The Right of Use Asset

1.
The carrying amount of the right of use asset would be periodically reduced by = Depreciation of
the right of use asset
2. Auto Corporation purchased a machine on March 31, 2016 for P1,500,000 for the purpose of
leasing it. The machine is expected to have a six-year life, no salvage, and will be depreciated on
a straight-line basis.
On April 1, 2016, under a cancelable lease. Auto Corporation leased the machine to Matic
Company for P920,000 a year for a three-year period ending on March 31, 2019. Auto
Corporation incurred maintenance and other related costs under the provisions of the lease of
P50,000 relating to the year ended December 31, 2016. Matic Company paid Auto Corporation
P920,000 on April 1, 2016.
What is the profit before income tax derived by Auto Corporation from this lease for the year
ended December 31, 2016?
=
Rent revenue (920,000 x 9/12) P690,000
Depreciation expense (1.5M/6 = 250,000/year; 250,000 x 9/12) (187,500)
Maintenance and other related costs (50,000)
Profit before income tax P452,500
3. On January 2, 2016, Exalta Corporation leased six computers for use in its engineering
department. The lease period is five years and the estimated economic life of the leased
property is six years. The lease does not contain automatic title transfer and a bargain purchase
option. Annual lease payments are payable in advance every January 2 in the amount of
P90,000.
The incremental borrowing rate for Exalta Corporation is 12% and the implicit interest rate
(known to Exalta is 10%. The company uses straight-line depreciation for this type of equipment.
What is the depreciation expense of the leased asset for the year 2016? = Depreciation expense
for 2016 (90,000 x 4.17) = 375,300/5 years) P75,060
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4. Under IFRS, a lessee is required to recognized = Right of use asset and lease liability
5. On December 31, 2016, Chrysler Company signed a five-year, non-cancelable lease for a machine
with Hyundai Company. The terms of the lease called for Chrysler Company to make annual
payments of P80.000 in advance starting on December 31, 2016 and every December 31
thereafter. The machine has an estimated useful life of six years and a P40,000 unguaranteed
residual value at the end of the five-year lease term. The machine reverts back to the lessor at
the end of the five-year lease term. Chrysler Company uses the straight-line method of
depreciation for all of its depreciable assets.
The rate implicit in this contract, which is known to Chrysler, is 12%. The market value of the
machine is P340.000. The present value of an annuity due of 1 at 12% for 5 periods is 4.037. The
present value of 1 for a single payment at 12% for 5 periods is 0.567.
What are the balances of finance lease obligation at December 31, 2016 and December 31,
2017, respectively?
=
Finance lease obligation, December 31, 2015 after 1st payment
(80,000 x 4.037) = 322,960 - 80,000 P242,960
December 31, 2016 payment 80,000 - (12% x 242,960) (50,845)
Finance lease obligation, December 31, 2016 P192,115
6. The right of use asset is reported as = Noncurrent as separate line stem

7. The lease payments include all, except = The lessee's obligation to pay executory cost
8. The lessee's lease liability for a finance lease would be periodically reduced by = Lease payment
less the portion allocable to interest
P90,000.
Assume that the lessee guarantees a residual value of P30,000 at the end of the lease term.
What is the depreciation expense for 2016?

=
Capitalized cost of the asset (90,000 x 4.17) + (30,000 x 0.621) P393,930
Residual value 30,000
Depreciable cost P363,930
Lease term ÷ 5 years
Depreciation expense for 2016 P 72,786
10. A right of use asset is initially measured at = Cost
P90,000.
What is the capitalized cost of the leased asset? = Capitalized cost of leased asset (90,000 x
4.17) P375,300
12. Kia Company acquires equipment under a non-cancelable lease at an annual rental of P45,000
payable in advance for five years. Under the lease contract, Kia Company is given the option to
purchase the asset for P75,000 which is significantly lower than the expected market value of
the asset at the end of five years. The appropriate interest rate is 12%. Present value of 1 at 12%
for 5 periods is 0.5674, Present value of an annuity due of 1 at 12% for 5 periods is 4.0373.
What is the capitalized cost of the asset and the first year's interest expense?
=
Capitalized cost of the asset (45,000 x 4.0373) + (75,000 x 0.5674) P224,234
Interest expense for first year (224,234 - 45,000) x 12% P 21,508
P920,000 on April 1, 2016.
Assuming that the machine intended for leasing given in the problem was purchased by Auto
Corporation on January 1, 2016, all other data being the same, what is the profit before income
tax reported by Auto Corporation for the year ended December 31, 2016?
=
Rent revenue (920,000 x 9/12) P690,000
Depreciation expense (1.5M/6) (250,000)
Maintenance and other related costs (50,000)
Profit before income tax P390,000
P920,000 on April 1, 2016.
What is the rent expense incurred by Matic Company for the year ended December 31, 2016? =
Rent expense (920,000 x 9/12) P690,000
P90,000.
How much is the interest expense recognized in profit or loss for the year 2016? = Interest
expense for 2016 (375,300 - 90,000) x 10% P28,530
16. What is the treatment of initial direct cost incurred by the lessee in a finance lease? = Added to
the carrying amount of the right of use asset
17. Which is not included in lease payments? = Costs for services and taxes paid by and lessee
18. A short-term lease is defined as = Twelve months or less
19. On December 31, 2016, Chrysler Company signed a five-year, non-cancelable lease for a machine
with Hyundai Company. The terms of the lease called for Chrysler Company to make annual
payments of P80.000 in advance starting on December 31, 2016 and every December 31
thereafter. The machine has an estimated useful life of six years and a P40,000 unguaranteed
residual value at the end of the five-year lease term. The machine reverts back to the lessor at
the end of the five-year lease term. Chrysler Company uses the straight-line method of
depreciation for all of its depreciable assets.
The rate implicit in this contract, which is known to Chrysler, is 12%. The market value of the
machine is P340.000. The present value of an annuity due of 1 at 12% for 5 periods is 4.037. The
present value of 1 for a single payment at 12% for 5 periods is 0.567.
What is the carrying amount of the leased machine at December 31, 2017?
=
Capitalized cost of asset, December 31, 2015 (80,000 x 4.037) P322,960
Depreciation expense for 2016 (322,960/5 years) 64,592
Carrying amount of leased asset, December 31, 2016 P258,358
20. A six-year finance lease specified equal annual lease payments. The lease payment in the fifth
year applicable to the reduction of the lease liability should be = More than in the fourth year
21. A lease liability is measured at = The present value of lease payments
22. In computing depreciation of aright of use asset under a lease, the lessee should deduct = The
residual value guarantee and depreciate over the lease term
23. On August 1, 2016, PAF Aviation leased two helicopters from Fast Aircraft for an initial period of
12 months with a provision for a continuation of a month-to-month basis. The lease is properly
classified as an operating lease. Lease payments are to be made as follows:
1st two months - P15,000 per month
Next three months - P12,000 per month
Last four months - P7,500 per month
After the first year, the rent continues at P6,000 per month.
How much is PAF Aviation's rent expense for the year ended December 31, 2016?
=
Total rental payments
(15,000 x 2) + (12,000 x 3) + (10,000 x 3) + (7,500 x 4) = 126,000
Rent expense per month (126,000/12) = 10,500
Rent expense, August 1 - December 31 (10,500 x 5 months) P52,500
24. Austin Company closed a lease contract for newly constructed terminals and freight storage
facilities on January 1, 2016. Although the terminals have a composite life of 15 years, the lease
runs for 10 years with a favorable bargain purchase option of P500,000 upon expiration of the
lease.
The annual rental is P1,000,000 payable at the beginning of each lease year starting January 1,
2016. The lessee must also make annual payments of P200,000 for taxes and insurance. The
contract was negotiated to assure the lessor a 10% rate of return.
Present value of 1 for a single payment at 10% for 10 periods is 0.385.

Present value of an annuity due of 1 at 10% for 10 periods is 6.759.
Present value of an ordinary annuity of 1 at 10% for 10 periods is 6.145.
What is the finance lease liability balance at December 31, 2016?

=
Lease liability, January 1, 2016 (1M x 6.759) + ( 500,000 x 0.385)
= 6,961,500; 6,951,500 - 1M = 5,951,500 P6,961,500
1st payment in advance (1,000,000)
Lease liability, December 31, 2016 P5,961,500
25. On August 1, 2016, PAF Aviation leased two helicopters from Fast Aircraft for an initial period of
12 months with a provision for a continuation of a month-to-month basis. The lease is properly
classified as an operating lease. Lease payments are to be made as follows:
1st two months - P15,000 per month
Last four months - P7,500 per month
After the first year, the rent continues at P6,000 per month.
How much is PAF Aviation's prepaid rent balance at December 31, 2016? =
Total payments for 5 months (15,000 x 2) + (12,000 x 3) P66,000
Rent expense for the period 52,500
Prepaid rent, December 31, 2016 P13,500
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1.

6. The right of use asset is reported as = Noncurrent as separate line stem

What is the depreciation expense for 2016?

10. A right of use asset is initially measured at = Cost

Present value of 1 for a single payment at 10% for 10 periods is 0.385.

What is the finance lease liability balance at December 31, 2016?

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