Problem #3 page 363.
Given:
Lease term 4 yrs
Annual payment 100,000.00
Payment term payable in advance
Implicit rate 10%
Incremental borrowing rate 12%
Useful life 5 yrs
Residual value 25,000.00
Purchase option 50,000.00
It is reasonably certain that ABC will exercise the option
Solution:
- If implicit rate and borrowing rates are given, use the implicit rate. In the
the absence of an implicit rate, then use the borrowing rate.
- The annual lease is payable in advance, that is rent is payable every January 1. Thus
use PV of an annuity of 1 in advance at 10% for 4 yrs.
- To calculate for the PV of an annuity of 1 in advance in your calculator:
a) Input 1.10
b) Press "divide" sign twice
c) Pres "equal" sign 4 times
d) Press minus 1
e) Press divide 0.10
f) Press multiply 1.10
Answer: 3.48685 (PV of an annuity of 1 in advance)
PV of lease payments = P100,000 x 3.48685 = 348,685.00
PV of purchase option = P50,000 x 0.6830 = 34,150.00
Right of use asset and lease liability 382,835.00
Amortization Table 10%
Date Payment Interest
Jan 1 20x1
Jan 1 20x1 100,000.00 -
Jan 1 20x2 100,000.00 28,283.50
Jan 1 20x3 100,000.00 21,111.85
Jan 1 20x4 100,000.00 13,223.04
Jan 1 20x5 50,000.00 4,545.34
Annual Depreciation:
Right of use asset 382,835.00
Less: Residual value (25,000.00)
357,835.00
Divided by useful life 5.00
Annual depreciation 71,567.00
a) Journal Entries
Jan 1 20x1 Right of use asset
Lease Liability
Lease liability
Cash
Dec 31 20x1 Depreciation expense
Accumulated dep.
Jan 1 20x2 Lease liability
interest Expense
Cash
Dec 31 20x2 Depreciation expense
Accumulated dep.
Jan 1 20x3 Lease liability
interest Expense
Cash
Dec 31 20x3 Depreciation expense
Accumulated dep.
Jan 1 20x4 Lease liability
interest Expense
Cash
Dec 31 20x4 Depreciation expense
Accumulated dep.
Jan 1 20x5 Lease liability
interest Expense
Cash
b) Carrying amount of the right of use asset and lease liability as of Dec 31, 20x1:
RIGHT OF USE ASSET
Jan 1 20x1 382,835.00
Less : Depreciation (71,567.00)
Carrying amount, Dec 31 20x1 311,268.00
LEASE LIABILITY
Carrying amount, Jan 1 20x2 211,118.50
Add: Payment, Jan 1 20x2 100,000.00
Carrying amount, Dec 31, 20x1 311,118.50
Principal PV
382,835.00
100,000.00 282,835.00
71,716.50 211,118.50 311,118.50
78,888.15 132,230.35
86,776.97 45,453.39
45,454.66 -
382,835.00
382,835.00
100,000.00
100,000.00
71,567.00
71,567.00
71,716.50
28,283.50
100,000.00
71,567.00
71,567.00
78,888.15
21,111.85
100,000.00
71,567.00
71,567.00
86,776.97
13,223.04
100,000.00
71,567.00
71,567.00
45,454.66
4,545.34
50,000.00
Problem 3-1 page 364
PV of annual rent (P80,000 - P6,000) * 5.2161 385,991.40
Note: The P6,000 maintenance should be deducted from the annual lease payment and
will be treated as repairs and maintenance expense per year
14%
Date Payment Interest Principal PV
Jan 1 20x1 385,991.40
Dec 31 20x1 74,000.00 54,038.80 19,961.20 366,030.20
Dec 31 20x2 74,000.00 51,244.23 22,755.77 343,274.42
Dec 31 20x3 74,000.00 48,058.42 25,941.58 317,332.84
Dec 31 20x4 74,000.00 44,426.60 29,573.40 287,759.44
Dec 31 20x5 74,000.00 40,286.32 33,713.68 254,045.76
Dec 31 20x6 74,000.00 35,566.41 38,433.59 215,612.17
Dec 31 20x7 74,000.00 30,185.70 43,814.30 171,797.87
Dec 31 20x8 74,000.00 24,051.70 49,948.30 121,849.58
Dec 31 20x9 74,001.00 17,058.94 56,942.06 64,907.52
Dec 31 20x10 74,002.00 9,087.05 64,907.52 (0.00)
Annual Depreciation:
Right of use asset 385,991.40
Divided by lease term 10.00 years
Annual depreciation 38,599.14
Note: The lease term is used in depreciation instead of the useful life of the
machine because there is no indication that the machine will be
transferred to the lessee after the end of the lease contract.
a) Journal Entries
Jan 1 20x1 Right of use asset 385,991.40
Lease liability 385,991.40
Dec 31 20x1 Interest expense 54,038.80
Repair and Maintenance expense 6,000.00
Lease liability 19,961.20
Cash 80,000.00
Depreciation Expense 38,599.14
Accumulated depreciation 38,599.14
Dec 31 20x2 Interest expense 51,244.23
Repair and Maintenance expense 6,000.00
Lease liability 22,755.77
Cash 80,000.00
Depreciation Expense 38,599.14
Accumulated depreciation 38,599.14
b) Current and Non Current portion of lease liability as of Dec 31, 20x1
Current Portion 22,755.77
Non Current Portion 343,274.43
Total lease liability 366,030.20
Problem 3-2 page 364
Given:
Annual lease payment 200,000.00
Term 4 years
Payment term at the start of the year
Incremental borrowing rate 14%
Direct cost 50,000.00
Useful life 10 years
Solution:
PV of an annuity:
Lease payment = (P200,000 x 3.3216) 664,320
Direct Cost 50,000
Righjt of use asset 714,320
Note: You will use PV for an annuity since rental is payable in advance
a) Amortization table
14%
Date Payment Interest Principal PV
Jan 1 20x1 664,320
Jan 1, 20x1 200,000 200,000 464,320
Jan 1, 20x2 200,000 65,005 134,995 329,325
Jan 1, 20x3 200,000 46,105 153,895 175,430
Jan 1, 20x4 200,000 24,560 175,430 0
Annual depreciation:
Right of use asset 714,320
Divided by lease term 4 yrs
Annual depreciation 178,580
Again, the lease term is used for depreciation because there is no
indication that the machinery will be transferred to the lessee after
the lease contract ends
b) Journal entries
Jan 1 20x1 Right of use asset 714,320
Lease liability 664,320
Cash 50,000
Lease liability 200,000
Cash 200,000
Dec 31 20x1 Depreciation expense 178,580
Accumulated depreciation 178,580
Jan 1 20x2 Interest expense 65,005
Lease liability 134,995
Cash 200,000
c) Caarrying amounts
Right of use asset:
Initial Cost 714,320
Accumualted depreciation (178,580)
Carrying amount, Dec 31, 20x1 535,740
Lease liability:
PV, Jan 1 20x2 329,325
Add: Payment Jan 1 20x2 200,000
Carrying amount, Dec 31, 20x1 529,325
Problem 8
Given:
Lease term 10 years
Annual lease 10,000
Payment term at the end of each year
Implicit rate 10%
Borrowing rate 12%
Useful life 10 years
Residual value 5,000
Note: The residual value is not guaranteed because the third party is unrelated to
Day (lessee)
PV @ 10% (10,000 x 6.1445) 61,445.00 (b)
PV of an ordinary annuity is used because lease payment is at the end of each year
Answer: b (61,446)
Problem 9
Given
Lease term 10 yrs
Annual lease 20,000
Payment term at the end of each year
Implicit interest rate 10%
Payment Interest Principal PV
Dec 30, 20x8 135,000.00
Dec 30 20x8 20,000 20,000.00 115,000
Dec 31 20x9 20,000.0 11,500 8,500.00 106,500
Answer : b (8,500)
Problem 10
Right of use asset (PV) 108,000
Divided by useful life 12 years
Annual depreciation 9,000
Note: The useful life is used because the machinery will be passed on to Cole at the
end of the lease term
Answer: b (9,000)
