CHAPTER 15 SALE AND LEASEBACK TECHNICAL KNOWLEDGE To define a sale and leaseback. To recognize a sale and leaseback on the part of © the lessee. To recognize a sale and leaseback on the part of the lessor. To know the recognition of a transfer of asset that is not a sale. 456SALE AND LEASEBACK eae and leaseback ig an arrangement whereby one party sells an asset to another party and then immediately leases the asset back from the new owner. Thus, the seller becomes a seller-lessee and the buyer, a buyer-lessor. A sale and leaseback transaction may occur when the seller-lessee is experiencing cash flow or financing problem or because there are tax advantages in such an arrangement in the lessee's jurisdiction. Moreover, the seller-lessee would like to avoid the burden of paying the executory costs attendant to the asset, such as repairs, insurance and taxes. Transfer of the asset is a sale IFRS 16, paragraph 100, provides that the transfer of an asset must satisfy the requirements for the recognition of sale in order to be accounted for as sale and leaseback. The important consideration in a sale and leaseback transaction is the recognition of two separate and distinct transactions. However, it is important to note that there is no physical transfer of asset. First - there is a sale. Second - there is a lease agreement for the same asset in which the seller is the lessee and the buyer is the lessor. However, the lease rent and the sale price are usually interdependent and negotiated as a package.Illustration - Sale price at fair value ee i ld At the beginning of the current year, an entity sold a machinery with a remaining life of 10 years for P2,000,000 which is equal to the fair value of the machinery. The entity immediately leased the machinery back for 1 year at the prevailing annual rental of P300,000. The machinery had a carrying amount of P1,800,000, net of accumulated depreciation of P1,200,000. Books of seller-lessee 1. To record the sale: Cash 2,000,000 deptesi 1,200,000 ee 3,000,000 Gain on right transferred 200,000 2. To record annual rental: Rentexpense 300,000 Cash 300,000 The seller-lessee used the operating lease model because the lease is short-term or one year. Books of buyer-lessor 1. To record the purchase: Machinery 2,000,000 Cash 2,000,000 2. To record the annual rental: Cash 100,000 Rent income 100,000 3. To record depreciation of the machinery: Depreciation 200,000 Accumulated depreciation 200,000 (2,000,000 /10) 458Illustration - Sale price at fair value On January 1, 2022, an entity 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 periods ’ 3.170 Measurement of lease liability The seller-lessee shall account for the leaseback as a finance lease. The lease liability is measured at the present value of rental payments. Present value of rentals (800,000 x 3.17) 2,536,000 Table of amortization Date Payment 10% interest Principal Present value 1/1/2022 2,536,000 12/31/2022 800,000 253,600 546,400 1,989,600 12/31/2023 800,000 198,960 601,040 1,388,560 12/31/2024 800,000 138,856 661,144 727,416 12/31/2025 800,000 72,584 727,416 Measurement of right of use asset IFRS 16, paragraph 100, provides that the seller-lessee shall measure the right of use asset arising from the leaseback at the proportion of the previous carrying amount of the asset in relation to the right retained by the seller-lessee. Simply stated, the cost of right of use asset is equal to a fraction whose numerator is the present value of lease liability and whose denominator is the fair value of the asset multiplied by the carrying amount of the asset. Carrying amount 4,500,000 Sale price at fair value 6,000,000 Cost of right of use asset (2,536,000 / 6,000,000 x 4,500,000) 1,902,000 459Gain or loss to be recognized Paragraph 100 provides that the gain or loss that pertains to the right retained by the seller-lessee is not recognized. The right retained by the seller-lessee is the proportion of the initial lease liability in relation to the fair value of the asset. The gain or loss that pertains to the right transferred to the buyer-lessor is recognized. The right transferred to the buyer-lessor is the fair value of asset minus the initial lease liability. Sale price at fair value 6,000,000 Carrying amount of equipment 4,500,000 Total gain 1,500,000 6,000,000 Fair value of equipment : Right retained by seller-lessee equal to lease liability 2,536,000 3,464,000 Right transferred to buyer-lessor Gain to be recognized (3,464,000// 6,000,000 x 1,500,000) 866,000 Gain not to be recognized (2,536,000 / 6,000,000 x 1,500,000) 634,000 Total gain 1,500,000 Books of seller-lessee The seller-lessee shall apply the finance lease model in accounting for the sale and leaseback transaction. 1. To record the sale and leaseback: Cash 6,000,000 Right of use asset 1,902,000 Equipment 4,500,000 Lease liability 2,536,000 Gain on right transferred 866,000 2. To record the annual rental for the first year: Interest expense (10% x 2,536,000) 253,600 Lease liability 546,400 Cash 800,000 3. To record the annual depreciation of right of use asset: Depreciation (1,902,000 / 4 years) 475,500 Accumulated depreciation 475,500 460Books of buyer-lessor Paragraph 100 provides that the buyer-lessor shall account for the purchase of the asset applying lessor accounting standard, Accordingly, the buyer-lessor shall apply the operating lease model because the lease term is 4 years or only 40% of the useful life of the underlying asset, Moreover, the present value of rentals of P2,536,000 is less than 90% of the fair value of P6,000,000. 1, To record the purchase of the underlying asset: Equipment 6,000,000 * Cash 6,000,000 2, To record the annual rental: Cash 800,000 Rent income 800,000 3, To record annual depreciation of equipment: Depreciation (6,000,000/ 10 years) “600,000 600,000 Accumulated depreciation 461Illustration - Sale price above fair value On January 1, 2022, an entity sold a building with remaining life of 20 years and immediately leased it back for 5 years, Sale price 20,000,000 Fair value of building 18,000,000 Carrying amount of building 10,800,000 Annual rental payable at the end of each year 1,500,000 Implicit interest rate 12% Present value of an ordinary annuity of Lat 12% for five periods 3.60 5,400,000 IFRS 16, paragraph 101, provides that if the sale price does not equal the fair value of the underlying asset, the seller-lessee shall make adjustment to measure the sale price at fair value. Lease liability (1,500,000 x 3.60) Any excess sale price over fair value shall be accounted for as additional financing provided by the buyer-lessor to seller-lessee. Sale price 20,000,000 Fair value of building 18,000,000 Excess sale price over fair value 2,000,000 Present value of lease liability 5,400,000 Additional financing equal to excess sale price (2,000,000) 400,000 Present value of lease liability related to rentals Carrying amount of building 10,800,000 Fair value of building 18,000,000 Cost of right of use asset (3,400,000 / 18,000,000 x 10,800,000) 040,000 Fair value of building 18,000,000 Carrying amount of building 10,800,000 Adjusted total gain 200,000 Fair value of buildin, 18,000,000 Right retained by seller-lessee equal to lease liability, excluding excess sale price 3,400,000 Right transferred to buyer-lessor 14,600,000 Gain to be recognized (14,600,000/ 18,000 x 7,200,000) 5,840,000 Gain not to be recognized ( 3,400,000 / 18,000 x 7,200,000) 1,360,000 Adjusted total gain 7,200,000 462Books of seller-lessee 1. To record the sale and leaseback: Cash 20,000,000 Right of use asset 2,040,000 uilding 10,800,000 Lease liability 5,400,000 Gain on right transferred 5,840,000 2. To record the annual rental for the first year: Interest expense (12% x 5,400,000) 648,000 Lease liability 852,000 Cash 1,500,000 3. To record the annual depreciation of right of use asset: Depreciation (2,040,000/5 years) 408,000 Accumulated depreciation 408,000 Books of buyer-lessor The buyer-lessor shall apply the operating lease model pecause the lease term is 5 years or only 25% of the 20-year useful life of the underlying asset. Moreover, the present value of lease liability related to rentals of P3,400,000 is less than 90% of the fair value of the asset of P18,000,000. 1, To record the purchase of the building: Building 18,000,000 Financial asset 2,000,000 Cash 20,000,000 9, To record the annual rental related lease: sh 944,444 Rent income 944,444 3. To record the annual rental related to financing: 4 555,556 Financial asset 315,556 Interest income 240,000 5. To record depreciation of building Depreciation (18,000,000 / 20) 900,000 900,000 Accumulated depreciation 463Allocation of the annual rental The annual rental of P1,500,000 is partly rental income and partly payment of the financial asset. Presentvalue Fraction — Allocation Rental income 3,400,000 3,400/5,400,000 944,444 Financial asset 2,000,000 —2,000/5,400,000 __555,556 Total present value 5,400,000 1,500,000 Amortization related to financial asset Date Payment 12% interest Principal Present value 1/1/2022 2,000.000 12/31/2022 555,556 240,000 315,556 1,684,444 12/31/2023 - 555,556 202,133 353,423 1,331,021 12/31/2024 555,556 159,723 395,833 935,188 12/31/2025 555,556 112,222 443,334 491,854 12/31/2026 555,556 63,702 491,854 - December 31, 2022 Payment 555,556, Interest income for 2022 (12% x 2,000,000) (240,000) Principal payment Present value — January 1, 2022 Principal payment Present value — December 31, 2022 464Illustration - Sale price below falr value On January 1, 2099, an entity sold an equipment with remaining life of 8 yonra and Joused it back for 6 years, Sale price 6,000,000 Fair value of equipment 6,000,000 Carrying amount of equipment 4,800,000 Annual rental payable at the end of each year 100,000 Implicit interest rate 6% Present value ofan ordinary annuity of Lat 8% for five poriods 3.90 Measurement of loaso liability Present value rontuls (900,000 x 4.09) 5,691,000 Table of amortization Date Payment 8% interest Principal Prosent value 1/1/2022 \ - 3,691,000 _ 12/31/2022 900,000 287,280 «12,720 2,978,280 12/31/2023 900,000 238,262 @G1,798 2,316,642 12/31/2024 900,000 185,323 714,677 1,601,865 12/31/2025 900,000 128,149 771,861 830,014 12/31/2026 900,000 69,986. 830,014 eeMeasurement of right of use asset IFRS 16, paragraph 101, provides that if the sale price does not equal the fair value of the asset, the seller-lessee shall make adjustment to measure the sale price at fair value. If the sale price is below fair value, the difference is accounted for as prepayment of rental. Fair value of equipment Sale price Excess fair value over sale price Present value of rentals (900,000 x 3.99) Excess fair value — prepayment of rental Total lease liability Carrying amount of equipment Fair value of equipment Cost of right of use asset (4,591,000 / 6,000,000 x 4,800,000) Gain to be recognized Fair value of equipment Carrying amount of equipment Total gain Fair value of equipment Right retained by seller-lessee equal to lease liability including the excess fair value Right transferred to buyer-lessor Gain to be recognized (1,409,000 / 6,000,000 x 1,200,000) Gain not to be recognized (4,591,000 / 6,000,000 x 1,200,000) Total gain 466 6,000,000 5,000,000 1,000,000 3,591,000 1,000,000 4,591,000 4,800,000 6,000,000 6,000,000 4,800,000 1,200,000 6,000,000 4,591,000 1,409,000 281,800 918,200 1,200,000Books of seller-lessee 1, To record the sale and lenseback: Cash 6,000,000 Right of use asset 4,672,800 Equipment 4,800,000 Lease liability 8,691,000 Gain on right transforred 281,800 2. To record the annual rental for the first year: Interest expense 287,280 Lease liability 612,720 Cash 900,000 3. To record the annual depreciation of right of use asset: Depreciation (3,672,800 /5 years) 734,660 Accumulated depreciation 734,660 Books of buyer-lessor The buyer-lessor shall apply the operating lease model because the lease term of 5 years is less than 75% of the g-year useful life of the underlying asset. Moreover, the present value of rentals of P4,591,000 is less than 90% of the fair value of 6,000,000. 1. To record the purchase of the equipment: Equipment 5,000,000 8 Cash 5,000,000 2, To record the annual rental: Cash 900,000 Rent income 900,000 3. To record annual depreciation of equipment: Depreciation (5,000,000 /8) 625,000 625,000 Accumulated depreciation 467Illustration - Sale price at fair value with loss On January 1, 2022, an entity sold a building with remaining life of 25 years and immediately leased it back for 3 years, Sale price at fair value 10,000,000 Carrying amount of building 12,000,000 Annual rental payable at the end of each year 500,000 Implicit interest rate 8% Present value of an ordinary annuity of 1 at 8% for three periods 2.58 Measurement of lease liability Present value of rentals (500,000 x 2.58) 1,290,000 Table of amortization Date Payment 8% interest Principal Present value 1/1/2022 1,290,000 12/31/2022 500,000 103,200 396,800 893,200 12/31/2023 500,000 71,456 428,544 464,656 12/31/2024 500,000 35,344 464,656 - Measurement of right of use asset Carrying amount of building 12,000,000 Sale price at fair value 10,000,000 Cost of right of use asset (1,290,000 / 10,000,000 x 12,000,000) 1,548,000 468Loss to be recognized Sale price Carrying amount of building Total loss Fair value of building Right retained by seller-lessee equal to lease liability Right transferred to buyer-lessor Loss to be recognized (8,710,000 / 10,000,000 x 2,000,000) Loss not to be recognized (1,290,000 / 10,000,000 x 2,000,000) Total loss Books of seller-lessee 1. Cash 10,000,000 Right of use asset 1,548,000 Loss on right transferred 1,742,000 Building Lease liability 2. Interest expense 103,200 Lease liability 396,800 Cash Depreciation (1,548,000 /3) 516,000 Accumulated depreciation Books of buyer-lessor 1. Building 10,000,000 Cash 2. Cash 500,000 Rental income 3. Depreciation (10,000,000 / 25) 400,000 Accumulated depreciation 469 10,000,000 12,000,000 (2,000,000) 10,000,000 1,290,000 8,710,000 1,742,000 258,000 2,000,000 12,000,000 1,290,000 500,000 516,000 10,000,000 500,000 400,000Transfer of asset is not a sale IFRS 16, paragraph 103, provides that if the transfer of an asset by the seller-lessee does not satisfy the requirements for the recognition of a sale: a. The seller-lessee shall continue torecognize the transferred asset and shall recognize a financial liability equal to the transfer proceeds. The entry is debit cash and credit lease liability for the transfer proceeds. The- rental or lease payment is accounted for as part payment of interest expense and part payment of the principal lease liability. The interest is computed based on the implicit interest rate using the effective interest method. b. The buyer-lessor shall not recognize the transferred asset but shall recognize a financial asset equal to the transfer proceeds. The entry is debit lease rceivable and credit cash. The rental or lease payment from the seller-lessee is accounted for as part collection of interest income and part collection of the principal lease receivable. 470QUESTIONS 1. Define a sale and leaseback transaction. Explaih why an original owner may enter into a sale and leaseback transaction, ~ What is the important consideration in accounting for sale and leaseback transaction? : Explain the computation of cost of right of use asset in a sale and leaseback transaction. = Explain the computation of gain or loss on right transferred in a sale and leaseback transaction. a Explain the accounting procedure when the sale price is at fair value. a Explain the accounting procedure when the sale price is above fair value. nm g, Explain the accounting procedure when the sale price is below fair value. 9, Explain the accounting procedure when the sale price is at fair value and there is an indicated loss. 10, Explain the accounting for a transfer of asset that is not asale. 471PROBLEMS Problem 15-1 (ACP) At the beginning of current year, German Company sold an equipment to Sterling Company for P1,200,000 which is the fair value of the equipment. The equipment had a cost of P2,500,000, carrying amount of P 1,000,000 and remaining useful life of 5 years. On the same day, German Company leased back the equipment for one year for an annual rental of P300,000 payable at the beginning of the year. German Company had no option to renew or repurchase the equipment. Required: Prepare journal entries for the current year to record the sale and leaseback transaction on the books of German Company and Sterling Company. Problem 15-2 (ACP) At the beginning of current year, Canada Company sold a machine with a remaining useful life of 10 years to Saigon Company and simultaneously leased it back for 3 years. The leaseback was appropriately classified as low value lease. Sale price 500,000 Machinery 600,000 Accumulated depreciation 120,000 Annualrental ~~ 100,000 Required: Prepare journal entries to record the sale and leaseback transaction on the books of Canada Company and Saigon Company for the current year. 472 .Problem 15-3 (rRs) At the beginning of current year, Juan Company sold a _ machine and immediately leased it back at market rental. The details of the sale and leaseback were: 5,000,000 Sale price at fair value Fair value of machine 5,000,000 Carrying amount of machine 4,500,000 Annual rental payable at the end of each year 600,000 Remaining life of machine 10 years Lease term 5S years Implicit interest rate : 10% Present value of an ordinary annuity of 1 at 10% 3.791 for five periods The leaseback provided for neither transfer of title to the Jessee nor a purchase option that is reasonably certain to be exercised. Required: L 2. Compute the initial measurement of lease liability. Compute the cost of right of use asset. Determine the gain on right transferred to the buyer-lessor. Prepare journal entries on the books of seller-lessee for the current year. Prepare journal entries on the books of buyer-lessor for the current year. =Problem 15-4 (IFRS) At the beginning of current year, Falcon Company sold a machine and immediately leased it back. The following data related to the sale and leaseback transaction: Sale price at above fair value 6,000,000 Fair value of machine 5,000,000 Carrying amount of machine 4,500,000 Annual rental payable at the end of each year 800,000 Remaining life of machine 10 years Lease term 5 years Implicit interest rate 12% Present value of an ordinary annuity of 1 at 12% : for five periods 3.60 There was no transfer of title to the lessee nor purchase option that is reasonably certain to be exercised. Required: 1. Compute the initial lease liability. 2. Compute the cost of right of use asset. 3. Determine the gain on right transferred to buyer-lessor. 4. Prepare journal entries on the books of seller-lessee for the current year. 5. Prepare journal entries on the books of buyer-lessor for the current year. 474Problem 15-5 (IFRS) At the beginning of current year, Hazel Company sold a machine and immediately leased it back. The entity provided the following data regarding the sale and leaseback transaction: Sale price at below fair value 4,000,000 Fair value of machine 4,500,000 Carrying amount of machine 3,600,000 Annual rental payable at the end of each year 500,000 Remaining life of machine 10 years Lease term 3years Implicit interest rate 6% Present value of an ordinary annuity of 1 at 6% for 3 periods 267 The lease provided for neither transfer of title to the lessee upon lease expiration nor a purchase option that is reasonably certain to be exercised. Required: 3, Compute the initial lease liability. * 2, Compute the cost of right of use asset. 3, Determine the gain on right transferred to buyer-lessor. 4, Prepare journal entries on the books of seller-lessee for the current year. Prepare journal entries on the books of buyer-lessor for the current year. oProblem 15-6 (IFRS) At the beginning of current year, World Company sold a machine and immediately leased it back. The entity provided the following data regarding the sale and leaseback transaction: Sale price at fair value 5,000,000 Carrying amount of machine : 6,500,000 Annual rental payable at the end of each year 300,000 Lease term : Ayears Remaining life of machine 20 years Implicit interest rate 6% Present value of an ordinary annuity of 1 at 6% for four periods : 3.465 “Required: 1. Compute the initial lease liability. 2. Compute the cost of right of use asset. 3 3. Determine the loss on right transferred to buyer-lessor. 4. Prepare journal entries on the books of seller-lessee for the current year. 5. Prepare journal entries on the books of buyer-lessor for the current year. : Problem 15-7 (IFRS) At the beginning of current year, Universal Company sold an equipment with remaining life of 10 years and leased it back immediately for 3 years. Sale price 1,200,000 Carrying amount of equipment 2,500,000 Annual rental payable at the end of each year 500,000 Implicit interest rate 1% Present value of an ordinary annuity of 1 at 12% for three periods 2.40 It was reliably determined that the transfer of the asset by the seller-lessee does not satisfy the recognition of a sale. Required: Prepare journal entries on the books of seller-lessee and buyer-lessor for the current year. 476Problem 15-8 (AICPA Adapted) ie 7 ennig of current year, Racquel Company sold a the followin qrumediately leased it back. The entity provided ‘ing data regarding the sale and leaseback transaction: Sale price at above fai Fairvalue of building: a! 8.000'000 Corrying amount of building 7,200,000 Us nit payal , Remaining life of building °° oma 1 each ee abyears Lease term ayeara Implicit interest rate “2% Present value of an ordinary annuity of Lat 12% for four periods 3.037 1. What amount should be reported as initial lease liability? a. 1,822,200 b. 2,400,000 c. 1,200,000 d. 1,000,000 2. Se should be reported as cost of right of use asset? a. 1,639,980 b. 739,980 c. 822,200 d. 411,100 3. What amount should be reported as gain on right transferred to buyer-lessor? 800,000 720,000 717,780 400,000 : ae op 4, What amount should be reported as annual rental income of the buyer-lessor? a. 600,000 b. 329,272 ce. 270,728 d. 300,000 477Problem 15-9 (IFRS) onni 1d At the beginning of current year, Pearl Company Sold a machine with remaining life of 10 years and immediately leased it back for 5 years at the prevailing market rental Sale price at fair value Reeve! Carrying amount of equipment 000,000 Annual rental payable at the end of each year 1,000,000 Implicit interest rate 6% Present value of an ordinary annuity of 1 at 6% for 5 periods 421 1. What amount should be reported initially as cost of right of use asset? a. 3,368,000 b. 3,290,000 c. 6,000,000 d. 3,750,000 2. What amount should be reported as gain on right transferred? a. 658,000 b. 826,400 c. 750,000 d. 375,000 3. What amount should be reported as annual depreciation of the right of use asset? a. 673,600 b. 336,800 c. 842,000 d. 421,000 4. What amount should be reported as lease liability at year-end? a. 4,210,000 b. 3,290,000 c. 3,462,600 d. 3,210,000 478Problem 15-10 (IFRS) At the beginnin, rs ning of current year, Globe Company sold machine and immediately tensed it back Sale price at fair value re amount of machine 000,000 nnual rental payable at the end of each ye "500, hanve tern ae yeaa Remaining life of machine 2 Implicit interest rate * a PV ofan ordinary annuity of 1 at 6% for 6 periods 4.21 1. What amount should be rted ini i of nae aeset? reported initially as cost of right a. 2,105,000 b. 2,526,000 c. 2,895,000 d. 1,500,000 2, What amount should be rep e i transferred to the buyer lesson 4 ae Tose on right a, 579,000 b. 505,200 c. 500,000 d 0 3. What amount should be reported as lease liability at year-end? 2,177,560 a. b. 1,605,000 ce. 1,731,300 d. 2,105,000 4. What amount should be reported as net annual rental income of the buyer-lessor? 373,700 200,000 500,000 . 250,000 Boop 479Problem 15-11 (IFRS) At the beginning of current year, Easy Company od an equipment with remaining life of 10 years and imme ately leased it back for 4 years at the prevailing market rental. Sale price at fair value Acne Carrying amount of equipment 000, Annual rental payable at the end of each year 1,009,000 Implicit interest rate 10% Present value of an ordinary annuity of fe Lat 10% for four periods 1. What amount should be reported as initial lease liability? a. 3,170,000 b. 4,000,000 c. 2,000,000 d. 0 2. What amount should be reported as cost of right of use asset? » a. 2,377,500 b. 3,170,000 ¢. 3,500,000 d. 0 3. Whta amount should be reported as gain on right transferred? a. 1,207,500 b. 2,000,000 c. 792,500 d. 500,000 4. What amount should be reported as annual depreciation of the lessee? a. 594,375 b. 800,000 ©. 317,000 d. 400,000 480Problem 15-12 (IFRS) At the beginning of current year, Judy Company sold a : aan with remaining useful life of 30 years and immediately leased it back for 5 years. Sale price at below fai; Fair value of building’ (2! 30'000.000 Carrying amount of building 24,000,000 nual rent K x iasice ti payable at the end of each year 1,000,000 resent value of an ordi i Lat 12% for S pone annuity of 3.60 1. What amount should be reported as initial lease liability? a. 3,600,000 ' b. 4,000,000 : c. 4,800,000 d. 0 wee ane should be reported as, cost of right of usé a. 3,000,000 b. 4,320,000 c. 5,760,000 d. 6,720,000 What amount should be A transferred? reported as loss on right a. 4,000,000 b. 2,880,000 e. 5,760,000 d. 6,720,000 What amount should be reported as interest expense of the seller-lessee for the euraae year? 7 a. 120,000 b. 576,000 c. 672,000 d. 432,000 What amount should be reported as net annual rent income of the buyer-lessor? a. 400,000 b. 200,000 ec. 300,000 d. 100,000 481Problem 15-13 (AICPA Adapted) At the beginning of current year, Lee Company sold equipment to an unaffiliated entity at the fair value of 5,000,000. The equipment had a carrying amount of P4,500,000 and a remaining life of 10'years. That same day, Lee Company leased back the equipment at P15,000 per month for 2 years with no option to renew the lease or repurchase the equipment. The present value of the lease payments using the appropriate interest rate was P320,000 on the date of sale. 1. What amount should be recognized as initial lease liability? a. 320,000 b. 500,000 c. 360,000 d. 180,000 2. What amount should be recognized as cost of right of use asset? a. 360,000 b. 288,000 c. 320,000 d. 450,000 3. What amount should be recognized as annual depreciation of the right of use asset? a. 144,000 b. 160,000 c. 180,000 d. 250,000 4. What amount should be recognized as gain on right transferred to the buyer-lessor? 500,000 468,000 250,000 0 : aeop 482Problem 15-14 (IFRS) ee pee nnie of current year, Baker Company sold an e n ‘emainini i immediately eased back or 8 yeates Sale price at above fair Fair value ofequipment. 5,000°000 Carrying amount of equipment 4'500,000 ‘anual rental payable at th "500, Implicit interest rate ea tio Present value of an ordinary annuity of 1 at 10% for 5 periods 3.79 1. What amount should b i initi lability? ie recognized as initial lease a. 5,000,000 b. 5,700,000 c. 1,895,000 d. 1,195,000 g. What amount should be recognized as cost of right of use asset? 5,000,000 4,500,000 1,075,500 1,705,500 Boop 3, What amount should be recognized as gai i transferred to the buyer-lessor? gain on right a. 250,000 b. 500,000 c. 380,500 d, 119,500 4. What amount should be recognized as annual rental income of the buyer-lessor? a. 184,697 b. 315,303 ec. 500,000 a. 0 483Problem 15-15 (AICPA Adapted) “ia Cuba Company owned a building costing P5,000,000 with P3,400,000 of accumulated depreciation. The building had a remaining useful life of 15 years. At the beginning of current. year, the building was sold to Mexico Company at the fair value of P2,400,000 and leased back over an 8-year term with annual lease payment of 300,000 to be made at the end of each year. The interest rate implicit in the lease is 6%. The present value of an ordinary annuity of 1 at 6% for eight periods is 6.21. 1. What amount should be reported as initial lease liability? 1,863,000 1,600,000 2,400,000 5,000,000 2. What amount should be reported as cost of right of use asset? a. 1,200,000 b. 1,242,000 c. 1,600,000 d. 3,400,000 pose 3. What amount should be reported as gain on right transferred? a. 500,000 b. 250,000 c. 179,000 d. 400,000 4. What amount should be reported as net rental income of buyer-lessor? a. 300,000 b. 150,000 ¢. 120,000 d. 140,000 484