Name: BAGADIONG, ANGELIAN T.

Grade & Sec: BSA-2B

ASSIGNMENT 2

Problem 1 OPERATING LEASE- LESSOR

On January 1, 2020, Condor Company purchased a new machine for P4,800,000 and leased it to East
Company the same day. The machine has an estimated useful life of 12 years and will be depreciated by
the straight line method.

The lease is for a three-year period expiring January 1, 2023 at an annual rental of P850,000.
Additionally, East Company paid P300,000 to Condor Company as a lease bonus to obtain the three-year
lease.
During 2020, Condor Company paid insurance of P80,000 for the leased machine.

Required:
Prepare journal entries on the books of the lessor for the year ended December 31, 2020.

Jan-20

Machinery 4,800,000.00

Cash 4,800,000.00

Cash 850,000.00

Rent Income 850,000.00

Cash 300,000.00

Unearned Rent Income 300,000.00

Insurance 80,000.00

Cash 80,000.00

Depreciation 400,000

Accumulated Depreciation 400,000

(4,800,000 / 12 yrs)

Unearned Rent Income 100,000.00

Rent Income 100,000.00

(300,000 / 3 yrs)
Problem 2 OPERATING LEASE- LESSOR

Manila Company is engaged in leasing heavy equipment. On December 1, 2020, the entity bought a
second hand heavy equipment for P375,000. In December 2020, the entity incurred P75,000 for a major
overhaul to put the equipment in good running condition.

The equipment is available for the intended use on December 31, 2020. The equipment has an
estimated useful life of 5 years. Depreciation is on a straight line basis.

On April 1, 2021, Manila Company leased the equipment to Makati Company for 2 years up to March 31,
2023. The lease fee is P15,000 per month. Makati Company paid P180,000 on April 1, 2021, the lease fee
for one year.

During 2021, Manila Company spent P7,000 for minor repairs and P3,000 for transportation of the
equipment to Makati Company.

Required:
Prepare journal entries on the books of lessor for 2020 and 2021.

Year
2020

Equipment 375,000.00

Cash 375,000.00

Equipment- overhaul 75,000.00

Cash 75,000.00

Year
Cash 180,000.00
2021

Rent Income- 1 year 180,000.00

Repair 7,000.00

Transportation
3,000.00
expense

Cash 10,000.00

Depreciation 90,000.00

Accumulated
90,000.00
Depreciation

(450,000 / 5 yrs)
 Rent Income 45,000.00

Unearned Rent Income 45,000.00

(15,000 x 3)

Problem 3 DIRECT FINANCING LEASE - LESSOR

Jolo Company is in the business of leasing new equipment. As lessor, Jolo Company expects a 12% return
Sophisticated on the net investment.

All leases are classified as direct financing.

At the end of the lease term, the equipment will revert to Jolo Company.

On January 1, 2020, an equipment is leased to a lessee with the following information.

Cost of equipment to Jolo 5,250,000
Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2020

Required:
1. Compute the total financial revenue.

Gross Rental (900,000 x 8) 7,200,000.00

Residual Value 600,000.00

Gross Investment 7,800,000.00

(debit to lease receivable)

Net Investment (5,250,000.00)

(cost of equipment)

Total Finance Revenue 2,550,000.00

2. Prepare a table of amortization for the lease receivable and interest income.

Date Payment Interest Principal Present Value

 1/1/2020 5,250,000.00

1/1/2020 900,000.00 900,000.00 4,350,000.00

1/1/2021 900,000.00 522,000.00 378,000.00 3,972,000.00

1/1/2022 900,000.00 476,640.00 423,360.00 3,548,640.00

1/1/2023 900,000.00 425,837.00 474,163.00 3,074,477.00

1/1/2024 900,000.00 368,937.00 531,063.00 2,543,414.00

1/1/2025 900,000.00 305,210.00 594,790.00 1,948,624.00

1/1/2026 900,000.00 233,835.00 666,165.00 1,282,459.00

1/1/2027 900,000.00 153,895.00 746,105.00 536,354.00

1/1/2028 600,000.00 63,646.00 536,354.00 0

7,800,000.00 2,550,000.00

3. Prepare journal entries for 2020 and 2021.

Jan. 2020 Lease Receivable 7,800,000.00

Equipment 5,250,000.00

Unearned Interest Income 2,550,000.00

Cash 900,000.00

Lease Receivable 900,000.00

Dec. 31 Unearned Interest Income 522,000.00

Interest Income 522,000.00

Jan. 2021 Cash 900,000.00

Lease Receivable 900,000.00

Dec. 31 Unearned Interest Income 476,640.00

Interest Income 476,640.00

4. Prepare journal entries for 2027.

Jan. 2027 Cash 900,000.00

 Lease Receivable 900,000.00

(Final payment)

Dec. 31 Unearned Interest Income 63,646.00

Interest Income 63,646.00

5. Prepare journal entry on January 1, 2028 to record the return of the equipment from the lessee.
The fair value of the equipment on this date is P500,000.

Jan. 2028 Equipment 500,000.00

Loss of Finance Lease 100,000.00

Lease Receivable 600,000.00

Problem 4 DIRECT FINANCING LEASE - LESSOR

Macedonia Company entered into a leasing business. The entity acquired a specialized machine for
P3,000,000 cash.

On January 1, 2020 the entity leased the machine to another entity for period of 6 years, after which the
machine is returned to Macedonia Company for disposition.

The expected unguaranteed residual value of the machine is P200,000. The lease terms are arranged so
that a return of 12% is earned by Macedonia Company.
The first lease payment is made on January 1, 2020 and subsequent payments are made each December
31. The relevant present value factors are:
PV of an annuity of 1 in advance at 12% for 6 periods 4.6048
PV of 1 at 12% for 6 periods .5066

Required:
1. Compute the annual rental payable in advance required to yield the desired return.

Cost 3,000,000.00

PV of residual value 101,320.00

(200,000 x 0.5066)

Net Investment 2,898,680.00

Divide by PV factor 4.6048

Annual Rental 629,490.97

2. Prepare an amortization schedule for the lease receivable.

Date Payment Interest Principal Present Value

1/1/2020 3,000,000.00

1/1/2020 629,490.00 629,490.00 2,370,510.00

12/31/2020 629,490.00 284,461.00 345,029.00 2,025,481.00

12/31/2021 629,490.00 243,058.00 386,432.00 1,639,049.00

12/31/2022 629,490.00 196,686.00 432,804.00 1,206,245.00

12/31/2023 629,490.00 144,749.00 484,741.00 721,504.00

12/31/2024 629,490.00 86,580.00 542,910.00 178,594.00

12/31/2025 200,000.00 21,406.00 178,594.00 -

976,940.00 3,000,000.00

3. Prepare journal entries for 2020.

Jan. 2020 Machinery 3,000,000.00

Cash 3,000,000.00

Lease Receivable 3,976,940.00

 Machinery 3,000,000.00

Unearned Interest Income 976,940.00

Gross Rental (629,490 x 6) 3,776,940.00

Residual Value 200,000.00

Gross Investment 3,976,940.00

(debit to lease receivable)

Net Investment 3,000,000.00

(cost of equipment)

Unearned Interest Income 976,940.00

Cash 629,940.00

Lease Receivable 629,940.00

Dec.2020 Cash 629,940.00

Lease Receivable 629,940.00

Unearned Interest Income 284,461.00

Interest Income 284,461.00

4. Prepare journal entry to recognize the interest income for 2025.

2025

Dec.31 Unearned Interest Income 21,406.00

Interest Income 21,406.00

5. Prepare journal entry on December 31, 2025, end of six years, to record the return of machine to the
lessor. The fair value of the machine on this date is the same as the unguaranteed residual value.

2025

Dec.31 Equipment 200,000.00

Lease Receivable 200,000.00