Chapter 15-A: SUBLEASES Cash 500T *To record annual rental

= a transaction for which an underlying asset is Rental Inc 500T income received from
released by a lessee to a third party, and the lease intermediate lessor
Dep'n. 151,685 *To depreciate leased
between the lessor and lessee remains in effect.
AccDep’n 151,685 asset based on Cost & UL
(1518650/10yrs)
Lessor leased an asset
*The depreciation is based on UL of asset because the
“Head lease” Head Lessor still owns title to the Leased Asset
Books of Intermediate Lessor
Operating Lease
Rental Exp 500T *To record lease payment
Lessee becomes Cash 500T to head lessor
(Intermediate Lessor) by Cash 600T *To record the received
releasing the leased asset Rental Inc 600T payment from the
sublease of the lessee
Books of Lessee
Rent Exp 600T *To record the payment
Third Party (lessee) Cash 600T for the sublease
“Sublease”

Illustration: On January 1, 2020, Head lessor leased a

Note:
machinery to Intermediate Lessor for 4 yrs while he
If Head Lease is a Short Term Lease = 1 year or
immediately subleased it to the Lessee for one year
Less than 12 Months and immediately subleased Annual rental to head lessor every 12/31 =500T;
it to lessee with the same Lease Term Annual rental - intermediate lessor every 12/31 =600T
Head Lease = Operating Lease Lease term and UL = 4yrs; Implicit int rate = 12%
Sublease = Operating Lease PV of Lease Payments = (500T X 3.0373) = 1,518,650
Note: *Liability applies only to Intermediate Lessor
If Head Lease is More than 1 year and Books of Head Lessor
Head Lease: Finance Lease
immediately, Intermediate lessor subleased it to
Lease Rec 2M *To record the consideration
lessee for 1 year & originally used finance lease Machinery. 1518650 to be received upon leasing
Head Lease = Finance Lease UII. 481350 the asset under Fin Lease on
Sublease = Operating Lease January 1, 2020
Cash 500T *To record received annual
Note: Lease Rec 500T payment on 12/31
If intermediate lessor subleased the underlying UII. 182,238 *To record the int income
asset in between or the remaining of the original Int Income 182,238 earned from the Fin Lease
lease term. (1518650 X .12) = 182238
Books of Intermediate Lessor
Ex. Orig LT (head lease) = 4yrs; then
Head Lease: Finance Lease
intermediate lessor subleased it on the 2nd yr
RUA. 1518650 *To record the Right to use
for the remaining 3yrs of lease term Lease Liab. 1518650 the leased asset and liability
Head Lease = Finance Lease on January 1, 2020
Sublease = Finance Lease Lease Liab 317762 *To record the annual
Int Exp 182238 payment to head lessor
Cash 500T IE=(1518650 X .12) = 182238
SHORT TERM LEASE: Dep’n 379663 *To record annual depr’n
Illustration: On January 1, Head lessor leased a AccDep'n. 379663 (1518650 / 4yrs)
machinery to Intermediate Lessor for 1 year while he Books of Intermediate Lessor
immediately subleased it to the lessee for 1 year. Sublease: Operating Lease
Cost of Machinery = 1,518,650; Annual rental payable Cash. 600T *To record the received
to head lessor every 12/31= 500,000; Annual Rental to Rental Income 600T payment from the lessee

the Intermediate Lessor every 12/31 = 600,000; Books of Lessee

Lease term = 1 year; UL of machinery = 10 years Sublease: Operating Lease
Note: 1 year so Operating Lease Rent Exp 600T *To record the payment
Books of Head Lessor Cash 600T for the sublease on 12/31
Operating Lease
Illustration: On January 1 2020, Head lessor leased a UII 172930 *To record the int income
machinery to Intermediate lessor for 4yrs. At the Int Inc. 172930 earned (1441080 X .12)
beginning of the second year he subleased it to the Books of Lessee
lessee for three years with the following details: Sublease: Finance Lease – Year 2
Annual rent to head lessor every 12/31 = 500T; RUA 1441080 *To record the right to
Annual rent to intermediate lessor every 12/31 = 600T Lease Liab. 1441080 use the leased asset on
Lease term (Head lease) 4 years; UL = 4yrs; IIR=12% Jan 1, 2021
PV of lease payments to Head lessor (4yrs & 12%) = Net Inv in Lease
= 500T X 3.0373 = 1518650 Lease Liab 427070 *To record the annual
Books of Head Lessor Int Exp 172930 payment to intermed. lessor
Head Lease: Finance Lease – Year 1 Cash 600T IE=(1441080 X .12) = 172930
Lease Rec 2M *To record the Dep'n 480360 *To record dep’n of RUA
Machinery 1518650 receivable consideration AccDep'n 480360 based on LT
UII. 481350 upon leasing the asset = (1441080 / 3yrs)
Cash 500T *To record received annual
Lease Rec 500T payment on 12/31
UII. 182,238 *To record the int income
Int Income 182,238 earned from the Fin Lease
(1518650 X .12)
Books of Intermediate Lessor
Head Lease: Finance Lease – Year 1
RUA. 1518650 *To record the Right to use
Lease Liab. 1518650 the leased asset and liability
on January 1, 2020
Lease Liab 317762 *To record the annual
Int Exp 182238 payment to head lessor
Cash 500T IE=(1518650 X .12) = 182238
Dep’n 379663 *To record annual depr’n
AccDep'n. 379663 (1518650 / 4yrs)
Books of Intermediate Lessor
Sublease: Finance Lease – Year 2
Lease Rec 1.8M *To record the sublease
AccDep'n 379663 to lessee on year 2, 12/31
RUA 1518650 *Gain on Sublease
UII 358920 = NIL – RUA-CA
Gain on = 1441080 – 1138988
Sublease 302093 = 302,093
1. Compute for Gross Investment
Gross Rentals = (600T X 3 yrs) = 1.8M
RV = 0
Gross Investment = 1.8M
2. Net Investment in the Lease
=3 yrs and 12%
= Cost of Asset + IDC paid by lessor
= (600T X 2.4018) + 0
= 1,441,080
3. Unearned Interest Income
= Gross Investments – Net Inv in Lease
= 1.8M – 1441080
= 358,920
*Payment for HEAD LEASE on 12/31:
Lease liab 355893 *To record the annual
Int Exp 144107 payment to head lessor
Cash 500T IE=(1200888 X .12) = 144107
*As Lessor for the SUBLEASE:
Cash 600T *To record the annual
Lease Rec. 600T payment received from
lessee