ACC115 – LESSOR ACCOUNTING

Problem 1: Operating Lease

SOR Company is engaged in leasing heavy equipment. On December 1, 2021, the entity bought secondhand heavy
equipment for P375,000.

In December 2021, 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, 2021. The equipment had an estimated useful life of 5
years. Depreciation is on a straight-line basis.

On April 1, 2022, SOR Company leased the equipment to SEE Company for 2 years up to March 31, 2024. The lease fee
is P15,000 per month. SEE Company paid P180,000 on April 2022, the lease fee for one year.

During 2022, SOR spent P7,000 for minor repairs and P3,000 for transportation of the equipment to SEE Company.

Required: Prepare journal entries on the books of SOR Company for 2021 and 2022.

Problem 2: Operating Lease – Uneven Rental Payments

On June 1, 2021, Anton Company, as a lessor, entered into a real estate lease agreement for a new building. The lease is
accounted for as an operating lease and fully executed on that day. According to the terms of the lease, rentals of
P300,000 per month are scheduled to begin on November 1, 2021.

As an incentive, the period from June 1 to October 31, 2021 is rent free. The lease term spans 5 years. Anton Company
has a calendar year-end.

1. What amount should be recognized as total rent income over the lease term?
a. 18,000,000 b. 16,800,000 c. 16,500,000 d. 15,000,000

2. What amount should be reported as net income for 2021?

a. 3,300,000 b. 1,925,000 c. 600,000 d. 550,000

Problem 3: Direct Financing Lease – Annual Rental

On January 1, 2021, Lessor Company leased a machinery to another entity with the following details:

Cost of machinery 1,518,650

Lease term 4 years
Useful life of machinery 4 years
Implicit interest rate before initial direct cost 12%
PVOA of 1 for 4 year at 12% 3.0373

Required:
Determine the annual rental that will give the lessor a fair rate of return on the net investment in the lease.

Problem 4: Direct Financing Lease – Initial Direct Costs

On January 1, 2021, 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 of machinery 4 years
Implicit interest rate before initial direct cost 12%
PVOA of 1 for 4 year at 12% 3.0373

On January 1, 2021, Lessor Company paid initial direct cost of P66,300.

Required:
Determine the new implicit rate after consideration of the initial direct cost.

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 ACC115 – LESSOR ACCOUNTING
Problem 5: Direct Financing Lease
Camia Company is in the business of leasing new sophisticated equipment. The lessor expects a 12% return on net
investment after considering the initial direct cost. All leases are classified as direct financing lease.

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 - unguaranteed 600,000
Annual rental payable 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 considering initial direct cost 12%

1. What amount should be reported as gross investment in the lease?

a. 7,200,000 b. 7,800,000 c. 5,000,000 d. 5,250,000

2. What amount should be reported as net investment in the lease?

a. 5,000,000 b. 5,250,000 c. 4,400,000 d. 4,650,000

3. What amount should be reported as total financial revenue over the lease term?
a. 2,550,000 b. 1,950,000 c. 3,150,000 d. 1,500,000

4. What amount should be reported as interest income for the current year?
a. 594,000 b. 522,000 c. 630,000 d. 450,000

Problem 6: Direct Financing Lease

On January 1, 2021m Alpha Company leased an equipment to another entity under a direct financing lease. The cost of
the equipment to Alpha Company was P1,550,000 which approximated the fair value on the lease date.

The lease payments stipulated in the lease are P500,000 per year payable at the end of each year over a 4-year period of
the lease. The title to the equipment remains in the hands of Alpha Company at the end of the lease term, although only
nominal residual value is expected at that time. The implicit interest rate in the lease is 11%. The fiscal year of Alpha
Company ends December 31.

1. What amount should be reported as total financial revenue over the lease term?
a. 450,000 b. 225,000 c. 500,000 d. 250,000

2. What amount should be reported as interest income for the current year?
a. 134,255 b. 170,500 c. 155,000 d. 220,000

3. What is the carrying amount of the lease receivable on December 31, 2021?
a. 1,220,500 b. 1,500,00 c. 875,755 d. 750,000

4. What is the carrying amount of the current portion of the lease receivable on December 31, 2021?
a. 500,000 b. 365,745 c. 854,755 d. 354,755

Problem 7: Direct Financing Lease

Ericson Company leased on asset to another entity. The cost of the asset was P7,994,000. Terms of the lease specified
four-year life for the lease, an annual interest rate of 15%, and four year-end rental payments. The lease qualified as a
direct financing lease.

The lease provided for a transfer of title to the lessee at the end of the lease term.

After the fourth year, the residual value was estimated at P1,000,000.

The PV of 1 at 15% for 4 periods is .572, and the PV of an ordinary annuity of 1 at 15% for 4 periods is 2.855.

What amount should be reported as annual rental payment?

a. 2,000,000 b. 3,000,350 c. 2,800,000 d. 2,599,650

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 ACC115 – LESSOR ACCOUNTING
Problem 8: Sales Type Lease – Asset Reverts Back to Lessor
Lessor Company is a dealer in machinery. On January 1, 2021, a machinery was leased to Lessee Company with the
following provisions:

Annual rental payable at the end of each year 800,000

Lease term 5 years
Useful life of machinery 5 years
Cost of machinery 2,000,000
Residual value 200,000
Initial direct cost paid by lessor 100,000
Implicit interest rate 10%
Present value of annuity of 1 for 5 years at 10% 3.7908
Present value of 1 for 5 periods at 10% 0.6209

At the end of the lease term on December 31, 2025, the machinery shall revert to Lessor Company. The perpetual
inventory system is used.

Case 1: If the Residual Value is GUARANTEED

Case 2: If the Residual Value is UNGUARANTEED

1. How much is the gross investment in the lease?

2. How much is the net investment in the lease?
3. Determine the unearned interest income to be recognized upon inception of the lease contract.
4. How much is the gross income attributable to the lease of the machinery?
5. Provide journal entry to be recognized on January 1, 2021, December 31, 2021, and December 31, 2025.

Problem 8: Sales Type Lease – Asset Transferred to Lessee

An entity is a dealer in equipment. On January 1, 2021, an equipment is leased to another entity with the following
provisions:

Annual rental payable at the end of each year 500,000

Lease term 4 years
Useful life of equipment 5 years
Cost of equipment 1,000,000
Initial direct cost paid by lessor 100,000
Purchase option 200,000
Implicit interest rate 8%
Present value of annuity of 1 for 5 years at 10% 3.312
Present value of 1 for 5 periods at 10% 0.735

It is reasonably certain that the lessee shall exercise the purchase option on December 31, 2024.

1. How much is the gross investment in the lease?

2. How much is the net investment in the lease?
3. Determine the unearned interest income to be recognized upon inception of the lease contract.
4. How much is the gross income attributable to the lease of the machinery?
5. Provide journal entry to be reocgnized on January 1, 2021, December 31, 2021, and December 31, 2025 (exercise
and non-exercise of purchase option).

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 ACC115 – LESSOR ACCOUNTING
Problem 9: Sales Type Lease – Asset Transferred to Lessee
France Company is a dealer in equipment. At the beginning of current year, an equipment was leased to another entity
with the following provisions:

Annual rental payable at the end of each year 1,500,000

Lease term and useful life of equipment 5 years
Cost of equipment 4,000,000
Residual value - unguaranteed 500,000
Implicit interest rate 12%
Present value of annuity of 1 for 5 years at 10% 3.60
Present value of 1 for 5 periods at 10% 0.57

At the end of the lease term the equipment shall revert to the lessor.

The entity incurred initial direct cost of P200,000 in finalizing the lease agreement.

1. What amount should be reported as gross investment in the lease?

a. 7,500,000 b. 8,000,000 c. 4,000,000 d. 4,500,000

2. What amount should be reported as net investment in the lease?

a. 5,400,000 b. 5,685,000 c. 4,000,000 d. 3,500,000

3. What amount should be reported as interest income for the current year?
a. 682,200 b. 648,000 c. 900,000 d. 960,000

4. What amount should be reported as gross income on sale?

a. 1,485,000 b. 1,685,000 c. 3,500,000 d. 4,000,000

Problem 10: Sales Type Lease – Asset Transferred to Lessee

At the beginning of current year, Yolk Company signed a ten-year noncancelable lease agreement to lease a storage
building to a lessee under a sales type lease. The agreement required equal rental payments at the end of each year.

The fair value of the building at the inception of the lease was P3,075,000. However, the carrying amount of the building
was P2,460,000. The building has an estimated economic life of 10 years with no residual value.

At the termination of the lease, the title to the building shall be transferred to the lessee.

Yolk Company set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by the lessee.
The annual total lease payment included P100,000 of executory cost related to taxes on the property. The present value of
ordinary annuity of 1 at 10% for 10 periods is 6.15.

1. What amount shall be reported as annual lease rental?

a. 400,000 b. 600,000 c. 500,000 d. 300,000

2. What amount shall be reported as total annual lease payment including the executory cost?
a. 500,000 b. 700,000 c. 400,000 d. 600,000

3. What amount should be reported as unearned interest income of the lessor at the beginning of current year?
a. 1,925,000 b. 4,500,000 c. 2,540,000 d. 1,325,000