LEASES
1. Listed below are four lease situations:
I II III IV
Asset’s fair value
(in million pesos) P12 P12 P10 P8
Asset’s useful life (years) 10 10 10 10
Bargain purchase option None None None None
Lease term (in years) 6 5 6 4
Present value of minimum lease payments P11 P8M ? P5M
Which of the foregoing leases shall be classified as operating lease?
I-6/10 x100= 60%
II-5/10x100=50 %
III-6/10x100=60% I,II,III,IV
IV-4/10X100=40%
2. James Company leased a new machine to Lake Co. on January 1, 2015. The lease expires on January
1, 2020. The annual rental is P900, 000. Additionally, on January 1, 2015, Lake paid P500,000 to James
as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease.
In James 2015 statement of comprehensive income, the amount of rental revenue should
be_____P1,000,000________.
Annual Rental 900,000
Amortization of lease bonus (500,000/5) 100,000
Total Rental Revenue P1,000,000
3. Peter Company leased office premises to Fox, Inc. for a five-year term beginning January 2, 2015.
Under the terms of the operating lease, rent for the first year is P80,000 and rent for years 2 through 5 is
P125,000 per annum. However, as an inducement to enter the lease, Peter granted Fox the first six
months of the lease rent-free. In its 2015 statement of comprehensive income, what amount should
Peter report as rental revenue?____ P108,000___________
First year (80,000x 6/12) 40,000
Second year 125,000
Third year 125,000
Fourth year 125,000
Fifth year 125,000
Total Rental Revenue P540,000
Average annual rental revenue (540,000/5) P108,000
4. On July 1, 2015, Extreme Company signed a five-year lease for equipment having a 12-year economic
life. The lease agreement provides for neither a transfer of title to Extreme nor a bargain purchase
option. The agreement calls for annual payments of P240, 000 starting July 1, 2016. Incremental
borrowing rate is 14% which approximates the rate implicit in the lease. Fair market value of the
equipment at the inception of the lease is P1,480,000. Present value factors are as follows:
PV of an ordinary annuity of 14% for five periods - 3.433
PV of an annuity due at 14% for five periods - 3.914
How much is the interest expense for the year ended December 31, 2015?__ P57,674______
Selling Price 240,000 x 3.433 = 823,920
Interest Expense (823,920-240,000x 6/12x14% ) P57,674
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5. Use the same information given in no.4. What is the amount of liability relating to the lease agreement
that Extreme would report in its December 31, 2015 statement of financial position?
__P823,920____________
Lease Liabilty (240,000 x 3.433 )P823,920
6. On July 1, 2015, Pat Co. leased a piece of land from Luke Corporation under a 3-year operating lease.
Total rent for the term of the lease will be P3,600,000, payable as follows:
12 months at P 50,000 = P 600,000
12 months at P 75,000 = P 900,000
12 months at P175,000 = P 2,100,000
P3,600,000
All payments were made when due.
How much is Luke’s rent revenue for the fiscal year ended June 30,2016?___ P 1,200,000_____
7. Use the same information given in no.6. What is the amount reported in Luke’s statement of financial
position at June 30, 2015?
Average annual rent revenue (3,6000,000/3) 1,200,000
Rent revenue from July 1,2015 to June 30,2016
(1,200,000 x 2) 2,400,000
Less: Rentals received
First 12 months 600,000
Second 12 months 900,000 1,500,000
Rent Receivable- June 30,2016 P 900,000
8. On December 31,2015, Simon Company leased a new machine from Junction Company with the
following pertinent information:
Lease term – 6 years; Useful life of machine – 6 years
Annual rental payable every December 31 P500,000
Simon’s incremental borrowing rate 15%
Implicit interest rate in lease (known by Simon) 12%
Present value of annuity of 1 in advance for 6 periods
at 12% - 4.61 ; at 15% - 4.35
The machine reverts to Junction at the termination of the lease. The cost of the machine on Junction’s
accounting records is P3,755,000.
At what amount should Simon record the asset at December 31, 2015?
500,000x4.61= P2,305,000
9. Use the same information given in 8. What is the lease liability balance at December 31, 2016?
_ P1,521,600_______
DATE PAYMENT 12% INTEREST PRINCIPAL PRESENT VALUE
12/31/15 2,305,000
12/31/15 500,000 1,805,000
12/31/16 500,000 216,600 283,400 1,521,600
10. Use the same information given in 8. Assuming that Simon uses straight –line method of depreciation,
how much is the depreciation expense for the year ended December 31, 2017?
______P384,167__________
2,305,000/6=384,166.67 or 384,167
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11. On December 31,2015, Lazarus Corporation leased equipment under a finance lease. Annual lease
payments of P200,000 are due December 31 for 10 years. The useful life of the equipment is 10 years,
and the interest rate implicit in the lease is 10%. The finance lease obligation was initially recorded on
December 31, 2015 at P1,350,000, and the first lease payment was made on that date.
What amount should Lazarus include in current liabilities for this finance lease in its December 31,
2015, statement of financial position?______ P85,000_________
200,000 -115,000 = 85,000
12. Dominic Company leased a new machine from Isidore Company on May 1,2015, under a lease with the
following information:
Lease term-10 years; Useful life of machine – 12 years
Annual rental payable at beginning of each year P400, 000
Implicit interest rate 14%
Present value of an annuity of 1 in advance for 10 periods at 14% 5.95
Present value of 1 for 10 periods at 14% 0.27
Dominic has the option to purchase the machine on May1, 2025 by paying P500,000, which
approximates the expected fair value of the machine on the option exercise date. On May 1, 2015,
Dominic should record a capitalized leased asset of __P2,515,000__________
PV of rentals( 400,000 x 5.95)2,380,000
PV of purchase option(500,000x0.27) 135,000
Total Cost P2,515,000
13. On January 2, 2015, Raphael Mining Company (lessee) entered into a 5-year lease for drilling
equipment. Raphael accounted for the acquisitions as a finance lease for P2, 400,000, which includes a
P100, 000 bargain purchase option. At the end of the lease, Raphael expects to exercise the bargain
purchase option. Raphael estimates that the equipment’s fair value will be P200, 000 at the end of its 8-
year life. Raphael regularly uses straight-line depreciation on similar equipment.
For the year ended December 31, 2015, what amount should Raphael recognize as depreciation expense
on the leased asset?____ P275,000_______
Cost of right of use asset 2,400,000
Less: Residual Value 200,000
Depreciable Amount 2,200,000
Depreciation(2,200,000/8) P275,000
14. On January 1, 2015, Bello Enterprises acquired a machine by signing a four – year lease. Annual rental
of P1,742,174 are payable at the beginning of each year starting January 1,2015. Bello guarantees the
residual value of P1,200,000 at the end of the lease term. The asset’s useful life is 5 years, at the end of
which, the asset’s scrap value is expected to be P80,000. Bello uses straight line method to depreciate
this asset. The lessor’s implicit interest rate is 10%, which is known to Bello.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of 1 discounted at 10% for 5 periods is 0.62092
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.
Present value of ordinary annuity at 10% for 4 periods is 3.16987.
At what amount should this machine be recorded by Bello on January 1, 2015?P6,894,311
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1,742,174 x 3.48685 6,074,699
1,200,000 x 0.68301 819,612
6,894,311
15.Use the same information given in 14. How much depreciation should Bello Enterprises record on this
machine for the year 2015?____ P1,423,578_
Depreciation,2015 (6,894,311-1,200,00 = 5,694,311/4 = P1,423,578
16.On January 1, 2015, Belle Enterprises acquired a machine by signing a four – year lease. Annual rentals of
P1,742,174 are payable at the beginning of each year starting January 1,2015. Belle does not guarantee the
residual value of P1,200,000 at the end of the lease term. The asset’s useful life is 5 years, at the end of which,
the asset’s scrap value is expected to be P80,000. Bello uses straight line method to depreciate this asset. The
lessor’s implicit interest rate is 10%, which is known to Bello.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of 1 discounted at 10% for 5 periods is 0.62092
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.
Present value of ordinary annuity at 10% for 4 periods is 3.16987.
At what amount should this machine be recorded by Belle on January 1, 2015?P6,074,699
1,742,174 x 3.48685 = 6,074,699
17. Use the same information given in 16. How much depreciation should Belle Enterprises record on this
machine for the year 2015?P1,518,675
6,074,699 / 4 = 1,518,675
18.On January 1, 2015, Bella Company acquired a machine by signing a four-year lease. Annual rentals of
P1,742,174 are payable at the beginning of each year starting January 1,2015. Bella is given the option to buy
the machine for P250,000 at December 31, 2018, when the asset’s market price is expected to be P1,250,000.
The asset’s useful life is 6 years, at the end of which the asset’s scrap value is expected to be P80,000. Bella
uses straight-line method to depreciate this asset.
With an implicit interest rate of 10%, Bella appropriately recorded the machine and the related liability on
January 1, 2015 at P6,245,450
On December 31,2018, the end of the lease term, Bella failed to exercise the purchase option.
How much loss, if any, should Bella recognize as a result of the failure to exercise the purchase option?
P1,000,000
1,250,000 – 250,000 = 1,000,000
19.On August 1, 2015, Gabriel Company leased a machine to Way Company for a six-year period requiring
payments of P100,000 at the beginning of each year. The machine cost P480,000, which is the fair value at the
lease date, and has a useful life of eight years with no residual value. Gabriel appropriately recorded the lease as
a direct financing lease. Gabriel’s implicit interest rate is 10% and present value factors are as follows:
PV of an annuity due of P1 at 10% for 6 periods 4.800
PV of an annuity due of P1 at 10% for 8 periods 5.868
At the inception of the lease, the gross lease receivables account balance should beP600,000
100,000 x 6 = 600,000
20.Use the same information given in 19. How much is the interest revenue relating to the lease for the year
ended December 31, 2015?P15,833
100,000 x 4.800 = 480,000 – 100,000 = 380,000 x 10% = 38,000 x 5/12 = 15,833
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21.Michael Company leased equipment to Hay Corporation on July 1, 2015 for an eight-year period expiring
June 30, 2023. Equal payments under the lease are P600, 000 and are due on July 1 of each year. The first
payment was made on July 1, 2015.
The rate of interest contemplated by Michael and Hay is 10%. The cash selling price of the equipment is
P3,520,000, and the cost of the equipment on Michael’s accounting records is P2,800,000. The lease is
appropriately recorded as a dealer’s lease.
What is the amount of profit on the sale that Michael should record for the year ended December 31,2015?
_____ P720,000____________
Selling price 3,520,000
Cost of equipment sold 2,800,000
Profit on sale P720,000
22.Use the same information given in 21. What is the interest revenue reported in Michael’s statement of
comprehensive income for the year ended December 31,2015?___P146,000_______________
Selling price 3,520,000
Less: First payment on July 1,2015 600,000
Lease receivable-7/1/15 2,920,000
Interest revenue,7/1/15 to 6/30/23(2,920,000x10%) 292,000
Interest revenue,7/1/15 to 12/31/15 (292,000x6/12) P146,000
23.On January 1, 2015, Thelma Industries leased equipment to Trician Company for a four-year period ending
December 31,2018. The equipment cost Thelma P300,000 and has an expected useful life of five years. Annual
payments are P118,951, which includes P10,000 executory costs. The equipment’s fair value is P400,000. The
lessee guarantees the residual value of P80,000. Lease payment is due every December 31 and Trician made the
first payment on December 31,2015. Trician’s implicit interest rate 10%.
Thelma incurred P15,000 costs to consummate the lease contract.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685
Present value of ordinary annuity of 1 at 10% for 4 periods is 3.16987.
How much profit, inclusive of interest revenue, should Thelma report from this lease for the year ended
December 31,2015?____125,000___
400,000 -300,000 -15,000 = 85,000
400,000 x 10% 40,000
125,000
24.Use the same information given in 23. How much should Thelma report as net investment in lease on
December 31,2015 statement of financial position?_321,049___
400,000 x 10% = 40,000
118,951 – 40,000 =78,951
400,000 -78,951 = 321,049
25.Glade Company leases computer equipment to customers under direct financing lease. The equipment has no
residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to
earn 8% interest on a five year lease of equipment with a fair value of P323, 400. The present value of an
annuity due of P1 at 8% for 5 years is 4.312.
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What is the total amount of interest revenue that Glade will earn over the life of the lease?
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___ P51,600_____________
Annual Payment (324,400/4.312) 75,000
Interest Revenue (75,000x5-323,4000) P51,600
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