toss to be recognized

gale price

Trsns,r of •tsset is not a sale

CarrYi.llg ainount
10,000,000
e
'l'otafloss 12,000,000
IFRS16, paragraph 103, provides tha if the transfer of
fair value b
( 2,000,000) asset the seller-l essee does not satisfy the require a
Y f
R,ight retained by seller-Ie i;,eee.al nie0•
qu to l.ease liabili 10,000,000 for th recognition o a sa1e:
Right transferred to b yer--lessor ty 1,290,000
8,710,000 The seller-lessee shall contin_ue to_reco_gnize the
Loss to be recognized a. transferred asset and $hall recogruze a financial liabili1:,
(8,710,000/ IO;O O.ooo x 2,000 oo ) equal to the transfer proceeds.
Loss not to be recogru.zed ' O I,'742,000
(1,290,000/ 10 000,000 X 2,000,0QQ)
258,000 The entry is debit cash and credit lease liability for 1�
Total.loss transfer proceeds.
2,000,000
Books of seller-Lessee The rent l or lease payment is accounted for as part
I. Cash payment of interest expense and part payment of the
10,000,000 principal'. lease liability.
Rig-ht of use as.set
1,548,000
Loss on right transferred
1,742,000
Building 'fhe interest is computed base<i on the implicit interest
Lease liability 1:2,000,000
l,290,000 rate using the effective interest method.

2. Interestexpense
Lease liability 108,200
396,800
b. The buyer-lessor shall not recogn.iu the transferred asset
Cruth but shall recognize a financial asset equal to the transfer
500,000
proceeds.
3. Depreciation (1,548,000/3)
516,000
Accumulated d-eprecfation The e.ntry is debit lease rceivable and credit cash.
616,000
Books of buye:r-lessor The rental or lease payment from the seller-Jessee is
accounted for as part collection·of interest income and
1. Building 10,000,000 part collection of the principal lease receivable.
Cash 10,000,000
2, Cash 500,000
Rental income 500,000

a. Depreciation (10,000iOOO / 25) 400,0()()

AQCwn.ulat.ed depreciation 400,000
All rights belo.ngs to
r.espectiv
V
r . Sale priice at fair value with lo
sooks of seller-lessee 1nustrat10J1 .... ss
To record the s.ale and 1- . an entity sold a building with rernai .
202 01
1. easeba k: On Ja.nuarY 1'. d imrnediateily leased it back for 3: y I.lint
life of 25 years an ·ears.
Cash
flight of use asset 15,000,00-0
·Equ.ipnie.nt
Lease liability 3,672,800 Sa.le price at fair value
4,800,000 C ry:ing aJI).OUilt

Gain on right transferred ualrenta.l payable at the end of each ye;rr

3,591,000
281,800 Implic:itinterestra..te . . . 0f
2. To record ithe annual rental f, Pn,i ent value of an ordi ary (lnnwty
or the first year:
1at8% for t'hree periods
[oterest e,-:pense
Lease liability 287,280 Measurem.ent of lease liability
Cash 612,720
900,000
Present value ofrentals. (500,000 x 2.58) 1,290,0,0Q
3. To Iecord the annual depre.- C l ta ·ion of ri.ght of
use.asset: Table of amortization
D-ep,reciatfon (3,672,800 / 5 years)
Accum ulat.ed depreciation 734,600
734,560 8% interest Principal Pres.ent value
IDate Payment
Books of buyer-lessor 1,290,000
l/1/2<D20 300,SOO 893,:200
The bt1.yer-l@ssor shall apply the operating l . . d l 12/3;1/2020 500,000 103,200
428,544· 464,656
71,456
bee:aus,e the le.ase term of 5 ye rs i's ,)e 'thane;; :c°t e 12/31/2021 500.,000
4'34,656
. . 6-yetlr u,eeful life of the underlying asaet. 500,000 35,344
12/31/20
Measurement of right-of use asset
i\foreover, the ·present "value of rentals of P4 591 000- l 12,1000;000
han 90% of the fair value of 6,000,000. . ' ' is ese
Carrying amount 10,000,000
t. To 1·ecord the purchase of the equipment: Sale price-at fair value

Equ ip m ent
C a sh
50 0 0 ·
' . ·o o o Cost of right ofu.se asset

(1,2901000 / 10,000,000 X 12,000,000)

6,000,000

2· To record th,e annual rental:

Cash.
900,000
.Rent income 900,000

a. To record annual depreciation of equipment:

Depr ciation (5,000,000 / 8) 625,000
Accumulated depreciation 626,000

608
50
 llustration - Sale price bel .
ow 1a1r value Measurement of right of use asset
I Januar l, 2020, an entity sol
On . .
maining life of 8 years and d _d an equipment w1tll IFRS 16, paragraph 101, provides that if the sale Price
re 1ease Lt back for 5 years. t riual the fair value of the asset, the .seller-less e- d0e
no e'tadjustment to measure the sae1 price
make at fair valuea .
Sale price
fair value of equipment 5,000,000 If the ale price is below fairl ualue, the difference is accou1ite
carrying amount 6,000,000 for as prepayment of renta .
Annual rental payable at the end of
each 4,800,000
!IllPliC·itl·Dteres t ra te year 900,000 Fair value of equipment 6,000,00()
Ptesent value of an ordinary annuity 8% S'ale price
of 3.99 Excess fair value over sale price 11000,00()
J at8% for five periods

M:easurement of lease liability Present value of rentals (900,000 x 3.99) 3,591;000

Present value rentals (900,000 x 3.99) Excess fair value -prepayment of rental 1,000,0_,QQ
3,591,000 Total lease liability 4,5-91,000
Table of amortization
Carrying amount 4,800,000
Fair value of equipment 6,000,000
Date Payment 8% interest Principal Present value
1/1/2020 3,591,000 Cost of right of use asset
12/81/2020 900,000 287,280 612,720 2,978,280 (4,591,000{6,000,000 X 4,800,000) 3,6'72.800
12/31/2021 900,000 i3S,282 661,738 2,316,542
12/31/2022 900,000 185,323 714,677 1,601,865 Gain to be recognized
12/31/2023 900,000 128,149 771,851 830,014
12/31/2024 900,000 69,986 830,014 Fair value of equipment 6,000,000
Carrying amount 4,800,000
Total gain 1,200,000

Fair value of equipment 6,000,000

Right retained by seller-lessee equal to lease
liability including the, excess fair value 4,591.0QQ
Right transferred to buyer-lessor l,409

Gain to be recognized
.(1,409,000 / 6,000,000 X 1,200,000) 281,SOo
Gain not to be recognized
. (4,591,000/6,000,0QO X 1,200,000)
Total gain
1,ooks of seller-lessee
Allocation of the annual rental
1. To record the sale and
1easeb ack- The annual rental of PI,500,?09 is partly rental incotnea
Cash
. 20,000,000 partly payment of the financial asset. d
Right of use asset 2,040,000
Building
Le· ase lo,800,000 Present value Fraction Allocat·
lia· bihlit.y
1011
G am on t transferred 5,400,000 ·

ng 5,840,000 Rental income 3,400,000 3,400 / 5,400,000 S4<1.

2. To record the annual rental £ e first year: Financial asset 2;000,000 2,000 I 6,400,000 555·
or
th
Interest ex:pense (12:% x 5 400 000) 5,400,000 1,500 0oo
Lease liability ' · 648,000 ToW.l present value
Cash 852,000
1,500,000 Amortization related to financial asset
3• To record the annual depreciation of ng· ht of use·asset:
Date Payment 12% interest Principal Present value
Depreciation (2,040,000 I 5 years) 408
000
Accumulated depreciation ' 408,000 1/1/2020 2,000.000
12/3112020 555,656 240,000 315,556 1,684,444
Books of buyer-lessor 12/3112021 5:56,556 202,133 353,423 1,331, 021
1

12/Jl/2022 565,556 i59,723 395,833 935,188

The buyer-lessor shal apply the operatin,g lease model 555,556
because. the lease term 1.s 5 years or only 25% of the 20- 12/3112023 112,222 443,334 491,854
year useful life of the underlying asset. 12/3112024 555,556 63,702 491,854
Moreover, the present value of lease liability related to December 31, 2020
rentals of PS.400,000 is less,than. 90% of the fair value of the
asset ofFlB,000,000. Payment 556,5:56
Interest income £or 2020 (12% x 2,000.,000)_ (240,000)
l. To record the purchase of the building:
Building . 18,000,000 Principal payment 3 1 5, 5 56
Financial asset
Ca.sh
2,000,000 20,000,000
Pre nt value-January 1, 2020
=== ==
2,000,000
Principal payment ( 315,
2. To record the annual r.mtal related lease:
Cash 944,444 Present value-December 31, 2020
Rentincome 944,444
3. To record the ann\lal rental related to financing:
555,556
4 Cash 0
D ation (18,000,0/ti
Financial asset Accumv.lat.ed depreeta 0
Interest income ep
5. To record depreciation of building re
ci
J
 3 240,000
1
6,
5
5
6 000,000
900.000

499 60
All rights belo..ngs to re
spective ut
.. a
 ts of buyer-lessor
1300 .
Illustrat1 on Sale price above fa ir va lue
. . .
-
plilragraph lOO provide.a that the buy:r-lessor shall acco nt Z020 an e·ntity sold a building with rem . _
for the purchase of the sset applying lessor account,ng On January 1 ' "'d 'immediately leased it back for 5 Yael.l')in
s/11.n.dard, life of 20 years au ars.
Sale price · . . . 2O,00000ci
Accordingly, the buyer-lessor.shall apply the operating lease Fair value ofbuild.-J,ng ild' 18,00o,Ooo
· ount of bu 1ng 10,800'

::f
t:lel because_the lease term is 4 yeara or only 40% of the ACna: rnr. yu ai nl grean....J. pa.y.able at t,.he end of 1,soo:000
life of the underlying asset. ac;;h ye.ar
Im licit interest rate . f l20,1o
p
P r esen v t alue of art ordin a
. d il'y annuity o 3.6(l
Moreover, the pre ent value of rentals of P2,536,000 is less 1 at 12% for five perio s
than 90% of the farr value of P6,0oo,ooo. Lea:se.liabHity (1,500,000 x 3.60)

1. To record the purchase of the underlying asset: IFRS rn, paragraph 101, provides th t if the sale price <f.oes /lot
equal the fair value of the underlymg asset,_ the sel er-lessee
shall make adjU$ tment to nieasure the sale pnce at fair ual .
Equipment 6,_000,000
Any excess sale price ouer fair alue shall be accounled for
Cuh 6,000,000
as additional financing provided by the bu.y r-lessor to
seller-lessee.
2. 'To record the ann u.al rental;
Sale price 20,000,000
Fair value of buildin 18,,000,000
Cash 800,000
Redtincom 800,000 Excesa sale priee ove:r fair value '.2,000,000
5,400,000
Present value of lease liability
3. ·To record annu.al depreciation of equipment: Additional financing equal to ei:ccess !?ale price (2,000,000)
600,000 Present value oflease liability related to rentals 3,400.,000
DepTeciation (6,000,000_l l?y,ears)
Accumulated depteciation 600,000 Carrying amount 10,800,000
Fair value of
building 18,000,000

Cost of righ:t of u5e asset

2,040,000
(3,400,00011s. oo,ooo x 10,soo,000)
Fair value ofb ildiqg 18,000,000
Carrying am,ou,nt 10,800,.000
Adjus·ted total gain 7,200,000
Fair value of building 18,000,000
Righ re_ ed by se er-lessee equal to lease
liability, exclu,.dt'},g excess sale price 3,400,000
Right transferred to buyer-lessor 14,600,0
-
491 All rights bel ngs to r_espective_
498
All rights bel ngs to r_espective_
uthors
 IJlustration - Sale pri-ce at fa'
Ir value
On Januar 1, 2020, an entit . Gain or Joss to be recognized
r ernaioing
4 years atlifethe
mamkm.
of prevailing t
10 years and sold .an equipment
d1ately leased it back the right reta.ined
toParagraph by thethat
100 provides seller-lessee
the gain ois rwt
lossrecogrii��1
that 11�
,o r et rental
5 le price at fair value
c:rrying amount of equipment The right retaine.d Y. th aeller-.lessee is th Ptoporti·
6,000,000 the initial lease liability m relation to the fanr valueo? ,or
Annual rental payable at the end of each 4,500,000 asset. llf:
llllPliCl ·t;"terest rate •
- year 800,000
present valu.e of an ordinary annuity of
il
10% The·gain or loss that perta.ins to the right transferred
at 1Oo/o fo_r four periods · 1 buyer-lessor is recognized. 1 the
3.170

Measurement of lease liability Th.e right transferred to the buyer-lessor is the fair valueof
asset minus the initial lease liability.
The seller-le.ssee h ac?ount for the leaseback asa finance
lease. The lease I.it.ability 1s measured at the pres nt value of Sale price at fair value 6,000.000
lease payments. Carrying amount
Totalgatn 1,500,000
Present value of rentals (800,000 x --.:::::
3.17) 2,536,000 Fair value 6,000,000
Right retained by aeller-1essee equal to lease liability g,536,0QQ
Table of amortization Right transferred to buyer lessor 3,464!,000
Date Payment 10% interest Principal Presentvalue
Gain to be recogni:zed (3,464,0b0/ 6,000,000x 1,500,000)
111/2020 2,536,000 800000 Gain not to be recognized '
12/31/2020 800,000 253,·600 546,400 1,989,600 (2,536,000 l 6 000,000 x l,500,0QO) 634,000
12131/2021 800,000 198,960 601,040 1,388,560 Total gain
12/31/2022 800,000 138,856 661,144 727,416 1,500,000
12/31/2023 800,000 72,584 727,416 Books of seller-lessee
Measurement of right of use asset The seller-lessee shall apply the finance le,ase mod-el in
rFRS 16, paragraph 100, provides. t at tbe seller-lessee shall accounting for the ijale and leaseback transaction.
measure the right of use asse,t a.i·1sm_g from the leaseback at 1. To record the sale and leaseback;
the proportion of the preuious carr uig amount of the asset Cash 6,000,000
that relates to the right of use retained by the seller-lessee. lµght of use asset 1,902,000
Equipment ·4,500,000
Simply stated, the cost of right of u.se asset is equal oa_fracti-On Lease liability 2,536,000
whose numerator i� th.e presen.t value � l ase liability a_nd Gain on.right transferred 866.,000
whose denominator is the fair value mu tr.plied by the
carryuig
.amoun.t of the asset. 2. To rec'.!ord the annual rental for the fir·st yeal':
Intere t e en e (10% x 2,636,000) 253,600
Carrytng amount 4,500,000
0,000,000 Lease liability
Sale price at fail- value 546 400 soo,()()()
Cash
Coat of right o.f uae asset· (2,538,000 I 6,000,000 ic 4,500,000)
 3
l.902,,000 · Torecord_the annual depreciation of right of use asset:
495
Dep,;ciatiouln (1,902,00 I� years) 4 75 500
ocum ated depreaation ' 475,600

==
 Illustration_ Sale price at fair value
sf\LE AND LEASEBACK
At the begi nifl!g of t e. cur ent year1 an en.tity
le and leaseback is an arra
8
machinery with a rema mng life of 10 yeal"s for p2 old1
A so· t t th ngetnent whereby one party O 0
which is equal to the fau value of the machinery. · 0 ,0(Hj
seUs an assek ano her party and then immediately leases
the asset bac ·om t e new owner.
The entity i ediately leased the machin ry back for r..
at the preva1ling annual rental of P300,000. 1Y- ,
fhUS, ithe seller becomes a sel.ler-lessee and the buyer, a
buyer-lessor. The machinery has a carrying amount of Pl,800,000
accumulated depreciation of Pl,200,000. 'net /
A sale and easeba k t ansaction may occur when the
Books of seller-lessee
seller-lessee 1s expenencmg cash flow or financing
problem r because there are tax advantages in such an 1. To record the sale:
arrangement
n the lessee's jurisdiction.
Cash 2,000,000
Accumulated depreciation 1,200,000
Mo,reover, the seller•lessee would like to avoid the burden Machinery a,000,000
of paying the executory costs attendant to the ass t, such as Gain on right transferred 2'00,000
repairs, insurance and taxes.
2. To record annual rental:
Transfer of the asset is a sale
Rent 300.000
expense 300,000
IFRS 16, paragraph 100, provides that the tran er of an ass t Cash
must satisfy the requirements for the recognition of salem The seller-lessee used the operating lease model 'because
order to be accounted for as sale and leaseback. the lease is short-term or one year.
.d
The important cons1 era
t· · n a sale and leaseback Books of buyer-lessor
ion l
· f two separate an d di8 me
tr ansaction is the
· ,,.; 1. To record the purd;hase;
recogm w ono
transactions.
. . . t t to note that there is no physical M.achinery 2,000,000
trans/
Howev
1t 1.s 1mpor an
er of a8Set. Cash
I
.2.000,000
2. To record the annual rental:
First - there is a sale. Cash 100,000
ment for the same asset in Rentjnc:ome
Second - there is a lease agreed tl'ie buyer is the lessor,
which the seller is the lessee all 3. To record depreciation of the mach nery:
H , t and h ale price are usually Depreciation 200,000
. t e s mterdepen,dent as they .are neg
. owev(!r, the lease ren o tiated 88 a package.
 Acctnnulated depreciation
(2,000,0()0 /10)
493
4
 Disclosures - Lessor
A lessor .shall disclose the following aniounts for the
reporting period;

1. For finance lease:

a. Selling profit or loss

b. Finance inco e on the n t investment in the lea.c;e
c. Income relating to variable lease _pay ents not
included in the measurement of the net mvestmerut
in the lease CHAPTER15
2. For opera.tin lease, le se income, separately disclosing
income relatmg to vanable lease p-ayments that do not
depe11d ori an index or rate
SALEAND LEASEBACK

Additio,nal disclosures
A lessor shall disclose additional qualitativ:e.and quantitative
information about leasing activities nece.ssa:ry t.o as&ess the
effect of lea-ses on financial position, financial performance TECHNICAL KNOWLEDGE
and cash flows,

This additional information includes) but is not funited to, Tb define a sale and leaseback.
nformation that helps users of financial statements o
assess: To recognize a sale and leaseback on the patt of
1. The nature of tbe lessor's leasing activities . the lessee.
2. How the lessor manages the l'isks associated with To recognize a sale and leaseback on the part of
a:ny rights it retain in the unde.rlying .asset. the lessor.
· In partfoular, a leaeQr shall disclose its risk tha1
01anage111ent trate y for the rights it retains in
To know the recognition of a transfe·r of asset
underlying asset, l cluding any me.ans by which the is not a sale.
lessor reduces thst
nd. -

4'1
All rights belongs to respective authors
. v· .i V ·)
 r
al sale of underlying asset
Exercise of purchase option ctU
.a lessor actually sells an ass t th •
At this point on Dece n:1-ber 31, 2023, if the entries are V'bell 8 finance lease the d -, e at it has !been leasing
under - . ' "" erence between the sale price
Prope d
t d the lease receivable has balance of P200,0ooe tl a a 1:,e c(J,rrying amount of the lease receiuabl . . d
pos e • . h d . . . <lUaJ to
1 ,· loss e is recognr,ze
the purchase option and t e unearne 1nterest income h
a a ill pra ,i eor •
zero balance.
fhe carry-ing aruount the lease receivable is equal to the
0

The putchase option is exercised by the lessee on December

alaJlce of the lease receivable min, us
btheu nearned erets
31, 2023. ·mt
in-corne.
Journ-lentry
naustration
Cash 200 000 An entity actually sold an equipment that it had been leasing
Lease receivable 200,000 under a sales type lease for P3,50O,OO0.

Nonexercise of.purchase option The following balances are assoc.iated with the finance lease
on the boo-ks of the lessor on the date of sale:
The purchase option is not exercised bythe lessee and the Leasereceivable
fair value of tbe underlying asset is Pl00,000 only. 5,000,000
Unearned interest income 1,200,000

Journal entry Computation

lnventory 100,000 Sdeprice 3,500,000

Loss on -finance leas:@ 100,000 Carryingamount.Qflease receivable:
Lease receivable 200,000 Lease receivable 5,000,000
Unearned interestincome (1,200,000) 3,800,000
ss on sale ofleased equipment ( 300,000)

Journal entry to record the actual sale

Cash •
Ullearnad interest income 3,500,000
lo:ss on sale of leased equipment 1,200,000
aee receivable 300,000
6,000,000

473
I
L
 - 1 try - January 1, 2020
Journa en f
· tual system is used1 the journal entry to r .Journal entries
If the pe pe eeo
o@
the sale 1:s:
Cash
2,200,000 D�- 500,ooo
1,ease reteivable 1,100,000 31 Lease receivable
500,000
Cost of goodssold 1;803,00o 31 UnIearned int.er·est in
Sa]e5 ' come
Unearnedinterest mcome 397,00o nterest income 144,240
Inventory 1,000,0(io 144,240
Cash H.J0,00()
2(121
Table of amortization oec. 91 Cash
500,00()
Lease :receivable
500,000
The table of amortization of :the net lease receivable mav Sl Unea.rned intel'est income·
115,779
appear as follows: · Interest income 115,779

Date 1,2020 Payment Interest Prin.cipaJ Present vafoe

Jan. 1,803,000 2022
144;2:40 3$5,760 1,447,240
Dec. 31. 2020 500,000 Cash
115,779 384,221 1,063,019' Dec. 31 500,000
Dec. 81, 2021 500,000
85,042 414,958 648,061 Lease receivable 500,000
Dec. 31, 2022 500,000
51,939 448,061 Z.00,000
De(:. 31,2023 500,000 Unearned interest income
31 85,042
Interest income 8.5,042
Payment represents the annual rental.
lnte.re:t is eq al to the preceding present value times the 2023
interest rate. - h 500,000
Dec. 31
1. A:iase·receivable
Thus, _fo:r2020,. Pl,803,000 times 8% equals P144,240, 500,000
end:so
0 - 51,939
31 Unearned interest income 51,-939
Interest in.come
PrinciP_al t;he portion of the annual rental paytnent aft.er
d.eductmg interest. · -
Thus, for 2020, P5OO,OO0 mil'lu.s P144 240 eq.-uals p355 '760 and
so -0n. ' ·- '
P r e se n t va l u e i s t h e b.al . _ Of h after
d e d u c ti ng t h e P • • . n ee e
present value
nncrpa1 payment.
T h u s, o n 2020 . 0
l s P l3 1
e Dq eu ea ember • Pl,803,000 min\l SP355,76
4 4 7 2 d '
• , 40 an so on. · -
4'10
4
 r
Return of asset to less.or type lease with purchase o·pt·
SllJ,eS •� y is a d e aler in equipme t 0 I
When the lease e•xpiresLon DCecember 31, 2024_ eoth - . . n · n January 1 2020
ti.
an
machini'.lrY will .revert to essor ompa.ny. 11,
/111 ....en t1s leased to another entity - , th ·£ II • .
p . ·w t e o ow i ng
Whether guaranteed. or unguaranleed residual val1.1 pr ,,,•is-ions,.
0 h
µtil1,1al rental payable at the end ofeach year .
entry on the books of the lessor will be the same. e,the 500,000
se term 4years
L.ejuilife of equipment 5years
Inventory (machinery) 2()0,009 O.ts of equipment 1,000,000
Lease receivable CtJ.Sti:aldaect cost paid by lessor 100,000
1 chase option 200,000
To-complete the illustrati n, assume on Decem er 31, 20 f'llfp'·cit interest.rate. 8%
11 1 1 d'
end of lease term,. the fair value of the machinery is only
2 p ' V o,u-fan or mary
. .
f 1 at 8% for 4 periods 3.312
PI50,000. ann1 :lltY o 0.736
p'V of l at 8¾ for 4 periods

Under the residual value guarantee scenar:io, the Iesse,e

It is reasonably certain that th les.see will exercis,e the
will make up for the deficiency by paying the difference.
p11rchase option on December 31, 2023.

Cash
Inventory 50,000
150,000 Col!11putation
Lease -receivable
200,000
Gross rentals (500,000 x 4) 2,000,000
Under the unguaranteed scenario, the lessor :shall PurGhase option 2.00,000
recog e a los!;l for the difference. Gross inveetmen:t- lease receivable 2:,200,000

Loss on finance lease P'Teeent value of gross rentals (500,000 x 3.312) 1,656,000
50,000 P'resentva}ueofpurchase option (20O,O00x .735) 147,000
Inventory
Lease receivable 160,000
200,000 Total present valu.e - net investment 1,803,000

It is to be pointed out that in the illustration the sales type . GNl$Sinvestment

lease provides that the underlying asset will revert to the Al !-Jet investment
4 righ
ssor upon. termination of the contract.
1
ts Unearned interest income
bel
Howeve.r, if the underlying asset will 11,0t revert to the ong S.aleis (equal to total present value)
le.ssor, the residual value is completely ignored by the s Cost of goods sold •
lessor,in the computation of unearned interest income and res
pec (11'088 uicome
gross profit on the sale.
tive
aut clequipment
The nderlying as;Set will remain with the lessee if the lease h Initial direct cost
proVl_des for either a purchase option that is re.asonabIY . . . .

chert.a.in to he exercised iOr transfer of title to the lessee upon !of gooduold
t e lea.1;re expiration. ,
469 2,200,000
(1,803,000)
397,000

1,S0
3,00
0
1,10
0,00
0
703,000

1,00
0,00
0
100.,000
1,10
0,00
0

All rights belongs to respective

auth •
• •

I -
 1 ..}e of amortization
Computation 'fil. "
Cost of
machinery h•e table iamortization of the ne
PV ofunguaranteed residual value 2.000On,,. T gttr as follows: t lease receivable may
( •~"\l aPJl
Cost of goods sold Payment
) 09.tiE! Interest
l,875 "'" Ptincipal Pre ent value
Sales equal to pre.sent value of gross re- 1111.2020 '
ntals
only, excluding the present value Qf the 1zJ3i/2:020 800,000 .315,682. 3,156,820
484,318
unguaranteed residual value 121Sl/Z021 800,000 267,250 2,672,502
3,032,640 532,750 2,139,752
Cost of goods sold 12.131/2'022 800,000 213,975
lnitial direct cost (1,875,820) 800,000 586,025 l,553,727
i2/31/2.0Z3 155,373
644,6-27 909,100
Gross income ) t:?.131/2.024 800,000 90,900 709,100 200,000

Note that the gross income mu t be the same un-der the

guaranteed and ung-uatanteed residual value scenario.
December 31J 2020

Journal entries p Jllent ..\. 800,000

Applicabl terest (10% x. 3,156,.820) (315,682)
The journal entries to r,ecord the sale and the initial direct App11icable to principal 484,318
cost on January 1, 2020 under the concept of unguaranteed
residual value are: et lease receivable - January 1, 2020 3,156,820
Payment on December 31, 2020 ( 484,318)
Lease receivable ryingamount-Decembei:31, 2©20
4,200.000 2,6'12,502
Costof g-oods sold
1,875,82.0
Sales 3,032,640 ether guaranteed or unguaranteed, the entries for the
Unearned interest income 1,043,180 collection of the annual rental and the interest inco-me are
Inventory 2:,000;000 the same.
Co.st of goods sold 100,000
Ca1;1h Journal entries - December 31, 2020
l, ·-Cash
800,000
Lease receivable 800,000

2. lJne e.dinterest income 316,682

Interest income 31-5,68-2
466
46'1
 Residual value guarantee
' tfpgilaranteed residual value
Gr&9srentals (8O0_,ooo x 5)
!]Jlg'la,ra.nteed residual value 4,000,000
Gross rentals (800,000 x 6) 200,000
r.easereceivable- gross investment
Resid.ual value guarantee <l,O(Jo nr.... 4,200,000
2 ·'"Vil
present value or. grose rentals
Lease receivable - gross investment 3,032,640
4,2fln flnA present value of unguaranteed res1-duaJ value
124,180
Present val1,1" Qf gross rentals (800,000 x a.7908) ,n ,.tal present valu.e -net inv·est·ment
· iu
3,lS.6,820
Present value- of residual value guarantee 3,oa2. 0
(2:QQ,Q0QX .6209) r.ease receivable
4,20-0,000
,rotalpre:sent value
(3,156,82:0)
Total present value - net investment
Unearned int.erest income
1,043,180
Lease receivable 4,200,[)0(I Observe that the lease receivable an .
Total pres·ent value
· come are the sa. me wheth d. u earned cnterest
in- . e scenano 1s guaranteed or
e
h
Unearned interest inc me _104;3 unguaranteed residual value. ·
Sailes equal to total p,resent value 3,156,820 However1 there is a c;tifference in the computation of the sales
Cost of goods sold- w t of machinery (2,000,000) and aost of goods sold.
lnitialdirectcost ( 100,@00J
Gross income l,056,g20 Under the resi ua.l _ value guarantee scenario, the present
value of the :i,-es,1d1,u.d value is i1'1,cl1,1,ded in the sales
Journal entries on January 1, revenue because the lessor knows that theentire asset has
2020 been sold.

Lease receivable 4,200,000

Cost of goods sold However. under the ungua.ranteed residual ualue scenario,
.2,000,000
Sales 3,156,820
the present value of the ungua:ranteed. residual value is n.ot
Unearned iAterest income 1,043,l.SO included in the sales revenue.
Inventory 2,000,000
Accordingly, the present value of the ung1,1aranteed
Cost of goods sold 100,000
Cash residual value is deducted from the cost of the underlying
100,000
asset in computing cost of goods sold.
The im.itia.l direct cost is charged directly to cost of goods
solti.. The reason is that this portion of the leae.ed asset is in effect
"not sold" in the sense that; the lessor will be_ recejving b ck
e.t the end of the lea'se term the underlymg asset with
uoguaranteed residual value of P2 0,000 and present value
of Pl24,180.
M . te d residual value is n o, ct onsidered
oreover, the ungu.aran e d ·
lease payment as far as the lessee is concerne,

464
 .
•
 r
Journal entries 51J1e, s type lease with residua)_va1 ue
On the books o.f Leasor Company, the sales type 1_ ltJ5
sot Company is a dealer in tnAcb·Ulery,
ll0· ws· aise·1e
recorded
1. a 6 10 the
To record ·
sale: on Januaryll l,l':
2020,
· a mac.hiner
. . ·Y
· eased, to another entity
1
· b the 10 owing provisions:
o;\'l

Lease receivabie 2,000,000.

AJlilu.al rental pay3:-ble at the end of each year 800,000
Sales 1,44O,0(Xj
[.ease terr.n . 5 years
Unearned interest income 560,00Q efal Life of machinery 5years
ll
The gros_s pr fit of P440,000 i not sepa.rately recorded s hi
Co!itofrnac nery z;,000,000
because 1t 16 mcluded already m the sales revenue. gst,itn.ated residual v_alu.e 200,000
Initial d.irect cost ]Jrud by lessor 100,000
2. To reco d the cost of goods sold, BSS\.1-nling the perpetual 1i,plicit interest rate . IO%
system 1s used: Present value ?fan ordmary annuity of
1for 5, penods at 10% 3.7908
Cost of goods sold. Present value of l for 5 periods at 0.6209
1,000,000
10%
Inventory 1,000,000 At the end of the lease term on December 31, 2024, the
3_. To r-ecord the collection of the annual machinery will revert t,oLessor Company.
rental:
Cash
Lease receivable 400,000 The perpetual inventory system is used.
400,.000

4. To record the interest income for 2020:

Unearned interest income

172,800
Inter-est in.come'
172,800
Present value -J a:nuary 1, 2020
Deoembe,r 81, 2020: 1,440,000
Payment.
400,()()0
Interest for 2020 (l2% x
1,440,000) (172;800) 227,200
Bhlanoe-De-cember 31, 2020 1,212.
46 All rights belongs to respective uthors
.. . .a -)
 r ruustr-atiort
Introduction
. a sales type lease is actually a mami.fa,.t or' Company is a dealer inm h.
The ff ac mery.
, ses the Mease as a means o J.,eS.S
les'shotrm •li "
am tat;ing th r,_
Ute
dealer t a,U e flak1
of product. · January 1, 2020, a machin
011 w·th the follo . e was leased to Legsee
comp.a.UY wrng provisions:
The accou·ntin' g for 3 sales. typl e lease exhibits many simil
.
¾ ti,
to that for dixect finanCJ.llg ease. ual rental payable at the end of each
400,000
year
5 years
H ever a sales type lease involves the recognition f easeterm . .
m ufact'u er or _d aler profit on t trans er of th asse 5year
trsefullife of_machinery 1,000,000
the lessee in addition to the recognition of mterest mcomoe. costof machinery 12%
1plicit interest rate 3.60
Accounting consideration ;esent value of annuity of 1 for 5 years at12%

Gross irwestmerit -This is equal to the gmss rentals for tbe Cotllputation
entire lease term plus the absolute amount of the residual I
2,000,000
value, whether guaranteed or unguaranteed. Gross rentals (400,000 x 5) 1,440.000
Present value afr ntals(400,000 ,c 3.60)
560,000
Recall that this is the same gross investment in a dired Unearnedinterest income
financing lease. 1,440,000
Pre nt value of rentals - sales 1,000,000
Net inueBtmen.t in the lease - This is equal o the presen\ Cost of machinery - cost of goods sold
440,000
value of the gross rentals plus the present value of the Gross profit on sale
residual value, whether.guaranteed or ungua.ranteed.
460
Unearned interest inc.o.me - This is the difference between u
the gross investment and net All rights bel oin the tease.
inv.e!;ltment espectiv a
.
Sales - The a ouilt is equal to the n t inv:estment in the
lease (present value of lease paymerits) or fair value of the
asset, whichever is lower. ·

Co-st of gr,ods- sold - This is equal to the cost of the as et

sold minus the present value of u guaran.teed residual value
plus. t h _e initial direct cost paid by the lessor.

Gross profit -This is the usual formula of sales minus

c.ostof
goods sold.

Initial direct cost -Thie amount is expensed immediatelY in

a sales type lease aa component of cost of goods sold.
A manufacturer or dealer lessor shall recognize
selling profit or loss in income for the period in
accordance with the policy fol.lowed by the entity
for outright sale. ·

4
6
1
 Table of amortization
l
Date Payment Interest Principa Pre eht
v•l11.e
1/1/2020 3,449,soo
1/1/2020 800,000 800,000 2,649,60()
1/1/2021 800,000 211,968 588,032 2,061.s68
1/1/2022 800,000 164,925 635,075 1,426,493
1/1/2023 800,000 114,119 685,881 740,612
1/1/2024 800,000 59,388 740,612

Interest is equal to. the preceding present value times tb cl{APTER 14

interest rate. The first rental payment on January 1,2
pertains to principal only. 020

Thus, on January 1, 2021 the intP.rest is equal to P2,64'9,60()

times 8% or P211,968. This interest income pertains to 20·20 sALES TYPE-LEASE - LESSOR
Principal is the portion of the rental payment minus the
interest. Thus, on January 1, 2021, PB00,000 minus
P211,968 equals P588,032.
TECHNICAL KNOWLEDGE
Present value is the balance of the present value minus
the principal payment. Thus, on January 1, 2021, P2,649,600
minus P588,032 equals P2,06l,568.
To understand a sales type lease·on thepart of
2020 lessor.
Jan. 1 Lease receivable 4,000,000
Machinery 3,449,600 To define gross investment and net investment in
Unearned interest income 550,400 a sales type lease.
1 Cash
800,000
Lease receivable
8()(),000 To rec·ognize profit on sq,le and interest income in
Dec. 31 Unearned interest income a sales type lease.
Interest income 211,968
211,968
21
Jan. 1 Cash
Lease receivable 800,000
avo.OOo 4-59
Dec. 31 Unearned interest income
Interest income 164,925 All rights belo..ngs to r
espec
 irect financing lease _t
J urnal enfrie.s P ransfer 0 · Lt e to lessee
January 1, 2020, Lessor Com
On ·t · h . , Pany I
2020 4,400,000 other ent1 Y wi t the fo l l o w · eased a machinery to
1
Lease receivable 9 11 ing details:
Ja Machinery .
Unea.rned interest income
a.1so.100
639, Cost of machinery
R idual value 3,449,600
1 Cash
Lease receivable
1,000,000
1,000,0(X]
u:;f Info and leas,e term
llllPlicit interest rate
500,000
5 years
8%
Unearned interest itlcome 276,<H0
Dec. 31 Th annual rental is payable in. a.dvan,ce
Interest ineome ?76,010
year starting January 1, 2020_ · on January l of each
2021
1,000;000 The lea.seprovides· for a, transfer of ti.tle to the lessee at the
Cash
Jan ..
Lease1·eceivable 1,000,000 ert.d of the lease term.
l
Unearned interest income 203,611 '!'he present value of an an.nuity of 1 in, advance at 8% for 5
Interest income 203,611
Dec. 31 periorls is 4.312.
2022
Cost of machinery to,be recouered from rental 3,449,600
Jan. 1 1,000,000
Cash Divide by PV of sn annuity of 1 in advance
Lease receivable 1,000,000 4.3l2
at 8% for {, periods
Dec. 31 Unearned interest income ]23,972 800,000
Annual rental
Interest income 123,972
Note well that if the machinery will n,ot r vert to the lessor
2023 at the end'.of the lease term because he lease p ovides
Jan. 1 Cash l,000,000 fora tremsfer of title to the lessee, the re$idual value is
Lease receivable 1,000,000 completel! ignored in the computation of the annual
rental and the
Dec, 31 Unearned interest income 36,307
36,307 llnearned interest income.
• Interest income
2024 Note also that the annual rental is pa able ina vance.

Jan. . d ce or Qnnuit,Y due factor is

Thus; the annuity of 1
1 On this date, the fair value of the machinery is i a van ·
P300,000 only. Since the·guaranteed re·sidual va]u 1
used in the computation.
is P400,000, the 1-essee will pay for the difference 4,000,000
0

PI00,000. Gross rentals (800,000 x 6 year.s) 3,449,

et investll'.lent - cost of piachinel'Y 550,400
Cash 100,000
Machinery 300,000 Une ned interest i,ncoDle
Lease receivable
44 I
II rignts belongs to respective 441
All rights belongs to respective authors
. . . . V
au
. ' i .
 ....mputation of annual
C
v ·

Accounting problem 0 stof1Pa.chinery

:esent va.lue ofresidual value , 3,760,100
Th,e ccou_nting problem i when the fair val i· _ . . 4,OOOx.683)
)'l'et wvestment to be recoi,ered fr ( 273,200)
machinery 1s P400,000 which 1s lower than the . ue of o·,;ide byPVof annuiity of 1 in ad 0111rent.a.J
th 3,486,900
1
st IO% for 4 periods vance
of P500,000. · resJ.dua1"'a.Ju:
3.4869
p.ortual rental
Under the guaranteed scenario, the lessee will a 1,000,000
difference. The journal entry of the lessor is: p 'Y fo:r th6 Nt'lte that the rental is payable in .a
Cash of each year. Thus, the "annuit /v nce at the beginni g
100,000 O 1
Machinery used in the com putijtion. Y m advance factor" 1s
Lease retf3ivab1e 400,000
soo,oao
Under the ungu::'ra-nleed scenario, the lessor shall•1 Gross rentals (1,000,000 x 4 years)
4,000,000
a loss fol" the difference. . R,e,sidual value - guaranteed
400,000
ecogmze orossinvestment
Net investment - cost of machinery 4,400,000
Loss on finance lease 3,760,100
Machinery 100,00Q
Urtearned interest income 639,900
Lease receivable 400,000
500,00(1 Payment lnte:rest Present value
D111te Princiipal
Direct :financing lease - with residual value 1(112020 3,760,100
0 J 1 · . 1/1/2020 l,000,000 1,000,000 2,760,100
n anuary • 2020, Lessor Company leased - hin J/112021 1,000,000 276,010 723,990 2,036.UO
another entity with the following details: a ma.c ery to 111'2022 1,000,,000 203,611 796,389 1,239,721
1. /112023 t000,000 123,972 363,693
876,028
Costof ma hinery l/112024 400,000 36,307 363.693
Residual value guaran.tee 3,760,100
Useful life and lease term 400,000 ln.lerest is equal to the preceding pl'esent value times the
Implicit interest rate 4 years interest ·rate.,The first rental payment on Janua.ry 1, 2020
HJ% pertains to principal only.
The annualrentalis.pa abl. '(}, s, o January 1, 2021, the100 intere t i.s equal to 2j_760,

year statting January i,20; a uance on January 1 ofeaeh bm.es I 0% or PZ76,0lo. This interest mcome pertains to 2020.
s·ince the residual value is , , Principal is. the portion of the rent?l payme t minus the
rerJert to the lessor at th dguoranteed, the mqchinery wdl int:erest. Thus, on January 1, 2021, Pl,000,000 mmus
· e e,i · ( the lease ternt. P276,010
The relevant present value tactors are: equals P723,990.
Present value is the balance of the present value minus tbe
Pres,mtvalue ofl at 10% f . p•tincipal payment.
· 4 per1ode 'I'hu.s on J"' 1 20-21 p·2 760 1.00 rt1inus P723,9l10equals.
or 0_6830
Preae t value of an . 3.4869
at 10¾ for 4 peri :wty ofl in advance
P2 I - a.nuary , > r I

,036,110.. ·
4
3 All rights belo..ngs to r ..a
espective
9
 Direct financing lease - with residual value '{'llble of amortization
On January 1, 2020, Lessor Co pany l ased a machiner Date Paylllent Inter st
Principal Prf!sentva.lue
another entity with the following details: Ytr; 11112020
900,000 3,l94,4J0
Cost of m.acbinery 1213J.12020 900,000
319.4411 580,559 2,613,851
1z13112021 261,385 638,615
Residual value 3,194,10 12131'2022 900,000 1,975,296
197,524
Useful life and lease term 500, 900,000 127,240
702.476 1,272,760
4Year 121311202a 772,760 500,000
I mplici.t interest rate th
fntertsl isequal to e preceding present value times the
10'

The machinery will revert to the lessor at the end of the 1 interestrate.Thus, for 2020, P3, 194,410 x 10% equalsP319,44
ter i because the,·e rt.either a transfer of title nor a pure !
option. l. p,-inc.ipal istheportion of the rental after
deductinginterest. Th\ts, fot 2020,P900,000 minus P319,441
The problem is the determmation of the annual rental. 'rhe
annual rental is payable at the end of each year with the equals P580,559.
first payment on December 31, 2020. The relevant present p;esent ualue equals the balance of the present value minus
value factors are: the principal payment. ·

Thus, on Decemlier 31, 2020, P3,194,410 minus P580,559

equals P2,613,8511..
PV of 1 at 10% for 4 periods
PV of an ordinary annuity of 1 at 10% for 4 .6830 Journal entries for 2020
periods 3.1699
L To record the direct financing lease:
Cost of machinery 3,194,410 Lease receivable 4,100,000
( 341,500) M chinery 3,194,410
Present value of residual value (500,000 x .683) 905,590
Unearneclinterest income
Net inv,estment to be recovered from rental 2,852,910
Divide by PV of an -0rdinaty annuity of 1 at 2. To record the collection of annual rental:
10% for 4 periods 3.1699 900,000
Cash 900,000
Annual rental 900,000 Lease receivable
Note that thepresent value of the residual value ie deducted 3. 'I'o record the interest income:
from the cost of the as.set if the machinery will revert to 319,441
the lessor at the end of the lease term. Unearnedinte:restirtoome 319,441 ·
Interest income
Otherwise, if the machinery will nQt revert to the le.ss-0r . D . mber 31, 2023, the
Whe·n the lease exp1.res on . eoe
at the end of the lease term, the residual value is completely machinery will revert to the lessor.
ignored. . nteed" the entry on the
' Whether "guaranteed" or unguara '
Gross rentals (900,000 x 4-) 3,600,000 books ·oi the less'or will be t;b@ so.me.
Residual value (whether guaran ed or unguaranteed) 600. 500,000
l.fachinery 600,000
Gross investment Cost of machinery - net investment
Unearned interest income 4 100.00° Lease receivable
437
9()5,690

486
■
fbI UF.ICll.!IMl.t.f.L-11.1&.!
Journal entries Journal entries
Machinery (initial direct cc;,st) 66,300
"'he reoognit. ion of interest 1·.n..come .
Cash
1
recorded as. or the first two years is,

Lease receivable 2,000,000 lJne.a.rned. interest incom

Machinery lnter st income e 158,495
Unearnedintere:st income 158,495
2021
The annual collection of the re tal is rec,orded as: pee. 31 Unearned interest income
Interest income 124,344

Caslt 500,000 124,344

If a statement of financial positi ·
.
Lease receivable 500,00() • December 31 2020 th le on 15 prepared by the lessor

The unearned interest.income of P415,050 is recogni.1.ed as oun ld be reporte'd as p'artl:y. ase receivable of Pl,500,000
income over the lease term following the effective intere t wo . current and partly noncurrent.
cur.rent portion
method of amortization. Lease rec-eivable 500,000
Unearned inte:re•st income (124, 44)
Table of amortization
Ca.rrYing amount 375,656
Date Payment Inter-est Principal Present value
Noncurrent portion
Jan. 1,2020 1,584,950
De . 31,2020 500,000 158,495 341,505 1,243,445 Ltase receivable 1,000,000
Dec. 31,2021 500,000 124,344 375,666 867,789 Unearned intereet incc;,me ( 132,2;11)
Dec. 31,2022 600,000 8(3,779 413,221 454,568 867,789
Cairyiog amoWlt
Dec. 31.2023 ,600;000 45,432, 454,568

Paymen,t represents the annual rental. IFRS 16. paragraph 67, st.at.es that lessors .shall recognize assets
held under a finance lease as a receivable at an amount equal to
Interest is equal to the preceding present value times the
interest rate. the Mt iriuestment in the l.ease.
I
Note that the unearned interest mcorne which is realizable
Thus, for 2020, Pl,584,950 times 10% equals P158,495. within one ye .r from December 31. 2020 is deducted from
the current lease receivable.
Principal is the portion of the rental payment after deducting
the intere,st. · , The ng por,t' 1O.n LS dedl.ucted from the noncurrent lease ,
remai.ni.
receivable.
Thu , for 2020, P500,000 minus Pl58,495 equals P341,505. equals Pl,243, _ ' ·
• 445 Uneamedi11tere
etincome
fres n! value is the balance oi the preceding value aftet 1,5-84,,950 mrnus P34,
Realtt.ed.in 2020
-edu-chng the prin.cipal payment.
(eee taible)
Thl\e, on De ember a1 2020 p . 1 506
ala.nee,December 81, 2020 415,050 124,344
r.ealizable in 2021 lr.8,495
132,211
Realiz.able beyond 2021 2 ,65q

48li
All rights belongs to respective.aut

■ -,-11--1-..1a. .' -
.
484
l'l - -
 [Jtputation of new irnpI· .
Co Lc1t
Direct financing lease - with initial direct "'he pew implicit rate is corn
. Ot
tbi tollgh' the inter.p. ol at·ion . procPesust .ed by trt·a1 and error or
On JanuaIY ]., 2020, Lessor Company leased a maeh·
another entity with the following details: t.nery t,-, ,rite 0ew jnterest rate i:s definit 1 .
otild be 11 %, 10% or 9%. e Y lower than 12% and it
Cost of m.;ichinery 1,518,6,l{
Annual rsntal payable at the end of each year 500,fXr;
Lease-term 4yi,
The procedure is determine the r .
Useful life of machinery en ls that would equate then _esent value of gross
4Ye¾I 5t
Implicit intErest rate before!initial direct cost 12 f pt,584,950 using a. part.ic1.1larr:tei.nve meot in the lease
Present value of annuity of l for 4 years a 3.0:3i3
12% Using 11%, the present value oE an . di
On J'\lnuary 1, 2020, Lessor Company paid initial direct C·OSi periods is 3.1024. or nary of1 at 11% for4
of P66,300..
The ini i.al direct c?st is adde to the cost of the mach nery
Thus_, t e present value of gross rentals is equal to P500 000
multiplied by 3.1024 or Pl,56 ,200. - '
1G
determm,e the net investment ui the lea.se.
Cost of machinery
Initial direct cos-t l,.Si.S,650 fbi,5 amount is. not the same aa the net investment in the
Net investment in the lease
I 661300 lease. The new mt!;!res t rate is not 11%.
1,584,950
Using 10%, the pr?sent value of an ordinary annuity of l at
The inclusion _of the initial direct cost in the net investment 10% for 4 periods 1s 3.1699.
in lease will have the effect of spreading the initial direct
cost o,ver the lease term and reduce the interest income from Thus, the present value of gross rentals is equal to P500,000
the fi:J\ance lease. multiplied by 3.1699 or Pl,584,950.
GroSB r.entals
Net investment in the lease 2,000,000 Coincidentally. this amount is the saroe as the net
1,684,950
Unearned interest income investment in the lease.

-
4L5 ,0 In conclusion, the new interest rate is 10%.

50
On$e•qiiently, the, initi:id clirect cost would decrease applied
iniplicit nymore because of the added initial di ct cost. .
mterest rate in the lease.

!he r b em therefore is the determination of the reduced

Lmpbc1t interest rate. ·

a The original ·rmplic·it . i· nterest.rate o.f 12% c·annot be

 determining the annual mtere.st mcome. _
Accordingly, the reduce intere l rate of 10% is used in

4,SS
43
All rights belongs to respective auth
I . v·I ·l!· l•
I •
 fllble of amortization
tnust1'at.ion - Direct financing lease
e unearned interest incorn
On J.a.nuar)' 1, 2020, Lessor Company leased a lhachi : Jesse term following the\f P4_8l,350 ·8 recocn..; d
another entity with the following details: ner;, to pate ective int LLze over
i; ..

PaY1llent Int e:rest metho<i.

Cost of machinery erht p . .
1,-618,65() Jflll. 1, 2020 rincipaJ I->re ent value
Annu.al rental payable at- the end of each year
500,0<X)
vec. :n, 2020 500,ooo 182,238
Lease term DeC· 31, 2021 500,000 317,762 l,018,650
4ye<l?s 144,107 1,200,888
Useful life of machinery De<:• 31, 2022 500,000
101,399 355,893
Implicit interest rate 4ye nee, 31, 202a 500,ooo 398,601 844.995
Present value of annuity of 1 for 4 yearsa 12% 12 53.606 446,394
3.0373 446,394

payment represents the annual

The initial problem is the deter ination of the annual rentaJ rental.
which will give the lesBor a fair rate of return on the net
J,derest is equal to the precedi
interest rate. Thus, for 2020, p \fresent _ value times the
investment in the lease. Pl82,238. ' 8,650 hmes 12% equals

T!he procedure is to divide th,e "n.et investment in t le-OSe to Principcil is the portion of the rental
be recovered from rerttal" by present ua.lue factor of an annuify the interest. Thus,for 2020 PS00 ay_ment after deducting
of 1 fer a numb-er of periods usin,g a desired rate of retum to ?3:17,762. ' j 0 mmus Pl82,238 q\lals
get the annual rentai.
Presen,t ualue is the balance of th .
Computation deducting the principal payment. e- present value after
The annual r.en.tal is computed by dividing the am.cunt of Thus, on December 31, 2020, PI 5 . p
Pl,518,660 by the present. value factor, 3.0373. of an annuity equals P1,200,888. • 18' 650
mmus 317• 62
of l for 4 years at 12%, or P500,000.
Recognition of interest income
Gross rentals or leaEJe receivable (600,000 x 4 ye8l's) 2,000,000
Present value of gross rent.ala (equal to the net he effective i11,terest method is used in recogni2ing interest
investment in the lease or cost of the machinery) l,fH8,650. UJcome.
Unearned interest income 481,350 WRS 16, _paragraph 75, states that the lessor shall
Lease receivable recognize nanc_e 1n_come over the lease terin based on a
M.ac·hinery 2,000.000 patt-ern retl cting a constant periodic rate of return on the
1,518,650 lessor's net tnves.tment in the lease.
Unearned interest incom.e
481,360 202()

ThBc annual collection of the rental is recorded as :folloVIS: 431

Cash Dec. 31 Uneamedinteres.tincome 182,238
500,000 ln rest income
Lease receivable

Unearned. interest income 1-44,107

Interest income
182,238

144,107
 7 fJNJ\NCE LEASE CLASSIFICATION

!l
the part of the lessoe
00pirect- fmancmg
. ,
leas€
Sales type lease
8
fi:
nance leas l!s eith r:

CHAP·TER 13
The main distinction between the tw .
b.sence cf a manufacturer ord
:e • ,
l °
the presence
ea 1er ptofit or loss.
01

<ljl'ect financing leas,e recoco:,n ·tzes only ·.int

A
A 6g}.es type .lease re-cognizes inter . eres,t income.
DIRECT FINANCING LEASE-LESSOR n s'11e. est mcome and gro s profit

Direct :financing lease

The lessor in a di1·ect financing lea . -. .
the financing business. Thus a dir!::Sfiactu ly lsngag d l.I'J
t b t fi ' . nancmg ea e is an
TECHNICAL KNOWLEDGE arrangernen e ween. a nancmg entity and a lessee.
The i come oi the lessor is o ly in the form of interest
inctime.
To know .the finance lease classification on the No dealer profit is recognized because the fair value and the
part of lessor. cost of the asset a.re equa.l.
I

To define a direct financing lease. Accounting considerations

a. Gross inl'estmenl - This is equal to the gross. rentalis for
the entire leaM te.rm plus the absolute a.mount of trie
To distinguish a direct financ.ing lease from. a residual value, whether guaranteed or ungua.tanteed.
sales type lease. '
' b.. Net investment in the lease - This i.s equal to the
co&,tof the·asset plus any initial direct cost pa-id by
To understand, gross investment and net the lessor.
investment in a direct financing lease·. .c. Unearn,ed interest inl:ome - This is the difference
between
To recogniz:e interest income in a direct financing the gross investment and net investment in the lease.
leaee using the effective interest me.thod. d. lni.tia.l direct cost - In a direct financing lease, the initial
direct co'st paid by the lessor is _added to the cost of the
asset to .get the net investment rn the lease.
The initial dire.ct QOS t would effectively spread the initia
direct cost over the lease term and reduce the amowit o,
intere t income,
428

429
All rights bel ngs to r_espective_ All rights bel ngs to r_espective_ utho
I I . I
 8. Themlalchinery is depreciated
annua Y· ov r 10 Year
or P300,000
Depreciation Illustration
Accumla ddper e c i tion
ased. office gpace to another entity for
300,000 Aye Company beginning January 1, 2020. a
1
.
three-year per10
ote that th de-pr ci tio 18
. 300,000
0
f the operating lease, rent for the 1lr
January 1, 2020 and not ; fronith date of ac urnition Under the terDl d rent for the ne-xt two years, Pl,250
0
omApril 1, 2020, date of lcaac'. yearis Pl,000,0 an '
9nnuttlly.
Th reason i that the mach· . ._ducement to•enter the lease, Aye grante:d
pu1·poses and alreadyavauln:fY 18acquired for leasing However, 88 anfi lilt5 ix months of the lease rent-free.
meaning for rental from Jo,.a, e for the· ntended use, the lessee the rs
.......uary 1, 2020.
Total rental for the lease term
Idle property is subject tod • .
available for the intendedus: reciatron as long as it i 500,000
2020 (1,000,Q{)O X 6/12)
1,250,00(0
2021 1,250,000
9. The initial <l.irect co t i recog · d 2022:
lease te.rm. . nize a expense over the Total rental for 3 years
3,000,000

Amortization of initial direct co13t 1,000,000

Defenedinitial direct cost 75,000 Average annual rental (3,000,000/ 8)
(300,000 I 3 x 9/12)
75,000 Books of Aye Company- Lessor
The balance of the deferred initial direct cost shall be
500,000
presented as an addition to the carrying amount of 2020 Cash 500,,000
nwchinery. Rent receiv:able
Rent income 1,000,000

Un_equal rental payments 2021 Cash 1,250,000

Rent income 1,000,000
Rent receivable 250,000
IFRS 16, paragraph 81, provides that lMse pa.yJttents under
an operating lease shall be recognized as income on a Rent income for 2020 and 2021 2,000,000
straight line basis or another systematic basis. Renteollected (500,000 + 1,750,000
1,250,000) 200,000
This simply means that where the operating lease requires Rent receivable
unequal cash payments, the total cashpaymen!s for_the lea e 1,250,000
202Z Cash 1,000,oOO
term shall be a1mortized uniformly on the straight line basis Rent income 200,000
Rent receivable
as rent income over the lease term.
418

lltdl!
Not.e that the rent receivable has
a zero balance 0: December 31,
2022 and. the recorded rent incom-
e eac year i.s Pl,000,000.

4
1 All rights belo.ngs to r .. ut
.espective a
4
111t.;.1
r Ulustratio
. n
. Simple Company purchased
operating lease - Lessor 0 Janual'Y 1 290 000 cash for thepurpose_ofleasnt
1. n 1 inet'Yfor P ,O ' ted to have a 10-year life and [
rRB 16, paragraph 81, provides th t mac i
·1·t 'The h'ne
mac il e
is e:xpec r.,
I se payments frolll operating a a le or shall recognize r esidual VfJ 3,000.000
1
JeB,,;oht line basis Ol' ahother .syete.ase a income e:ither orl a u. ·
strP'"P 3 mane basis.
Machinery 3,000,ooo
-r1ie Jessor shall apply another systernat' b . . . . Cash . . le Company leased the machine
entative of the pattern . h- LC as1s if this LS more IQ
On April 1,202 -f,mpars a a monthly rental P5O,0,oo
,epre5 of
- in w icb b fi fr
of the underlying asset is diminished. ene t omt e use 2. another entity r-0r y, e.g of every month.

O·t·herwis. e .s·t-ate . the .P€ri.oru.c: ren·tal _ bl,e at tbe beginmn

. . d b y the lessor pa ya 9 · 450,000
re cei ve
:.,an operating 1ease is sunply recogru.· d . Cash ) 450,()QQ
(50,000X
..,. ze as ren;t in..com.e. Rent income
A Iess r shall P sentan underiyin.g a$set subject to .1 2
s·m le Company received a security

°5g0tt/be efunded upon the lease expiration.

0perat_ing lease rn
the statement. of financial position
3. On Apnpl •
600
aec.ordmg to the nat,ure of the ass.et. depos1tof . ,
600,000
Cash . 600,000
The underlying asset remains as an asset of thelef>sor. Liability for rent deposit
Consequently, the le so bears all ownership or executory .. rental Simple Company received from
easts uch as deprec1at1 n of leased property, re proper y 4. In addition to theb 'fPl20 000 on Janu'3.r:y 1, 2020.
taXes, msurance and maintenance. the lessee a lease onuso '
120.000
Cash 120,000
However, the l ssor may pass on to the leijsee the payment Unearned rent income
{or wees, insurance and maintenance cost. 5. 0 A·1l 2020 Simple Campany paid initial direct cost
The depreciation policy for depreciable leased asset shall or.P.:; ,00 S ch costs are di:red y attributable to
negotiating and arranging the operating lease.
boe nsistent with the lessor1s normal depreciation
for
similar asset. Deferred initial direct cost 300,000
Cash ,300,000
hr.itial direct cost inol\rred by lessor in an opera ting leae.e
1 ellallbe odaed to the carrying amount of t'be underlying 6. During the year, Simple Company p:n··d repair and
asset and recognized as an expense over the lease term on maintenance of P20,000.
·the
&a.me basis as the lease income. Repair and maintenance 20,000
Cash 20,00o
Any 9!-Curity deposit refundable upon the lease expiration
ahaU1:Je accounted for as liability by the lessor. 7. The lease bonus ·1s amor ·tized over 3 years or-p40• 0
Any lease hon.us received by the lessor from the lessee is annually.
reeormzed ae u earned. rent income to be amortized over Unearne:drent income
the lease-t.erm., 30,000
Rent income (40,000 x 9/12)

411
8jor part
dn,8t percentage r pre en
vi., a ntajor part?
[ it 60%, 75% or 80%?
Land and building lease
i unfortunate that th
1rovide a clearcut d fi.nition
P ;
a maJor })art
leas tandard doe n<;t
Application Guidance B55 provides that in claesif1in
on land and building, a lessor normally considers ha lea
Vnder USA GAAP, major partm ·
economic life of an asset.
part implies a p ·oportion lower ela
eans at least 75% of the
te whether a major
and building elements separately.
.
lease or a finance lease, an i mportant
eland
erar1
of co-urse, right thinking persons In determining whether the land element is an op n
50 consideration .
little a 51%, or lmplies a high X<\ID:l) e, as land normally hos an indefinite economic life. lJ! that

as 90 ¾o. _¼, for

, er proportion than 75% such
'
Substantially all Application Guidance B56 provides that the lease PaYin
• are allocated between the land and building
elemen/0. proportion to the rel?'ti e fair value of the le
sehold inte s:
Unde USA GAAP, substantially all means at least 90¾ of m tµe land and buddmg elements at the inception of the
the fair value of the leased asset. lease.
The e is room for debate over whether substantially -all
implies a threshold lower than or higher than 90%. If the lease payments cannot be allocated reliably between
the two elements, the entire lease is classified as a
Other criteria finance lease, unless it is clear that both elements are
ope:rating leases.
Paragraphs 63 and 64 provide that other situations that
individually or in combination could also lead to a lease
being classified as finance lease are: For lease of land and building· n w h· ch the amount for
the land element is immaterial to the lease, a lessor may
a. The underlying asset is of such specialized nature that treat the land and building ai:1 single un.it for the purpose of
only the lessee can use it without major modification. lease classification.
b. If the lessee can cancel the lease, the lessor's losses The single lease ie classified as a finance lease or an ope.rating
associated with the cancelation•are borne by the lessee. l ease applying the lease classification criteria /or lessor.
. .
c. Gains or losses from the fluctuation in the fair value of
In such a case, the eco'nomic life of the building is regarded
the residual accrue to the lessee.
as the economic life of the entire underlying asset.
d. The lessee has the ability to col}tinue he lease f a
secondary period at a r nt that is.substantially lowert an
market rent.
'I'hese other criteria are more tu. re meaning
· · _na . '. '
suggest1 vem
these could also lead to a finance lease classification.

409
II rights belongs to
 Introduction
Lessor accounting under the new lease standard i. husiri
as usual. a.
LtsSOJ' a,ccounti.ng under JFRS 16 i:s substantially unc
from the old lease standard under IAS 17. ang d

IFRS 16, paragraph 61, p1_·ovides that a l ssor shall class.i

CHAPTER-12 le_ases a either an operating lease or a finance lease.

Definitions
An opera.ting lease is a lease that does no tran13f
substan_tially aH th€ isks and rewards incidental
ownership of an underlytng asset. i
OPERATING•LEAsE- LESSOR
A finance lease is.le se that transfers s,_ubstantially all
the, risks and rewards mc1d.ental to ownership of an
underlying asset.
When is a lease. classified as finance lease?
TECHNICAL KNOWLEDGE Whether a lease is a finaMe lease or sn operating lease
depends on the substance of the transation rather th&n
the form of the_contract.

To understand less?r accounting in contrast to Under IF'RS 16, paragraph 63, among others, any of the
following situations would normally lead to a lease being
lessee accounting under the new lease classified as a finance lease by the lesson:
standard. a. The lease transfers ownership of the underlying asset to
the lessee at the end of the lease term.
To define on operating lease and a finance lease. b. The lessee has an option to P,UTchase the asset at a prioe
which is expected to be sufficiently lowi!r than the fair
value at the date the option becomes exercisable.
To identify the criteria in determining a finam;e
At the inception of the lease, it is reasonably c:ertain that
lease on the·part of lessor. the option will be exercised. ·
c. The lease term is for the, major part of the economjc life
To know the recognition of an aperat.ing lease uf the underlying asset even if title is not transferred.
'
o.n d. The pre ent value- of th lease paymente am?unts t
substan.tially ll of the fair value of tbe underlying
the par.t of lessor. ,. asse at the inception of the lease.
These four major criteria are determinative in nature,
meanin_g, any one of' tlhese woµld nomally result to 9
<:onclusion that the lease contl'act is a finance le.ase-

407
 Lease change in rental CoJ1lputation
1
'ficatio_n
mod
M dified lease liability-Jan
0 an entity leased equipment w·h IO(70,000 X 2.5313) \1ary l,2023
On January 1 , 202 . • it
following information. carrying amount of ]ease liability_ l 'l?,lgl
. . . January
ve,erease m lease liability · 1• 023 (209,941)
Annu.alrental payable at the en,d of l'!ach.year
· l· · - ( 3:2,750)
Lease term "[he de<?·ea.sefm iab hty is a. redu ti .
Implicit:.rate i_o the lease . .
Present value of an ordi.nary annwty of of the right o use asset. -on in the carrying amouni
1 at 7% for6periods 4.7£&5
Prese t value of lease pay-roerats-January1, cost ofright of use asset
Accuroulated depreciation -Janua , 381,320
2020 381,-32-0 (63.553X 3) ry, 12023
(80,000:< 4.7665) (19-0,659)
Carrying amount-January 1, 2023.
190,661
Tab le of amortization Decrease in lease liability ( 3'2,750)
Adjustead rrying amount- January 1,2023 157,911
Lease
Date Payment 7%lnterest Principal tia.bility Revised amortization schedule
Jan. 1,.2020 381,320 Lease
Dec. 31, 2020 80,000 26.,692 53,308 328,012 Payment
Date 9% l11:terest Principal liability
Dec.. 31, 20Zl 80,000 22,961 57,039 270,973
80,000 61,032 209,941 Jan. 1, 2023 177,191
Dec_31. 2022 lS.,968
Dec. 31, 2023 70,000 15,947 54,01>3 123,138
Journal entries for 2020 Dec. 31, 2024 70,000 11,082 58,918 64,220
Dec. 31, 2025 70,000 5,780 64,220
Jan. 1 Rig:ht of use asset
381,320
381,320
Lease liability
Journal entries for
Dec. 31 Intereste:xpense 26,692 2023 32,750
Lease liability 53.308 32,750
80,oOO Jan. 1 Lease liability
Gash Right of use asset 15,947
63,553 54,053
31 Depreciation (381,320 / 6) Dec. 31 Interest expense 70,000
63,653
AccwntJ.la.te.d depr.eciation Lease liability
Cash

Amendment of the lease periods is 2.5313. Depreciation

d A umulated
On January I, 2023, the entity and the lessor agreed depreciation
toaroeD 3 (157, 9H
the original terms of the lease by reducing the lease paymeilt 1
9 / 3 years
. to P7O,OO0 and increasing the implicit rate to 9%. 6 remaining
3 )
The present value of an ordinarj' annuity of l at 9% for
 52,637
52,637

897
. spective
All rights belongs to re uthors
.. a •.J
.
. I ..,•
 l
·.sed t;ible of amortizat· i
Jte"'l
Deere in oi>• Payment Leue
l)ate 101/o Intere? t
Since the floor. pace wa.e reduc d 0 8.0 qu· r Principal Li bility
rn!
ec.ope of th lease wa r duced by 0 JaJl· l, 202z 30,000 1 ,047
1 , para ph , stat th.a a !II or loi, h
vec.3 l 2022 16,005
13,995 146,052
6
nited• s a re ult of lhe arti I ternnn I2023 30,000
•
pee- 31, 30,000 1'1,605 15,395 ]30,657
a um',
vec•31 2024 13,066 16,934 113.723
1

pee. 2025 30,000 ll,372

I
18.628 95,095
If ih d. r a in. carrying amounl of lea.s_e 11.(1.bi.i,ty LS Ji 31, 20,490 74,605
than- th d cl'eose in. carrying amounl of nght of us as : 1
Dec-31, 2026 30,000 9,510 22,539 52,066
differ nee is a terminatiori gain. · 1 vec,31t2027 30,000 7,461 24,793 27,273
. l)eC. 31,2028 30,000 5,207 27,273
If the de,creast in ca.rrying amount of right of use a.-is 1 30,000 2,727
hi,gher than the decrease in carrying amount of lease lia:bu - Dec- 31. 2029
tht difference is a termination loss, tr,
Accwnulated Carrying
Decrease in carrying a mount of lease liability Cost depreciation amount
Rjgbtofuse asset
(229,866 X 40%) 91,946
268,404 63,680 214,724
Decrease in carrying amount of right of use &eduction by 40% (107,362) (21,472) ( 85,890)
'
asset ( So, J
(214,724 X 40%)
Balimee 161.042 32,2€)8 128,834
Increase in lease liability 22.127 22,127
Termination gain
=
El.0
i\djustedbalance 183,169 32,2()8 150,001
Coat oi right of use a.ss:et
Accwpi,tlawd.depreciation- December 31, 2021 56, Journal entries for 2022
(26,840x 2) 2613,404
Jan. 1 Lease liability 91,946
Clll'rying amount-December 31. 2021 21.472
Aoc ulated depreciation
Right of uee asset 107,362
Leasebility-Janua.ry l.2022 (see table) 6,056
Reduction of old lease liability Termination gain
229,800
Remaining old leas,e liability- Juua.ry l, 2022 ( 91,946)
137,920

Present
as value oflease p.ayments 00 22,127
January 1 2022 1 Right of use aBSet
Lease liability 22,127
result of the decreaae in scope
& '
(30,0()0 X 5,a349)
16(),047 ll6,005
Carrying amount of old lease liability Oee. 81 Intereat e,cpense
January 1, 2022 on Leaee liability 13,995 30,000
• (13"7,920)
ncrease
I in lease liability Ca.sh
22,127
Th·increase in lea$· rb :;::::::::::: Depreciation
18,870
lS,870
e ·z·
m.odi/icati.o i.s an.ad.e ta i ity cu a result 0/ the leas 01U6e asset. 'JUSim.enl to the carrying amoun.t of right
 Aocumulat.ed depreciati<>n
39 (150,961 / 8 y ea:ta remaining)
II rights belongs to respective .
a • ■ ••

396
 l
Revised amortization. schedule
modification - decre .
f_.e.ll913 ase ID scope of lease
Date Payment 1t%Interest P.rincipal nu3!Y 1, 2020, an entity ent d .
Jan. 1.
O a.u ·th the following in£or t:re mto a lease of offici.!
2022 2;00,000 93,082 106,918 !lce " 1 · ma 11:on:
Dec. 31, 200,000 81,321 118,679 P rspace
2022 6B,i66 131,734
Dec. 31. 2023
53,776 146,224
Dec. 31, 2024 ZD0,000 37,691 162,309 BOOsquare meter
ual rental payable atth end of each
Dec.31 2025 200,000 19,664 180,336 year
40,000
Dec. 31, 2026 200,000 lOyeara
. se term 8%
Dec. 31, 2027 200,000 Lelllicit rate in the ltia e
!OlP ntvalue of an ord.mary annuity of 6.7101
pre.stfor 8% for 10 periods
Journal entries for 2022 i ent value ofle se payments-January 1 2020
pres(40,000x6.7101) ' iss,404
Jan. 1 Right of use asset 339,858
Lease liability 339,858 Table of amortization for 2020 and :!021
Dec. 31 Inwrestexpense 93,082 Lea$e
Lease liability 106,918 Payment interest
pate 8% Prinoipal Leahility
Cash 200,000
Jall, 1, Z020 .268,404
31 Depteciation 134,443 pee. 31, 2020 40,000 21,472 18,528 249,876
Accumulated depreciation 134,44.3 oee. 31, 2021 40,000 19,990 20,010 229,866

Cost of right use asset

Ac-cu.m lJ.!ated depreciation - December 31, 2021
778,000 Journal entries for 2020
{165,600 x 2 years) (311,200) Right of"se asset 268,404
Jan. 1 268.404
Lease liability
Carrying amount- December 31, 2021 466,800
Increase in lease liability 339,858 Interest expense 21,4'72
Dec. 31 18,528
Adjusted carrying amount-January 1, 2022 806,658 Lease liability 40,000
Cash
The increase in libility is an adjustment of the carrying Depreciation (2e8,404/l ) . 26,840
amount of the right of use asset. 31 26,840
AccU!llula.ted depreaation
Old lease term 5 years
E1'J)ired 2020 and 2021 Amendment of the l.ease
Remaining old lease te,rm, -1 . d the lesSOl' agreed to ain nd
l;xtension 3 On January 1, 2.022, the lessee 8 th the following information:
Extended lease term 3 theoriginal terms of the lease wt .·
_§_ ye s 480 square meters
Depreciation io.r 202:2 Floor space cl f ach yea:r 30,000
(80a, 65816) 21· An·nual rental paya.ble at the en ° e 10%
lm:Pli.cit rate i,n the lease· t. of
Present value ofan ordinary nnui
392 l at10% £or 8 period's
.

393
All rights belongs to respective authors
. . . . -)
 ase modificatio_n ene .
Journal entries for ZOZO i.,e ns1on of I
Japuary I, 2020, an entity ease term
ayments -January 1.2020 O ce 11Vith the following inf or! , n r e d into a lease for offke
Present value of the 1easeP sP.. - , .. .. a i o n ·
(100,000J 5.3349) _ iuJ.lre tal payablf! at the end o.f ·
533,490 }\Jil'lbeginrung December 31, 2020 each yea.r
Jan. 1 Right of use asset se term 200 000
Lease liability
r,ealicit rate in the lease
lpllrlePsent valo.e , oaf nord, inary 5 y ars
annuity of 9%
Dec. 31 Interest expense (533,490 x l0%) 53.349
1 for5 periods at 9%
Lease bability 46,651
O□January 1, 2022, the entity and th 3_g9
C9.Bh theoriginal lease by extsnding the e les.sor agreed to amend
with th.e following information: easeterm b;x 3 mare
31 Depreciation (533,490/8) 00,686 yea.rs. 1
Accum ulat.ed depreciation.
,4JJ!lualrent'.3-I r:ental payable at end oef ach
year be ng December 31, 2022
Q11, January l, 2022j the entity shall accoJ.1.nt for the {Plplicit rate m_the 1e.a e 200,000
modificwion as a .separate lease. p!'{lsent value of an or_dmary annuity of 11%
1 at U% for 6 periods
4.2.31
The entity shall recognize the right of use asset and lease AJ)lortization sch dule foi- 2020 and 2021
liability for the additional 4,500 square-meter -lease space
present value of the lease lialbility on
ott January 1, 2022. January 1, 2020 (200,000x: 3.89) 778,000
No adjustment is made to •the 3,000 square-meter lease Lease
because of the modification. Date Payment 9¾ interest Pr-incipal liability
J n. 1, 2020 778,000
Present value o£the additional lease payment De,c.31, 20:lO 200,000 70,020 129,980 648,020
,on Jan\lary 1, 2022 (200.000 x 4.6229) D&c.-31.202:1 200,000 58,322 141,678 506,34!2
924,580
Journal entries for 2020
Journal entries for 2022- new separ·ate lease Jaa Right of uae asset 778,000
Lease liability 778,00()
1
Jan. I Right of use uset 924,580 Interest expense 70,02.0
Dee. 31 129,980
Lease liability 924,580 Lease liability
Ce.sh 200.000
Dec. 81 Interestexpense (924,580,:: 6%)
73,966 31 Depreciation . . 15-5,600
u:ase liability lti5,600
12.6,034 Accumulated. depreoation
Cash 200.000 (778,000/5)
31 Depreciation
New lease liability due to extension
Accumulated d.epreciation
154,097 rr e s ent value
n _ _
oflea.se: - - . 0 nJartuary]. 2022 846,200
ts
(9Z4,58016 ,Years-)
 2
a.s. a result of the paym_en ··
exteiI1S10n (20, x 4.231)
0 000
Carrying amount on January 1,202 (506,342)
be:fore the ex.tension - see schedule
:339,.858
lncreaaein lease liabilitx

191
Table of amo•rtiztion
ii$,,\.SE l\{ODIFICATION
(10%) Principal Present fBS16, paragrap 4, r:rov-id.ea that ti
[nterest V4t I! the lease modif1cat1on as 1e le:ssee shall account
Date Payment {,1lr1wi)1g canditiLJns: a separat !ease under the
1,884,916
111/2020 188,492 111,508 1,773,408 fa 0
12131/2020 300,000 122,659
177,341 1,£50,749 th
:dd
300,000 The modification increase
12/31/2021 165,075 134,925 1,515,82-4 addin6 the rig t to U!Se an cope of Lhe lease by
248,418 ti,
12/31/2022 300,000 151,582 1,267.406 l ional u11derlying aeset.
400,000
12/3112023
12/31/3024 100,000 126,'741 2'73,259 994,14'.7 - The rental for the lease m
arnount
a·r· .
0· 1 1cat10
300,585 ·1
12/31/2025 400,000 99,415 6 3,562
69,356 330,644 362,918 commensurate with he . _n nc eases by an
12/31/2026 400,000 equivalent to the currentm k mcreasem scope and
400,000 37,0S2"' 362,918
12/31/2027 a.r et rental.

* 10% x P362,918 equals P36,292.

JJlustra tion
There is a difference _of P790 due to rounding of present
value factor. ()11.January l·i2.020,_an entity entered into a lea .
with the followmg mfor mation: se ager emen.t
Journal entries for 2020
Floor pace 3,000 square meters
1. Right of use asset 1,884,'916 Annual rental payable at the end of ei'J;ch year 100,000
Lease liability 1,884,916 Jwpliciti-ate in the lease 10%
l,€aseterm 8yeara
2. Interest expense 188,492 Present value of an ordinary annuity of
Lease liability 111,.508 I at 10% for 8 periods 6.3349
Cash. 300,000
On January 1, 2022. the entity andthelessor agreed to amend
3. Depreciation 235,615 theoriginal terms of the leas(; with the following
Aocum ulat.ed depreciation 235,615 information:
(l,884,916/ Syears)

Additional flloor space 4,500 square meters

The depreciation is based on the lease term of 8 years Increase in rental payable at the end of each year 200,000
. bec use there is neither a transfer of 'title nor p·urchase lmplidtrat@in the lease 8%
option. Present value of an ordinary annuity of
1at 8% for 6'perio.ds 4.6229

The im;:reaise in the rental for tpe aciditional 4,500 square

tne ters is equivalent to the current market rent.

All rights belongs to respective authors

. . . . - I •
• 389
 New table amortization
(8¾) V JABLE PAYMENTS
Date Payment Interest Principal Pres1int
"'111e
onoorJanuary 1, _2 20, an entity entere .
of a brulding with the foll _d into an 8-year lease of
1/1/2023 2,944,70() B fl owmg terms:
12/31/.2023 500,000 235,576 264,424 2,68-0,27 ual rental for the first th:ree yea
12/31/2024 500,000 214!,4.22 28.5,578 2,394,69 J\l)Jlat'the end of each year ra payable
12/31/2025 600,000 11H,576 408,424 l.9 .27'i 300,000
441,098 1,545,l?a ;\ltllual ren for the next five years payabl
12/31/2026 600,000 158,902
at the end of each year e
12/31/2027 600,000 123,6l4 476,386 1,068,790 400,000
85,503 514,497 554,293 j[!!plicit iPte est rate . 10%
12/31/2028 600,000 p\f of an ordm y anmut,yof 1at10%
12/31/2029 60(),000 45,707* 55,293
for three per19ds 2.487
• 8% x P564,293 equals P44,343 pVofan ordinary annuity of 1 at 10%
torfive periods 3.791
There is a difference of Pl,364 due to rounding ofpresell pV of 1 at l 0% for three periods 0.751
value factor. t

Journal entries for 2028 'fhe lease provides or neither a transfer of title to the lessee
nor a purchase option.
l. To remeasure the lease liability on January I, 2023:
Computation
Right of use- asset
Lease liability 2,076,790 Annual rental for first three years 300,000
2,076,790 Multiply by PV of an ordinary annuity
of 1 at 10% for three periods 2.487
The ncrease in. lease liability is an adjustment of·the 746,100
Presentvalue -January 1, 2020
carrymg amount of the right of use asset.
Annual rental for next five periods 400,000
2. To rec<'.>rd the annual rental on December 31, 2023: Multiplyby PV of an ordinaey annuiy of1 at
10%
mterest expense 3.791
Lease liability 235,576 for five periods
1,616,400
Ca.sh 264,424 Present value -January 1,2028 0.751
500,000 Multiply by PV of l at 10% for three -
periods l,138,81El
3. To r cord the annual depreciation based on the new· Present value -January 1,2020
carrymg amount: uiet
1. ._
1 11
lva
ue o
f th·e ann.,,.,l rental for the next fiue years
presen
d
startin.g January 1, 2023 is rediscou.nted for three perw sat
LIIU' ·
Depreciation
Accumulated depreciation 404,999 2
(2,834,990 / 7 yrs,)
the begin,n.ing of the lease on Jan'!-°T'J 1,20 0.
404,999
9 746,ilOO.
Present value of annual rentals for threeyear 1,198,816
The total lea."a'e ter:m 1·8 10 ye • •- i A
equals remaining te f ar$ minus 3 years expw,u b
rm o 7 years. t
r_espective_ ut Present value of annual rentals for next five
l,BM,916
years
liability-January 1, 2020

387 a
All rights belo..ngs to r
espective uthors
..
 r Joll.l'
na.1 entries for 2020
EXTENSION OPTION l Right of use asset
.
Anentity en er. - of building on Janllaty 1
t ·. ed into a fease Jol.1· Lease liability l,895,500
t1 0 . , 2r1�, lnterestexpene 1,895,500
,
1
with the follow1ng informa n. "1J pee-•3 Lease liability l 9,.650
the end of each year
Annual rental pay ab'le (.It Cash 310,450
·
31 I)epr-eciation (l,-895.500 I GYea ) 500,000
5
0O,,00(J
5
Lease term Year
Useful li.fe of building 20 Y(Ja 8 Aocu.mulaood depreciation ts 379,100
lroplicit interest rate 5 • d6 10 379.100
PV ohm ordinary annuity of 1 at LO% for perio
3.79 j .fleP'leasurement of lease liability
Thelease contained an option _for the lessee toex.tend tota ,,,January 1. 2,()23, ,the lease li,0,b Tt . .
fwrther 5 years. tht0new imphcit in,te1·es.t rate of B%.,..i Y isremeasured using
At the comm.e nee ment date, .the exercise of the extensi·o.n
option is not rea.sonobly certam.
V
i\.rlliU.aJ!llrebn rem id ng2 _years. of old lea.s term
iult.lP Y Y
go/o for 2 periods
an or mary annuity of 1 t
a
500,000

Presiant value - January 1, 2023 891,500

After 3 years on J nuaty 1, 2023, the lessee decided to extend
the lease for a further 5 years. Af)nlta! rental for 5year starting J nuary 1, 600,000
2025
Multtply by PV fan ordmary annuity of l at
Ne'?' annual rental payable at the e-nd of ea,cb. ·600,000 8% for 5 periods 3.993.
year B¾
Present value January 1, 2025 Z,395,$00
New implicit interest rate , 3.993
0,857 Multiply by PV of 1 at 8% fo1· 2 periods 0.857
PV of an ordinary annuity of 1 at 8% fo1· 5 periodiS
PV of 1 at 8% for 2 _periods 1.783 Present value -January 1, 2023 2,053,200
PV of an ordinary annuity of 1 at 8% fo1·2 periods

Table of amortization The pre.sent value of the new re1tlals on J.anuary 1, 2025 is
Date Paym(!Di Interest Principal Present value
redi.sc-0un.ted for 2 periods on. the date of exten.sion. on Ja.n11,ary
11202.3.

Ul/2020 l,,89S,500 Present va}u,e of remainin:g rentals of old lease 891,500

12!31/2020 500,000 189,650 310,450 1,585,050 t€rm 2,053,ZOO
12/31/2021 5QO,OOO .1.58,505 841,495 1,.,243,555
Present value of rentals; of extended le:ase term 2,944,700
Tot.al present ua!ue-January 1, 2023
12/31/2022 500,000 124,355 375,645 867,9l0 Pres ntvalue-December:31, 2022 (see table) ( 867,910)
2,076,,790
De ember 31, 2020 !□crease .in lease liability on January 1, 2023
kigbt of use asset. - January l., 2020 1,89:6,500

P-aymentonbecember 31, 2020 Interest expense for 2020 (10% x 1,895.500) Applicaille to principal
 500,000 A.ccwnula 31. 2022 (1,137,300)
ted (3;9.100 x 3 years)
- -- -
( 18 9 ,55 0)
31-0 450
depreciatio
n-
Carrying amount- December 31, 2022
loctease: in liabiht;v on Janury·1, 2023
'758,:200
2,076,190'
December New canying amount- January !, 2023 2,834,'990
Pr se_nt value - Ja.nuacy 1, 2020 (500 000 k3.791) I 895,o0O lFRS16 . . ·des that the remeasurement of
Pnnc1palpaymentonDe ·b th 1· ' ar ra h-39, pr_ovi t I the carrying amount of
cem er 31, ,2020
Lease liability- December 31, 2020 e ase liability 1s an od1ustmen ° ·
tiie 1•1£hl of u.st2 asset. .
385
38
 f-ayment orlia. bility for restoration
amount
cost
' ! '
Oc ·J a n u ary l6, t'-e. carrying Id: b P63 4 9:20 afte r .n a d
, l it y ti 202 e of the
-r8, bi r ra
·es t .orat ion c o st wou ,.
usin<l'the effective mterest method ·'¼llle
r rec(){, y . ;_ ,·
mterest ,or v years 1:o •

T liability is simply derecognized upon payment for the CHAPTER 11

re.storation cost.
I

Estimated liability for restoration cost 634,92Q

634,920
Cash LESSEE ACCOUNTING
Actual purchase of underlying asset Other accounting issues
An entity can actually purchase an equipment that it has
been leasing under a finance leas.e.
The co t of the asset purchased is equal to the carrying am.ou. t
of the leased asset plus 'cash payment minus the balance of
the lease liability. TECHNICAL KNOWLEDGE
An entity pur hased an equipment that it had been leasing
under a finance lease for P4,000,000. The balances of'certain
ac.counta on the date of actual purchase are: To remeasure the lease .liability in case of an
extension option.
RightofuseaB&et . 5,000,000
Accumulated depreciatiQb,/
1,500,000
Lease liability . .
3,800,00
To measure the lease liability when lease conta
Jf:)urnal entry,, ns
uariable payments.
Equipment ,
Accwnulated dep n 8,700,000
l,500,000.
To identify a lease modification that is accounted
for eparately.
Lease liability ·. .. 3,800,000
Right of use
asset' Cash 5,000,000
.
.· 4,000,000 To know the recognition °/ a lease modificatio
5,000,000
n relating to extension of lease term, decrease
Right of use asset
(1,500, in scope o fl ease and chana,:,e-in rental
Ac.cumulated depreciation
Carrying amount
3,500,00o payment.
Cash payment .1i.QOO,
Total consideration 7 500,000
Lease liability
_Cost of equipm•ent purchased
All
ri
g
ht
s
be
l
ng
s
to
r_
es
pe
cti
ve
_
ut
ho
rs
 Illustration - Unguaranteedresidual value
.,,. aI entries fol" 2020
J()!P 0
Ezzy Company leased a warehouse on January 1, 2020"' To record the acquisition of th
the following informat'on: lth l finance le.ase: e warehou.ae under a
R,ight Qf use asset
Annual. rental payable at the end of each year r,ease liability 3,240,000
Unguaranteed residual value 600,0oQ Cash 2,616,000
200. Estimated liability for restoration 224,000
Payment to lessor to obtain a 11'.ing-term tease 400,000
22-t,OO()
Cost of:re-storing the asset a,·equired by contract
634,920 2. To record the payment of executory cast:
Annual executory coat paid 5O,00t) xecutory cost :iO,OOO
Lease term
6year8 Ch 50 ooo
Useful life of equip,ment 8yeats 3_ To record tb.e tirst rental payment on December 31, 020:
Implicit interest rate
10¾ [nterei;,_te ense (10% x 2.,616;000) 261,600
Dis,countrate for the restoration cost 8% Lease liability 338 400
Present value of.an ordinary annuity of 1 at C h 600,000
10%
for 6 periods
tas
0.56 '
Present value of 1 at 10% for 6 periods
4. To record the depreciation for 2020:
Pre.sent value of l at 8% for.16 perio s D,epreciat.ion (3,240,000 / S} _ 640,000
O.6:J
. Accumulated depreci,ation 540,000
The lease provides for neither a transfer of title to the lesse The depreciation is based. cm th@lease term. of 6 years which
nor a purchase option. e 1
is shorter than the useful bfe of 8 years because there is
neither a transf' r of title nor a purchase option.
Thus, the equipment will reµert to the lessor upon th.e The unguanmteed residual value is ignored in computing
expiration oflease ,on January I, 2026. the depreciable amount.
Computatio11: 5. To record the interest on the liabilily for restoratio cost
£or 2020:
Lease.liability (600,000 x4.36) Ir1terest expense (400,000" 8%) , 32,000
Payment to lessor to obtain a long-term lease 2,616,000 Estimated liability £or rE;storation cost 32,000
Present,value of r at.oration cost (634,920 x .224,000
400,000 Retu.rn of equipment to lessor
O.68)
Total coat ofrightof:use asset On January 1, 2026, the return of the warehouse to the
3,Z40,000
lessor
The present value of the residual al . . . . is $imply recorded as:
the lease liability be. . . \' ue is :not included m 3.z4o,OOO-
. cause it is unguaranteed. . Accumulatetidepreciation (540,000 lt G) 3,M0,000
Equipment
The an.nual executory cost .is treat.ed· .. . . .d ardless of whethar th.e...
The same journal
· as ou,tnght expense. entry 1e_ mhae :ri!wer than t}le
fall' value of estimated aeset 1B big er or
the
unguaranteed residual value. . .. ·h
1'he lessee has . _ . ation. but to return t e
n,o .{inancwl oblr,g
u:iiderly.in,g asset to the lessot.
368
All rights bel ngs to r_espective_ uthor
 zosi
Table of amortization 'f record the second paynieht
lnt-erest Principe.I Presentv- L 1. o on January 1, 2021:
Date Payment 4,51s.280
II. Ile cerued interest payable
1,000,000 ase liability 281, 02
718,698
l/ 1/2020 .'3,5•l6,2ao cash
l/ 1/2020 1,000,000 281,:302 718,698
776,193 2,797,58 1,000,000
1/1/2021 1,000,000 223,807 2,021,389
1/ 1/20 2 1,000,000 161,111 838,289 1,183,100 "'o accrue the interest for 2021 D
111/2023 1.000,000
94,648
905,352
277,74&
z. n0 ecember -31, 2020:
111/2024 1,000,000
22,:252 277.,748 I terest expense
223,807
1/1/2025, 300.000 Jl. Acaued interest payable
223,807
Journal entries a. To record the depreciation for 202l:
2020
Depreciation 863,256
I. To record the a,cquisition of the e•quipment under a Accumulated depreciation .863,256
:finance lease:
Right ofu.se asset ote that the equipment is returned by the lessee to the
4,616,28,0
Lease liability
4,516,2&) le!!Or upon the lease expiration on January 1, 2025.
Cash (250,000- 150,000)
100,000
On such date, if the fair value of the asset is P400,c,ffi0 whicb
2. T o record the first payment on January l, 2020; is higher than the guaranteed residual value of p·aoo,ooo,
. liabili y
Lease 1,000,000 t h ee ntry to record the return of the equipment to the lessor
C h ' 1,000,000
is:
Since the annual payment is in advance, the first
payment Accumulated depreciation (863,256 x 5) 4,316,280
is applicable only to the principal lease liability. Leaaleiability 277,748
22,2.52
A(XfUedinterest payable 4,616,288
3. .To accrue the interest for 2020 on December 31, 2020:
Iµterest expense ghtof use·ass..et
Accrued intereEtt payable 281,302
281.302 The excess of Pl00,000 of the fair value over the residual
4. To record the depreciation for 2020; value guarantee is notaccounted for by the lessee because
there is no ca.sh settlement.
Depreciation (4,316,280 I 5) 863,256
Aocum ulated depreciation 863;256
Coat
4,616,2&0
Residual!value guarantee
( 800,0
De,preclable amo:unt 4,316,2

Thbe. deprt ciat on. is b_ased on th.elease term of 5 y;lf

ecause nere a residual va l
ue guarantee.

et1uau1.11a1
36R ITl!l!IM!!l'!P.!l'll!IP!l!lll!lalll!Wl!ll!'9!11 111!!19!!
 Return of equipmentto lessor on December 31,
,uu...,tra.tion - Initial direct co' st

J
1 02
Oil JaauafrY , • ' imple_ Company leased an equipment
·th the ·a J!owing
1 m-1ormation:
WI

20
1. To record the final annual payment on Decernb r
2023: 31'
Interest expense 109,090
Lease liability 890,910 nnual jixed payment i.n adv a.nee at
Cash 1,000,o()(j
the
1,000,000
A begjnnin.g of each lease year 250,000
• t.ial (iirect cost paid
2. To r•ecord the return of the equipmen,t to the lessor: [J U se 15-0,000
r',.. "e..c.entivre
a received

Accumuhated depreciation 3,106,470 &esidual value guarantee 300,000

Lease liability 200,000 Lease term 5years
Right of use asset (Jse:ful life of equ.ipment
3,306,4-70 6years
rinplicit interest rate . 8%
The annual depreeiation is P7'76,617, multiplied by 4 Year ?resent value of an annmty of 1 in
ql!.als P3,106,468, or rounded, P3, 106,470. s advance at.8% for 5 periods 4.3121
present value ot 1 at 8% for 5 peri<ids .6806
Obs.erve that th.e residual value guarantee is not paid by
the lessee to the le:ssor because the underlying asset is computation
simply transferred by the lessee to the lessor to satisfy the
liability for the residual :value guarantee. pVofrentals (1,000,000 x 4.3121) 4,312,100
PVof residual value guarantee (300,000 x. .6806) 204,180
Note al.so that the remai.n.ing carrying amount of the asset
should be equal to the residual 1Jalue guarantee. · Lease liability- January 1, 2oi,o 4,516,280
Initial direct c.os.t 250,000
However, if the fail' value of the underlying asset is less Lease ince.ntive re(,':eived ( 160,00-0)
c an the residual value guarantee, a loss is reported for the Casto.fright of use asset 4,616,2S0
difference Bf!d the lessee must make up for the difference
with a ca.sh pa,yment. Note that th.e initial direct cost and lease incentive r-eceived
are included in the measurement of the cost of right of use
Thus, _if the fair value of the equipment on December 31, asset but excluded in the measurement of lease lia.bilit:;.
20 3 1s on[y P150,000. whieh is P50,000 lower than the
residual _value guaranteee, an additional entry to record The initi l direct cost i.s added and the lease incentive
the toss 18 made.
received is deducted in computing the cost of right of use
Losa on finance lease asset.
Cash 50,000
50,000
Needless to say, if the fair valu . . .
al value guarantee no
dd't" e 18 higher than the res1du
1
there i8 no cash ':settl:m Itonal entry is necessary
because
en.

349
 . f purchas,e option
'fable of amortization
Nonexercise O thepurchase option ia
However if for anyre.asog:ized equal to the differell.ol
e. _ e.rcis d a lo ss i::i r ec o t 0·£ the right of use asse• pate P&Ytnent Interest
:c... .. , .- . a m o un L\ / 112020 Principal Pres nt value
1
between the carryrngJ - uary 1 2030. 1,000,000
12/ 330,647 3,306,470
the lease liability on an ' 4,342,500 1,000,000 669,353
3112020 263,7H 2,637,ll7
Actumulated depreciation 500,000 12/ 3112021 1,000,000 736,289
190,082 1,900,828
Lease liability 968,500 12/31/2022 1,000,000 809,918
Lose i;m finance lease 5.811.00() 109,090 1,090,910
Right of use asset 12131120?3 890,910 200,000
pecember 31, 2020
5,81 ,000
Right ofuse asset ,, . lO ears) pa)11llent
Accumulateddeprec1at1on (434,25 x0 Y ·
4,342,500
Interest expense (10% x 3,906,470) 1,000,000
Carrying amouot-Janua:ry 1. 2030 1,468,500 ( 330,647)
500,00o Applicable toprincipal
Lease liability-January 1, 2030 669,353
968,500 r,ease liability or. present valu,e on January
Loss on finance lease
- """':::.
principal payment 1' 3,306,470
Illustration - Residual value guarantee ( 669,353)
!.,ease liability-December 31, 2020
2,637,117
Easy Company leased 8:Il equipment on January 1, 2020
with Journal entries
the followingnformabon:
Fixed annual payment t the end of ea.ch lease year 1,000,000
Lease term 4years 1. To record the acquisition of the equipment:
Useful life of equipment (>years Right of use asset 3,306,470
Implicit interest rate , _ · 10% Lease liability
Present value of an ordmary annUJty of 1 fot 3,306,470
4 period:e at lO% . . . a.16987
Present valu.e of 1 for 4 periods at 10% 0.683 2. To record the fi;st annual payment on December 31, 2020;
Eas.y Company guaranteed a P200,000 residual value on Interestexpeiwe 330,647-
December a1, 2023 to the lessor. · Lease liability 669,353
Cash 1,000,000
As long as there is a residual value guarantee, the ' re is no
more purchase option because the equipment will revert to 3. To record the annual depreciation
the lessor upon the expiration of the lease on De-cember 31,
2023. Depreciation (3,106,470 / 4) 776,617
Accumulated depreciation 776,617,

Cost of right of useasse-t 346

Present v!due ofl ase payment.s (1,000,000 x 8 169,870
3.16987) Present valueof remdual value g'Uarantee , 136·,6E2
(200,000x ..683)
Costofright,ofuse aeeetand lease liability
The asset is depreciated over the lease reas purchase option.
term of 4 years ona to p3 306 470 minus the
which is shorter than the useful life of .5 'Ill. depreciable amount 1s• equa
ue 'p l.06 470
1
bly· 1
years because the cert residual value guarantee of P200, 000or 3' • ·
is neithera transfer of title nor a a:ui
84"1
 ,rable of a...nortization
. ht f use asset
Cost ofrig· o . (1000.000 x 5.65) 5.650,oeo
Payment Interest
Present value oHeasepaym nts( 'oooo x .322) 161,0Qo pate
f urchase option 5 ' l /1 / 2020 Princip I Pre ent value
Present valueo P l.OQo 2/31/2020 1,000,000 697,320 5,811,0 0
Total lease hability 2/31 /2021 1.000,000 <>60,998 302,680 5,508,320
f. tor applicable to 12½O 1s i21s112022 1,000,000 620,318 339,002 5,169,318
. t value al
Used• Note that the presen ac of the leas.e
ts 12/31/2023 1,000,000 674,756 379,682 4,7 9,636
paymen . computing the presentv .ue . II' •
1,{)00,000 425,244
. be 12/31/2024 523,727 4,364,392
The lease payments sha U 12/31/2025 1,000,000 476,273 3,888,119
466,574
discounted usmg the 12Va implit 12/31/2026 1,000,000 402,563
533 3,354,694
interest rate. . . 12/31/2027 1.000,000 330,871 426 2,757,257
st t 597,437
If the implicit intere .rae cannot be readily deternnned 12131/ 2028 1.000,000 250,575 669,129 2,088,128
ental borrowing rate. · 749.425
the lessee can use the mcrem 12/31/2029 1,000,000 161,297 1,338,703
838,703 500,000
Journal entries for 2020 represents the fixed annual tal
o . _ ,n1,ent
, .0 . ., payment.
ren
1, To cquisition of the machinery unqer a
recor d· e a ' Jnter ��t is equal to the preceding present value multiplied
finance lease:
5,811,000
oy 1 2 10,
Right of use asset 5,811,000
Lease liability Thus, for 2020, P5,81l,000 times 12% equals P697,320.
2. To record the first rental pay111ent on December 31, 2020:
Principa.l is equal to the payment minus the interest.
Interest expense • 697,320
Lease liability 302,680 Thus, on December 31, 2020, Pl 000,000 minus P697,320
Cash 1,000,000
e-quals P302,68O.
Lease liability-Jam.lazy 1, 5,811,000
2020 1,000,000 Present value is the balance of the lease liability which is
Payment o-n December 31, 20.20
Interest for 2020 (12% x 5,811,000) ( 697,320) 302,680 the preceding present value minus the principal payment.
Lease liability-December 31, 2020 5,508,320
Thus, on December 31, 2020, P5,811,000 minus P302,680
3. To record the annual d,epreciation: equals P5,508,320.
Depreciation 434,250
Accumulated depr ciation (5,211,000 / 12) 434,250 Exercise of the purchase option
If accounts are properly posted, the tabl oiamortization of
The asset is depreciated over the useful life because there the lease ijability and interest expense will show the balance
is a purchase option that is rea onably certain to be
exercised.
of the lease liability on December 31, 2029 atP500,000.
When the purchase option is exerci ed on January 1. 2030d
The depreciable amount is equal to the cost of P5
811,000 which is the leaije e,xp.irat· theJournal entry to recor
10
minus the residual value of P600,000 or P5,21l,000.
344 the payment is:
500,000
lA!aae liability 600,000
Cash
All rights belongs to re. spective au
. .i
f.1.ii&St.i!if!ii!+!!P.CJ_f§J_GJ..QJ.._O.CSJ fiJ_Cti l!
 presentation

Accounting for fixed payment If e. statement of financial .

l fixed payment of Pl00,000 shaU 31, 2020, the right of use a.sPos1tion is
hb annualrenta to£rr the principal lease liability and
The J:>re donDecember
liri.e item under noncurr · Get Would b re P
r8
treated! as payrnen ° t t ent assets. ported asa separate
interest thereon. Jtightof use asset
Th . t . t . the difference between theface alue of gr ,t\ccwnulated depreciation
edmeres i_sb f P400 000 for 4 year,s and the present va109s 303,730
:fixe paymen= o ., u ()afiYUlS' .arnount ( 75,982)
of P303,730, or P96,270.
The interest of P96,270 is reco nizedas anexpenseo er - li'-bil' 22-7,798
The ease
l a ity would b
th
leasete1·m following the effectiveinterest method o af morlizatio;
the amount of P71, 179 a::eported as partly current i.n
remaining portion of Pl68.999. Partly nonc;urrent for the
The table of amortization for the lease liability and the
interest may appear a.s followe: Olustration - Certain pur ·h
Principal Pre-Bent value c se opt·on
Date Payment Jnterest
303,730 Lessee Company leased a ma h.
Jan. 1, 2020
Dec. 31, 2020 100,000 3B,448 63,552 240,178 the following pertinent infor :::n January 1, 2020 with
Dec. 31, 2021 100,000 28,821 71,179 168,999
Dec. 31. 2022 100,000 Z;0,280 79,720 89,279
89,279 Filled rental payment at the end of each
Dec. 31, 2023 100,000 10,72-1
"u 1,000,000
Payment represents. the annual rental or fixed payment. Useful life of machine IO years
Incremental borrowing rat.e 12yea.rs
In.terest i:s equal to the preceding present value times 12% ll.4%
interest rate. Thus, for 2020, P303,73? times 12% equals Implicit interest rate
12'¾
P36,448. fusent value of an ordinary annuity of l for 10 p"·· d
1
t 6.216
incipal is the portion of the renta:l payment after deducting ._no &a 5.650
mterest. Thus, for 2020, Pl00,000 minus P36,448e,quals
P63,552. 12%
Prestmt value of 1 for 10 periods !3,t 0.270
Present value is the balance of the lease liability after 0.322
14%
deducting the annual principal payment. Tpus on December 1Z%
31, 2020, P3(}3, 730 minus P63,552 equals P24-0, 178.
Journal entries .342 28,821
71,179
lWJO
Dec. 31 Interestexpense
Lease liability 36
Cash ,4
2021 48
63
Dec. 31 Interest expenae ,5
Lease liability 52
Ca.eh
 h chi on. on January 1, 2030 by paying P500t'000.
Less a ne
ee s u. The lessee il; reasonably certain to exercisf! the purchase option
Com e po at the- commencement date of the lease.
pany the
haf) t lea The estimated residual value of the• machine at the e ,9f.
100,000
the h se the 12-year life ia P600,000.
optio e e-
ri to xpi
'purc m rati
lQ0,000 a 348
. spective
All rights belongs to re
a
..
utho
. . I a
. spective
All rights belongs to re
..
utl1ors
.
 Disclosures - Lessee , 111ustl'ation
A lea,see shall . .h following for the reporting Peri
d1sclos,e te Od,
Oit J8 uary 1, 2020, au entity 1
D r right of use assets by class f a mac ti.·
. hiS the same as the useful liteased
i
. inery for 4 years
1. Depreciation chal'ge O of '1J l or fixed payment of PlOO the
underlying asset .. machine at annual
1 se liability rellh year. ' O Paya hie at the end of
2. Interest expense on 1 1 di eac
1 •. e short term eases exc u ngt
to e lease provides for a lran f
3. The expense elating with a term of one month t Tl1 ·ng asset to the1 er of ownership of the
expense relatrng to leases Ot 1
less under Y1 essee at the end of the leaseteim.

T h 1 t' ng to low value leases excluding the pres nt value computation

4. e expensle a t10 lo value leases with term of o,i
expense re a m g e
month or less The pres.en tv.alue_oa_nnual payment of Pl00,000- for4 years
5. The expense relating to variafblle lealis_ea!'ili iyments not l!Sirtg a 12
0
lii implicit mterest tate is determined as follows:
included in the rneasure:ment O ease 1.1
present value= Pl00'.000 x present val4e of an ordinary
6. Income from subleasing right of use assets annuity of 1 for 4 years al 12¾
7. Total cash outflow for leases
= Pl00,,000 x 3.0373
8. Addition to right of use assets
9. The carrying amount of right of use ass ts at the end of = P30 ,730
the reporting period by class of underlying asset
10. Short rerm leases or low value leases accounted for a:s The present value factor of 3.0373 is derived from the
mathematic.al table of present value and annuity.
operating lease

Additional disclosures The journal entry to record t e finance lease at the

commencement date of the lease 1s:
Alessee shall disclose ad&itiional qualitative and ql\
Right ofuae ass t .303,730
antitative information about leasing activities necessary to
LeMe liability 303,730
help users of financial statements to,assess the effect of
le!lses on
financial position, financial performance and cash flows.
Depreciation of right of use asset
1. The nature of the lessee's leasing activities
2. Future cash outflows to which the lessee is potentially If the lease transfers owners p te ud : Jo:s tt .
exposed that are not reflected in the measurement of the les:see at the ,enbd ofdlea.s hee:s;ful life ,of the underlying
lease liability. right of use asset 1s ase on
a. Variable lease p yments asset.
d ciation of the riight of use asset
b. Ext nsion option and termination option Accordingly, the annua1 epre ·
c. Residual value guarantee is recorded as follows:
d. Lease not y-et commenced to which the lessee is
committed Depreciation 75,93)).

S. Restrictions, Ol' covenants mposed .

.
Accu ion
. mula {P30J..730/ 4 years)
840
V t.ed
depr
All rights belongs to respective autl1ors eciat
341
All rights bel ngs to
r_espective_ uthors
 pefioitions
Fixed payments J?esidual value guarantee is the

t:=
. . ments made by the le see to th bY a party unrelated to the!guarantee made to th I ssor
Fixed paymen.t are pay an underlying asset during th.e onderl ngasset at theencl of that the value of an
lessor for the right to use e
lease term. a speci/1,ed amount. ase term will rJt least
. vides the following examples of leaee
Appendix [Jngru:srcmteedre1;idual value istha .
paymants t a are var1·able in legal form but should be treated
hB4t2 pro
value fthe underlying aseet,theret ort on of th residual
as fixed in substance: lessor is not a..ssured or is guaranteeadlization of which f>y
a. Payments that inust be mad only if an asset isproven to the to the lessor. solely by a party rela.ted
be-capable of operating durmg the·lease
Executory costs are ownership expen h
b. Payments that must be made only if _an event occurs with
d· ·
taxes an msurance for the underlv{
ses sue as maintenance
·
no genuine possibility of not occurring J
.ng
c. Payments that are initially variable but f r whiclh the Suchex.ecutory COSts are expen,sed immediately when
variability will be resolved at some point and the incurred.
payments become in-substance fixed when resolved
Lease term
d. When there is more than one set of payments, only the
realistic set of payments should be considered
Appendix·A de.fines lease term as the .n.on,cancelable per-iod
· Variable payments for which the lessee has the right to use the underlying asset
together with both of the following:
Variable payments are payments made by the lessee·ror
the right to use the underlying asset during the lease te:rm a. Period covered by an option to extend the lease if the
that vary because of changes in facts or circumstances lessee is :reasonably certain to exetcise the extension
occurring after the commencement date other than passage
option.
of time.
In other words, the accounting for variable payment depends b. Period covered by an option to teminate the lease if the
on the nature of variability. · lessee is reasonably certain not to exercise the
termination option.
Payments that are based on an index or interest rate, for
e:xample, payments linked to consumer p'rice index or
benchmarkinterestrate are included in the lease payments.
The lease liability is remeasured when the index or interest
rate changes and the lease payments are revised.
Payments tha arebased on pa8sage of time or future
usage
of the underlymg asset are not incl."...ded ·m1 ease payments ·

338 All rights bel ngs to r_espective_ uthor

819

All rights bel ngs to r_espective_

uthors
 r
easuJ'ement of lease liability
trnodels
Other measw-emen IfRS 1 6 p, aragraph 26, provide th
.des that if a lesseeapplies the{ . d11te, the lessee shall tneasu/ tat at the commencement
a. Par:agraph 34 provi ,g investrnent property, thele 14t esent value of lease payment
pr $. he lease lrn.bil.ity at &he
value model inmea
s
u;,':1 value model to the right 0/se
I

shall also apply thhe dru.f\ition of investment property Use The lease payments shall be di
asset that meets t. e e t:- • ,ate implicit in the lease. scounted usmg the inlPresl
Paragraph 35 further provides that iftheright f se
If the implicit interest rate cannot be e . .
b. asset relates to a class of propei-ty,p nt ndequu:n nt the incremental borrowing rateof th l r a y determmed,
to which the lessee applies the rev.uatrnn modela; e essee ts ed.
lessee may elect to .apply the revaluation model to allf ,,,he interest rate implicit in the1 , h ,
ease 1s t e mterest rate
the right of use assets that relate to that class of that
1
causest h e pr sent ualu-e of the lease payments and the
property,
plant and equipment. unguar.anteed :r:e$1ddua.l .v a. lue to equ,...,..z th e ue th ,e
Io
, ai,
1 · •
va l
Depreciation of right of use asset !t11,derlying a,sset an initial direct costs of thelessor.

The lessee shall apply normal depreciation policy for :right The lessee's incremental borrowing rate is the rate of
of us-e asset. interest that the lessee would have to pay to borrow funds
necessary to obtain a similar asset over a similar term and
IFRS 16, paragraph 32, provides that the lessee shall similar security.
depreciate the right of use asset over the useful life o,f the
u.nderlying asse:t 11.nder the following conditions: Components of lease payments.

a. The lease tran-sfers own,ership of the underlying asset to The lease payments compris,e the following payments for the
the- lessee at the end of lease term. right to u e the·underlying asset during the- lease term:

b. The lessee is reasonably certain to exercise a pure.base p. Fixed lease payments

option. b. Variable lease payments
If there is no transfer of ownership to the lessee or if the c. Exercise_price of a purcha$e optio": if the lessee is
reaso11,ably certain to exercise the opt10n
p,urchase option is not reasonably certain to be -exercised,
the lessee shall depreciate the right of use asset over the ~
d. Amount expect e d • ., , . be payable by the lessee under a
residual value guarantee
shorter betw en the useful life of the asset and the lease , f• th 1 . se term reflects the
term.
e. Termination penalties 1 _e ea
exercise of a termination option
 387
All rights belongs to respective authors
s . . . . V •
All' rights belongs to respective uthors
. ' . .a
.)
 The Jea.se incentives sho ld be ded
cigbt of use asset. «.cted ftorn the cost of the
Finance l a e - Le see 'tial direct costs are incrern
{Ill, uld th b entat cost £ h
. nnn.ce le i� defm (i as o IPr .,. tltat wod. no. ave een inct1rred .if stheolease o taming-a
Under· pp odil'< 1, f ll of then ks and re u.r,.J, i'l"trb ' obtalll had not leae
been
transfers b·tan "' :t{iertymg as et.
lo ownership o 1on 1
[Jasehold improvements are 11-ot in.i . ,
tnt d arh.er, :a LI IeeBe shaU b ccounte•l for Ly ,r.., . eluded in the cost of the right f tial direct costs and not
tn ° use asset.
fin nee leoa · r ,asehold improve-men ts are Be
lfi l d· . Pa rately d
·lt th ornm ncervumt date! .the l,essee shall recogniz q: r"ta,, rC1perty,p ant an equi pment a d ac ounte 1or as
�I u c <1sset and lease liability. p barter between the lease t n deprec1ated over the
mprovements. errn and the life of the
Initial measutement of right of use asset
Ansyecurity deposit refundable upon the le . . .
right of use asset is defined as an asset that repre-sen th.
right of a lessee to use an underlyi.ng asset over the ie.a aceOunted for as an asset b,, thJ
·
e
ase expiration 1s

term in a finance lease. Subsequent measurement of right of useasset

IFRS 16, paragraph 23, provides that thelessee shall measuri: IFRS_16, paragraph29, pro':'ides that a lessee shall measure
the right of use asset at cost at commencement date. thenght of use isset applying the cost mqdel.
Paragraph 24 providee that the cost of right of us asset To apply the _cost model, the lessee shallmeasure the right
comprises: ofuse asset at cost less a,n.y accumulated depreciation arid
impairmen.t loss. ·
a. The present value of lease payments or the initial
measurement of the leas,e liability Moreover, th carrying amount of the right of use asset. is.
ad.justed for any ,emeosurement of the lease liability.
b. L ase payments made to lessor at or before
commencement date, such as lease bonus, less any
lease in,centives received Presentation of right. 0£ use asset

c. Initial direct costs incurred by the lessee Paragraph 47 provia.es that the lessee shall present the right
J 1 oruse asset as a separate line item in the statement of
d. Estimate of cost of dismantling, removing and restoring financial position..
the underlying asset for which the lessee has ll present
obligation Ag an alternative the lessee may includ!e the right of use
asset in the ap;ropriat line item within w ich the
Lease incentives are 'payments by the lessor to the lesse.i corre,sponding underlying asset orld be pres nted. if owned.
· associated witha lease or the reimbursement or assumption
. by the lessor of th.e costs of the lessee. For example, the right of the use asset related to_ equipment
maybe' included within property, plant and equipment.
For example, as an incentive to the lessee for entering into
the le the edssbor &g-rees to reimburse the lessee for the ff() ever, disclosure is required that the property1 plant and.
comrrus..-,un pa.i y the lessee toa broker. eqlllPment include right of use asset.

334
335
-..i1a111:F.,i.f,].1Wil ·
All rights bel ngs to r_espective_ uthors ·\
aI I
 odel for lessee Short-term]ease
Fin.a.nee
lease 22
IFRS 16, paragraph ·ovides that at the commenceftnt
e,J1u; endi;,c A defines a short-termle•
· P\e a tight of use asset anda MP of 12 months or less at the aae as a lease ha has a
date, a lessee shall recogm 11
W c comrnencement dae of the
UabiWy. · · d · \
th t a lessee ts requ re to initiI
This si ply 1:1.eans. !se asS'et for the ng ht t use ly lease that contains a purchase t· .

t
,:,, O
tecogm e a I tght ofthe lease term and a lease ltabilLty P 10n lfi not a short-term
)ease.
underJyrng asset over nts r
the obligation to make payme . The election for short-term lease sh be
ll be accounted for by the lessee as a fin.aric underlying asset. a 1 made by class of
AU leases s ah· · t d rd ·e
lease under the new leases an a .
A dass of underlying as.sl'!.t is a gro1.1ping f d .
derl ·ing asset is the subject of a lease for which the right ., oimilar nature and use in anent1·ty·s oo un rymg
1 assets
Tt oh eu sue nht a t.Yasset has been provided b·y the lessor to the 1,11 peral,mns.
leS&l@. Low value lease
The iessee is the entity that obtains the right to u e
anu_nderlYing
a e t fi
Pen'od of time exchange f,or cons1derabon. //ow much is low ualue of the underlying a.sset?
a in,
The lessor i.s the entity tht prouide the_right to use an
underlying asset for a p·er10d of t1Inem exchange for The new lease standard does not p1·ovide for a quantitative
consideration. threshold for low value asset.
Operating lease model for lesse,e Low value asset is a matter of profession,al judgment.
IFRS 16, :paragraph 5, provides t at a less·ee is permitted to
make an accounting policy ele t10n to apply the op�ra!1�g Appendix B3 states that a lessee shall assess the value of
lease accounting and not recogmze an asset andlease liability an underlying asset based on the va.lue of the asset when it
in two option-al exempticriQ. is new regardle,ss'of the age of the asset being leased..

a. Short-term lease A lease of an underlying asset does not qualify a.s a low ualue
b. Low value lease lease if the nature of the asset is such thatthe asset is typ
cally
Stated differently, a lea.see may or may not apply th .not of low value when new.
operating lease accounting if th.e lease is short-term or if
the underlying asset is of low value. For example, a lease of car would_not q1.1.alify as low value
lease.because a new c:ar would typically not be of low value.
Paragraph 6 p1·ovides that if the lessee elects to apply the
operating lease accounting under the two eiemptions, t e Typically low value u.nderlying a sets include personal
lessee shall recognize the lease payments as an expense I'll computers, office f-u.rniture and equipment. ·
either a straight line basis over the lease term or another
IFRS 16, paragraph.8 , provi· des that th.e election for low value
systemati_c basis.
lease is made on a lease by lease basis.
Thelessee s all apply another systematic basis if this is rnore
representative of the patt :m of the lessee'sbenefit.
Under _the operating lease model, the periodic rental is aiDDP1Y
recognized as r-ent expense on the part of the lessee. 383
332 All rights belongs to respective authors
.............................................................)
All rights bel ngs to r_espective_1thors

·\
 1,¢E
1FRS JG is the new lease standard.

CHAPTER10 part of a contract that on: s:11!1 defined a1:1 a contract

der.Appendix A of IFRS 16 a.l
u;
0
nderlying asset for a period ; _
the ght to use the
u sideration. 0
t1tme in exchange for
con
LESSEE ACCOUNTING end.ix B9 provides that to bea
the right lo control theu f ea e. a contract must
Basic principles M\rey
e<1n · se O an identified asset
Appendixlicitly
B13 sp
states
i£ ithat
d · an asset ist y p.1 ll c a. Y tdentilied
. by
beinge:xp ec e m acontract or i m li ·u ifi d
when made available to the customer. P c1 Y Bpec e

For example, p ysically distinct portion of an asset such

TECHNICAL KNOWLEDGE as floor ofa building could be considered an identified asset.
Right to contl'Ol the use of an asset
To define a lease under the new lease standard. A. contract conveys the right to control the use of an asset if
t.hroughout the priod of use, the customer has the right to:
To know the option-al application of operating a. Obtain substantially all of !he econ-0mic benefits from the
lease on the part of lessee. use of the identified asset.

The customer can obtain substantially all of the economic

To recognize a right of use asset in a finance benefits from the use of the asset by having·exclusive
lease. use of the asset throughout the period of use.
A customer can obtain economic benefits directly or
To understand the measurement of a right of use indirectly in many ways, such as using, holding or
asset. · subleasing the asset.

b. Dire t use of the identifi.e asset.

To recognize a lease libility in a finance lease.
A customer ha:s the right to direct use of the asset when
the customer has the right t() direct how nd for what
To- n rs and the mecm.urement ofa lease p11,rpose the asset is u.sed throughout the period of use.
liability in a finance le.n..,...,e.

All rights bel ngs to r.espective.\authors

331
_ All rights belongs to respective authors
. . i . -