FINANCE LEASE – LESSOR

LECTURE DRILLS
Problem 1
An entity is a dealer in machinery. At the beginning of current year, a machinery was leased to another
entity under a sales type lease with the following provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Fair value of equipment on date of lease 12,000,000
Guaranteed residual value 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

The equipment will revert to the lessor at the end of lease term. The perpetual inventory system is
used. The lessor incurred initial direct cost of ₱300,000 in finalizing the lease agreement.

1. What is the gross investment in the lease?

a. 15,000,000
b. 16,000,000
c. 12,000,000
d. 11,000,000
2. What is the net investment in the lease?
a. 10,800,000
b. 11,370,000
c. 8,000,000
d. 9,000,000
3. What amount of interest income should be recognized for the current year?
a. 1,364,400
b. 1,296,000
c. 1,320,000
d. 1,440,000
4. What amount should be reported as gross income on sale for the current year?
a. 3,070,000
b. 7,700,000
c. 2,500,000
d. 3,370,000

Problem 2
An entity leased equipment to a lessee on July 1, 2022 for an eight-year period. Equal payments under
the lease are ₱600,000 due on July 1 of each year. The first payment was made by the lessee on July 1,
2022. The rate of interest contemplated by the lessor and lessee was 10%. The cash selling price of the
equipment is ₱3,520,000 and the carrying amount is ₱2,800,000. The lease was appropriately recorded
as a sales type lease. The lessor follows the calendar year.
1. What amount should be recognized as gross income on sale in 2022?
a. 600,000
b. 720,000
c. 360,000
d. 300,000
2. What amount should be recorded as interest revenue for 2022?
a. 292,000
b. 146,000
c. 352,000
d. 176,000

Problem 3
An entity is in the business of leasing equipment under a direct financing lease. The lessor expects a 12%
return on net investment after considering the initial direct cost. At the end of the lease term, the
equipment shall revert to the lessor. At the beginning of current year, an equipment is leased to a lessee
with the following information:

Cost of equipment to the lessor 5,000,000

Residual value guaranteed 600,000
Annual rental payable in advance at the beginning of each year 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate after initial direct cost 12%

1. What is the gross investment in the lease?

a. 7,200,000
b. 7,800,000
c. 5,000,000
d. 5,250,000
2. What is the net investment in the lease?
a. 5,000,000
b. 5,250,000
c. 4,400,000
d. 4,650,000
3. What amount of interest income should be recognized for the current year?
a. 594,000
b. 522,000
c. 630,000
d. 450,000

Problem 4
An entity acquired an asset costing ₱3,165,000. The asset is leased to another entity for 5 years under a
direct financing lease. The five annual lease payments are due at the end of each year. The
unguaranteed residual value of the asset at the end of the lease term is ₱500,000. The asset will revert
to the lessor at the end of the lease term. The lessor’s implicit interest rate is 12%. The PV of 1 at 12%
for 5 periods is .57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. What is the annual
rental payment?
a. 879,166
b. 740,278
c. 800,000
d. 500,000

Problem 5
At the beginning of current year, the entity leased the machine for a period of six years to a lessee under
a sales type lease. The six annual lease payments are due at the end of each year. The fair value of the
machine is ₱2,670,000 and the cost is ₱2,000,000. The guaranteed residual value of the machine at the
end of lease term is ₱400,000. The machine will revert to the lessor at the end of lease term. The lease
terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six
periods is 0.51 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11.

1. What is the annual lease payment payable to yield the desired return?
a. 600,000
b. 649,635
c. 552,510
d. 389,295
2. What is the total financial revenue?
a. 1,330,000
b. 2,000,000
c. 670,000
d. 930,000