Problem 1

At the beginning of the current year, Lessee Company leased a machinery with the following information:

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

Residual value guarantee 500,000
Payment to lessor to obtain a long term lease 300,000
Cost of dismantling and restoring the asset as required by
the contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. What is the initial lease liability? – 3,510,000

2. What is the cost of right use asset? – 4,200,000
3. What is the depreciation for current year? – 925,000
4. What is the lease liability at year end? – 2,861,000

Problem 2

Helen Company recorded the cost right of use asset at P4,500,000.

The underlying asset had a useful life of 8 years and the lease term is 5 years.
The asset is expected to have a fair value of P1,500,000 at the end of 5 years and a fair value of P500,000 at the end
of 8 years.
The lease agreement provided for the transfer of title of the underlying asset to the lessee at the end of the lease
term.
What amount of depreciation expense should be recorded for the first year of the lease? – 500,000

Problem 3

On December 31, 2019, Action Company signed a 7-year finance lease for an airplane. The airplane’s fair value was
P8,415,000.
The entity made the first annual lease payment of P1,530,000 on December 31, 2019.
The entity’s incremental borrowing rate was 12% and the interest rate implicit in the lease, which was known by
Action, was 9%. The rounded present value factors for an annuity due are:
9% for 7 years 5.5
12% for 7 years 5.1
1. What amount should be reported as lease liability? – 6,885,000
2. What amount should be reported as interest expense for 2020? -

Problem 4

Miracle Company leased machinery with useful life of 10 years for 10 years on January 1, 2019. At that date, the fair
value of the machinery was 4,900,000.
Annual rentals of 700,000 are payable in advance on January 1 and the interest rate implicit in the lease is 9%.
1. What amount should be reported as total liability (principal and interest) on December 31, 2019?
What amount should be reported as interest expense for 2019?

Problem 12-5

Trojan Company prepared the following lease payments schedule for the lease of a machine from another entity. The
machine had an economic life of six years. The lease agreement required four annual payments of P33,000 and the
machine will be returned to the lessor at the end of the lease term.

Lease Payment Interest Expense Reduction of Liability Balance of Liability

July 1, 2019 98,512
July 1, 2020 30,000 9,851 20,149 78,363
July 1, 2021 30,000 7,836 22,164 56,199
July 1, 2022 30,000 5,620 24,380 31,819
July 1, 2023 35,000 3,181 31,819 -
 125,000 26,488 98,512

1. What is the amount of executory cost?

2. What is the residual value guarantee?
3. On June 30, 2020, what would Trojan Company record in relation to the lease?
4. What is the annual depreciation expense?

Problem 6 (IFRS - Extension of Lease Term)

Alyanna Company entered into a lease of building on January 1, 2019 with the following information:

Annual rental payable at the end of each year 500,000

Lease term 5 years
Useful life building 20 years
Implicit interest rate 10 %
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79

The lease contained an option for the lessee to extend for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After three years on January 1, 2022, the lessee decided to extend the lease further 5 years.

New annual rental payable at the end of each year 600,000

New implicit interest rate 8%
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
PV of 1 at 8% for 2 periods 0.86
PV of an ordinary annuity of 1 at 8% for 2 periods 1.78

1. What amount should be reported as lease liability on December 31, 2021?

2. What amount should be reported as depreciation for 2019?
3. What amount should be reported as new lease liability on January 1, 2022?
4. What is the carrying amount of right of use asset on January 1, 2022?
5. What amount should be reported as depreciation for 2022?

Problem 7 (IFRS-Lease modification)

On January 1, 2019, Yoga Company leased machine with the following information:
Annual rental payable at the end of each year 100,000
Leased term 5 years
Implicit rate in the lease 6%
Present value of an ordinary annuity of 1 at 6% for 5 years 4.2124

On January 1, 2021, the lessee and the lessor agreed to amend the original terms of the lease by reducing the lease
payment by 20,000 and increasing the implicit rate to 8%.
The present value of an annuity of 1 at 8% for 3 periods is 2.5771.

1. What amount should be reported as lease liability on December 31, 2020 before the modification?
2. What amount should be reported as modified lease liability on January 1, 2021?
3. What amount should be reported as interest expense for 2021?
4. What amount should be reported as depreciation of the right of use asset for 2021?

Problem 8

On January 1, 2029, Glen Company leased a building to Dix Company for a ten-year term at an annual rental of
500,000.
At inception of the lease, Glen received 2,000,000 covering the first two years’ rent of 1,000,000 and a security
deposit of 1,000,000.
This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of rent for the last
two years of the lease.
1. What portion of the 2,000,000 should be reported as current liability on December 31, 2019? – 500,000
2. What portion of the 2,000,000 should be reported as non current liability on December 31, 2019? – 1,000,000

Problem 9

Abe Company, lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease
payments are made in advance on January 1 of each year as shown in the following schedule:

January 1, 2019 1,000,000

January 1, 2020 1,000,000
January 1, 2021 1,400,000
 January 1, 2022 1,700,000
January 1, 2023 1,900,000
Total Rentals 7,000,000

1. What amount should be reported as rent income for 2019?

2. On December 31, 2020, what amount should be recognized as accrued rent receivable?

Problem 10

Meg Company leased equipment from Wee Company on July 1, 2019 for an eight-year period expiring June 30, 2027.
Equal payments under the lease are 600,000 and are due on July 1 of each year. The first payment was made on July
1, 2019. The rate of interest contemplated by Meg and Wee is 10%.
The cash selling price of the equipment is 3,520,000 and the carrying amount is 2,800,000. The lease is appropriately
recorded as a sales type lease.

1. What amount of gross income on sale should be recorded for the year ended December 31, 2019?
2. What amount of interest revenue should be recorded for the year ended December 31, 2019?

Problem 11

Vanderbilt Company is a dealer in machinery. On January 1, 2019, a machinery was leased to another entity with the
following provisions:
Annual rental 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 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

At the end of the lease term on December 3, 2023, the machinery will revert to Vanderbilt.
Vanderbilt incurred initial cost of 300,000 in finalizing the lease agreement.

1. What amount should be reported as unearned interest income on January 1, 2019?

2. What amount should be reported as gross income on sale in 2019?
3. What amount should be reported as interest income for 2019?

Problem 12

Camia Company is in the business of leasing new sophisticated equipment. As lessor, the entity expects a 12% return.
At the end of the lease term, the equipment will revert to Camia Company.
On January 1, 2019, an equipment is leased to another entity under a direct financing lease.

Cost of equipment to Camia 5,000,000

Residual value-unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2019

1. What is the gross investment in the lease?

2. What amount should be reported as unearned interest income on January 1, 2019?
3. What amount should be reported as interest income for 2019?

Problem 13

Lyle Company entered into a finance lease on January 1, 2019. A third party guaranteed the residual value of the
asset under the leased estimated to be 1,200,000 on January 1, 2024, the end of the lease term.
Annual lease payments are 1,000,000 due each December 31 beginning December 31, 2019. The last payment is due
December 31, 2023.
The remaining useful life of the asset was six years at the commencement of the lease.
Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is 0.62 and the PV of an
ordinary annuity of 1 at 10% for 5 periods is 3.79.

1. What is the net lease receivable of the lessor at the commencement of the lease?
2. 2. What is the gross investment in the lease?
3. What amount should be reported initially as total unearned interest income?
4. What amount should be reported as interest income for 2019?
Problem 14

At year-end, Bain Company sold a machine with 12 year useful life to another entity and simultaneously leased it back
for one year.
Sales price 360,000
Carrying amount 330,000
Present value of reasonable lease rentals (3,000 for 12 months @ 12%) 34,100
What amount of gain on right transferred should be reported in the current year? – 30,000

Problem 15

At the beginning of the year, Easy Company sold an equipment with remaining life of 10 years and immediately
leased it back for 4 years at the prevailing market rental.
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for four years 3.17

1. What amount should be reported as initial lease liability?

2. What is the cost of right of use asset?
3. What amount should be reported as gain on right transferred to the buyer-lessor?
4. What amount should be reported as annual depreciation of the right of use asset?
5. What is the net annual rental income of the buyer-lessor?