Leases - PAS 17

Cancellable (not covered by the standard) Lessee - Expense - Payment Pattern

Lessor - Income - Collection Pattern

Non-cancellable
No Operating Lease

is there a transfer of
substantially all
economic
benefits/ownership? Substance is a
Yes sale/purchase on
installment - Finance
Lease

*if not explicitly

stated, check if one of
the following is
present:

1. Transfer clause

2. Bargain Purchase Option

3. Majority of Est. Useful Life is

the subject of the lease
4. The present value of MLP is
substantially equal to the FV of
the leased asset.

5. Major Modifications

PFRS 16: Lessee - all lease transactions should be classified as finance lease except if the lease is:
1. Short - term
2. Low - value

At commencement date the lessee should record:

Lease Liability (at present value using implicite rate of interest):

 1. Fixed lease payments less any lease incentives receivable Excluding executory
2. Variable lease payments costs
3. Exercise price of a purchase option if the lessee is reasonably certain to exercise the option
4. Amount expected to be payable by the lessee under a residual value guarantee
5 . Termination penalties if the lease term reflects the exercise of a termination option

Right of Use:
1. Initial measurement of Lease Liability
2. Lease bonus less lease incentives received
3. Initial direct costs incurred by the lessee
4. Estimate cost of dismantling, removing and restoring the underlying asset for which the lessee has a p

Subsequent measurement: Cost Model

Note: The carrying amount of the rightof use asset is adjusted for any remeasurement of the

Presentation in the Balance Sheet:

a. separate line item; or
b. include in the appropriate line item within whicj the corresponding underlying asset would

Period
Depreciation: Transfer Clause
Yes EUL
P.O.

Certainty of transfer
to the lessee?
GRV Shorter of
No
EUL/LT
 Year 1 50000
Year 2 100000
Year 3 150000

r clause

Purchase Option

of Est. Useful Life is

of the lease
ent value of MLP is
ly equal to the FV of
asset.

odifications
 Excluding executory
costs
o exercise the option

ination option

sset for which the lessee has a present obligation

for any remeasurement of the lease liability.

ponding underlying asset would be presented if owned.

Salvage value
Lessee's estimate

GRV
 2,053,200 2,395,500

500,000 500,000 500,000 500,000 500,000 600,000

Year 0 1 2 3 4 5 6
Dec. 31, 2019 2020 2021 2022 2023 2024

891,500
0.926 0.857 0.794
462,963 428,669 476,299
600,000 600,000 600,000 600,000

7 8 9 10
2025 2026 2027 2028

0.735 0.681 0.630 0.583 3.423

441,018 408,350 378,102 350,094 2,945,496
 Leases - PAS 17

Cancellable (not covered by the standard) Lessee - Expense - Payment Pattern

Lessor - Income - Collection Pattern

Non-cancellable
No Operating Lease

is there a transfer of
substantially all
economic
benefits/ownership?
Substance is a
Yes sale/purchase on
installment - Finance
Lease

*if not explicitly

stated, check if one
of the following is
present:

1. Transfer clause

2. Bargain Purchase Option

3. Majority of Est. Useful Life i

lease
4. The present value of MLP is
the FV of the leased asset.

5. Major Modifications

Additional Problems

Problem 1
As an incentive to enter a non cancelable operating lease for office premises for 10 years, Valley
Company as lessor has offered the lessee a rent-free period of two years. Annual rental payment under
the lease commencing in the third year is P500,000. What amount of lease income should be recognized
in the first year?

Problem 2

On January 1, 2019, HX Company leased a building to GTX Company under a four-year operating lease.
The monthly rental for 2019, 2020, 2021 and 2022 is P100,000, P150,000, P200,000 and P250,000,
respectively. Rentals are payable at the end of each month. All rental payments within the year were
made when due. What amount should be reported as rent receivable from Bee Company on December
31, 2020?

2019 Collections:
Cash (100,000 x 12 mos.) 1,200,000
Rent Receivable 900,000
Rent Income 2,100,000 Less: Rent Income (2019 and 2
2020 Rent Receivable
Cash (150,000 x 12 mos.) 1,800,000
Rent Receivable 300,000
Rent Income 2,100,000

Rent Receivable, 12/31/20 1,200,000

Total Rentals - excl. E.C. xx ₱ 1,800,000.00

Non-refundable dep. -L.B. xx ₱ 120,000.00
Lease Incentives (xx) ₱ -

Net Contract Price xx ₱ 1,920,000.00

Divided by: Lease Term x years 3 years
Rent Income - Annual xx ₱ 640,000.00 ₱ 480,000.00
Add: Contingent rent, if any xx
Total Rent Income xx

Machinery at Cost ₱ 3,000,000.00

Acc. Dep'n ₱ 300,000.00
C.A. ₱ 2,700,000.00
Def. I.D.C. ( 300,000 - 75,000) ₱ 225,000.00
Total C.A. ₱ 2,925,000.00

Total Dep'n:

Dep'n expense ₱ 300,000.00

Amort. Of IDC (300,000/3*9/12) ₱ 75,000.00
Total ₱ 375,000.00

Total Rentals - excl. E.C. xx ₱ 4,500,000.00

Non-refundable dep. -L.B. xx ₱ 500,000.00
Lease Incentives (xx) ₱ -

Net Contract Price xx ₱ 5,000,000.00

Divided by: Lease Term x years 5 years
Rent Income xx ₱ 1,000,000.00
Add: Contingent rent, if any xx ₱ -
Total Rent Income xx ₱ 1,000,000.00

Total Rentals - excl. E.C. xx ₱ 1,200,000.00

Non-refundable dep. -L.B. xx ₱ -
Lease Incentives (xx) ₱ -

Net Contract Price xx ₱ 1,200,000.00

Divided by: Lease Term x years 2 years
Rent Income xx ₱ 600,000.00 ₱ 450,000.00
Add: Contingent rent, if any xx
Total Rent Income xx

Gross Rental Income ₱ 450,000.00 Cost

Less: Accumulated Depreciation
Depreciation expense ₱ 345,000.00 Carrying Amount
Repairs and Maintenance ₱ 15,000.00 IDC (120,000 - 45,000)
Transportation ₱ 10,000.00 Total Carrying Amount
Net Rental income ₱ 80,000.00
 Year 1 100,000
Year 2 150,000
Year 3 175,000
Total 425,000 / 3 years 141,666.67

Operating Lease
Lessor
Total Rentals - excl. E.C. xx
Non-refundable dep. -L.B. xx
Lease Incentives (xx)

Net Contract Price xx

Divided by: Lease Term x years
Operating Lease
Rent Income xx
Add: Contingent rent, if any xx
Total Rent Income xx

Substance is a
sale/purchase on
installment - Finance
Lease
IDC - added to the carrying amount of the leased asset
- deferred and amortized as expense over the lease term
*if not explicitly
stated, check if one
of the following is
present:

1. Transfer clause

2. Bargain Purchase Option

3. Majority of Est. Useful Life is the subject of the

lease
4. The present value of MLP is substantially equal to
the FV of the leased asset.

5. Major Modifications

Total Rentals - excl. E.C. xx 5,000,000

 Non-refundable dep. -L.B. xx -
Lease Incentives (xx) 1,000,000

Net Contract Price xx 4,000,000

Divided by: Lease Term x years 10 years
Rent Income xx 400,000
Add: Contingent rent, if any xx -
Total Rent Income xx 400,000

Total Rentals - excl. E.C. xx 8,400,000

Non-refundable dep. -L.B. xx -
Lease Incentives (xx) -

Net Contract Price xx 8,400,000

Divided by: Lease Term x years 4 years
Rent Income xx 2,100,000
Add: Contingent rent, if any xx -
Total Rent Income xx 2,100,000

Collections:
2019 1200000
2020 1800000 3000000
Less: Rent Income (2019 and 2020) 4200000
Rent Receivable 1200000
 ₱ 1,600,000.00
ted Depreciation ₱ 300,000.00
₱ 1,300,000.00
000 - 45,000) ₱ 75,000.00
ying Amount ₱ 1,375,000.00
 Year 1 Year 2 Year 3
Cash 100000 Cash 150000 Cash
Rent Receivable 41666.67 Rent Receivable 8,333.33 Rent Receivable
Rent Income 141666.67 Rent Income 141,666.67 Rent Income

Operating Lease
Lessee
Total Rentals - excl. E.C. xx
Non-refundable dep. -L.B. xx
Initial Direct Costs xx
Lease Incentives (xx)
Net Contract Price xx
Divided by: Lease Term x years
Rent Expense xx
Add: Contingent rent, if any xx
Total Rent Expense xx

e lease term
 175000
nt Receivable 33,333.33
141,666.67
On January 1, 2019, Lessor Company leased a machinery to another entity with the following details:

Cost of Machinery 1,518,650

Annual rental payable at the end of each year 500,000
Lease term 4 years
Useful life 4 years
Implicit rate 12%
Present value of annuity of 1 for 4 years @ 12% 3.0373

Gross Investment 2,000,000 Annual Rental x OA = PV

Net Investment 1,518,650 Annual Rental = PV / OA
Unearned Interest Income 481,350 500,000

January 1, 2019:

Lease Receivable 2,000,000 Lease Receivable

Unearned Interest Income 481,350 Unearned Interest Income
Machinery 1,518,650 Lease Receivable, 1/1/19

Lease Receivable
December 31, 2019: Machinery

Cash 500,000 Cash

Lease Receivable 500,000 Interest Income
OR
Lease Receivable
Unearned Interest Income 182,238
Interest Income (1,518,650 x 12%) 182,238

Lease Receivable as of 12/31/19: Lease Receivable as of 12/31/19:

LR 1,500,000
UII 299,112 Current Portion:
LR, 12/31/19 1,200,888

Current Portion:
Collection - 2020 500,000 Non Current Portion: ( C.A. NEXT YEAR)
Less: Interest - 2020 144,107 355,893

Non-current portion: 844,995

December 31, 2020:

Cash 500,000 Cash

Lease Receivable 500,000 Interest Income
OR
Lease Receivable
Unearned Interest Income 144,107
Interest Income 144,107

Lease Receivable as of 12/31/20: Lease Receivable as of 12/31/20:

LR 1,000,000 LR at gross
UII 155,005 PV
LR, 12/31/20 844,995 UII

0
1
5
5.5638
6
PV of RENTALS 5,334,820
PV OF RV 161,553
COST /NI 5,496,390
 2,000,000
- 481,350
1,518,650

ease Receivable 1,518,650

Machinery 1,518,650

500,000
Interest Income 182,238
Lease Receivable 317,762

s of 12/31/19: 1,200,888 (1,518,650 x 1.12) - 500,000

144,107
355,893

n: ( C.A. NEXT YEAR) 844,995

 500,000
Interest Income 144,107
Lease Receivable 355,893

ease Receivable as of 12/31/20: 844,995 1,200,888

844,995
1,000,000
844,995
155,005

958,845

987,884
Problem 1

Mikee Company is a dealer in Machinery.

On January 1, 2019, a machinery was leased to Cheska Company with the following provisions:

Annual rental payable at the end of each year

Lease term
Useful life of machinery
Cost of machinery
Implicit interest rate
Present value of annuity of 1 for 5 years at 12%

Gross investment (400,000 x 5 years) 2,000,000

Net investment (400,000 x 3.60) 1,440,000
Unearned Interest Income 560,000

Sales (NI or FV whichever is lower) 1,440,000

Cost of Sales (Cost of the asset + IDC) 1,000,000
Gross Profit 440,000

Jan. 1, 2019
Lease Receivable 2,000,000
Cost of Sales 1,000,000
Sales 1,440,000
Unearned Interest Income 560,000
Inventory 1,000,000

Dec. 31, 2019

Cash 400,000
Unearned Interest Income 172,800
Interest Income (1,440,000 x 12%) 172,800
Lease Receivable 400,000

Lease Receivable 1,600,000

Unearned Interest Income 387,200
C/A of LR 12/31/19 1,212,800

Problem 2

R3 Company adopted the policy of leasing as the primary method of selling products. The entity's main product is a small
cargo vessel. R3 Company constructed such a cargo vessel for Razer Company at a cost of P8,500,000.
 R3 Company adopted the policy of leasing as the primary method of selling products. The entity's main product is a small
cargo vessel. R3 Company constructed such a cargo vessel for Razer Company at a cost of P8,500,000.

The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership
transferring to Razer Company at the end of the lease period. It is estimated that the cargo vessel will have a residual
value of P1,600,000 at that date.

The lease payments began January 1, 2019. R3 Company incurred initial direct cost of P500,000 in financing the lease
agreement with Razer Company. The sale price of the cargo vessel is P14,875,000.

Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14% for 10 periods is 5.95.

1. What amount should be reported as gross profit on sale for 2019? 5,875,000
2. What is the unearned interest income on January 1, 2019? 10,125,000
3. What is the interest income for 2019? 1,732,500

Lease Receivable (2.5M x 10 yrs.) 25,000,000

Cost of Sales ( 8.5M + 500,000) 9,000,000
Sales 14,875,000
Inventory 8,500,000
UII 10,125,000
Cash 500,000

Cash 2,500,000
Lease Receivable 2,500,000

Problem 3

On December 31, 2019, Benz Company, a lessor, actually sold a machinery that it had been leasing under a sales type lease.

On January 1, 2019, after receipt of the lease payment for the year, the following account balances were associated with the

Gross lease receivable 5,850,000 12/31/19

Unearned interest income 1,000,000
CA - 1/1/19 4,850,000 Gross lease receivable - 12/3
The interest rate implicit in the lease Is 10% UII
CA - 12/31/19
On December 31, 2019, Benz Company actually sold the leased machinery to the lessee for P3,250,000 cash.
1. What is the interest income for 2019?
2. What is the carrying amount of the lease receivable on December 31, 2019?
3. What is the loss on sale of the machinery that should be recognized on December 31, 2019?

Cash 3,250,000 Selling Price

UII 515,000 CA of Lease Receivable
Loss 2,085,000 Gain/Loss
Lease Receivable 5,850,000
 400,000
5 years
5 years
1,000,000
12%
3.60

Lease Receivable 1,440,000

Cost of Sales 1,000,000
Sales 1,440,000
Inventory 1,000,000

Cash 400,000
Interest Income 172,800
Lease Receivable 227,200

Lease Receivable 1,212,800

Lease Receivable @ gross 1,600,000

CA of LR 1,212,800
UII 387,200

's main product is a small

,000.
's main product is a small
,000.

years with the ownership

el will have a residual

in financing the lease

or 10 periods is 5.95.

NI (2.5M x 5.95) 14,875,000

Lease Receivable 22,500,000

UII 10,125,000
CA - 1/1/19 12,375,000

CA - 1/1/19 12,375,000

ng under a sales type lease.

ces were associated with the lease:

Unearned Interest Income 485,000

Interest Income 485,000
Gross lease receivable - 12/31/19 5,850,000
515,000
CA - 12/31/19 5,335,000
50,000 cash.
 485,000
5,335,000
2,085,000

Selling Price xx 3,250,000

CA of Lease Receivable xx 5,335,000
xx - 2,085,000