413889810.

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FAR EASTERN UNIVERSITY – MANILA
PRACTICAL ACCOUNTING PROBLEMS 1
LEASES

Lease. An agreement whereby the lessor conveys to the lessee in return for payment the right to use an asset for an agreed period of
time.

Finance lease (lease purchase). A lease that transfers substantially all the risks and rewards of ownership of an asset. Title need not
necessarily be eventually transferred.

Operating lease. A lease that is not a finance lease. It is a rental approach in the sense that the periodic rental is simply recognized as
rent expense ( on lessee’s books) and rent income (on lessor’s books)

Minimum lease payments. The payments over the lease term that are required to be made. For a lessee, this includes any amounts
guaranteed to be paid; for a lessor, this includes any residual value guaranteed to the lessor.

Classification of Lease
Lessor Lessee
 Operating Lease  Operating Lease
 Finance Lease  Finance Lease
1. Sales – type Lease
2. Direct Financing Lease
Finance lease

a. Plain or regular finance lease, hereinafter referred to as direct

financing lease, (FMV of lease asset is equal to the cost of lease
asset)

b.Finance lease by manufacturers or dealers, hereinafter referred to as

sales-type lease,(FMV of lease asset is not equal to the cost of
lease asset)

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the
form. Situations that would normally lead to a lease being classified as a finance lease include the following:

No Is the lease contract non-cancelable?  The lease transfers ownership of the asset to the lessee by the end of the lease term;
Yes
 The lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than fair value at the date the option becomes exercisable
Is ownership transferred by the end of the
vdjksjkjkdjcacacacancelable Yes that, at the inception of the lease, it is reasonably certain that the option
lease term?
will be exercised;
No  At the inception of the lease, the present value of the minimum lease
Does the lease contain a bargain purchase payments amounts to at least substantially all of the fair value of the
Yes
option? leased asset; (Under American Standard, at least 90% of the fair value
of the leased asset) Minimum Lease Payment – the payments over
No the lease term that the lessee can be required to make, excluding
Is the lease term form a major part of the Yes contingent rent, cost for services and taxes to be paid and
asset’s useful life? reimbursed to the lessor, together with guaranteed residual value
and bargain purchase option.
No  The lease term is for the major part of the economic life of the asset, even
Is the present value of minimum lease
Yes if title is not transferred; (Under American Standard, at least 75% of the
payments greater than or substantially economic life of the asset) and
equal to asset’s fair value?
 Other Criteria:
No  The lease assets are of a specialized nature such that only the lessee can
Is the asset so special in nature that only Yes use them without major modifications being made.
the lessee can use it without modification?  If the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee.
No  Gains and losses from the fluctuation in the fair value of the residual
accrue to the lessee, for example, in the form of a rent rebate equaling
Operating Lease Finance Lease most of the sales proceeds at the end of the lease.
 The lessee has the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent.

ACCOUNTING FOR OPERATING LEASE

OPERATING LEASE ON THE VIEWPOINT OF LESSOR AND LESSEE

Rent expense/Rental receipts
Free rent/ Uneven payments
Lessee
Rent expense – lessee does not record the
leased asset; instead, the periodic rental
payment is recognized as rent expense on a
straight line basis
Rental expense is still recognized by lessee on
a SL basis and is prorated over full term of
Lessor
Rental receipts – recognized as rental revenue
of a SL basis
Rental revenue is still recognized by lessor on a
SL basis and is prorated over full term of lease

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Lessee Lessor
lease
Lease bonus Treated as prepaid rent and amortized as Treated as Unearned rent by lessor and
rental expense over the lease-term on a SL amortized as rental revenue over the lease term
basis on a SL basis
Security deposits If refundable is treated as a receivable (asset) If refundable is treated as a payable (liability) by
by the lessee until the deposit is returned to the the lessee until the deposit is returned to the
lessee lessee

If nonrefundable is recorded as prepaid rent If nonrefundable is recorded as unearned

and amortized as rental expense over the lease revenue and recognized as rental revenue over
term the lease term

Leasehold improvement Leasehold improvement – capitalized by lessee

and amortized over the shorter of the
remaining lease term or the useful life of the
improvements

Classified - Property, plant and equipment

Expense matched against rent a. Depreciation of the leased asset – Lessor
revenue depreciates the asset over asset’s economic life
(regardless of the date the lease term begins)

b. Initial direct costs – are recorded as an

asset by the lessor and amortized on a SL basis
to operating expense over the lease term

c. Executory costs – insurance, property tax,

repairs on the leased asset usually paid by lessor
are charged to operating expense as incurred.
Pro-forma Entries
Lessee's Books Lessor's Books
1. Lease payments Rent expense Xxx Cash xxx
Cash xxx Rent income xxx

2. Contingent rental Rent expense Xxx Cash xxx

Cash xxx Rent income xxx

3. Lease bonus Prepaid rent Xxx Cash xxx

Cash xxx Unearned income xxx

Amortization Rent expense Xxx Unearned income xxx

Prepaid rent xxx Rent income xxx

4. Security deposit Rent deposit Xxx Cash xxx

( refundable upon lease Cash xxx Liability for rent deposit xxx
Expiration)

5. Lease improvements Lease improvements xxx Not Applicable

Cash xxx

Depreciation Depreciation expense xxx

Accum. Depreciation - LI xxx

6. Leased property Not applicable Leased property xxx

( recognized as asset and shall Cash xxx
be depreciated consistent with the
lessor's normal depreciation for similar Depreciation expense xxx
asset) Accumulated depreciation xxx

7. Initial direct cost ( added to the Not applicable Deferred initial direct cost xxx
carrying amount of the leased asset Cash xxx
and recognized as an expense over the
lease term of the same basis as the Amortization of IDC xxx
lease income) Deferred initial direct cost xxx

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Financial Statement Presentation

Lessee
Statement of financial position Prepaid rent
Rent deposit
Leasehold improvement (if any)
Less: Accumulated depreciation
Lessor
Leased property
Less: Accumulated depreciation
Deferred IDC - net of amortization
Liability for rent deposit
Unearned rent income

Statement of comprehensive income Rent expense Rent income

Depreciation expense - LI Depreciation expense
Amortization of IDC
ACCOUNTING FOR FINANCE LEASE (Lessee’s Point of View)

Note of Guaranteed and Unguaranteed Residual Value: (Computation for Present Value)

Lessee book  guaranteed only

Lessor book  Either guaranteed or unguaranteed included in the computation

Note: the guaranteed residual value is not included in the lease liability if it is guaranteed by a third party (lessee not
included) ( lessor included)

Journal Entries under finance lease on the books of the Lessee

1. To record the lease at the commencement of the lease term
Leased property under finance lease xxx
Obligations under finance lease Xxx
Lower between : FV of the leased asset and PV of minimum lease payment
Total leased asset/ liability:
PV of rental payments required during the lease term
(annual rental x * annuity factor) xxx
PV of BPO payment ( BPO x PV of 1 factor) xxx
PV of guaranteed residual value ( in the absence of BPO)
(GRV x *PV of 1 factor) xxx
PV of MLP (a ) xxx

Compared with the Fair value of leased asset (b) xxx

Total leased asset/ liability ( the lower amount a or b) xxx

* The discount rate is the interest rate implicit in the lease, if determinable,
Otherwise the lessee’s incremental borrowing rate.

Note:
a. BPO ( There is a bargain purchase option if the option price is less than the fair value of
the asset upon the option exercise date).
b. Guaranteed RV is not included,(if guaranteed is not related to the lease contract) or
if there is no indication that the third party is related to the lessee.

2. To record periodic lease payments

Obligations under finance lease ( periodic rental payment minus interest) xxx
Interest expense (PV x interest rate) xxx
Cash Xxx

(PV = balance of the leased liability – principal)

3. To record depreciation on the leased property

Depreciation expense - leased property xxx

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Accu. Depreciation - leased property Xxx

Note: If there is transfer of ownership or there is bargain

Purchase option, depreciate using the useful life of the
Leased asset.

If there is no transfer of ownership, use the shorter

Of the useful life of leased asset or lease term.

4. To record transfer of ownership of the leased property at the end of the lease term
Asset xxx
Accu. Depreciation – leased property xxx
Leased property under finance lease Xxx

5. To record the exercise of the bargain purchase option upon lease expiration

Asset xxx
Accu. Depreciation – lease property xxx
Lease liability xxx
Interest expense xxx

Cash xxx
Leased property under finance lease xxx

6. To record return of the leased asset to the lessor if the bargain purchase option is not exercised
Accumulated depreciation – leased asset xxx
Leased liability xxx
Interest expense xxx
Loss on finance leased ( Book value of leased asset minus lease liability balance) xxx
Leased asset Xxx

7. To record return of the leased asset to the lessor upon leased expiration and there is guaranteed residual value (GRV)
a. if the residual value of leased asset is EQUAL to its fair value upon lease expiration, then no payment of GRV of the lessor.

Accumulated depreciation – leased asset xxx

Leased liability xxx
Interest expense xxx
Leased asset xxx

b. if the fair value of leased asset is LESSER than the GRV upon lease expiration, then the lessee pays the difference between the
GRV and the fair value of leased asset to the lessor.

Accumulated depreciation – leased asset xxx

Leased liability xxx
Interest expense xxx
Leased asset xxx

Loss on finance leased ( difference between the

FV and GRV) xxx
Cash xxx

Lessee's Statement of financial position

Assets
Leased Property :
Finance leases, less accumulated depreciation

Liabilities
Current liabilities:
Obligations under finance lease

Noncurrent liabilities:
Obligations under finance lease

Lessee’s Statement of comprehensive income

Operating
expenses Depreciation expense – leased asset

Other expense Interest expense

ACCOUNTING FOR FINANCE LEASE (Lessor’s Point of View)

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Summary:
1. Lessors shall recognized a receivable at an amount equal to the net investment in the lease
2. The lease payment receivable is treated by the lessor as repayment of the principal and finance income
3. The finance income is allocated over the lease term using the effective interest method
4. Initial direct cost are treated as follows:
a. For finance lease other than those involving manufacturer dealer lessor – initial direct cost are included in the initial
measurement of the finance lease receivable and reduce the amount of income recognized over the lease term
b. Cost incurred by manufacturer or dealer lessors in connection with negotiating and arranging finance lease are recognized
as expense when selling profit is recognized
5. Manufacturer or dealer lessor recognizes two types of income:
a. selling profit or loss
b. finance income over the lease term

Direct Financing Lease Sales Type Lease

Lessor - A financing company - A manufacturer or a dealer

Cost vs. FV of leased asset - Cost = FMV - Cost is not equal to FMV

Income or revenue - Interest income - Selling profit

- Interest income

Gross investment - MLP + RV - MLP + RV

- Equal to the gross rental for the entire - Equal to the gross rentals for the entire
term plus the absolute amount of the lease term plus the absolute amount of the
residual value, whether guaranteed or residual value, whether guaranteed or
unguaranteed unguaranteed.

- The amount debited to lease receivable - same as direct financing lease.

Net investment in the lease - PV* of MLP + PV of RV + IDC ** - PV* of MLP + PV of RV

- Equal to the cost of the asset plus any - Equal to the present value of the gross
initial direct cost paid by the lessor rentals plus the present value of the
residual value, whether guaranteed or
unguaranteed.

Unearned interest income - The total financial revenue of the lessor - The total financial revenue of the lessor
which is the difference between the gross which is the difference between the gross
investment and net investment in the lease investment and net investment in the lease.
- Sale as direct financing lease

Initial direct cost - The initial direct cost paid by the lessor is - Expensed immediately is a sales type
added to the cost of the asset to get the lease as component of cost of sales.
net investment in the lease. (added to net (added to cost of sales)
investment in the lease)
- This would effectively spread the initial
direct cost over the lease term and reduce
the amount of interest income.
- The interest implicit in the lease is
recomputed so as to include the initial
direct cost in the measurement of the
receivable.

Notes:
* Interest rate implicit in the lease is used in PV calculations
** Initial direct costs are capitalized and allocated over the lease term. Likewise, IDC reduces the implicit interest rate to the lessor.
Legend:
FMV – fair market value PV – present value
MLP – minimum lease payment IDC – initial direct cost
URV – unguaranteed residual value CGS – cost of goods sold

A. DIRECT FINANCING LEASE

Direct Finance Lease

To record the lease

MLP Receivable (Gross) Xxx
Leased asset
(PV + IDC) Xxx
Unearned Interest Revenue Xxx

To record the cost of sales

Not applicable

To record collection of leased payments

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Cash Xxx
MLP Receivable Xxx

To record amortization of interest

Unearned Interest Revenue * Xxx
Interest revenue Xxx

Note : * Unearned interest income is amortized over the lease term based on a pattern reflecting a constant periodic rate of return on
the lessor’s net investment in the finance lease ( effective interest method).

COMPUTATIONS
1. Direct Finance Lease with Initial Direct Cost

a. The initial direct cost should be added to the cost of the asset to determine the net investment.
Cost of asset Xxx
Add: Initial direct cost Xxx
Net investment in the lease Xxx

b. Computation of unearned interest income

Gross rental Xxx
Less: Net investment in the lease (xxx)
Unearned interest income Xxx

2. Direct Financing Lease with Residual Value

a. The present value of the residual value is deducted from the cost of the asset to determine the net investment if the asset
will revert to the lessor at the end of the lease term.
Cost of asset Xxx
Less: PV of residual value (xxx)
Net investment to be recovered from rental Xxx
Divide by PV of an ordinary annuity of 1 at ___% for ___ periods Xxx
Annual rental Xxx

Note: The present value of the residual value is IGNORED in computing the net investment if the asset will NOT revert to the lessor at
the end of the lease term.

b. Computation of unearned interest income

Gross rentals Xxx
add: residual value ( whether guaranteed or unguaranteed) Xxx
Gross investment Xxx
Less: Cost of machinery - net investment (xxx)
Unearned interest income Xxx

Note : if the leased asset will not revert to the lessor at the end of the lease term because the lease provides for a transfer of title to the
lessee, the residual value is completely ignored in the computation of the annual rental and the unearned interest income.

B. SALES TYPE LEASE

 At the commencement of the lease term, the lessor recognizes:

Sales revenue = FMV of the asset, or if lower, the PV of MLP computed at a market rate of interest
Cost of goods sold = cost, or carrying amount if different, of the leased asset less the PV of URV plus IDC
Selling profit (gross profit) = difference between the sales revenue and the CGS

 Two types of income in a sales type lease:

a. Selling profit or gross profit – it is recognized in full at the commencement of the lease term.
b. Finance income – (Gross investment less net investment). It is recognized over the lease term based on a pattern
reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease.

Sales Type Lease

To record the lease

MLP Receivable xxx
Sales Xxx
Unearned Interest Revenue Xxx

To record cost of sales

Cost of goods sold xxx
Inventory Xxx

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To record collection of leased payments

Cash xxx
MLP Receivable Xxx

To record amortization of interest

Unearned Interest Revenue* xxx
Interest revenue Xxx

Note: * unearned interest income is amortized over the lease term based on a pattern reflecting a constant periodic rate of return on
the lessor’s net investment in the finance lease ( effective interest method).

COMPUTATIONS
1. The lease receivable and unearned interest income are the same whether the scenario is guaranteed or
unguaranteed residual value.
Gross rentals Xxx
Add: guaranteed/unguaranteed residual value Xxx
Lease receivable - gross investment Xxx

PV of gross rentals
Add: PV of residual value Xxx
Total present value - net investment Xxx
Xxx

Lease receivable Xxx

Less: Total present value (xxx)
Unearned interest income Xxx

2. Computation of sales and cost of sales:

a. Under the “guaranteed residual value scenario,” the present value of the guaranteed residual value is
included in the sales revenue because the lessor knows that the entire asset has been sold.
Sales ( equal to the total PV PLUS guaranteed residual value)
or FMV of the asset (whichever is lower) Xxx
Less: cost of sales - cost of machinery (xxx)
Less: initial direct cost (xxx)
Gross income Xxx

b. Under the “unguaranteed residual value scenario,” the present value of the unguaranteed residual value is not
included in the sales revenue.
Sales ( equal to present value of gross rentals ONLY) Xxx
Less: cost of sales - cost of machinery MINUS unguaranteed
residual value (xxx)
Less: initial direct cost (xxx)
Gross income Xxx

NOTE: The present value of the unguaranteed residual value is deducted from the cost of the leased asset in computing cost of sales
because this portion of the leased asset is in effect “not sold” in the sense that the lessor will be receiving backed at the end of the
lease term the leased asset with unguaranteed residual value.

ACCOUNTING FOR SALE – LEASEBACK TRANSACTIONS

SALE AND LEASEBACK TRANSACTIONS

 If sale and leaseback transactions results in a finance lease
a. Excess of sales proceeds over the carrying amount of the asset shall not be immediately
recognized as income by a seller-lessee
b. The excess shall be deferred and amortized over the lease term
Sales proceeds xxx
Less: CV xxx
Gain or (loss) xxx(xxx)

Gain - deferred and amortized over the lease term

Loss- recognized immediately

 If a sale and leaseback transaction results in an operating lease

a. Sales price equal to fair value – any profit or loss is recognized immediately

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b. Sales price below fair value – an profit or loss is recognized immediately except that if loss is
compensated for by future lease payments at below market price, the loss is deferred and
amortized in proportion to the lease payments over the period the asset is expected to be used
c. Sales price above fair value – excess over fair value shall be deferred and amortized over the
period the asset is expected to be used and the excess of the fair value over the carrying amount is
an outright gain

Sale – leaseback as a FINANCE LEASE

 IAS 17 provides that “if the sale and leaseback transaction results in a finance lease, any excess of sale proceeds over the
carrying amount should not be immediately recognized as income but DEFERRED and amortized over the lease term.”
 If the leaseback is a finance lease, any GAIN on sale and leaseback is DEFERRED and amortized over the lease term, but
any LOSS on sale and leaseback is recognized IMMEDIALTELY.

 Pro-forma entries
Seller-Lessee's books Buyer- Lessor's books
To record the sale of asset Cash xxx Equipment xxx
Accumulated depreciation xxx Cash xxx
Equipment Xxx
Deferred gain on sale and leaseback xxx

To record the leaseback as finance lease Equipment - leased asset xxx Lease receivable xxx
Lease liability Xxx Equipment xxx
Unearned interest income xxx

To record the periodic rental payment Interest expense xxx Cash xxx
Lease liability xxx Unearned interest income xxx
Cash Xxx Leased receivable xxx
Interest income xxx

To record the depreciation of the leased

asset Depreciation expense xxx None
Accumulated depreciation Xxx

To record amortization of the deferred gain

as Deferred gain on sale and leaseback xxx Unearned interest income xxx
Earned over the lease term Gain on sale and leaseback Xxx Interest income xxx

Sale – leaseback as a OPERATING LEASE

For a transaction that results in Sale – Leaseback as an operating lease:

 If the transaction is clearly carried out at fair value - the profit or loss should be recognized immediately;
 If the sale price is below fair value - profit or loss should be recognized immediately, except if a loss is compensated for by future
rentals at below market price, the loss it should be amortized over the period of use;
 If the sale price is above fair value - the excess over fair value should be deferred and amortized over the period of use; and
 If the fair value at the time of the transaction is less than the carrying amount - a loss equal to the difference should be recognized
immediately.

A. if sale – leaseback is ESTABLISH ( Sales price = Fair value)

 Any GAIN or LOSS shall be recognized immediately
 CV < FV = Gain
 CV > FV = Loss

B. if sale – leaseback is NOT ETABLISHED at FV (SP < FV)

 Any GAIN or LOSS shall be recognized immediately
 CV < FV = Gain
 If the LOSS is compensated by future lease rental at below market rate, the LOSS is deferred and amortized in proportion to
the lease payments over the period for which the asset is expected to be used.
 If the LOSS is NOT compensated by future lease payments at below market value, the LOSS is recognized immediately.

C. if sale – leaseback is NOT established at FV (SP >FV)

 If the sales price is above fair value, the excess over fair value is deferred and amortized over the period for which the asset is
expected to be used.
 The excess of fair value over the carrying amount is an outright GAIN.

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SP

Deferred

Selling price Deferred FV

CV Immediately
Fair value Selling price Immediately

Selling price Immediately Note

Note
If the LOSS is compensated by future lease rental at below market rate, the LOSS is deferred and amortized in proportion to
the lease payments over the period for which the asset is expected to be used.

Pro-forma Entries:
Seller-Lessee's books Buyer- Lessor's books
To record the sale of asset Cash Xxx Equipment xxx
Accumulated depreciation Xxx Cash xxx
Equipment xxx
Gain on sale of leaseback xxx

To record the depreciation of the leased

asset None Depreciation expense xxx
Accumulated depreciation xxx

To record the periodic rental payment Rent expense Xxx Cash xxx
Cash xxx Rent income xxx

Exercises
Exercise No. 1 (Operating Lease)
Lessor Company purchased a machine on January 1, 2010, for P1,250,000 for the express purpose of leasing it. The machine was
expected to have a 9-year life from January 1, 2010, no salvage value, and to be depreciated on a straight-line basis. On March 1,
2010, Lessor leased the machine to Lessee Company for P300,000 a year for a 4-year period ending February 28, 2014. The
appropriate interest rate is 12% compounded annually. Lessor paid a total of P15,000 for maintenance, insurance, and property taxes
on the machine for the year ended December 31, 2010. Lessee paid P300,000 to Lessor on March 1, 2010. Lessor retains title to the
property and plans to lease it to someone else after the 4-year lease period.

Required: Prepare the 2010 journal entries relating to the lease on (1) Lessor Company’s books and (2) Lessee Company’s books.

SOLUTION GUIDE:

LESSOR'S BOOKS
Debit Credit
To purchase of machine
Machinery 1,250,000
Cash 1,250,000

To record receipt of advance rental

Cash 300,000
Rent income 300,000

To record payment of executory costs

Expenses 15,000
Cash 15,000

To recognized unearned rent

Rent income 50,000
Unearned rent income 50,000

To record depreciation
Depreciation 138,889
Accumulated depreciation 138,889

LESSEE'S BOOK
Debit Credit
To record payment of advance rental
Rent expense 300,000

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Cash 300,000

To recognize prepaid rent

Prepaid rent 50,000
Rent expense 50,000

QUIZZER –OPERATING LEASE

1. On January 1, 2010, Jacklyn Company signed a 3-year operating lease for office space at P3,000,000 per year. The lease included
a provision for additional rent of 10% of annual company sales in excess of P15,000,000. Jacklyn Company’s sales for the year ended
December 31, 2010 amounted to P20,000,000. Upon execution of the lease, Jacklyn Company paid P1,200,000 as a bonus for the
lease.

What is the rent expense for the year ended December 31, 2010?
a. P3,500,000 b. P5,400,000 c. P3,900,000 d. P4,700,000

2. On July 1, 2010, Rinna Company leased office space for five years at P150,000 a month. On that date, Rinna Company paid the
lessor the following amounts:
Rent security deposit P350,000
First month's rent 150,000
Last month's rent 150,000
Nonrefundable reimbursement for modifications to the leased premises 900,000

Rinna Company made timely rental payments from August 1 through December 1, 2010.

What portion of payments to the lessor should Rinna have recognized as deferred to years beyond 2010?
a. P1,400,000 b. P1,310,000 c. P1,250,000 d. P500,000

3. As an inducement to enter a lease, a lessor grants to Rose Company, a lessee, six months of free rent under a five-year operating
lease. The lease is effective on July 1, 2010, and provides for monthly rental of P150,000 to begin January 1, 2011.

In the income statement for the year ended June 30, 2011, what amount should be reported as rent expense?
a. P1,800,000 b. P1,620,000 c. P810,000 d. P900,000

4. On October 1, 2010, Kim Company leased office space at a monthly rental of P300,000 for 10 years expiring September 30, 2020.
As an inducement for Kim Company to enter into the lease, the lessor permitted Kim Company to occupy the premises rent-free from
October 1 to December 31, 2010.

For the year ended December 31, 2010, what amount should Kim record rent expense?
a. P900,000 b. P292,500 c. P877,500 d. 0

5. On January 1, 2010, Natasha Company leased a building to a lease under an operating lease for three years at P4,800,000 per
year, payable the first day of each lease year. Natasha Company paid P600,000 to a real estate broker as a finder’s fee. The building
is depreciated P500,000 per year. Natasha Company incurred property tax expense totaling P100,000 for 2010.

What amount should be reported as net rental income?

a. P4,000,000 b. P3,600,000 c. P4,800,000 d. P4,500,000

6. Zara Company purchased a new machine for P6,000,000 on January 1, 2010 for the purpose of leasing it. The machine has an
estimated 10-year life. On April 1, 2010, Zara Company leased the machine to a lessee for three years at a monthly rental of P400,000.
The lessee paid the rental for one year of P4,800,000 on April 1, 2010 and additionally paid P900,000 to Zara Company as a lease
bonus to obtain the three-year lease. On April 1, 2010, Zara Company incurred initial direct cost of P300,000.

What is the net rental income on this leased asset for 2010?
a. P3,150,000 b. P4,350,000 c. P3,200,000 d. P4,400,000

7. On July 1, 2009, Helen Company leased an equipment to another entity under a 3-year operating lease. Total rent for the lease
term is P3,600,000, payable P50,000 monthly for the first lease year, P75,000 monthly for the second lease year and P175,000 monthly
for the third lease year. All payments were made when due.

In Helen Company’s June 30, 2011 statement of financial position, what amount should be reported as accrued rent receivable?
a. P2,100,000 b. P1,200,000 c. P900,000 d. 0

8. On January 1, 2010, Mineriza Company leased a building to another entity under a 10-year operating lease at an annual rental of
P1,000,000. At the inception of the lease, Mineriza Company received P4,000,000 covering the first two year’s rent of P2,000,000 and
a security deposit of P2,000,000. The deposit will be applied to payment of rent for the last two years of the lease.

What portion of the P4,000,000 should be shown as current and noncurrent liability, respectively?
a. P2,000,000 and P1,000,000 c. P1,000,000 and P2,000,000
b. P2,000,000 and P2,000,000 d. 0 and P3,000,000

Exercise No. 2 (Finance Lease with BPO)-Lessee

Lessee Enterprises has a long-standing policy of acquiring company equipment by leasing . Early in 2010, the company entered into a
lease for a new equipment. The lease stipulates that annual payments will be made for 5 years. The payments are to be in advance
on December 31 of each year. At the end of the 5-year period, Lessee may purchase the equipment. The estimated economic life of

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the equipment is 12 years. Lessee uses the calendar year for reporting purposes and straight-line depreciation for other equipment. In
addition, the following information about the lease is also available:

Annual lease payment (including executory costs of P5,000) P60,000

Purchase option price 25,000
Estimated fair value of equipment after 5 years 75,000
Implicit rate 10%
Date of first lease payment January 1, 2010

REQUIRED:
1. Prepare the 2010 journal entries relating to the lease on the books of Lessee (Round off present value factors to four decimal
places).

2. Prepare the journal entry to record the exercise of the purchase option.

3. Prepare the journal entry at the end of the lease term if the purchase option is not exercised.

SOLUTION GUIDE:
Debit Credit
January 1, 2010
To recognize asset and liability
Equipment under finance lease
Finance lease liability 244,868

To record initial payment

Finance lease liability 55,000
Cash 55,000

To record payment for executory costs

Expenses 5,000
Cash 5,000

December 31, 2010

To recognize the second payment
Interest expense 18,987
Finance lease liability 36,103
Cash 55,000

To record payment for executory costs

Prepaid expenses 5,000
Cash 5,000

To record depreciation
Depreciation expense 20,406
Accumulated depreciation 20,406

REQUIREMENT NO. 2
Interest expense 15,386
Finance lease liability 39,614
Accumulated depreciation
Equipment
Cash 55,000
Equipment under finance lease

REQUIREMENT NO. 3
Interest expense 2,268
Finance lease liability 22,732
Accumulated depreciation 102,028
Loss on finance lease 117,840
Equipment under finance lease 244,868

Amortization schedule:

Date Payment Interest Principal Carrying amount

1/1/10 244,868
1/1/10 55,000 55,000 189,868
12/31/2010 55,000 18,987 36,013 153,855
12/31/2011 55,000 15,385 39,615 114,240
12/31/2012 55,000 11,424 43,576 70,664
12/31/2013 55,000 7,066 47,934 22,731

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12/31/2014 25,000 2,269 22,731 (0)

Exercise No. 3 (Finance Lease with Guaranteed Residual Value) Lessee

On January 1, 2010, Lessee Company entered into a lease contract with Lessor Company for a new equipment that had a selling price
of P2,120,000. The lease contract provides that annual payments of P420,000 will be made for 6 years. Lessee made the first
payment on January 1, 2010, subsequent payments are made on January 1 of each year. Lessees guarantees a residual value of
P367,122 at the end of the lease term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be
12%. Lessee has an incremental borrowing rate of 15%. The economic life of the equipment is 9 years. Lessee depreciates its
equipment using straight line method.
Required:
1. Prepare the 2010 and 2011 journal entries relating to the lease on the books of Lessee (Round off present value factors to four
decimal places).
2. Prepare the journal entry at the end of the lease term if the fair value of the leased asset is P400,000.
3. Prepare the journal entry at the end of the lease term if the fair value of the lease asset is P300,000.

SOLUTION GUIDE:
Debit Credit
January 1, 2010
To recognize asset and liability
Equipment under finance lease
Finance lease liability 21,200,000

To record initial payment

Finance lease liability 420,000
Cash 420,000

December 31, 2010

To record accrual of interest
Interest expense 204,000
Interest payable 204,000

To record depreciation
Depreciation expense
Accumulated depreciation

January 1, 2011
To record the second payment
Interest payable 204,000
Finance lease liability 216,000
Cash 420,000

December 31, 2011

To record accrual of interest
Interest expense 178,080
Interest payable 178,080

To record depreciation
Depreciation
Accumulated depreciation

REQUIREMENT NO. 2 (FV > GRV)

To record return of equipment to lessor
Interest payable 39,337
Finance lease liability 327,785
Accumulated depreciation 1,752,878
Equipment under finance lease 2,120,000

REQUIREMENT NO. 3 (FV<GRV)

To record return of equipment to lessor
Interest payable 39,337
Finance lease liability 327,785
Accumulated depreciation 1,752,878
Equipment under finance lease 2,120,000

To record payment to lessor

Loss on finance lease 67,122
Cash 67,122

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Amortization schedule
Date Payment Interest Principal Carrying amount
1/1/10 2,120,000
1/1/10 420,000 420,000 1,700,000
1/1/11 420,000 204,000 216,000 1,484,000
1/1/12 420,000 178,080 241,920 1,242,080
1/1/13 420,000 149,050 270,950 971,130
1/1/14 420,000 116,536 303,464 667,665
1/1/15 420,000 80,120 339,880 327,785
1/1/16 367,122 39,337 327,785 0

QUIZZER - FINANCE LEASE-LESSEE

1. Raiza Company leased an equipment from a lessor on January 1, 2010 with the following pertinent information:
P50
Annual rental payable at the end of each year 0,000
Lease term 8 years
Useful life of equipment 10 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 8 periods at
10% 5.33
Present value of 1 for 8 periods at 10% 0.47

Raiza Company has the option to purchase the equipment on January 1, 2018 by paying P500,000 which is significantly less than the
expected fair value of the equipment on the option exercise date. There is reasonable certainty that Raiza Company will exercise the
option. On January 1, 2010, Raiza Company incurred initial direct cost of P200,000.

What is the initial cost of equipment?

a. P2,900,000 b. P3,100,000 c. P2,865,000 d. 0

2. On January 1, 2010, Olivette Company leased two automobiles for executive use. The lease requires Olivette Company to make
five annual payments of P1,000,000 beginning January 1, 2010. At the end of the lease term, December 31, 2014. Olivette Company
guaranteed the residual value of the automobiles at P500,000. The lease qualifies as a finance lease. The interest rate implicit in the
lease is 10% and present value factors at 10% are as follows:
For an annuity due with 5 payments 4.17
For an ordinary annuity with 5 payments 3.79
Present value of 1 for 5 periods 0.62

What is the principal finance lease liability on December 31, 2011?

a. P3,928,030 b. P2,828,000 c. P3,100,000 d. P3,510,000

3. On January 1, 2010, Gianne Company entered into a 6-year lease with a lessor. Annual lease payments of P1,200,000 including
annual executory cost of P200,000 are payable at the end of each year. Gianne Company knows that the lessor expects a 10% return
on the lease. Gainee Company has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of
6 years. In addition, a third party guaranteed to pay the lessor a residual value of P400,000 at the end of the lease. The present value
of an ordinary annuity of 1 for 6 years at 10% is 4.35 and at 12% is 4.11. The present value of 1 at 10% for 6 periods is 0.56 and at
12% for 6 periods is 0.51.

In the December 31, 2010 statement of financial position, what is the principal amount of the lease obligation?
a. P3,785,000 b. P4,031,400 c. P4,616,800 d. P4,542,000

4. Roche Company leased machinery for 10 years, its useful life, with effect from January 1, 2010. At that date, the fair value of the
machinery was P4,900,000. Annual rentals of P700,000 are payable in advance on January 1 and the interest rate implicit in the lease
is 9%. The first rental payment was made on January 1, 2010.

What is the total lease liability (principal and interest) which Roche Company should recognize in its statement of financial position on
December 31, 2010?
a. P4,578,000 b. P4,641,000 c. P700,000 d. 0

5. On December 31, 2010, Deanne Company leased equipment under a finance lease. Annual lease payments of P400,000 are due
December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The lease
obligation was recorded on December 31, 2010 at P2,700,000 and the first lease payment was made on that date.

What amount should Deanne Company include its current liabilities in relation to the finance lease in its December 31, 2010 statement
of financial position?
a. P130,000 b. P170,000 c. P230,000 d. P400,000

6. On January 1, 2010 Jessica Company entered into an 8-year finance lease for an equipment Jessica Company accounted from the
acquisition of the finance lease at P5,000,000, which includes a P200,000 bargain purchase option. At the end of the lease, Jessica
Company expects to exercise the bargain purchase option. The expected fair value of the equipment is P400,000 at the end of its 10-
year life. The straight line deprecation is used.

What amount of depreciation should be recognized by Jessica for 2010?

a. P575,000 b. P460,000 c. P600,000 d. P480,000

7. On January 1, 2010, Veronica Company entered into an 8-year lease for an equipment Veronica Company accounted for the
acquisition as a finance lease for P6,000,000 which includes a P600,000 guaranteed residual value. At the end of the lease, the asset

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will revert back to the lessor. It is estimated that the asset’s fair value at the end of its 10-year useful life will be P200,000. Veronica
Company regularly uses the straight line depreciation on similar equipment.

For the year ended December 31, 2010, What amount should Veronica Company recognize as depreciation expense on the lease
asset?
a. P675,000 b. P725,000 c. P540,000 d. P580,000

Exercise No. 4 (Direct Finance Lease) Lessor (Unguaranteed Residual Value)

Lessor Controls Corporation is in the business of leasing equipment. Lessor Controls purchased a new equipment on December 31,
2010. The equipment was delivered the same day (by prior arrangement) to Lessee investment Company, a lessee. The corporation
accountant revealed the following information relating to the lease transaction:
Cost of equipment to Lessor Controls P550,000
Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) 40,000
Lessor Control’s implicit rate of interest 12%
Lessee’s incremental borrowing rate 14%

Additional information is as follows:

(a) At the end of the lease, the equipment will revert to Lessor Control.
(b) Lessee is aware of Lessor Controls rate of implicit interest.
(c) The lease rental consist of equal annual payments.

REQUIRED:
Prepare the 2010 and 2011 journal entries relating to the lease on the books of Lessor Controls and Lessee Investment Company
(Round off present value factors to four decimal places.)

Debit Credit

LESSOR'S BOOKS
December 31, 2010
Commencement of finance lease
Finance lease receivable 807,600
Equipment (cost plus initial direct cost) 550,000
Discount on FLR 257,600

To record initial payment

Cash 95,950
Finance lease receivable 95,950

December 31, 2011

To record the second payment
Cash 95,950
Finance lease receivable 95,950

To record amortization of discount on FLR

Discount on FLR 54,486
Interest income 54,486

LESSEE'S BOOKS
December 31, 2010
To recognize asset and liability
Equipment under finance lease
Finance lease liability 533,844

To record initial payment

Finance lease liability 95,950
Cash 95,950

December 31, 2011

To record the second payment
Interest expense 52,547
Finance lease liability 43,403
Cash 95,950

To record depreciation
Depreciation 66,731
Accumulated depreciation 66,731

Amortization schedule - lessor (guranteed or unguaranteed, included in PV amount)

Date Payment Interest Principal Carrying amount
12/31/2010 550,000

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12/31/2010 95,950 95,950 454,050
12/31/2011 95,950 54,486 41,464 412,586
12/31/2012 95,950 49,510 46,440 366,146
12/31/2013 95,950 43,938 52,012 314,134
12/31/2014 95,950 37,696 58,254 255,880
12/31/2015 95,950 30,706 65,244 190,636
12/31/2016 95,950 22,876 73,074 117,562
12/31/2017 95,950 14,107 81,843 35,719
12/31/2018 40,000 4,280 35,720 (0)

Amortization schedule - lessee (guranteed included / (unguaranteed not included), in PV

amount)
Date Payment Interest Principal Carrying amount
12/31/2010 533,844
12/31/2010 95,950 95,950 437,894
12/31/2011 95,950 52,547 43,403 394,491
12/31/2012 95,950 47,339 48,611 345,880
12/31/2013 95,950 41,506 54,444 291,436
12/31/2014 95,950 34,972 60,978 230,458
12/31/2015 95,950 27,655 68,295 162,163
12/31/2016 95,950 19,460 76,490 85,673
12/31/2017 95,950 10,278 85,672 0

Exercise No. 5– Sales Type Lease With Residual Value (Guaranteed vs Unguaranteed Residual Value)

Sales Type Lease With Residual Value

Note: For the Residual Value

Account Sales Type Lease – (Will revert to the lessor Sales Type Lease – (Will not revert to the lessor upon
upon termination of the contract) termination of the contract)
Residual Value Included by the lessor – in the computation of the Ignored by the lessor – in the computation of the
unearned interest income and gross profit unearned interest income and gross profit

XYZ Company is a dealer in machinery. On January 1, 2005, a machinery was leased to another entity with the following provisions:
Annual rental payable at the end of each year P 800,000.00
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery P2,000,000.00
Estimated residual value P 200,000.00
Initial direct costs paid by lessor P100,000.00
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 5 periods at 10% 3.7908
Present value of 1 for 5 periods at 10% 0.6209

At the end of the lease term on December 31, 2009, the machinery will revert to XYZ Company. The perpetual inventory system is
used. (Prepare the necessary journal entries in the books of Lessor)

Guaranteed Residual Value Unguaranteed Residual Value

Gross rentals Gross rentals

Add: Guaranteed residual value Add: unguaranteed residual value
Gross Lease Receivables Gross Lease Receivables

PV of Gross rentals PV of Gross rentals

Add: PV of Guaranteed residual value Add: PV of Unguaranteed residual value
MLP MLP

PV of Gross rentals PV of Gross rentals

Add: PV of Guaranteed residual
value
Total Sales Total Sales

Cost of machinery Cost of machinery

Less: PV of Unguaranteed residual value
Add: Initial direct cost Add: Initial direct cost
Cost of sales Cost of sales

Amortization Table
10% x PV Payment – Interest

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Payment Interest Principal Present value
Jan. 1, 2005 3,156,820
Dec. 31,
2005 800,000 315,682 484,318 2,672,502
Dec. 31,
2006 800,000 267,250 532,750 2,139,752
Dec. 31,
2007 800,000 213,975 586,025 1,553,727
Dec. 31,
2008 800,000 155,373 644,627 909,100
Dec. 31,
2009 800,000 90,910 709,090 200,000  (Bal) Res. Value

Guaranteed Unguaranteed
Jan.1, 2005 Initial Direct cost
Cash

Lease receivable
Cost of sales
Sales
Unearned interest income
Inventory
Initial direct cost
Dec. 31,
2005
D Cash
Dec. 31, Unearned interest income
2005 Lease receivable
Interest income

When the lease expires on Dec. 31, 2009, the machinery will revert to the lessor.
Guaranteed Unguaranteed
Dec. 31,
2009 Inventory
Lease receivable

Assume, Dec. 31, 2009, FV of machinery is P150,000, the machinery will revert the lessor
Guaranteed Unguaranteed
Cash
Inventory
Loss on finance lease
Lease receivable

Exercise No. 6 – Sales Type Lease

Excel Inc. leases equipment to its customer under noncancelable leases. On January 1, 2010, Excel leased equipment costing
P4,000,000 to Microsoft Co., for nine years. The rental cost was P440,000 payable in advance semiannually (January 1 and July 1).
The equipment had an estimated life of 15 years and sold for P5,330,252 with an estimated unguaranteed residual value of P800,000.
The implicit interest rate is 12%.

REQUIRED:
Prepare the 2010 journal entries relating to the lease on the books of Excel and Microsoft (Round off present
value factors to four decimal places).
Debit Credit

LESSOR'S BOOKS
January 1, 2010

Commencement of finance lease

Finance lease receivable 8,720,000
Cost of sales 3,719,012
Sales 5,050,012
Discount on FLR 3,389,748
Inventory 4,000,000

To record initial payment

Cash 440,000
Finance lease receivable 440,000

July 1, 2010
To record the second payment
Cash 440,000

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Finance lease receivable 440,000

To record amortization of discount on FLR

Discount on FLR 293,415
Interest income 293,415

December 31, 2010

To record amortization of discount on FLR
Discount on FLR 284,620
Interest income 284,620

LESSEE'S BOOKS
January 1, 2010
To recognize asset and liability
Equipment under finance lease 5,050,012
Finance lease liability 5,050,012

To record initial payment

Finance lease liability 440,000
Cash 440,000

Amortization schedule (partial) lessor

Date Payment Interest Principal Carrying amount
1/1/10 5,330,252
1/1/10 440,000 440,000 4,890,252
7/1/10 440,000 293,415 146,585 4,743,667
1/1/11 440,000 284,620 155,380 4,588,287
7/1/11 440,000 275,297 164,703 4,423,584
1/1/12 440,000 265,415 174,585 4,248,999

Amortization schedule (partial) lessee

Date Payment Interest Principal Carrying amount
1/1/10 5,050,012
1/1/10 440,000 440,000 4,610,012
7/1/10 440,000 276,601 163,399 4,446,613
1/1/11 440,000 266,797 173,203 4,273,410
7/1/11 440,000 256,405 183,595 4,089,815
1/1/12 440,000 245,389 194,611 3,895,204

QUIZZER - FINANCE LEASE – LESSOR

1. Donna Company is a dealer in equipment. On January 1,2010, an equipment was leased to another entity with the following
provisions:
Annual rental payable at the end of each year P1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Residual value-unguaranteed 500,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term on December 31, 2014, the equipment will revert to the lessor, Donna Company. The perpetual
inventory system is used. Donna Company incurred initial direct cost of P200,000 in finalizing the lease agreement.

1. What is the total financial revenue to be reported by Donna Company?

a. P2,315,000 b. P1,815,000 c. P2,100,000 c. P2,600,000

2. What is the interest income to be recognized by Donna for 2010?

a. P682,200 b. P648,000 c. P900,000 d. P960,000
3. What amount should Donna Company report as profit on the sale for 2010?
a. P1,485,000 b. P1,685,000 c. P3,500,000 d. P4,000,000

2. Neliza Company uses leases as a method of selling its products. In 2010, Neliza Company completed construction of a passenger
ferry. On January 1, 2010, the ferry was leased on a contract specifying that ownership of the ferry will transfer to the lessee at the
end of the lease period. Annual lease payments do not include executory costs. Other terms of the agreement are as folows:
Original cost of the ferry P9,000,000
Lease payments payable in advance 2,000,000
Estimated residual value 1,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2010
Lease term 10 years
Present value of an annuity due of 1 at 12% for 10 periods 6.33
Present value of 1 at 12% for 10 periods 0.32
1. What is profit on sale for 2010?

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a. P3,980,000 b. P3,660,000 c. P7,340,000 d. P8,020,000
2. What is the interest income for 2010?
a. P1,557,600 b. P1,317,600 c. P1,279,200 d. P1,519,200

3. Carina Company is in the business of leasing new sophisticated equipment. As lessor, Carina Company expects a 12% return on its
net investment. All leases are classified as direct financing lease. At the end of the lease term, the equipment will revert to Carina
Company. On January 1, 2010, an equipment is leased to a lessee with the following information.
Cost of equipment to Carina Company P5,250,000
Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2010

1. What is the unearned interest income on January 1, 2010?

a. P2,550,000 b. P1,950,000 c. P3,150,000 d. P1,500,000

2. What is the interest income that should be recognized for 2010?

a. P594,000 b. P522,000 c. P630,000 d. P450,000

4. Rissa Company acquired an asset costing P3,165,000. The asset is leased on January 1, 2010 to another entity. Five annual lease
payments are due each December 31, beginning December 31, 2010. The unguarantedd residual value of the asset at the end of the
lease term on December 31, 2014 is P500,000. The asset will revert to Rissa Company at the end of the lease term. The lessor’s
implicit interest rate is 12%. The PV of 1 at 12% for 5 periods is .57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60.
What is the annual rental payment?
a. P879,166 b. P740,278 c. P800,000 d. P500,000

5. Irene Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. On
January 1, 2010, Irene Company leased the machine for a period of six years, after which title to the machine is transferred to the
lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1, 2010. The residual
value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Irene Company. The present
value of 1 at 12% for six periods is 0.51, and the present value of an annuity in advance of 1 at 12% for six periods is 4.60.
What is the annual lease payment payable in advance required to yield the desired return?
a. P500,000 b. P477,826 c. P383,333 d. P460,000

Exercise No. 7 – Sales Leaseback (Finance)

On January 1, 2009, Legend Company sold machinery costing P411,750 at the fair market value and then immediately leased the
machine back for P150,000 annually, payable in advance. The life of the machinery and the lease term is five years. The implicit rate
12%. Assume that the fair market value and the present value of the lease payments are equal.

REQUIRED: Compute the following –

(a) Selling price of the machinery.
(b) Deferred gain recorded on January 1, 2009.
(c) Depreciation expense for the leased asset for the year 2009, assuming a straight-line method of depreciation.
(d) Interest expense for the year 2009.
(e) Gain on sale-leaseback for the year 2009.

Exercise No. 8 – Sales Leaseback (Operating)

On July 1, 2009, Honest Company sold equipment to Excellent Company, and simultaneously leased it back for 4 years. Pertinent
information at this date is as follows:
Sales price (equal to its fair value) – P540,000; Cost of equipment – P800,000; Accumulated depreciation – P350,000; Retaining
economic life – 10 years; Annual lease payments payable in advance at the beginning of each lease year – P80,000; Implicit interest
rate – 12%.
REQUIRED:
(a) Prepare all journal entries required in the books of Honest Company for the year 2009 to reflect the sale and leaseback
transaction.
(b) Assuming that the fair value of the asset on July 1, 2009 is P500,000, prepare all journal entries required in the books of
Honest Company for the year 2009 to reflect the sale and leaseback transaction.
(c) Assume, instead, that the sales price is P400,000. The rental of P80,000 is considered to be a fair annual rental. Prepare
entries for 2009.
(d) Assume, instead that the sales price is P350,000 and Honest able to bargain the annual rental of P80,000 although similar
assets are being leased at an annual rental of P120,000. Prepare entries for 2009.
(Honest Company)
(a)
2009
July 1 Cash 540,000
Accumulated Depreciation 350,000
Equipment 800,000
Gain on Sale Leaseback 90,000

1 Rent Expense 80,000

Cash 80,000

Dec. 31 Prepaid Rent 40,000

Rent Expense 40,000
(b)

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 413889810.doc Page 19 of 19
2009
July 1 Cash 540,000
(d) Accumulated Depreciation 350,000
2009 Equipment 800,000
July 1 Cash
Gain on Sale Leaseback - 50,000
Accumulated Depreciation
Unearned Profit on Sale Leaseback 350,000 40,000
Deferred Loss on Sale Leaseback 100,000
1 Rent Equipment
Expense 80,000 800,000
Cash 80,000
1 Rent Expense 80,000
Dec. 31 Cash
Prepaid Rent 40,000 80,000
Rent Expense 40,000
Dec. 31 Prepaid Rent 40,000
31 Rent Profit
Unearned Expense
on Sale Leaseback 5,000 40,000
Profit on Sale Leaseback 5,000
Rent(40,000/4)
Expense x 6/12 12,500
(c) Deferred Loss on Sale Leaseback 12,500
2009 100,000 x 6/48 = 12,500
July 1 Cash 400,000
Accumulated Depreciation 350,000 QUIZZER -
Loss on Sale Leaseback 50,000 LEASEBACK
Equipment 800,000
1. On December 31, 2010,
1 Rent Expense 80,000 Carmedia Company sold
Cash 80,000 machine to another entity
and simultaneously leased it
Dec. 31 Prepaid Rent 40,000 back for one year.
Rent Expense 40,000 Pertinent information at
this date follows:

Sales price P3,600,000

Carrying amount 3,300,000
Present value of reasonable lease rentals (P30, 000 for 12 months @ 12%) 341,000
Estimated remaining useful life 12 years

In Carmedia Company’s 2010 income statement, what amount of revenue from sale of this machine should be reported?
a. P341,000 b. P300,000 c. P41,000 d. 0

2. On December 31, 2010, Geraldine Company sold an equipment with an estimated remaining useful life of 10 years. At the same
time, Geraldine Company leased back the equipment for 2 years. The leaseback is an operating lease.
Sales price P7,500,000
Carrying amount 5,000,000
Fair value of equipment on date of sale 6,000,000

What amount of gain should Geraldine Company report in its 2010 income statement?
a. P2,500,000 b. P1,500,000 c. P1,000,000 d. P1,750,000

3. On January 1, 2010, Lorene Company sold a machinery to another entity. Lorene Company leased back the machinery for 12 years
for its use in the new farm that it is developing. The annual lease payment is P700, 000 on January 1 of each year. The sales price of
the machinery was P5, 000,000 while the carrying amount as of the date of the sale was P3, 500,000. The engineers have estimated
that the remaining economic life of the equipment is 15 years. Lorene Company is a wholly owned subsidiary of a US company. It is
required to follow US GAAP in its reporting package for consolidation.

In its reporting package for use in consolidation with the US parent company, what should Lorene Company report respectively as gain
from sale of the equipment for 2010 and total finance cost over the lease term?
a. P1,500,000 and P3,400,000 c. P1,500,000 and P4,900,000
b. P100,000 and P3,400,000 d. P125,000 and P3,400,000

4. On January 1, 2010, Dominique Company sold equipment it had recently purchased to an unaffiliated entity for P5, 700,000. The
equipment had a carrying amount of P4, 500,000 and a remaining life of five years. On that same day, Dominique Company leased the
equipment at P1, 350,000 per year payable in advance for a 5-year period. The lessor’s implicit interest rate in the lease is 10%.
Dominique Company uses the double declining balance method of depreciation.

What is the unearned income on the sale and leaseback on December 31, 2010?
a. P1,200,000 b. P960,000 c. P720,000 d. 0

P1 - 46