A.

Jackie Chan Leasing signs an equipment lease contract with Chris Tucker on January 1,
2015. The following information pertains to the lease.

Lease term 5 years

Equipment’s useful life 6 years
Bargain option price P 40,000
Implicit rate, known by Chris Tucker 10%
Fair value of the asset at January 1, 2015 P600,000
Estimated recoverable value at the end of 5 years P 80,000
Estimated residual value at the end of 6 years P 20,000

The cost of the asset to Jackie Chan Leasing is P600,000. Chris Tucker uses the sum-
of-years-digit method to depreciate this type of equipment. Annual lease payments are
made at the beginning of each year, starting January 1, 2015.
Fair value of asset 600,000
PV of bargain purchase option (40,000 x .6209) 24,836
PV of periodic payment 575,164
PV factor (annuity due for 5 years at 10%) 4.1699
Periodic payment P137, 932

Date Periodic interest Reduction in Present value

payment principal
01/01/2015 137,932 - 600,000
01/01/2015 137,932 - 137,932 462,068
01/01/2016 137,932 46207 91,725 370,343
01/01/2017 137,932 37,034 100,898 269,445

Required:
a. Give entries in the books of Chris Tucker for years 2015 and 2016 as a result of the
lease contract.
2015
Jan.01 leased equipment 600,000
Financed lease liability 600,000
Financed lease liability 137,932
Cash 137,932
Dec.31 interest expense 46,207
Interest payable 46,207
Depreciation expense-lease equipment 165,714
Accumulated depreciation-leased equipment 165,714
2016
Jan.01 financed lease liability 91,725
Interest payable 46,207
Cash 137,932
Dec.31 interest expense 37,034
Interest payable 37,034
Depreciation expense-leased equipment 138,095
Accumulated depreciation-leased equipment 138,095

b. Give the entries in the books of Jackie Chan Leasing for years 2015 and 2016.
2015
Jan.01 financed lease receivable 729,660
Equipment for lease 600,000
Discount on finance lease receivables 129,660
Cash 137,932
Financed lease receivable 137,932
Dec.31 discount on finance lease receivable 46,207
Interest revenue 46,207
2016
Jan.01 cash 137,932
Financed lease receivable 137,932
Dec.31 discount on financed lease receivable 37,034
Interest revenue 37,034