= CHAPTER 10 LESSEE ACCOUNTING Basic principles TECHNICAL KNOWLEDGE To know the optional application of operating lease on the part of lessee. To recognize a right of use asset and lease liability in a finance lease. To understand the measurement of a right of use asset. To understand the measurement of a lease liability in a finance lease. 308LEASE IFRS 16 is the new lease standard. Under Appendix A of IFRS 16, a lease is defined as a contract or part of a contract that conveys the right to use the underlying asset for a period of time in exchange for consideration. Appendix B9 provides that to be a lease, a contract must convey the right to control the use of an identified asset. Appendix B13 states that an asset is typically identified by being explicitly specified in a contract or implicitly specified when made available to the customer. For example, a physically distinct portion of an asset such as floor of a building could be considered an identified asset. Right to control the use of an asset A contract conveys the right to control the use of an asset if throughout the priod of use, the customer has the right to: a. Obtain substantially all of the economic benefits from the use of the identified asset. The customer can obtain substantially all of the economic benefits from the use of the asset by having exclusive use of the asset throughout the period of use. A customer can obtain economic benefits directly or indirectly in many ways, such as using, holding or subleasing the asset. b. Direct use of the identified asset. A customer has the right to direct use of the asset when the customer has the right to direct how and for what purpose the asset is used throughout the period of use. 309Finance lease model for lessee } IFRS 16, paragraph 22, provides that at the commencement date, a lessee shall recognize a right of use asset and a leage liability. Simply stated, a lessee is required to initially recognize q right of use asset for the right to use the underlying asset over the lease term and a lease liability for the obligation to make payments. All leases shall be accounted for by the lessee as a finance lease under the new lease standard. ‘The underlying asset is the subject of a lease for which the right to use that asset has been provided by the lessor to the lessee, The lessee is the entity that obtains the right to use an underlying asset for a period of time in exchange for consideration. The lessor is the entity tht provides the right to use Po underlying asset for a period of time in exchange for consideration. Operating lease model for lessee IFRS 16, paragraph 5, provides that a lessee is permitted to make an accounting policy election to apply the operating lease accounting and not recognize an asset and lease liability in two optional exemptions. a. Short-term lease b. Low value lease Stated differently, a lessee may or may not apply the operating lease accounting if the lease is short-term or if the underlying asset is of low value. Paragraph 6 provides that if the lessee elects to apply the Operating lease accounting under the two exemptions, the lessee shall recognize the lease payments as an expense in either a straight line basis over the lease term or another systematic basis. The lessee shall apply another systematic basis if this is more representative of the pattern of the lessee's benefit. Under the operating lease model, the periodic rental is simply recognized as rent expense on the part of the lessee. 310Short-term lease Appendix A defines a short-term lease as a least with a term of 12 months or less at the commencement date of the lease. : lease that contains a purchase option is not a short-term lease. The election for short-term lease shall be made by class of underlying asset. A class of underlying asset is a grouping of underlying assets of similar nature and use in an entity's operations. Low value lease How much is low value of the underlying asset? The new lease standard does not provide for a quantitative threshold for low value asset. Low value asset is a matter of professional judgment. Appendix B3 states that a lessee shall assess the value of an underlying asset based on the value of the asset when it is new regardless of the age of the asset being leased. A lease of an underlying asset does not qualify as a low value lease if the nature of the asset is such that the asset is typically not of low value when new. For example, a lease of car would not qualify as low value lease because a new car would typically not be of low value Typically low value underlying assets include personal computers, office furniture and equipment. IFRS 16, paragraph 8, provides that the election for low value lease is made on a lease by lease basis., Finance lease ~ Lessee Under Appendix A, a finance lease is defined as a lease that transfers substantially cin of the risks and rewards incidental fo ownership of an wnderlying asset. As stated earlier, all leases shall be accounted for by the lessee as finance lease. At the commencement date, the lessee shall recognize a right of use asset and lease liability. Initial measurement of right of use asset A right of use asset is defined as an asset that represents the right of a lessee to use an underlying asset over the lease term in a finance lease. IFRS 16, paragraph 23, provides that the lessee shall measure the right of use asset at cost at commencement date. Paragraph 24 provides that the cost of right of use asset comprises: a. The present value of lease payments or the initial measurement of the lease liability b. Lease payments made to lessor at or before commencement date, such as lease bonus, less any lease incentives received c. Initial direct costs incurred by the lessee d. Estimate of cost of dismantling, removing and restoring the underlying asset for which the lessee has a present obligation Lease incentives are payments by the lessor to the lessee associated with a lease or the reimbursement or assumption by the lessor of the costs of the lessee. For example, as an incentive to the lessee for entering into the lease, the lessor agrees to reimburse the lessee for the commission paid by the lessee to a broker. 312The lease incentives should be deducted from the cost of the right of use asset, Initial direct costs are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained. Leasehold improvements are not initial direct costs and not included in the cost of the right of use asset. Leasehold improvements are separately accounted for as property, plant and equipment and depreciated over the shorter between the lease term and the life of the improvements. Any security deposit refundable upon the lease expiration is accounted for as an asset by the lessee. Subsequent measurement of right of use asset IFRS 16, paragraph 29, provides that a lessee shall measure the right of use asset applying the cost model. To apply the cost model, the lessee shall measure the right of use asset at cost less any accumulated depreciation and impairment loss. Moreover, the carrying amount of the right of use asset is adjusted for any remeasurement of the lease liability. Presentation of right of use asset Paragraph 47 provides that the lessee shall present the right of use asset as a separate line item in the statement of financial position. As an alternative, the lessee may include the right of use asset in the appropriate line item within which the corresponding underlying asset world be presented if owned. For example, the right of the use asset related to equipment may be included within property, plant and equipment. However, disclosure is required that the property, plant and equipment include right of use asset. 313Other measurement models a. Paragraph 34 provides that if a lessee applies the fair value model in measuring investment property, Be f use shall also apply the fair value model to the rig : use asset that meets the definition of investment property. Paragraph 35 further provides that if the right of use asset relates to a class of property, plant and snodel, to which the lessee applies the revaluation mo Ee lessee may elect to apply the revaluation model to a , the right of use assets that relate to that class of property, plant and equipment. Depreciation of right of use asset The lessee shall apply normal depreciation policy for right of use asset. IFRS 16, Paragraph 32, provides that the lessee ae depreciate the right of use asset over the useful life of the underlying asset under the following conditions: a. The lease transfers ownership of the underlying asset to the lessee at the end of lease term. : ; oe rchase The lessee is reasonably certain to exercise a purcha option. If there is no transfer of ownership to the lessee or if the purchase option is not reasonably certain to be exercised, the lessee shall depreciate the right of use asset over the shorter between the useful life of the asset and the lease term.Measurement of lease liability IFRS 16, paragraph 26, provides that at the commencement date, the lessee shall measure the lease liability at the present value of lease payments. The lease payments shall be discounted using the interest rate implicit in the lease. If the implicit interest rate cannot be readily determined, the incremental borrowing rate of the lessee is used. The interest rate implicit in the lease is the interest rate that causes the present value of the lease payments and the unguaranteed residual value to equal the fair value of the underlying asset and initial direct costs of the lessor. The lessee's incremental borrowing rate is the rate of interest that the lessee would have to pay to borrow funds necessary to obtain a similar asset over a similar term and similar security. Components of lease payments The lease payments comprise the following payments for the right to use the underlying asset during the lease term: a. Fixed lease payments b. Variable lease payments c. Exercise price of a purchase option if the lessee is reasonably certain to exercise the option d. Amount expected to be payable by the lessee under a residual value guarantee e. Termination penalty if the lease term reflects the exercise of a termination optionDefinitions Fixed payments are payments made by the ine fhe lessor for the right to use an underlying asset during the lease term. Variable payments are payments made by the lessee forthe right to use the underlying asset during the lease term that vary because of changes in facts or circumstances occurring after the commencement date other than passage of time. Residual value guarantee is the guarantee made to the lessor by a party unrelated to the lessor that the value of an underlying asset at the end of the lease term would be at least a specified amount. Unguaranteed residual value is that portion of the ee value of the underlying asset, the realization of which by the lessor is not assured or is guaranteed solely by a party related to the lessor, Executory costs are ownership expenses such as maintenance, taxes and insurance for the underlying asset. Such executory costs are expensed immediately when incurred. Lease term Appendix A defines lease term as the noncancelable period for which the lessee has the right to use the underlying asset together with both of the following: a. Period covered by an option to extend the lease if the lessee is reasonably certain to exercise the extension option. b. Period covered by an option to teminate the lease if the lessee is reasonably certain not to exercise the termination option. 316Disclosures ~ Lessee A lessee shall disclose the following for the reporting period: 1. Depreciation charge for right of use assets by class of underlying asset 2. Interest expense on lease liability 3. The expense relating to short term leases excluding the expense relating to leases with a term of one month or less i 4. The expense relating to low value leases excluding the expense relating to low value leases with term of one month or less 5. The expense relating to variable lease payments not included in the measurement of lease liability Income from subleasing right of use assets Total cash outflow for leases Addition to right of use assets The carrying amount of right of use assets at the end of the reporting period by class of underlying asset Sono 10. Short: term leases or low value leases accounted for as operating lease Additional disclosures - Alessee shall disclose additional qualitative and quantitative information about leasing activities necessary to help users of financial statements to assess the effect of leases on financial position, financial performance and cash flows. 1. The nature of the lessee's leasing activities 2. Future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liability. a. Variable lease payments b. Extension option and termination option c. Residual value guarantee d. Leases not yet commenced to which the lessee is committed 3. Restrictions or covenants imposed 317Illustration - Transfer of title to lessee On January 1, 2022, an entity leased a machinery for 4 yearg which is the same as the useful life of the 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 is determined using a 12% implicit interest rate. 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. At the commencement date of the finance lease, the lessee is required to recognize a right of use asset and a lease liability. 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 asset is based on the useful life of the underlying asset. Accordingly, the annual depreciation of the right of use asset is normally recorded. Depreciation 75,982 Accumulated depreciation 75,932 (P303,730/ 4 years)Accounting for fixed payment The annual rental or fixed payment of P100,000 shall be treated as payment inci liability and the interest thereon for the principal lease y The interest is the difference between the face amount 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. Table of amortization Date Payment Interest Principal Present value Jan. 1, 2022 303,730 Dec. 31,2022 100,000 36,448 63,552 240,178 Dec. 31,2023 100,000 -- 28,827 71,179 168,999 Dec. 31,2024 100,000 —-20,280 79,720 89,279 Dec. 31,2025 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 2022, P303,730 times 12% equals P36,448. Principal is the portion of the rental payment after deducting interest. Thus, for 2022, 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, 2022, P303,730 minus P63,552 equals 240,178. Journal entries 2022 : Dec. 31 Interest expense 36,448 Lease liability 63,552 Cash 100,000 2023 Dec. 31 Interestexpense 28,821 Lease liability «71,179 Cash 100,000 3191 ‘I Presentation Ifa statement of financi ition is prepared on Decem| cial positio! 31, 2022, the right of use Baa would be reported as @ separaig line item under noncurrent assets. ' 303,73 Right of use asset 1780 Accumulated depreciation * 75,982) Carrying amount 221299 The lease liabilit: ld be reported as partly current in y woul ye rep we E the amount of P71,179 equal to the principal payment on December 31, 2023 and partly noncurrent for the remaining Portion of P168,999. Illustration - Certain purchase option On January 1, 2022, Lessee Company leased a machine with the following pertinent information: Fixed rental payment at the end of each year 1,000,000 Lease term 10yeara Useful life of machine Srey Incremental borrowing rate : tee 12% Implicit interest rate . Present value of an ordinary annuity of 1 for 10 periods at uM 5.216 12% 5.650 Present value of 1 for 10 periods at 14% 0.270 12% 0.322 Lessee Company had the option to purchase the machine upon the lease expiration on January 1, 2032 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 useful life is P600,000. 320Cost of right of use asset Present value of lease payments (1,000,000 6.65) 5,650,000 Present value of purchase option (500,000 x .322) 161,000 Total lease liability : 5,811,000 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 2022 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, 2022: Interestexpense 697,320 Lease liability 302,680 Cash 1,000,000 Lease liability - January 1, 2022 5,811,000 Payment on December $1, 2022 1,000,000 Interest for 2022 (12% x 5,811,000) (697,320) _ 3 Lease liability - December 31, 2022 3. To record the annual depreciation: Depreciation 434,250 Accumulated depreciation (5,211,000 / 12) 434,250 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 at the end of the 12-year useful life or P5,211,000. 321Table of amortization Date Payment Interest Principal Present value tr Panea 5,811,000 12/31/2022 1, 302,680 eee 315 12/31/2023 ooo oy 660998 339,002 Arsaaes 12/81/2024 1,000,000 620,318 379,682 daatace 12/31/2025 1,000,000 574,756 426,244 eee 12/31/2026 1,000,000 523,727 476,273 sastond 12/31/2027 1,000,000 466,574 533,426 arena 12/31/2028 1,000,000 402,563 597,437 2,757,287 12/31/2029 1,000,000 330,871 669,129 2,088,128 12/31/2030 1,000,000 250,575 749,425 age 12/31/2031 1,000,000 161,297 838,703 Payment represents the fixed annual rental payment. Interest is equal to the preceding present value multiplied by 12%. Thus, for 2022, P5,811,000 times 12% equals P697,320. Principal is equal to the payment minus the interest. Thus, on December 31, 2022, 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, 2022, P5,811,000 minus P302,680 equals P5,508,320. Exercise of the purchase option If accounts are properly posted, the table of amortization will show the balance of the lease liability on December 31, 2031 at P500,000 equal to the purchase option. When the purchase option is exercised on January 1, 2032 which is the lease expiration, the payment is simply recorded as full settlement of the lease liability. Lease liability 500,000 Cash 500,000 822Nonexercise of purchase option However, if for an: ion i ees y 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, 2032, Accumulated depreciati 4,342,600 Lease liability oa “500,000 ‘Loss on finance lease 968,500 Right of use asset 5,811,000 Right of use asset 5,811,000 Accumulated depreciation (484,250 x 10 years) 4,342,500 Carrying amount — January 1, 2032 1,468,500 Lease liability - January 1, 2032 500,000 Loss on finance lease 968,500 Illustration - Residual value guarantee On January 1, 2022, Easy Company leased an equipment with the following information: Fixed annual payment at the end ofeach lease year —_ 1,000,000 Lease term 4years Useful life of equipment 5 years Implicit interest 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 guaranteed a P200,000 residual value on December 31, 2025 to the lessor. As long as there is a residual value guarantee, there is no more purchase option because the equipment shall revert to the lessor upon the expirciion of the lease on December 31, 2025. 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 306,470 3238Tatle of amortization principal Present valug Date Payment Interest 8,306,470 1/1/2022 . f 12/31/2022 1,000,000 930,647 669,353 Tenens 12/31/2023 1,000,000 263,711 736,289 100 or0 12/31/2024 1,000,000 190,082 809,918 1,090,910 12/31/2025 1,000,000. 109,090 890,910 om December 31, 2022 Payment 1,000,000 Interest expense (10% x 3,306,470) (330,647) Applicable to principal 669,353 Lease liability or present value on January 1, 2022 3,306,470 Principal payment (669,353) Lease liability — December 31, 2022 2,637,117 Journal entries 1 To record the acquisition of the equipment: Right of use asset 3,306,470 Lease liability 3,306,470 To record the first annual payment on December 31, 2022: Interest expense 330,647 Lease liability 669,353 Cash 1,000,000 To record the annual depreciation: Depreciation (3,106,470 / 4) 776,617 Accumulated depreciation 776,617 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. 324Return of equipment to lessor on December 31, 2025 1 Horeca the final annual payment on December 31, Interest expense co 109,090 Lease liability 890,910 _ Cash : 1,000,000 2. To record the return of the equipment to the lessor: Accumulated depreciati 7 Lease liability as 000 Right of use asset : 3,306,470 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 or returned 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 equal 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, 2025 is only P150,000 which is P50,000 lower than the residual value guaranteee, an additional entry to record the loss is necessary. 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.Illustration ~ Rental payable in advance On January 1, 2022, Simple Company leased an equipment with the following information: Annual fixed payment in advance at the beginning of each lease year maeinn Initial direct cost paid . Feo Lease incentive received ac aa Residual value guarantee eee Lease term pecans Useful life of equipment te Implicit interest rate i Present value of an annuity of 1 in advance at 8% for 5 periods oes Present value of 1 at 8% for 5 periods oc Computation PV of rentals (1,000,000 x 4.3121) 4812,100 PV of residual value guarantee (300,000 x .6806) — eee Lease liability — January 1, 2022 eee Initial direct cost Tape Lease incentive received ow) Cost of right of use asset 4,616,280 The initial direct cost and lease incentive received are included in the measurement of the cost of right of use asset but excluded in the measurement of lease liability. The initial direct cost is added and the lease incentive received is deducted in computing the cost of right of use asset. Initial direct cost 250,000 Lease incentive received (150,000) Net cash payment at the start of lease 100,000 326Table of amortization Date Payment Interest Principal Present value 1/1/2022 4,516,280 1/1/2022 1,000,000 - 1,000,000 3,516,280 1/1/2023 1,000,000 281,302 718,698 2,797,582 1/1/2024 — 1,000,000 223,807 776,193 2,021,389 1/1/2025 — 1,000,000 161,711 838,289 1,183,100 1/1/2026 —_ 1,000,000 94,648 905,352 277,748 1/1/2027 300,000 22,252 277,748 - Journal entries 2022 1. To record the acquisition of the equipment under a finance lease: Right of use asset 4,616,280 Lease liability 4,516,280 Cash (250,000 — 150,000) 100,000 2. To record the first payment on January 1, 2022: Lease liability 1,000,000 Cash 1,000,000 Since the annual payment is in advance, the first payment is applicable only to the principal lease liability. 3. To accrue the interest for 2022 on December 31, 2022: Interest expense 281,302 Accrued interest payable > 281,302 4. To record the depreciation for 2022: Depreciation (4,316,280 / 5) 863,256 Accumulated depreciation 863,256 Cost 4,616,280 Residual value guarantee (300,000) Depreciable amount 16,280 The depreciation is based on the lease term of 5 years because there is a residual value guarantee. . 3272023 1. To-record the second payment on January 1, 2023: Accrued interest payabl 281,302 Lease liability 718,698 Cash. 1,000,009 2. To accrue the interest for 2023 on December 31, 2023; Interest expense 223,807 Accrued interest payable 223,807 3. To record the depreciation for 2028: Deprediation 863,256 .ccumulated depreciation 863,256 The equipment is returned by the lessee to the lessor upon the lease expiration on January 1, 2027. On such date, the fair value of the asset is P400,000 which is higher than the guaranteed residual value of P300,000. In such a case, the equipment is simply returned by the lessee to the lessor. Accumulated depreciation (863,256 x5) 4,316,280 Lease liability 277,748 Accrued interest payable 22,252 Right of use asset 4,616,280 The excess of P100,000 of the fair value over the residual value guarantee is not accounted for by the lessee because there is no cash settlement.Illustration - Unguaranteed residual value On January 1, 2022, Ezzy Company leased a building with the following information: Annual rental payable at the end of each year 1,500,000 Unguaranteed residual value 1,000,000 Lease bonus to lessor 335,000 Present value of restoring the asset aa required by contract discounted at 8% 680,000 Annual executory cost paid 100,000 Lease term £ 5 years Useful life of equipment B years Implicit interest rate 10% Present value of an ordinary annuity of | at 10% for 5 periods 3.79 Present value of 1 at 10% for 5 periods 0.62 The lease provides for neither a transfer of title to the lessee nor a purchase option. Thus, the equipment shall revert to the lessor upon the expiration of lease on January 1, 2027. Computation Lease liability (1,500,000 x 3.79) 5,685,000 Lease bonus to lessor 335,000 Present value of restoration cost 680,000 Total cost of right of use asset 6,700,000 The present value of the residual value is not included in the lease liability because it is unguaranteed. The restoration cost must be required by contract or law and included in the cost of right of use asset at present value. The annual executory cost is treated as outright expense. 329Journal entries for 2022 1. To record the acquisition of the building under a financg lease: Right of use asset 6,700,000 iabili 5,685,00 Lease liability oe 10 Estimated liability for restoration 680,000 2. To record the payment of executory cost: Executo1 100,000 nutory cost a 3. To record the first rental payment on December 31, 2022; Interest 5,000) 568,500 Lease lablbgy * 1% %5 8500 9515600 Cash 1,500,000 4. To record the depreciation for 2022: Depreciation (6,700,000 /5) 1,340,000 Accumulated depreciation 1,340,000 The depreciation is based on the lease term of 6 years which is shorter than the useful life of 8 years because there is neither a transfer of title nor a purchase option. The unguaranteed residual value is ignored in computing the depreciable amount. 5. To record the interest on the liability for restoration cost for 2022: Interest expense (680,000 x 8%) 54,400 Estimated liability for restoration 54,400 Return of equipment to lessor On January 1, 2027, the return of the building to the lessor is simply recorded. Accumulated depreciation (1,340,000.x 5) 6,700,000 Equipment 6,700,000 The same journal entry is made regardless of whether the fair value of the asset is higher or lower than the estimated” unguaranteed residual value. The lessee has no financial obligation but to return the underlying asset to the lessor. 330Actual purchase of underlying asset An entity can actually purchase an equipment that it has been leasing under a finance lease. The cost of the asset purchased is equal to the carrying amount of the leased asset plus t minus the balance oj the lease liability,” °° PME” ’ An entity purchased an equipment that it had been leasing under a finance lease for P4,000,000. The balances of certain accounts on the date of actual purchase were: Right of use asset 5,000,000 Accumulated depreciation 1,500,000 Lease liability 3,800,000 Journal entry Equipment 3,700,000 Accumulated depreciation 1,500,000 Lease liability 3,800,000 Right of use asset e 5,000,000 Cash 4,000,000 Right of use asset 5,000,000 Accumulated depreciation (1,500,000) Carrying amount 3,500,000 Cash payment 4,000,000 Total consideration 7,500,000 Lease liability ’ (3,800,000) Cost of equipment actually purchased 3,700,000QUESTIONS ye XN @ © ow 13. 14. - Define a lease under the new lease standard. Explain the right to control the use of an underlying asset in a lease. . Explain the finance lease model on the part of the lessee. . Explain underlying asset, lessee and lessor. . Explain the operating lease model in the part of the lessee. . What are the two conditions in order that a lessee may apply the operating lease model? . Explain a short-term lease. . Explain a low value lease. . Define a finance lease. . Explain the initial measurement of a right of use asset in a finance lease. . What are the components of the cost of right of use asset? . Explain the treatment of the following: a. Payment to lessor on or before commencement date . Lease incentive ce. Initial direct cost d. Estimated cost of restoring underlying asset Explain the subsequent measurement of right of use asset. Explain the presentation of right of use asset in the statement of financial position. . Explain the depreciation of right of use asset. . Explain the measurement of lease liability. . Define interest rate implicit in the lease and lessee's incremental borrowing rate. . What are the components of lease payments? . Define residual value guarantee and unguaranteed residual value. ). Define a lease term.PROBLEMS Problem 10-1 (AICPA Adapted) On January 1, 2022, Mixx Company entered into a lease for a new warehouse. Lease payments are P800,000 a year for 5 years, payable in advance starting January 1, 2022. The warehouse had an estimated life of 10 years. The entity paid initial direct cost of P100,000 on January 1, 2022. The realty taxes of P40,000 a year are paid by the entity. The lease provided for neither transfer of title to the lessee upon expiration of the lease term nor.a purchase option. The underlying asset shall revert to the lessor at the expiration of the lease term. The interest rate implicit in the lease is 10%. The relevant present value factors are: PV ofan ordinary annuity of 1 at 10% for 5 periods 3.79 PV ofan annuity of ] in advance at 10% for 5 periods 4.17 Required: Prepare journal entries for 2022 and 2023. Problem 10-2 (AICPA Adapted) On January 1, 2022, Overland Company closed a lease contract for newly constructed terminals and freight storage facilities. Although the terminals have a composite life of 10 years, the lease runs for 5 years with a transfer of title to the lessee upon expiration of the lease. The annual lease payment is P1,000,000 payable at the end of each year starting December 31, 2022. The lessee must also make an annual payment of P75,000 for taxes and P125,000 for insurance. ‘The lessee incurred initial direct cost of P150,000 including P50,000 commission paid to the broker that arranged the lease. As an incentive to the lessee, thelessor agreed to reimburse the lessee for the commission of P50,000. The contract was negotiated to assure the lessor a 10% rate of return. The present value of an ordinary annuity of 1 at 10% for five periods is 3.79. Tequired: Prepare journal entries for 2022 and 2023. 333uF hd Problem 10-3 (AICPA Adapted) On January 1, 2022, Robbin Company leased a machine with the following provisions. Annual lease payment in advance at the beginning of each year, starting January 1, 2022 ioveaet Lease term 14 years Useful life of machine 12% Implicit interest rate in the lease t ods 5.650 PY of an ordinary annuity of | at 12%for 10periods 5.650 PV of an annuity of | in advance at 12% for 10periods 6.528 PV of Lat 12% for 10 periods The entity had an option to purchase the machine on January 1, 2082 by paying P1,000,000. At the commencement date, it is reasonably certain that the purchase option shall be exercised. Required: Prepare journal entries on the books of Robbin Company for 2022 and 2023. Problem 10-4 (AICPA Adapted) = ‘ " i 15-year On January 1, 2022, Veronica Company negotiated a lease for a building with useful life of 20 Rheai aa Jake provided for neither a transfer of title nor a purchase option. Before occupancy, the lessee incurred leasehold improvement of P600,000 with useful life 5 years. The lessee is required to restore the building upon aaa of the lease. The present value of estimated cost o restoration is P644,000 discounted at 7%. Annual payments of P1,000,000 are payable to the lessor on December 31 of each of the 15 years of the lease term. Y The lease was negotiated to assure the lessor a 10% rate of return. PV of an ordinary annuity of 1 at 10% for 15 periods eee PV ofan annuity of 1 in advance at 10% for 15 periods 5. Required: Prepare journal entries on the books of Veronica Company for 2022. 334Problem 10-5 (IAA) On January 1, 2022, Lessee Company entered into a lease with Lessor Company for a new equipment. The lease stipulated that annual payments of P1,000,000 shall be made for five years starting December 31, 2022. Lessee Company guaranteed a residual value of P474,060 at the end of the 5-year period. The equipment shall revert to the lessor at the lease expiration. The implicit interest rate for the lease is 16% after considering the guaranteed residual value. The economic life of the equipment is 10 years. The present value factors at 16% for five periods are: 0.4761 it value of 1” ea 3.2743 present value of an ordinary annuity of 1 Required: Prepare a schedule of the annual payments showing 1 reduction of liability every year. 2, Prepare journal entries on the books of Lessee Company for 2022 and 2023. 3. Prepare journal entry on December 31, 2026, end of lease term, to record the return of the equipment to the lessor. Assume the fair value of the equipment is equal to the guaranteed residual value. 4, Prepare journal entry on December 31, 2026 to record the return of the equipment to the lessor assuming the fair value of the equipment is only P300,000. 5. Prepare journal entry on December 31, 2026 to record the return of the equipment to the lessor assuming the fair value of the equipment is P500,000. 385x we eRe Problem 10-6 (IAA) On January 1, 2022, Lawton Company leased a machinery with an estimated useful life of 8 years. The lease required annual payments of P500,000 beginning January 1, 2022. The contract was a six-year noncancelable lease with a 10% implicit interest rate. PV ofan annuity due of 1 at 10% for six periods 4.7908 PV of 1 at 10% for six periods 0.5645 The lease contains neither a transfer of title to the lessee nor a purchase option. : The entity had a residual value guarantee of P400,000 when the machinery is returned to the lessor upon the lease expiration. Required: 1. Prepare a table of amortization of the lease liability and interest expense 2. Prepare journal entries for 2022 and 2023. 3. Prepare journal entry on January 1, 2028 to record the return of the machinery to the lessor. Assume the fair value of the asset is P450,000. 4. Prepare journal entry on January 1, 2028 to record the return of the machinery to the lessor. Assume the fair value of the asset is P300,000. } j \ | | } } \Problem 10.7 (LFRS) On Docombor 31; 2022, Ja s with the following a Company jawed an eaoment Annual ront payablo in advanco on Decombor 31 of cach your 120,000 Hatimatod rowidual valuo at end of lease term 300,000. Roaidual valuo guarantoo by lonaoe 200,000 Lease term 4ycare Economic life of equipment. 6 yours Implicit intoreat rate ™m% PV of an annuity of 1 in advance at 7% for 4 periods 3.6243 PV of 1 at 7% for 4 periods .7629 Included in the annual rental is an amount of P20,000 to cover reimbursement for insurance paid by the lessor, ‘The directors of Eden Company intended to return the asset to the lessor at the end of the lease term. Required: 1. Prepare a table of amortization of the lease liability and interest expense. 2. Prepare journal entries for 2022 and 2023 on the books of Eden Company. 3. Prepare journal entry to record the return of the equipment to the lessor on December 31, 2026, Assume the fair value of the equipment is P50,000.Problem 10-8 (IAA) Dexter Company had maintained a policy of Kequiring oquipment by leasing, On January 1, 2022, Dextor Company ontored into a longo agrooment for an equipment with useful life of 8 yours, ‘Tho lonso stipulnted an wnnunt rental paymont of P6O0,009 to bo paid every Decombor 31 starting December BL, 2022, The lense contains noithor a transfer of title to the lowweo nor a purchase option. The equipmont had a reaidual value of P300,000 at the end of the 5-year louse torm bul. is unguarantoed by the lessee, Tho implicit interest rate is 12% after considering the unguaranteed residual valuo. Tho present value of an ordinary annuity of 1 at 12% for 6 periods is 3.60. Required: 1. Prepare journal entries on the books of Dexter Company for 2022. 2. Prepare journal entry on December 31, 2026 to record the return of the equipment to the lessor as required by the contract. The fair value of the equipment is P200,000, Problem 10-9 (IAA) Macedon Company leased many assets and capitalized most of the leased assets. On December 31, 2022, the entity had the following balances in relation to a piece of specialized equipment: Right of use asset 4,000,000 Accumulated depreciation 2,450,000 Lease liability 1,300,000 Depreciation had been recorded up to end of the year and no accrued interest is involved. On December 31, 2022, the entity decided to purchase the equipment for P 1,600,000 and paid cash to complete the purchase. Required: Prepare journal entry to record the actual purchase of the equipment on the books Macedon Company. 338Problom 10-10 (ERS) tion schedule he machine roy C yr ray Cempaiy prepared the following amortlai for the lease of vw machine Crom another entity had an economic life of wix yorre, The loawe Agroomont required four annual payments of 290,000 inoluding executory coat of PH0,000, and the mashine ahall be returned to the lewnor at tha end of the lease term, Minimum leave Interest Meduction Balance of paymont expense — lability Nability 1/1/2022 946,160 12/31/2022 400,000 08,015 201,480 185,006 12/91/2025 900,000 78,300 221 id 662,041 2/1/2024 300,000 60,203 2A, 107 318,234 12/31/2026 400,000 11,706 208,214 50,000 Required: 1. Prepare journal entry to rocord the finance lease on January 1, 2022. Propare journal ontry on Decomber 31, 2022 to record the annual lease payment and the oxecutory cost, 3. Prepare journal entry to record the depreciation for 2022, 4. Prepare journal entry to record the annual lease payment and the executory cost on December 31, 2025. 5. Prepare journal entry to record the return of the machine to the lessor. Assume the fair value is the same as the residual value guarantee.Problem 10-11 (AICPA Adapted) At the beginning of current year, East Company leased a new machine from North Company with the following information: Annual rental payable at beginning of each lease year 400,000 Lease term . 10 years Useful life of machine 12 years Implicit interest rate 14% Present value of an annuity of 1 in advance for 10 periods at 14% ee Present value of 1 for 10 periods at 14% East Company had the option to purchase the machine upon the expiration of the lease term by paying P500,000. The purchase option is reasonably certain to be exercised. What amount should East Company record as initial cost of the right of use asset? a. 2,515,000 b. 2,380,000 c. 2,245,000 d. 1,980,000 Problem 10-12 (AICPA Adapted) At the beginning of current year, Nori Company entered into a 5-year lease for drilling equipment. The entity accounted for the acquisition as a finance lease for P2,400,000 which included a P100,000 purchase option. At the commencement date, the entity is reasonably certain to exercise the purchase option. The entity estimated the fair value of the equipment at P200,000 at the end of the 8-year life and regularly used straight line depreciation on similar equipment. What amount should be recognized as depreciation of the right of use asset for the current year? a. 480,000 b. 460,000 c. 300,000 d. 275,000 enna yProblem 10-13 (AICPA Adapted) At the beginni eight-year non P750,000 anni 4g of current yoar, Cola Company signed an cancelable lease for a new machine, requiring ual payments at the beginning of each year. The machine had a useful lif ith residual value of P300,000 at the ond of vee — Title passes to Cola Company at the lease expiration date. Cola Company used straight-line depreciation for all plant assets. Aggregate lease payments have a present value of P5,400,000 based on an appropriate rate of interest. What amount should be recorded as depreciation of the right of use asset for the current year? a, 460,000 b. 426,000 c, 675,000 d. 637,500 Problem 10-14 (AICPA Adapted) At the beginning of current year, Kosovo Company entered into an 10-year lease for an equipment. The entity accounted for the acquisition as a finance lease for P4,900,000 which included a P200,000 residual value guarantee. At the end of the lease, the asset shall revert back to the lessor. It is estimated that the fair value of the asset at the end of the 12-year useful life would be P400,000. The entity used the straight line depreciation. What amount should be recognized as depreciation of the right of use asset for the current year? a. 470,000 b. 400,000 c. 490,000 d. 480,000Problem 10-15 (AICPA Adapted) Oak Company leased e the entire nine year useful life, agreeing to pay E ment, for the gtart of the lease term on December 31, 2022 and P500,000 annually on each December 31 for the hext eight vers The present value on D. 2, of the nine lease ayments over the ase meee Bt the rate implicit in the ase which Oak Company knows tore 10%, was P3,165,000. The December 31, 2022 f the lease payments using the incremental bobrowting varaof 1 was PS 985,000. Deeee eenauat chou liability on December 31, 20250" id be reported as lease a. 3,500,000 b. 2,431,500 c. 2,283,200 d. 2,485,000 Problem 10-16 (AICPA Adapted) On January 1, 2022, Blaugh Company signed a long-term lease for an office building. The terms of the lease required Blaugh Company to pay P100,000 annually, beginning December 31, 2032, and continuing each year for 30 years. On January 1, 2022. the present value of the lease payments was P1,125,000 at the 8% interest rate implicit in the lease. What amount should be reported as lease liability on December 31, 2022? a. 1,025,000 b. 1,115,000 ec. 1,125,000 d. 2,900,000 Problem 10-17 (AICPA Adapted) On December 31, 2022, Rafferty Company leased equipment under a finance lease. Annual lease payments of P200,000 are due December 31 for 10 years. The useful life of the equipment is 10 years, and the interest rate implicit in the lease is 10%. The lease obligation was recorded on December 31, 2022 at P1,350,000 and the first lease payment was made on that date. What amount should be included in current liabilities on December 31, 2022 in relation to the lease? a. 65,000 b. 85,000 c. 115,000 d. 200,000 342Problem 10-18 (AICPA Adapted) Qn December 31, 2022, Roe Company leased a machine from Colt Company for a five-year period. Equal annual payments under the lease are P1,050,000 including P50,000 annual executory cost and are due on December 31 of each year. The first payment was made on December 31, 2022, and the second payment was made on December 31, 2023. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was P4,170,000. On December 31, 2023, what amount should be reported as lease liability? a. 3,170,000 b. 3,150,000 c: 2,853,000 d. 2,487,000 Problem 10-19 (AICPA Adapted) On January 1, 2022, Babson Company leased two automobiles for executive use. The lease required Babson Company to make five annual payments of P1,300,000 beginning January 1, 2022. At the end of the lease term, December 31, 2026, Babson Company had a residual value guarantee of the automobiles at a total of P1,000,000. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are: For an annuity due with 5 payments in advance 4.240 For an ordinary annuity with 5 payments 3.890 Present value of 1 for 5 periods 0.650 What amount should be reported as lease liability on December 31, 2022? a. 4,862,000 b. 4,407,000 ¢, 3,562,000 d. 3,107,000Problem 10-20 (AICPA Adapted) On January 1, 2022, Day Company entered into lease agreement with Ward Com any fore equipment. Annual lease payments of P1,000,0! at the end of each year, to a 10-year ndustrial payable a 10% return Day Company knows that the lessor expects ‘an estimated on the lease. The equipment is expected to have useful life of 10 years, In addition, a third party had guaranteed to pa Company a residual value of P500,000 at the end of t] A i 1% for 10 The present value of an ordinary annuity of 1 at 10% fe years is 6.14. The present value of 1 at 10% for 10 years is .39 What amount should be reported as principal lease L.iability on December 31, 2022? a. 6,335,000 b. 6,140,000 c. 5,754,000 d. 5,968,500 Problem 10-21 (AICPA Adapted) On December 31, 2022, Action Company signed a 7-year finance lease for an airplane. The airplane's fair value was P8,415,000. The entity made the first annual lease payment of P1,530,000 on December 31, 2022. The entity’s incremental borrowing rate was 12% and the interest rate implicit in the lease, which was known by Action, was 9%. The rounded present value factors for an annuity due are 5.50 at 9% for 7 years and 5.10 at 12% for 7 years. 1. What amount should be reported as lease liability on December 31, 2022? a. 8,415,000 b. 7,803,000 c. 6,885,000 d. 6,273,000 2. What amount should be reported as interest expense for 2023? a. 619,650 b. 826,200 c. 757,350 d. 841,500 Ward e leaseProblem 10-22 (IAA) ee a Gea yearend, Mercedez Company purchased a tyrangement, ad been leasing under a finance The right of sabili ot ipo ae ane 2,000,000" lease liability were originally At the time of the purchase, the accumulated de jati u i preciatio. on the right of use asset was P800,000 and the remaining balance of the lease liability was P1,300,000. The underlying asset was purchased for P1,500,000 cash. What amount should be debited as cost of the machinery on the date of purchase? a. 1,400,000 b. 1,500,000 ¢. 1,300,000 d. 1,200,000 Problem 10-23 (IFRS) On January 1, 2022, Yemen Company leased an equipment for 6 years from another entity. The entity recorded the asset at P4,800,000 which included a purchase option of P100,000. ‘At the commencement date, the lessee is reasonably certain to exercise the purchase option. The equipment had an eight-year useful life and a fair value of P300,000 at end of the useful life. On January 1, 2028, the entity did not exercise the purchase option. What amount of loss on finance lease should be recognized by Yemen Company for 2028 for not exercising the purchase option? a. 1,325,000 b. 1,425,000 c. 200,000 d 0 345Problem 10-24 (IFRS) At the beginning of current year, Southstar Company leased a building with the following information: Annual rental payable at the end of each lease year apr Initial direct cost paid 50,000 Lease incentive received 300,000 Lease bonus paid to lessor before commencement of lease , Present value of cost of restoring the building 945,000 as required by contract discounted at 8% 1,000,000 Purchase option that is reasonably certain “Gyears Lease term Useful life of building Oy O% Implicit interest rate ‘ 4.36 Present value of an ordinary annuity of Lat 10%for 6periods 38 Present value of 1 at 10% for 6 periods 1. What amount should be recorded initially as cost of right of use asset? a. 8,750,000 b. 8,700,000 c. 9,900,000 d. 7,755,000 2. What amount should be recorded as annual depreciation of the right of the asset? a. 1,450,000 b. 1,550,000 ec. 870,000 d. 875,000 3. What total amount should be reported as interest expense for the current year? a. 785,600 b. 710,000 c. 804.500 d. 729,600 4. What amount should be reported as lease liability at year-end a. 6,310,000 b. 7,100,000 c. 9,060,000 d. 5,600,000 346problem 10-26 (IFRS) atthe Peake current year, Panorama Company leased a bu ‘sor with the following pertinent information: nual rental payable Annus onl payable atthe ond ofeach year 1,000,000 jo incentive received conaen Leasehold improvement ooo Purchase option that is reasonably certain to be exercised 500000 ase e vou life of building oo Jmplicit inteneat rate . on py'ofan ordinary annuity of 1 for 6 peri rv gent value of for 5 periods at idee we cae 1, What amount should be ized initi Vo eres recognized initially as cost of the a. 4,500,000 b. 4,400,000 ¢. 4,700,000 d. 4,600,000 9, What amount should be recognized as depreciation of right of use asset for current year? a. 880,000 b. 900,000 c. 550,000 d. 575,000 3, What amount should be recognized as interest expense for current year? a. 410,000 b. 379,000 c. 450,000 d. 429,000 What ili 1 eee should be reported as lease liability at a. 3,510,000 b. 3,169,000 c. 3,950,000 d. 3,719,000 347Problem 10-26 (AICPA Adapted) At the beginning of current year, Ashe Company entered into a ten-year noncancelable lease requiring year-end payments of P1,000,000. Ashe’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Ashe, is 10%. Present value factors for an ordinary annuity for ten periods are 6,145 at 10%, and 5.650 at 12%. On the same date, Ashe Company paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease. The leased property had an estimated economic life of 12 years, 1. What amount should be capitalized as cost of the right of use asset? a. 6,145,000 b. 6,345,000 c. 5,650,000 d. 5,850,000 2. What amount should be recorded as depreciation of the right of use asset for the current year? a. 614,500 b. 634,500 c. 528,750 d. 565,000 3. What amount should be reported as lease liability at the end of current year? a. 5,328,000 b. 5,552,000 c. 5,759,500 d. 5,979,500 348Problem 10-27 (aicpa Adapted) On January 1, 2029 Nun Co: : . , " mpany leased machinery from Chin Company for a 10-year period. The useful life of the asset is 20 eee dae sunual payments under the lease are P200,000 ten due on January 1 of each year starting January 1, The Fhe Tene Ue oF January 1, 2022 of the lease payments 10% Seenon we licit interest rate of 10% was P1,352,000, -ounted at implicit interest rate o The lease provided for a transfer of title to the lessee upon expiration of the lease term. 1, What amount should be reported as lease liability on December 31, 2022? 1,352,000 1,152,000 1,067,200 1,552,000 2. What amount of lease liability should be reported as noncurrent on December 31, 2022? : a. 1,215,920 b. 1,090,240 c d. Bo op 1,067,200 973,920 3. What amount should be reported as interest expense for 2022? a. 200,000 b. 115,200 c. 106,720 d. 0 4. What amount should be reported as depreciation of the right of use asset for 2022? a. 135,200 b. 115,200 c. 67,600 d 20,000 349Problem 10-28 (AICPA Adapted) On December 31, 2022, Ames Company leased equipment for 10 years. The entity contracted to pay P400,000 annual | rent on December 31, 2022 and on December 31 of each of is the next nine years. The lease liability was recorded at P2,700,000 on December 31, 2022 before the first payment. | 1 The useful life of the equipment is 12 years and the interest rate implicit in the lease is 10%. The entity used the straight line method to depreciate all equipment. : 1. In recording the December 31, 2023 payment, by what amount should the lease liability be reduced? a. 270,000 b. 230,000 c. 225,000 d. 170,000 2. What amount should be reported as interest expense for 2023? 270,000 230,000 200,000 0 peop 3. What amount should be reported as lease liability on December 31, 2023? 2,700,000 2,300,000 2,130,000 1,900,000 Pe oe 350Problem 10-29 Multiple choice (IFRS 16) 1 Under IFRS, a lessee is required to récognize Right of use asset and lease liability Right of use asset but not lease liability Lease liability but not right of use asset Neither right of use asset nor lease liability pose . The lessee may apply the operating lease model under what condition? a. Short-term lease b. Low value lease c. Both short-term lease and low value lease d. Under all circumstances . A short-term lease is defined as a. Twelve months or less b. Six months or less : c. Twelve-month lease with a purchase option d. Two-year lease with option to terminate | Which statement is true about low value lease? a. The value of an underlying asset is based on the value of the asset when new regardless of the age of the asset. b. The term of a low value lease may be more than twelve months. c. An underlying asset does not qualify as low value lease if the nature of the asset is such that the asset is typically not of low value when new. d. All of these statements are true about low value lease. . A right of use asset is initially measured at a. Cost b. Fair value c. Current cost d. Present value of expected cash inflows 35110. . The cost of right of use asset comprises all of the following, except a. The present value of lease payments b. Lease payments made to lessor on or before commencement date c. Initial direct cost incurred by lessee d. Leasehold improvement . The right of use asset is reported as a. Noncurrent as separate line stem b. Property, plant and equipment c. Intangible asset d. Investment property . A lessee with a lease containing a purchase option that is reasonably certain to be exercised should depreciate the right of use asset over a. Useful life of the asset b. Lease term c. Useful life of the asset or the lease term, whichever is shorter d. Useful life of the asset or the lease term, whichever is longer . A lease liability is measured at a. The absolute amount of lease payments b. The present value of lease payments c. The present value of fixed lease payments d. The fair value of the underlying asset The lease payments include all of the following, except a. Fixed lease payments b. Termination penalty if the lease term does not reflect the exercise of a termination option c. Exercise price of a purchase option that is reasonably certain to be exercised d. Residual value guarantee of the lessee 352Problem 10-30 Multiple choice (IAA) 1, Which is not included in lease payments? 2, ad ~ - a. Any payment required by a purchase option that is reasonably certain to be exercised Costs for services and taxes paid by lessee . Required payments over the lease term . Amount guaranteed by a party related to the lessee b, ©. d Which is not part of the lease payments? a. The rental payments called for by the lease b. Any residual value guarantee of the lessee c, Any residual value at the end of the lease term d. Any payment the lessee must make under a purchase option that is reasonably certain to be exercised The lease payments include all of the following, except a. The residual value guarantee b. The lessee's obligation to pay executory cost c. The purchase option that is reasonably certain to be exercised | d. Any payment that the lessee must make upon failure to extend or renew the lease What is the cost of a right of use asset? a. The absolute lease payments over the lease term b. The present value of the lease payments including executory costs discounted at’ an appropriate rate c. The present value of the lease payments exclusive of executory costs discounted at an appropriate rate d. The present value of the market value of the asset discounted at an appropriate rate The carrying amount of the right of use asset would be periodically reduced by a. Total lease payment | b. Portion of the lease payment allocable to the interest Portion of the lease payment allocable to reduction of the lease liability Depreciation of the asset ic a 3536. What is the treatment of initial direct cost incurred by the lessee in a finance lease? a. Added to the lease liability b. Added to the carrying amount of the right of use asset c. Expensed immediately d. Added to the carrying amount of the right of use asset and lease liability 7. Which of the following statements concerning residual value guarantee is appropriate for the lessee? a. The asset and related liability should be increased by the absolute amount of the residual value. b. The asset and related liability should be decreased by the absolute amount of the residual value. c. The asset and related liability should be decreased by the present value of the residual value. d. The asset and related liability should be increased by the present value of the residual value. 8. In computing depreciation of a right of use asset under a finance lease, the lessee should deduct a. The residual value guarantee and depreciate over the lease term. : b. An’unguaranteed residual value and depreciate over the lease term. ‘ c. The residual value guarantee and depreciate over the useful life of the asset. . d. An unguaranteed residual value and depreciate over the useful life of the asset. 9. If the fair value of a underlying asset is greater than the amount guaranteed by the lessee a. The lessor pays the lessee for the difference. b. The lessee recognizes a gain at the end of the lease. c. The lessee has no obligation for excess fair value. d. The lessee pays the lessor for the difference. 10. What is the interest rate used when the implicit interest rate cannot be determined? The prime rate The lessor's published rate The lessee's average borrowing rate The lessee's incremental borrowing rate Boop 354Problem 10-31 Multiple choice (AICPA Adapted) 1. The lessec’s lease liability for a finance lease would be periodically reduced by a. Lease payment plus the depreciation of the asset b. Lease payment less the depreciation of the asset c. Lease payment less the portion allocable to interest d. Lease payment 2. A six-year finance lease entered into on December 31 of the current year specified equal annual lease payments due on December 31 of each year. The first annual lease payment paid on December 31 of the current year consists of which of the following? Interest expense Lease liability Both interest expense and lease liability Neither interest expense nor lease liability Boge 3. A six-year finance lease specified equal annual lease payments. The lease payment in the fifth year applicable to the reduction of the lease liability should be a. Less than in the fourth year b. More than in the fourth year c. The same as in the sixth year d. More than in the sixth year A lessee had a ten-year finance lease requiring equal annual payments. The reduction of the lease liability in the second year should equal = a. The current liability shown for the lease at the end of first year b. The current liability shown for the lease at the end of second year The reduction of the lease liability in the first year d. One-tenth of the original lease liability