CHAPTER 13 DIRECT FINANCING LEASE— LESSOR TECHNICAL KNOWLEDGE To know the finance lease classification on the part of lessor. To define a direct financing lease. To distinguish a direct financing lease from a sales type lease. To understand gross investment and net investment in a direct financing lease. To recognize interest income in a direct financing lease using the effective interest method.MINANCH LAs CLASBIEICATION On the (Ht oF the laa, a finance leaae is either: i Direet finanoing te hh Silew dype lesish, a ‘The daly iHatinetion between the two is the presence or nheetive of A MUTACtUReY ur dealer profit or loss. Adiveet financing lem vevogninos only interest income, A sales type lene revoni¢es Literest income and gross profit un aale, Direct financing lease ‘The leseor (hn direct financing lease ia actudly engaged in the financing business, Vhua, a ditect finanging Jonge ia an arrangement between a finaneing entity and a lense, Nhe income of the leasor is only in the form of interest ineome, No dealer profit ia recognized because the fair value and the coat of the anseb are equal, Accounting considerations Grond investment in the leane in equal to the gross rentals for the entire lease term plus the absolute amount of the residual value, whether guaranteed or unguaranteed. . tl Net investment in the leane ia equal to the cost of the asset b pluwany initial direct cost paid by the Jessor. Unearned interest income ia the difference between the grows inveatmont and net investment in the lease. . Initial direct cost paid by the lessor is added to the cost of the asset to get the net investment in a direct financing leawe. The initial direct cost would effectively spread the initial direct cont over the lease term and reduce the amount of interest income 401Illustration — Direct financing lease On January 1, 2022, Leasor Company lonsed a machinery to another entity with the following details: Cost of machinery 1,518,660 Annual rental payable atthe end ofeach year 500,000 Lease torm dyenta Useful life of machinery dycara 12% Implicit intorest rate Present value of annuity of | for 4 years a 12% 3.0373 ‘The initial problem is the determination of the annual rental which will give the lessor a fair rate of return on the net investment in the lease. The procedure is to divide the "net investment in the lease to be recovered from rental" by present value factor of an annuity of 1 for a number of periods using a desired rate of return to get the annual rental. Computation The annual rental is computed by dividing the amount of P1,518,650 by the present value factor, 3.0373, of an annuity of | for 4 years at 12%, or P500,000. Gross rentals or lease receivable (500,000 x 4 years) 2,000,000 Present value of gross rentals (equal to the net investment in the lease or cost of the machinery) 1,518,650 Unearned interest income 481,350 Journal entries Lease receivable 2,000,000 Machinery 1,518,650 Unearned interest income 481,350 The annual collection of the rental is simply recorded. Cash 500,000 Lease receivable 500,000 402Table of amortization The unearned interest income of P481,350 is recognized over the lease term following the effective interest method. Date Payment Interest Principal Present value Jan. 1, 2022 1,518,650 Dec. 31,2022 500,000 182,288 += 317,762 1,200,888 Dec. 31,2023 500,000 144,107 355,893 844,995 Dec. 31,2024 500,000 101,399 ~—-398,601 446,394 Dec. 31, 2025 500,000 53,606 446,394 = Payment represents the annual rental. Interest is equal to the preceding present value times the interest rate. Thus, for 2022, P1,518,650 times 12% equals P182,238. : Principal is the portion of the rental payment after deducting the interest. Thus, for 2022, P500,000 minus P182,238 equals P317,762. Present value is the balance of the present value after deducting the principal payment. Thus, on December 31, 2022, P1,518,650 minus P317,762 equals P1,200,888. Recognition of interest income ‘The effective interest method is used in recognizing interest income. IFRS 16, paragraph 75, states that the lessor shall recognize finance income over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the lease. 2022 Dec. 31 Unearned interest income 182,238 Interest income 182,238 2023 Dec. 31 Unearned interest income 144,107 Interest income 144,107 403Direct financing lease — with initial direct cost On January 1, 2022, Lessor Company leased a machinery to another entity with the following details: Cost of machinery 1,518,650 Annual rental payable at the end of each year 500,000 Lease term 4years Useful life of machinery years Implicit interest rate before initial direct cost 12% Present value of annuity of 1 for 4 years a 12% 3.0373 On January 1, 2022, Lessor Company paid initial direct cost of P66,300. The initial direct cost is added to the cost of the machinery to determine, the net investment in the lease. Cost of machinery 1,518,650 Initial direct cost 66,300 Net investment in the lease 1,584,950 The inclusion of the initial direct cost in the net investment in lease will have the effect of spreading the initial direct cost over the lease term and reduce the interest income from the finance lease. Gross rentals 2,000,000 Net investment in the lease 1,584,950 Unearned interest income 415,050 Consequently, the initial direct cost would decrease implicit interest rate in the lease. The problem therefore is the determination of the reduced implicit interest rate. The original implicit interest rate of 12% cannot be applied anymore because of the added initial direct cost. 404Computation of new implicit rate The new implicit rate is computed by trial and error or through the interpolation process. The new interest rate is definitely lower than 12% and it could be 11%, 10% or 9%. The procedure is determine the present value of gross rentals that would equate the net investment in the lease of P1,584,950 using a particular rate. Using 11%, the present value of an ordinary of 1 at 11% for 4 periods is 3.1024. Thus, the present value of gross rentals is equal to P500,000 multiplied by 3.1024 or P1,551,200. This amount is not the same as the net investment in the lease. The new interest rate is not 11%. Using 10%, the present value of an ordinary annuity of 1 at 10% for 4 periods is 3.1699. Thus, the present value of gross rentals is equal to P500,000 multiplied by 3.1699 or P1,584,950. Coincidentally, the present value of P1,584,950 is the same as the net investment in the lease. In conclusion, the new interest rate is 10%. Accordingly, the reduced interest rate of 10% is used in determining the annual interest income. 405Journal entries Machinery (initial di nin rect cost) 66,300 66,300 Lease receivable ° Machinery mamas "18.080 415,050 Unearned interest income The annual collection of the rental is normally recorded. Cash 500,000 Lease receivable ar The unearned interest income of 415,050 is 00 eat income over the lease term following the effective » method of amortization. Table of amortization present value Date Payment Interest Principal Jan. 1, 2022 rotaas Dec. 31,2022 500,000 158,495 See "967,789 124,344 75, i Dec. 31,2023 500,000 12 43221 454.568 Dec. 31, 2024 500,000 86,779 Dec. 31, 2025 500,000 45,432 454,568 od Payment represents the annual rental. Interest is equal to the preceding present value times the interest rate. Thus, for 2022, P1,584,950 times 10% equals P158,495. Principal is the portion of the rental payment after deducting the interest. Thus, for 2022, P500,000 minus P158,495 equals P341,505. Present value is the balance of the preceding value after deducting the principal payment. Thus, on December 31, 2022, P1,584,950 minus P341,505 equals P1,243,445. 406Journal entries The recognition of first fwo years is normally recorded 2022 interest income for the ec. Inear Dec. 31 Unearned interest income oe Interest income 158,495 2023 Dec. 31 Unearned interest income 124,344 Interest income 124,344 If a statement of financj iti ‘ial position is prepared by the lessor on December 31, 2022, the lease receivable of P1,500,000 4 Ported as partly current and partly noncurrent. Current portion Lease receivable 500,000 Unearned interest income (124,344) Carrying amount Noncurrent portion Lease receivable « 1,000,000 Unearned interest income (182,211) Carrying amount IFRS 16, paragraph 67, states that lessors shall recognize assets held under a finance lease as a receivable at an amount equal to the net investment in the lease. : The unearned interest income realizable within one year from December 31, 2022 is deducted from the current lease receivable The remaining portion is deducted from the noncurrent lease receivable. Unearned inter 415,050 Realized in 2 158,495 Balance, December 31, 2022 256,555 Realizable in 2023 (124,344 Realizable beyond 2023 (132,211 407Direct financing lease ~ with residual value On January 1, 2022, Les: hine: a? S022, sor Ci ed a machinery to another entity with the follows details: Costof machinery « 3,194,410 Residual value 500,000 Useful life and lease term years Implicit interest rate 10% The machinery shall revert to the lessor at the end of the lease term because there is neither a transfer of title nor a purchase option. ‘The problem is the determination of the annual rental. The annual rental is payable at the end of each year with the first payment on December 31, 2022. The relevant present value factors are: : PV of Lat 10% for 4 periods 6830 PV of an ordinary annuity of 1 at 10% for 4 periods 3.1699 Cost of machinery 3,194,410 Present value of residual value (500,000 x .683) (__ 341,500) Net investment to be recovered from rental 2,852,910 Divide by PV of an ordinary annuity of 1 at 10% for 4 periods 3.1699 Annual rental | 900,000 Note that the present value of the residual value is deducted from the cost of the asset if the machinery shall revert to the lessor at the end of the lease term. Otherwise, if the machinery shall not revert to the lessor at the end of the lease term, the residual value is completely ignored. Gross rentals (900,000 x 4) 3,600,000 Residual value (whether guaranteed or unguaranteed) __ 500,000 Gross investment 4,100,000 Cost of machinery — net investment (3,194,410) Unearned interest income 905,590Table of amortization Date Payment Principal Present value Interest 1/1/2022 3,194,410 12/31/2022 900,000 580,559 2,613,851 12/31/2023 900,000 Ser'gag «68,615 1,975,236 19/31/2024 900,000 197'524 702,476. 1,272,760 12/31/2025 900,000 197'249 «772,760 500,000 Interest is equal to the receding present value times the interest rate. Thus, for 2082, P3, 194410 x 10% equals P319,441. Principal is the portion of the rental after deducting interest. Thus, for 2022, P900,000 minus P319,441 equals P580,559. Present value equals the balance of the present value minus the principal payment. Thus, on December 31, 2022, P3,194,410 minus P580,559 equals P2,613,851. Journal entries for 2022 1. To record the direct financing lease: Lease receivable 4,100,000 Machinery 3,194,410 Unearned interest income 905,590 g. To record the collection of annual rental: Cash 900,000 Lease receivable 900,000 3. To record the interest income: Unearned interest income 319,441 Interest income 319,441 When the lease expires on December 31, 2025, the machinery shall revert to the lessor. Whether "guaranteed" or unguaranteed", the entry on the books of the lessor is the same. Machinery 500,000 Lease receivable 500,000 409Accounting problem fair value of the The accountin 4 g problem is when the sidudl value machinery is P400,000 ° of P500,000. which is lower than the re! difference ny eed scenario, the lessee shall pay for th the lessor. Cash 100,000 Machinery 400,000 cae 000 Lease receivable Under the unguaranteed scenario, the lessor shall recognize a loss on finance lease for the difference. Loss on finance lease 100,000 Machinery 400,000 Lease receivable 500,000 Direct financing lease - rental payable in advance On January 1, 2022, Lessor Company leased a machinery to another entity with the following details: Cost of machinery 3,760,100 Residual value guarantee 400,000 Useful life and lease term 4 years 10% Implicit interest rate The annual rental is payable in advance on January 1 of each year starting January 1, 2022. Since the residual value is guaranteed, the machinery shall revert to the lessor at the end of the lease term. The relevant present value factors are: Present value of 1 at 10% for 4 periods 0.6830 Present value of an annuity of 1 in advance at 10% for 4 periods 3.4869 410Computation of annual rental Cost of machinery 3,760,100 Present value of residual value (400,000 x .683) (__273,200) Net investment to be recovered from rental 3,486,900 Divide by PV of annuity of 1 in ndvanee at 10% for 4 periods 3.4869 Annual rental 1,000,000 Note that the rental is payable in advance at the beginning of each year. Thus, the "annuity of 1 in advance factor" is used in the computation, Gross rentals (1,000,000 x 4 years) 4,000,000 Residual value ~ guaranteed 400,000 Gross investment 4,400,000 Net investment ~ cost of machinery 3,760,100 Unearned interest income 639,900 Date Payment Interest Principal Present value 4/1/2022 3,760,100 1/1/2022 1,000,000 . 1,000,000 2,760,100 1/1/2023 1,000,000 276 019 723,990 2,036,110 1/1/2024 ‘1,000,000 203,611 796,389 1,239,721 4/1/2025 1,000,000 123,972 876,028 363,693 3/1/2026 400,000 36,307 363,693 - Interest is equal to the preceding present value times the interest rate. The first rental payment on January 1, 2022 pertains to principal only. Thus, on January 1, 2023, the interest is equal to P2,760, 100 times 10% or P276,010. This interest income pertains to 2022. i he Principal is the portion of the rental payment minus tl interest. Thus, on January 1, 2023, P1,000,000 minus P276,010 equals P723,990. Present value is the balance of the present value minus the principal payment. Thus, on January 1, 2023, P2,760, 100 minus P723,990 equals P2,036,110 411Journal entries 2022 Jan. 1 Lease receivable 4,400,000 Machinery 3,760,100 Unearned interest income 639,900 1 Cash 1,000,000 Lease receivable 1,000,000 Dec. 31 Unearned interest income 276,010 Interest income 276,010 2028 Jan. 1. Cash 1,000,000 Lease receivable 1,000,000 Dec. 31 Unearned interest income 203,611 Interest income 203,611 2024 Jan. 1 Cash 1,000,000 Lease receivable 1,000,000 Dec. 31 Unearned interest income 123,972 Interest income 123,972 2025 Jan. 1 Cash 1,000,000 Lease receivable 1,000,000 Dec. 31 Unearned interest income 36,307 Interest income 36,307 2026 Jan. 1 On this date, the fair value of the machinery is P300,000 only. Since the guaranteed residual value is P400,000, the lessee shall pay for the difference of P100,000 to the lessor. Cash 100,000 Machinery 300,000 Lease receivable 400,000 412Direct financing lease - transfer of title to lessee On January 1, 2022, Lessor Company leased a machinery to another entity with the following details: Cost of machinery 3,449,600 Residual value 500,000 . Useful life and lease term 5 years Implicit interest rate 8% The annual rental is payable in advance on January 1 of each year starting January 1, 2022, The lease provided for a transfer of title to the lessee at the end of the lease term, The present value of an annuity of 1 in advance at 8% for 5 periods is 4.312, Cost of machinery to be recovered from rental 3,449,600 Divide by PV of an annuity of 1 in advance at 8% for 5 periods 4.312 Annual rental 800,000 If the machinery shall not revert to the lessor at the end of the lease term because the lease provides for a transfer of title to the lessee, the residual value is completely ignored in the computation of the annual rental and the unearned interest income. The annual rental is payable in advance. Thus, the annuity of 1 in advance or annuity due factor is used in the computation. Gross rentals (800,000 x 5 years) 4,000,000 Net investment ~ cost of machinery 3,449,600 Unearned interest incomeTable of amortization Date Payment Interest Principal Present value ' 1/1/2022 3,449,600 1/1/2022 800,000 = 800,000 2,649,600 1/1/2023 800,000 211,968 588,032 2,061,568 1/1/2024 800,000 164.925 635,075 1,426,493 1/1/2025 800,000 114119 685,881 740,612 1/1/2026 800,000 59,388 740,612 4 Interest is equal to the preceding present value times the interest rate. The first rental payment on January 1, 2022 pertains to principal only. Thus, on January 1, 2023 the interest is equal to P2,649,600 times 8% or P211,968. This interest income pertains to 2022, Principal is the portion of the rental payment minus the interest. Thus, on January 1, 2023, P800,000 minus P211,968 equals P588,032. Present value is the balance of the present value minus the principal payment. Thus, on January 1, 2023, P2,649,600 minus P588,032 equals P2,061,568. 2022 Jan. 1 Lease receivable 4,000,000 Machinery 3,449,600 Unearned interest income 550,400 1 Cash 800,000 Lease receivable 800,000 Dec: 31 Unearned interest income 211,968 Interest income 211,968 2023 Jan. 1 Cash 800,000 Lease receivable 800,000 Dec. 31 Unearned interest income 164,925 Interest income 164,925, 414QUESTIONS 1. What are the two classifications of finance lease on the part of the lessor? cy Explain a direct financing lease. Distinguish direct financing lease from sales type lease. |. Explain the following in a direct financing lease: a, Gross investment in the lease b. Net investment in the lese c. Unearned interest income . Explain the treatment of initial direct cost paid by the lessor in a direct financing lease. Explain the formula in computing annual rental. Explain why the residual value is ignored in the computation of annual rental if the underlying asset shall transfer to the lessee at the end of lease term. = What is the method in recognizing interest income in a direct financing lease? ~ Explain the "trial and error" or interpolation approach of determining the implicit interest rate if an initial direct cost is paid by the lessor in a direct financing lease. © 10. Explain the presentation of the lease receivable in the statement of financial position.PROBLEMS Problem 13-1 (IAA) Iceberg Company is i i i y is in the busin sophisticated equipment. At the begin an equipment was delivered to a le financing lease. The equipment sha Company at the end of the lease. ess of leasing new ning of current year, ssee under a direct II revert to Iceberg oe “smn Annual rental payable at the end of year 000 Initial direct cost paid by lessor fe 143,400 Useful life and lease term 10 years 12% Implicit interest rate before initial direct cost, Present value of an ordinary annuity of Lat 12% for 10 years - 5.650 Present value of an ordinary annuity of 1 at 11% for 10years 5.889 Required: Prepare journal entries on the books of Iceberg Company for the current year. Problem 13-2 (IAA) Camia Company is in the business of leasing new sophisticated equipment.All leases are classified as direct financing. At the end of the lease term, the equipment shall] revert to Camia Company. The implicit interest rate is 12% after considering the initial direct cost. On January 1, 2022, an equipment is leased to a lessee with the following information: . Cost of equipment to Camia 5,000,000 Residual value - unguaranteed 600,000 ‘Annual rental payable in advance 900,000 Initial direct cost paid by lessor 250,000 Useful life and lease term 8 years Implicit interest rate 12% First lease payment January 1, 2022 Required: Prepare a table of amortization for the lease receivable 1 and interest income. 2. Prepare journal entries for 2022 and 2023 3. Prepare journal entry on January 1, 2030 to record the return of the equipment from the lessee. The fair value of the equipment on this date is P500,000. 416Problem 13-3 (IFRS) Macedonia Company entered into a leasing business. The entity acquired gq specialized machine for P3,000,000 cash. On January 1, 2022 the entity leased the machine to another entity for period of 6 years, after which the machine is returned to Macedonia Company for disposition. The expected unguaranteed residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Macedonia Company. The first lease payment is made on January 1, 2022 and subsequent payments are made each December 31. The relevant present value factors are: pV of an annuity of 1 in advance at 12% for 6 periods 4.6048 PV of Lat 12% for 6 periods 5066 Required: 1. Compute the annual rental payable in advance required : to yield the desired return. 2. Prepare an amortization schedule for the lease receivable. 3. Prepare journal entries for 2022. A Prepare journal entry to recognize the interest income for 2027. 5, Prepare journal entry on December 31, 2027, end of six years, to record the return of machine to the lessor. ‘The fair value of the machine on this date is the same as the unguaranteed residual value. ® AL,Problem 13-4 (IAA) Oceanic Company is engaged in leasing equipment. Such an equipment was delivered to a lessee at the beginning of current year under a direct financing lease with the following provisions: Cost of equipment barred Unguaranteed residual value aoe Useful life and lease term eae Implicit interest rate ry Present value of an ordinary annuity of | for Syears at 10% | 5.335 Present value of 1 for 8 years at 10% “ The annual rental is payable at the end of each year. The equipment shall revert to the lessor upon the lease expiration. 1. What amount should be reported as net investment in the lease to be recovered from rental? 4,361,200 4,161,200 4,268,000 4,561,200 Bop 2. What amount should be reported as annual rental over the lease term? a. 800,000 b. 817,470 c. 779,980 d. 834,940 3. What amount of interest income should be recognized for the current year? 436,120 416,120 426,800 640,000 Boop 4, Prepare journal entries for current year. 418Problem 13-5 (AA) At a beginning of current year, Lessor Company leased a ea yessee Company. The machine had an original cost of P6,000,000. The leage term was five years and the implicit interest rate on the lease was 15%. The lease is properly classified as a direct financing lease. The annual lease payments of P1,750,000 are made each December 31. The machine reverts to Lessor at the end of the lease term, at which time the residual value of the machine will be P275,000. The residual value is unguaranteed. 1, At the commencement of the lease, what would be the net lease receivable on the part of the lessor? a. 6,275,000 b. 8,750,000 c. 6,000,000 d. 5,725,000 2. What amount should be reported as gross investment in the lease? a. 8,750,000 b. 9,025,000 c, 6,000,000 d. 8,475,000 3. What amount should be reported as total unearned interest income? a. 3,025,000 b. 2,750,000 c. 2,475,000 d. 6,000,000 4. What amount should be reported as interest income for the current year? a. 1,312,500 b. 1,353,750 ce. 900,000 d. 450,000 5. Prepare journal entries for current year. 419Problem 13-6 (IAA) mpany entered into At the beginning of currei Lyle Cot a 5-year direct financing lease of an equipment. A third party guaranteed the residual value of the equipment, under the lease estimated to be P1,200,000 at the end of the lease term. Annual lease payments -f P1,000,000 are due at the end of each lease year. The remaining useful life of the equipment was Six years at the commencement of the lease. The lessor used 10% as the impli 1 at 10% for 5 periods is .62, and the of 1 at 10% for 5 periods is 3.79. 1. What amount should be reported as net lease nen of the lessor at the commencement of the lease? ,534,000 ; 790,000 -990,000 90,000 2. What amount should be reported as gross investment in the lease? it interest rate. The PV of PV of an ordinary annuity » a. b. ic: d. 10 go on 3. What amount should be reported as total unearned interest income? a. 2,410,000 b. 1,666,000 e. 1,210,000 d. 466,000 4. What amount should be reported as interest income for the current year? a. 379.000 b. 620,000 c. 453,400 d. 500,000 Prepare journal entries for current year. on 420Problem 13-7 (IAA) On January 1, 2022, Alpha Company leased an equipment to another entity under a Bingct financing lease. The cost of the equipment to Alpha Company was P1,550,000. The lease payments stipulated in the lease are P500,000 per year payable at the end of each year over a 4-year period of the lease. The title to the equipment remains in the hands of Alpha Company at the end of the lease term, although only nominal residual value is expected at that time. The implicit interest rate in the lease is 11%. The fiscal year of Alpha Company ends December 31. 1. on What amount should be reported as total financial revenue over the lease term? a. 450,000 b. 225,000 c. 500,000 d. 250,000 What amount should be reported as interest income for the current year? a. 134,255 b. 170,500 c. 155,000 d. 220,000 What is the carrying amount of the lease receivable on December 31, 2022? a. 1,220,500 b. 1,500,000 ce... 875,755 d. 750,000 . What is the carrying amount of the current portion of the lease receivable on December 31, 2022? a. 500,000 b. 365,745 c. 854,755 d. 354,755 Prepare journal entries for 2022 and 2023. 421 W wl ntProblem 13-8 (AICPA Adapted) Glade Company leases a computer equipment under a direct financing lease. The equipment has no residual value at the end of the lease and the lease does not contain purchase option. The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000. The present value of an annuity due of 1 at 8% for 5 years is 4.312. What total amount of interest revenue should be recognized over the lease term? a. 1,293,600 b. 1,394,500 c. 516,000 d. 750,000 Problem 13-9 (IAA) At the beginning of current year, Nueva Company, as lessor, leased an equipment for ten years at an annual rental of P1,200,000, payable by Caster Company, the lessee, at the beginning of each year. The lease is appropriately accounted for as finance lease. The equipment had a cost of P8,400,000 with an estimated life of 12 years and no residual value. The straight line depreciation is used. The implicit interest rate is 9%. What amount of interest income should be reported for the current year? 500,000 648,000 756,000 360,000 pe oS 422Problem 13-10 (IAA) Cassandra Company is in the leasing business. The entity acquired a specialized packaging machine for P3,000,000 cash and leased it for a period of six years, after which the machine is to be returned to Cassandra Company for disposition. The guaranteed residual value of the machine is P200,000. The lease term was arranged so that a return of 12% is earned by Cassandra Company. “The PV of 1 at 12% for six periods is .51, and the present ae of an annuity of 1 in advance at 12% for six periods is What amount should be reported as annual lease rental payable in advance required to yield the desired return? a. 630,000 b. 652,174 c. 608,695 d: 732,000 Problem 13-11 (IAA) Magnum Company had an asset costing P5,239,000. The asset was leased at the beginning of current year to another entity. Five annual lease payments are due in advance at the beginning of each lease year. The lessee guaranteed the P2,000,000 residual value of the asset at the end of the 5-year lease term. The lessor's implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of an annuity of 1 in advance , at 8% for 5 periods is 4.31. What amount should be repored as anrtual lease payment? a. 1.215.545 b. 1,531,090 c. 900,000 d. 751,500 423Problem 13-12 (IAA) Ericson Company leased entity. Th an asset to another entity. The cost of the asset was P7,994,000. Terms of the lease specified four-year life for the lease, an annual interest rate of 15%, and four year-end rental payments. The lease qualified as.a direct financing lease. 2 The lease provided for a transfer of title to the lessee at the end of the lease term. After the fourth i alue was estimated at i P1,000,000. year, the residual v: jn The PV of 1 at 15% for 4 periods is .572, and the PV of an ordinary annuity of 1 at 15% for 4:periods is 2.855. What amount should be reported as annual rental payment? a. 2,000,000 b. 3,000,350 c. - 2,800,000 d. 2,599,650 Problem 13-13 (IAA) Irene Company acquired a specialized machine for P2,300,000. At the beginning of current year, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due in advance at the beginning of each lease year. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is | 0.51, and the present value of an annuity in advance of 1 at * 12% for six periods is 4.60. What amount should be reported as annual lease rental payable in advance? 500,000 477,826 383,333 460,000 oO PP 424 —_,Prob! 1. Gr a, Ne aad a, b, c. d. rey lem 13-14 Multiple choice (IFRS) 086 investment in the lease is equal to Sum of the lease payments receivable by a lessor under a finance lease ani any unguaranteed residual value accruing to the lesyor, * The lease payments under a finance leaso of the lessor. Present value of lease payments under a finance lease of the lessor and any unguaranteed residual value. Present value of the lease payments under a finance lease of the lessor, ' t investment in a direct financing lease is equal to Cost of the asset Cost of the asset plus initial direct cost paid by lessor Cost of the asset minus guaranteed residual value Cost of the asset. plus unguaranteed residual value . Which is the correct accounting treatment for a finance lease in the accounts of a lessor? a. b. Les as = a, b, c. d. 5. Th a b. c d Noncurrent asset equal to net investment in lease and all finance payments in income statement. Receivable equal to gross investment in the lease and all finance payments by reduction of debt. Receivable equal to net investment ih the lease and recognize finance payments by reduction of debt and taking interest to income statement. Receivable equal to net investment in the lease and all finance payments by reduction of debt. ssors shall recognize asset held under a finance lease a receivable at an amount equal to the Gross investment in the lease Net investment in the lease Gross rentals . Residual] value whether guaranteed or unguaranteed e lease receivable in a direct financing lease is The gross amount of lease payments. Gross rentals minus fair value of the leased asset. The present value of lease payments. The cost of the asset less any depreciation 4256. The primary difference between a direct financing lease and a sales type lease is the a. Manner in which rental collections are recorded. b. Depreciation recorded each year by the lessor. c. Recognition of dealer profit at inception of the lease, d. Allocation of initial direct cost incurred by the lessor, 7. All of the following would be included in the lease receivable, except a. Guaranteed residual value b. Unguaranteed residual value : c. A purchase option that is reasonably certain d. All would be included 8. Under a direct financing lease, the excess of aggregate rentals over the cost of the underlying asset should be recognized as interest income of the lessor In increasing amounts during the term of the lease In constant amounts during the term of the lease In decreasing amounts during the term of the lease After the cost of the underlying asset has been fully recovered through rentals Boop 9. In a direct financing lease, unearned interest income should be a. Amortized over the lease term using the interest method. b. Amortized over the lease term using straight line. c. Ignored d. Recognized at the lease expiration. 10. Which statement is true regarding initial direct cost incurred by the lessor? a. Ina direct financing lease, initial direct cost shall be added to the net investment in the lease. b. In a sales type lease, initial direct cost shall be expensed as component of cost of goods sold. c. In an operating lease, initial direct cost incurred by lessor shall be deferred and allocated over the lease term. d. All of these statements are correct. 426