Chapter 13

SALES TYPE LEASE - LESSOR

Problem 13-1 (AICPA Adapted)

Howe Company leased equipment to Kew Company on January 1, 2016 for an eight-year period
expiring December 31, 2023. Equal payments under the lease are ₱500,000 and are due on
January 1 of each year. The first payment was made on January 1, 2016.

The selling price of the equipment is ₱2,900,000 and the carrying amount is ₱2,000,000. The
lease is appropriately accounted for as a sales type lease.

The present value of the lease payments at an implicit interest rate of 12% is ₱2,780,000

What amount of gross profit on sale should be reported for 2016?

a. 900,000
b. 780,000
c. 240,000
d. 333,600
Problem 13-2 (AICPA Adapted)

Meg Company leased equipment from Wee Company on July 1, 2016 for an eight-year period
expiring June 30, 2024.

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, 2016. 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 profit on the sale should be recorded for the year ended December 31,
2016?

a. 600,000
b. 720,000
c. 360,000
d. 300,000

2. What amount of interest revenue should be recorded for the year ended December 31,
2016?

a. 292,000
b. 146,000
c. 352,000
d. 176,000
Problem 13-3 (AICPA Adapted)

Hitech Company, a dealer in machinery and equipment, leased equipment to Quality Company
on July 1, 2016.

The lease is appropriately accounted for as a sale by Hitech and as a purchase by Quality.

The lease is for a ten-year period equal to the useful life of the asset expiring June 30, 2026. The
first of ten equal annual payments of ₱250,000 was made on July 1, 2016.

Hitech had purchased the equipment for ₱1,337,500 on January 1, 2016 and established a list
selling price of ₱1,678,500 on the equipment.

The present value on July 1, 2016 of the rent payments over the lease term discounted at 12%
was ₱1,582,500.

1. What amount of profit on sale should be recorded for the year ended December 31, 2016?

a. 250,000
b. 245,000
c. 350,000
d. 175,000

2. What amount of interest income should be recorded for the year ended December 31, 2016?

a. 159,000
b. 189,000
c. 94,950
d. 79,950
Problem 13-4 (AICPA Adapted)

Vanderbilt Company is a dealer in machinery. On January 1, 2016, 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 31, 2020, the machinery will revert to Vanderbilt.
Vanderbilt incurred initial direct cost of ₱300,000 in finalizing the lease agreement.

1. What is the unearned interest income on January 1, 2016?

a. 4,630,000
b. 4,200,000
c. 5,200,000
d. 3,630,000

2. What amount should be reported as gross profit on sale in 2016?

a. 7,700,000
b. 3,070,000
c. 2,500,000
d. 3,370,000

3. What is the interest income for 2016?

a. 1,364,000
b. 1,296,000
c. 1,800,000
d. 926,000
Problem 13-5 (AICPA Adapted)

Reagan Company used leases as a method of selling products. In 2016, the entity completed
construction of a passenger ferry.

On January 1, 2016, the ferry was leased to the Super Ferry Line on a contract specifying that
ownership of the ferry will transfer to the lessee at the end of the lease period.

Annual lease payments do not include executory costs.

Original cost of the ferry 8,000,000

Fair value of ferry at lease date 12,555,000
Lease payments payable in advance 1,500,000
Estimated residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2016
Lease term 20 years
Present value of an annuity due of 1 at 10% for 20 periods 8.37
Present value of 1 at 12% for 20 periods 0.10
1. What is the unearned interest income on January 1, 2016?

a. 17,445,000
b. 19,245,000
c. 19,445,000
d. 22,000,000

2. What is the gross profit on sale for 2016?

a. 6,555,000
b. 4,555,000
c. 4,755,000
d. 4,355,000

3. What is the interest income for 2016?

a. 1,506,000
b. 1,524,000
c. 1,326,000
d. 1,350,000
Problem 13-6 (AICPA Adapted)

Marianas Company adopted the policy of leasing as the primary method of selling its products.
The entity’s main product is a small helicopter that is very popular among politicians and entity
managers. Marianas Company constructed such a helicopter for Jade Company at a cost of
P8,500,000.

The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10
years with the ownership transferring to the lessee at the end of the lease period. It is
estimated that the helicopter will have a residual value of P1,600,000 at that date.

The lease payments began January 1, 2016. Marianas Company incurred initial direct cost of
P500,000 in financing the lease agreement with Jade. The sale price of the helicopter is
P14,875,000.

Financing the construction was at a 14% rate. The present value of tan annuity due of 1 at 14%
for 10 periods is 5.95.

1. What is the gross profit on sale that should be recognized by Marianas Company?

a. 5,875,000
b. 6,375,000
c. 4,275,000
d. 4,775,000

2. What in the unearned interest income on January 1, 2016?

a. 10,125,000
b. 11,725,000
c. 9,625,000
d. 8,525,000

3. What is the interest income for 2016

a. 2,082,500
b. 1,732,500
c. 2,306,500
d. 1,956,500
Problem 13-7 (AICPA Adapted)

Easter Company leased equipment to Faye Company on January 1, 2016. The lease is for an
eight – year period expiring December 31, 2023. The first of eight equal annual payments of
P900,000 was made on January 1, 2016. The entity had purchased the equipment on December
29, 2015 for P4,800,000. The lease is appropriately accounted for as a sales type lease. The
present value on January 1, 2016 of all rent payments over the lease term discounted at a 10%
interest rate was P5,280,000.

1. What is the gross profit on sale for 2016?

a. 1,920,000
b. 2,400,000
c. 480,000
d. 240,000

2. What amount of interest revenue should be recorded in 2017?

a. 490,000
b. 480,000
c. 438,000
d. 391,800
Problem 13-8 (AICPA Adapted)

On January 1, 2016, Gallant Company entered into a lease agreement with Blacksheep
Company for a machine which was carried in the accounting records of Gallant at P2,000,000.

Total payments under the lease which expires on December 31, 2025, aggregate P3,550,800 of
which P2,400,000 represents cost of the machine to Blacksheep.

Payments of P355,080 are due each January 1 of each year.

The interest rate of 10% which was stipulated in the lease is considered fair and adequate
compensation to Gallant for the use of its funds.

Blacksheep expects the machine to have a 10-year life, no residual value and be depreciated on
a straight line basis. The lease is conceived a sales type lease.

1. What amount should be recognized by Gallant as profit from sale for the year ended
December 31, 2016?

a. 1,150,800
b. 1,550,800
c. 400,000
d. 355,080

2. What is the interest income that should be recognized by Gallant for the year ended
December 31, 2016?

a. 244,080
b. 200,000
c. 204,492
d. 240,000

3. What is the total income before income tax derived by Gallant from the lease for the year
ended December 31, 2016?

a. 204,492
b. 604,492
c. 355,080
d. 755,080

Maureen Christine C. Mandap