Prelim – Lease Accounting for Lessor - Binibigyan ng option ang lease.

At the
Lease Accounting inception at the time ng pagagree ni
 Why does it is important for us because at lessor and lease. In the form of writing.
some point it becomes complicated Finance Lease – 2 types – Objective to generate
because of the recognition of the Asset. funds
 PAS 17 may issue for the recognition of
the asset because matagal na yung lease 1. Direct Financing Lease – Incidental activity
term o ginagamit. 2. Sales Type – Dealer (Seller) primary
 For example ang useful life ay 5 years activity which one way to sell the
pero ginagamit mo na yung asset for merchandise.
almost the entirety of the useful life like 4
years out of 5 years. Almost 80% na ng Answer to Problem 13-1 (Direct Financing Lease)
asset ginagamit na pero you’re not
- There was no intention to transfer the
recognizing the asset.
title but you need to justify why it is
 The new standard that the asset must be
finance lease:
recognized not the asset per se but the
right on the asset. Useful Life = 10 years; Lease Term= 10 years
Lease on the part of the lessor can be classified as
Ratio = 100%
Operating Lease or Finance Lease.
Lessor – Nagpaparenta Answer: This is classified as finance lease because
Leasse- Nagrerenta of the qualification number 1. And since this is
Expect if: finance lease the asset of the lessor is not subject
1. The asset that we’re talking about is trivial to depreciation. Kasi majority ng buhay na sa
like small amount. Immovable items. No lease.
need to finance lease operational lang.
2. Ang lease term ay isang taon walang 1. Gross Investment- Total Collection +
effect sa useful life ng asset expect kapag Bargain Purchase Option (if any)
- This is incidental activity which is this is
ang useful life din ay isang taon.
use to generate funds.
Lessor: we still have the same accounting 2. Net Investment – Cost of Equipment +
treatments. Initial Direct Cost
- Present Value of Rental Collection is
Qualification to be recognized as Finance Lease: deemed to be equal to the COST OF THE
(At least 1): EQUIPMENT
- Pag direct financing deretcho kana ng cost
1. Ratio = Lease Term/ Useful Life
- Baka kasi substantial na siya na
of equipment. Pero since may dinadagdag
gumagamit to the point konti nalang na initial direct cost na appektuhan ang
natitirang buhay ng asset. In terms of interest rate na gagamitin. We might need
Useful Life the ratio is at least 75%. to adjust the value of interest rate. That’s
- Operating Lease ginagamit mo an activity
why merong 11% and 12%
nito sa operation mo lang kaya 1 year. Ang Example:
finance lease ginagamit ito to obtain Annual Rental Payable 600,000
funds. More than 1 year. Multiply by: PV of OA of 1 12% x 5.650
2. Ratio = PV of Lease Payments/Fair Value Equal to Cost of Equipment 3,390,000
of Assets 3. Unearned Interest – Gross Investment –
- At least 90% Net Investment.
3. Transfer of title – which is no doubt kasi - Dahil ito ay financing may interest portion
nilipat na ang titulo. kasi hindi naman immediate ang
4. Bargain Purchase Option – Probable to be pagtanggap ng funds. Dahil pautay utay
executed. ang pagtanggap ng rent collection ang
future collection may interest.
Gross Investment - No bargain option
Annual Rental Payable 600,000
Lease Term x 10 yrs. 11% Carrying
Date Collection Interest Principal Amount
Gross Investment 6,000,000
Jan 1 3,533,400
Net Investment 2020 Net
Cost of Equipment 3,390,000 Investment
Dec 31, 600,000 388,674 211,326 3,322,074
Add: Initial Direct Cost 143,400 2020
Net Investment 3,533,400 Dec. 31, 600,000 365,428.14 234,571.86 3,087,502.14
2021
Dec. 31, 600,000 339,625.24 260,374.76 2,827,127.38
Unearned Interest
2022
Gross Investment 6,000,000 Dec. 31, 600,000 310,984.01 289,015.99 2,538,111.39
Less: Net Investment (3,533,400) 2023
Unearned Interest 2,466,600 Dec. 31, 600,000 279,192.25 320,807.75 2,217,303.64
2024
Dec. 31, 600,000 243,903.40 356,096.60 1,861,207.04
2025
Assuming the transaction happened on January Dec. 31, 600,000 204,732.77 395,267.23 1,465,939.81
1, 2021: 2026
Dec. 31, 600,000 161,253.38 438,746.62 1,027,193.19
Lease Receivable 6,000,000 2027
Equipment 3,390,000 Dec. 31, 600,000 112,991.25 487,008.75 540,184.44
2028
Cash in Bank 143,400 Dec. 31, 600,000 59,815.56 540,184.44 0
Unearned Interest 2,466,600 2029 Balancing
Figure
6,000,000 2,466,600 3,533,400 6,000,000
Information: Gross Unearned Net
1. Lease Receivable – Value of Gross
Investment December 31, 2020 - Journal Entries
2. Equipment- Value of Net Investment
- Tatanggalin sa record kasi di na Annual Collection of Rent
magagamit na which is walang Cash in Bank 600,000
depreciation. Lease Receivable 600,000
3. Cash in Bank – Value of Net Investment
Amortization of Interest
*If the net investment is adjusted by initial direct Unearned Interest 388,674
cost then the implicit interest rate must also be Interest Income 388,674
adjusted.
This is the process in computing the new interest Presentation in the Statement of Financial
rate: (Objective is to get the new PV Factor) Position
44196
Annual Payment x PV Factor = Net Investment Lease Receivable (6M – 600K) 5,400,000
Less: Unearned Interest
P600, 000 x PV Factor = P3, 533,400 (2,466,600 – 388,674) 2,077,926
Carrying Amount 3,322,074
PV factor = P3, 533,400 / P600, 000 = 5.889
December 31, 2021 - Journal Entries
To find the new interest rate:
1. PV Factor = 5.889
Annual Collection of Rent
2. Lease Term = 10 years
Cash in Bank 600,000
Lease Receivable 600,000
PV Factor Table for Ordinary Annuity
New Implicit Interest = 11%
Amortization of Interest
Unearned Interest 365,428.14
Interest Income 365,428.14
 2. Net Investment – Cost of Equipment +
Presentation in the Statement of Financial Initial Direct Cost
Position - Present Value of Rental Collection is
44561 deemed to be equal to the COST OF THE
Lease Receivable (5,400M – 600K) 4,800,000 EQUIPMENT
Less: Unearned Interest - Pag direct financing deretcho kana ng cost
(2,077,926 – 365,428.14) 1,712,497.86 of equipment. Pero since may dinadagdag
Carrying Amount 3,087,502.14 na initial direct cost na appektuhan ang
interest rate na gagamitin. We might need
December 31, 2022 - Journal Entries to adjust the value of interest rate. That’s
why merong 11% and 12%
Annual Collection of Rent 3. Unearned Interest – Gross Investment –
Cash in Bank 600,000 Net Investment.
Lease Receivable 600,000 - Dahil ito ay financing may interest portion
kasi hindi naman immediate ang
Amortization of Interest pagtanggap ng funds. Dahil pautay utay
Unearned Interest 339,625.24 ang pagtanggap ng rent collection ang
Interest Income 339,625.24 future collection may interest.
Gross Investment - No bargain option
Presentation in the Statement of Financial
Annual Rental Payable 900,000
Position
Lease Term x 8 yrs.
44926
Gross Investment 7,200,000
Lease Receivable (4,800M – 600K) 4,200,000
Add: Residual Value 600,000
Less: Unearned Interest
Gross Investment 7,800,000
(1,712,497.86 – 339,625.24) 1,372,872.62
Carrying Amount 2,827,127.38
Net Investment
Cost of Equipment 5,250,000
Answer to Problem 13-2 (Direct Financing Lease)
Add: Initial Direct Cost 0
- There was no intention to transfer the Net Investment 5,250,000
title but you need to justify why it is
finance lease: Unearned Interest
Gross Investment 7,800,000
Useful Life = 8 years; Lease Term= 8 years
Less: Net Investment (5,250,000)
Ratio = 100% Unearned Interest 2,550,000

Answer: This is classified as finance lease because Assuming the transaction happened on January
of the qualification number 1. And since this is 1, 2021:
finance lease the asset of the lessor is not subject
to depreciation. Kasi majority ng buhay na sa Lease Receivable 7,800,000
lease. Equipment 5,250,000
Unearned Interest 2,550,000
1. Gross Investment- Total Collection +
Bargain Purchase Option (if any)
Information:
- This is incidental activity which is this is
1. Lease Receivable – Value of Gross
use to generate funds.
Investment
- Residual Value wether guaranteed or not.
2. Equipment- Value of Net Investment
Walang kaso kay lessor. If unguaranteed
- Tatanggalin sa record kasi di na
hindi si lease ang magshoushoulder or
magagamit na which is walang
bibii ng asset at the end of this life.
depreciation.
Disposal price nalang.
3. Cash in Bank – Value of Net Investment
- Kapag guaranteed si lease na ang bibili
hanggang matapos.
*If the net investment is adjusted by initial direct Cash in Bank 900,000
cost then the implicit interest rate must also be Lease Receivable 900,000
adjusted.
This is the process in computing the new interest Statement of Financial Position Presentation
rate: (Objective is to get the new PV Factor) Jan 1, 2021
Lease Receivable (6,900M – 900K) 6,000,000
Annual Payment x PV Factor = Net Investment Less: Unearned Interest
(2,550M – 522K) 2,028,000
1st Collection in Advance - NO INTEREST Carrying Amount 3,972,000
ALLOTTED - January 1, 2020:
Cash in Bank 900,000 Note: By the end of the period hindi talaga
Lease Receivable 900,000 nagkakatugma ang Carrying amount ng nasa
amortization table at ng present sa statement of
11% Carrying financial position. Ang pag present ng lease
Date Collection Interest Principal Amount receivable ay katulad ng pag present sa non-
Jan 1 5,250,000
2020 Net interest bearing note. Nag kakatugma sila by the
Investment January 1. Prior year ang accrual ng interest.
Jan. 1, 900,000.00 0 900,000.00 4,350,000
2020
Jan. 1, 900,000.00 522,000.00 378,000.00 3,972,000
December 31, 2021 - Amortization of Interest /
2021 Accrual of Interest
Jan. 1, 900,000.00 476,640.00 423,360.00 3,548,640 Unearned Interest 476,640
2022
Jan. 1, 900,000.00 425,836.80 474,163.20 3,074,476.80
Interest Income 476,640
2023
Jan. 1, 900,000.00 368,937.22 531,062.78 2,543,414.02 Statement of Financial Position Presentation
2024
Jan. 1, 900,000.00 305,209.68 594,790.32 1,948,623.70
2025
Dec 31, 2021
Jan. 1, 900,000.00 233,834.84 666,165.16 1,282,458.54 Lease Receivable (6,900M – 900K) 6,000,000
2026 Less: Unearned Interest
Jan. 1, 900,000.00 217,541.46 682,458.54 600,000.00
(2,028M – 476,640) 1,551,360
2027 Balancing
Figure Carrying Amount 4,448,640
7,200,000 2,550,000 4,650,000
Gross Unearned Net January 1, 2022 – Journal Entry:
 The last figure is the UNGUARANTEED RESIDUAL Cash in Bank 900,000
VALUE. Lease Receivable 900,000
 Pag si lease ang magsasaot 0 ang balancing
figure. Statement of Financial Position Presentation
 First collection ay walang interest Jan 1, 2022
 Irerecognized na ang interest even if hinid pa
Lease Receivable (6,000M – 900K) 5,100,000
nangyayari kasi accrual.
Less: Unearned Interest
December 31, 2020 - Amortization of Interest / (2,028M – 476,640) 1,551,360
Accrual of Interest Carrying Amount 3,548,640
Unearned Interest 522,000
Interest Income 522,000 December 31, 2022 - Amortization of Interest /
Accrual of Interest
Statement of Financial Position Presentation Unearned Interest 425,836.80
Interest Income 425,836.80
Dec 31, 2020
Lease Receivable (7,800M – 900K) 6,900,000
Less: Unearned Interest
(2,550M – 522K) 2,028,000
Carrying Amount 4,872,000 Statement of Financial Position Presentation
January 1, 2021 – Journal Entry:
 Dec 31, 2022 1. Gross Investment- Total Collection +
Lease Receivable (6,000M – 900K) 5,100,000 Bargain Purchase Option (if any)
Less: Unearned Interest - This is incidental activity which is this is
(1,551,360 – 425,836.80) 1,125,523.2 use to generate funds.
Carrying Amount 3,974,476.8 - Residual Value wether guaranteed or not.
Walang kaso kay lessor. If unguaranteed
January 1, 2023 – Journal Entry: hindi si lease ang magshoushoulder or
Cash in Bank 900,000 bibii ng asset at the end of this life.
Lease Receivable 900,000 Disposal price nalang.
- Kapag guaranteed si lease na ang bibili
Statement of Financial Position Presentation hanggang matapos.
Jan 1, 2022 2. Net Investment – Cost of Equipment +
Lease Receivable (5,100M – 900K) 4,200,000 Initial Direct Cost
Less: Unearned Interest - Present Value of Rental Collection is
(1,551,360 – 425,836.80) 1,125,523.2 deemed to be equal to the COST OF THE
Carrying Amount 3,074,476.8 EQUIPMENT
- Pag direct financing deretcho kana ng cost
January 1, 2027 - Annual Collection of equipment. Pero since may dinadagdag
Cash in Bank 900,000 na initial direct cost na appektuhan ang
Lease Receivable 900,000 interest rate na gagamitin. We might need
to adjust the value of interest rate. That’s
January 1, 2028 - Return of the Leased Asset why merong 11% and 12%
3. Unearned Interest – Gross Investment –
Equipment (At Fair Value) 500,000 Net Investment.
Loss on Finance Lease 100,000 - Dahil ito ay financing may interest portion
Lease Receivable 600,000 kasi hindi naman immediate ang
pagtanggap ng funds. Dahil pautay utay
Equipment (At Fair Value) 700,000 ang pagtanggap ng rent collection ang
Gain on Finance Lease 100,000 future collection may interest.
Lease Receivable 600,000
Gross Investment - No bargain option
If gain this will be the journal entry. Annual Rental Payable 440,000
Less: Executory Cost (40,000)
Answer to Problem 13-4 (Direct Financing Lease) Total Annual Rental Payable 400,000
Lease Term x 4 yrs.
- There was no intention to transfer the Gross Investment 1,600,000
title but you need to justify why it is
finance lease: Net Investment
Useful Life = 4 years; Lease Term= 4 years Cost of Equipment 1,377,340
Add: Initial Direct Cost 0
Ratio = 100% Net Investment 1,377,340
*Executory Cost- Not treated as part of lease
payments and therefore treated only as Unearned Interest
EXPENSE. Ito ay maintenance cost lang na Gross Investment 1,600,000
kailngan bayaran in order na yung equipment Less: Net Investment (1,377,340)
nagana. Ihihiwalay ang 40,000 dahil ito ay Unearned Interest 222,520
treated as expense.

Expense ang treatment – Lessee;

Income naman treated – Lessor
Assuming the transaction happened on January - Whether guaranteed or unguaranteed this
1, 2021 to record the lease contract: is how we compute it kasi yung
equipment is makukuha natin in 2 ways:
Lease Receivable 1,600,000
- Dalawa ang paraan para ma collect yung
Equipment 1,377,340
economic benefit ng asset:
Unearned Interest 222,520
1. Renta
2. Benta
Information: Formula:
1. Lease Receivable – Value of Gross
Annual Collection x PV Factor for Annuity =
Investment
Net Investment
2. Equipment- Value of Net Investment
- Tatanggalin sa record kasi di na Annual Collection x PV Factor for Annuity =
magagamit na which is walang Net Investment – PV of Residual Value (PV of
depreciation. 1)
3. Cash in Bank – Value of Net Investment
- Annuity kasi annual installment ang
payment.
1st Collection in Advance - NO INTEREST - The present value not the residual value
ALLOTTED - January 1, 2020: perse. PV Of 1 isang beses lang kasi one
Cash in Bank 400,000 time transaction.
Lease Receivable 400,000
Annual Collection x 5.335 = P4, 361,200 –
(200,000 x 0.466)
Payment for Executory Cost received from
Annual Collection x 5.335 = P4, 361,200 – 93,200
Lessee:
Cash in Bank 40,000 Annual Collection x 5.335 = 4,268,000 (Net
Rent Income 40,000 Investment allotted to rent collection)
Annual Collection = 4,268,000/ 5.335
11% Carrying
Date Collection Interest Principal Amount Annual Collection = P800, 000
Jan 1 1,377,340
2020 Net Kahit hindi gumawa ng amortization table
Investment pwedeng short version na gawin macocompute
Jan. 1, 400,000.00 0 400,000.00 977,480 pa din.
2020
Jan. 1, 400,000.00 107,522.80 292,477.20 685,002.80 1. Implicit Interest Rate – Lessor
2021
Jan. 1, 400,000.00 75,350.31 324,649.69 360,353.11 - Use it first in all transaction. PRIORITY
2022 2. Incremental Borrowing Rate – Lessee
Jan. 1, 400,000.00 39,646.89 360,353.11 0 - If there is no Implicit Rate then use this.
2023
1,600,000 222,520 1,377,340
- To compute the first year; Use Net
Gross Unearned Net Investment

December 31, 2020 - Amortization of Interest / Formula:

Accrual of Interest 2020 Interest Income = Carrying Amount (Net
Unearned Interest 107,522.80 Investment) x Implicit Interest Rate
Interest Income 107,522.80 2020 Interest Income = P4, 361,200 x 10%
2020 Interest Income = 436,120.00
Letter A
Answer to Problem 13-6 (Direct Financing Lease)
- If revert to the lessor. 2020 Carrying Amount = Carrying Amount prior
- Useful Life = 8 years; Lease Term= 8 years to amortization x (1+Implicit Rate) – Collection
- No annual rent 2020 Carrying Amount = P4,361,200 x 1.1 -
P800,000
 2020 Carrying Amount = 3,997,320.00 Dec 31, 800,000.0 709,008.2 200,000.00
2027 0 90,991.78 2
6,400,000 2,238,800 4,161,200
2021 Interest Income = P3,997,320 x 10% - At the end of the year ang ilalagay ay yung Residual
Value
2021 Interest Income = 399,732.00
Guaranteed Residual Value – Amortization Table

2021 Carrying Amount = Carrying Amount 10% Carrying

Date Collection Interest Principal Amount
prior to amortization x (1+Implicit Rate) –
Jan 1 4,361,200
Collection 2020 Net
2020 Carrying Amount = 3,997,320 x 1.1 – Investment
P800,000 Dec 31, 800,000.0 436,120.0 363,880.0 3,997,320.00
2020 0 0 0
2020 Carrying Amount = 3,597,052.00 Dec 31, 800,000.0 399,732.0 400,268.0 3,597,052.00
2021 0 0 0
Dec 31, 800,000.0 359,705.2 440,294.8 3,156,757.20
2022 Interest Income = P3,597,052 x 10% 2022 0 0 0
2022 Interest Income = 359,705.20 Dec 31, 800,000.0 315,675.7 484,324.2 2,672,432.92
2023 0 2 8
Dec 31, 800,000.0 267,243.2 532,756.7 2,139,676.21
2024 0 9 1
2022 Carrying Amount = Carrying Amount Dec 31, 800,000.0 213,967.6 586,032.3 1,553,643.83
prior to amortization x (1+Implicit Rate) – 2025 0 2 8
Collection Dec 31, 800,000.0 155,364.3 644,635.6 909,008.22
2026 0 8 2
2022 Carrying Amount = 3,597,052 x 1.1 – Dec 31, 800,000.0 709,008.2 200,000.00
P800,000 2027 0 90,991.78 2
2022 Carrying Amount = 3,156,757.20 Dec 31,
2027 200,000.00 0 200,000.00 0
6,400,000 2,238,800 4,161,200
2023 Interest Income = P3,156,757.20 x 10% - At the end of the year ang value ay 0 dahil mapupunta
kay lessee ang asset siya ang magbabayad ng residual
2023 Interest Income = 315,675.72
value. Proof lang na binayaran ni lessee.

Answer to Problem 13-7 (Direct Financing Lease)

2023 Carrying Amount = Carrying Amount
prior to amortization x (1+Implicit Rate) – Gross Investment - No bargain option
Collection Annual Rental Payable 1,750,000
2023 Carrying Amount = 3,156,757.20 x 1.1 – Lease Term x 5 yrs.
P800,000 Total Annual Payable 8,750,000
2023 Carrying Amount = 2,672,432.92 Add: Residual Value 275,000
Gross Investment 9,025,000
Letter B.
Unguaranteed Residual Value –Amortization Table  Regardless if it is guaranteed or not
10% Carrying
guaranteed isasama
Date Collection Interest Principal Amount Net Investment
Jan 1 4,361,200 Cost of Equipment 6,000,000
2020 Net Add: Initial Direct Cost 0
Investment
Net Investment 6,000,000
Dec 31, 800,000.0 436,120.0 363,880.0 3,997,320.00
2020 0 0 0 Letter C.
Dec 31, 800,000.0 399,732.0 400,268.0 3,597,052.00
2021 0 0 0 Unearned Interest
Dec 31, 800,000.0 359,705.2 440,294.8 3,156,757.20
2022 0 0 0
Gross Investment 9,025,000
Dec 31, 800,000.0 315,675.7 484,324.2 2,672,432.92 Less: Net Investment (6,000,000)
2023 0 2 8 Unearned Interest 3,025,000
Dec 31, 800,000.0 267,243.2 532,756.7 2,139,676.21 Letter A.
2024 0 9 1
Dec 31, 800,000.0 213,967.6 586,032.3 1,553,643.83
2025 0 2 8 If the collection is not advance / year end:
Dec 31, 800,000.0 155,364.3 644,635.6 909,008.22
2026 0 8 2
  Basis of first year for the formula is Net
Investment
Interest Income = Carrying Amount prior to
amortization x implicit interest rate
Carrying Amount = Carrying Amount prior to 2. What is the net investment in the lease?
amortization x (1+Implicit Interest rate) - Annual Solution:
Collection Net Investment
Cost of Equipment 5,000,000
Formula: Add: Initial Direct Cost 250,000
2020 Interest Income = Carrying Amount prior Net Investment 5,250,000
to amortization x implicit interest rate Letter B.
2020 Interest Income = P6,000,000 x 15%
2020 Interest Income = 900,000 3. What is the total interest income over
Letter C. the lease term?

2020 Carrying Amount = Carrying Amount prior Unearned Interest

to amortization x (1+Implicit Interest rate) - Gross Investment 7,800,000
Annual Collection Less: Net Investment (5,250,000)
2020 Carrying Amount = P6,000,000 x 1.15 – Unearned Interest 2,550,000
P1,750,000 Letter A.
2020 Carrying Amount = 5,150,000
4. What is the interest income for the
Formula: current year?
2021 Interest Income = Carrying Amount prior
to amortization x implicit interest rate If the collection is advance / beginning:
2021 Interest Income = P5,150,000 x 15%  Interest of 2021 prior year kukunin
2021 Interest Income = 772,500  Carrying amount of year end
Interest Income = (Carrying Amount prior to
2021 Carrying Amount = Carrying Amount prior
amortization - Annual Collection) x implicit
to amortization x (1+Implicit Interest rate) -
interest rate
Annual Collection
Carrying Amount = (Carrying Amount prior to
2021 Carrying Amount = P5,150,000 x 1.15 –
amortization - Annual Collection) x (1+Implicit
P1,750,000
Interest rate)
2021 Carrying Amount = 4,172,500
Formula:
Answer to Problem 13-5 (Direct Financing Lease)
2020 Interest Income = (Carrying Amount prior
- *When the problem is silent, the implicit to amortization - Annual Collection) x implicit
interest rate is already adjusted. interest rate
- There was no intention to transfer the title 2020 Interest Income = (P5,250,000 -900,000) x
but you need to justify why it is finance lease: 12%
Useful Life = 8 years; Lease Term= 8 years 2020 Interest Income = 522,000
Letter B.
1. What is the gross investment in the
lease? 2020 Carrying Amount = Carrying Amount prior
Solution: to amortization x (1+Implicit Interest rate) -
Gross Investment - No bargain option Annual Collection
Annual Rental Payable 900,000 2020 Carrying Amount = (P5,250,000 -900,000)
Lease Term x 8 yrs. x 1.12
Gross Investment 7,200,000 2020 Carrying Amount = 4,872,000
Add: Residual Value 600,000
Gross Investment 7,800,000 2021 Interest Income = (Carrying Amount prior
Letter B to amortization - Annual Collection) x implicit
 interest rate Gross Investment - No bargain option
2021 Interest Income = (P4,872,000-900,000) x Annual Rental Payable 500,000
12% Lease Term x 6 yrs.
2021 Interest Income = 476,640 Gross Investment 3,000,000

2021 Carrying Amount = Carrying Amount prior Net Investment

to amortization x (1+Implicit Interest rate) - Cost of Equipment 2,300,000
Annual Collection Add: Initial Direct Cost 0
2021 Carrying Amount = (P4,872,000- 900,000) Net Investment 2,300,000
x 1.12
2021 Carrying Amount = 4,448,640 Unearned Interest
Gross Investment 3,000,000
Problem 13-13 - Transfer of Title Less: Net Investment (2,300,000)
* Deretcho na kay lessee yung titulo; Moreof Unearned Interest 700,000
walang ng mangyayaring benta deretcho na agad
kay lessee. Lahat ng economic benefit ay If the collection is advance / beginning:
itratransfer so no need ot subtract the residual  Interest of 2021 prior year kukunin
value so ignored it.  Carrying amount of year end
Interest Income = (Carrying Amount prior to
Rules: amortization - Annual Collection) x implicit
*Residual Value is ignored if there is a transfer of interest rate
title. Carrying Amount = (Carrying Amount prior to
* Solve ng annual payment; Ordinary Annuity amortization - Annual Collection) x (1+Implicit
Annual Collection x PV Factor = Net Investment Interest rate)
Annual Collection x 2.855 = P7, 994,000
Annual Collection = P7, 994,000/ 2.855 Formula:
Annual Collection = 2,800,000.00 2020 Interest Income = (Carrying Amount prior
Letter C. to amortization - Annual Collection) x implicit
interest rate
Gross Investment - No bargain option 2020 Interest Income = (P2,300,000-500,000) x
Annual Rental Payable 2,800,000 12%
Lease Term x 4 yrs. 2020 Interest Income = 216,000
Gross Investment 11,200,000
2020 Carrying Amount = Carrying Amount prior
Net Investment to amortization x (1+Implicit Interest rate) -
Cost of Equipment 7,994,000 Annual Collection
Add: Initial Direct Cost 0 2020 Carrying Amount = (P2,300,000-500,000)
Net Investment 7,994,000 x 1.12
2020 Carrying Amount = 2,016,000
Unearned Interest
Gross Investment 11,200,000
Less: Net Investment (7,994,000)
Unearned Interest 3,206,000

Problem 13-14 - Transfer of Title

*Residual Value is ignored if there is a transfer of
title.

Annual Collection x PV Factor = Net Investment

Annual Collection x 4.60 = P2, 300,000
Annual Collection = P2, 300,000/ 4.60
Annual Collection = 500,000
 Gross Profit
SALES TYPE - FINANCE LEASE - LESSOR Sales 3,520,000
 Direct financing lease is more of Less: Cost of Sales 2,850,000
accidental activity. But sales types is more Gross Profit 670,000
of main activity it is one way for you to
sale the asset. Unearned Interest 1,280,000
 Seller or Dealer - Lessor Add: Gross Profit 670,000
 To recognize profit under finance lease Total Income under Sales Type 1,950,000
aside from interest.
Direct financing lease
- Gross Investment = Total Rent Collections Gross Investment - No bargain option
+ Residual Value / Option Annual Rental Payable 600,000
- Net Investment = Present Value of Lease Lease Term x 8 yrs.
Payments or Fair Value of Asset – LOWER Gross Investment 4,800,000
- Sales = Net Investment
- Cost of Sales = Cost of Asset + Initial Net Investment
Direct Cost Cost of Equipment 2,800,000
Add Initial Direct Cost 50,000
Problem 14-1 – Sales Type Net Investment 2,850,000
 Gross investment = Total Rent Collection +
Residual value/ Bargain Option Unearned Interest
 Net Investment = Cash Selling Price – Fair Gross Investment 4,800,000
Value Less: Net Investment (2,850,000)
 Sales = Value ng Net Investment Unearned Interest 1,950,000
 Cost of Sales = Cost of Asset + Initial Direct
Cost January 1, 2020 - To recognize finance lease
Sales Type agreement - sales type –
Gross Investment - No bargain option  PERPETUAL INVENTORY SYSTEM
Annual Rental Payable 600,000
Lease Term x 8 yrs. Lease Receivable 4,800,000
Gross Investment 4,800,000 Sales 3,520,000
Unearned Interest 1,280,000
Net Investment
Cash Selling Price 3,520,000 Cost of Sales 2,850,000
Net Investment 3,520,000 Merchandise Inventory 2,800,000
Cash in Bank 50,000
Unearned Interest
Gross Investment 4,800,000 - Lease Receivable is equal to Gross
Less: Net Investment (3,520,000) Investment
Unearned Interest 1,280,000 - Sales is equal to the value of net
investment
Sales – Equivalent to Net Investment - Merchandise Inventory is the value of
Net Investment 3,520,000 Equipment deemed to be inventory
Sales 3,520,000 - Cash in Bank is Initial Direct Costs
- Walang difference gaano ang sales type at
Cost of Sales direct financing
Cost of Asset 2,800,000 - Pag in advance ang first payment ay
Add: Initial Direct Cost 50,000 walang interest.
Cost of Sales 2,850,000
 - Pag first year ang basis ng carrying Subsequent Year Carrying Amount = same na po
amount ay ang net investment ng ORDINARY ANNUITY FORMULA pati pag
compute ng interest income.
If the collection is advance / beginning: January
1 or before December 31 Problem 14-2 – Sales Type
 Interest of 2021 prior year kukunin  Gross investment = Total Rent Collection +
 Carrying amount of year end Residual value/ Bargain Option
Interest Income = (Carrying Amount prior to  Net Investment = List Selling Price is not
amortization - Annual Collection) x implicit Fair Value this is list price hindi siya official
interest rate price kasi pwede pa maadjust so the Net
Carrying Amount = (Carrying Amount prior to investment is the PV of Rent Payment
amortization - Annual Collection) x (1+Implicit Discounted at 12%
Interest rate)  Sales = Value ng Net Investment
 Cost of Sales = Cost of Asset + Initial Direct
Formula: Cost
2020 Interest Income = (Carrying Amount prior Sales Type
to amortization - Annual Collection) x implicit Gross Investment - No bargain option
interest rate Annual Rental Payable 500,000
2020 Interest Income = (P3,520,000-600,000) x Lease Term x 10 yrs.
10% Gross Investment 5,000,000
2020 Interest Income = 292,000
Net Investment
2020 Carrying Amount = Carrying Amount prior PV of Rent Payment 3,165,000
to amortization x (1+Implicit Interest rate) - Net Investment 3,165,000
Annual Collection
2020 Carrying Amount = (P3,520,000-600,000) Unearned Interest
x 1.10 Gross Investment 5,000,000
2020 Carrying Amount = 3,212,000 Less: Net Investment (3,165,000)
Unearned Interest 1,835,000
Formula:
2021 Interest Income = (Carrying Amount prior Sales – Equivalent to Net Investment
to amortization - Annual Collection) x implicit Net Investment 3,165,000
interest rate Sales 3,165,000
2021 Interest Income = (P3,212,000-600,000) x
10% Cost of Sales
2021 Interest Income = 261,200 Cost of Asset 2,675,000
Add: Initial Direct Cost 0
2021 Carrying Amount = Carrying Amount prior Cost of Sales 2,675,000
to amortization x (1+Implicit Interest rate) -
Annual Collection Gross Profit
2021 Carrying Amount = (P3,212,000-600,000) Sales 3,165,000
x 1.10 Less: Cost of Sales 2,675,000
2021 Carrying Amount = 2,873,200 Gross Profit 490,000

For In Advance: if December 31 - no chance for Unearned Interest 1,835,000

accrual for 1st year Add: Gross Profit 490,000
Total Income under Sales Type 2,325,000
1st Year Carrying Amount
= Net Investment - Annual Collection Direct financing lease
*No interest Income sa 1st Year Gross Investment - No bargain option
Annual Rental Payable 500,000
Lease Term x 10 yrs.
 Gross Investment 5,000,000 2020 Interest Income = (Carrying Amount prior
to amortization - Annual Collection) x implicit
interest rate
Net Investment 2020 Interest Income = (P3,165,000-500,000) x
Cost of Equipment 2,675,000 12%
Add Initial Direct Cost 0 2020 Interest Income = 319,800
Net Investment 2,675,000
2020 Carrying Amount = Carrying Amount prior
Unearned Interest to amortization - Annual Collection x
Gross Investment 5,000,000 (1+Implicit Interest rate)
Less: Net Investment (2,675,000) 2020 Carrying Amount = (P3,165,000-500,000)
Unearned Interest 2,325,000 x 1.12
2020 Carrying Amount = 2,984,800
January 1, 2020 - To recognize finance lease
agreement - sales type – Formula:
 PERPETUAL INVENTORY SYSTEM 2021 Interest Income = (Carrying Amount prior
to amortization - Annual Collection) x implicit
Lease Receivable 5,000,000 interest rate
Sales 3,165,000 2021 Interest Income = (P2,984,800-500,000) x
Unearned Interest 1,835,000 12%
2021 Interest Income = 298,176
Cost of Sales 2,675,000
Merchandise Inventory 2,675,000 2021 Carrying Amount = Carrying Amount prior
to amortization x (1+Implicit Interest rate) -
- Lease Receivable is equal to Gross Annual Collection
Investment 2021 Carrying Amount = (P2,984,800-500,000)
- Sales is equal to the value of net x 1.12
investment 2021 Carrying Amount = 2,782,976
- Merchandise Inventory is the value of
Equipment deemed to be inventory For In Advance: if December 31 - no chance for
- Walang difference gaano ang sales type at accrual for 1st year
direct financing
- Pag in advance ang first payment ay 1st Year Carrying Amount
walang interest. = Net Investment - Annual Collection
- Pag first year ang basis ng carrying *No interest Income sa 1st Year
amount ay ang net investment
- First payment ay January 1 so ito ay in Subsequent Year Carrying Amount = same na po
Advance dahil naganap ito noong January ng ORDINARY ANNUITY FORMULA pati pag
1 din. compute ng interest income.

If the collection is advance / beginning: January Problem 14-10 – Sales Type

1 or before December 31  Gross investment = Total Rent Collection +
 Interest of 2021 prior year kukunin Residual value/ Bargain Option
 Carrying amount of year end  Net Investment = Selling price vs Present
Interest Income = (Carrying Amount prior to Value – WHICHEVER IS LOWER
amortization - Annual Collection) x implicit  Sales = Value ng Net Investment
interest rate  Cost of Sales = Cost of Asset + Initial Direct
Carrying Amount = (Carrying Amount prior to Cost
amortization - Annual Collection) x (1+Implicit Sales Type
Interest rate) Gross Investment - No bargain option
Annual Rental Payable 500,000
Formula: Lease Term x 8 yrs.
 Gross Investment 4,000,000 Unearned Interest 1,220,000

Cost of Sales 2,000,000

Net Investment Merchandise Inventory 2,000,000
Selling Price 2,900,000
PV of Lease Payments 2,780,000 - LOWER - Lease Receivable is equal to Gross
Net Investment 2,780,000 Investment
- Sales is equal to the value of net
Unearned Interest investment
Gross Investment 4,000,000 - Merchandise Inventory is the value of
Less: Net Investment (2,780,000) Equipment deemed to be inventory
Unearned Interest 1,220,000 - Walang difference gaano ang sales type at
direct financing
Sales – Equivalent to Net Investment - Pag in advance ang first payment ay
Net Investment 2,780,000 walang interest.
Sales 2,780,000 - Pag first year ang basis ng carrying
amount ay ang net investment
Cost of Sales - First payment ay January 1 so ito ay in
Cost of Asset 2,000,000 Advance dahil naganap ito noong January
Add: Initial Direct Cost 0 1 din.
Cost of Sales 2,000,000
1. What amount of profit on the sale should
Gross Profit be reported for the current year?
Sales 2,780,000 Letter B. 780,000
Less: Cost of Sales 2,000,000
Gross Profit 780,000 Problem 14-11 – Sales Type
 Gross investment = Total Rent Collection +
Unearned Interest 1,220,000 Residual value/ Bargain Option
Add: Gross Profit 780,000  Net Investment = PV of Lease payment is
Total Income under Sales Type 2,000,000 used because the list price is not valid.
 Sales = Value ng Net Investment
Direct financing lease  Cost of Sales = Cost of Asset + Initial Direct
Gross Investment - No bargain option Cost
Annual Rental Payable 500,000  Between Implicit rate and Incremental
Lease Term x 8 yrs. Borrowing Rate the first that you need to
Gross Investment 4,000,000 use is the implicit rate after the
Incremental Rate. If there is no Implicit
Net Investment Rate then you can use Incremental
Cost of Equipment 2,000,000 Borrowing rate
Add Initial Direct Cost 0 Sales Type
Net Investment 2,000,000 Gross Investment - No bargain option
Annual Rental Payable 300,000
Unearned Interest Lease Term x 8 yrs.
Gross Investment 4,000,000 Gross Investment 2,400,000
Less: Net Investment (2,000,000)
Unearned Interest 2,000,000 Net Investment
PV of Lease Payments 1,700,000
January 1, 2020 - To recognize finance lease Net Investment 1,700,000
agreement - sales type –
 PERPETUAL INVENTORY SYSTEM Unearned Interest
Lease Receivable 4,000,000 Gross Investment 2,400,000
Sales 2,780,000 Less: Net Investment (1,700,000)
 Unearned Interest 700,000 - Walang difference gaano ang sales type at
direct financing
Sales – Equivalent to Net Investment - Pag in advance ang first payment ay
Net Investment 1,700,000 walang interest.
Sales 1,700,000 - Pag first year ang basis ng carrying
amount ay ang net investment
Cost of Sales - First payment ay January 1 so ito ay in
Cost of Asset 1,100,000 Advance dahil naganap ito noong January
Add: Initial Direct Cost 0 1 din.
Cost of Sales 1,100,000
If the collection is advance / beginning: January
Gross Profit 1 or before December 31
Sales 1,700,000  Interest of 2021 prior year kukunin
Less: Cost of Sales 1,100,000  Carrying amount of year end
Gross Profit 600,000 Interest Income = (Carrying Amount prior to
amortization - Annual Collection) x implicit
Unearned Interest 700,000 interest rate
Add: Gross Profit 600,000 Carrying Amount = (Carrying Amount prior to
Total Income under Sales Type 1,300,000 amortization - Annual Collection) x (1+Implicit
Interest rate)
Direct financing lease
Gross Investment - No bargain option Formula:
Annual Rental Payable 300,000 2020 Interest Income = (Carrying Amount prior
Lease Term x 8 yrs. to amortization - Annual Collection) x implicit
Gross Investment 2,400,000 interest rate
2020 Interest Income = (P1,700,000-300,000) x
Net Investment 11%
Cost of Equipment 1,100,000 2020 Interest Income = 154,000
Add Initial Direct Cost 0
Net Investment 1,100,000 1. What amount of profit on the sale should
be reported for the current year?
Unearned Interest Letter B. 600,000
Gross Investment 2,400,000
Less: Net Investment (1,100,000) 2. What amount of interest income should
Unearned Interest 1,300,000 be reported in the current year?
Letter D. 154,000
January 1, 2020 - To recognize finance lease
agreement - sales type – Problem 14-12 – Sales Type
 PERPETUAL INVENTORY SYSTEM  Gross investment = Total Rent Collection +
Lease Receivable 2,400,000 Residual value/ Bargain Option
Sales 1,700,000  Net Investment = Cash Selling Price – Fair
Unearned Interest 700,000 Value
 Sales = Value ng Net Investment
Cost of Sales 1,100,000  Cost of Sales = Cost of Asset + Initial Direct
Merchandise Inventory 1,100,000 Cost
Sales Type
- Lease Receivable is equal to Gross Gross Investment - No bargain option
Investment Annual Rental Payable 600,000
- Sales is equal to the value of net Lease Term x 8 yrs.
investment Gross Investment 4,800,000
- Merchandise Inventory is the value of
Equipment deemed to be inventory
Net Investment Cash in Bank 600,000
Cash Selling Price 3,520,000 Lease Receivable 600,000
Net Investment 3,520,000
- Lease Receivable is equal to Gross
Unearned Interest Investment
Gross Investment 4,800,000 - Sales is equal to the value of net
Less: Net Investment (3,520,000) investment
Unearned Interest 1,280,000 - Merchandise Inventory is the value of
Equipment deemed to be inventory
Sales – Equivalent to Net Investment - Walang difference gaano ang sales type at
Net Investment 3,520,000 direct financing
Sales 3,520,000 - Pag in advance ang first payment ay
walang interest.
Cost of Sales - Pag first year ang basis ng carrying
Cost of Asset 2,800,000 amount ay ang net investment
Add: Initial Direct Cost 0
Cost of Sales 2,800,000 If other than January 1
 Interest of 2021 prior year kukunin
Gross Profit  Carrying amount of year end
Sales 3,520,000 Interest Income = (Carrying Amount prior to
Less: Cost of Sales 2,800,000 amortization - Annual Collection) x implicit
Gross Profit 720,000 interest rate x Pro Rata July- December (6
months)/12
Unearned Interest 1,280,000 Carrying Amount = (Carrying Amount Prior to
Add: Gross Profit 720,000 Amortization - Annual Collection) + Computed
Total Income under Sales Type 2,000,000 Interest Income

Direct financing lease Formula:

Gross Investment - No bargain option 2020 Interest Income = (Carrying Amount prior
Annual Rental Payable 600,000 to amortization - Annual Collection) x implicit
Lease Term x 8 yrs. interest rate x Pro rata of Months
Gross Investment 4,800,000 2020 Interest Income = (P3,520,000-600,000) x
10% x 6/12
Net Investment 2020 Interest Income = 146,000
Cost of Equipment 2,800,000
Add Initial Direct Cost 0 2020 Carrying Amount = (Carrying Amount
Net Investment 2,800,000 Prior to Amortization - Annual Collection) +
Computed Interest Income
Unearned Interest 2020 Carrying Amount = (P3,520,000-600,000)
Gross Investment 4,800,000 + 146,000
Less: Net Investment (2,800,000) 2020 Carrying Amount = 3,066,000
Unearned Interest 2,000,000
Formula:
July 1, 2020 - Commencement of the Lease 2021 Interest Income = (Carrying Amount prior
PERPETUAL INVENTORY SYSTEM to amortization - Annual Collection) x implicit
Lease Receivable 4,800,000 interest rate
Sales 3,520,000 2021 Interest Income = (P3,066,000-600,000) x
Unearned Interest 1,280,000 10%
2021 Interest Income = 246,600
Cost of Sales 2,800,000
Merchandise Inventory 2,800,000 2021 Carrying Amount = (Carrying Amount
First Payment of Lessee Prior to Amortization - Annual Collection) x(1 +
 implicit rate) Annual Rental Payable 700,000
2021 Carrying Amount = (P3,066,000-600,000) Lease Term x 8 yrs.
x 1.10 Gross Investment 5,600,000
2021 Carrying Amount = 2,712,600
Net Investment
Problem 14-6 – Sales Type Cost of Equipment 3,700,000
 Gross investment = Total Rent Collection + Add Initial Direct Cost 0
Residual value/ Bargain Option Net Investment 3,700,000
 Net Investment = PV of Annuity 1 in
advance Unearned Interest
 Sales = Value ng Net Investment Gross Investment 5,600,000
 Cost of Sales = Cost of Asset + Initial Direct Less: Net Investment (3,700,000)
Cost Unearned Interest 1,900,000
Sales Type
Gross Investment - No bargain option July 1, 2020 - Commencement of the Lease
Annual Rental Payable 700,000 PERPETUAL INVENTORY SYSTEM
Lease Term x 8 yrs. Lease Receivable 5,600,000
Gross Investment 5,600,000 Sales 4,107,600
Unearned Interest 1,492,400
Net Investment
Annual Payments 700,000 Cost of Sales 3,700,000
Multiply by: PV of Annuity x 5.868 Merchandise Inventory 3,700,000
Net Investment 4,107,600
First Payment of Lessee
Unearned Interest Cash in Bank 700,000
Gross Investment 5,600,000 Lease Receivable 700,000
Less: Net Investment (4,107,600)
Unearned Interest 1,492,400 - Lease Receivable is equal to Gross
Investment
Sales – Equivalent to Net Investment - Sales is equal to the value of net
Net Investment 4,107,600 investment
Sales 4,107,600 - Merchandise Inventory is the value of
Equipment deemed to be inventory
Cost of Sales - Walang difference gaano ang sales type at
Cost of Asset 3,700,000 direct financing
Add: Initial Direct Cost 0 - Pag in advance ang first payment ay
Cost of Sales 3,700,000 walang interest.
- Pag first year ang basis ng carrying
Gross Profit amount ay ang net investment
Sales 4,107,600
Less: Cost of Sales 3,700,000 If other than January 1
Gross Profit 407,600  Interest of 2021 prior year kukunin
 Carrying amount of year end
Unearned Interest 1,492,400 Interest Income = (Carrying Amount prior to
Add: Gross Profit 407,600 amortization - Annual Collection) x implicit
Total Income under Sales Type 1,900,000 interest rate x Pro Rata April- December (9
months)/12
Carrying Amount = (Carrying Amount Prior to
Amortization - Annual Collection) + Computed
Direct financing lease Interest Income
Gross Investment - No bargain option
Formula:
 2020 Interest Income = (Carrying Amount prior Multiply by: PV of OA 1 x 3.60
to amortization - Annual Collection) x implicit Rent PV of OA 10,800,000
interest rate x Pro rata of Months
2020 Interest Income = (P4,107,600- 700,000) Residual Value 1,000,000
x 10% x 9/12 Multiply by: PV of 1 for 5 period x 0.57
2020 Interest Income = 255,570 Residual Value PV of 1 for 5 periods 570,000

2020 Carrying Amount = (Carrying Amount Rent PV of OA 10,800,000

Prior to Amortization - Annual Collection) + Add: Residual Value PV of 1 570,000
Computed Interest Income Net Investment 11,370,000
2020 Carrying Amount = (P4,107,600- 700,000)
+ 255,570 Unearned Interest
2020 Carrying Amount = 3,663,170 Gross Investment 16,000,000
Less: Net Investment (11,370,000)
Formula: Unearned Interest 4,630,000
2021 Interest Income = (Carrying Amount prior
to amortization - Annual Collection) x implicit Sales – Equivalent to Net Investment
interest rate Net Investment 11,370,000
2021 Interest Income = (P3,663,170- 700,000) Sales 11,370,000
x 10%
2021 Interest Income = 296,317 Cost of Sales
Cost of Asset 8,000,000
2021 Carrying Amount = (Carrying Amount Add: Initial Direct Cost 300,000
Prior to Amortization - Annual Collection) x(1 + Cost of Sales 8,300,000
implicit rate)
2021 Carrying Amount = (P3,663,170- 700,000) Gross Profit
x 1.10 Sales 11,370,000
2021 Carrying Amount = 3,259,487 Less: Cost of Sales 8,300,000
Gross Profit 3,070,000
Problem 14-4 – GUARANTEED RESIDUAL VALUE
 Gross investment = Total Rent Collection + Unearned Interest 4,630,000
Residual value whether guaranteed or Add: Gross Profit 3,070,000
unguaranteed / Bargain Option Total Income under Sales Type 7,700,000
- Mababawi pa din ni Lessor kasi ito.
 Net Investment = *PV of Lease Payments Direct financing lease
(Rental + Residual Value). Gross Investment - No bargain option
Isang beses ang residual value normally ang Annual Rental Payable 3,000,000
residual value ay ginagamit ang PV of 1 Lease Term x 5 yrs.
 Sales = Value ng Net Investment Total Rent Payable 15,000,000
 Cost of Sales = Cost of Asset + Initial Direct Add: Residual Value 1,000,000
Cost Gross Investment 16,000,000
Sales Type
Gross Investment - No bargain option Net Investment
Annual Rental Payable 3,000,000 Cost of Asset 8,000,000
Lease Term x 5 yrs. Add: Initial Direct Cost 300,000
Total Rent Payable 15,000,000 Net Investment 8,300,000
Add: Residual Value 1,000,000
Gross Investment 16,000,000

Net Investment Unearned Interest

Annual Payments 3,000,000 Gross Investment 16,000,000
 Less: Net Investment (8,300,000) – 3,000,000
Unearned Interest 7,700,000 2020 Carrying Amount = P11,370,000 x 1.12 –
3,000,000
July 1, 2020 - Commencement of the Lease 2020 Carrying Amount = 12,734,400 –
PERPETUAL INVENTORY SYSTEM 3,000,000
Lease Receivable 16,000,000 2020 Carrying Amount = 9,734,400
Sales 11,370,000
Unearned Interest 4,630,000 Concept:
1. In all computation whether guaranteed or
not we need to consider it in gross
Cost of Sales 8,300,000 investment and net investment.
Merchandise Inventory 8,000,000 2. Tapos pag yearend iba ang formula.
Cash in Bank 300,000
Problem 14-3 – UNGUARANTEED RESIDUAL
First Payment of Lessee VALUE
Cash in Bank 3,000,000  Gross investment = Total Rent Collection +
Lease Receivable 3,000,000 Residual value whether guaranteed or
unguaranteed / Bargain Option
- Lease Receivable is equal to Gross - Mababawi pa din ni Lessor kasi ito.
Investment  Net Investment = *PV of Lease Payments
- Sales is equal to the value of net (Rental + Residual Value).
investment Isang beses ang residual value normally ang
- Merchandise Inventory is the value of residual value ay ginagamit ang PV of 1
Equipment deemed to be inventory  Sales = Value ng Net Investment
- Walang difference gaano ang sales type at  Cost of Sales = Cost of Asset + Initial Direct
direct financing Cost
- Pag in advance ang first payment ay  Dinededuct ang residual value sa sales at
walang interest. cost of sales ay yun ang naipepresent ng
- Pag first year ang basis ng carrying talagang kinita kay lessee hindi kita ang
amount ay ang net investment residual value kasi hindi naman obligado
na si lesse ang magbabayad. Ganon din sa
If the collection is Year end Cost of sales.
 Carrying amount of year end Sales Type
Interest Income = Carrying Amount prior to Gross Investment - No bargain option
amortization x implicit interest rate Annual Rental Payable 700,000
Carrying Amount = (Carrying Amount prior to Lease Term x 8 yrs.
amortization x (1+Implicit Interest rate) – Annual Total Rent Payable 5,600,000
Collection Add: Residual Value 400,000
Gross Investment 6,000,000
Formula:
2020 Interest Income = (Carrying Amount prior Net Investment
to amortization - Annual Collection) x implicit Annual Payments 700,000
interest rate Multiply by: PV of OA 1 x 4.968
2020 Interest Income = P11,370,000 x 12% Rent PV of OA 3,477,600
2020 Interest Income = 1,364,400
Residual Value 400,000
Multiply by: PV of 1 for 5 period x 0.404
Residual Value PV of 1 for 8 periods 161,600
2020 Carrying Amount = (Carrying Amount
Prior to Amortization x (1+ Implicit interest Rent PV of OA 3,477,600
rate) – Annual Collection Add: Residual Value PV of 1 161,600
2020 Carrying Amount = P11,370,000 x (1+.12) Net Investment 3,639,200
 Cost of Sales 1,838,400
Unearned Interest Sales 3,477,600
Gross Investment 6,000,000 Unearned Interest 2,360,800
Less: Net Investment (3,639,200) Merchandise Inventory 2,000,000
Unearned Interest 2,360,800
Lease Receivable is equal to Gross Investment
Sales – Equivalent to Net Investment - Sales is equal to the value of net
Net Investment 3,639,000 investment
Less: Residual Value Unguaranteed - Merchandise Inventory is the value of
(400,000* 0.404) Equipment deemed to be inventory
Sales 3,477,600 - Walang difference gaano ang sales type at
Less the PV of Residual Value direct financing
Cost of Sales - Pag in advance ang first payment ay
Cost of Asset 2,000,000 walang interest.
Less: Residual Value Unguaranteed - Pag first year ang basis ng carrying
(400,000 * 0.404) amount ay ang net investment
Cost of Sales 1,838,400
Problem 14-5 – Transfer of Title
Gross Profit
Sales 3,477,600 - Residual Value and Bargain Options is
Less: Cost of Sales 1,838,400 TOTALLY IGNORED IN ALL
Gross Profit 1,639,200 COMPUTATIONS
- This is just a smooth transaction.
Unearned Interest 2,360,800
Add: Gross Profit 1,639,200 Sales Type
Total Income under Sales Type 4,000,000 Gross Investment - No bargain option
Annual Rental Payable 3,328,710
Direct financing lease Lease Term x 5 yrs.
Gross Investment - No bargain option Gross Investment 16,643,550
Annual Rental Payable 700,000
Lease Term x 8 yrs. Net Investment
Total Rent Payable 5,600,000 PV of Lease Payments 3,328,710
Add: Residual Value- Unguaranteed 400,000 Multiply by: PV of OA X 3.605
Gross Investment 6,000,000 Net Investment 11,999,999.55

Net Investment Unearned Interest

Cost of Asset 2,000,000 Gross Investment 16,643,550
Add: Initial Direct Cost 0 Less: Net Investment (11,999,999.55)
Net Investment 2,000,000 Unearned Interest 4,643,550.45

Unearned Interest Sales – Equivalent to Net Investment

Gross Investment 6,000,000 Net Investment 11,999,999.55
Less: Net Investment (2,000,000) Sales 11,999,999.55
Unearned Interest 4,000,000
Cost of Sales
Cost of Asset 8,000,000
Add: Initial Direct Cost 200,000
Cost of Sales 8,200,000

July 1, 2020 - Commencement of the Lease Gross Profit

PERPETUAL INVENTORY SYSTEM Sales 11,999,999.55
Lease Receivable 6,000,000 Less: Cost of Sales 8,200,000
 Gross Profit 3,799,999.55 Interest Income = Carrying Amount prior to
amortization x implicit interest rate
Unearned Interest 4,643,550.45 Carrying Amount = (Carrying Amount prior to
Add: Gross Profit 3,799,999.55 amortization x (1+Implicit Interest rate) – Annual
Total Income under Sales Type 8,443,550 Collection

Direct financing lease Formula:

Gross Investment - No bargain option 2020 Interest Income = (Carrying Amount prior
Annual Rental Payable 3,328,710 to amortization - Annual Collection) x implicit
Lease Term x 5 yrs. interest rate
Gross Investment 16,643,550 2020 Interest Income = P11,999,999.55 x 12%
2020 Interest Income = 1,439,999.946
Net Investment
Cost of Equipment 8,000,000 2020 Carrying Amount = (Carrying Amount
Add Initial Direct Cost 200,000 Prior to Amortization x (1+ Implicit interest
Net Investment 8,200,000 rate) – Annual Collection
2020 Carrying Amount = P11,999,999.55 x
Unearned Interest (1+.12) – 3,328,710
Gross Investment 16,643,550 2020 Carrying Amount = P11,370,000 x 1.12 –
Less: Net Investment (8,200,000) 3,328,710
Unearned Interest 8,443,550 2020 Carrying Amount = 13,439,999.50 –
3,328,710
January 1, 2020 - To recognize finance lease 2020 Carrying Amount = 10,111,289.50
agreement - sales type –
 PERPETUAL INVENTORY SYSTEM Problem 14-14 – Transfer of Title
Lease Receivable 16,643,550
Sales 11,999,999.55 - Residual Value and Bargain Options is
Unearned Interest 4,643,550.45 TOTALLY IGNORED IN ALL
COMPUTATIONS
Cost of Sales 8,200,000 - This is just a smooth transaction.
Merchandise Inventory 8,000,000
Initial Direct Cost 200,000 Sales Type
Gross Investment - No bargain option
- Lease Receivable is equal to Gross Annual Rental Payable 1,500,000
Investment Lease Term x 20 yrs.
- Sales is equal to the value of net Gross Investment 30,000,000
investment
- Merchandise Inventory is the value of Net Investment
Equipment deemed to be inventory PV of Lease Payments 1,500,000
- Walang difference gaano ang sales type at Multiply by: PV of OA X 8.37
direct financing Net Investment 12,555,000
- Pag in advance ang first payment ay
walang interest. Unearned Interest
- Pag first year ang basis ng carrying Gross Investment 30,000,000
amount ay ang net investment Less: Net Investment (12,555,000)
- First payment ay January 1 so ito ay in Unearned Interest 17,445,000
Advance dahil naganap ito noong January
1 din. Sales – Equivalent to Net Investment
Net Investment 12,555,000
If the collection is Year end Sales 12,555,000
 Carrying amount of year end Cost of Sales
Cost of Asset 8,000,000
 Add: Initial Direct Cost 0 - First payment ay January 1 so ito ay in
Cost of Sales 8,000,000 Advance dahil naganap ito noong January
1 din.
Gross Profit If the collection is advance / beginning: January
Sales 12,555,000 1 or before December 31
Less: Cost of Sales 8,000,000  Interest of 2021 prior year kukunin
Gross Profit 4,555,000  Carrying amount of year end
Interest Income = (Carrying Amount prior to
Unearned Interest 17,445,000 amortization - Annual Collection) x implicit
Add: Gross Profit 4,555,000 interest rate
Total Income under Sales Type 22,000,000 Carrying Amount = (Carrying Amount prior to
amortization - Annual Collection) x (1+Implicit
Direct financing lease Interest rate)
Gross Investment - No bargain option
Annual Rental Payable 1,500,000 Formula:
Lease Term x 20 yrs. 2020 Interest Income = (Carrying Amount prior
Gross Investment 30,000,000 to amortization - Annual Collection) x implicit
interest rate
Net Investment 2020 Interest Income = (P12,550,000-
Net Investment 8,000,000 1,500,000) x 12%
Add: Initial Direct Cost 0 2020 Interest Income = 1,326,000
Net Investment 8,000,000
2020 Carrying Amount = Carrying Amount prior
Unearned Interest to amortization x (1+Implicit Interest rate) -
Gross Investment 30,000,000 Annual Collection
Less: Net Investment (8,000,000) 2020 Carrying Amount = (P12,550,000-
Unearned Interest 22,000,000 1,500,000) x 1.12
2020 Carrying Amount = 12,376,000
January 1, 2020 - To recognize finance lease
agreement - sales type – 1. What is the gross investment in the
 PERPETUAL INVENTORY SYSTEM lease?
Lease Receivable 30,000,000 Answer: Letter A. 30,000,000
Sales 12,555,000
Unearned Interest 17,445,000 2. What is the net investment in the lease?
Answer: Letter A. 12,555,000
Cost of Sales 8,000,000
Merchandise Inventory 8,000,000 3. What is the Gross Profit on sale of 2020?
Answer: Letter B. 4,555,000
- Lease Receivable is equal to Gross
Investment 4. What is the interest income for 2020?
- Sales is equal to the value of net Answer: 1,326,000
investment
- Merchandise Inventory is the value of Problem 14-16 – Transfer of Title
Equipment deemed to be inventory
- Walang difference gaano ang sales type at - Residual Value and Bargain Options is
direct financing TOTALLY IGNORED IN ALL
- Pag in advance ang first payment ay COMPUTATIONS
walang interest. - This is just a smooth transaction.
- Pag first year ang basis ng carrying Sales Type
amount ay ang net investment Gross Investment - No bargain option
Annual Rental Payable 2,000,000
Lease Term x 10 yrs.
 Gross Investment 20,000,000 Cost of Sales 9,000,000
Net Investment Merchandise Inventory 9,000,000
PV of Lease Payments 2,000,000
Multiply by: PV of OA X 6.33 - Lease Receivable is equal to Gross
Net Investment 12,660,000 Investment
- Sales is equal to the value of net
Unearned Interest investment
Gross Investment 20,000,000 - Merchandise Inventory is the value of
Less: Net Investment (12,660,000) Equipment deemed to be inventory
Unearned Interest 7,340,000 - Walang difference gaano ang sales type at
direct financing
Sales – Equivalent to Net Investment - Pag in advance ang first payment ay
Net Investment 12,660,000 walang interest.
Sales 12,660,000 - Pag first year ang basis ng carrying
Cost of Sales amount ay ang net investment
Cost of Asset 9,000,000 - First payment ay January 1 so ito ay in
Add: Initial Direct Cost 0 Advance dahil naganap ito noong January
Cost of Sales 9,000,000 1 din.
If the collection is advance / beginning: January
Gross Profit 1 or before December 31
Sales 12,660,000  Interest of 2021 prior year kukunin
Less: Cost of Sales 9,000,000  Carrying amount of year end
Gross Profit 3,660,000 Interest Income = (Carrying Amount prior to
amortization - Annual Collection) x implicit
Unearned Interest 7,340,000 interest rate
Add: Gross Profit 3,660,000 Carrying Amount = (Carrying Amount prior to
Total Income under Sales Type 11,000,000 amortization - Annual Collection) x (1+Implicit
Interest rate)
Direct financing lease
Gross Investment - No bargain option Formula:
Annual Rental Payable 2,000,000 2020 Interest Income = (Carrying Amount prior
Lease Term x 10 yrs. to amortization - Annual Collection) x implicit
Gross Investment 20,000,000 interest rate
2020 Interest Income = (P12,660,000-
Net Investment 2,000,000) x 12%
Net Investment 9,000,000 2020 Interest Income = 1,279,200
Add: Initial Direct Cost 0
Net Investment 9,000,000 2020 Carrying Amount = Carrying Amount prior
to amortization x (1+Implicit Interest rate) -
Unearned Interest Annual Collection
Gross Investment 20,000,000 2020 Carrying Amount = (P12,660,000-
Less: Net Investment (9,000,000) 2,000,000) x 1.12
Unearned Interest 11,000,000 2020 Carrying Amount = 11,939,200

January 1, 2020 - To recognize finance lease 1. What is the total financial revenue
agreement - sales type – (Unearned interest) over the lease term?
 PERPETUAL INVENTORY SYSTEM Answer: Letter B. 7,340,000
Lease Receivable 20,000,000
2. What amount should be reported as
Sales 12,660,000
gross profit on sale?
Unearned Interest 7,340,000
Answer: Letter B. 3,660,000
 3. What is the interest income for current Gross Profit
year? Sales 4,884,000
Answer: Letter C. 1,279,200 Less: Cost of Sales 3,100,000
Gross Profit 7,984,000
Problem 14-8 – Bargain Option
*Options are just OFFER made by the LESSOR - Unearned Interest 1,916,000
REASONABLE CERTAINTY / PROBABLE na bilhin Add: Gross Profit 1,784,000
ang asset ni Lessee this is not the obligation sa Total Income under Sales Type 3,700,000
part ni lessee.
*Ang ilalagay lang ay probable na mangyayari Direct financing lease
para sa option. Gross Investment - No bargain option
*Mataas na tsansa ni lessee. Wag isali pag Annual Rental Payable 800,000
walang chance na kukunin ang offer. In problem Lease Term x 8 yrs.
solving need to be stated the status bago Gross Investment 6,400,000
iconsider ang option. Add: Option Reasonable 400,000
*Consider the option in Gross investment and Net Gross Investment 6,800,000
Investment.
Cost of Sales
Sales Type Net Investment 3,100,000
Gross Investment - No bargain option Add: Initial Direct Cost 0
Annual Rental Payable 800,000 Net Investment 3,100,000
Lease Term x 8 yrs.
Gross Investment 6,400,000 Unearned Interest
Add: Option Reasonable 400,000 Gross Investment 6,800,000
Gross Investment 6,800,000 Less: Net Investment (3,100,000)
Unearned Interest 3,700,000
Net Investment
PV of Lease Payments 800,000 January 1, 2020 - To recognize finance lease
Multiply by: PV of OA X 5.87 agreement - sales type –
PV OF Lease Payment 4,696,000  PERPETUAL INVENTORY SYSTEM
Lease Receivable 6,800,000
PV of Option 400,000 Sales 4,884,000
Multiply by: PV of 1 x 0.47 Unearned Interest 1,916,000
PV of Option 188,000
Cost of Sales 3,100,000
PV of Lease Payment 4,696,000 Merchandise Inventory 3,100,000
Add: PV of Option 188,000
Net Investment 4,884,000 - Lease Receivable is equal to Gross
Investment
Unearned Interest - Sales is equal to the value of net
Gross Investment 6,800,000 investment
Less: Net Investment (4,884,000) - Merchandise Inventory is the value of
Unearned Interest 1,916,000 Equipment deemed to be inventory
- Walang difference gaano ang sales type at
Sales – Equivalent to Net Investment direct financing
Net Investment 4,884,000 - Pag in advance ang first payment ay
Sales 4,884,000 walang interest.
- Pag first year ang basis ng carrying
Cost of Sales amount ay ang net investment
Cost of Asset 3,100,000 - First payment ay January 1 so ito ay in
Add: Initial Direct Cost 0 Advance dahil naganap ito noong January
Cost of Sales 3,100,000 1 din.
If the collection is advance / beginning: January If the Option is not exercised:
1 or before December 31 Merchandise Inventory 250,000
 Interest of 2021 prior year kukunin Loss on Finance Lease 150,000
 Carrying amount of year end Lease Receivable 400,000
Interest Income = (Carrying Amount prior to
amortization - Annual Collection) x implicit  The asset should measure at fair value.
interest rate  Yung DIFFERENCE NG EXPECTATION VS
Carrying Amount = (Carrying Amount prior to REALITY AY LOSS ITO.
amortization - Annual Collection) x (1+Implicit
Interest rate)

Formula:
2020 Interest Income = (Carrying Amount prior
to amortization - Annual Collection) x implicit
interest rate
2020 Interest Income = (P4,884,000-800,000) x
10%
2020 Interest Income = 408,400

2020 Carrying Amount = Carrying Amount prior

to amortization x (1+Implicit Interest rate) -
Annual Collection
2020 Carrying Amount = (P4,884,000-800,000)
x 1.10
2020 Carrying Amount = 4,492,400

Statement of Financial Position as of December

31, 2027
Lease Receivable Face Value 400,000
Less: Unearned Interest -
Carrying Amount 400,000

 Pag gumawa ng amortization ang pinaka

dulo ay yung value ng option. Ang bearing
ay if you have going to have statement of
financial position.
 By the end of amortization ubos na ang
unearned interest na amortization na
natin lahat.
 From the beginning credit ang asset by
means of merchandise inventory kaya
kapag iexercised naman eto ang journal
entry. Madadagdagan ka lang ng pera
 Pag di inexercised ang option walang
madadatnan na pera babalik lang ang
asset.

If the Option is exercised:

Cash in Bank 400,000
Lease Receivable 400,000
SALES AND LEASEBACK - CONTRACT particular is retained by you. Baka hindi
need irecognized lahat ng gain or loss
 Accounting for lease on the part of lessor during the sales transaction because
- Direct Financing lease nasayo padin ang possession ng
- Sales Type ownership.
 This pertains to two transactions
happening either subsequently or Problem 15-1 – Sales and Leaseback
simultaneously. *Divide it in 2 section first is for the sales and the
 Binenta ito and then subsequently tayo second one is the leaseback.
din ang nag renta don sa object ng lease
ng ating binenta. Step 1 - Accounting for Sale Transaction
 That arrangement is for seller to
immediately obtain cash. Kung sa tingin Seller: German Company;
niya mas maximize ang kanyang benefit Buyer: Sterling Company
dinederived niya sa asset by way of selling
it then that is the best. German Company - SELLER
 Binebenta ang asset at sila din ang nag Selling Price 1,200,000
rerenta non so the reason for that is for Less: Carrying Amount 1,000,000
the company to have an immediate relief Gain on Sale 200,000
of cash para meron na sila fund.
 Since ang decision ng company is to rent it Carrying Amount 1,000,000
para kumbaga masulit ang economic Add: Accumulated Dep. 1,500,000
benefit. For emergency. Cost 2,500,000
 *Traditio Constitutum Possessorium - sale
of asset and subsequently retaining the Cash in Bank 1,200,000
physical ownership. Accumulated Depreciation 1,500,000
Equipment 2,500,000
1. Sale Transaction Gain on Sale 200,000
2. Lease Transaction
*Weigh on the COST BENEFIT first before you Sterling Company – BUYER – Kung magkano
decide to pursue this transaction. Because nabili
remember binenta mo na ang asset the legal Equipment 1,200,000
ownership is transferred from you to buyer wala Cash in Bank 1,200,000
kana magagawa unless gusto mo bilhin kay buyer
yun. Take note kaya mo ito ginagawa para sa Step 2 - Accounting for Lease
immediate fund and kung ayaw bitawan ang
Lessee: German Company; Seller - Lessee
asset do the lease contract.
Lessor: Sterling Company; Buyer - Lessor
* For example binenta ng 100,000 pero nirerenta
mo ng 120,000 maaring hindi sulit ang
German Company - LESSEE - OPERATING LEASE -
transaction yes nakaobtain ka nga ng 100,000
SHORT TERM
but the rent is not worth in total ang bayad ay
*By default - FINANCE LEASE; else, operating
120,000. So if you decide the sales and lease back
lease if
hanapin ang cost benefit.
Operating Lease
*Seller - Lessee; Buyer - Lessor
1) SHORT TERM (12 mos. or less);
2) LOW VALUE
 Main Issue: How much should be
recognized as GAIN OR LOSS ON SALE
*If operating lease is the classification, there is
TRANSACTION?
no need to adjust the GAINS/LOSSES recognized
 Remember after you sell the asset you will in the sale transaction.
lease it rerentahan din ito even if you are *When the problem is silent the default is
no longer the owner of this but the finance lease. It needs to be adjustment.
physical ownership or present of that
 Rent Expense 300,000 Step 2 - Accounting for Lease
Cash in Bank 300,000
Lessee: Canada Company; Seller - Lessee
Sterling Company - LESSOR - OPERATING LEASE Lessor: Saigon Company; Buyer - Lessor
*4 Qualifications for FINANCE LEASE else
OPERATING LEASE Canada Company - LESSEE - OPERATING LEASE -
* Transfer of Title SHORT TERM
Lease Term = 1 year; Useful Life = 5 years; *By default - FINANCE LEASE; else, operating
Ratio = 20% did not meet the minimum of 75% lease if
Formula: Lease Term/Useful Life Operating Lease
1/5 =20% 1) SHORT TERM (12 mos. or less);
2) LOW VALUE
Cash in Bank 300,000
Rent Income 300,000 *If operating lease is the classification, there is
no need to adjust the GAINS/LOSSES recognized
Depreciation Expense 240,000 in the sale transaction.
(P1,200,000 / 5 years) *When the problem is silent the default is
Accumulated Dep. 240,000 finance lease. It needs to be adjustment.

 Si lessor ang mag depreciate ng asset pag Rent Expense 100,000

operating lease pero pag finance lease Cash in Bank 100,000
hindi depreciate.
 When the problem is silent ang Saigon Company - LESSOR - OPERATING LEASE
depreciation method ay straight line. *4 Qualifications for FINANCE LEASE else
OPERATING LEASE
Problem 15-2 – Sales and Leaseback * Transfer of Title
*Divide it in 2 section first is for the sales and the Lease Term = 3 year; Useful Life = 10 years;
second one is the leaseback. Ratio = 30% did not meet the minimum of 75%
Formula: Lease Term/Useful Life
Step 1 - Accounting for Sale Transaction 3/10 =30%

Seller: Canada Company; Cash in Bank 100,000

Buyer: Saigon Company Rent Income 100,000

Canada Company - SELLER Depreciation Expense 50,000

Selling Price 500,000 (P500,000 / 10 years)
Less: Carrying Amount 480,000 Accumulated Dep. 50,000
Loss on Sale 20,000
 Si lessor ang mag depreciate ng asset pag
Carrying Amount 480,000 operating lease pero pag finance lease
Add: Accumulated Dep. 120,000 hindi depreciate.
Cost 600,000  When the problem is silent ang
depreciation method ay straight line.
Cash in Bank 500,000  Si lessee as operating lease hindi na need
Accumulated Depreciation 120,000 magadjust ng gain or loss.
Equipment 600,000
Gain on Sale 20,000

Saigon Company – BUYER – Kung magkano nabili

Equipment 500,000
Cash in Bank 500,000
Problem 15-9 – Sales and Leaseback *Divide it in 2 section first is for the sales and the
second one is the leaseback.
POV of Seller - Lessee - Bain Company
Seller (Lessee) – Bain Company Step 1 - Accounting for Sale Transaction
Buyer (Lessor) – Ryan Company
Seller (Lessee) – Juan Company
Step 1 - Accounting for Sale Transaction Buyer (Lessor) – Market Company

Bain Company - SELLER Juan Company - SELLER

Selling Price 360,000 Selling Price 5,000,000
Less: Carrying Amount 330,000 Less: Carrying Amount 4,500,000
Gain on Sale 30,000 Gain on Sale 500,000

Lease Transaction - OPERATING LEASE - SHORT Cash in Bank 5,000,000

TERM (12 MONTHS) Machinery 4,500,000
*No adjustment needed for Gain on Sale since the Gain on Sale 500,000
lease contract is OPERATING LEASE
* Clue: Lease it back for one year. Short term. Market Company – BUYER – Kung magkano
nabili
1. In the income statement for 2020, what Machinery 5,000,000
amount should be reported as gain from Cash in Bank 5,000,000
the sale of the machine?
Answer: Letter B. 30,000 Step 2 - Accounting for Lease

Problem 15-10- Sales and Leaseback Lessee: Juan Company; Seller - Lessee
Lessor: Market Company; Buyer - Lessor
POV of Seller - Lessee - Lane Company
Seller (Lessee) – Lane Company Juan Company - LESSEE - OPERATING LEASE -
Buyer (Lessor) – Noll Company SHORT TERM
*By default - FINANCE LEASE; else, operating
Step 1 - Accounting for Sale Transaction lease if
Operating Lease
Selling Price 480,000 1) SHORT TERM (12 mos. or less);
Less: Carrying Amount 360,000 2) LOW VALUE
Gain on Sale 120,000
Lease Transaction - OPERATING LEASE - LOW *If operating lease is the classification, there is
VALUE LEASE no need to adjust the GAINS/LOSSES recognized
*No adjustment needed for Gain on Sale since the in the sale transaction.
lease contract is OPERATING LEASE. *When the problem is silent the default is
* Clue: Low Value Lease finance lease. It needs to be adjustment.
* Since this problem is not qualified in the
1. What amount should be reported as gain requirements of operating lease then this would
from the sale of the equipment for 2020? be a finance lease.
Answer: Letter A. 120,000 * Finance Lease should be adjust the gain or loss.

Formula for Lease Liability (PV of Lease

Payments):
- Annual Rent Payment x PV of OA of 1

Problem 15-3 - SALES PRICE = FAIR VALUE

Computation for Lease Liability: Gain on Sale 227,460
Annual Rent Payable 600,000 Right of Used Asset 2,047,140 Balancing
Multiply by: x 3.791 Figure
Lease Liability 2, 274,600 Lease Liability 2,274,600

*The lease liability represents the RETAINED Depreciation – Ang dinedepreciate ni lessee ay
OWNERSHIP OF THE SELLER in the lease contract. ang right of use hindi mismong asset. As a rule
Nirerecognized ang gain kapag alam natin di na pag walang bargain option or transfer of title use
tayo may ari. the lower between Useful Life and Lease Term.
If may bargain option or transfer of title
Things to be done: na given then deretcho na ito sa useful life. When
1. Calculate the gain not to be recognized. the problem is silent n method of depreciation ay
2. Calculate the Right of used asset. straight line method.
3. Adjust the Gain on sale
4. And since this is finance lease it needs to Depreciation Expense 409,428
be depreciated. Accumulated Depreciation 409,428
*Depreciated - RIGHT OF USED ASSET
Formula for Gain - Not to be recognized:
= (Lease Liability / Fair Value) x Total Gain Amortization: Year End
Interest Expense = Carrying Amount Prior to
Computation for Gain – Not to be recognized: Amortization x Interest Rate
Lease Liability 2,274,600 Carrying Amount = Carrying Amount prior to
Divide by: Fair Value / 5,000,000 Amortization x (1+Interest Rate) - Annual
Ratio 0.45492 Payment
Multiply by: Total Gain x 500,000
Gain not to be recognized 227,460 2020 Interest Expense = P2, 274,600 x 10%
227,460.00
Formula for Right of used asset: 2020 Carrying Amount = P2, 274,600 x 1.1 - P600,
= (Lease Liability / Fair Value) x Carrying 000
Amount 1,902,060.00
Computation for Right of used asset: 2021 Carrying Amount = P1, 902,060 x 1.1 - P600,
Lease Liability 2,274,600 000
Divide by: Fair Value / 5,000,000 1,492,266.00
Ratio 0.45492
Multiply by: Carrying Amount x 4, 500,000 Interest Expense 227,460
Right of Used Asset 2,047,140 Lease Liability 227,460

Lease Liability 600,000

Formula for Adjusted Gain on Sale
Cash in Bank 600,000
= (Fair Value - Lease Liability) / Fair Value x
Total Gain
Lessor - Market
*4 Criteria to be classified as FINANCE LEASE
Computation for Adjusted Gain on Sale:
*Lease Term = 5 years; Useful Life = 10 years;
Fair Value 5,000,000
Ratio = 50% - OPERATING LEASE
Less: Lease Liability (2,274,600)
Total Fair Value 2,725,400
Divide by Fair Value / 5,000,000 Cash in Bank 600,000.00
0.54508 Rent Income 600,000.00
Multiply by: Total Gain x 500,000
Adjusted Gain on Sale 272,540 Depreciation Expense 500,000.00
Depreciation of Machinery
 Sales price and Fair Value is equal.
 Accumulated Depreciation
500,000.00

Rent Expense 100,000

Cash in Bank 100,000

Market Company - LESSOR - OPERATING LEASE

*4 Qualifications for FINANCE LEASE else
OPERATING LEASE
* Transfer of Title
Lease Term = 3 year; Useful Life = 10 years;
Ratio = 30% did not meet the minimum of 75%
Formula: Lease Term/Useful Life
3/10 =30%

Cash in Bank 100,000

Rent Income 100,000

Depreciation Expense 50,000

(P500,000 / 10 years)
Accumulated Dep. 50,000

 Si lessor ang mag depreciate ng asset pag

operating lease pero pag finance lease
hindi depreciate.
 When the problem is silent ang
depreciation method ay straight line.
 Si lessee as operating lease hindi na need
magadjust ng gain or loss.

Direct Financing Lease

 Format:
Format Normal:
Gross Investment (Total Rent Collection + Residual/Opt.)
Less: Net Investment (Cost + Initial Direct Cost) Gross Investment (Total Rent Collection + Residual
Unearned Interest Value)
Less: Net Investment (Cash Selling Price – Fair Value ito)
Information: Unearned Interest
1. Gross Investment
= Total Rent Collection (Annual Collection x Lease Sales (Value ng Net Investment)
term) Less: Cost of Sales (Cost of Equipment + Initial Direct
= Residual Value whether guaranteed or Cost)
unguaranteed isasama Gross Profit
- Guaranteed ibig sabihin si lessee ang mag
shoulder Unearned Interest
- Unguaranteed naman ay balancing figure sa Add: Gross Profit
amortization Total Income under Sales Type
= Bargain Option – Dapat probable. When the
problem is silent then hindi ito probable. Need istate. Information:
1. Gross Investment
2. Net Investment = Total Rent Collection (Annual Collection x Lease
= Cost of Equipment + Initial Direct Cost term)
= Residual Value whether guaranteed or
*If the net investment is adjusted by initial direct cost unguaranteed isasama
then the implicit interest rate must also be adjusted. - Guaranteed ibig sabihin si lessee ang mag
shoulder
This is the process in computing the new interest rate: - Unguaranteed naman ay balancing figure sa
(Objective is to get the new PV Factor) amortization
= Bargain Option – Dapat probable. When the
Formula: Annual Payment x PV Factor = Net problem is silent then hindi ito probable. Need istate.
Investment
2. Net Investment
*But when it comes to problem solving the implicit = Fair Value – Cash Selling Price
rate is already adjusted no need to adjust even if the = Ang list price ay hindi FV.
net investment is adjusted by initial direct cost. = Present Value or Fair Value whichever is Lower.

* The formula above is true in real life situation. 3. Sales

= Equal lang ang value nito sa net investment.
* If the asset is finance lease no need to depreciate
the asset. 4. Cost of Sales
= Cost of equipment + Initial Direct Cost
*If Advance ang First Collection ay no interest. = Pag Guaranteed no need na ibawas sa cost of sales.
*Executory Cost- Is only expense not treated as part  Perpetual Inventory System ang Pagrecord.
of lease payments.  Selling Price vs Present Value whichever is
lower.
PV of OA of 1 – Annual Rent Payable
PV of 1 – Option/ Residual Value Format Residual Value:

1. Implicit Interest Rate – Lessor – Use it first Gross Investment

eto ang PRIORITY. Less: Net Investment
2. Incremental Borrowing Rate – Lessee- If there Unearned Interest
is no Implicit rate then eto na gamitin.
Sales
* To compute the Interest Income use Net investment Cost of Sales
value. Gross Profit

*When it comes to transfer of title the residual value

will be ignore.

Sales Type
 Guaranteed Unguaranteed Accounting for Lease
Gross SIMILAR SIMILAR
Investment Qualification to be recognized as Finance Lease:
Net Investment SIMILAR SIMILAR (At least 1):
Unearned SIMILAR SIMILAR 1. Ratio = Lease Term/ Useful Life
Interest - Baka kasi substantial na siya na gumagamit to
Sales DO NOT DEDUCT PV OF the point konti nalang natitirang buhay ng asset.
DEDUCT PV OF RESIDUAL In terms of Useful Life the ratio is at least 75%.
RESIDUAL - Operating Lease ginagamit mo an activity nito sa
Cost of Sales DO NOT DEDUCT PV OF operation mo lang kaya 1 year. Ang finance
DEDUCT PV OF RESIDUAL lease ginagamit ito to obtain funds. More than 1
RESIDUAL year.
Gross Profit SIMILAR SIMILAR 2. Ratio = PV of Lease Payments/Fair Value of
Assets
FORMULA - At least 90%
In Advance - January 1 or dates before December 31 3. Transfer of title – which is no doubt kasi nilipat
Interest Income = (Carrying Amount Prior to na ang titulo.
Amortization - Annual Collection) x Interest Rate 4. Bargain Purchase Option – Probable to be
executed.
Carrying Amount = (Carrying Amount Prior to - Binibigyan ng option ang lease. At the inception
Amortization - Annual Collection) x (1+Interest Rate) at the time ng pagagree ni lessor and lease. In
the form of writing.
In Advance - December 31 meaning no more accrual
1st Year:
Interest Income = NONE
Carrying Amount = (Carrying Amount Prior to
Amortization - Annual Collection)

Subsequent Years = same procedure for ORDINARY

ANNUITY / YEAR-END

In Advance - if Other Than January 1

1st Year:
Interest Income = (Carrying Amount Prior to
Amortization - Annual Collection) x Interest Rate x
Pro-rata

Carrying Amount = (Carrying Amount Prior to

Amortization - Annual Collection) + Computed Interest
Income
Subsequent Years:
Interest Income = (Carrying Amount Prior to
Amortization - Annual Collection) x Interest Rate

Carrying Amount = (Carrying Amount Prior to

Amortization - Annual Collection) x (1+Interest Rate)

Year End Computation:

Interest Income = Carrying Amount Prior to
Amortization x Interest Rate
Carrying Amount = Carrying Amount Prior to
Amortization x (1+Interest Rate) - Annual Collection

Sales and Leaseback