CHAPTER 3

LEASES

3. a. A contract of lease
b. Not a contract of lease
c. A contract of lease
d. Not a contract of lease

Two conditions must be satisfied to determine whether there is a lease contract

• There is an identified asset
• The customer has the right to obtain substantially all of the economic benefits from the
use of the asset.

Problems

3-1. (Generous, Inc.)

(a) Cash payment P 260,000

Present value of remaining payments (260,000 x 3.2397) 842,322
Present value of guaranteed residual value (200,000 x 0.6499) 129,980
Capitalized cost of right-of-use equipment/automobiles P1,232,302

(b) Lease liability at January 1, 2020 after the first payment

842,322 + 129,980 P972,302

(c)
Amortization Table
Total Annual Interest Reduction in
Date Payment Expense Principal Lease Liability
01/01/20 972,302
01/01/21 260,000 87,507 172,493 799,809
01/01/22 260,000 71,983 188,017 611,792
01/01/23 260,000 55,061 204,939 406,853
01/01/24 260,000 36,617 223,383 183,470
12/31/24 200,000 16,530* 183,470 -
*Adjusted; difference is due to rounding off.
(d)

2020
Jan. 1 Right-of-Use Automobiles 1,232,302
Lease Liability 972,302
Cash 260,000

Dec. 31 Interest Expense 87,507

Lease Liability 87,507

31 Depreciation Expense 206,460

Accumulated Depreciation-ROU Auto 206,460
(1,232,302-200,000)/5
2021
Jan. 1 Lease Liability 260,000
Cash 260,000

Dec. 31 Interest Expense 71,983

Lease Liability 71,983

31 Depreciation Expense 206,460

Accumulated Depreciation 206,460
 Chapter 3 – Leases

(e)
Dec. 31 Accumulated Depreciation (206,460 x 5) 1,032,300
Interest Expense 16,532*
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
*adjusted; balancing figure

(f)
Dec. 31 Impairment Loss 50,000
Accumulated depreciation 1,032,300
Interest Expense 16,532
Lease Liability 183,470
Right-of-Use Automobiles 1,232,302
Cash 50,000

3-2. (Diana Corporation)

(a) Cash paid at commencement P 86,680

Initial direct costs paid by lessee 10,000
PV of remaining lease payments (86,680 x 3.1699) 274,767
PV of estimated restoration costs (20,000 x 0.6209) 12,418
Capitalized cost of the right-of-use asset P383,865

(b)
Amortization Table
Total Annual Interest Reduction in
Date Payment Expense Principal Lease Liability
01/01/20 - 287,185
01/01/21 86,680 28,719 57,961 229,224
01/01/22 86,680 22,922 63,758 165,466
01/01/23 86,680 16,547 70,133 95,333
01/01/24 86,680 9,533 77,147 18,186
12/31/24 20,000 1,814* 18,186 -
*Adjusted; difference is due to rounding off.

(c)

2020
Jan. 1 Right-of-Use Equipment 383,865
Cash (86,680 + 10,000) 96,680
Lease Liability (274,767 + 12,418) 287,185

Dec. 31 Interest Expense 28,719

Lease Liability 28,719

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773
383,865/5 years

2021
Jan. 1 Lease Liability 86,680
Cash 86,680

Dec. 31 Interest Expense 22,922

Lease Liability 22,922

31 Depreciation Expense 76,773

Accumulated Depreciation 76,773

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 Chapter 3 – Leases

3-3. (Riza, Inc.)

(a) 1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods

From Table VI across 12 periods, 7.4951 is under 10% interest rate.
OR 1,011,840 – 135,000 = 876,840
876,840/135,000 =6.4951 (Table IV, 11 periods = 10%)

(b) Amortization Table

Total Annual Interest Reduction in Lease
Date Payment Expense Principal Liability
12/31/20 876,840*
12/31/21 135,000 87,684 47,316 829,524
12/31/22 135,000 82,952 52,048 777,476
12/31/23 135,000 77,748 57,252 720,224
*1,011,840 – 135,000 = 876,840

(c) Depreciation expense for 2021 (1,011,840 – 40,000) / 15 years P64,789

(d)
12/31/20 Right-of-Use Equipment 1,011,840
Cash 135,000
Lease Liability 876,840

12/31/21 Lease Liability 47,316

Interest Expense 87,684
Cash 135,000

Depreciation Expense 64,789

Accumulated Depreciation 64,789

(e) Lease Liability as of December 31, 2020:

Current portion 47,316
Noncurrent portion 829,524

3-4. (Shirley Corporation)

(a) Payment at commencement P150,000
PV of periodic payments (150,000 x 3.0373) 455,595
PV of bargain purchase option (240,000 x 0.5674) 136,176
Total capitalized cost P741,771
(b)
Amortization Table
Total Annual Interest Reduction in
Date Payment Expense Principal Lease Liability
01/01/20 - 591,771
01/01/21 150,000 71,013 78,987 512,784
01/01/22 150,000 61,534 88,466 424,318
01/01/23 150,000 50,918 99,082 325,236
01/01/24 150,000 39,028 110,972 214,264
12/31/23 240,000 25,736* 214,264 -
*Adjusted; difference is due to rounding off.

(c) Depreciation expense for 2020 (741,771 / 15 years) P49,451

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 Chapter 3 – Leases

(d)
2020
Jan. 1 Right-of-Use Machinery 741,771
Lease Liability 591,771
Cash 150,000

Dec. 31 Interest Expense 71,013

Lease Liability 71,013

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

2021
Jan. 1 Lease Liability 150,000
Cash 150,000

Dec. 31 Interest Expense 61,534

Lease Liability 61,534

31 Depreciation Expense 49,451

Accumulated Depreciation 49,451

(e)
Dec. 31 Interest Expense 25,736
Lease Liability 214,264
Accumulated Depreciation (49,451 x 5) 247,255
Machinery (741,771 – 247,255) 494,516
Right-of-Use Machinery 741,771
Cash 240,000

(f)
Dec. 31 Interest Expense 25,736
Lease Liability 214,264
Accumulated Depreciation 247,255
Loss on Failure to Exercise BPO 254,516
Right-of-Use Machinery 741,771
(Loss = 494,516-240,000)

3-5. (Prince of Wales, Inc.)

(a) Cash paid P 700,000

PV of future payments (700,000 x 5.7590) 4,031,300
Capitalized cost of the building P4,731,300

(b) Annual depreciation = P4,731,300/10 P 473,130

(c)
2020
July 1 Right-of-Use Building 4,731,300
Taxes and Insurance Expense 50,000
Cash 750,000
Lease Liability 4,031,300

Dec. 31 Interest Expense 201,565

Lease Liability 201,565
4,031,300 x 10% x ½

31 Depreciation Expense 236,565

Accumulated Depreciation – RoU Building 236,565
473,130 x 6/12

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 Chapter 3 – Leases

Dec. 31 Prepaid Taxes and Insurance 25,000

Taxes and Insurance Expense 25,000

2021
July 1 Lease Liability 498,435
Interest Expense 201,565
Taxes and Insurance Expense 50,000
Cash 750,000

Dec. 31 Interest Expense 186,721

Lease Liability 186,721
4,031,300 – (700,000 – 403,130) x 10% x 6/12

31 Depreciation Expense 473,130

Accumulated Depreciation – RoU Building 473,130

3-6. (Joy Company)

(a)
2020
Aug. 1 Finance Lease Receivable 605,000
Equipment for Lease 480,000
Discount on Finance Lease Receivable 125,000

1 Discount on Finance Lease Receivable 1,900

Cash 1,900

1 Cash 100,000
Finance Lease Receivable 100,000

Dec. 31 Discount on Finance Lease Receivable 15,912

Interest Revenue 15,912
381,900 x 10% x 5/12

2021
Aug. 1 Discount on Finance Lease Receivable 22,278
Cash 100,000
Interest Revenue (38,190 x 7/12) 22,278
Finance Lease Receivable 100,000

Dec. 31 Discount on Finance Lease Receivable 13,370

Interest Revenue (32,090 x 5/12) 13,370

Partial Amortization Table

Periodic Reduction in Balance of
Date Payment Interest Principal Principal
08/01/20 - - 481,900
08/01/20 100,000 - 100,000 381,900
08/01/21 100,000 38,190 61,810 320,090
08/01/22 100,000 32,090 67,910 252,180

(b) As of December 31, 2020:

Total Current Non-current
Finance Lease Receivable P505,000 P100,000 P405,000
Discount on Finance Lease Rble 107,188 22,278 84,910
P397,812 P 77,722 P320,090
Current portion:
Principal due in 2021 P 61,810
Accrued interest, 12/31/20 (38,190 x 5/12) 15,912
Total P 77,722

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 Chapter 3 – Leases

3-7. (Jane Company)

(a) Right-of-Use Asset 9,306,400

Cash 1,000,000
Lease Liability (1.0M x 8.3064) 8,306,400

(b) Interest Expense 415,320

Lease Liability 415,320
8,306,400 x 5%

Depreciation Expense 775,553

Accumulated Depreciation 775,553
9,306,400/12

(c) Right-of-Use Asset 597,060

Lease Liability 597,060

Lease Liability 1,080,000

Cash 1,080,000

Partial Amortization Table for 3 years

Periodic Reduction in Balance of

Date Payment Interest Principal Principal
01/01/Y1 - - 8,306,400
01/01/Y2 1,000,000 415,320 584,680 7,721,720
01/01/Y3 1,000,000 386,086 613,914 7,107,806
01/01/Y4 1,000,000 355,390 644,610 6,463,196

PV of revised liability before this payment

Revised lease payment, starting beginning of Y4 1,080,000
1,000,000 x 135/125 = 1,080,000
PV of 8 future payments at 5%
1,080,000 x 6.4632 6,980,256
Total 8,060,256
CV of lease liability, beg of 4th year
7,107,806 + 355,390 7,463,196
Adjustment 597,060
(or 80,000 x 7.4632 = 597,056)

At end of year 4

Interest Expense 349,013

Lease Liability 349,013
6,980,256 x 5%

Depreciation Expense 841,873

Accumulated Depreciation 841,873
9,306,400- (775,533 x 3) + 597,060
9 = 841,873

Revised Amortization Table, year 4

Periodic Reduction in Balance of

Date Payment Interest Principal Principal
Revised LL 8,060,256
01/01/Y4 1,080,000 6,980,256
01/01/Y5 1,080,000 349,013 730,987 6,249,269

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 Chapter 3 – Leases

3-8. (Jackie Chan and Chris Tucker)

Annual Lease Payment:

Fair value of asset P600,000
PV of BPO (40,000 x .6209) 24,836
PV of periodic payment P575,164
PV factor (Annuity due for 5 years at 10%) ÷4.1699
Periodic payment P137,932

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Jan. 1, 2020 600,000
Jan. 1, 2020 137,932 137,932 462,068
Jan. 1, 2021 137,932 46,207 91,725 370,343
Jan. 1, 2022 137,932 37,034 100,898 269,445

Depreciable cost = P600,000 – P20,000 = P580,000

2020 Depreciation = P580,000 x 6/21 = P165,714

2021 Depreciation = P580,000 x 5/21 = 138,095

(a) Books of Chris Tucker (Lessee)

2020
Jan. 1 Right-of-Use Equipment 600,000
Lease Liability 462,068
Cash 137,932

Dec 31 Interest Expense 46,207

Lease Liability 46,207

31 Depreciation Expense – RoU Equipment 165,714

Accum. Depr. – RoU Equipment 165,714

2021
Jan. 1 Lease Liability 137,932
Cash 137,932

Dec 31 Interest Expense 37,034

Lease Liability 37,034

Depreciation Expense – RoU Equipment 138,095

Accum. Depr.– RoU Equipment 138,095

(b) Books of Jackie Chan (Lessor)

2020
Jan. 1 Finance Lease Receivable 729,660
Equipment for Lease 600,000
Discount on Finance Lease Receivable 129,660
(137,932 x 5) + 40,000 = 729,660

1 Cash 137,932
Finance Lease Receivable 137,932

Dec 31 Discount on Finance Lease Receivable 46,207

Interest Revenue 46,207

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 Chapter 3 – Leases

2021
Jan. 1 Cash 137,932
Finance Lease Receivable 137,932

Dec 31 Discount on Finance Lease Receivable 37,034

Interest Revenue 37,034

3-9. (Ben Ten and Ironman)

(a) Direct finance lease

(The cash price equals the carrying value of the asset; hence, there is no gross profit).

(b) The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9 (which
is 8 annual payments of P80,000 + 1 payment for guaranteed residual value of same
amount), the corresponding interest rate is 8%.

Partial Amortization Table

Periodic Reduction in
Date Payment Interest Principal Lease Liability
April 1, 2020 P539,730
April 1, 2020 80,000 80,000 459,730
April 1, 2021 80,000 36,778 43,222 416,508
April 1, 2022 80,000 33,321 46,679 369,829

(c) Books of Ironman (Lessee)

2020
Apr. 1 Right-of-Use Equipment 539,730
Cash 80,000
Lease Liability 459,730

Dec. 31 Interest Expense 27,584

Lease Liability 27,584
36,778 x 9/12

Dec. 31 Depreciation Expense 43,100

Accumulated Depreciation 43,100
(539,730-80,000)/8 = 57,466
57,466 x 9/12 = 43,100

2021
Apr. 1 Interest Expense (36,778 x 3/12) 9,194
Lease Liability (43,222 + 27,584) 70,806
Cash 80,000

Dec. 31 Interest Expense 24,991

Lease Liability 24,991
33,321 x 9/12

31 Depreciation Expense 57,466

Accumulated Depreciation 57,466
(539,730-80,000)/8 = 57,466

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 Chapter 3 – Leases

(d) Books of Ben Ten (Lessor)

2020
Apr. 1 Finance Lease Receivable 720,000
Discount on Finance Lease Receivable 180,270
Equipment for Lease 539,730
(80,000 x 8) + 80,000 GRV = 720,000

1 Cash 80,000
Finance Lease Receivable 80,000

Dec. 31 Discount on Finance Lease Receivable 27,584

Interest Revenue 27,584

2021
Apr. 1 Cash 80,000
Finance Lease Receivable 80,000

1 Discount on Finance Lease Receivable 9,194

Interest Revenue 9,194

Dec. 31 Discount on Finance Lease Receivable 24,991

Interest Revenue 24,991
32,893 x 9/12

(e) The asset shall be recorded at P496,512 which is 80,000 x 6.2064.

Depreciation for 2020 = 496,512/8 x 9/12 = 46,548

(f) No difference in journal entries. To the lessor, under the direct finance lease, it does not
matter whether the residual value is guaranteed or unguaranteed.

3-10. (Prudent Company)

(a) Sales price P1,011,840

Cost of machine 784,500
Gross profit P 227,340

(b) Gross investment (135,000 x 12) P1,620,000

Sales 1,011,840
Total financial revenue over the lease term P 608,160

(c) Interest revenue for 2020

(1,011,840 – 135,000) x 10% x 6/12 P 43,842

(d) Finance Lease Receivable (1,620,000 – 135,000) P1,485,000

Less Discount on Finance Lease Receivable (608,160-43,842) 564,318
Net Finance Lease Receivable, December 31, 2020 P 920,682

3-11. (Glad Manufacturing Company)

(a)
2020
Apr. 1 Finance Lease Receivable(175,000x8)+100,000 1,500,000
Cost of Sales 940,000-(100,000 x .4665) 893,350
Discount on Finance Lease Receivable 426,380
Sales (175,000 x 5.8684) 1,026,970
Finished Goods Inventory 940,000

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 Chapter 3 – Leases

175,000 x 8 = 1,400,000
1,400,000 + 100,000 = 1,500,000
940,000–(100,000 x 0.4665)=893,350
175,000 x 5.8684 = 1,026,970
100,000 x 0.4665 = 46,650
1,026,970 + 46,650 = 1,073,620
1,500,000 – 1,073,620 = 426,380

1 Cash 175,000
Finance Lease Receivable 175,000

Dec. 31 Discount on Finance Lease Receivable 67,397

Interest Revenue 67,397
89,862 x 9/12

2021
Apr. 1 Cash 175,000
Discount on Finance Lease Receivable (89,862 x 3/12) 22,465
Finance Lease Receivable 175,000
Interest Revenue 22,465

Dec. 31 Discount on Finance Lease Receivable 61,011

Interest Revenue 61,011
81,348 x 9/12

Partial Amortization Table

Periodic Reduction in Balance of
Date Payment Interest Principal Principal
April 1, 2020 P1,073,620
April 1, 2020 175,000 175,000 898,620
April 1, 2021 175,000 89,862 85,138 813,482
April 1, 2022 175,000 81,348 93,652 719,830

*The compound entry may also be presented in separate entries as follows:

Apr. 1 Finance Lease Receivable 1,400,000

Sales 1,026,970
Discount on Finance Lease Receivable 373,030

1 Cost of Sales 940,000

Finished Goods Inventory 940,000

1 Finance Lease Receivable 100,000

Cost of Sales 46,650
Discount on Finance Lease Receivable 53,350

(b) (i) Sales P1,026,970

Cost of Sales (940,000 – 46,650) 893,350
Gross profit on sales P 133,620

(ii) Interest Revenue for 2020 (see journal entries) P 67,397

(c) Sales (1,026,970 + 46,650) P1,073,620

Cost of sales (cost of the asset) P 940,000

3-12. (Ruby Company and Emerald Company)

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 Chapter 3 – Leases

a. Manufacturer’s or dealer’s lease, because FV exceeds CV. The difference represents gross
profit, which characterizes a dealer’s or manufacturer’s lease.

b. Present value of MLP (850,365 x 4.60478) (Adjusted) P3,915,747

Present value of residual value (166,300 x .50663) 84,253
Total present value P4,000,000
Carrying value of leased asset 3,200,000
Gross Profit P 800,000
Lease arrangement cost ( 85,000)
Interest income (377,956 x 3/12) 94,489
Total income in 2020 P 809,489

c. Books of Ruby Company (Lessor)

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
Oct. 1, 2020 4,000,000
Oct. 1, 2020 850,365 850,365 3,149,635
Oct. 1, 2021 850,365 377,956 472,409 2,677,226
Oct. 1, 2022 850,365 321,267 529,098 2,148,490

2020
Oct. 1 Finance Lease Receivable (850,365 x 6) + 166,300 5,268,490
Cost of Goods Sold (3,200,000 – 84,253) 3,115,747
Inventory 3,200,000
Sales 3,915,747
Discount on Finance Lease Receivable 1,268,490

Oct. 1 Selling Expense 85,000

Cash 85,000

1 Cash 850,365
Finance Lease Receivable 850,365

Dec. 31 Discount on Finance Lease Receivable 94,489

Interest Revenue 94,489
377,956 x 3/12

2021
Oct. 1 Cash 850,365
Finance Lease Receivable 850,365

Dec. 31 Discount on Finance Lease Receivable 363,784

Interest Revenue 363,784
(377,956 – 94,489) + (321,267 x 3/12)

(d) Books of Emerald Company (Lessee)

Amortization Table
Periodic Reduction in
Date Payment Interest Principal Lease Liability
Oct. 1, 2020 3,065,382
Oct. 1, 2021 850,365 367,846 482,519 2,582,863
Oct. 1, 2022 850,365 309,944 540,421 2,042,442

2020
Oct. 1 Right-of-Use Equipment 3,915,747

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 Chapter 3 – Leases

Lease Liability 3,065,382

Cash 850,365

Dec 31 Interest Expense 91,962

Lease Liability 91,962
367,846 x 3/12

31 Depreciation Expense – RoU Equipment 163,156

Accumulated Depreciation – RoU Equipment 163,156
3,915,747/6 = 652,625; 652,625 x 3/12

2021
Oct. 1 Interest Expense (367,846 – 91,962) 275,884
Lease Liability (482,519 + 91,962) 574,481
Cash 850,365

Dec.31 Interest Expense 77,846

Lease Liability 77,846
309,944 x 3/12

31 Depreciation Expense – RoU Equipment 652,625

Accumulated Depreciation – RoU Equpment 652,625

3-13. (Metro Industrial Company and Western Company)

(a) Sales = (99,046 x 3.1699) + (80,000 x.6830) P368,606

(b) Sales P368,606

Cost of equipment sold (300,000)
Selling expense (15,000)
Interest income (368,606 x 10%) 36,861
Total profit from lease P 90,467

(c) Depreciation expense recorded by Western

(368,606 – 80,000) / 4 = P 72,152

3-14. (Technocraft Company and Marina Sands)

(a)
PV of Periodic Payments (1,328,622 x 8.1078) P10,772,200
PV of GRV (2,000,000 x .6139) 1,227,800
Total PV = Sales P12,000,000
Cost of audio system (9,000,000)
Commission and other lease costs (100,000)
Interest revenue (533,569 + 493,816) 1,027,385
Profit for 2019 P3,927,385

Amortization Table
Periodic Reduction in Balance of
Date Payment Interest Principal Principal
1/1/2020 P12,000,000
1/1/2020 P1,328,622 --- P1,328,622 10,671,378
7/1/2020 1,328,622 P533,569 795,053 9,876,325
1/1/2021 1,328,622 493,816 834,806 9,041,519
7/1/2021 1,328,622 452,076 876,546 8,164,973
1/1/2022 1,328,622 408,249 920,373 7,244,600
(b) Interest Expense for 2020 (533,569 + 493,816) P 1,027,385

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 Chapter 3 – Leases

(c ) Carrying value of equipment

Cost P12,000,000
Accumulated depreciation
(12,000,000 – 2,000,000) x 2/5 (3,200,000)
Carrying value, December 31, 2021 P 8,800,000

(d) Interest revenue for 2020 P1,027,385

(e) Current Assets:

Finance Lease Receivable, net
834,806 + 876,546 P1,711,352
Interest Receivable 493,816

Non-current Assets
Finance Lease Receivable, net P8,164,973

3-15. (Hope Manufacturing Company)

(a) Lessor’s Books (Hope Manufacturing Co.)

2020
Jan. 1 Machinery for Lease 2,200,000
Cash 2,200,000

1 Cash 600,000
Rent Revenue 400,000
Unearned Rent Revenue 200,000
2 M/5 = 400,000
2 M x 30% = 600,000

1 Machinery for Lease 60,000

Cash 60,000

Dec. 31 Depreciation Expense 212,000

Accumulated Depreciation 200,000
Machinery for Lease 12,000
(2.2 M – 200,000)/10 200,000
60,000 / 5 years 12,000
Total 212,000

2021
Jan. 1 Cash 400,000
Rent Revenue 400,000
2,000,000 x 20%

Dec. 31 Depreciation Expense 212,000

Accumulated Depreciation 200,000
Machinery for Lease 12,000

(b)
Statement of Comprehensive Income
(In profit or loss section)
Rent Revenue P400,000
Depreciation Expense 212,000

Statement of Financial Position

Machine for Lease, net of Accum. Depreciation 2,048,000
Unearned Rent Revenue 200,000

3-16. (Faith Company and Love Corporation)

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 Chapter 3 – Leases

a. Monthly rental payment 12,000

No. of payments (12-2 mos free) x 10
Total payments (120,000/12 =10,000/mo.) 120,000
Rent Expense for 2020 (120,000 x 4/12) P40,000

Rent Expense for 2021 (120,000 x 8/12) P80,000

(b) Faith Company (Lessee)

2020
Nov. 1 Rent Expense 12,000
Cash 12,000

Dec. 1 Rent Expense 12,000

Cash 12,000

Dec. 31 Rent Expense (40,000 – 24,000) 16,000

Rent Payable 16,000

2021
Jan. 1 Rent Payable 16,000
Rent Expense 16,000

(monthly entry from Jan. 1 to Aug. 1)

Rent Expense 12,000
Cash 12,000

Love Corporation
2020
Nov. 1 Cash 12,000
Rent Revenue 12,000

Dec. 1 Cash 12,000

Rent Revenue 12,000

Dec. 31 Rent Receivable 16,000

Rent Revenue 16,000
(40,000 – 24,000)

2021
Jan. 1 Rent Revenue 16,000
Rent Receivable 16,000

(monthly entry from Jan. 1 to Aug. 1)

Cash 12,000
Rent Revenue 12,000

3-17. (Provident Company)

Lessor’s Books (Provident Company)

2020
July 1 Equipment for Lease 1,500,000
Cash 1,500,000

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 Chapter 3 – Leases

Oct. 1 Cash 54,000

Rent Revenue 54,000

1 Cash 30,000
Rent Revenue 30,000

Nov. 1 Cash 30,000

Rent Revenue 30,000

Dec. 1 Cash 30,000

Rent Revenue 30,000

31 Rent Revenue 49,500

Unearned Rent Revenue 49,500
54,000 x 33/36 = 49,500

Dec. 31 Depreciation Expense 75,000

Accumulated Depreciation 75,000
(1,500,000/10) x 6/12

3-18. (Legend Company)

Cash (700,000-150,000) 550,000

Right-of-Use Machinery 432,568
Machinery 500,000
Gain on Sale Leaseback 26,973
Lease Liability (605,595 – 150,000) 455,595

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 – 150,000) P455,595
Fair value of right transferred
(700,000 - 605,595) P 94,405
Carrying amount of rights retained
(605,595/700,000) x 500,000 P432,568
Carrying amount of right transferred
(500,000 - 432,568) P 67,432
Total gain (700,000 – 500,000) P200,000
Recognized gain:
(94,405/700,000) x 200,000
or
(67,432/500,000) x 200,000 P 26,973

Gain may also be computed as:

Selling price P700,000
Fair value of asset retained 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 67,432
Gain on sale leaseback P 26,973

By using a matrix, computations can be simplified as follows:

Total Right Retained Right Sold
FV (SP=FV) 700,000 605,595 94,405
Carrying value
(apportioned based on FV) 500,000 432,568 67,432
Gain 200,000 173,027 26,973
Not recognized Recognized

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 Chapter 3 – Leases

3-19. (Legrand Company)

January 1, 2020
Cash (700,000 – 150,000) 550,000
Right-of-Use Machinery 439,484
Machinery 500,000
Gain on Sale Leaseback 33,889
Lease Liability (605,595 – 150,000) 455,595

December 31, 2020

Interest Expense 54,671
Lease Liability 54,671
455,595 x 12%

Depreciation Expense – RoU Machinery 87,897

Accum. Depr. – RoU Machinery 87.897
439,484/5 years

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 – 150,000) P455,595
Fair value of rights retained (605,595 + 80,000) P685,595
Fair value of right transferred
(780,000 – 685,595) P 94,405
Carrying amount of rights retained
(685,595/780,000) x 500,000 P439,484
Carrying amount of right transferred
(500,000 - 439,484) P 60,516
Total gain (780,000 – 500,000) P280,000
Recognized gain:
(60,516/500,000) x 280,000
or
(94,405/780,000) x 280,000 P 33,889

Gain may also be computed as:

Selling price P700,000
Present value of liability 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 60,516
Gain on sale leaseback P 33,889

Using the matrix, computations can be simplified as follows:

Total Right Retained Right Sold
FV (SP<FV) 780,000 685,595* 94,405
Carrying value
(apportioned based on FV) 500,000 439,484 60,516
Gain 280,000 246,111 33,889
Not recognized Recognized
*P605,595 PV of lease liability + 80,000 excess of FV over SP

3-20. (Legit Company)

January 1, 2020

Cash 550,000
Right-of-Use Machinery 427,381
Machinery 500,000
Gain on Sale Leaseback 21,786
Lease Liability 455,595

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 Chapter 3 – Leases

December 31, 2020

Interest Expense 54,671

Lease Liability 54,671
455,595 x 12%

Depreciation Expense – RoU Machinery 85,476

Accum. Depr. – RoU Machinery 85.476
427,381/5 years

Net cash received (700,000 – 150,000) P550,000

Present value of lease payments (150,000 x 4.0373) P605,595
Lease liability after 1st payment (605,595 - 150,000) P455,595
Fair value of rights retained (605,595 - 50,000) P555,595

Fair value of right transferred

(650,000 - 555,595) P 94,405
Carrying amount of rights retained
(555,595/650,000) x 500,000 P427,381
Carrying amount of right transferred
(500,000 - 427,381) P 72,619
Total gain (650,000 – 500,000) P150,000

Recognized gain:
(72,619/500,000) x 150,000
or
(94,405/650,000) x 150,000 P 21,786

Gain may also be computed as:

Selling price P700,000
Present value of liability 605,595
Fair value of asset transferred P 94,405
Carrying amount of rights transferred 72,619
Gain on sale leaseback P 21,786

Using the matrix, computations can be simplified as follows:

Total Right Retained Right Sold
FV (SP>FV) 650,000 555,595* 94,405
Carrying value
(apportioned based on FV) 500,000 427,381 72,619
Gain 150,000 128,214 21,786
Not recognized Recognized
*P605,595 PV of lease liability – P50,000 excess of SP over FV.

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 Chapter 3 – Leases

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 C MC11 A MC16 D

MC2 D MC7 C MC12 C MC17 C
MC3 B MC8 D MC13 C MC18 C
MC4 D MC9 B MC14 A MC19 A
MC5 D MC10 B MC15 A MC20 C

Problems

MC21 C MC30 B MC39 C MC48 A

MC22 C MC31 D MC40 A MC49 C
MC23 C MC32 D MC41 B MC50 A
MC24 B MC33 C MC42 D MC51 B
MC25 C MC34 A MC43 A MC52 D
MC26 B MC35 D MC44 D MC53 A
MC27 B MC36 D MC45 C MC54 A
MC28 D MC37 A MC46 D MC55 A
MC29 A MC38 D MC47 A

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