Practice Set: PFRS 16 – Leases

Instructions: Answer to learn

1. Dahyun contracted a 4-year lease of a machinery with Jackson Weng on

January 1, 20x1. Rent in 20x1 is ₱10,000 and as stipulated in the
contract, shall increase by 10% annually starting on January 1, 20x2.
Rentals are payable at every year end. Dahyun pays Jackson a lease
bonus of ₱5,000 on January 1, 20x1. Dahyun opts to use the practical
expedient allowed under PFRS 16 for leases of low value assets. How
much is the lease expense in 20x1?

2. Wiwil Co. from Malaybalay City leased an equipment of January 3,

2017 from the lessor Gui-yang Corp. The lease contract provides the
following:
Annual fixed payments in advanced at
January 3 of each lease year Php 2,000,000
Initial direct cost paid on January 3, 2017 500,000
Lease incentive received 300,000
Residual value guaranteed 600,000
Executory cost 50,000
Contractual lease term 5 years
Useful life of equipment 6 years

The implicit rate of the lease was at 8%

a. Compute for the cost of the right of use asset recognized by

Wiwil at the start of the lease.
b. What is the interest expense for 2017?
c. What is the depreciation expense for 2017?

3. Jan K Jang. Inc entered into a lease contract on January 1, 2017

with Jude Jar Co. for a 6 year lease of a cold spring with a useful
life of 8 years.
 It was agreed that annual rental payable at the end of each
year was Php 1,200,000
 Because of the attractiveness of the cold spring, a payment
was made by Jan K Jang Inc. to Jude Jar Co. to obtain the
long-term lease: Php 200,000
 Insurance, maintenance and taxes per year to be paid by Jan K
Jang. Php 100,000
 Initial direct cost incurred by JK Jang Inc. was Php 248,000
 Unguaranteed residual value of the cold spring was Php 400,000
 Cost of restoring the cold spring as required in the contract
Php 800,000
  The lease neither provides a transfer of title to the lessee
nor a purchase option.
 The implicit rate of the lease cannot be determined, but as
inquired from Banko de Oro, the same financing can be obtained
at the rate of 10%
a. What is the current portion to be presented in the statement of
financial position for the lease liability as of December 31,
2017?
b. What is the noncurrent portion to be presented in the statement
of financial position for the lease liability as of December 31,
2017?
c. What is the carrying amount of the lease liability as of December
31, 2017?
d. What is the accumulated depreciation on the right of use asset
for 2018?

4. Maaa Mits Co. is a company based in Iligan City. It has been the
policy of Maaa Mits Co. to acquire equipment by leasing. On January
2, 2017, Maaa Mits Co. signed a leased contract with Shapi Company
for a new delivery truck that had a selling price of Php 1,060,000.
The lease contract provides that annual payments of Php 210,000 will
be made for 6 years. Maaa Mits Co. made the first lease payment on
January 2, 2017, and subsequent payments are made on December 31 of
each year. Maaa Mits Co. guarantees a residual value of Php 183,560
at the end of the lease term. After considering the guaranteed
residual value, the implicit rate in the lease is determined to be
12%. Maaa Mits Co. has an incremental borrowing rate of 15% as
determined from a local bank. A security of Php 150,000 was made by
Maaa Mits Co. to Shapi to cover for any damages occurring during the
lease term. The economic life of the truck is 9 years. Maaa Mits
depreciates its other equipment using the straight-line method and
uses the calendar year for financial reporting purposes.
a. What is the cost of the leased delivery truck at the commencement
of the lease?
b. What is the balance of the lease liability after the first
payment at the commencement of the lease?
c. What is the depreciation expense to be recognized by Maaa Mits
Co for the year ended December 31, 2017?
d. What is the balance of the lease liability as of December 31,
2020?

5. In the long-term liabilities section of its balance sheet at December

31, 2019, Gwapo Kaayo Co. reported a lease liability of ₱75,000, net
of current portion of ₱1,364. Payments of ₱9,000 were made on both
January 2, 2020, and January 2, 2021. Gwapo Kaayo’s incremental
 borrowing rate on the date of the lease was 11% and the lessor's
implicit rate, which was known to Gwapo Kaayo, was 10%. In its December
31, 2x20, balance sheet, what amount should Gwapo Kaayo report as
lease liability, net of current portion?

LESSOR Problems
1. On January 1, 20x1, Chantaly Bars Co. leased equipment to NJA Inc.
Information on the lease is shown below:

Cost of equipment ₱ 2,400,000

Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of each year 800,000
Interest rate implicit in the lease 10%

Initial direct costs amounted to Php 160,000. The lease qualifies for
sales type lease accounting.

a. How much is the gross investment in the lease on January 1, 20x1?

b. How much is the net investment in the lease on January 1, 20x1?
c. How much is the total interest income (finance income) to be
recognized by Chantaly Bars over the lease term?
d. How much is the gross profit from the sale?
e. How much is the net profit from the sale?

2. On January 1, 20x1, Kating J Corp. leased equipment to Adonis Inc.

 The cost of equipment leased was Php 1,322,588

 Useful life of equipment is 5 years with the agreed lease term of
4 years
 Annual rent payable at the end of each year 400,000
 The incremental borrowing rate is 8% while the interest rate
implicit in the lease is 10%.
 Residual value 80,000

The equipment will revert back to Kating J Corp. at the end of the
lease term. The lease is classified as direct financing lease.
a. Assuming the residual value is guaranteed, how much is the
gross investment in the lease on January 1, 20x1?
b. Assuming the residual value is unguaranteed, how much is the
net investment in the lease?
c. How much is the total interest income to be recognized by
Kating J Corp. over the lease term if the residual value is
unguaranteed and guaranteed, respectively?

3. As an inducement to enter a lease, Hashirama Inc., a lessor, grants

Madara Corp., a lessee, nine months of free rent under a five-year
operating lease. The lease is effective on July 1, 20x5, and provides
for monthly rental of Php 1,000 to begin April 1, 20x6. In Art's
 income statement for the year ended June 30, 20x6, rent income should
be reported as?

4. On January 1, 2017, Carlo Senpai Inc. leased machinery to Molly Co.

with a lease term and useful life of 5 years. The lease provides for
a transfer of title to the Molly Co. at the end of the lease term.
The implicit rate is 8%. The PV of ordinary annuity at 8% for 5
periods is 3.993, PV of 1 at 8% for 5 periods is 0.6805, while PV of
annuity due at 8% for 5 periods is 4.312. The cost of the machinery
is Php 10,348,800 with a residual value of Php 1,500,000. The annual
rental is payable in advance on January 1 of each year starting
January 1, 2017.

a. How much is the annual rental?

b. How much is the unearned interest income of Carlo Senpai Inc.
as of January 1, 2017?
c. How much is the interest income on the lease for 2017?
d. How much is the unearned interest income of Carlo Senpai Inc.
as of December 31, 2017?
e. What is the finance lease receivable as of December 31, 2017?