Lobrigas, Claudine L.

BSIA-IV

Intermediate Accointing - 2

Unit 5: Topic 1 - Lessee Accounting

Problem 1

On January 1, 2021, Large Company leased a machine with the following provisions.

Annual lease payment in advance at the beginningof each year, starting

January 1, 2020
1,000,000
Lease term
10 years
Useful life of machine
15 years
Implicit interest rate in the lease
12%
PV of an ordinary annuity of 1 at 12% for 10 periods
5,650
PV of an annuity of 1 in advance at 12% for 10 periods
6,328
PV of 1 at 12% for 10 periods
0.322

The entity has an option to purchase the machine on January 1, 2031 by paying P200,000.
At the commencement date, it is reasonably certain that the purchase option will be exercised.

1. What is the initial cost of the right of use asset? = 6,392,400

PV of rentals (1,000,000 x 6.328) 6,328,000

PV of purchase option (200,000 x 0.322) 64,400

Cost of the right of the used Asset 6,392,400

Date Payment Interest Principal Present Value

01/01/2021 6,392,400

01/01/2021 1,000,000 1,000,000 5,392,400

01/01/2022 1,000,000 647,088 352,912 5,039,488

 01/01/2023 1,000,000 604,739 395,261 4,644,227

01/01/2024 1,000,000 557,307 442,693 4,201,534

2. What is the interest expense for the current year? = P 647,088

3. What is the lease liability at year-end? = P 5,392,400

4. What is the depreciation for current year? = P 426,160

Depreciation of the current year P 6,392,400/15 years = P 426,160

Problem 2

On January 1, 2021, Verna Company negotiated a 15-year lease for a building. The building
has useful life of 20 years. Before occupancy, the lessee incurred leasehold improvement of
P600,000 with useful life 5 years. The lessee is required to restore the building upon expiration
of the lease. The present value of estimated cost of restoration is P644,000 discounted at 7%.

Annual payments of P1,000,000 are payable to the lessor on December 31 of each of the 15
years of the lease term. The lease was negotiated to assure the lessor a 10% rate of return.

PV of an ordinary annuity of 1 at 10% for 15 periods 7.606

PV of an annuity of 1 in advance at 10% for 15 periods 8.367

1. What is the initial cost of the right of use asset?

PV of rentals (1,000,000 x 7.606) 7,606,000

PV of restoration cost 644,000

Cost of the right of the used Asset 8,250,000

Date Payment Interest Principal Present Value

01/01/2021 7,606,000

12/31/2021 1,000,000 760,600 239,400 7,366,600

2. What is the interest expense for the current year? = P 760,600

3. What is the lease liability at year-end? = P 7,366,600

4. What is the depreciation for current year? 8,250,000/15 years = P 550,000

Problem 3

Dynamite Company has maintained a policy of acquiring equipment by leasing. On January

1, 2021, Dynamite Company entered into a lease agreement for an equipment. The lease
stipulates an annual rental payable of P600,000 to be paid every December 31 starting
December 31, 2021. The lease contains neither a transfer of title to the lessee nor a purchase
option.

The equipment has a residual value of P300,000 at the end of the 5-year lease period but is
unguaranteed by the lessee. The economic life of the equipment is 8 years. The implicit interest
rate is 12% after considering the unguaranteed residual value. The present value of an ordinary
annuity of 1 at 12% for 5 periods is 3.60.

1. What is the initial cost of the right of use asset? (600,000 x 3.60) = P 2,160,000

Date Payment Interest Principal Present Value

01/01/2021 2,160,000

12/31/2021 600,000 259,200 340,800 1,819,200

2. What is the interest expense for the current year? = P 259,200

3. What is the lease liability at year-end? = P1,819,200

4. What is the depreciation for current year? (2,160,000/5years) = P 432,000