Intermediate Accounting 2 Dolor, Lorely B.

BS Accountancy, 2nd yr

Chapter 8: Leases Part II

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D

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

Gross investment [(220,000 - 18,098) x 4] 807,608

Net investment 640,000
Unearned interest income, Jan. 1, 20x1 167,608

Date Collections Interest Amortization Present value

1/1/x1 640,000
12/31/x1 201,902 64,000 137,902 502,098

3. A
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

4. B
Net Investment
PV of lease payments + PV of Unguaranteed residual value = FV of underlying asset
+ Initial direct costs

? + ? = 394,833 + 25,000

⮚ Net investment = (394,833 + 25,000) = 419,833

⮚ Net investment = (PV of ₱120,000 annual rent) + (PV of ₱10,000 residual value)
⮚ 419,833 = (PV of ₱120,000 annual rent) + (PV of ₱10,000 residual value)

Trial and error:

⮚ 419,833 = (120,000 x PV of annuity due @x%, n=4) + (10,000 x PV of 1 @x%, n=4)
Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

Trial @11%:
⮚ 419,833 = (120,000 x 3.443715) + (10,000 x 0.658731)
⮚ 419,833 = (413,246 + 6,587)
⮚ 419,833 = 419,833

❖ The implicit interest rate is 11%.

Date Collections Interest Amortization Present value

1/1/x1 419,833
1/1/x1 120,000 0 120,000 299,833
1/1/x2 120,000 32,982 87,018 212,815
1/1/x3 120,000 23,410 96,590 116,224
1/1/x4 120,000 12,785 107,215 9,009
12/31/x4
0 991 -991 10,000
(end of lease)

Carrying amount of net investment, Dec. 31, 20x1:

212,815 + 120,000 = 332,815

5. A
Net Investment
PV of lease payments + PV of Unguaranteed residual value = FV of underlying asset
+ Initial direct costs

? + ? = 593,685 + 25,000

⮚ Net investment = (593,685 + 25,000) = 618,685

⮚ Net investment = (PV of X annual rent) + (PV of ₱10,000 residual value)
⮚ 618,685 = (X annual rent x PV of annuity due @12%, n=4) + (10,000 x PV of 1
@12%, n=4)
⮚ 618,685 = (X annual rent x 3.401831) + (10,000 x 0.635581)
⮚ 618,685 = (X annual rent x 3.401831) + 6,356
⮚ 618,685 – 6,356 = (X annual rent x 3.401831)
⮚ 612,329 = (X annual rent x 3.401831)
⮚ X annual rent = 612,329 ÷ 3.401831
⮚ Annual rent = 180,000

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

Interest revenue = (3,520,000 – 600,000) x 10% x 6/12 = 146,000

Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

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

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

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

10. A
Net Investment
PV of lease payments + PV of Unguaranteed residual value = FV of underlying asset
+ Initial direct costs

Sales
PV factors @10%,
Lease payments n=4 PV of LP
Annual rent 600,000 3.486852 2,092,111
Guaranteed
res. value 180,000 0.683013 122,942
Net investment in the lease equal to Sales 2,215,053

Cost of sale & Net selling profit

Sales 2,215,053
Cost of sales (equal to carrying
(1,500,000)
amount)
Gross profit from sale 715,053
Direct costs (20,000)
Net profit from sale 695,053

Net investment, end of Year 1

Date Collections Interest Amortization Present value
1/1/x1 2,215,053
1/1/x1 600,000 0 600,000 1,615,053
1/1/x2 600,000 161,505 438,495 1,176,558
1/1/x3 600,000 117,656 482,344 694,214
1/1/x4 600,000 69,421 530,579 163,635
12/31/x4
0 16,365 -16,365 180,000
(end of lease)

⮚ 1,176,558 from amortization table + 600,000 = 1,776,558

Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

11. D
Net Investment
PV of lease payments + PV of Unguaranteed residual value = FV of underlying asset
+ Initial direct costs

Lease payments +
Unguaranteed residual Net investment in the
value  PV factors @10%, n=4 lease
600,0
Annual rent (LP) 00 3.486852 2,092,111
Unguaranteed res. 180,0
value 00 0.683013 122,942
Net investment in the lease 2,215,053

Sales
➢ PV of lease payments = 2,092,111

Cost of sales
Cost/carrying amount 1,500,000
Less: PV of unguaranteed residual value (122,942)
Cost of sales 1,377,058

Net selling profit

Sales 2,092,111
Cost of sales (1,377,058)
Gross profit from sale 715,053
Direct costs (20,000)
Net profit from sale 695,053

Net investment, end of Year 1

Date Collections Interest Amortization Present value
1/1/x1 2,215,053
1/1/x1 600,000 0 600,000 1,615,053
1/1/x2 600,000 161,505 438,495 1,176,558
1/1/x3 600,000 117,656 482,344 694,214
1/1/x4 600,000 69,421 530,579 163,635
12/31/x4
0 16,365 -16,365 180,000
(end of lease)

⮚ 1,176,558 from amortization table + 600,000 = 1,776,558

Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

12. D
13. A
⮚ Guaranteed residual value:

Step 1: Place the given information in the equation.

Net Investment
PV of lease payments (PV of Annual + PV of guaranteed residual value)= Selling Price
+
? ? = 2,738,081

Step 2: Squeeze
⮚ (Annual rent x PV of annuity due @10%, n=4) + (Guaranteed residual value x PV of
1 @10%, n=4) = 2,738,081
⮚ (Annual rent x 3.486852) + (180,000 x 0.683013) = 2,738,081
⮚ (Annual rent x 3.486852) = 2,738,081 – 122,942
⮚ Annual rent = 2,615,139 ÷ 3.486852 = 750,000

⮚ Unguaranteed residual value:

Step 1: Place the given information in the equation.
Net Investment
PV of lease payments + PV of Unguaranteed residual value = Selling Price+ PV of
Unguaranteed residual value
? + ? = 2,738,081 + ?

Selling price = PV of lease payments (the PV of res. val. is a reduction to cost of sales)

Step 2: Squeeze
⮚ (Annual rent x PV of annuity due @10%, n=4) + (Unguaranteed residual value x PV
of 1 @10%, n=4) = 2,738,081 + (Unguaranteed residual value x PV of 1 @10%,
n=4)
⮚ (Annual rent x PV of annuity due @10%, n=4) = 2,738,081
⮚ (Annual rent x 3.486852) = 2,738,081
⮚ Annual rent = (2,738,081÷ 3.486852) = 785,259

Comparison of amortization tables:

(1) Guaranteed residual value
Date Collections Interest Amortization Present value
1/1/x1 2,738,081
1/1/x1 750,000 0 750,000 1,988,081
1/1/x2 750,000 198,808 551,192 1,436,890
1/1/x3 750,000 143,689 606,311 830,579
1/1/x4 750,000 83,058 666,942 163,636
12/31/x4
0 16,364 -16,364 180,000
(end of lease)
Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

(2) Unguaranteed residual value

Date Collections Interest Amortization Present value
1/1/x1 2,738,081
1/1/x1 785,259 0 785,259 1,952,822
1/1/x2 785,259 195,282 589,977 1,362,845
1/1/x3 785,259 136,285 648,974 713,871
1/1/x4 785,259 71,388 713,871 0
12/31/x4
0 0 0 0
(end of lease)

14. B
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

15. C
⮚ Cello Co. (Seller-lessee accounting)
Step 1: Lease liability
Fixed lease payments 120,000
Multiply by: PV ordinary annuity @4.5%, n=18 12.159992
PV of lease payments 1,459,199

Step 2: Right-of-use asset

Right of use Carrying PV of lease payments
= x
asset amount Fair value of asset

Right of use asset = 1,000,000 x (1,459,199 ÷ 1,800,000) = 810,666

Journal entry:
Date Cash 1,800,
Right-of-use asset 000
Building 810,66 1,000,000
Lease liability 6 1,459,199
Gain (squeeze) 151,467

Step 3 (Optional): Reconciliation of Gain or loss

Carrying amount 1,000,000
Right of use retained by seller-lessee (810,666)
Rights transferred to buyer-lessor 189,334
Intermediate Accounting 2 Dolor, Lorely B.
BS Accountancy, 2nd yr

Sale price 1,800,000

Carrying amount (1,000,000)
Total gain 800,000
Multiply by: (189,334 rts. transferred / 1M carrying
amt.) 18.9334%
Gain - recognized portion 151,467