INTERMEDIATE ACCOUNTING 3

OPERATING
LEASE
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

OPERATING LEASE
Intermediate Accounting 3
PREPARED BY: Aguiluz, Kc Nicole
L.

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EXCLUSIVE FOR ACCOUNTANCY STUDENTS OF NATIONAL UNIVERSITY ONLY

ACCOUNTING FOR OPERATING LEASES

• The lessor shall recognized lease payments from operating lease as lease (or
rent) income on a straight-line basis over the lease term.
• Any lease bonus is recognized as unearned lease income to be amortized over
the lease term.
• Initial direct costs incurred by the lessor shall be capitalized as cost of the
leased asset and recognized as expense over the lease term on the same
basis as the lease term.
• Executor (or ownership) costs are recognized as expense.
• Depreciation of the depreciable asset shall be consistent with the lessor’s
depreciation policy.
• Any refundable security deposit shall be accounted for as financial liability by
the lessor.
 NATIONAL UNIVERSITY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

Problem 1
Salighayag Comapany purchased a tractor on January 1, 2020 at a cost of P3,200,000
for the purpose of leasing it. The tractor is estimated to have a useful life of 5 years
with residual value of P200,000. Depreciation is on a straight-line basis.

On April 1, 2020. Salighayag entered into a lease contract for the lease of the contractor
for a term of three years up to March 31, 2023. Under the lease contract, the lessee shall
pay the annual lease fee of P1,200,000 in advance every April 1 starting April 1, 2020.

Salighayag paid P240,000 commission associated with negotiating the lease, P30,000
minor repairs and P20,000 transportation of the tractor to the lesse during the year
2020.

1. What amount of gross lease income should be reported for 2020?

Annual lease fee 1,200,000
Divided by: 12
Monthly lease 100,000
Multiply by: No. of months from 4/1/2020 – 9
12/31/2020
GROSS LEASE INCOME - 2020 900,000

2. What amount of profit from lease should be reported for 2020?

Cost of Contractor 3,200,000

Gross lease income – 2020 900,000 Less: Residual value (200,000)
Less: Depreciation expense – 2020 (600,000) Depreciable cost 3,000,000
Amortization of initial direct cost
Divided by: Useful life 5
[(240,000/3) x 9/12 (60,000)
Repairs and maintenance expense (30,000) Annual depreciation 600,000
Transporation expense (20,000) Multiply by: 12/12
NET PROFIT FROM LEASE – 2020 190,000 Depreciation – 2020 600,000

3.What is the carrying amount of the leased asset in the books of the lessor on December 31,
2020?

Cost of tractor 3,200,000

Less: Accumulated depreciation, 12/31/2020 (600,000)
2,600,000
Add: Unamortized initial direct cost (240,000 – 180,000
60,000)
CV of leased asset, 12/31/2020 2,780,000

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