ACTIVITY NO.

6 -LEASES- Part 2 A

PROBLEM 1
On January 1, 2023, RED Company, lessee, leased a machine with the following pertinent information:

Fixed rental payment at the end of each year P 900,000

Lease term 10 years
Useful life of machine 12 years
Incremental borrowing rate 14%
Implicit interest rate 12%
Present value of an ordinary annuity of 1 for 10 periods at
14% 5.216
12% 5.650
Present value of 1 for 10 periods at
14% 0.270
12% 0.322

RED Company had the option to purchase the machine upon the lease expiration on January 1, 2033 by paying
P600,000. The lessee is reasonably certain to exercise the purchase option at the commencement date of the lease.
The estimated residual value of the machine at the end of the 12-year useful life is P700,000.

Questions:
1.1 Carrying amount of Right of use asset -12/31/23? _______________________________
1.2 Carrying amount of Lease liability – 12/31/23? ___________________________
1.3 If purchase option is not exercised, Loss on finance lease should be at what amount? ______________________

PROBLEM 2
On January 1, 2023, Relax Company, a lessee, leased an equipment with the following information:

Fixed annual payment at the end of each lease year P 900,000

Lease term 4 years
Useful life of equipment 5 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 4 periods at 10% 3.16987
Present value of 1 for 4 periods at 10% 0.683

Relax Company guaranteed a P300,000 residual value on Dec. 31, 2026 to the lessor.

Questions:
2.1 Carrying amount of lease liability -12/31/23? ____________________________
2.2 Carrying amount of Right of use asset-12/31/23? ________________________
2.3 If the fair value of equipment is only P200,000 end the end of lease term, how much is the loss on finance lease?
_____________________________

PROBLEM 3
On January 1, 2023, an entity entered into a lease of building with the following information:

Annual rental payable at the end of each year P600,000

Lease term 5 years
Useful life of building 20 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 5 periods 3.791

The lease contained an option for the lessee to extend for a further 5 years. At the commencement date, the exercise of
the extension option is not reasonably certain.

After 3 years on January 1, 2026, the lessee decided to extend the lease for a further 5 years.

New annual rental payable at the end of each year P700,000

New implicit interest rate 8%
PV of an ordinary annuity of 1 at 8% for 5 periods 3.993
PV of 1 at 8% for 2 periods 0.857
PV of an ordinary annuity of 1 at 8% for 2 periods 1.783

Questions:
3.1 Carrying amount of Right of use asset -12/31/23 Financial statement? ________________________
3.2 Carrying amount of Lease liability -Jan. 1, 2026 after remeasurement? _______________________
3.3 Depreciation expense -12/31/2026 Financial statement? _________________________

*Round-off two decimal places

* Deadline : June 21 ; 10:00 pm.