INTERMEDIATE ACCOUNTING 3

LESSEE
ACCOUNTING
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

LESSEE ACCOUNTING
INTERMEDIATE ACCOUNTING 3
PREPARED BY: Aguiluz, Kc Nicole L.

DISCLAIMER: This paper is prepared by bonafide NUJPIANS for A.Y. 2021-2022.

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Accounting for Leases by the Lessee

All leases shall be accounted for by the lessee as a Finance lease.

At the commencement date, the lessee shall recognize a right of use assets and a lease
liability.

Measurement of Lease Liability

At the commencement date, the lessee shall measure the lease liability at the present
value of lease payments.

• The lease payments shall be discounted using the interest rate implicit in the
lease. If the implicit interest rate is not available, the incremental borrowing rate
of lessee shall be used.
Lease liability shall be subsequently measured using the effective interest method.
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

INITIAL MEASUREMENT OF LEASE LIABILITY

Present Value of Lease Payments xx
Present Value of Guaranteed Residual Value xx
Present Value of Purchase Option Price xx
Lease Liability at Commencement Date xx

MEASUREMENT OF RIGHT-OF-USE ASSET

Initial Measurement of Lease Liability xx
Lease payments made to lessor on or before commencement, net of incentives xx
Initial direct costs incurred by the lessee xx
Dismantling cost (at present value) xx
Initial measurement of right-of-use asset xx

Right of use asset shall be subsequently measured using the cost model.

Depreciation of Right-of-Use Asset

Right of use asset shall be depreciated over the useful life of the asset under the
following conditions:
1. There is a transfer of ownership of the asset to the lessee at the end of the lease
term.
2. The lessee is reasonably certain to exercise purchase option

Cost – Residual Value

Useful life of the asset

Otherwise, the right of use asset shall be depreciated over the shorter
between the useful life of the asset and the lease term.

Cost – Guaranteed Residual Value

Lease term or useful life (shorter)

Executory Costs

Executory costs are the ownership expenses such as maintenance and taxes for the leased
asset.
• Such costs are expensed immediately when incurred.
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Financial Statement Presentation

Right of use asset is presented under non-current assets.
Lease liability is partly current and partly non-current liability.

PROBLEM 1:
At the beginning of current year, Conrad Company leased a building from a
lessor with the following pertinent information:

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

Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be
exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of ordinary annuity of 1 for 5 periods at 10% 3.79
Present Value of 1 for 5 periods at 10% 0.62

1. What is the cost of the right of use asset?

PV of Annual Rental (1,000,000 x 3.79) 3,790,000
PV of purchase option (500,000 x 0.62) 310,000
Initial lease liability 4,100,000
Lease incentive received (100,000)
Cost of Right-of-use Asset 4,400,000
The leasehold improvement is not part of the cost of right of use asset but
accounted for separately as property, plant, and equipment.

2. What is the depreciation for current year?

Depreciation (4,400,000 / 8 years) 550,000
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

The depreciation is based on the useful life of the underlying asset

because there is purchase option that is reasonably certain to be
exercised.

3. What is the interest expense for current year?

Interest expense for current year (10% x
4,100,000) 410,000

4. What is the lease liability at year-end?

Annual Rental 1,000,000
Applicable to interest (410,000)
Applicable to principal 590,000

Lease Liability – Jan. 1 4,100,000

Principal Payment (590,000)
Lease Liability – December 31 3,510,000

Operating Lease Model

A lessee is permitted to apply operating lease under two exemptions: Short-term Lease and
Low-value Lease

The lessee shall recognize the lease payments as expense in a straight-line basis over the
lease term.

PROBLEM 1:
On August 1, 2020, Zoey Co. leased a tablet from Conrad Company for a period of
one year. The rentals are payable at the beginning of each month starting August 1,
2020. The lease agreement called for the first 6 months’ rental to be P5, 000 per
month while the last 6 months’ rental is P6, 000 per month.

1. What is the lease expense for the year 2020?

First 6 months rental (5,000/month x 6 months) P30,000
Last 6 months rental (6,000/month x 6 months) 36,000
Total rental over the lease term 66,000
Divided by: Lease term /12 mos.
Lease Expense per month P5,500
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Lease expense – 2020 (P5,500/month x 5 months) P27,500

2. What amount shall be reported as operating lease liability on December 31, 2020?

Lease Expense to date, Dec. 31, 2020 27,500

Lease payments to date, Dec. 31, 2020 (5,000 x 5 months) (25,000)
Operating Lease Liability, Dec. 31, 2020 2,500

SOURCES:
Empleo, Patricia M., CPA, Ph.D., (2019). The Intermediate Accounting Volume 3.