MA.

CRHISTHIEN ARNAN BSA-2 ACC227 E-PORTFOLIO

Chapter 8
Leases (Part 2)

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. TRUE
8. FALSE
9. TRUE
10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solution:

 Requirement (a):

Gross investment = (50,000 x 3) = 150,000

Net investment = 50,000 x PV of ordinary annuity of 1 @10%, n= 3 = 124,343
Unearned interest = 150,000 - 124,343 = 25,658

 Requirement (b):

Interes
Date Collections t Amortization Present value
1/1/x1 124,343
12/31/x1 50,000 12,434 37,566 86,777
12/31/x2 50,000 8,678 41,322 45,454
12/31/x3 50,000 4,545 45,455 0

Jan. 1, Finance lease receivable 150,000

20x1 Equipment 124,343
Unearned interest income 25,658
Dec. Cash 50,000
31, Unearned interest 12,434
20x1 Finance lease receivable 50,000

1
 Interest income 12,434
Dec. Cash 50,000
31, Unearned interest 8,678
20x2 Finance lease receivable 50,000
Interest income 8,678
Dec. Cash 50,000
31, Unearned interest 4,545
20x3 Finance lease receivable 50,000
Interest income 4,545

2. Solutions:
Annual rent income is computed using the straight line method as follows:

Total rentals P 700,000

First six-month rent-free (100,000 x 6/12) ( 100,000)
Adjusted total rentals 600,000
Divide by: Lease term 3
Annual rent income P200,000

The entries are:

Books of Lessor
Jan. 1, 20x1
No entry
Dec. 31, 20x1
Cash 100,000
Rent receivable 100,000
Rent income 200,000

Dec. 31, 20x2

Cash 240,000
Rent income 200,000
Rent receivable 40,000
Dec. 31, 20x3
Cash 260,000
Rent income 200,000
Rent receivable 60,000
Dec. 31, 20x3
Rent receivable 100,000
Rent income 100,000
[10% x (3M – 2M)]
to record contingent rent receivable

2
3
PROBLEM 3: EXERCISE

Solutions:

 Requirement (a) – Gross investment on Jan. 1, 20x1

Gross investment in the lease is computed as follows:
Lease payment (220,000 – 18,098) P 201,902
Multiply by: Lease term 4
Gross investment in the lease – Jan. 1, 20x1 P 807,608

 Requirement (b) – Net investment on Jan. 1, 20x1

Net investment in the lease is computed as follows:
Lease payment (220,000 – 18,098) P 201,902
PV of ordinary annuity of P1 @10%, n=4 3.1698654
Net investment in the lease – Jan. 1, 20x1 P 640,000

Net investment in the lease may also be computed as follows:

Cost of equipment P 600,000
Initial direct cost 40,000
Net investment in the lease – Jan. 1, 20x1 P 640,000

 Requirement (c) – Unearned interest income on Jan. 1, 20x1

Unearned interest income is computed as follows:
Gross investment in the lease P807,608
Net investment in the lease ( 640,000)
Unearned interest income – Jan. 1, 20x1 P167,608

 Requirement (d) – Amortization table

Interes
Date Collections t Amortization Present value
1/1/x1 640,000
12/31/x1 201,902 64,000 137,902 502,098
12/31/x2 201,902 50,210 151,692 350,406
12/31/x3 201,902 35,041 166,861 183,544
12/31/x4 201,902 18,354 183,548 0

PROBLEM 4: CLASSROOM ACTIVITY

1. Solution:

 Requirement (a):

Gross investment = (80,000 x 3) = 240,000

Net investment = 80,000 x PV of ordinary annuity of 1 @10%, n= 3 = 198,948

4
Unearned interest = 240,000 – 198,948 = 41,052

 Requirement (b):

Interes
Date Collections t Amortization Present value
1/1/x1 278,948
1/1/x1 80,000 - 80,000 198,948
1/1/x2 80,000 19,895 60,105 138,843
1/1/x3 80,000 13,884 66,116 72,727
1/1/x4 80,000 7,273 72,727 0

Jan. 1, Cash 80,000

20x1 Finance lease receivable 240,000
Equipment 278,948
Unearned interest income 41,052

Dec. Unearned interest 19,895

31, Interest income 19,895
20x1
Jan. 1, Cash 80,000
20x2 Finance lease receivable 80,000
Dec. Unearned interest 13,884
31, Interest income 13,884
20x2
Jan. 1, Cash 80,000
20x3 Finance lease receivable 80,000
Dec. Unearned interest 7,273
31, Interest income 7,273
20x3
Jan. 1, Cash 80,000
20x4 Finance lease receivable 80,000

2. Solution:

Lease bonus 20,000

20x1 (100,000 x 6/12) 50,000

20x2 120,000

20x3 140,000

5
20x4 160,000

Total 490,000

Divide by: 4

Annual lease income 122,500

The entries are as follows:

Jan. 1, Cash 20,000

20x1 Unearned rent income 20,000
Dec. Cash 50,000
31, Unearned rent income (20K ÷ 4) 5,000
20x1 Rent receivable (squeeze) 67,500
Rent income (Lease income) 122,500

Dec. Cash 120,000

31, Unearned rent income (20K ÷ 4) 5,000
20x2 Rent income (Lease income) 122,500
Rent receivable (squeeze) 2,500

Dec. Cash 140,000

31, Unearned rent income (20K ÷ 4) 5,000
20x3 Rent income (Lease income) 122,500
Rent receivable (squeeze) 22,500

Dec. Cash 160,000

31, Unearned rent income (20K ÷ 4) 5,000
20x4 Rent income (Lease income) 122,500
Rent receivable (squeeze) 42,500

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. E
2
. B
3
. A
4 C

6
 .
5
. D
6
. B
7
. B
8
. B
9
. A
10
. B

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. A
Solution:

Fair value (deemed equal to PV of LP) 323,400

Divide by: PV annuity due @8%, n=5 4.3121
Annual lease payments 74,998
Multiply by: No. of payments in the lease 5
Gross investment in the lease 374,991
Less: Net investment in the lease (323,400)
Unearned interest income 51,591
*Answer choice is rounded-off

2. C (135,000 – 20,000) x 10% x 6/12 = 5,750

3. D
Solution:

PV = Cash flows x PV factor

7,596 = 2,000 x PV annuity due @ x%, n=5

First trial @ 12%:

(2,000 x PV annuity due @ 12%, n=5) = 7,596
(2,000 x 4.0373) = 7,596
8,075 is not equal to 7,596

We need a lower amount. Therefore, we will increase the rate. Let us try 16%.

Second trial @ 16%:

7
(2,000 x PV annuity due @ 16%, n=5) = 7,596
(2,000 x 3.7982) = 7,596
7,596 is equal to 7,596. Therefore, the implicit interest rate is 16%.

4. A
Solution:
Sales 77,000
Cost of sales (60,000)
Gross profit 17,000

5. B
Solution:
Sales (PV of MLP) 3,300,000
Cost of sales (2,800,000)
Gross profit 500,000

6. B
Solution:
Sales 3,520,000
Cost of sales (2,800,000)
Gross profit 720,000

Interest revenue = (600,000 x PV of annuity due @10%, n=5) = 3,521,040 – 600,000

first payment = 2,921,040 x 10% x 6/12 = 146,052

7. B {10,000 + [(30,000 ÷ 5 years) x 1/12]} = 10,500

8. C [90,000 + (50,000 ÷ 5 years)] = 100,000

9. B
Solution:
Straight line rent income per year = 36,000 ÷ 3 = 12,000

Rent income per year 12,000

Multiply by: 2
Total rent income to date (July 1, 20x6 to June 30, 20x8) 24,000
Less: Total rent collections to date (6,000 + 9,000) (15,000)
Rent receivable as of June 30, 20x8 9,000

10. C
Solution:

Annual rent 96,000

8
Contingent rent [(600,000 - 500,000) x 5%] 5,000
2,40
Amortization of lease bonus (24,000 ÷ 10) 0
103,40
Rent expense 0