Lessee Accounting:

Problem 11-1

At the beginning of current year, lessee company leased a machinery with the following information:

Annual rental payable at the end of each year 1,000,000

Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required by contract at PV 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 4 periods 3.17
PV of 1 at 10% for 4 periods 0.68
1. What is the initial lease liability?
a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000
2. What is the cost of right use asset?
a. 4,200,000
b. 4,250,000
c. 3,810,000
d. 3,900,000
3. What is the depreciation for current year?
a. 462,500
b. 925,000
c. 850,000
d. 965,000
4. What is the lease liability at year-end?
a. 2,510,000
b. 3,159,000
c. 2,861,000
d. 3,620,000
Problem 11-2
At the beginning of current year, Panorama Company leased a building from a lessor with the following pertinent
information:
Annual rental payable at the end of each year 1,000,000
Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
PV of 1 for 5 periods at 10% 0.62
1. What is the cost of the right of use asset?
2. What is the depreciation for current year?
3. What is the interest expense for current year?
4. What is the lease liability at year-end?
Problem 11-3
At the beginning of current year, Ashe Company entered into a ten-year noncancelable lease requiring year-end
payments of P1,000,000.
Ashe incremental borrowing rate is 12% while the lessor’s implicit interest rate, known to Ashe is 10%.
Present value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%.
On same date, Ashe company paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement.
Ownership of the property remains with the lessor at expration of the lease. There is no purchase option.
The leased property has an estimated economic life of 12 years.
1. What amount should be capitalized initially as cost of the right of use asset?
2. What amount should be recognized initially as lease liability?
3. What is the annual depreciation of the right of use asset?
Problem 11-4
Neal company entered into a nine-year lease on aware on a warehouse on December 31,2019.
Lease payment of P520,000 which included executory cost of P20,000 is due annually, beginning on December 31,2020
and every December 31 thereafter.
The cost of restoring the underlying asset to its original condition as required by the contract is estimated at the present
value of P200,000.
The interest rate implicit in the lease is 9%. The present value of an ordinary annuity of 1 for nine years at 9% is 5.6.
1. What amount should be reported as lease liability on December 31,2019?
2. What is the cost of the right of use asset?
Problem 11-5
At the beginning of current year, Day Company leased a new machine from Parr with the following pertinent
information:
Lease term 5 years
Annual rental payable at the beginning of each year 500,000
Useful life of machine 8 YEARS
Implicit interest rate in lease 12%
Present Value of an annuity of 1 in advance for 5 periods at 12% 4.04
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
The lease is not renewable and the machine reverts to Parr at the termination of the lease. The cost of the machine on
Parr’s accounting records is P3,755,000.
1. At the beginning of the lease term, what amount should be recorded as cost of right of use asset?
 2. What amount should be reported as depreciation of the right of use asset for the current year?

Problem 11-6
Robbin Company leased a machine with remaining useful life of 14 years from Ready Leasing Company. The lease
required 10 annual payments of P1,000,000 beginning immediately.
The lease specified an interest rate of 12% and a purchase option of P1,000,000 at the end of the tenth year. The lessee
is reasonably certain to exercise the purchase option.
Present Value of an annuity due (in advance) of 1 at 12% for 10 periods 6.328
Present Value of 1 at 12% for 10 periods 0.322
1. What amount should be recorded initially as cost of the right of use asset?
2. What amount should be reported as annual depreciation of the right of use-asset?
Problem 11-7
At the beginning of current year, Nori Mining Company entered into a 5-year lease for drilling equipment. The
entity accounted for the acquisition at the present value of lease payments of P2,400,000 which included a P100,000
purchase option.
At the end of the lease, the entity is certain to exercise the purchase option.
The entity estimated that the equipment’s fair value will be P200,000 at the end of the 8-year life. The entity
regularly used straight line depreciation on similar equipment.
What amount should be recognized as depreciation expense on the right of use asset for the current year?
a. 480,000
b. 460,000
c. 300,000
d. 275,000
Problem 11-8
Helen Company recorded the cost right of use asset at P4,500,000. The underlying asset had a useful life of 8 years and
the lease term is 5 years. The asset is expected to have a fair value of P1,500,000 at the end of 5 years and a fair value of
P500,000 at the end of 8 years.
The lease agreement provided for the transfer of title of the underlying asset to the lessee at the end of the lease term.
What amount of depreciation expense should be recorded for the first year of the lease?
a. 900,000
b. 800,000
c. 600,000
d. 500,000
Problem 11-9
At the beginning of current year, Cola Company signed an 8-year noncancelable lease for a new machine requiring
P750,000 annual payment at the beginning of each year.
The machine has a useful life of 12 years with residual value of P150,000. Aggregate lease payments have a present
value of P5,400,000 based on an appropriate interest rate. Title passes to Cola Company at the lease expiration date.
The straight line method of depreciation is used for all plant assets.
What amount should be recognized as depreciation of the right of use asset for the current year?
Problem 11-10
At the beginning of current year, Kosovo Company entered into 10 year lease for an equipment.
The entity accounted for the acquisition at the present value of lease payment of P4,900,000, which included a P200,000
residual value guarantee. At the end of the lease, the asset will revert back to the lessor.
It is estimated that the assets fair value at the end of the 12-year useful life will be P100,000.
The entity regularly used the straight line depreciation on similar equipment.
What amount should be recognized as depreciation expense of the right of use asset for the current year?
Remeasurement of Lease Liability
Problem 13-1
Alyanna Company entered into a lease of building on January 1,2019 with the following information:
Annual rental payable at the end of each year 500,000
Lease term 5 years
Useful life building 20 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
The lease contained an option for the lessee to extend for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 2022, the lessee decided to extend the lease for a further 5 years.
New annual rental payable at the end of each year 600,000
 New implicit interest rate 8%
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
PV of 1 at 8% for 2 periods 0.86
PV of an ordinary annuity of 1 at 8% for 2 periods 1.78
1. What amount should be reported as lease liability on December 31, 2021?
2. What amount should be reported as depreciation for 2019?
3. What amount should be reported as new lease liability on jan. 1, 2022?
4. What is the carrying amount of right of use asset on jan.1,2022?
5. What amount should be reported as depreciation for 2022?
Problem 13-2
On January 1, 2019, Variety company entered into an 8-year lease of a floor of a building with useful life of 15 years with
the following terms:
Annual rental for the first three years payable at the end of each year 300,000
Annual rental for the next 5 years payable at the end of each year 400,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for three periods 2.49
PV of an ordinary annuity of 1 at 10% for five periods 3.79
PV of 1 at 10% for three periods. 0.75
The lease provides for neither a transfer of title to the lessee not a purchase option.
1. What amount should be reported as lease liability on January 1,2019?
2. What amount should be reported as interest expense for 2019?
3. What amount should be reported as interest expense for 2022?
4. What amount should be reported as lease liability on December 31,2022?
Problem 13-3
On January 1, 2019, Milan Company entered into a lease agreement with the following information:
Floor Space 1,500 square meters
Annual rental payable at the end of each year 200,000
Implicit rate in the lease 12%
Lease term 12 years
PV of an ordinary annuity at 12% for 12 periods 6.1944
Problem 13-4
On January 1, 2019, Jones Company entered into a lease for floor space with the following information:
Floor Space 5,000 square meters
Annual rental payable at the end of each year 200,000
Implicit rate in the lease 10%
Lease term 5 years
PV of an ordinary annuity at 12% for 12 periods 3.7908
Problem 13-5
On January 1,2019, Hoyt Company leased an office building with the following items:
Annual rental at the end of each year 300,000
Lease term and useful life of the building 4 years
Implicit rate in the lease 10%
PV of an ordinary annuity of 1 at 10% for 4 periods 3.17
Problem 13-6
On January 1, 2019, Yoga Company leased machine with the following information:
Annual rental payable at the end of each year 100,000
Lease term 5 years
Implicit rate in the lease 6%
PV of an ordinary annuity of 1 at 6% for 5 periods 4.2124