FINANCE LEASE-LESSEE’S PERSPECTIVE

On January 1, 2020, Generous, Inc. leased two automobiles for executive use. The lease requires
Generous to make five annual payments of P260,000 beginning January 1 ,2020. At the end of the
lease term, December 31, 2024, Generous guarantees that the residual value of the automobiles will
total P200,000. The property reverts to the lessor at the end of the lease term. The property reverts
to the lessor at the end of the lease term. The estimated useful life of the automobiles is 6 years and
Generous uses straight-line method for all of its assets. Generous’ incremental borrowing rate is
10%. The interest rate implicit in the lease, which is known to Generous, Inc is 9%.

Right of use-equipment, January 1, 2020

Cash payment P 260,000
Present value of remaining payments (260,000 x 3.2397) 842,322
Present value of guaranteed residual value (200,000 x 0.6499) 129,980
Capitalized costof right-of-use equipment/automobiles P1,232,302

CV of right of use equipment 12/31/2020

1,232,302-200,000/5 years= 206,460 dep exp
1,232,302-206,460= 1,025,640

Lease Liability, January 1, 2020

Lease liability at January 1, 2020 after the first payment
842,322 + 129,980 P972,302

Amortization Table
Amortization Table
Total Annual Interest Reduction in Lease
Date Payment Expense (9%) Principal Obligation
01/01/20 260,000 - 260,000 972,302
01/01/21 260,000 87,507 172,493 799,809
01/01/22 260,000 71,983 188,017 611,792
01/01/23 260,000 55,061 204,939 406,853
01/01/24 260,000 36,617 223,383 183,470
12/31/24 200,000 16,530* 183,470 -
*Adjusted; difference is due to rounding off.

Journal entries for the year 2020 and 2021

 2020
Jan. 1 Right-of-Use Automobiles 1,232,302
Lease Liability 972,302
Cash 260,000

Dec. 31 Interest Expense 87,507

Lease Liability 87,507

31 Depreciation Expense 206,460

Accumulated Depreciation 206,460
(1,232,302-200,000)/5

2021
Jan. 1 Lease Liability 260,000
Cash 260,000

Dec. 31 Interest Expense 71,983

Lease Liability 71,983

31 Depreciation Expense 206,460

Accumulated Depreciation 206,460

Journal entry at the end of the lease term (transfer of the asset)
Dec. 31 Accumulated Depreciation (206,460 x 5) 1,032,300
Interest Expense 16,532*
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
*adjusted; balancing figure

Journal entry at the end of the lease term (transfer of the asset- residual value of the asset
amounted to P150,000)

Dec. 31 Impairment Loss 50,000

Accumulated depreciation 1,032,300
Interest Expense 16,532
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
Cash 50,000

On January 1, 2020, Supra Corporation leased a machinery from Jam Company on a five-year lease
term at P150,000 annual rental payments, paid in advance. There is a bargain purchase option on
December 31, 2024 of P240,000. The economic life of the equipment is 15 years. The interest rate
implicit in this lease, which is known to Supra is 12%

Amount of asset, January 1, 2020

Payment at commencement P150,000

PV of Lease Liability (150,000 x 3.0373) 455,595

PV of bargain purchase option (240,000 x 0.5674) 136,176

Total capitalized cost P741,771

Amortization table

Amortization Table

Total Annual Interest Reduction in Lease

Payment Principal Obligation
Date Expense

01/01/20 - 591,771

01/01/21 150,000 71,013 78,987 512,784

01/01/22 150,000 61,534 88,466 424,318

01/01/23 150,000 50,918 99,082 325,236

01/01/24 150,000 39,028 110,972 214,264

12/31/23 240,000 25,736* 214,264 -

*Adjusted; difference is due to rounding off.

Depreciation by Supra in 2020

Depreciation expense for 2020 (741,771 / 15 years) P49,451

Entries in Supra’s books for 2020 and 2021

 2020

Jan. 1 Right-of-Use Machinery 741,771

Lease Liability 591,771

Cash 150,000

Dec. 31 Interest Expense 71,013

Lease Liability 71,013

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

2021

Jan. 1 Lease Liability 150,000

Cash 150,000

Dec. 31 Interest Expense 61,534

Lease Liability 61,534

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

Entry for the exercise of BPO

 Dec. 31 Interest Expense 25,736

Lease Liability 214,264

Accumulated Depreciation 247,255

Machinery (741,771 – 247,255) 494,516

Right-of-Use Machinery 741,771

Cash 240,000

Entry for the unexercised BPO

Dec. 31 Interest Expense 25,736

Lease Liability 214,264

Accumulated Depreciation 247,255

Loss on Failure to Exercise BPO 254,516

Right-of-Use Machinery 741,771

(Loss = 494,514-240,000)

On January 1, 2020, Theo Corporation signed a 5-year non-cancelable lease for a machine with
Robert Company. The terms of the lease called for Theo to make annual payments of P86,680 at the
beginning of each year starting January 1, 2020. The machine has an estimated useful life of 6 years
and a P50,000 unguaranteed residual value at the end of the five year lease term. The machine
reverts to the lessor at the end of the five-year lease term. Theo uses the straight-line method of
depreciation for all of its plant assets. The rate implicit in this contract, which is known to Theo is
10%. The fair value of the machine on January 1, 2020 is P392,490. Theo incurred directly
attributable cost of P10,000 to install the machine. Theo has a constructive obligation to restore the
machine to a condition still suitable for use at the end of the lease term. Estimated cost of
restoration is P20,000.

Leased asset, January 1, 2020

Cash paid at commencement P 86,680
PV of remaining lease payments (86,680 x 3.1699) 274,767
Initial direct cost 10,000
PV of estimated restoration costs (20,000 x 0.6209) 12,418
Capitalized cost of the right-of-use asset P383,865

Amortization Table

Amortization Table
Total Annual Interest Reduction in Lease
Date Payment Expense Principal Obligation
01/01/20 - 287,185
01/01/21 86,680 28,719 57,961 229,224
01/01/22 86,680 22,922 63,758 165,466
01/01/23 86,680 16,547 70,133 95,333
01/01/24 86,680 9,533 77,147 18,186
 12/31/24 20,000 1,814* 18,186 -
*Adjusted; difference is due to rounding off.

Entries on Theo’s books for 2020 and 2021.

2020
Jan. 1 Right-of-Use Equipment 383,865
Cash (86,680 + 10,000) 96,680
Lease Liability (274,767 + 12,418) 287,185

Dec. 31 Interest Expense 28,719

Lease Liability 28,719

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773
383,865/5 years

2021
Jan. 1 Lease Liability 86,680
Cash 86,680

Dec. 31 Interest Expense 22,922

Lease Liability 22,922

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773

Statement of Financial Position 12/31/2020 12/31/2021

Property, Plant and Equipment

Right of Use- Machine P383,865 P383,865
Accumulated Depreciation 76,773 153,546

Current Liabilities
Lease Liability P86,680 P86,680

Noncurrent liabilities:
Lease Liability P229,224 P165,466

Income Statement
Interest Expense P 28,719 P 22,922
Depreciation Expense 76,773 76,773