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Problem 1.

On December 29, 2015, More Company entered into a lease arrangement with Wee
Company to start on January 1, 2016. More Company agrees to refund Wee Companys
relocation costs as an incentive to Wee Company for entering into the new lease. The relocation
cost amounted to P150,000. The non-cancellable lease contract shall be for 10 years, at a fixed
rate of P700,000 annually for the first 5 years and P900,000 for the remaining term of the
The lease also includes a provision for additional rent of 5% of annual company sales in excess
of P7,500,000.
Direct cost of lease incurred and paid by More Company amounted to P60,000 while Wee
Company paid its agent P50,000.
Wee Companys sales in 2016 and 2017 were P7,100.000 and P9,900,000, respectively.
a) Rent expense for 2016 b) Rent expense for 2017
Problem 2. On January 1, 2015, MM Company leased a machine to BB Company for P48,000
annually, P3,000 of which represents reimbursements for maintenance and taxes, payable every
December 31, for a 4-year period starting December 31, 2015. The cost of the machine to MM
Company was P125,540. The fair value at the date of the lease was P149,040. The implicit rate
of interest is 8%. Commissions and legal fees incurred by MM Company in connection with the
negotiation for the lease amounted to P4,000.
PVF of P1 @ 8% for 4 periods 0.735
PVF of an OA @ 8% for 4 periods 3.312
PVF of an AD @ 8% for 4 periods 3.577
a) Prepare the necessary entries for 2015-2016
b) Compute for the following:
Lease receivable at inception date
Lease receivable initially recorded at commencement date
Total income recognized for 2015 in relation to the lease
Lease receivable included in the current asset section of the December 31, 2015 statement
of financial position
Interest income for 2017
Problem 3. On January 1, 2015 TY Company leased one of its transport vehicles to YW
Company. This 6 year contract will require YW to pay annual rentals every December 31 starting
TY Companys transport vehicle has a cost of P1,348,900. It plans to earn a return equal to 12%.
It incurred costs in relation to negotiating and completing the lease of P110,000. The expected
residual amount of the transport vehicle at the end of the lease is P40,000. The contract, however,
does not provide any guaranteed amount to TY Company by YW Company upon the assets
PVF of P1 @ 12% for 6 periods 0.51
PVF of an OA @ 12% for 6 periods 4.11
PVF of an AD @ 12% for 6 periods 4.60
a) Annual rental to be paid by TY Company
b) Interest income in 2015
c) Net investment as of December 31, 2015