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College of Accounting Education
3F Facundo Hall, Business and Engineering Building Matina Campus, Davao City Phone No.: (082) 305 - 0645 Local 137 Auditing Problems L. Eddie I. Aguilar, CPA, MBA Audit of Long-Term Liability (Leases)
SUMMARY OF ACCOUNTING STANDARDS AFFECTING LEASES
Lessee
Accounting
(PFRS 16 -
Leases)
A lease is a contract or part of a contract that conveys the right to control the use the
underlying asset for a period of time in exchange for consideration.
IFRS 16 provides that at the commencement date, a lessee shall recognize a Right of Use
Asset (debit) and a Lease Liability (credit). The lessee shall be accounted all leases as a
finance lease under IFRS 16.
Exemption in Using Finance Lease ( this is discretionary )
- Short-term lease – a lease that has a term of 12 months or less at the commencement
date of the lease. This shall be made by class of underlying asset.
- Low-value lease – a leased asset will not quality as low value if the nature of the asset
is such that the asset is not of low value when new. A typically low value assets include
personal computers and office furniture/equipment.
If the lessee elects operating lease, the lessee will recognize the lease payment as an
expense in either a straight line basis over the lease term or another systematic basis (IFRS
16, par. 6).
Initial Measurement of Right of Use Asset
- The amount of initial measurement of the lease liability or the PV of lease payments.
- Lease payments made to lessor at or before commencement date, such as lease bonus,
less any lease incentives received.
- Initial direct costs incurred by the lessee.
- Estimate of cost of dismantling, removing and restoring the underlying asset for which
the lessee has a present obligation.
Components of Lease Payments
- Fixed lease payment less any lease incentives
- Variable lease payments
- Exercise price of a purchase option if the lessee is reasonably certain to exercise the
option
- Amount expected to be payable by the lessee under a residual value guarantee
- Termination penalties if the lease term reflects the exercise of a termination option
Lease incentives are payments by the lessor to the lessee associated with the lease
contract. Example is the commission paid by the lessee to a broker.
Improvements on the lease are not part of the initial direct costs, therefore, not part of
the cost of the Right to Use Asset. These improvements are part of the PAS 16.
Any security deposit refundable upon the lease expiration is accounted for an asset by the
lessee, therefore, not part of the cost of the Right to Use Asset.
Executory costs such as maintenance, taxes and insurance for the underlying asset are
expensed immediately.
Case in Point 1:
Ganade Company closed a lease contract for newly constructed terminals and freight
storage facilities on January 1, 2017. Although the terminals have a composite life of 20
years, the lease runs for 5 years.
The annual lease payment is P1,000,000 payable at the end of each year starting December
31, 2017. The lessee must also make an annual payment of P75,000 for taxes and P125,
for insurance. The lessee incurred initial direct cost of P150,000 including P50,
commission paid to the broker that arranged the lease. As an incentive to the lessee, the
lessor agreed to reimburse the lessee for the commission of P50,000.
The contract was negotiated to assure the lessor a 10% rate of return. The PV of an ordinary
annuity of 1 at 10% for five periods is 3.79. PV value of 1 at 10% for 5 periods is 0.62. The
PV of an annuity of 1 in advance at 10% for 5 periods is 4.17.
Required: Prepare the necessary journal entry.
Right of Use Asset 3,890, Lease Liability 3,790, Cash 100, Fixed payment 1,000,000 x 3.79 = 3,790, Initial direct cost = 100, Cost of right of use asset = 3,890, Payment Interest Principal Amort. Cost 3,790,000 1/1/ 1,000,000 379,000 621,000 3,169,000 12/31/ 1,000,000 316,900 683,100 2,485,900 12/31/ 1,000,000 248,590 751,410 1,734,490 12/31/ 1,000,000 173,449 826,551 907,939 12/31/ 1,000,000 92,061 907,939 - 12/31/ Lease Liability 621, Interest expense 379, Cash 1,000, Depreciation 778, Accum. Dep’n. 778, At the end of the least term, the entry will be: Accum. Dep’n. 3,890, Right of Use Asset 3,890,
Case in Point 2:
Using the same information in CIP#1, except that the annual lease payment is made at the
beginning of each lease year. Assume further that there is a guaranteed residual value of
P300,000 at the end of the lease term.
Required: Prepare the necessary journal entry.
Right of Use Asset 4,456, 000 Lease Liability 4,356, Cash 100, Fixed payment 1,000,000 x 4.17 = 4,170, Guaranteed Res. Value 300,000 x 0.62 = 186, Initial direct cost = 100, Cost of right of use asset = 4,456, Payment Interest Principal Amort. Cost 4,356,000 1/1/
PV of payment – 1,000,000 x 3.79 = 3,790, PV of purchase option – 500,000 x 0.62 = 310, Initial direct cost = 100, Cost of the Right of Use Asset = 4,200, Payment Interest Principal Amort. Cost 4,100,000 1/1/ 1,000,000 410,000 590,000 3,510,000 12/31/ 1,000,000 351,000 649,000 2,861,000 12/31/ 1,000,000 286,100 713,900 2,147,100 12/31/ 1,000,000 214,710 785,290 1,361,810 12/31/ 1,000,000 138,190 861,810 500,000 12/31/ Interest expense 410, Lease liability 590, Cash 1,000, Depreciation 210 , Acccum. Dep’n. 210 , 4,200,000 / 2 0 yrs = 420, The asset is depreciated over the useful life of the asset since it is certain that purchase option will be exercised. If the option is exercised at the end of the lease term, the journal entry would be: Lease liability 500, Cash 500, If the option is not exercised, the loss is recognized equal to the difference between the carrying amount of the Right of Use Asset and the Lease Liability. The entry would be: Accum. Dep’n. 1,050, Lease liability 500, Loss on finance lease 2,650, Right of Use Asset 4,200,
Case in Point 4:
Using the same information in CIP#1, except that the lease contained an option for the
lessee to extend for a further 5 years. At the commencement date, the extension option is
not reasonably certain.
After 2 years, On January 1, 2020, the lessee decided to extend the lease for a further 3
years.
Additional relevant information:
New annual rental payable at the end of each year 1, 200 ,
New implicit rate 8%
Required: Prepare the necessary journal entry.
Right of Use Asset 3,890, Lease Liability 3,790, Cash 100, Fixed payment 1,000,000 x 3.79 = 3,790, Initial direct cost = 100, Cost of right of use asset = 3,890, Payment Interest Principal Amort. Cost 3,790,000 1/1/ 1,000,000 379,000 621,000 3,169,000 12/31/
Remeasurement of Lease Liability
New amortization table:
Case in Point 5:
Using the same information in CIP#1, except that on January 1, 2020, Ganade Company
purchased the terminal and freight storage facility that it had been leasing for P5,000,000.
- If the lessee can cancel the lease, the lessor’s losses associated with the cancelation are
borne by the lessee.
- Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee.
- The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
Operating Lease
- Lease payments from the lessee is recognized as income either on a straight line basis
or another systematic basis if this is more representative of the patterns in which
benefit from the use of the underlying asset is diminished.
- Initial direct cost incurred by the lessor is added to the carrying amount of the
underlying asset and recognized as an expense over the lease term on the same basis
as the lease income.
- Security deposit refundable upon the lease expiration is accounted for as liability by the
lessor.
- Lease bonus received by the lessor from the lessee is recognized as unearned rent
income to be amortized over the lease term.
Case in Point 7:
Sablay Company purchased a machine on January 1, 2017 for P5,000,000 for the express
purpose of leasing it. The machine was expected to have a 10-year life with no residual value
and the straight line method of depreciation is used.
On March 1, 2017, Sablay Company leased the machine to Sacramento Company for
P1,200,000 a year for a 4-year period ending February 28, 2021. Below is the pertinent
information in relation to the lease:
Security deposit received from Sacramento 500,
Lease bonus 200,
Initial direct costs incurred by Sablay Company 300,
During the year, the company paid repair and maintenance of P25,000.
Required: Compute the following:
1. Rent income for 2017
2. Carrying amount of the machine.
3. Unearned rent income at December 31, 2017.
4. Prepare the necessary journal entries.
Rent income – 3/1/2017 to 12/31/17 = 1,000, Amort. of lease bonus – 200,000 / 4 x 10/12 = 41, Rent income – 2017 = 1,041, 667 Cost of the machine = 5,000, Depreciation – 2017 – 5M / 10 yrs = ( 500,000) Deferred Initial direct costs – 300,000 – [300,000 / 4 x 10/12] = 237, Carrying value of the machine – 12/31/2017 = 4,737, Unearned rent income – [200,000 – 41,667] = 158, Machinery 5,000, Cash 5,000, Rent Receivable/Cash 1,000, Rent income 1,000, Cash 500, Liability for security deposit 500,
Cash 200, Unearned rent income 200, Deferred initial direct costs 300, Cash 300, Repairs and maintenance 25, Cash 25, Depreciation 500, Accum. Depreciation 500, 5M / 10 x = 500, Amortization of lease bonus and deferred initial direct costs: Unearned rent income 41, Rent income 41, Amortization – initial direct costs 62, Deferred initial direct costs 62,
If payment of the lease cannot be recognized as income on a straight line basis, the
lessor will use another systematic basis in recognizing income. If the lease is payable in
an unequal manner, the total cash payments for the lease term shall be amortized
uniformly on the straight line basis as rent income over the lease term.
Case in Point 8:
Cabrera Company owns an office building and normally charges tenants P3,000 per square
meter per year for office space.
Because the occupancy rate is low, Cabrera Company agreed to lease 1,000 square meter to
Calacar Company at P1,200 per square meter for the first year of a three-year operating
lease. Rent for the remaining years will be at the P3,000 rate. As an inducement to enter
the lease, Cabrera Company granted Calacar Company the first six months of the lease rent-
free.
Required: Prepare the necessary journal entries.
Total rent for the lease 1 st^ year – 1,200,000 x 6/12 = 600, 2 nd^ year – 1,000 x 3,000 = 3,000, 3 rd^ year – 1,000 x 3,000 = 3,000, Total rental for 3 years = 6,600, 1 st^ year Cash 600, Rent receivable 1,600, Rent income 2,200, 2 nd^ year Cash 3,000, Rent receivable 800, Rent income 2,200, 3 rd^ year Cash 3,000, Rent receivable 800, Rent income 2,200,
Finance
Lease
Finance lease is either:
- Direct financing lease – recognizes only interest income
- Sales type lease – recognizes both interest income and gross profit on sale.
Equipment 5,000, Cash 5,000, Equipment 250, Cash 250, Lease receivable 7,800, Equipment 5,250, Unearned interest income 2,550, Cash 900, Lease receivable 900, Unearned interest income 522, Interest income 522,
At the end of the lease term, the entry to revert the machine to the lessor would be:
Equipment 600, Lease receivable 600,
Case in Point 11:
Using the same information in CIP#10. Assume that at the end of the lease term, the fair
value of the equipment is P400,000. Prepare the journal entry to revert the machine to the
lessor.
Equipment 400, Loss on finance lease 200, Lease receivable 600,
Case in Point 12:
Using the same information in CIP#10, except that the residual value is guaranteed. Assume
further that at the end of the lease term, the fair value of the equipment is P400,000.
Prepare the journal entry to revert the machine to the lessor.
Equipment 400, Cash 200, Lease receivable 600,
Case in Point 13:
Cardona Company is engaged in leasing equipment. Such an equipment was delivered to a
lessee at the beginning of the current year under a direct financing lease with the following
provisions:
Cost of equipment 4,361,
Unguaranteed residual value 200,
Useful life and lease term 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 8 periods at 10% 5.
PV of 1 for 8 periods at 10% 0.
The annual rental is payable at the end of each year. The equipment will revert to the lessor
upon the lease expiration.
Questions:
a. What is the net investment in the lease to be recovered from rental?
b. What is the annual rental over the lease term?
c. What amount of interest income should be recognized for the current year?
Cost of the equipment 4,361,
PV of unguaranteed residual value (500,000 x 0.567) 283,
Net investment to be recovered from rental 4,268, Divided by PV of an ordinary annuity 5. Annual rental 800, Payment Interest Principal Amort. Cost 4,361, 800,000 436,120 363,880 3,997,320 year 1 800,000 399,732 400,268 3,597,052 year 2 800,000 359,705 440,295 3,156,757 year 3 800,000 315,676 484,324 2,672,433 year 4 800,000 267,243 532,757 2,139,676 year 5 800,000 213,968 586,032 1,553,644 year 6 800,000 155,364 644,636 909,008 year 7 800,000 90,992 709,008 200,000 year 8
Case in Point 14:
Using the same information in CIP#13, except that the residual value is guaranteed. Prepare
the amortization schedule.
Payment Interest Principal Amort. Cost 4,361, 800,000 436,120 363,880 3,997,320 year 1 800,000 399,732 400,268 3,597,052 year 2 800,000 359,705 440,295 3,156,757 year 3 800,000 315,676 484,324 2,672,433 year 4 800,000 267,243 532,757 2,139,676 year 5 800,000 213,968 586,032 1,553,644 year 6 800,000 155,364 644,636 909,008 year 7 800,000 90,992 709,008 200,000 year 8 200,000 200,000 - year 8
Case in Point 15:
Using the same information in CIP#13, except that the lease provides for a transfer of title
to the lessee at the end of the lease term.
Questions:
a. What is the net investment in the lease to be recovered from rental?
b. What is the annual rental over the lease term?
c. What amount of interest income should be recognized for the current year?
Cost of the equipment/net investment 4,361, Divided by PV of an ordinary annuity 5. Annual rental 817, Note: residual value is completely ignored in the computation since the equipment will not revert to lessor. Payment Interest Principal Amort. Cost
[(8,000,000 – 283,500) + 200,000]
Case in Point 17:
Using the same information in CIP#1 6 , except that the residual value is guaranteed. Required: a. Compute the total unearned financial revenue. b. Compute the manufacturer profit to be recognized immediately. c. Compute the interest income for the first year. d. Prepare the necessary journal entry to record the transactions. e. Prepare the entry to revert the helicopter to lessor. Assume that the fair value the asset
- 1,000,000 316,900 683,100 2,485,900 12/31/ - 1,000,000 248,590 751,410 1,734,490 12/31/
- Lease Liability 621,
- Interest expense 379,
- Depreciation 778,
- Jan. 1,
- Annual rental for remaining 2 years of old lease term – 1,000,000 x 1.78 = 1,780, PV as of Jan. 1, 2020:
- Annual rental for 5 years starting January 1, 2022 – 1, 2 00,000 x 3.99 = 4,788,
- X PV of 8% for two periods = 0.
- PV of rentals of extended lease term = 4,117,
- PV of the remaining 2 years of old lease = 1,780,
- PV of extended lease term = 4,117,
- Total PV as of Jan. 1, 202 0 = 5,897,
- Less: Amortized cost as of 12/31/2019 = 1,734,
- Increase in lease liability as of 1/1/2020 = 4,163,
- Right of Use Asset 4,163,
- Lease liability 4,163, - 5,897,680 1/1/ Payment Interest Principal Amortized cost
- 1,000,000 471,814 528,186 5,369,494 12/31/
- 1,000,000 429,560 570,440 4,799,054 12/31/
- 1,200,000 383,924 816,076 3,982,978 21/31/
- 1,200,000 318,638 881,362 3,101,617 12/31/
- 1,200,000 248,129 951,871 2,149,746 12/31/
- 1,200,000 171,980 1,028,020 1,121,726 12/31/
- 1,200,000 78,274 1,121,726 - 12/31/
- Lease liability 528,
- Interest expense 471,
- Depreciation 817,
- CV – 12/31/19 (3,890,000 – 2,334,000) 1,556,0
- Increase in lease liability – 1/1/2020 4,163,
- CV – 1/1/2020 5,719,
- Annual depreciation 817, Divided by: remaining life 7 years
- Terminal and Freight Storage 4,821, Required: Prepare the necessary journal entry.
- Accum. Depreciation 2,334,
- Lease liability 1,734,
- Right of Use Asset 3,890,
- Cash 5,000,
- PV of rentals (3,328,710 x 3.605) 12,000,
- PV of unguaranteed residual value (500,000 x 0.567) 283,
- Total present value – net investment 12,283,
- Lease receivable 17,143,
- Total present value 12,283,
- Unearned interest income 4,860,
- Cost of helicopter 8,000,
- PV of unguaranteed residual value 283,
- Cost of sales 7,716,
- Initial direct cost 200,
- Total COS 7,916,
- Sales 12,000,
- Cost of goods sold 7,916,
- Gross profit 4,083,
- Cost of goods sold 7,916,
- Lease receivable 1 7,143,
- Sales 12,000,
- Unearned interest income 4,860,
- Inventory 8,000,
- Cash 200,
- Cash 3,328,
- Unearned interest income 1,474,02
- Interest income 1,474, - 12,283, Payment Interest Principal Amort. Cost
- 3,328,710 1,474,020 1,854,690 10,428,810 year
- 3,328,710 1,251,457 2,077,253 8,351,557 year
- 3,328,710 1,002,187 2,326,523 6,025,034 year
- 3,328,710 723,004 2,605,706 3,419,328 year
- 3,328,710 409,382 2,919,328 500,000 year
- Inventory 400, Entry to revert the helicopter to lessor:
- Loss on finance lease 100,
- Gross rentals (3,328,710 x 5) 16,643, on that year is only P400,000.
- Unguaranteed residual value 500,
- Lease receivable – gross investment 17,143,
- PV of rentals (3,328,710 x 3.605) 12,000,
- PV of unguaranteed residual value (500,000 x 0.567) 283,
Total present value – net investment 12,283, Lease receivable 17,143, Total present value 12,283, Unearned interest income 4,860, Cost of helicopter 8,000, Initial direct cost 200, Total COS 8,200, Sales 12,283, Cost of goods sold 8,200, Gross profit 4,083, Cost of goods sold 8,200, Lease receivable 17,143, Sales 12,283, Unearned interest income 4,860, Inventory 8,000, Cash 200, Entry to revert the helicopter to lessor: Inventory 400, Cash 100, Lease receivable 500,
Case in Point 18:
Using the same information in CIP#16, except that the asset will not revert to the lessor.
Required:
a. Compute the total unearned financial revenue.
b. Compute the manufacturer profit to be recognized immediately.
c. Compute the interest income for the first year.
d. Prepare the necessary journal entry to record the transactions.
- If the underlying asset will not revert to the lessor, the residual value is completely
ignored by the lessor in the computation of unearned interest income and gross profit
on the sale.
- The underlying asset will remain with the lessee if the lease provides for either a
purchase option that is reasonably certain to be exercised or transfer of title to the
lessee upon the lease expiration.
Gross rentals (3,328,710 x 5) 16,643, PV of rentals (3,328,710 x 3.605) 12,000, Unearned interest income 4,643, Cost of helicopter 8,000, Initial direct cost 200, Total COS 8,200, Sales 12,000, Cost of goods sold 8,200, Gross profit 3,800, Cost of goods sold 8,200, Lease receivable 16,643, Sales 12,000, Unearned interest income 4,643, Inventory 8,000, Cash 200,
On January 1, 2017, Timbal Company leased equipment to another entity. The terms of the
lease called for annual payment of P500,000 to be made at the end of each year. The lease
term is 5 years which is the useful life of the equipment.
The lease is appropriately recorded as a sales type lease. The cost of the equipment is
P1,000,000. The implicit rate in the lease is 12%. The PV of an ordinary annuity of 1 at 12%
for 5 periods is 3.60.
On July 1, 2019, Timbal Company actually sold the equipment to the lessee for P1,200,000.
Required: Prepare the necessary journal entries.
- When a lessor actually sells an asset that is has been leasing under a finance lease, the
difference between the sales price and the carrying amount of the lease receivable
(balance of lease receivable minus the unearned interest income) is recognized in profit
or loss.
Gross rentals (500,000 x 5) 2,500, PV of gross rentals (500,000 x 3.60) 1,800, Unearned interest income 700, Lease receivable 2,500, Sales 1,800, Unearned interest income 700, Payment Interest Principal Amort. Cost 1,800,000 1/1/ 500,000 216,000 284,000 1,516,000 12/31/ 500,000 181,920 318,080 1,197,920 12/31/ 71,875 841,670 7/1/ 469, Sales price 1,200, CV of lease receivable: Lease receivable 1,500, Unearned int. receiv. (700,000 – 469,795) 230,205 1,269, Loss on sale of leased equipment 69, Cash 1,200, Unearned interest income 230, Loss on sale 69, Lease receivable 1,500,
PROBLEMS
Problem 1
On January 1, 2017, Geldore Company entered into a lease with Genaldo Company, a lessor, for a new
equipment. The lease stipulates that annual payments of P1,000,000 will be made for five years starting
December 31, 2017. Gedlore Company guaranteed a residual value of P474,000 at the end of the 5-year
period. The equipment will revert to Genaldo Company at the lease expiration.
The implicit interest rate for the lease is 16% after considering the guaranteed residual value. The economic
life of the equipment is 10 years.
Required:
1. Prepare a schedule of the annual payments.
2. Prepare journal entry on the books of Geldore Company and Genaldo Company for 2017 and 2018.
3. Prepare journal entry on December 31, 2021, end of lease term, to record the return of the equipment to
Genaldo Company. Assume the fair value of the equipment is equal to the guaranteed residual value.
4. Prepare journal entry on December 31, 2021 to record the return of the equipment to Genaldo Company
assuming the fair value of the equipment is only P300,000.
5. Prepare journal entry on December 31, 2021 to record the return of the equipment to Genaldo Company
assuming the fair value of the equipment is P500,000.
Problem 2
Giangan Company entered into a lease of building on January 1, 2017 with the following information:
Annual rental payable at the end of each year 600,
Lease term 5 years
Useful life of building 20 years
Implicit interest rate 9%
The lease contained an option for the lessee to extend the lease for a further 5 years. At the commencement
date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 2020, the lessee decided to extend the lease for a further 5 years. Effective January
1, 2020, the new annual rental is at P800,000 and the new implicit rate is 12%.
Required:
1. Prepare a schedule of payment for 2017 to 2019.
2. Compute the lease liability as of January 1, 2020.
3. Prepare a new schedule of payment as of January 1, 2020 to end of the lease term.
Problem 3
On January 1, 2017, Golusinda Company leased an equipment from Gomez Heavy Equipment with the
following pertinent information:
Annual lease payable at the end of each year 500,
Lease term 8 years
Useful life of equipment 10 years
Implicit interest rate 10%
The entity has the option to purchase the equipment on January 1, 2025 by paying P500,000. There is
reasonable certainty that the entity shall exercise the option. On January 1, 2017, the entity incurred initial
direct costs of P200,000.
Questions:
1. What is the initial cost of the Right to Use Asset?
a. P 0 b. P 2,865,000 c. P 2,900,000 d. P 3,100,
2. What is the interest expense for 2017?
a. P 266,500 b. P 290,000 c. P 310,000 d. P 316,
3. What is the lease liability on December 31, 2017?
a. P 2,398,500 b. P 2,690,000 c. P 2,848,500 d. P 2,790,
4. What is the depreciation for 2017?
a. P 290,000 b. P 310,000 c. P 362,500 d. P 387,
Problem 4
On January 1, 2017, Calamba Company leased a machine to another entity for a four-year period. The annual
rentals will be paid by the lessee beginning December 31, 2017. The lease agreement called for a 10% increase
in annual rental per annum. The rental due on December 31, 2020 was P133,100.
Questions:
1. What is the rental payment due on December 31, 2018?
a. P 90,909 b. P 100,000 c. P 110,000 d. P 121,
Eneluna Company set the annual rental to ensure a 10% rate of return. The implicit rate of the lessor is known
by the lessee.
The annual total lease payment included P20,000 of executory costs related to taxes on the property. Round
off PV factor to three decimal places.
Questions:
1. What is the annual lease payment?
a. P 400,000 b. P 435,044 c. P 480,000 d. P 522,
2. What is the total annual lease payment?
a. P 420,000 b. P 455,044 c. P 500,000 d. P 542,
3. What is the unearned interest income of the lessor at the beginning of the current year?
a. P 1,542,000 b. P 1,850,000 c. P 2,342,000 d. P 2,542,
Problem 9
Bigoy Company is a dealer of equipment. On January 1, 2017, an equipment was leased to another entity with
the following provisions:
Annual rental payable at the end of each year 1,500,
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,
Residual value – unguaranteed 50 0,
Implicit interest rate 12%
PV of an ordinary annuity of 1 at 12% for 5 periods 3.
PV of 1 at 12% for 5 periods 0.
At the end of the lease term on December 31, 2021, the equipment will revert to the lessor. The entity incurred
initial direct cost of P200,000 in finalizing the lease agreement.
Questions:
1. What is the gross investment in the lease?
a. P 4,000,000 b. P 4,500,000 c. P 7,500,000 d. P 8,000,
2. What is the net investment in the lease?
a. P 3,500,000 b. P 4,000,000 c. P 5,400,000 d. P 5,685,
3. What interest income should be reported for 2017?
a. P 648,000 b. P 682,200 c. P 900,000 d. P 960,
4. What amount should be reported as gross profit on sale?
a. P 1,485,000 b. P 1,685,000 c. P 3,500,000 d. P 4,000,
Problem 10
Bulay-og Company adopted the policy of leasing as the primary method of selling products. The entity’s main
product is a small cargo vessel. Bulay-og Company constructed such a cargo vessel for Claud Company at a
cost of P8,500,000.
The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the
ownership transferring to Claud Company at the end of the lease period. It is estimated that the cargo vessel
will have a residual value of P1,600,000 at that date.
The lease payments began January 1, 2017. Bulay-og Company incurred initial direct cost of P500,000 in
financing the lease agreement with Claud Company. The sales price of the cargo vessel is P14,875,000.
Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14% for 10 periods
is 5.95.
Questions:
1. What amount should be reported as gross profit on sale for 2017?
a. P 4,275,000 b. P 4,775,000 c. P 5,875,000 d. P 6,375,
2. What is the unearned interest income on January 1, 2017?
a. P 8,525,000 b. P 9,625,000 c. P 10,125,000 d. P 11,725,
3. What is the interest income for 2017?
a. P 1,732,500 b. P 1,956,500 c. P 2,082,500 d. P 2,306,
Problem 11
On December 31, 2017, Conarco Company, a lessor, actually sold a machinery that it had been leasing under a
sales type lease.
On January 1, 2017 after receipt of the lease payment for the year, the following account balances were
associated with the lease:
Gross lease receivable 5,850,
Unearned interest income 1,000,
The interest rate implicit in the lease is 10%. On December 31, 2017, Conarco Company actually sold the leased
machinery to the lessee for P3,250,000 cash.
Questions:
1. What is the interest income for 2017?
a. P 0 b. P 325,000 c. P 485,000 d. P 585,
2. What is the carrying amount of the lease receivable on December 31, 2017?
a. P 4,850,000 b. P 5,335,000 c. P 5,365,000 d. P 5,850,
3. What is the loss on sale of the machinery that should be recognized on December 31, 2017?
a. P 1,600,000 b. P 2,015,000 c. P 2,085,000 d. P 2,600,
Honor Your Choice
Don’t become overwhelmed by all the possible choices. Consider the options, pick one,
and go with it.
The possibilities do not create their own fulfillment. That’s your job, and it’s a great
one, though necessarily difficult at times.
When the challenges come, don’t slide into the trap of wishing you had chosen
differently. Push on ahead, stick to the road you’re on, and build the value you’ve decided to
build.
Every achievement worth achieving takes effort, sacrifice, time and resources. Every
possibility worth bringing to life will demand the best of you.
Instead of wishing for an easier ride, reaffirm your commitment with new action, a
smarter strategy, a more positive attitude. Honor your choice by seeing it through.
Possibilities have value only to the degree you act upon them. Choose the best, give
your best, and live the unmatched experience of bringing great value into being.
- Ralph Marston
