Problems related to

LEASES Adapted
 Cost of asset (normal sales price) P365,760
PROBLEM 16 to 20 Present value of guaranteed residual value (80,000 x 0.683)
Present value of annual payments
54,640
P311,120
On December 31, 2019, Beam Company leased equipment Divided by: PV factor of annuity due* 3.487
to Forth Company for a four-year period ending December Annual lease payment P 89,223
31, 2023. The equipment cost Beam Company P365,760
and has an expected useful life of five years. Its normal Gross lease receivable (89,223 x 4) P356,892
sales price is P365,760. The lessee guarantees the residual Guaranteed residual value 80,000
value of P80,000. Lease payment is due every December Gross investment in the lease P436,892
31 and Forth Company made the first payment on
December 31, 2019. Beam Company’s implicit interest rate Gross investment in the lease P436,892
Net investment/present value 365,760
is 10%.
Interest revenue over the four-year lease term P 71,132
16. How much is the annual lease payment?
17. Before the first payment on December 31, 2019, how Net investment, December 31, 2019 (after 1 st payment)
much is the gross investment in the lease? 365,760 – 89,223 P276,537
18. How much interest revenue should Beam Company Amortization of unearned interest income (10% x 276,537) 27,654
recognize over the four-year lease term? 2nd annual payment on December 31, 2020 (89,223)
Net investment in the lease, December 31, 2020 P214,968
19. How much is the net investment in the lease at
December 31, 2020?
20. If the residual value is not guaranteed, how much net From the viewpoint of the lessor, the residual value, whether
investment, before the 1st payment, in the lease shall be guaranteed or not, is accounted for in the same manner. P365,760
recognized on December 31, 2019?
PROBLEM 21 to 24 Fair market value/sales price P792,200
Ming Company uses lease as a means of selling its equipment. Cost of leased equipment 684,000
On July 1, 2019, the company leased an equipment to Kit Manufacturer’s profit P108,200
Company. The cost of the equipment to Ming Company was
P684,000. The fair market value (which was the sales price)
Gross investment P1,080,000
was P792,200 at the time of the inception of the lease. Annual Sales price 792,200
lease payments are P135,000 and are payable in advance for 8 Total financial revenue P 287,800
years. The equipment has an expected economic life of 10
years. At the end of the lease term, title to the equipment will
Interest revenue in 2019 (792,200 – 135,000) x 10% x 6/12 P32,860
pass to Kit Company. Implicit interest rate is 10%.
21. What is the manufacturer’s profit recognized by Ming
Company in 2019?
Fair value/sales price P792,200
22. What is Ming Company’s total financial revenue Cost of leased equipment [684,000 - (50,000 x 0.4665)] 660,675
pertaining to the lease? Manufacturer’s profit P131,525
23. How much is the interest revenue recognized by Ming
Company in 2019?
24. Assume that at the end of the lease term, the title to the
equipment will not pass to the lessee. The lessee (Kit
Company) however, does not guarantees a residual value of
P50,000 at the end of the lease term. How much is the
manufacturer’s profit and interest revenue recognized by
Ming Company for the year 2019?
PROBLEM 25
Ohm Company is engaged in leasing equipment. An
equipment was delivered to a lessee on December 31, 2019
under a direct financing lease with the following terms and
conditions:
Cost of equipment P5,680,000
Interest revenue
Residual value (unguaranteed) 300,000
Useful life and lease term 8 years (5,680,000 – 1,000,000) x 12% P561,600
Implicit interest rate 12%
The annual rental is P1,000,000 payable every December 31.
The first payment is made on December 31, 2019. The
equipment will revert to the lessor upon the lease expiration
(Use two decimal places in computing the PV). How much is
the interest revenue for the year ended December 31, 2020?
PROBLEM 26

Fluke Company leases printing equipment to customers

under direct financing leases. The equipment has no
residual value at the end of the lease and the leases do Annual payment 484,440/4.037 = 120,000
not contain bargain purchase option. Fluke Company
wishes to earn 12% interest on a 5-year lease of
equipment with a fair value of P484,440. (Use three Gross investment 120,000 x 5 P600,000
decimal places). What is the total amount of interest Cost of equipment 484,440
revenue that Fluke Company will earn over the life of Interest revenue over the lease term P115,560
the lease?
PROBLEM 27
Mew Company adopted the policy of leasing as the
primary method of selling its product. The company’s
main product is a small helicopter that is very popular
among politicians and company officers. Mew
Company constructed such a helicopter for Pert
Company at a cost of P6,000,000. Financing the Selling price
construction was at a 12% rate. The terms of the lease (2,500,000 x 3.04) +2,500,000 P10,100,000
provided for annual advance payments of P2,500,000 to Cost of helicopter (6,000,000)
be paid over 5 years with the ownership transferring to Initial direct costs (500,000)
Pert Company at the end of the lease period. It is Profit on sale P3,600,000
estimated that the helicopter will have a residual value
of P1,500,000 at that date. The lease payments begin on
January 1, 2019. Mew Company incurred initial direct
cost of P500,000 in financing the lease agreement with
Pert Company. The profit on the sale to be recognized
by Mew Company should be
PROBLEM 28 and 29

On July 1, 2019, Xiao Company leased piece of land from

LongBao Company under a three-year operating lease
effective on this date. Total rent for the term of the lease will
Rent revenue for 2019
be P630,000, payable as follows:
(630,000/3 = 210,000; 210,000 x ½) P105,000
First 12 months at P15,500 per month
Next 18 months at P18,000 per month
Last 6 months at P20,000 per month
28. What is LongBao Company’s rent revenue for the year Total rentals received (15,500 x 6) P 93,000
ended December 31, 2019? Rent revenue for 2019 105,000
29. How much is the deferral or accrual reported in Accrued rent receivable P 12,000
LongBao Company’s statement of financial position at
December 31, 2019?
PROBLEM 30 Fair Value of the rights retained
= (P240,000 x 1.7355) + P240,000 = P656,520
On December 31, 2019, Justin Company sold = P656,520 - (P1,000,000 – P850,000)
a machinery with a remaining life of six years = P506,520
for P1,000,000. On the same date, Justin
Carrying value of the asset retained
Company leased back the equipment for three = P800,000 x (P506,520 ÷ P850,000)
years at the prevailing annual rental of = P476,725
P240,000 payable in advance. The machine Carrying value of the rights transferred
has an original cost of P1,500,000 and an = P800,000 - P476,725
accumulated depreciation of P700,000. On the = P323,275
date of sale and leaseback, the machine has a
fair value of P850,000. Implicit rate is 10%. Total Proceeds 1,000,000
PV of Lease Payments 656,520
How much is the gain as a result of the sale Selling price of rights transferred 343,480
and leaseback transaction? CV of rights transferred 323,275
Gain on Sale and Leaseback 20,205
PROBLEM 31 TO 33 Fair Value of the rights retained
On January 1, 2019, Kurt Company sold an equipment = P360,000 x 6.1446
= P2,212,056
with carrying amount of P2,000,000 and a remaining
useful life of 10 years to Fitz Drilling Company for
P3,000,000. Kurt Company immediately leased the Carrying value of the asset retained
= P2,000,000 x (P2,212,056 ÷ P3,000,000)
equipment back under a 10-year finance lease by
= P1,474,704
payment of P360,000 starting on December 31, 2019.
Rate implicit in the lease on January 1, 2019 is 10%.
Carrying value of the rights transferred
The asset’s fair value at that time was P3,000,000 and = P2,000,000 - P1,474,704
will be depreciated using the straight-line method. The = P525,296
transaction meets the criteria of IFRS 15 to be
accounted for as sale.
Required: Total Proceeds 3,000,000
Right of Use assets PV of Lease Payments (2,212,056)
Selling price of rights transferred 787,944
Lease Liability
CV of rights transferred (525,296)
Gain on Sale-Leaseback Gain on Sale and Leaseback 262,648
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