Lease accounting problems

Chapter
4 -‐ Leases

PROBLEMS

4-‐1.
(a) Lessor’s Books (Hope Manufacturing Co.)
2015
Jan. 1 Machinery for lease 2,200,000
Cash 2,200,000

1 Cash 600,000
Rent revenue 400,000
Unearned rent revenue 200,000
2 M/5 = 400,000
2 M x 30% = 600,000

1 Machinery for lease 60,000
Cash 60,000

Dec. 31 Depreciation expense 212,000
Accumulated depreciation 200,000
Machinery for lease 12,000
(2.2 M – 200,000)/10 200,000
60,000 / 5 years 12,000
Total 212,000
2016
Jan. 1 Cash 400,000
2,000,000 x 20%

Machinery for lease 12,000

Lessee’s Books (Charity Co.)
2015
Jan. 1 Rent expense 400,000
Prepaid rent 200,000
Cash 600,000

2016
Jan. 1 Rent expense 400,000
Cash 400,00
(b)
Statement of Comprehensive Income: Hope Charity
(In profit or loss section)
Depreciation expense 212,000
Rent expense 400,000
Statement of Financial Position
Machinery for lease, net of accum. depreciation 2,048,000
Prepaid rent 200,000

Chapter 4 – Leases
4-‐2.
a. Rentals for 2015 and 2016 (360,000 x 4) P1,440,000
Rentals for 2017 (432,000 x 2) 864,000
Total rentals for three years P2,304,000
Rent expense per year (2,304,000/3 years) P768,000
Rent Expense for 2015 (768,000 x 8/12) P512,000

b. Cumulative rent revenue for 2015 and 2016
2015 P512,000
2016 768,000 P1,280,000
Cumulative collections (360,000 x 4) 1,440,000
Unearned rent, December 31, 2016 P 160,000

Rent Receivable, December 31, 2016 P -‐0-‐

4-‐3.
a. Monthly rental payment 10,000
No. of payments (60-‐6 mos free) x 54
Total payments 540,000
Rent expense for 2015 (540,000 x 4/60) 36,000

or
Monthly rental 10,000
Less lease bonus (60,000/60 mos) (1,000)
Rent expense per month 9,000
Rent expense for 2015 (9,000 x 4) 36,000

Rent expense for 2016 (9,000 x 12) 108,000

(b) Faith Company
2015
Dec. 31 Rent expense 36,000
Rent payable 36,000
9,000 x 4 = 36,000
2016
Mar. 1 -‐ Monthly entry
Cash 10,000

Rent payable 8,000
Rent expense for 2016:
540,000 x 12/60 108,000
Payments in 2016 100,000
Increase in rent payable 8,000

Love Corporation
2015
Dec. 31 Rent receivable 36,000
Rent revenue 36,000
Page 51
2014
Mar. 1 -‐ Monthly entry
Dec. 1 Cash 10,000
Rent revenue 10,000

Dec. 31 Rent receivable 8,000
Rent revenue 8,000
Year-‐end adjusting entry

4-‐4.
a. Fixed annual rental 960,000
Additional rent 5% x (6M-‐5M) 50,000
Amortization of lease bonus (125,000/5 years) 25,000
Rent expense for 2015 1,035,000

b. Prepaid rent expense (125,000 – 25,000) 100,000
Security deposit, January 1, 2015 (150,000 x 0.62092) P93,138
Add amortization for 2015 (10% x 93,138) 9,314
Security deposit, December 31, 2015 P102,452

4-‐5.
a. Rent revenue (960,000 x 9/12) 720,000
Depreciation expense
3,500,000/6 = 583,333; 583,333 x 9/12 (437,500)
Maintenance and other related costs (50,000)
Income before income tax for year 2015 232,500

b. Rent expense for 2015(960,000 x 9/12) 720,000

4-‐6.
Lessor’s Books
2015
July 1 Equipment for lease 1,500,000
Cash 1,500,000

Oct. 1 Cash 54,000
Rent revenue 54,000

1 Cash 30,000
Rent revenue 30,000

Nov. 1 Cash 30,000
Rent revenue 30,000

Dec. 1 Cash 30,000
Rent revenue 30,000

31 Rent revenue 49,500
54,000 x 33/36 = 49,500

31 Depreciation expense 75,000
(1,500,000 / 10) x 6/12

Page 52
Lessee’s Books
2015
Oct. 1 Rent expense 54,000
Cash 54,000

1 Rent expense 30,000
Cash 30,000

Nov. 1 Rent expense 30,000
Cash 30,000

Cash 30,000

31 Prepaid rent 49,500
Rent expense 49,500

4-‐7.
Present value of annual payments (260,000 x 4.2397) 1,102,322
Present value of guaranteed residual value (200,000 x 0.6499) 129,980
Total capitalized cost 1,232,302

(a) Amortization Table
Total Annual Reduction in
Date Payment Interest Expense Principal Lease Obligation
01/01/15 -‐ -‐ 1,232,302
01/01/15 260,000 -‐ 260,000 972,302
01/01/16 260,000 87,507 172,493 799,809
01/01/17 260,000 71,983 188,017 611,792
01/01/18 260,000 55,061 204,939 406,853
01/01/19 260,000 36,617 223,383 183,470
12/31/19 200,000 16,530* 183,470 -‐
*Adjusted; difference is due to rounding off.
(b)
2015
Jan. 1 Leased automobile 1,232,302
Finance lease obligation 1,232,302

1 Finance lease obligation 260,000
Cash 260,000

Dec. 31 Interest expense 87,507
Interest Payable 87,507

(1,232,302-‐200,000)/5

2016
Jan. 1 Finance lease obligation 172,493
Interest payable 87,507
Cash 260,000



Page 53
(c)
Dec. 31 Accumulated depreciation (206,460 x 5 years) 1,032,300
Interest expense 16,532*
Finance lease obligation 183,470
Leased automobile 1,232,302
*adjusted; balancing figure

(d)
Dec. 31 Loss on finance lease 50,000
Accumulated depreciation 1,032,300
Interest expense 16,532
Leased automobile 1,232,302
Cash 50,000

4-‐8.
(a) Capitalized cost of the leased asset (86,680 x 4.1699) P361,447

(b) Amortization Table
01/01/15 -‐ -‐ 361,447
01/01/15 86,680 -‐ 86,680 274,767
01/01/16 86,680 27,477 59,203 215,564
01/01/17 86,680 21,556 65,124 150,440
01/01/18 86,680 15,044 71,636 78,804
01/01/19 86,680 7,876* 78,804 -‐

(c)
2015
Jan. 1 Leased machine 361,447

1 Finance Lease Obligation 86,680
Cash 86,680


361,447/5 years
2016
Cash 86,680



Page 54
(d)
Statement of Financial Position 2015 2016
Property, plant and equipment
Leased machine 361,447 361,447
Accumulated depreciation 72,289 144,578
Current liabilities
Interest payable 27,477 21,556
Finance lease obligation 59,203 65,124
Noncurrent liabilities
Finance lease obligation 215,564 150,440
Income Statement
Interest expense 27,477 21,556
Depreciation expense 72,289 72,289

4-‐9.
(a) Lessor’s implicit interest rate
1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods
From Table VI across 12 periods, 7.4951 is under 10% interest rate.

(b)
12/31/14 -‐ -‐ 1,011,840
12/31/14 135,000 -‐ 135,000 876,840
12/31/15 135,000 87,684 47,316 829,524
12/31/16 135,000 82,952 52,048 777,476

(c) Depreciation expense for 2016 (1,011,840 – 40,000) / 15 years P64,789

(d)
12/31/15 Leased equipment 1,011,840

Cash 135,000

12/31/16 Finance lease obligation 47,316
Cash 135,000

(1,011,840 – 40,000) / 15

(e) Lease obligation as of December 31, 2015:
Current portion P 47,316
Noncurrent portion 829,524

4-‐10.
(a) Present value of annual payments (150,000 x 4.0373) P605,595
Present value of bargain purchase option (240,000 x 0.5674) 136,176
Total capitalized cost of the asset P741,771

Page 55
(b)

01/01/15 -‐ -‐ 741,771
01/01/15 150,000 -‐ 150,000 591,771
01/01/16 150,000 71,013 78,987 512,784
01/01/17 150,000 61,534 88,466 424,318
01/01/18 150,000 50,918 99,082 325,236
01/01/19 150,000 39,028 110,972 214,264
12/31/19 240,000 25,736* 214,264 -‐
(c) Depreciation expense for 2015 (741,771 / 15 years) P49,451

(d)
2015
Jan. 1 Leased machinery 741,771

Cash 150,000



2016
Cash 150,000


(e)
Accumulated depreciation (49,451 x 5 years) 247,255
Machinery 494,516
Leased machinery 741,771
Cash 240,000
(f)
Loss on finance lease 254,516
Leased machinery 741,771
Carrying amount of leased asset
(741,771 – 247,255) P494,516
Bargain purchase option price 240,000
Loss P254,516
Page 56
4-‐11.
(a) Present value of minimum lease payments
700,000 x 6.3282 P4,429,740

(b) Annual depreciation (4,429,740/10) P 442,974

(c)
2015
July 1 Building 4,429,740

1 Taxes and insurance expense 50,000
Cash 750,000

447,569 x 6/12 (see table below)

31 Depreciation expense-‐Building 221,487
Accum. Depreciation-‐Building 221,487
4,429,740/10 = 442,974; 442,974 x ½

31 Prepaid taxes and insurance 25,000
Taxes and insurance expense 25,000

2016
July 1 Taxes and insurance expense 50,000
Cash 750,000

417,277 x 6/12 (see table below)

Accum. Depreciation-‐building 442,974

Amortization Table
Periodic Applied to Balance of
Date Payment Interest Principal Principal
July 1, 2015 P4,429,740
July 1, 2015 P700,000 -‐ P700,000 3,729,740
July 1, 2016 700,000 P447,569 252,431 3,477,309
July 1, 2017 700,000 417,277 282,723 3,194,586

Page 57
4-‐12.
a.
2015
Aug. 1 Finance lease receivable 605,000
Equipment for lease 480,000
Unearned interest revenue 125,000

1 Unearned interest revenue 1,900
Cash 1,900

1 Cash 100,000
Finance lease receivable 100,000

Dec. 31 Unearned interest revenue 15,912
Interest revenue 15,912
38,190 x 5/12 (see table)

2016
Aug. 1 Cash 100,000
38,190 x 7/12 = 22,278 (see table)

32,009 x 5/12 (see table)

Partial Amortization Table
Periodic Reduction in Balance of
08/01/15 -‐ -‐ 481,900
08/01/15 100,000 -‐ 100,000 381,900
08/01/16 100,000 38,190 61,810 320,090
08/01/17 100,000 32,009 67,991 252,099

(b) As of December 31, 2015:
Total Current Non-‐current
Finance lease receivable P505,000 P100,000 P405,000
Unearned interest revenue 107,188 22,278 84,910
P397,812 P 77,722 P320,090

Current portion:
Principal due in 2016 P 61,810
Accrued interest, 12/31/15 (38,190 x 5/12) 15,912
Total P 77,722

4-‐13.
Annual Lease Payment:
Fair value of asset P600,000
PV of BPO = 40,000 x .6209 24,836
PV of periodic payment P575,164
PV factor (Annuity due for 5 years at 10%) ÷4.1699
Periodic payment P137,932

Page 58

Jan. 1, 2015 P600,000
Jan. 1, 2015 P137,932 P137,932 462,068
Jan. 1, 2016 137,932 P46,207 91,725 370,343
Jan. 1, 2017 137,932 37,034 100,898 269,445

2015 Depreciation (600,000 – 20,000) x 6/21 = P165,714
2016 Depreciation (580,000 x 5/21) = 138,095

(a) Books of Chris Tucker
2015
Jan. 1 Leased equipment 600,000

Cash 137,932


31 Depreciation expense – Leased equipment 165,714
Accum. depr. – Leased equipment 165,714

2016
Cash 137,932


Accum. depr.– Leased equipment 138,095

(b) Books of Jackie Chan
2015
Jan. 1 Finance lease receivable 729,660
137,932 x 5 = 689,660
689,660 + 40,000 = 729,660

Cash 137,932

Dec 31 Unearned interest revenue 46,207

2015
Jan. 1 Cash 137,932


Page 59
4-‐14.
(a) This is a direct finance lease. The cash price of the asset is the same as its carrying
value; hence, there is no gross profit).

(b) The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9
(which is 8 annual payments of P80,000 + 1 payment for guaranteed residual value
of same amount), the corresponding interest rate is 8%.

(c)
Partial amortization table
April 1, 2015 P539,730
April 1, 2015 80,000 80,000 459,730
April 1, 2016 80,000 36,778 43,222 416,508
April 1, 2017 80,000 33,321 46,679 369,829

Books of Ironman
2015
Apr. 1 Equipment 539,730

Cash 80,000

36,778 x 9/12 (see table)

(539,730-‐80,000)/8 = 57,466/year
57,466 x 9/12 = 43,100
2016
Apr. 1 Interest expense (36,778-‐27,584) 9,194
Cash 80,000

33,321 x 9/12


(d) Books of Ben Ten
2014
Apr. 1 Finance lease receivable 720,000
80,000 x 8 = 640,000; 640,000 + 80,000
Page 60
Apr. 1 Cash 80,000



2016
Apr. 1 Cash 80,000

1 Unearned interest revenue 9,194

33,321 x 9/12

(e) The asset shall be recorded at P496,512 which is 80,000 x 6.2064.
Depreciation for 2015 (496,512/8) x 9/12 = 46,548

(f) No difference in journal entries. To the lessor, under the direct finance lease, it does
not matter whether the residual value is guaranteed or unguaranteed.

4-‐15.
(a) Sales price P1,011,840
Cost of machine 784,500
Gross profit P 227,340

(b) Gross investment (135,000 x 12) P1,620,000
Sales 1,011,840
Total financial revenue over the lease term P 608,160

(c) Interest revenue for 2015
(1,011,840 – 135,000) x 10% x 6/12 P 43,842

(d) Finance lease receivable (1,620,000 – 135,000) P1,485,000
Less Unearned interest revenue (608,160 -‐43,842) 564,318
Net finance lease receivable, December 31, 2015 P 920,682

4-‐16.
(a)
2015
Apr. 1 Finance lease receivable 1,500,000
Cost of sales 893,350
Sales 1,026,970
Finished goods inventory 940,000
175,000 x 8 = 1.4M; 1.4M + 100,000 = 1.5M
940,000 – (100,000 x .4665) = 893,350
(175,00 x 5.8464) + (100,000 x .4665) = 1,073,620
1,500,000 - 1,073,620 = 426,380
1 Cash 175,000

Page 61

89,862 x 9/12 (see table)

2016
Jan. 1 Interest revenue 67,397

Apr. 1 Cash 175,000

81,348 x 9/12 (see table)

Partial amortization table
April 1, 2015 P1,073,620
April 1, 2015 175,000 175,000 898,620
April 1, 2016 175,000 89,862 85,138 813,482
April 1, 2017 175,000 81,348 93,652 719,830

*April 1 transactions may also be presented as follows:

2015
Apr. 1 Finance lease receivable 1,400,000
Sales 1,026,970

1 Cost of sales 940,000
Finished goods inventory 940,000

1 Finance lease receivable 100,000
Cost of sales 46,650

(b) (i) Sales 1,026,970
Cost of Sales (940,000 – 46,650) 893,350
Gross profit on sales 133,620

(ii) Interest Revenue for 2015 (see journal entries) 67,397

(c) Sales (1,026,970 + 46,650) 1,073,620
Cost of sales (cost of the asset) 940,000

4-‐17.
a. This is a manufacturer’s or dealer’s lease, because FV exceeds CV. The difference
represents gross profit, which characterizes a dealer’s or manufacturer’s lease.

b. Present value of MLP = 850,365 x 4.60478 (Adjusted) P3,915,747
Present value of residual value = 166,300 x .50663 84,253
Total present value P4,000,000
Page 62
Carrying value of leased asset 3,200,000

Gross Profit P 800,000
Lease arrangement cost ( 85,000)
Interest income (377,756 x 3/12) see table 94,439
Total income in 2015 P 809,439
c.
Amortization Table
Oct. 1, 2015 4,000,000
Oct. 1, 2015 850,365 850,365 3,149,635
Oct. 1, 2016 850,365 377,956 472,409 2,677,226
Oct. 1, 2017 850,365 321,267 529,098 2,148,490

Books of Ruby (Lessor)
2015
Oct. 1 Finance lease receivable (850,365 x 6) + 166,300 5,268,490
Cost of goods sold (3,200,000 – 84,253) 3,115,747
Inventory 3,200,000
Sales 3,915,747
Unearned interest revenue 1,268,490

1 Selling expense 85,000
Cash 85,000

1 Cash 850,365

377,956 x 3/12

2016
Oct. 1 Cash 850,365
377,956 – 94,489 = 283,467

321,267 x 3/12

d. Amortization Table for Emerald (Lessee)
Oct. 1, 2015 3,915,747
Oct. 1, 2015 850,365 850,365 3,065,382
Oct. 1, 2016 850,365 367,846 482,519 2,582,863
Oct. 1, 2017 850,365 309,944 540,421 2,042,442

2015
Oct. 1 Leased equipment 3,915,747

Page 63
Oct. 1 Finance lease obligation 850,365

Cash 850,365

367,846 x 3/12 (see table)

3,915,747/6 = 652,625; 652,625 x 3/12
2016
Oct. 1 Interest payable 91,962
Interest expense (367,846 – 91,962) 275,884
Cash 850,365

Dec.31 Interest expense 77,846
309,944 x 3/12


4-‐18.
(a) Sales = (99,046 x 3.1699) + (80,000 x.6830) P368,606

(b) Sales P368,606
Cost of equipment sold (300,000)
Selling expense (15,000)
Interest income (368,606 x 10%) 36,861
Total profit from lease P 90,467

(c) Depreciation expense recorded by Western
(368,606 – 80,000) / 4 P 72,152

4-‐19.
(a) PV of Minimum Lease Payments:
PV of Periodic Payments (1,328,622 x 8.1078) P10,772,200
PV of GRV (2,000,000 x .6139) 1,227,800
Total PV P12,000,000
Cost of audio equipment (9,000,000)
Commission and other lease costs (100,000)
Interest revenue (533,569 + 493,816) 1,027,385
Profit for 2015 P 3,927,385

1/1/2015 12,000,000
1/1/2015 1,328,622 -‐-‐-‐ 1,328,622 10,671,378
7/1/2015 1,328,622 533,569 795,053 9,876,325
1/1/2016 1,328,622 493,816 834,806 9,041,519
7/1/2016 1,328,622 452,076 876,546 8,164,973
1/1/2017 1,328,622 408,249 920,373 7,244,600

(b) Interest Expense for 2015 (533,569 + 493,816 P1,027,385
Page 64
(c ) Carrying value of equipment

Cost P12,000,000
Accumulated depreciation
(12,000,000 – 2,000,000) x 2/5 (4,000,000)
Carrying value, December 31, 2015 P 8,000,000

(d) Interest revenue for 2016 (452,076 + 408,249) P860,325

(e) Current Assets:
Finance Lease Receivable, net (834,806 + 876,546) P1,711,352
Interest Receivable 493,816
Non-‐current Assets
Finance Lease Receivable, net P8,164,973

4-‐20.
(a) Selling price of the machinery (150,000 x 4.0373) P605,595
(b) Deferred gain on January 1, 2015 (605,595 – 411,750) P193,845
(c) Depreciation expense for 2015 (605,595 / 5 years) P121,119
(d) Interest expense for 2015 (605,595 – 150,000) x 12% P 54,671
(e) Gain on sale-‐leaseback for 2015 (193,845 / 5 years) P 38,769

4-‐21.
(a)
2015
July 1 Cash 540,000
Equipment 800,000
Gain on sale leaseback 90,000

July 1 Rent expense 80,000
Cash 80,000

Dec. 31 Prepaid rent 40,000
Rent expense 40,000

(b)
2014
July 1 Cash 540,000
Equipment 800,000
Gain on sale leaseback 50,000
Unearned profit on sale leaseback 40,000


Cash 80,000

Rent expense 40,000

31 Unearned profit on sale leaseback 5,000

Profit on sale leaseback 5,000
(40,000/4) x 6/12
Page 65
(c)
2014
July 1 Cash 400,000
Loss on sale leaseback 50,000
Equipment 800,000

Cash 80,000

Rent expense 40,000
(d)
2015
July 1 Cash 350,000
Deferred loss on sale leaseback 100,000
Equipment 800,000

Cash 80,000

Rent expense 40,000

31 Rent expense/Loss on sale leaseback 12,500
Deferred loss on sale leaseback 12,500
100,000/4 = 25,000; 25,000 x 6/12

Page 66
MULTIPLE CHOICE QUESTIONS
Theory
MC1 C MC9 C MC17 A

MC2 D MC10 C MC18 A
MC3 C MC11 D MC19 D
MC4 B MC12 D MC20 C
MC5 B MC13 B MC21 C
MC6 C MC14 A MC22 A
MC7 D MC15 C MC23 A
MC8 D MC16 C MC24 C
MC25 D

Problems

MC26 C Annual rental P 900,000
Lease bonus amortized over five years (500,000/5) 100,000
Rental revenue for 2015 P1,000,000
MC27 C Rental for first year (six months free) P 40,000

Rental for 2nd to 5th year (125,000 x 4) 500,000
Total rental for five years P540,000
Rent revenue for 2015 (540,000/5) P108,000
MC28 D This is an operating lease; thus, there is no interest expense involved.
MC29 D Accrued rent from July 1 to December 31 (240,000 x 6/12) P120,000
MC30 C Total rental payments for three years P3,600,000

Lease term ÷ 3
Rent revenue for fiscal year ended June 30, 2016 P1,200,000
MC31 B Accumulated rent revenue up to June 30, 2017 (1.2M x 2) P2,400,000
Accumulated payments up to June 30, 2017 (600,000 + 900,000) 1,500,000
Rent receivable, June 30, 2017 P 900,000
MC32 B Capitalized cost of leased asset (500,000 x 4.61) P2,305,000
MC33 D Lease liability, December 31, 2015 P2,305,000

1st payment on December 31, 2015 (500,000)
2nd payment on December 31, 2016 500,000
Amount applicable to interest (12% x 1,805,000) 216,600 (283,400)
Lease liability, December 31, 2016 P1,521,600
MC34 A Depreciation expense (2,305,000/6 years) P 384,167
MC35 B Lease liability, December 31, 2015, after 1st payment

1,350,000 – 200,000 P1,150,000
Current portion (payable on December 31, 2016)
200,000 – (10% x 1,150,000) P 85,000
MC36 B Capitalized leased asset on May 1, 2015 (400,000 x 5.95) P2,380,000
Page 67
MC37 D Depreciation is based on the economic life of the asset
(2,400,000 – 200,000) / 8 years P275,000
MC38 D Present value of annual rentals (1,742,174 x 3.48685) P6,074,699

Present value of guaranteed residual value (1.2M x 0.68301) 819,612
Capitalized cost of the machine P6,894,311
MC39 C Depreciation is based on the lease term

(6,894,311 – 1,200,000) / 4 P1,423,578
MC40 A Present value of annual rentals (1,742,174 x 3.48685) P6,074,699
MC41 D Depreciation is based on the lease term

6,074,699 / 4 P1,518,675
MC42 D Cost of leased asset P6,245,450

Accumulated depreciation (6,245,250 – 80,000) / 6 = 1,027,575
1,027,575 x 4 years 4,110,300
Carrying value, end of lease term P2,135,150
Bargain option price 250,000
Loss from failure to exercise the purchase option P1,885,150
MC43 A Gross lease receivable (100,000 x 6) P600,000
MC44 D Net investment in the lease after 1st payment (100,000 x 4.8) P380,000
Interest revenue for the year 2015 (380,000x 10% x 5/12) P 15,833
MC45 C Selling price P3,520,000

Cost of equipment 2,800,000
Profit on sale P720,000
MC46 A Net investment in the lease after 1st payment (3,520,000– 600,000) P2,920,000
Interest revenue for year 2015 (2,920,000 x 10% x 6/12) P146,000
MC47 B Gross profit on sale (400,000 – 300,000) P100,000

Costs to consummate lease contract (15,000)
Interest revenue (400,000 x 10%) 40,000
Profit, inclusive of interest for year 2015 P125,000
MC48 D Net investment in the lease, January 1, 2015 P400,000
Reduction in net investment for 2015
Annual rental, excluding executory costs P108,951
Interest expense (400,000 x 10%) 40,000 68,951
Net investment in the lease, December 31, 2015 P331,049
MC49 A Gross investment in the lease 75,000* x 5 P375,000

*Annual payment 323,400/5 = 75,000
Cost/fair value of asset 323,400
Total interest revenue P 51,600
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MC50 D Present value of lease payments (30,000 x 3.1699) 95,097

Present value of guaranteed residual value (5,000 x .683) 3,415
Capitalized cost of asset /Liability, Jan. 1, 2014 98,512
Interest expense for 2014 (98,512 x 10%) 9,851
Liability balance, December 31, 2014 95,097 – (30,000 – 9,851) P78,363
Interest expense/payable, December 31, 2015 (78,363 x 10%) P7,836
MC51 C Depreciation is based on the lease term

(98,512 – 5,000) / 4 P23,378
MC52 D Minimum lease payments for the remaining two years

(30,000 x 2) P60,000
Guaranteed residual value 5,000
Total P65,000
MC53 A Initial direct costs increase the net investment in lease recorded by the lessor.
The terms of the lease already indicated that the residual value is guaranteed;
hence, it could not be taken as the reason for the variance. However, if the
residual value is unguaranteed, then it could be considered as a reason for the
variance.
MC54 A This excess over the limited hours should be accrued by the end of
2016, even if payment would be made at January 1, 2017.
MC55 B Deferred gain, January 1, 2015 (550,000 – 450,000) P100,000

Gain recognized in 2015 (100,000/5 20,000
Deferred gain, December 31, 2015 P80,000
MC56 A Deferred gain (4.8M – 3.6M) P1,200,000
MC57 B Revenue on sale leaseback 1.2M/12 = 100,000; 100,000 x 6/12 P50,000
MC58 B Unearned gain, January 1, 2015 (150,000 – 100,000) P50,000

Recognized gain in 2015 (50,000/10 years) 5,000
Unearned gain, December 31, 2015 P45,000
MC59 B Excess of fair value over carrying value (710,000 – 650,000) P60,000
Excess of sales price over fair value
800,000 – 710,000 = 90,000; 90,000 / 12 = 7,500; 7,500 x 9/12 5,625
Gain from sale leaseback P65,625
MC60 D If selling price is at fair value, full amount of gain is recognized
immediately (800,000 -‐ 650,000) P150,000
MC61 B Additional information, lease term is 12 years out of total life
of 25 years.
Deferred loss (650,000 – 470,000) P180,000
Amortized loss in 2015 (180,000/12 = 15,000; 15,000 x 9/12 11,250
Deferred loss, December 31, 2015 P168,750

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Chapter

(c) Depreciation expense for 2015 (741,771 / 15 years) P49,451

Periodic Reduction in Balance of

Dec. 31 Depreciation expense 43,100

Apr. 1 Cash 80,000

Dec. 31 Unearned interest revenue 67,397

Carrying value of leased asset 3,200,000

Oct. 1 Finance lease obligation 850,365

(c ) Carrying value of equipment

1 Rent expense 80,000

31 Unearned profit on sale leaseback 5,000

MULTIPLE CHOICE QUESTIONS

MC1 C MC9 C MC17 A

MC27 C Rental for first year (six months free) P 40,000

MC30 C Total rental payments for three years P3,600,000

MC32 B Capitalized cost of leased asset (500,000 x 4.61) P2,305,000

MC33 D Lease liability, December 31, 2015 P2,305,000

MC34 A Depreciation expense (2,305,000/6 years) P 384,167

MC35 B Lease liability, December 31, 2015, after 1st payment

MC38 D Present value of annual rentals (1,742,174 x 3.48685) P6,074,699

MC39 C Depreciation is based on the lease term

MC40 A Present value of annual rentals (1,742,174 x 3.48685) P6,074,699

MC41 D Depreciation is based on the lease term

MC42 D Cost of leased asset P6,245,450

MC43 A Gross lease receivable (100,000 x 6) P600,000

MC45 C Selling price P3,520,000

MC47 B Gross profit on sale (400,000 – 300,000) P100,000

MC49 A Gross investment in the lease 75,000* x 5 P375,000

MC50 D Present value of lease payments (30,000 x 3.1699) 95,097

MC51 C Depreciation is based on the lease term

MC52 D Minimum lease payments for the remaining two years

MC55 B Deferred gain, January 1, 2015 (550,000 – 450,000) P100,000

MC56 A Deferred gain (4.8M – 3.6M) P1,200,000

MC58 B Unearned gain, January 1, 2015 (150,000 – 100,000) P50,000

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