Module InAc 313 1

Course : BACHELOR OF SCIENCE IN ACCOUNTING
INFORMATION SYSTEM
Course Code : InAc 313
Course Title : Intermediate Accounting 3
Course Credit : 3 units/ 54hours
BULACAN POLYTECHNIC COLLEGE

Bulihan, City of Malolos
COURSE DESCRIPTION: In this course students will learn how to account for
complex business transactions. Topics studied will include, among others,
leases, income taxes, shareholders equity, share-based compensation,
accounting changes, error corrections, and derivatives. In addition, students will
learn to compute earnings per share and to prepare a complex statement of cash
flows. Students will also analyze real world cases and learn how to evaluate firm
performance using financial statements.
LEARNING OUTCOMES
Expected Graduate
General Learning Outcomes
Attributes
 Critical and creative  Demonstrated thorough knowledge on

thinker. the vision, mission, goals and objectives
 Possesses good of the BPC and of the BSAIS Program.
working attitude.  Identified, analyzed and recorded the
 Globally and lease contracts of an enterprise
technologically  Identified, analyzed and recorded the
competitive deferred tax assets and liabilities of an
professionals. enterprise
 Competent, sensitive,  Identified, analyzed and recorded the
productive, and shareholders equity of an enterprise
responsive member of  Prepared an advanced level statement of
society cash flows
 Capable, creative and  Identified, analyzed and recorded
research/service accounting changes and correct
oriented accounting accounting errors
information system  Identified, analyzed and recorded the
specialist derivative transactions of an enterprise
 Morally straight  Applied financial accounting theory,
professional standards and judgment to
real world business transactions and
record these transactions
TEACHING METHODOLOGIES
1. Lecture/Discussion
2. Individual Activities
GRADING SYSTEM
Seat works/ Assignments/ Quizzes 60%
Major Examinations 30%
Attendance 10%
Total 100%
Bachelor of Science in Bulacan Date Developed:

Accounting June 2020
Polytechnic Date Revised: Page 2 of 18
Information System
College
Intermediate Developed by:
Accounting 3 Document No. Danielle Jane Lazaro Revision No.: 0
(InAc 313)
GRADES PERCENTAGE DESCRIPTIVE RATING
1.00 98- 100 Excellent
1.25 95-97 Excellent
1.50 92-94 Very Good
1.75 89-91 Very Good
2.00 86-88 Good
2.25 83-85 Good
2.50 80-82 Satisfactory
2.75 77-79 Satisfactory
3.00 75-76 Passed
4.00 73-74 Lacking Requirements
5.00 72 and below Failed
COURSE POLICIES
1. Student is expected to participate to the best of his/her abilities in

whatever activity is scheduled per module in accordance to his/her
preferred but approved mode of learning such as any or combination of
the following:
a) online using the institution’s learning management system “BPC
eLearning”
b) modular (print out or in flash disk for pick up or courier/drop box).
2. The rule on failing mark for 20% unexcused absences cannot be enforced
due to allowed flexible schedule during this time of pandemic instead a
student has to be mindful of the required pre-scheduled
submission/compliance of the requirements.
3. Assessment of learning shall be done for every module; however, there
shall be two summative tests that a student needs to undergo before the
semester ends. For a student who opted to have summative exam online,
it has to be real time and there should be somebody who would video
him/her to prove that he/she is really the one answering the test.
However, if there is no more community quarantine, the summative exam
shall be done by batch and in school.
4. Mid-Term and Final Exams shall be given only to students who have
completely or partially settled their accounts for the specified period.
5. Student will be held responsible for all assignments and requirements
missed for the entire content on the course regardless of the mode of
learning he/she has chosen.
6. Only students officially enrolled in the course will be allowed to attend the
class.
7. The professor is not obliged to give a special or late test to any student who
fails to take an examination at the scheduled time, except upon
presentation of any certificate (e.g. medical certificate, etc.), or excuse
letter scrutinized by the subject teacher in terms of its veracity.
8. When given a grade of INC. (Incomplete), the student shall complete the
grade within one year; otherwise, a grade of 5.0 will be given automatically
by the registrar.
Intermediate Accounting 3
MODULE MATERIALS
Information System
College
(InAc 313)
List of Modules
No. MODULE
MODULE TITLE
CODE
1 Leases InAc 313-1
2 Accounting for Income Taxes InAc 313-2
3 Shareholder’s Equity InAc 313-3
4 Statement of Cash Flows Revisited InAc 313-4
5 Accounting Changes and Error Corrections InAc 313-5
6 Pension and Other Post Retirement Benefits InAc 313-6

Information System
College
(InAc 313)
LEASES
InAc 313-1

Information System
College
(InAc 313)
MODULE CONTENT
COURSE TITLE: Intermediate Accounting 3
MODULE TITLE Leases
NOMINAL DURATION: 3 Hours
SPECIFIC LEARNING OBJECTIVES:

At the end of this module you MUST be able to:
1. Identify, analyze and record the lease contracts of an enterprise under
the new lease standard.
TOPIC: (Sub Topics)

1. Categories of Leases: Operating Lease and Capital Lease
2. Classifications of Leases: Finance and Operating
3. Transition for Existing Leases and related Practical Expedients
ASSESSMENT METHOD/S:
Quiz – Problem Solving/Multiple Choice
REFERENCE/S:
http://www.lhmp.com/wp-content/uploads/2019/01/Accounting-Update-
Seminar-Leases-Topic-842_1.23.19.pdf
https://asc.fasb.org/imageRoot/39/117422939.pdf
https://leasequery.com/blog/asc-840-vs-asc-842-old-lease-accounting-
standard-vs-new/#asc-840
Valix, C.T., Peralta, J.F. & Valix, C.T. Financial Accounting 3 (2017 ed.). GIC
Enterprises Co.,INC.

Information System
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(InAc 313)
Information Sheet InAc 313-1
Leases
Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Define a lease under the new lease standard.
2. Understand the purpose of the new guidance regarding on Lease
Contracts.
3. Recognize the asset and liability on tha part of the lessee.
4. Identify and apply the transition for existing leases and related Practical
Expedients.
5. Prepare journal entries of the lease contracts.
Recap of Current Lease Guidance (Accounting Standards Committee 840)

Under ASC 840, leases were classified into two categories: operating leases and capital
leases.
 Operating lease: not recognized on balance sheet, payments are considered
rent expense
 Capital lease: the asset and the required payments are recognized on the
balance sheet, payments reduce the liability with a portion considered interest
expense (treated as a financed transaction)
If any of the four criteria below are met then it is a capital lease.
a. Ownership is transferred to lessee at the end of the lease term.
b. A bargain purchase option for the leased asset exists
c. The lease term is equal to 75 percent or more of the estimated economic life
of the leased asset.
d. The present value of the minimum lease payments equals or exceeds 90
percent of the fair value of the leased asset at inception.
Purpose of the New Guidance (ASC 842)

 Increase transparency and comparability between entities
 Concern that the financial statements did not represent a faithful presentation of
lease transactions, specifically in regards to operating leases
 Numerous requests from users to update the accounting requirements
 Main issues were revolved around lessee accounting of operating leases.
 Lessor accounting remained fundamentally unchanged
ASC 840 to ASC 842 Effective Dates and Commencement Dates
 Public calendar-year companies had until January 1, 2019 to adopt the new
standard, ASC 842, Leases.
 Calendar-year private companies are required to transition to ASC 842 by
January 1, 2021.

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(InAc 313)
New Guidance (ASC 842): Recognizing the Asset and Liability – Lessee
Lease defined
Under the new standard, ASC 842, a lease is a contract, or part of a contract, that
conveys the right to control the use of identified property, plant, and equipment (an
identified assets) for a period of time in exchange for consideration.
There are two classifications of lease: finance leases and operating leases.
A lease is classified as a finance lease if the lease meets any of the following criteria:
 Transfer of ownership of the asset by the end of the lease term.
 There is an option to purchase and exercising that option is reasonably certain.
 The term of the lease represents the major part (Under USA GAAP, “major part”
means at least 75% of the economic life of an asset.) of the economic life of the
asset.
 The present value of the lease payments equals or exceeds substantially all
(Under USA GAAP, “substantially all” means at least 90% of the fair value of the
leased asset.) of the fair value of the least asset.
 Specialized asset being leased is not expected to have alternative use.
Under the new standard, a lessee is required to initially recognize a lease liability for the
obligation to make payments and a right of use asset for the right to use the underlying
asset over the lease term.
 The lease liability is measured at the present value of the lease payments to be
made over the lease term.
 The right of use asset is initially measured at the amount of lease liability
adjusted for lease prepayments, lease incentives received, initial direct costs and
an estimate of restoration, removal and dismantling cost.
 Short Term Exception permits a lessee to elect not to recognize a lease that, at
the commencement date has a lease term of 12 months (do not have to record
the asset or liability)
Transition for Existing Leases and related Practical Expedients

Entities currently are required to adopt the new leases standard using a modified
retrospective transition method. Under that transition method, an entity initially applies
the new leases standard (subject to specific transition requirements and optional practical
expedients) at the beginning of the earliest period presented in the financial statements.
Practical Expedient allows the entity, at the time of adoption, to not reassess:
 Whether any expired or existing contract are, or contain, leases
 The Lease classification for any expired or existing leases
 Initial direct costs for any existing leases.

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If the entity elects to use any of the three practical expedients, it must use all three and
must apply them to all leases in existence upon adoption.
For each lease classified as an operating lease before and after the adoption, the entity
will record a lease liability equal to the present value of the remaining minimum payments
Illustration
On January 1, 2017, an entity leased a machinery for 4 years which is the same as the
useful life of machinery at annual rental or fixed payment of P100,000 payable at the
end of each year.
The lease provides for a transfer of ownership of the underlying asset to the lessee at
the end of the lease term.
Present value computation

The present value of annual payment of P100,000 for 4 years using 12% implicit
interest rate is determined as follows:
Present Value = P100,000 x present value of an ordinary annuity of 1 for 4 years at 12%
= P100,000 x 3.0373
= P303,730
The present value factor of 3.0373 is derived from the mathematical table of present
value and annuity.
The journal entry to record the finance lease at the commencement date of the lease is:
Right of use asset 303,730

Lease liability 303,730
Depreciation of right of use asset

If the lease transfers ownership of the underlying asset to the lessee at the end of lease
term, the depreciation of the right of use is based on the useful life of the underlying
asset.
Accordingly, the annual depreciation of the right of use asset is recorded as follows:
Depreciation 75,932
Accumulated depreciation 75,932
(P303,730 / 4 years)
Accounting for fixed payments

The annual rental or fixed payment of P100,000 shall be treated as payment for the
principal lease liability and the interest thereon.
The interest is the difference between the face value of gross fixed payments of
P400,000 for 4 years and the present value of P303,730, or P96,270
The interest of P96,270 is recognized as an expense over the lease term following the
effective interest method of amortization.
The table of amortization for the lease liability and the interest may appear as follows:

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(InAc 313)
Date Payment Interest Principal Present Value
Jan. 1, 2017 303,730
Dec. 31, 2017 100,000 36,448 63,552 240,178
Dec. 31, 2018 100,000 28,821 71,179 168,999
Dec. 31, 2019 100,000 20,280 79,720 89,279
Dec. 31, 2020 100,000 10,721 89,279 -
Payment represents the annual rental or fixed payment.
Interest is equal to the preceding present value times 12% interest rate. Thus for 2017,
P303,730 times 12% equals P36,448.
Principal is the portion of the rental payment after deducting interest. Thus, for 2017,
P100,000 minus P36,448 equals P63,552.
Present Value is the balance of the lease liability after deducting the annual principal
payment. Thus on December 31, 2017, P303,730 minus P63,552 equals P240,178.
Journal Entries
2017
Dec. 31 Interest Expense 36,448
Cash 100,000
Dec. 31 Interest expense 28,821

Cash 100,000
Presentation
If a statement of financial position is prepared on December 31, 2017, the right of use
asset would be reported as a separate line item under noncurrent assets.
Right of use asset 303,730

Accumulated depreciation (75,932)
Carrying amount 227,798
The lease liability would be reported as partly current in the amount of P71,179 and
partly noncurrent for the remaining portion of P168,999.
Illustration – Certain purchase option
Lessee Company leased a machine on January 1, 2017 with the following pertinent
information:
Fixed rental payment at the end of each year 1,000,000

Lease term 10 years
Useful life of machine 12 years
Incremental borrowing rate 14%
Implicit interest rate 12%
Present value of an ordinary annuity of 1 for 10 periods at
14% 5.216
12% 5.650

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Present value of 1 for 10 periods at
14% 0.270
12% 0.322
Lessee Company has the option to purchase the machine upon the lease expiration on
January 1, 2027 by paying P500,000.
The lessee is reasonably certain to exercise the purchase option at the commencement
date of the lease.
The estimated residual value of the machine at the end of the 12-year life is P600,000.
Cost of right of use asset

Present value of lease payments (1,000,000 x 5.65) 5,650,000
Present value of purchase option (500,000 x .322) 161,000
Total lease liability 5,811,000
Note that the present value factor applicable to 12% is used in computing the present
value of the lease payments.
The lease payments shall be discounted using the 12% implicit interest rate.
If the implicit interest rate cannot be readily determined, the lessee can use the
incremental borrowing rate.
Journal entries for 2017

1. To record the acquisition of the machinery under a finance lease:
Right of use asset 5,811,000
Lease liability 5,811,000
2. To record the first rental payment on December 31, 2017:

Interest expense 697,320
Cash 1,000,000
Lease liability – January 1, 2017 5,811,000

Payment on December 31, 2017 1,000,000
Interest for 2017 (12% x 5,811,0000) ( 697,320) 320,680
Lease liability – December 31, 2017 5,508,320
3. To record the annual depreciation:

Depreciation 434,250
(5,211,000/12)
The asset is depreciated over the useful life because there is a purchase option
that is reasonably certain to be exercised.
The depreciable amount is equal to the cost of P5,811,000 minus the residual
value of P600,000 or P5,211,000.

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Table of amortization

1/1/2017 5,811,000
12/31/2017 1,000,000 697,320 302,680 5,508,320
12/31/2018 1,000,000 660,998 339,002 5,169,318
12/31/2019 1,000,000 620,318 379,682 4,789,636
12/31/2020 1,000,000 574,756 425,344 4,364,392
12/31/2021 1,000,000 523,727 476,273 3,888,119
12/31/2022 1,000,000 466,574 533,426 3,354,694
12/31/2023 1,000,000 402,563 597,437 2,757,257
12/31/2024 1,000,000 330,871 669,129 2,088,128
12/31/2025 1,000,000 250,575 749,425 1,338,703
12/31/2026 1,000,000 161,297 838,703 500,000
Payment represents the fixed annual rental payment.
Interest is equal to the preceding present value multiplied by 12%.
Thus, for 2017, P5,811,000 times 12% equals P697,320.
Principal is equal to the payment minus the interest.
Thus, on December 31, 2017, P1,000,000 minus P697,320 equals P302,680
Present value is the balance of the lease liability which is the preceding present value
minus the principal payment.
Thus, on December 31, 2017, P5,811,000 minus P302,680 equals P5,508,320.
Exercise of the purchase option

If accounts are properly posted, the table of amortization of the lease liability and
interest expense will show the balance of the lease liability on December 31, 2026 at
P500,000.
When the purchase option is exercised on January 1, 2027 which is the lease
expiration, the journal entry to record the payment is:

Cash 500,000
Nonexercise of purchase option

If for any reason the purchase option is not exercised, a loss is recognized equal to the
difference between the carrying amount of the right of use asset and the lease liability
on January 1, 2027.
Accumulated depreciation 4,342,500

Loss of finance lease 968,500

Accumulated depreciation (434,250 x 10 years) 4,342,500
Carrying amount – January 1, 2027 1,468,500
Lease liability – January 1, 2027 500,000
Loss on finance lease 968,500
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Illustration – Residual value guarantee
Easy Company leased an equipment on January 1, 2017 with the following information:
Fixed annual payment at the end of each lease year 1,000,000

Lease term 4 years
Useful life of equipment 5 years
Implicit rate 10%
Present value of an ordinary annuity of 1 for
4 periods at 10% 3.16987
Present value of 1 for 4 periods at 10% 0.683
Easy Company has guaranteed a P200,000 residual value on December 31, 2020 to
the lessor.
As long as there is a residual value guarantee, there is no more purchase option

because the equipment will revert to the lessor upon the expiration of the lease on
December 31, 2020.
Cost of right of use asset
Present value of lease payments (1,000,000 x 3.16987) 3,169,870

Present value of residual value guarantee (200,000 x .683) 136,600
Cost of right of use asset and lease liability 3,306,470
Table of amortization

1/1/2017 3,306,470
12/31/2017 1,000,000 330,647 669,353 2,637,117
12/31/2018 1,000,000 263,711 736,289 1,900,828
12/31/2019 1,000,000 190,082 809,918 1,090,910
12/31/2020 1,000,000 109,090 890,910 200,000
December 31, 2017

Payment 1,000,000
Interest Expense ( 330,647)
Applicable to principal 669,353
Lease liability or present value on January 1, 2017 3,306,470

Principal payment ( 669,353)
Lease liability – December 31, 2017 2,637,117
Journal Entries
1. To record the acquisition of the equipment:
Lease liability 3,306,470
2. To record the first annual payment on December 31, 2017:

Cash 1,000,000
3. To record the annual payment on December 31, 2017:

Depreciation (3,106,470 / 4) 776,617
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(InAc 313)
The asset is depreciated over the lease term of 4 years which is shorter than
the useful life of 5 years because there is neither a transfer of title nor a
reasonably certain purchase option.
The depreciable amount is equal to P3,306,470 minus the residual value

guarantee of P200,000 or P3,106,470.
Return of equipment to lessor on December 31, 2020

1. To record the final annual payment on December 31, 2020:
Cash 1,000,000
2. To record the return of the equipment to the lessor:

Accumulated depreciation 3,106,470
The annual depreciation is P776,617, multiplied by 4 years equals P3,106,468, or

rounded, P3,106,470.
Observe that the residual value guarantee is not paid by the lessee to the lessor
because the underlying asset is simply transferred by the lessee to the lessor to satisfy
the liability for the residual value guarantee.
Note also that the remaining carrying amount of the asset should be equal to the
residual value guarantee.
However, if the fair value of the underlying asset is less than the residual value
guarantee, a loss is reported for the difference and the lessee must make up for the
difference with a cash payment.
Thus, if the fair value of the equipment on December 31, 2020 is only P150,000 which is
P50,000 lower than the residual value guarantee, an additional entry to record the loss
is made.
Loss on finance lease 50,000

Cash 50,000
Needless to say, if the fair value is higher than the residual value guarantee, no
additional entry is necessary because there is no cash settlement.

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Course : BACHELOR OF SCIENCE IN ACCOUNTING

Course Code : InAc 313

Course Title : Intermediate Accounting 3

Course Credit : 3 units/ 54hours

BULACAN POLYTECHNIC COLLEGE

 Critical and creative  Demonstrated thorough knowledge on

Bachelor of Science in Bulacan Date Developed:

1. Student is expected to participate to the best of his/her abilities in

1 Leases InAc 313-1

2 Accounting for Income Taxes InAc 313-2

3 Shareholder’s Equity InAc 313-3

4 Statement of Cash Flows Revisited InAc 313-4

5 Accounting Changes and Error Corrections InAc 313-5

6 Pension and Other Post Retirement Benefits InAc 313-6

Bachelor of Science in Bulacan Date Developed:

Bachelor of Science in Bulacan Date Developed:

COURSE TITLE: Intermediate Accounting 3

MODULE TITLE Leases

NOMINAL DURATION: 3 Hours

SPECIFIC LEARNING OBJECTIVES:

TOPIC: (Sub Topics)

Bachelor of Science in Bulacan Date Developed:

Recap of Current Lease Guidance (Accounting Standards Committee 840)

Purpose of the New Guidance (ASC 842)

ASC 840 to ASC 842 Effective Dates and Commencement Dates

Bachelor of Science in Bulacan Date Developed:

Transition for Existing Leases and related Practical Expedients

Bachelor of Science in Bulacan Date Developed:

Present value computation

Right of use asset 303,730

Depreciation of right of use asset

Accounting for fixed payments

Bachelor of Science in Bulacan Date Developed:

Payment represents the annual rental or fixed payment.

Dec. 31 Interest expense 28,821

Right of use asset 303,730

Illustration – Certain purchase option

Fixed rental payment at the end of each year 1,000,000

Bachelor of Science in Bulacan Date Developed:

Cost of right of use asset

Journal entries for 2017

2. To record the first rental payment on December 31, 2017:

Lease liability – January 1, 2017 5,811,000

Lease liability – December 31, 2017 5,508,320

3. To record the annual depreciation:

Bachelor of Science in Bulacan Date Developed:

Date Payment Interest Principal Present Value

Payment represents the fixed annual rental payment.

Interest is equal to the preceding present value multiplied by 12%.

Thus, for 2017, P5,811,000 times 12% equals P697,320.

Principal is equal to the payment minus the interest.

Thus, on December 31, 2017, P1,000,000 minus P697,320 equals P302,680

Thus, on December 31, 2017, P5,811,000 minus P302,680 equals P5,508,320.

Exercise of the purchase option

Lease liability 500,000

Nonexercise of purchase option

Accumulated depreciation 4,342,500

Right of use asset 5,811,000

Fixed annual payment at the end of each lease year 1,000,000

As long as there is a residual value guarantee, there is no more purchase option

Cost of right of use asset

Present value of lease payments (1,000,000 x 3.16987) 3,169,870

Date Payment Interest Principal Present Value