Name : ___________________

Section : ___________________
Subject : AE 417/ Intermediate Accounting 3
Class Schedule : MWF (3:00 pm – 6:00 pm)
Teacher : Cyril Marie S. Ramos, CPA, MBA
Date : March 18, 2020 (Wednesday)

MODULE 2
Assignment #3

Write your answers in a long bond paper. Submit a picture of your answers and submit it
online (moodle). Show your complete solution. Deadline of submission: March 25, 2020
(Wednesday).

Problem 1
Cai Company, a dealer in machinery and equipment, leased equipment to Quality
Company on July 1, 2019.
The lease is appropriately accounted for as sale by Cai Company and as purchase by
Quality.
The lease is a ten-year period equal to useful life of the asset expiring June 30, 2029.
The first ten annual payments if P250, 000 was made on July 1, 2019.
Cai had purchased the equipment for P1, 337, 500 on January 1, 019 and established a
list selling price of P1, 687, 500 on the equipment.
The present value on July 1, 2019 of the rent payments over the lease term discounted
at 12% was P1, 582, 500.

Required:
1. What amount of gross income on sale should be recorded for the year ended
December 31, 2019?
2. What amount of interest income should be recorded for the year ended December 31,
2019?
3. Prepare the necessary entries on:
a. July 1, 2019
b. December 31, 2019
4. On December 3, 2019. Compute:
a. Current portion of the finance lease receivable
b. Non-current portion of the finance lease receivable

Problem 2
Dar Company is a dealer in machinery. On January 1, 2019, machinery was leased to
another entity with the following provisions:
Annual renal 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
Residual value-unguaranteed 1, 000, 0000
Implicit interest rate 12%
Round off Present value factor to two decimal places.
At the end of the lease term on December 31, 2023, the machinery will revert to Dar
Company
Dar Company incurred initial direct cost of P300, 000 in finalizing the lease agreement.

Compute:
1. Unearned interest income on January 1, 2019
2. Gross income on sale in 2019
3. Interest income for 2019
4. Net income for 2019
5. Prepare the necessary entries on:
a. January 1, 2019
b. December 31, 2019.
6. Compute items 1,2,3 and 4 assume however that at the end of the lease term, the
asset will revert to the lessee.
7. Compute items 1,2,3 and 4 assume however that the residual value is guaranteed
8.

Problem 3:
CD Company acquired a specialized packaging machine for P3, 000, 000 cash and leased
it under a financing lease for a period of six years, after which the machine is to be
returned to CD Company.
The unguaranteed residual value of the machine is P200, 000.
The lease terms are arranged so that a return of 12% is earned by CD.
Round off the present value factor to two decimal places.
Compute:
1. Annual Lease Payment Payable in advance required yielding the desired return.
2. Prepare the necessary entries on the commencement of the lease.

**Nothing Follows ***