LESSOR ACCOUNTING – PROBLEM-SOLVING

PROBLEM 1
Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor of
computer, Luna purchased a new system on December 31, 2022. The system was delivered the
same day (by prior arrangement) to General Investment Company, a lessee. The corporation
accountant revealed the following information relating to the lease transaction:

Cost of system to Lun P550,000

Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) 40,000
Luna’s implicit rate of interest 12%
Date of first lease payment December 31, 2022

Additional information is as follows:

a) At the end of the lease, the system will revert to Luna.
b) The lease rental consists of equal annual payments.

Based on the above information, answer the following: (Round off present value factors to four
decimal places.)

1. The annual lease payment under the lease is

a. 110,717
b. 95,950
c. 102,665
d. 91,664
2. The total financial revenue to be earned by the lessor over the lease term is
a. 257,600
b. 183,312
c. 271,320
d. 335,736
3. The interest income to be recognized by the lessor in 2023 is
a. 53,680
b. 52,714
c. 54,486
d. 52,547

PROBLEM 2
Catanauan Incorporated uses leases as a method of selling its products. On January 1, 2022,
Catanauan completed construction of a passenger ferry for use between Quiapo and Guadalupe.
On April 1, 2022, the ferry was leased to Balik-Balik Ferry line on a contract specifying that
ownership of the ferry will transfer to the lessee at the end of the lease period. The ferry is expected
to be economically useful for 25 years. Annual lese payments do not include executory costs.

Other terms of the agreement are as follows:

 Original cost of the ferry P1,500,000
Lease payments 25,000
Estimated residual value 78,000
Implicit rate 10%
Date of first lease payment April 1, 2022
Lease period 20 years
PV of an ordinary annuity of 1 for 20 periods 8.5136
at 10%
PV of an annuity due of 1 for 20 periods at 10% 9.3649
PV of for 20 periods at 10% 0.1486

Based on the above information, determine the following:

4. Total finance income that will be earned by the lessor over the lease term
a. 2,459,306
b. 2,650,849
c. 2,392,897
d. 2,584,440
5. The profit on sale to be recognized by the lessor
a. 607,103
b. 427,151
c. 415,560
d. 618,694

PROBLEM 3
Denmark Co. leased equipment to Nini Corp. on January 2, 2022, for an 8-year period expiring
December 31, 2029. Equal payments under the lease are P1,200,000 and are due on January 2 of
each year. The initial payment was made on January 2, 2022. The carrying value of the equipment
on Denmark’s books is P5,600,000, and has a listed selling price of P7,040,000. The lease is
properly accounted for as sales-type lease. The lease payments have a present value of P6,600,000
at an implicit interest rate of 12%.

6. How much is the dealer’s profit to be recognized by Denmark in 2022?

a. 4,000,000
b. 1,440,000
c. 1,000,000
d. 0

PROBLEM 4
On January 2, 2022, Hungary Co. purchased a machine for P2,400,000 for the purpose of leasing
it. The machine’s estimated useful life is 10 years, no residual value, and will be depreciated under
the straight-line method. The machine was leased to Marita Corp. on March 1, 2022, for a four-
year period at a monthly rental of P36,000. There is no provision for the renewal of the lease or
purchase of the machine by the lessee at the end of the lease term. Hungary paid P120,000 of
commission associated with negotiating the lease.
 7. What amount of income before income taxes should Hungary record for the year-ended
December 31, 2022?
a. 360,000
b. 110,000
c. 95,000
d. 120,000

PROBLEM 5
Ireland Co., a lessor of office equipment, purchased a new equipment for P1,000,000 on December
31, 2022. The equipment was delivered on the same day to Gilbert Co., the lessee.

The following information relates to the lease transaction:

1. The leased asset has an estimated useful life of seven years, which is also the lease term
2. At the expiration of the lease, the equipment will revert to Ireland, at which time it is
expected to have a residual value of P120,000 (none of which is guaranteed).
3. Ireland’s implicit interest rate is 12%.
4. Lease rentals consist of seven equal annual payments, the first one of which was paid on
December 31, 2022.
5. Ireland properly accounts for this lease as a direct financing lease.

The present value tables who the following present value factors:

PV of 1 for seven periods at 12% 0.4523

PV of an annuity due for seven periods at 12% 5.1114

8. How much is the annual lease payment?

a. 195,641.12
b. 185,022.50
c. 135,103.43
d. 142,857.14
9. How much unearned interest income should be recognized by Ireland at the inception of
the lease?
a. 65,724.00
b. 0
c. 120,000
d. 415,157.50

PROBLEM 6
Baxter Company leased equipment to Fritz Inc. on January 1, 2022. The lease is for an eight-year
period expiring December 31, 2029. The first of eight equal annual payments of P900,000 was
made on January 1, 2022. Baxter had purchased the equipment on December 29, 2021, for
P4,800,000. The lease is appropriately accounted for as a sales-type lease by Baxter.
 10. Assume that the present value at January 1, 2022, of all rent payments over the lease term
discounted at a 10 percent interest rate was P5,280,000. What amount of interest revenue
should Baxter record in 2023 (the second year of the lease period) as a result of the lease?
a. P490,000
b. P480,000
c. P438,000
d. P391,800