LESSOR ACCOUNTING

Direct Financing and Sales-type Lease

PROBLEM 1

Capin Company is in the business of leasing new sophisticated equipment. The lessor expects a 12% return on net

investment. All leases are classified as direct financing lease.

At the end of the lease term, the equipment will revert to the lessor. On January 1, 2017, an equipment is leased

to Cardente Company, the lessee, with the following information:

Cost of equipment to the lessor

Residual value — unguaranteed 600,000

Annual rental payable in advance 900,000

Initial direct cost incurred by the lessor 250,000

Useful life and least term 8 years

Implicit interest rate 12%

First lease payment January 1, 2017

Required:

1. What is the gross investment in the lease?

2. What is the net investment in the lease?

3. What is the total interest income over the lease term?

4. What is the interest income for 2017? 5. Prepare the necessary journal entry for 2017.

PROBLEM 2

Using the same information in PROBLEM 1. Assume that at the end of the lease term, the fair value of the

equipment is P400,000. Prepare the journal entry to revert the machine to the lessor.
PROBLEM 3

Using the same information in PROBLEM 1, except that the residual value is guaranteed. Assume further that at

the end of the lease term, the fair value of the equipment is P400,000. Prepare the journal entry to revert the

machine to the lessor.