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A Professional Business School Financial Accounting and Reporting Exercises On Leases Finance Lease - Lessee
A Professional Business School Financial Accounting and Reporting Exercises On Leases Finance Lease - Lessee
A Professional Business School Financial Accounting and Reporting Exercises On Leases Finance Lease - Lessee
***Questions: Based on the foregoing and the result of your audit, compute for the following:
(Round off present value factors to four decimal places.)
A. Amount to be capitalized as an asset for the lease of the milling machine:
a. 382,835 b. 489,734 c. 458,689 d. 508,689
C. Amount to be reported under current portion of the finance lease as of December 31, 2012:
a. 72,026 b. 82,644 c. P 79,230 d. 83,816
Solution:
Gross rentals (959,500 x 8) 7,676,000
Residual value 400,000
Page 1 of 4
ST. THOMAS MORE COLLEGE – CLARK TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
A Professional Business School
Tel. No. (045) 321 - 0727
Gross investment 8,076,000
Net investment - equal to the cost of the equipment 5,500,000
Unearned interest income - January 1, 2013 2,576,000
Solution:
Present value of rentals - equal to the cost of the equipment or net investment 5,500,000
First payment on January 1, 2013 (all principal payments) 959,000
Lease receivable - January 1, 2013 4,540,000
Interest income for 2013 (4,540,000 x 12%) 544,860
5. On January 1, 2013, Lessor Company leased a machine to Lessee Company. The machine had an
original cost of P6,000,000. The lease term was five years and the implicit internst rate on the
leases 15%. The lease is properly classified as a direct financing lease. The annual payments of
P1,730,541 are made each December 31. The machine reverts to Lessor at the end of the lease
term, at which time the residual value of the machine will be P400,000. The residual value is
unguaranteed.
The PV of 1 at 15% for 5 periods is .4972, and the PV of an ordinary annuity of 1 at 15% for 5
periods is 3.3522. At the commencement the lease, what would be the lease receivable on the part
of the lessor and lease liability on the part of the lessee?
Lease receivable Lease liability Lease receivable Lease liability
a. 6,000,000 6,000,000 c. 6,000,000 5,801,120
b. 5,801,120 5,801,120 d. 5,801,000 6,000,000
Solution:
Lessor
PV of lease payments (1,730,541 x 3.3522) 5,801,120
Unguaranteed residual value (400,000 x .4972) 198,880
Lease receivable equal to the cost of asset 6,000,000
Lessee
Lease liability (1,730,541 x 3.3522) 5,801,120
Page 2 of 4
ST. THOMAS MORE COLLEGE – CLARK TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
A Professional Business School
Tel. No. (045) 321 - 0727
Solution:
Gross rentals (1,500,000 x 20) 30,000,000
Present value or fair value of asset (1,500,000 x 8.37) 12,555,000
Unearned interest income - January 1, 2013 17,445,000
Solution:
Fair value of asset - sales revenue 12,555,000
Cost of sales 8,000,000
Gross profit on sale 4,555,000
Solution:
PV of rentals equal to the fair value of asset 12,555,000
Payment on January 1, 2013 - all applicable to principal 1,500,000
Lease receivable - January 1, 2013 11,055,000
Interest income for 2013 (11,055,000 x 12%) 1,326,600
9. Meg Company leased equipment from Wee Company on July 1, 2013 for an eight-year period
expiring June 30, 2021. Equal payments under lease are P600,000 and are due on July 1 of each
year. The first payment was made on July 1, 2013. The rate of interest contemplated by Meg and
Wee is 10%. The cash selling price of the equipment is P3,520,000 and the carrying amount is
P2,800,000. The lease is approximately recorded as a sales type lease. What amount of profile on
the sale and interest revenue should be recorded for the year ended December 31, 2013?
Profit on Sale Interest revenue Profit on Sale Interest revenue
a. 720,000 176,000 c. 45,000 176,000
b. 720,000 146,000 d. 45,000 146,000
10. Hitech Company, a dealer in machinery and equipment, leased equipment to Quality Company on
July 1, 2013. The lease is appropriately accounted for as a sale by Hitech and as a purchase by
Quality. The lease is for a ten-year period equal to the useful life of the asset expiring June 30,
2023. The first of ten equal annual payments of P250,000 was made on July 1, 2013. Hitch had
purchased the equipment for P1,337,500 on January 1, 2013, and established a list selling price of
P1,687,500 on the equipment. The present value on July 1, 2013 of the rent payments over the
lease term discounted at 12% was P1,582,500. What amount of profit on sale and interest income
should be recorded for the year ended December 31, 2013, respectively?
a. 245,000 and 94,950 c. 350,000 and 79,950
b. 245,000 and 79,950 d. 350,000 and 94,950
Solution:
Present value of rentals - Sales revenue 1,582,500
Cost of equipment 1,337,500
Profit on sale 245,000
Page 3 of 4
ST. THOMAS MORE COLLEGE – CLARK TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
A Professional Business School
Tel. No. (045) 321 - 0727
Present value - July 1, 2013 1,582,500
Payment on July 1, 2013, all applicable to principal ( 250,000)
Lease receivable - July 1, 2013 1,332,500
Page 4 of 4