe leave term. Otherwise, the residual valus is ignored ross entle 90000034) 3.500.000 ‘Residual vale whether guaranteed or ungueranteed) 50,000, Grosinvesment “4200000 Costaf machinery. Gissa10) Unoarmadinterestiname 905.00 Date Payment Interest Principal Present value sv2t08 900.00: srswate 1wia2608 900000 si9sti Sosa 2818881 sue — 900000 281,385 © sR LTE, 2N6 evn 90000 awraza eave zr 700 wanveon — 990000 1272407720 “500,000, Interest is equal to the prodeding present value times the interoet rate Thus, fr 2008, P3,194.410% 10% equals P819,441. Principal isthe portion of the rental efter deducting interest. ‘Thus, for 2008, P900,000 minus P319,441 equals PB80,559 174 Present value equals the belance ofthe present valu minus the principal payment. Thus, on December 31, 2008, P3, 194.410 minus P580,659 equals P2613.851 ‘The entries for the frst yoar 2008 are AL. record the direct financing lease: Lease retivable 7 4100,000 Machinery aroiano ‘neared interest income ‘ons 00 2 To record the collection of annual rental: cath 00.00 Tense resirabie 00.00 8. ‘To record the intarest income: Unownedimaestsneme nose. Tnteret nee aig. When the lease expires on December 31, 201, the macminery will revert to the lessor. Whether "guaranteed" or ianguarantaed the entry on the Boks of he ese wil be the Machinery 0200 ‘Leaereceiveble 500.00 ‘The accounting problem is when the fair value of the machinery is P400,000 which s lower than the residual value of P500, 000, ‘Under the *guarantoed” scenario the les will pay for the, Ailference. The entry of the lessor i: xh 100.000 Machinery 00.000 Teno resiable 500.000Under the "enguaranteed” aoanaro, the lestor shall recognize ‘as for the diflerence as follows: Mochinery [oss on nance ease Teas rosvable 40.000 1,000 1 00000 [Note well hat ifthe machinery will not revert tothe lessor fat the end of the lease tarm boceuse the lease providee for a transfor te tothe lessee, the residual value is completely ignored in the computation of the annual zental and the linearmed interest income, Mustration ~ Sales type lease Lessor Company isa dealer in machinery: On January 1. 2008, a machinery as Jetsed to Leateo Company with the following provisions Annvalrontal payable st he endfeach your 0000 3 Loasetorm ‘years neal ofmachinery years (Cost sachinery 16000 Innpliatineret rate a Prison value ofonnuy of for yearant 12% 860 . Computation (roas rentals (4000005) 2.000.000 Less: Presensvalsnorental (400,000 3.60) s.sta.so0 Unearned interest ince Preset value ofetala 1.430.000 ear Cont efeachinery L010 000 Desler prot “44900 “Manufacturor or desler lesors shall roogaize selling prob or Joa in income for the period in accordance with the policy followed by the entity for outright sale. 116 On the books of Lessor Company, the sales type lease ix ecotded as follows ‘Te second the eae: Lean resale 2000000 Sale 1 d1oe0 Unearnednteestincome Seoeee ‘The dealer's profit of P4400 is not separately recorded It's included in the sales revense, o vevord the cost of sales, assuming the perpetual system ss used coef 2000000 Inventory s.u040 ‘To record tho collection of the anni ve cos 109000 Tease eceivelo 400000 ‘To record the intorest income for 2008: Unoarned interest iname 72800 Tnvretincme 73,600 Prose value —dAnuary, 2008 1.140000 Deemer 3, 2008 Payment Tetons (124 1.440.000 Balance - December 3, 2008, Payment Tetoen(12%x1232,80 Balance -Dicembe 31,2009 085535) anMlustration - Sales type lease with residual value ‘XYZ Company is dealer in machinery. On Janiaary 1, 2008, a machinery was leased to another entity with the following provisions: Annual rental papas he end ofeach ear 200.000 Leaseteem years Unullieoftcinery res Ccoatofmechinory sono nated esd vale 220.000 Ini drecteosts psy esr ieo,000 inp intrest rate 10% recent vale ofan ordinary annsty of Tor pesos oc 10% 008 Present valued for periods at 10% 6200 [Atte end oft lease term on Dasomber 31,2013, the machinery ‘will revert to XYZ. Compan: The perpetual invuntnry system i used Guaranteed residual value roas renal 0 005) Sormied eSahedae Lear resivable—grossinvestment ‘Prsont vals of gros ental (80000 3.7908) Prstent vals ofguaeasteodresual vat “Boc.a00 0) ‘etl prevent valu Lensareniable {ese Total present value ‘Unearned nteretincone Sales (equatotta preset vale) Coatof enoe cost ofmechinery Ini dro cone Greineome ‘The entries to recard the sale of the machinery and th initial direct costs on January 1, 2008 are ease resivable 4.200.000 Cotati 2e0a00 ‘Se osgsa0 neem interest incre Pots ee inventory bona Tail diet couts 1.000, Cah 100.00 Note that the initial direct costs can be charged dircetty to cost of sales ‘Unguaranteod residual value (ron rentals 00.0005) Uguarantzed rena valve Leasrrocevable— gave sovestment Brosent value grease Precnt vl cftiagsarantoot ress vlue ‘etalprosnt value netinvestizent Leseerecatie es otal present value ‘Unearned intrest none Obsorve that: at this point there is no distinction, ‘The lease receivable and unearned interest income ave the same whether the soenari is guaranteed or unguaranieed residual value ‘Tho difrenoe is inthe computation ofthe sales and cst uf eles Under the "guaranteed residual value sonari’. the presen value cf the guaranteed residual value is included inthe Seles revere ‘because the lessor knows thatthe entire asst hiss boon se However, under the “anguaranteed residual value secoavie the present value of the tnguaraateed residual value i not ineluded in the sales reveni, Accordingly, the present value of the unguarantced residual value is deducted from the cost ofthe Inared asset in compu {st of sales because this portion of the leased asert vein efens “ot eold in the wense that the lessor willbe seceiving back ne the eau ofthe lea term the leased asset with unguaranteed ‘sidual value of PZ00,000 and present value of PIES, 180. 17.Underscore the felling computations: Cont a machinery 2000000 [ess PV unguaeanteed residual value 24380 Cont afsales 1875500 Sile(oqual to present vale of ros rota oni exluding the prosont value ofthe ‘ngunraneedveshual vale) eazet0 costes c.s75820 Trial diet cote (100000 Gross invome Lag [Noto also that the gross Income must be the same under the guaranteed and unguseanteed residual value scenario, “The entees to ecard the sale and the itn direct et on January 1, Bons under the eoneeptof unguaranteed residual value ae: nase receivable 4.210000 Catofelae vaT5520 ‘le soszea0 ‘neaenedinteostingome ots 180 Inventory 200000 Initial iectcons 10.000 Coot 100000, The table of amortization ofthe net ease receivable may appear as follows: Dato Payment ‘Intetest_Prineipal Prosent value ‘vio siasea wabipmis ——ainggoo 15682 aseans era 02 BIEN «Sion eT BRIO ISNT waveni ~ — st0 Ise Samos LaTET imal OMNIS GT 00 a December 81, 2008, Paymnont ‘Appliabltoimterest 10% x 3.156820) Applicable prixtpal [Net feos resavable— 1/2008 PeymentonDeceniber 31 2008 Balance December 2, 2008 Whether guaranteed or uniuaranteed, the entries for tha callection of the annual rental and the interest income ae the same. The entries on December 31, 2008 are 1. Cah 00.000 Lease esivable s0a00 2 Uncarnednteretincome sis 682 Thtoretincme sises2 When te late exis on Dicomber 3, 2012 the machinery walevero the baon 12 Cpany. ether anne Or Nngunranted concep, the etry co te bake Site eee ‘wil bo the same, as flows. “8 Poke a the Inventory (machinery) 200000 easereceivale 2nn000 ‘Tocamplete the illustration, assume on Dead 31, 2012. end of ‘eave term, the far value ofthe machinery is only 6,000 UUnior the guaranteed scenario, the lessee will make wp fr the deficiency by paving the diffrance, Thus, te entry of the lessor och soeo ventory 150,000, Lego esva 200000Under the unguaranteed seenaro, the lessor shall recognize floss forthe difference, as fellows: Inventory 180000 nono lance lease 30,000 ‘ase recive 220000 {kn tobe pointed out tha the eal type lease provides that tho Ted ane wil revert othe lessor pon trmin tion ofthe canta, However ifthe leased ascet ell not rovert io the lesor but, will remain with te Jesse because the lose provides fr a transfer of ‘Sle tothe esse upon the lease expiration, the residual value is ‘Completely ignored by the lessor in the computation of unearned {terest income and gross praBt on the sale ‘Actual gale of leased asset ‘When a lesor actually sells an aset that it has been Sensing linder @ Snance lease, the difference between the selling iifee ‘and the book value of the lease receivable is Recognized in profit or loss. The book value of the lease ‘Sonnac is equal to the balance of the lease receivable minus the unearned interest inonme. For exampic, an entity sold an equipment that it had bees caning under a direct fmaneing leave for P3,000,000. The {allowing belances are aseociated with the finance lease on the books ofthe lear on the dat of sale: eine reson secq000 Cnenrnd ntaret income 1130000 cash 500.000 {earned staretincome ‘’a00.000 Uoseonanleofosod equipment ‘500.000 Trane eceati son0e00 Salesprice 3500000 ‘Book value oflase receivable: ease recetable 5.000.000 peared interest income Loseonsniealegsd euipment Sale and leaseback Asal ond asta isan arrangement wherby one pars propery ack fon ena own tly ‘Thus, the seller Becomes a asler- ts ‘Thus the ger er fesce and the purchaser, a ‘The lease rent and the sales price are usual 0 they are negotiated aa package, interdependent ‘The awounting treatment ofa sale and Jeasebac opens upon ihe peo the laze iokcds nk ommenON Leaseback as a finance lease AS JF mre haf he sal nd enact results in a finance lease, any excess of tale precced ver the Ccrring amount sould ot be immedi toons os Scone but dofersed and sncrzad rr heise en If the leasback isa finance lease, the transaction ‘hereby the our provides nae the lsc wth he sat 2 security. For this reason se not appropiate ta teeta exces of proces over the caning amount ay income Such exces is dofored and amortined ovr the lense term In ther words if the least ie a Sans ease, lenuteck is deferred and antl ayer thon ek, tea ‘any loss on sale and lesseback is recognized immediately. " Mlustration ~ Leaseback as a finance lease On January 1, 2008, Lyka Company sld an equipment with a ‘einige of 19 yar At th um ng Tosa the eaupment for 10 years Other data ure, os et eta a oe Salesprce usualy equal tothepresontvaluecfrentals) 4590000 Iitsrestyate mit n te ace ‘recent val of annuity at 12% fo 10 years 183. 12 55Books of seller-lessee 1, To record the eal: cash 44520000 ‘Arsumelated epeniation 1.250000, euipment Deferedguinonsale an leassback 2, To record the leaceback as finance ease: Easipmnt 0.000 eae ability (00.0008 68) 3. To record the first rental payment Interest expense 42.400 sees 257600 ath recent value —January 1, 2008 Dessert, 2008 Payment 000 Interest (12943 450,000) 622,300) Batanos December 3, 2008, To resord the deprosiation: Deprsiaton(520000/15) wan ‘Aoounatn deprecation ‘is hased on the Iie of the equipment. 184 Assume that the leaoback is a finance leape because Lyka Company has a bargain purchase option and ean acquire the ‘equipment ata vry:nominal amount at the endof the lease torm, 500000 ‘70000 ss2n000 ‘00.000 2st60 4zse.00 sos Since there is a bargain purchase option, the deprecation ‘To amortize the deferred gain as earned over the lease term of 10 years Deferred guinon sale aden ‘Gainer sale and ens ‘ri.c001 1) scl 00 PAS 17, paragraph 58, explicitly states that any deferred {gain onstle and leaseback shall be amortized aver the lease Books of purchaser-lessor 1. To record the purchase: Co a 4320000 2. Tp record the lease a8 finance Tease: ‘Leads recsveble 600 00010) 000.600 Equipment 4520.00 UUnearaedntsest nso, Sa0.000 8, To recerd the first rental payment: cash 800.00 Leaoe eile s0¢00 4 To record the intarest income for the fist year: ‘Unegrne intret ince 12.00 Tnteresincome 12400 Leaseback as an operating lease PAS 17 provides the following rules ifthe Teasoback is an operating lease 1 Ih the sale and leaseback transaction is clearly established ‘at for value, any gain or las on sale and leascback shall be recognized immediatly. 1a‘The transaction is established t fai value whem the soles prog ig equal tothe air value Ifthe lease rental and the sales price ave established at fair value, in effect there is a normal sale transaction and Uhetefore any gain oF lose is recognized immediately. 2, If th sales pice is below fair value, any gnin oF loss shal also be recognized immediately. Horwever ifthe loss js compensated by future lease rental fot below market value, the Toe i deferred and amortized in proportion fo the lease payments ever the period for which the asset ie exposted to be used, In this cas, the Jobs is ain artifical loss an mote in the form of a prepaid tent and therefor shall be deferred and amortized 3. It the sales price is above fair wolue, the excoss ov fair valu is deferted and amortized over the period for which the asset is expected to be used, In other words, the excoss of sales pie over the fair value ssa deterred gain and the excess of fair value over the caorying ainount isan outright gain Ilustration - Leaseback as an operating lease (On Javiuasy 1, 2008, Simple Company sold a machinery with a emoining life of 10 years for P2,000,000 whichis equal to the {oir value of the machinery. Simple Company immediately Teascl the machinery back for 4 years atthe prevailing annut restal of PL00,000, ‘The machinery has a carrying value of P1,800,000, net of accumulated depreciation of PI,200,000 186 Books of seller-lessee 1, “To record the sale cas conan ‘Slatin too ac 00 Genome ane sone ‘The gain i recognized immediately because the sales price and the rental are tablished at fair value 2 To record annual reatal Rentexpense igo’ oe on eco Books of purchaserlessor 1. My record the purchase: Machinay Cash penne 200.00 2. ‘To record the annual rental ct entinome aa 00000 8. ‘To record depreciation of the machinery: Depression 209000 ‘Accuntiate depreciation aaa (200,0007105 187QUESTIONS 1. Define a lease 2. What are the two kinds of lasé? 8. Explain an operating leas 4. Explain the treatment of the fillowing in connection with an operating lonse: Lange bonus ‘Gwmership or exeeutary cacts such as property taxes, jnsurance and repair and maintenance . ce. Initial diceet eosts incurred by the lessor for the negotiation of the lease a, Security dopoxit 5, Explain the eccounting treatment of unequal rental payments in an operating lease 6, What ie finance lease? 7. What are the Snance loase? tions in order to classify 9 Tease a @ £8, Distinguish inception of the lease and commencemnent.of the Tease 9, Baplain the elasiiation of land and building tease 10; Bxplain the meaning of minimum lease payments, 11. How much is recorded as cost ofthe asset and how much is the lone Babli?” 12 Define implicit interest vate and ineremental borrowing rate 19, Which interest rato is used in computing the present yalue ofthe minima Tease payments? veg 14. Bxplain the following 2. Bargain purchase option 1. Guaranteed residual value © Unguaranteed residual value 15, Define and explain the treatment of oontingent reat 16, Define and explain the treatment of exeeutony costs ?, What i the treatmont of initial direct costs in a Gnance Tease on the part ofthe leseo? 18 Distinguish a sales type lease and dirt financing lease on the part of th lessor 19, What is the treatmont of initia direct costs in a finance lease on the part ofthe lssox? a. Dincet financing lease bb Sales typo lease 20, Define the following: Gross invastment in the lense Not investment in the ase ‘Uneamed finance ino. me Manufacturer's or daster’s profit 21, What isa sale ne leaseback transaction? 2 Explain the trontment of « gain or loss from Je and leaseback ifthe leassback ie a nace lease, 23. Explain the treatment of gain or loas from sale ang Teascback i the leaseback iss operating lease, 1s9PROBLEMS Problem3-1 Multiple choice (AICPA Adapted) 1."The appropriate valuation of aa epersting lease on the balance sheet ofthe lessee is Zero 1. ‘The absolute sum of the lease payments ©. The present value of the sum of the loase payments iscountad st an appropriate rate 4. ‘The mavet value ofthe asot atthe inception ofthe lease 2, Rent received in advance by the lessor or an operating lense should be recognized as revenue a. When received 4 Tn the period specified by the lease 8. When should lessor recognize in income a nonsefundable Toeee bone paid by Jenee on signing an operating lease’ When received Ar the inooption of the ls ‘tthe lease expiration (Over the lense term 4. Asan inducement to enter ass Gray Company, a esor, ranted Zeta Company, lease, twelve months of re ret Stora five year operating lense, The lense was eect nana 1 Sos apd provides fr monthly rental payments ‘Dhepn Janay 12008 Za made the Sst rental payment ‘er Decembur 31, 3008, in te S008 income sstement, ray ompany shoal report rent evens eal “re ah ese ing 2008, mover ofthe fal cad rie ne Eee tl csh fob anved over elie of feieen 190 5. At its incoption, the lease terin of Lease Z is 50% of the economic hf of the leased property but the Iso contains bangain purchase option The leamo should record Lanse Za ‘a Neither asset nor liability 1b. Aasot but nota lability ©. Asset and a bisbility 4. Expense 6. Whats the cost bass qran asset acquired ina finance lease? ‘Tho absolute sum ofthe minimum lease payments over the Teas term ms ‘The presen value ofthe minimum lass payments under the Tease including executory costs diecpunted at an gee te ‘The prosont value of the minimum lease peyments under the Tease, exclusive of exoestoryotetsdscountad a a8 appropriate rate ‘Tho present value of the market value of the asset discounted at an appropriate rate ax an amount fo be reeoived at the end of the lease At the inception ofa finance leat, the guaragteed residual walue should be seas ‘Included as par of minimum lease payments at present value » Indded as part ef minimum lease payments a ature «. Tnclided as part of minimum lease payments only to the extent guaranteed residual values expected to txcod estimated residual value 4. Byelude fom minimum lease paymonta Fore finance eat, the amount recorded initlly by the Jessee as a liability should. aay ‘Eued the presen valu ofthe minimum lease payments Excood the total of the minimum lease payments Not exceed the fair value of the leseed property at the inception of the lease [qual the tolal ofthe minimum lease payments9.The lessee’s net carrying value of an asset from the ‘capitalization ofa lease would be periodically reduced by a, ‘Total minimum lease payment 1b Portion of the minimam lease payment allocahe to the interest ©. Portion of the minimum lease payment allocable to reduction of the lease liability 4, Depreciation of the asset 10.'The losce's lease lisbility for a finance lease would be periogeally reduced by the total ‘4. Minimum lease payment plus the depreciation of the related asset >. Minimum lease payment less the depreciation of the related ascat ‘e. Minimum lease payment leeé the portion allocable to 4. Minimum leaso payment Problem 22. (FRS) 1, The dassifcation of leas is normaly cared out fa Anthe end ofthe Jesse tenn ‘Ate a "eoling off period of one year ‘As the inception of the lease ‘When the entity deems it o be nowessary 2 Where thore is a les of land and building and the title to the Iand isnot transferee, generally tho lease is treated a8 ‘2. Tholands finance lease an th building is a finance lene. 1B ‘The land isa france lease and the building i an operating ease. The land is an operating Jase and the building is a finance lente, 4. The land is an operating lease and the building is an operating lease. soo 8. The ease of land and building when spit causes difficulty in the allocation of the minimum lease payments. In this case, the minimum lease payments should be split ‘8. According to the relative fair value of tivo elements b. By the entity based on the useful life of the tine elements ©. Using the sum of the digits method 4. According to any fair method devised by the entity 4. Which is the correct accounting treatment for a ‘operating lease payment in the accounts of the leseu? a. De Cash Cr_ Operating lease rentalsincome statement b. Dr Operating lease rentalstincome statement Cr Cash ©. Dr Ascot account Cr Cash 4. Dr Cash Cr Asset account 5. Which is the correct accounting treatment for # finance lease in the socounta of a lesser? a. ‘rat as a noncurrent asset equal to net investment jn lease. Recognize all finance payments in income statement. », Treat as a recsivable équal to gross amount receivable fon Tease. Recognize finance payments in cash by reducing debt Treat as a roceivable equal to net investinent in the lease. Recognize finance payments by reducing debt and taking intorest to income statement. 4. ‘Treat as a receivable equal to net investment in the lease. Recognize finance payments in cash by eduction of debt. 193he pion a aan as rasan fr esos who TR anuthtree or dlrs should Not be recognized eeparatoly from finance income B. Be recog in the normal way on the tranaction Oni be recognized atthe end of tho Tease term | 4. Beallowed on a steaight-ine basis over the life of the the clasifcation ofa lease as either operating or finance Tease is based on a. The length of the nao . TPR eet ite is and yowae fener Th minim lense panents bing at est 50% of 4. The ccono i of he asset 4: ‘he accounting concept that is principally used to classify rating and finance t= leases into operating an s. Substanee over form b. Pradence s. Neutrality a Completeness, would prima facie lesd 8. Which ofthe following situations would prima fa ton leave being classified as an operating lense 4 Tranafor of oxnorsip tothe lessee atthe end of he &. Option to purchase ata value below the fir valve of te anot ‘Tre lene term is for'a major part ofthe ‘ase’ li 4. The brecon velueof th minim lace payments i Sic the fr va ofthe act 10, Lessors should show assots that are out on operating leases and income therefrom as which of the following? The asset should be kept off the balance shect and the lease income should go to reserves, b. ‘The asset should be kept off the balance sheet and the lease income shoild go to the income statement. © ‘The asset should be shown in the balance sheet According to its nature and the lease income should go to reserves, 4. The asset should be shown in the balance sheet according to ite nature with the lease income going to the income statement Problem 8.8 Multiple choice (PAS 17) 1. The minimum lease payments incl al the flowing, exoept 4 ‘Rental payment® over the lease term 1b Any amount guaranteed by the lessee or by a party ‘lated to the lese © Payment required to exercise an aption on the part of the lessee to purchase the asset st a price Which 1 ‘expected to be sufficiently lower than its fair valve ot the option exercise date Contingent rent 2: tvs that portion of the-rosidual value ofthe leased asset Ue realization of which by the lessor is not assured or i ‘guaranteed solely by a party related to the lesson a Guaranteed residual value b. Unguaranteed residual value ©. Pair value 4. Bargain purchase option 8, Gross investment in the lease isthe Aggregate of the minimum lease payments under a finance Tease of the lessor and any ungueranteed fesidual value accruing to the lessor,~~" ‘The minimum lease payments under a finance lease of the lessor. Prevent value of minimum lease payments under a finance lease of the lessor and any unguaranteed residual value. 44. Present value of the minimum lease payments sider 9 Finance lease of the lessor 4 Not investment in the lease is equal to the ‘4 Gross investment in the lease legs unearned finance », Cott of tho leased asset ¢) The minimum lease payments {4 The minimum lease payments less unguaranteed residual value 5. [is that portion of the lease payments that is not fixed in ‘amount but is based on a factor other than just the aseage of me, for example, percentage ofsales, amount St usage, price index and market rate of interest. Variable rent Contingent rent [Bargoin purchase option & Bxecutory cost 6.The situations which would normally lad toa lease being claseiied as Snanceleaee include al the following, except a. The lease transfers ownership of tho asset tothe lessee by the end ofthe lease tem. The estes has the option fo purchase the asset ata price ‘which is expected to be sufiiently higher than the fair value at the date the option becomes exercisable ce. The lease tsem is for the major part of the economic ie ofthe ageot even if title is not transfered, 4. The present value of the minir-um lease payments amounts to at least eubstantally all ofthe fair viluo of the leased asst at the inception of the lease. 4. ital direct costs incurred by the letsee in connection with specific leasing activities as in negotiating and securing leasing arrangements and directly attributable to activities performed by the lessee under a finance lease axe '& Included as part af the amount recognized as an és under the lense * a b. Expensed immediatoly c. Deferred and. amortized over the lease term 4, Tncluded inthe minimum lease payments a present value ‘The depreciable asst recgnied by the esse under fnaae law hold doped sve tae Tans arm ou le ft aset Shurtr ofthe ler term the wf if ofthe asl cell if of tho actif thee ie ensonae corcsny that che hone wil obtain oer the eal sts lease term, eee 8.Lease payments wider an operating lease should be ‘recognized as an expense in the income statement on Straight lino basis ove the lease term utleasanoth systematic bsis i representative of the time pattern of the user’s benefit. » Diminishing balance bass Sum of nite basis Cash base 10, What isthe treatment of an unguaranteed residual value in determining the cost of sales under a sales type lense? ‘he unguaraneed resis value i ignored. ‘he unguarantod ial valu seed the cot the leased asset. * ' ‘he unguaranteed residual valu is deducted othe coat of the leased asset at absolute amount. » ‘The ungunranteed rsa values deducted Som th cost ofthe leaped ae at preven vel.Problem 3-4 (PHILCPA Adapted) Mavian Company puschased a machine on January 1, 2008 for 'P2,100,000 for the express purpese of leasing it. The machine twas expected to have a sbcyenr hi, no vesidual value and be {epreciated om a straight-line basis. (On March 1, 2008, Marian leased the machine to Dea Company, Sar PGDO,000 a yen forfour Years ending February 28 2012 Mevian incurred total masintenance’ ond othor related costs “under the provisions of the ease of P90,000 relating to the year tned December 81, 2008 Delia Company paid P600,000 to Marian Company on March 1, 2008, Required: Prepare all journal entries on the books of Marian Company fant Delia Company using the “operating Tease” concopt. Problem 3-5 (PHILCPA Adapted) ‘Vim Company purchased an equipment on January 1, 2008, for 9,000,000 eash for the purpose of leasing it. The machine ie fepected to have a 10-year life from the date of purchase. On April 1, 2008, the equipment was leased to Bloisa Company for a three-year pariod, ata menthly rental of P40,000, payable at the end of every month. Aaaitionally, Boise paid P120,000 to Vimn on Apeil 1, 2008 as a lease bons. Vim paid repairs of 20,000 seating to year 2008 Required: 1. Prepare entries sn the books of the lessee and lessor following the operating Tease concept Compute the net rent income of the lestor forthe edlendar 7 ae Problem 8-6 (PHILCPA Adapted) Myra Comoany purchase a tractor on January 1, 2008 a a costa 1,000,000 forthe purpose ofleasing it. The tractors estimated tohave a useful life of § years with residual value of P100,000. Depreciation is on a straight-line basia, On April 1, 2008, Myra “entered into a lease contrac forthe Iso of the tractor for states oftwoyears up toMareh 31, 2010, Te lease fe is 0,000 a month ana the lessee psid P600,000, the lease foe for one year. Myra spent the amount of P15,000 for minor repaire and P5,000 ‘ansportation ofthe tretgr during 2008 Required: Prepare all journal entries on the books of te lessat ain less using the operating lease concept Problem 8-7 (AICPA Adapted) On March 20, 2008, Barnes Company’ purchased a machine for 2,400,000 for the purpose of leasing it to others. The machine is expected to have a 10-year life and no residual value It ll be depreciated on the stright ine basis computed t the ‘The machino was leased to Relly Company’ on Apri 1, 2008 for four years, at 2 monthly rental of P35,000, There is no provision Tor renewal ofthe lease or purchase ofthe machine by the lessee ‘upon expiration of the lease, Barnes paid P120,000 initial direct costs associated witi nogotisting the lease in March 2008, Required: Prepace journal entries on the books of the ltsor and lessee for the year 2008, ‘io8‘The realty ase of P40,000 a yoar are to be paid by Mixx. Mixx hes the option to purchase the property at the conclusion of ‘the leae fora nominal amount is 10%. The Assume the interest vate implicit in the lea tlevant present value factors are: Votan ordinary annuity of at 10% for periede a7 Votan annuty oft advance st 108 for peri a7 Required: PPropare all journal entrgs on the books of Mixx Company for ‘he Years 2008 and 2008, Problem 3-13 (AICPA Adapted) Overiand Company close « lease contract fbr newly construstad ‘wsminals and freight storage facilities on January 1, 2008. ‘Although the terminals have a compecite life of 10 years, the lease rns fr § years with a favorable bargain purchase option ‘upon expiration af the lease. ‘The annual rental is 2,000,000 payable at the endof each year starting December 31, 2008. The lease mustaleo make af annual payment of P75,000 for taxes and P125,000 for insurance, The contract was nogotiated to assure the lesaora 10S rata of return, ‘The present valuo of an ordinary annuity of Lat 10% for ve perleds 83.79. The piutent value ofan annuity off in advance 10% for 8 periods i 4.17 Required: Prepare all journal entries on the books of Overland Company or 2008 and 2009 in connection with the finance lease, 202 Problem 3-14 (AICPA Adapted) Letty Company’ leased a machine on January 1, 2008 with the {following provisions, ‘Annual rental payabein advance a the beginning ofeach yeu starting January 1, 2008 4.000000 Leasaters, years Usefull ofmachine 18 years Implicit interetrat inthe ease 2 PV ofanordinary annuityof1 st 22% for 1Operiads 5600 PVofanannuityoflinadvance at 2%¢forlOperinds 08 PVofl at 12% tor 10 periods oa Letty Company has the option to purchase the machine on ‘January 1, 2018 by paying P200,000 which is sufficiently Lower ‘than the expected fair value ofthe machine on Jenuaty 12018, Required: Prepare all entries on the books of Letty Company for the yoars 2008 and 2009, Problem 3-15 (AICPA Adapted) Veronica Company negetiated a long term lease for nowly constructed building, On January 1, 2008, Veronica took posseesion ofthe building, ‘The building has woof feof 20 years. The ease runs for 15 years from Januasy 1, 2008, Annual payments of P1,000,000 are payable to the lessor on December 31 of each of the 15 years of the lease term. The lease was negotiated to assure the leoor a 10% rata of reture, Present value factors are PWetanordinary annulyof Lat 10% fo 18 pci 008 PVofanannsityof]inadvenceatlOW fr Isperiods 36Required: Prepare all entries on the books of Veronica Company for the ‘year 2008. Problem 3-16 (IAA) On January 1, 2008, Lessoe Company entered into a Tease with Lestor Company for « new equipment that ad a fir valve of 500.00, The lease eipulates that annual payments ofPI000,00 ‘willbe made for five years starting December $1, 2008, Leceeo Conipany gusenated a residual value of P&74,080 at evert to the the end of the S-vear period. The equipment wil reve lessor at the lease expiration, The implicit interest rate for the lease is 16% after considering the guaranteed residual valve “The economic life of the equipment is 10 years. The present value factors at 10% for ive periods are: Preeentvalueof Prevent val ofeedinary ansity of Required: 1. Prepare a schedule of the annual payments showing reduction of lability every year 2, Prepare all indicated entries on the books of Lessee Company for 2008 and 2008, 44. Propre th entry on December 3 2012, end of ese term, toveord the etm ofthe gunn tothe lear Assume the fr Valo of the egupment egal othe guaranteed rovidal vale 44. Prepare the entry on December 21, 2012 to record tho return of the equipment to the lesor assuming the fair value of the equipment is only 300,000. ° joa Problem 3-17 (IAA) Sunlife Company uses leases as a means of matketing its products. On January 1, 2008, Stole leasod an equipment to ‘Sundown Company for 8500,000 per year for 10 years, payable fon December 3) of each year ‘The cost ofthe equipment to Sunlife is 2,000,000 and its fair value is P3,072,500 on January 1, 2008 sing an implies rate of 10%, The fair value ofthe equipment approximates the present value of rentals At the expiration ofthe leas, title to the equipment passes to Sundown Company. Sunlifo Company employs the porpetual system, Required: Prepare all entries for 2008 on the books of Sunlife Company following the “sales type lease” concept. Problem 3-18 (IAA) ‘Makati Leasing’Compsny buys machinery for loase to its slients. On January 1, 2008 Makati Leasing leased a machinety to San Company for Pi00,000 per yea, for years toe pald su the beginning ofeach year starting January 1, 2008, The cost of the machinery ia equal tothe present value of rentaln ‘The economic useful lie of the inachinery is 5 yours with very ‘ominal residual value, Tile passes to the lessee at the lease expiration ‘Makati Leasing is expecting a 12% return on this transaction. ‘The present value ofan annuity off at 12% for 5 pereds is Annuity in advance me Ordinary annuity a Required: Prepare all entries for 2008 and 2009 on the books of Makati Leasing using the “direct financing ease” eoncepeProblem 3-19 (AICPA Adapted) Company lensed equipment from Anne Company on January Shas ee an cghcyear period expaing densary 1 3010 Equal pigments under tbe lar ave POODO00 and are due on dant 1 Flach year Tho fist payment wae mad on January 1, 2008 The fate of interest contemplated is 1086, Tho cash sling pace ofthe ‘ruipment s P5200, and the cn! of the equipment on Annes unin records is P2400 000 rte Compa paid inal direc ‘rts of PS0,000 sn negotiating and wrranging theese, Tho Tease S'proprntly rood aaa sales Ge fase. Required: Prepare all entries on the books of Anne Company for the year 2008, Problem 3-20 (AICPA Adapted) Fox Company, dealer in equipment, leased equipment to Tiger Company om January 1, 2008, The Tease is appropriataly scanned fr asa sale by Fox and a8 a purchase by Tier. The lease is for a 10.vear period which approximates the yseful life of the aseet. The frst of 10 equal annual payments of 'P500,000 was made on January 1, 2008. ‘Fox purchased the equipmont for 2,675,000 and established & lise selling price of P175,000 on the equipment, Fox uses the perpetual inventory system. “Assume that the present value on January 1, 2008 of the rent pasments ver the lease tek dssounted at 12% as PS, 165,000, Requires Prepare all entries for 2008 and-2009 on the books of Fox Company” and Tiger Company. Problem 3-21 ((AA) Dexter Company has maintained a policy of anquiting equipment byleesing. On January 1, 2008, Dexter Company entered into 8 ye agreement with Oceanic Company for an equipmest with, jr value of P2390,000 which approximates the presont value 206 ofthe rental. The lose stipulates an annual rental paynient of 600,000 be paid every Dostmnber 21 starting December 3, 2008 Derter guarantees a rosa vale of P900,000 tthe eno the year pened. The impli interest rato of Oceanic Companys Frohman fe cng the erin ‘Revtie nm quai or ues ee Required: 1. Prepare the entree on the books of Dexter Company for the fest year 2008, 2 Prepare the entry in December 31, 2012 to rood the return ofthe equipment to the lessor as required bythe contract. The fair value ofthe equipment isthe same asthe guaranteed dual valve, 3. Assume on December $1, 2012, the'fair value of the ‘equipment is P180,000°only. Prepare the entry to record the roturn of the equipment tothe lessor and to satisfy the residual value guarantae Problem 3.22 AA) Universe Company ase less a method of saling its products. On danuaty 1, 2008 Universal leased equipment to Nstonal Conan with the blowing miormation Anqualzentl payable at ths end oes ase year 0.00 CoaatequipmenttoUnvere! 2600000 Unguacaniedseasdual vale 00000 nelle sfeqsipment nd lean term ‘years Impl interest atin helene i PVofanordinary anny of for periods at 12% 1868 PV of for perndest 13% 08 At the end of the lease the equipment will revert tothe lessor Both lessor and lessee roport on a calendar year basis, dopreciste all assots on tho straight line, and uae the perpetual inventory gystem, Required: 1. Prepare all enti onthe books of Universal Company for the year 2008, ae 2 Prepare all entries on the books of National Company for the year 2008,Problem 3-23 (AA) Jamu 3, ands Company ie» desler i, machinery. , Site ancy was Ise to Thunder Company mth ‘wine poi Srrmmegaldentye’ Sn ‘$2ueninanf uf eafmechinen aa ae as aaa ee PVeriises penotat 2 Required: = Prepace all the entree on the books of Vandasbilt, fand Thundat Company for the sear 2008, Problem 3-24 (AA) Ieaborg Company isin te basins of easing ne ophistionted equipment. Such an equipment ws delivered to a lessee. ‘Janary 12008 under adirct- financing lease with the following provisions: ‘Spr ela gupabia at the endfyear (ule nndleaxtera paabt aluc ofen oiinary annuity of at 12 for 10 years Peseta dina anne of at for 10 years 6 iia direct casts of Iesberg Company incurred and pai inital ql ra nbgtiatgand acranging theleae, The equipment Sibert berg Company’ atthe end of the lease Required 1. Compute the total franca revenue to be recognized ovr 2, Propane all tho entree on the bors of Iceberg, Company forthe yoar 2008 Problem 3-25 (IAA) Angola Company uses leases as the primary method of selling its products: The company’s main product isa small helicopter {hat is very popular among govornment officials and corporate executives. Angola constructed such a helicopter for a Cabinet Secretary ata ast of PS,000,000: Financing the eonstraction ae ‘ta 12% rate. The terms of the lease provided for anol rental of 'P5,328,710 to be paid over 5 years every Dacember 31 of each ‘year with the ownership of the helicopter transférvieg to the Cabinet Secretary at the end of the lease term itis stated thatthe helicopter will have a esl vl of P500,000 ‘after 5 years. Angola incurred inital direct costs of P200}000 in finalizing the lease withthe lessee, The preset value of an ondinary Annuity of 1 for 5 porods at 129% is 9.605, Required: 1. Compute the fotal unesoned financial revenue 2 Compute the manufacturer's profit tn be recognized immediately 8. Compute the intarest incom for the fist year Problem 3.26 (ACP) On danwery Stetling Company for PI,100,000 which s the fait Vatu ofthe 1, 2008 German Company sold an equipment to ‘equipment. The equipmant had cos of P2,500,000, book vale ‘€P1,000,000 and remaining useful lie of 10 year, inthe same day, German Company eased back the equipment {or years for an annual ental of 40,900 payable atthe ging ofeach year. German has no opticn to renew or repurchase the cuipment Required: ‘Prepare journal ontres for 2008 to the rood the sale leak ‘transaction on the books of German Comy Company. pany and SterlingProblem $-27 (ACP) On January 1, 2008 Canada Company gold machine with 2 ‘eniuining useful life of 10 years to Saigon Company and ‘Srmultancoudy leased it back for 9 years, Pertiont data are as fellow Saleprice 500.000 Mactenesy 100,000 ‘osalated depreciation "60000 ‘Aenalreeal ‘0000 Required: Prepare journal entries to record the sale and leageback Ptauotion on the books of Canada Company and Saigon Company. Problem 3.28 (ACP) Cuba Company owns a building costing P5,000,000 with Sah Rs Sou of accumuleted depresiation and fair value of 2'900:000, The building has o remaining useful life of 1 years ‘On January 1, 2008, the building is old to Mexico Company for Pe 235000 nd leavod back aver a 10-year tarm, with lease Pajmeae of P500,000 tobe made atthe end ofeach year: ‘he Igebac sa nance ean ease Cue Coma Ma Pe ea purehace option ‘which is. nominal amount. The parte fae impli in the Tease is approximately 16%. Required; Prepare the journal entree op the books of Cuba and Meio osha the sale and lesseback for the year 2008, Problem 3-29 (AICPA Adapted) on June 1, 2008, Oren Company entered into a five-year Sonenewable lease, commencing on that date, fr office epace “tnd made the flowing payments tothe Yessoi Bonstnobainlease Factmanthsrent Losemonthersat ea Initsinoine statement forthe year on 2 Snont shold Oren reper on expense 8 ME ‘a. 200.000 b. 210,000 «800,000, 4, 320000, Problem 3-30 (AICPA Adapted) Kew Company lass and op xan tal stor. Te fi crination rates te ev he eat eel eee Ti igh Additional rent is computed Additonal rent is computed at 6% of net sales over F040 000 ut 76,000.00 and a net san ovor sales fr 2008 were P9, 000,000, Kev pai exeutory costa PIZ0[00 and insurance of B50,000. 7" PPAR tne of For 2008, Kew's expenses relating t» the store lease are 2. 710000 680,000 ©. 540000, 4. 350000, Pron 34 LEA Age Rlcew ameia ee SUR en a. 2,010,000 1,800,000 “600,000 & 510,000Problem 32 (AIUPA Adapted) On October 1, 2008, Dean Company leased office space at a ‘monthly rental of P600,000 for 10 years expiring September 0, 2018. As an indvcement for Dean to entor into the lease, the lense permitted Dean to oceupy the promises rent-free frpm Gciober 1 to Decomber 81, 2008. For the year ended December 51, 2008, Dean should record rent expense of Problem $-38 (AICPA Adapted) CConn Campainy owns fice building and normally charges tenants P0000 per oguare mote per your or fice pace Bocatsa {Beomayang rate inl, Com agreed tolease 1,000 equate meters te Hsnwen Compan at 20 per gure meter te Si er tatveeyear operating ease Rent or remaiirg Jere wil sat fhe P50 rate’ Hanon moved ino the bung on January 1 $3005, cnd paid the Sat year’ rent im vance. What amount of rental evens should Gon sepert from Hanaon i its income Statement for the year ended September 90, 20087 ‘2.400000 200000 ©. 1800000 a. "900000 Problem 3-34 (AICPA Adapted) Wall Company leased office premises to Fox Company for a Tve-year term beginning January 1, 2008, Under the terme of the operating ns rn he ia yor ie? a et fbr years 2 ugh 3s P,250,000 per annum. However as an Inducement to enter the lane, Wall grant Pox the fst a tmonths of the lease rent-tee ate December 91,2008 tncome ‘etenen, what asount should Wall eport as rental income? a. 1,200,000 b. 1160,000 a ©. 180,600 “300,000 Problem 3-35 (AICPA Adapted) p July 1, 2006, Gee Company lensed a delivery truck fom Mare Company under a Sear operating lense Boul snr tho term ofthe lease will ba P300,000, pablo A2monthsat P5000 = P 90,000 Rmonthest P7500 =" 90000 Vemontheat P1700 = 210.000 All payments were made when dno. I Marr's June 20° takin shot the scrond ent able sania emg «219000 & iano © sano am Problem 3-36 (AICPA Adapted) On January 1, 2008, Wren Conary lned a bulng wo Bei under an operating lease for ten years at 2500,000 per yest payable the fist day ofeach lease year iron part PLSU 000 to 8 teal estate broker av iia tet cote he busin deorecated Piah od per year For 2008, Ween nerfed {nuranen and property tax expan ah Wes net rental ince for 3008 should be ne P9000. 4. 275000 & Saloon © 350000 a Seam Problem 3-37 (AICPA Adapted) Rapp Company leased a new machine to Lake Compai Sanuary 1, 2008. The leas expire ondanuary 1 2013, The aeocal Fental is 7900,000. Additionally, on Janaary 1, 2008, Lake pas 0000010 Rapp aes bon and P20 0a a wets depcat tobe refunded spon expiration ofthe Ieee: In Raps 2008 shone atement, the amcunt of rental revenae sould be ‘1,400,000 B-1'350,000 «1,000,000 4 "s00.000Problem 338 (AICPA Adapted) On ddanuary 1, 2008, Clay Companiy leased a new machine from Saxe Company. The following data relate to the least ‘ansaction at the inception of the lease ‘Annual rentalpayablestbeginningofeachleaseyoar ~ 50,000, ‘Unefalie ofmachine years Tnsplcsnterest ate 10% Present valucofen ana of i “pieance for 0 periods 10% ar, Proeent vale ofannuity of] taut for 10 period a 10% eis ‘rirvalueofthe machine 4000000 ‘The lease has so renewal option, and the possession of the machine reverts to Saxe when the lease tarminatee. At the Inception ofthe lease, Clay shall record a Tease liability of| a. 000,000 5 8sc,000. 075,000 0 Problem 3-39 (AICPA Adapted) (On Janusty 1, 2008, Ashe Company entered into a ten-year ‘noncencelable ease requiring yearend payments of P100,000. Ache's incremental borrowing vate is 12%, while the lessor’ impli interest rate, known to Ashe, is 10%. Present value factors for an ordinary annuity fr ton periods are 6.145 at 10%, snd 5,650 at 12%. Ownorship ofthe property remains with the Toesor at expiration ofthe lease. Thare is no bargain purchase ‘option. The leased property has an estimated eeonomic life of 1 years, What amount should Ashe capitalize for this leased property'on January 1, 2008? 1,000,000 he "614500 . 565,000, a ° Problem 3-40 (IAA) (On December 31,2008, Tiger Company lated equipment ‘other entity, Pertinent lease transaction data ae as lows, * ‘Te estimated seven-year useful equipment lif coin with the lease term. “e nd ‘Thetirst ofthe seven equal annual 800,000 leas payments was paid on December 31, 2008, oa ‘he impli inaret sate 12 percent ‘Tiger's incremental borrowing rate i 14 percent Present values of an annuity of 1 in advance for sovon prods are 6.11 at 12 percent and 4.89 at Id percent. ‘Tiger Company should reood the equipment at 2. 5,600,000 1 £088,000, © 3912000 4 ° Problem 3-41 (AICPA Adapted) East Company leased new machine frm North Company on May 1, 2008 under a lease with the following inforeaton, ‘Annualrentalpeyablesteginningteachleaseyenr 46000 eon ss eel ee *s Reais amt Sage ea Posen le of ropes 6 a on East has the option to purchass the michine on May 1, 2018s Baving PS00,000 which approximate te expected fir vlue Of the machine onthe open exercises: Os ‘at sll rcord a omsed mace at n=” OF Mav 12008, 2,515,000 2'380.000 2.245,000 1,880,000Problem 3-42 (AICPA Adapted) ‘on Januar}, 2008, Nar Company entered into a yer lease fo deling equipment. Non accounted forthe aquisition a8 a Seared eke lors 40,00, whe include a P108,000 brain Durcane option, Ate ede eas, Nr ean to brags 2 eebatyattpurdese option Nor etimatee thatthe equipments th aie wl be F500 000 at nen of Sear Nor (Ry Jury wre straightine depreiation on amir equipment For. ae ‘ended December 31, 2008, what amount should ‘Nini teoogiae as deprecation expense on the lose see” 480,000 460,000 30.000 00 Sroblem 3-48 (AICPA Adapted) en , Cole Company signed an eight-eet “la iase for a'naw macnn rearing P1690 eset armen atthe beginning ofeach year. The machine ear a 2 yare, with nb endunl valueTie pauses Ct time atin dine Cae wth agin viata loft plan nota Ageogte lars ee restetnt eon dannty 3008 f 1,080,000 bared oe art rae ofintre Hor 2008, oe nd ord keen expense or the Tezed mache at o 5 50,000 126,000 3. 150,000, Problem 3-44 (AICPA Adapted) ‘Nun Company leased machinery fom Chin Company on January T Shoe Be 10year period (nfl li of tho aes e 20 ye) ‘igual annual payments under the Tease are P200,000 gnd are Sos on January 1 of each year starting January 1, 208, ‘The present value at January 1, 2008 of the Tease payments over the loase term scouted at 10% was P1,952,000, Nunlo incremental borrowing rate was 12%. The leae is appropeately accounted for asa finance lease by Nun because there ie very ‘ominal bargain purchase option, 1 What should be the liability under finance leae to be shot ‘a8 noncurrent on the December 31, 2008? a. 1.215.920 b Losa.240, ©. 1,067,200, & “97g3920 2, What isthe interest oxpence forthe year 2008? a. 200000 15200, 106720, ao 8, What isthe depreciation forthe year 2008? a. 135200 118.200 © 67.600 20000 Problem 3-45 (AICPA Adapted) Oak Company leased equipment forts entire nine-year useful lif, agreeing to pay P500,000 at the start ofthe leaes term on December 31, 2007 and P500,000 annually on each December 31 for the next eight years. The present value on December 91 2007, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak knows to be 10%, as 3,165,000. The December 1, 2007, present value of the lease payments using Oa’s incremental borrowing rate of 12% was 2,985,000. Oak made a timely second lease payment. What samount should Oak report ae lease iabiliy in its December 1, 2008 balance chest? ‘&. 3800000 B. 2431500 ©, 32831200 a °Problem3-46 (AICPA Adapted) On January 1, 2008, Blawg Company signed a long-term lease for an offce building. The terme ofthe lease required Blaugh to pay P100,000 annually, beginning December 30, 2008, and fontinwing each sear fr 30 vears. Me lose qualifies as a finance Tease. On January 1 2008, che present vale ofthe lease 'sP1,125,00 atthe interest rateimplicitin the lease. In Blaugh’s ever 31, 2008 balance sbeot, the lease lability ehould be 1,025,000 113,000 © 1.135,000 & 2'900,000 Problem 3.47 (AICPA Adapted) On January 1, 208, Harrow Company as lessee signed a five ‘eer noncancilable equipment lease with annual payments of 'P1,000.000 beginning Decembor 31, 2008, Harrow treated this transaction asa finance leace. The fve lease payments have a prevent vale of P3790 000 at January 1, 2008, based on interest. v 10%, What amount should Harrow report a intarest expense for the year ended December 81, 2008? ». 979,000 L. 279.000 242000 ao Problem 3-48 (AICPA Adapted) (On January 1, 2008, Vick Compacy as lessee signed a ten-year noneancelable lease for @ machine stipulating annual payments ‘FP200,000. The fst payment was made on January 1, 2008. Vik Sppvcpriately treated this transaction a8 finance leabe. The ten Tease payments have a present valuo of P, 380,000 at January 1 2008, based on implicit interest of 10%. For the year ended December 31, 2008, Vek chould record intrest exponto of 135000 %. 115;000, 68000, . ao 218 Problem 3-49 (AICPA Adapted) On Januar 1, 208 Babson Compsny leased eo atom trent bee lns gue Bohn once eae Payments of 300000 begin aman 1 3008.8 at Ot tie eae term. Decor, SI2 Beara perme ‘taal value othe stoma wil tf POGUOE Tels gualiies a's Soon ln The nents gt ee Tease ia 0%, Present value factors forthe 9 rate plait ne the lease are as follows: cee Foren annuity de with Spepment in advance ‘i200 For an ordinary anmusty with payments > 3.890 Presntvaluc ot or pride a Babson's recorded finance lease liability immediately atte the Sree required payment should be ‘a. 4,862,000 407.000 Problem 3-50 (AICPA Adapted) On Janvary 1 2008, Day Company ontered into a 10-year lease ‘agreement with Ward Company for industrial equipmcnt, ‘Annual lease payments of P1,000,000 are payable at the end of teach year Day knows that the lessor expects a 10% retura oa the lasse. The oquipment is expected to have an estimated ‘useful life of 10 years, In addition, a third party hes guaranteed ‘opay Ward a residual value of P500,000 at the end ofthe lence, ‘The present value of an ordinary annuity of 1 at 10% for 10 Years is 6.14. The present Value ofl at 10% for 10 year i 30 In Day/s October 91, 2008 balance she ofthe lease obligation was eet, the principal amount a 6335,000 & 6.140.000 © 5,810,000 4 5650}000Problem 351 (AICPA Adapted) ‘On December 31, 2008, Rafferty Company leased equipment ‘under a finance please, Annual lease payments of PZ00,000 are dlue Devernber 21 for 10 years. The equipment’ usefl life is 10, Sears, and the interest rate implicit inthe lease is 10%The Fnanceleace obligation was recorded on Decomber 31, 2008, P1 360,000 and the first lease payment was made on that date What amount should Rafferty include in current Hisbiltes of ‘this finance leaee in ite Deoomber 31, 2008 balance sheet? a. 65,000 b. 85.000 ©. 115000 200,000 Problem 3.52 (AA) ‘Adonis, Company leased machinery with a fair value of 'P2,500,000 from another entity on Decembor $1, 2008. The contract is a six-year noncancelable lense with an implicit {nteret vate of 10 percent The lease roquires annual payments ‘f P500,000 beginning December 31, 2008. Adonis appropriately Sccounted for the lease as a finance lease. The incremental oreowing rate is 12 percent. The present value of an-annity duc of I for 6 years at 10 peroent is 479 and the present value fof an annuity due of | for 6 years at 12 percent is 4.60. What is thelease Habit iat Adonis ehould report on the balance sheet st December 31, 2008? 1,895,000 3,800,000 2,900,000 ‘4. 305,000 Problem $58 (AA On Doceinber 81, Meteedes Company purchased a machinery that it had been leasing under a finance arrangement. The leased asset and lease liability were originally recorded at 'P2,000,000. At the time of the purchase, the accumulated ‘eer depreciation on the leaved 800,000 ed asnet was and the remaining balance ofthe leave Vability was P1,300,000. The leased asset was purchased { 1,440,000 cash. What amount is debited as cost of the machinery on the date of purchase? 1,840,000 1,440,000, 1.200.000, 4000}000 ene Problem 3.54 (AICPA Adapted) The interest raic contemplated by Peg and Howe ist land Howe is'10%. The echoing pin of einen 3,200, th cont af the equipment on Howe's accounting records fe P2800, ‘The lease is appropriately recorded ae sales type leases 1. Whats the gain onsale of the eqtprient that Howo should recognize for 2008 ‘a0 860,000, 90,000 45,000 What is the intorest rovewlue that Howe Wot Howe should recognize 292.000 146000 353,000, 76.000Problem3.55 (AICPA Adapted) (On January 1, 2008, Gallant Company entered into a lease ‘agreement with Blacksheep Company for machine which was, cirriedon the accounting records of Gallant at P2;000,000, Total paymente under the lease wich expires on Decomber 31, 2017, Fggregate 3,500,800 of which P2 400,000 represents cost ofthe ‘chine to Blacksheep. Payments of P365,080 are due each ‘January Lof each year The intorost rate of 10% which was ‘iipulated in the Tease ia considered fair and adequate Compensation to Gallant for th use of ta funds, Te “interest ‘method of amortization ia being used. Blacksheep expects the machine to have a 0-year life, no residual value and be feprecated of a straight line basis. The lease qualifies as a tales type lease ‘What should be the income before income tax derived by Gallant fom this lease for the year ended December 31, 2008? a. 204402, B eogso2 ©. 355080 4. 755,080 Problem 3.56 (AICPA Adapted) Glade Company louses computer equipment to customers under dive financing eases, The equipment has no residual value ft the end of the lease and the leaves do not contain bargain purchase options, Glade wishes to esrn 8% intrest on a Sear {ease af equipment with a cost of PS23,400. The present value tf an annuity due of 1 at 8% for 5 years is 4312. What is the {otal amount of interest revenue that Glade will earn over the feof the lease? a. 129360 5. 139450, ©. "51,600 4, 75,000 . ‘909 Problem 3-57 (IAA) Oceanic Company is engaged in leasing equipment. Such an ‘equipment was delivered to lessee on January 1, 2008 under diteet financing lease withthe following provisions: Ot cfupent ssexa ‘Unguarantoed residual value “J Uaioe erm Proatvlonsfamordnay anuityefifrByearetio% pe PesentvalwafforSyeaset 0 rr ‘The annual rental is payable at the end of each year. The fequpment will revert to the lessor upon the lease expiration. ‘What is che shnual rental over the lease term? Problem 3.58 (AA) . 480.000, © 488000, @.- 391,800, Problem 3-65 (IAA) Accenture Company, a dealer in. machinery and equipmént, leased equipment to another entity on July 1, 2008. The lease is appropriately accounted for asa ale by Accenttre. The lease is fora ten-year period (the useful feof the asset) expiring ‘June 90,2018. The first often equal annua payments of P800,000 was made on July 1, 2008, Aecenture had purchased the equipment for P2,675,000 on January 1, 2006, and established a lis selling price of P3,575,000 on the equipment. The present value at July 1, 2008, ofthe ent paymenta over the lene term Aliscounted at 12 pereent (the appropriate interest rats) was 3,165,000. What isthe amount of profit on the sale and theamount of interest income that Accenture should record for ‘the year ended December 81, 20087 490,000 and 189,900 3. 490,000 and 159,900 ©. 700,000and 158,900 4 700/000and 188,900 Problem 3-66 (AA) OnJanuary 1,2008, Lessor Company leased a machinoto Lessee Company: ‘The machine had. an original woet of P6A0,000. The lease term vas five years and the implicit interest on the lease jwas 15 percent. The lease is properly classified aa a direct financing lease. The annual lease payments of P173,000 are made each December 21. The machine revests to Lessor ‘Company atthe end ofthe lcse term, at which time the residual value of tse machine will be P40,000, The residual value inno! trunrantood ‘The PVof | at 15% for periods ie 479, andthe PV of an ordinary annuity of 1 at 15% is'3.35. At tho inception of the Teas the balance of Lestor’s not receivable and Lessee'sliabty would be Lessor receivable Lastoe liability a. 600,000 600,000 & 579.550 579,550 © 600000 579,550 a 579,550 69,000 Problem 3-67 (AA) ‘The commoncoment of lease 1s January 1, 2008. A third party ‘guarantees the residual value of the asset under the lease, estimated to be P1,200,000 at January 1, 2013, the ond ofthe lease term. Annual ioise payments are P1,000,000 due exch December 3, beginning December $1, 2008. The last payment 1s duo Docomiber 31, 2012. Both the lest and lesteo se 10% as the interest rate, The remaizizg useful li of tho assét was ‘Sx yours at the commencement of the lease ‘Tho PV of at 10% fo 5 periods is.62, andthe PV ofan ordinary fnnuity of 1 at 10% for 8 poriods is 3.79, What isthe net asset. ‘balance for the lessor, and net lability balance for the loses, at the date ofthe commencement of the leaca? 7 Net asset (lessor) Net lability (lessee) 434,000 4534000 b.—8.780.000, 3,780,000 & 4534000 53.790,000 @ —-3799,000 +4534,000 Problem 3-68 (AICPA Adapted) On Janiuary 1, 2008, Hook Company sold equipment with a ¢arrying amount of P1,000,000, and a remaining useful life of 40 years, to Maco Drilling for B1,500,000. Hooke immediataly leased the equipment back under 10-year finance lease with 4 present value of P1,500,000 and will depreciate the ‘squipment using the straight-line method. Hook made the fret annual lease payment of P244,120 in December 2008. In the Decomber $1, 2008 balance she, the unearned gain on ‘equipment sale should be 500,000 450,000 25,880 ° Problem 3.69 (AICPA Adapted) On Deceinber 31, 2008, Lane Company sold equipment to Not and simultaneously lessed it back for 12 years, P information on this date is as follows Salesprie Carrying amowt Batimated maining somomicifeCN ———— [At December 91, 2008 how much should Lane report as deferred revenue from the sale of the equipment? s. 120.000 112000 fe. 110,000 a0 Problem 3-70 (PHILCPA Adapted) (On December 31, 4008, Albocassor Company purchased a tractor from Chelf Company Simultaneeus with the sale, Chel lensed Thick the trator for 12,years for its use in Une new frm that i ic fleveloping, The sales price ofthe tractor wa P7,800,000, while tts carrying amount in the books of Cheliffas ofthe date ofthe {als was 5,850,000. Cheliffe enginoors have estimated that the remsining economic feof the tractor is 15 years. Clif is ‘awhly-owned subsidiary ofa US company. What s the amount ‘hat Chelif should report as deferred gain ftom the sale of the tractor on December 31, 2008 in its reporting package for use tn eonsolidation with the Head Office accounts? 1,950,000 PF Pigg Problem 3-71 (AICPA Adapted) ‘On December 31, 2008, Bain Company sald 8 machine to Ryan fand simultaneously leased it back for one year. Pertinent Information at this date follows: Sslesprice a0 00 Corpingamount 0000 Present valu ofeatnaieaee ele (@.000for 12 months 12%) si00 tated remaining wos ie year: In Bain's December 81, 2008 balance sheet, the deferred income from the sele of this machine should be a. 34,100 », 30,000 4100 a0 Problem 3-72 (ACP) (On December $1, 2008 Are Company sold an equipment with a zomaining uacful lip of 10 yeare. At the same tie, Arc leased ‘bak the equipment fr 4 yours The lensaback san operating lease. Data relative to the sal and leasehack are Saesprice one airvalueofoquipmenton the date ofaale S000 Cereyingamount cfequipment 3500 00 In An 2008 income satement, ow mich ain on he ‘and leaseback should be reported? * fesse 500,000 1,750,000 11500,000 17000,000 #31