PAMANTASAN NG LUNGSOD NG PASIG

ALCALDE JOSE, PASIG 1600 METRO MANILA

SCHOOL YEAR- 2020

BY: PROF. COMBO
Assignment 3
Sales Type Lease – Lessor & Sales Leaseback
Name: Giddel Ann Kristine E. Velasquez

Problem 1- SALES TYPE LEASE- LESSOR

Universal Company used leases as a method of selling products. At the beginning of current year,
Universal Company leased equipment to National Company with the following information:

Annual rental payable at the end of each lease year 700,000

Cost of equipment to Universal 2,000,000
Unguaranteed residual value 400,000
Useful life of equipment and lease term 8 years
Implicit interest rate in the lease 12%
PV of an ordinary annuity of 1 for 8 periods at 12% 4.968
PV of 1 for 8 periods at 12% 0.404

At the end of the lease the equipment will revert to the lessor. Both lessor and lessee report on a
calendar year basis, depreciate all assets on the straight line, and use the perpetual inventory system.

Required:
Prepare journal entries on the books of Universal Company and National Company for the current year

.
 GENERAL JOURNAL
UNIVERSAL COMPANY

TO RECORD SALES:
1/1 Lease receivables P 6,000,000
COGS 1,838,400

Sales P 3,477,600
Unearned Interest Income 2,360,800
Inventory 2,000,000

TO RECORD THE COLLECTION OF THE ANNUAL RENTAL

12/31 Cash 700,000
Lease Receivable 700,000

TO RECORD THE INTEREST INCOME

12/31 Unearned Interest Income 436,704
Interest Income 436,704

GENERAL JOURNAL
NATIONAL COMPANY

TO RECORD SALES:
Equipment (700K*4.968) P 3,477,600
Lease Liability 33,477,600

TO RECORD ANNUAL RENTAL

Interest Expense (12%*3,477,600) 417,312
Lease Liability 282,688
Cash 700,000

TO RECORD THE RIGHT TO USED ASSET

Depreciation (3,477,600/8) 434,700
Accumulated Depreciation 434,700

Problem 2 SALES TYPE LEASE- LESSOR

Vanderbilt Company is a dealer in machinery. The perpetual inventory system is used. At the beginning
of current year, a machinery was leased to Thunder Company with the following provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value guarantee 1,000,000
Initial direct cost paid by Vanderbilt 300,000
Implicit interest rate 12%
PV of an ordinary annuity of for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
Required:

Prepare journal entries on the books of Vanderbilt Company and Thunder Company for the current year

JOURNAL ENTRIES
1/1 Lease receivables P 16,000,000
COGS 8,000,000

Sales P 11,370,000
Unearned Interest Income 4,630,000
Inventory 8,000,000

COGS 300,000
Cash 300,000
12/31 Cash 3,000,000
Lease Receivable 3,000,000

Unearned Interest Income 1,364,400

Interest Income 1,364,400

BOOKS OF THUNDER COMPANY

TO RECORD PURCHASE:
Machinery P 11,370,000
Lease Liability 11,370,000

TO RECORD ANNUAL RENTAL

Interest Expense (12%*3,477,600) 1,364,400
Lease Liability 1,635,600
Cash 3,000,000

TO RECORD DEPRECIATION
Depreciation (10,370,000/5) 2,074,000
Accumulated Depreciation 2,074,000
 BOOKS OF VANDERBILT COMPANY

TO RECORD SALES:
Lease receivables P 16,000,000
COGS 8,000,000

Sales P 11,370,000
Unearned Interest Income 4,630,000
Inventory 8,000,000

TO RECORD COSTS OF GOOD SOLD

COGS 300,000
Cash 300,000
TO RECORD COLLECTION OF ANNUAL RENTAL
Cash 3,000,000
Lease Receivable 3,000,000

TO RECORD INTEREST INCOME

Unearned Interest Income(12%*11,370,000) 1,364,400
Interest Income 1,364,400

Problem 3 SALES AND LEASEBACK

At the beginning of current year, Pedro Company sold a machine and immediately leased it back. The
following data relate 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 4 years
Implicit interest rate 8%
Present value of an ordinary annuity of 1 at 8% for four periods 3.312
There is no transfer of title to the lessee nor purchase option that is reasonably certain to be exercised..
 BOOKS OF SELLER-LESSEE

TO RECORD SALE AND LEASEBACK:

Cash P 6,000,000
Right of use to Asset 1,484,640

Machine P 4,500,000
Lease Liability 2,649,600
Gains on rights transferred 335,040

TO RECORD ANNUAL RENTAL

Interest Expense 211,968
Lease Liability 588,032
Cash 800,000

TO RECORD DEPRECIATION
Depreciation (1,484,640/4) 371,160
Accumulated Depreciation 371,160

BOOKS OF BUYER-LESSOR

TO RECORD PURCHASE:
Machine P 5,000,000
Financial Asset 1,000,000
Cash 6,000,000

TO RECORD ANNUAL RENTAL (LEASE)

Cash 498,068
Rental Income 498,068

TO RECORD ANNUAL RENTAL (FINANCE)

Cash 301,932
Financial Asset 221,932
Interest Income 80,000

TO RECORD DEPRECIATION
Depreciation (5M/10) 500,000
Accumulated Depreciation 500,000

Problem 4 SALES AND LEASEBACK

At the beginning of current year, Hazel Company sold a machine and immediately leased it back.
The following data pertain to the sale and leaseback transaction:
Sale price at below fair value 4,000,000
Fair value of machine 5,000,000
Carrying amount of machine 3,500,000
Annual rental payable at the end of each 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 3 periods 2.67

The lease provides for neither transfer of title to the lessee upon lease expiration nor a 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.

BOOKS OF SELLER-LESSEE

TO RECORD SALE AND LEASEBACK:

Cash P 4,000,000
Right of use to Asset 1,634,500

Machine P 3,500,000
Lease Liability 1,335,000
Gains on rights transferred 799,500

TO RECORD ANNUAL RENTAL

Interest Expense 80,100
Lease Liability 419,900
Cash 500,000

TO RECORD DEPRECIATION
Depreciation (1,634,500/3) 544,833
Accumulated Depreciation 544,833
 BOOKS OF BUYER-LESSOR

TO RECORD PURCHASE:
Machine P 4,000,000
Cash 4,000,000

TO RECORD ANNUAL RENTAL

Cash 500,000
Rental Income 500,000

TO RECORD DEPRECIATION
Depreciation (4M/10) 400,000
Accumulated Depreciation 400,000