Case 1 Operating lease

On January 1, 2020, PAN Co. entered into a five-year nonrenewable

operating lease, commencing on that date, for office space. The
office space has a useful life of 50 years and the lease specifies a
rent of P20,000 per month.

Assume independent cases:

1. How much is the total rent expense in 2020?
2. Assuming that the lessor grants nine months of free rent, how much is
the total rent expense 2020? How much is the accrued rent payable
or prepaid rent at the end of 2021?
3. Assume instead that in the first two years, rent will be P20,000 per
month but in the last three years, it will be P25,000 per month. How
much is the total rent expense in 2020? How much is the accrued rent
payable or prepaid rent at the end of 2021?
4. Assume that lessee paid P60,000 lease bonus to obtain the lease and
security deposit of P40,000 to be refunded upon expiration of the lease.
How much is the total rent expense in 2020?
5. Assume instead that the lessor paid initial direct cost of P6,000 and
incurred insurance and property tax expense in 2020 totaling P30,000.
The depreciation of the office space for the year 2020 is P30,000. How
much is the net income to be recognized by the lessor as a result of
this lease in 2020?
6. Assume that in addition to the monthly rent of P20,000 per month, the
lessor and lessee agreed on the following additional terms:
Additional rent is computed at 6% of net sales over P1,500,000 upto
P3,000,000 and 5% of net sales over P3,000,000 per calendar year.
Net sales for 2020 were P5,000,000.

Compute the total rent expense in 2020 for each of the above independent
cases.

Case 2 Finance Lease-Lessee (MLP)

On January 1, 2020, MUN Co. leased a building from AL Co. for a lease term
of 10 years. The building has a useful life of 20 years. The rate implicit in
the lease is 10%. Lease payment of P400,000 is due every December 31,
starting December 31, 2020. The lease is appropriately classified as finance
lease. The guaranteed residual value at the end of the lease term is P100,000.

Case 1. Assuming that the leased asset will be transferred to the lessee
at the end of the lease term.
Case 2. Assume instead that the leased will revert to the lessor at the end
 of the lease term and the fair value of the leased asset is equal to
the present value of the minimum lease payments.

Determine the following (round off PV factors into 4 decimal places) for each
independent cases above.
1. Total minimum lease payments
2. Present value of the minimum lease payments

Case 3 Finance Lease- Lessee (Annual Lease Payments)

On January 1, 2020, BEN Co. leased an asset with fair value of P1,000,000
from BAG Co. for a lease term of 5 years. The lease specifies equal annual
payments beginning on January 1, 2020. The lessee guarantees the P200,000
residual value of the asset at the end of the lease term. The rate implicit
on the lease is 12%.

How much is the annual lease payment? (round off factors to 4 decimal places)

Case 4 Finance Lease - Lessee (Depreciation of Leased Asset)

On December 31, 2020, KAL Co. signed a 4-year noncellable finance
lease for a new machine for P267,845. The machine has a useful life
of 10 years. KAL Co. regularly uses straight line depreciation on
similar asset.

Case 1. Assuming the cost of the machine includes P20,000 gross

bargain purchase option. At the end of the lease, KAL expects to
exercise the bargain purchase option. KAL estimates that the
equipment's fair value will be P40,000 at the end of its useful
life.

Case 2. Assume instead that the cost of the machine includes

P20,000 gross guaranteed residual value.
 Compute for the depreciation expense to be reported on
December 2021 for each case above.

CASE 5:
Case 5 Finance Lease - Lessee (Depreciation of Leased Asset)
On January 2, 2020, AB Co. signed an eight-year noncancellable lease
for a new machine, requiring P300,000 annual payments at the beginning
of each year. The machine has a useful life of 12 years, with no salvage value.
Title passes to AB Co. at the lease expiration date. AB Co. uses straight line
depreciation. Aggregate lease payments have a present value on January 2,
2020 of P1,080,000 based on an appropriate rate of interest.

Compute for the amount of depreciation should Ab record on 2020.

Case 6 Finance Lease - Lessee (PV of MLP < FV)

On December 31, 2017, APA Co. signed a four-year noncancelable lease
for a new machine, requiring P150,000 annual payments beginning
December 31, 2017. The machine has a useful life of 10 years, with no
salvage value. The rate implicit on the lease is 12%. (Round off present
value factors to four decimal places).

PV of MLP is less than the Fair Value

Case No. 1 Assume that APA has a bargain purchase option amounting to
P30,000 and it is reasonably certain that the company will
exercise this option and that the fair value of the machine on
 the inception date is equal to P600,000.

PV of MLP is greater than the Fair Value

Case No. 2 Assume that APA has a guaranteed residual value of P30,000
and assume that the fair value of the machine on the inception
date is equal to P515,000.

For each of the above cases, compute for the following:

1. The amount to be capitalized as machinery (leased asset) on
December 31, 2017.
2. Depreciation expense on the lease in 2018.
3. The amount to be shown in the current liability section of the statement
of financial position on December 31, 2018.
4. The amount to be shown in the noncurrent liability section of the
statement of financial position on December 31, 2018.
PV of lease payments (200,000*3.6048) 720960
PV of residual value guarantee (200,000*.5674) 113480
Total lease liability 834440

Date Payment Interest Principal PV

1/1/2020 834,440
1/1/2020 200,000 100133 99,867 734,573
1/1/2021 200,000 88149 111,851 622,722
1/1/2022 200,000 74727 125,273 497,448
1/1/2023 200,000 59694 140,306 357,142
1-Jan 200,000 42857 157,143 199,999

Right of use of assets 834,440

Lease liability 834,440

Interest expense 100133

Leases liability 99,867
Cash 200,000
Depreciable amount 1,080,000
Divide by: Useful life of machinery 12 years
Depreciable amount 90000

To record the depreciation for 2020:

Depreciation 90,000
Accumulated Depreciation 90,000

CASE NO. 1 CASE NO. 2

PV of lease payments (150,000*3.0373) 455595 PV of lease payments (128,750*3.0373)
PV of residual value guarantee (30,000*.6355) 19065 PV of residual value guarantee (30,000*.6355)
Total lease liability 474660 Total lease liability

Date Payment Interest Principal PV Date Payment

12/31/2017 474660 12/31/2017
12/31/2017 150,000 56959 93,041 381,619 12/31/2017 128,750
 12/31/2018 150,000 45794 104,206 277,414 12/31/2018 128,750
12/31/2019 150,000 33290 116,710 160,703 12/31/2019 128,750
12/31/2020 150,000 19284 130,716 30,000 12/31/2020 128,750

No. 1 474660 No. 1 410117

No. 2 Depreciable amount 474660 No. 2 Depreciable amount

Deduct: Residual value guarantee 30,000 Deduct: Residual value guarantee
Depreciable amount 444,660 Depreciable amount
Divide by: Number of lease term 4 Divide by: Number of lease term
Amount of depreciation 118665 Amount of depreciation
 1 0.567426856 0.432573 3.604776 1.12 4.0373
4.0373
ayments (128,750*3.0373) 391052
l value guarantee (30,000*.6355) 19065
410117

Interest Principal PV
410117
49214 79,536 330581
 39670 89,080 241501
28980 99,770 141731
17008 111,742 30000

Depreciable amount 410117

Deduct: Residual value guarantee 30,000
Depreciable amount 380,117
Divide by: Number of lease term 4
Amount of depreciation 102529