OPERATING LEASE & LEASEBACK

LECTURE DRILLS
Problem 1
On January 1, 2022, an entity owned a building held as investment property using the cost model. The
carrying amount of the building was ₱9,000,000 with remaining useful life of 10 years. On April 1, 2022,
the entity leased the building to a lessee for three years at monthly rental of ₱200,000. The lessee paid
the rental for one year of ₱2,400,000 and ₱2,000,000 secuirty deposit to be refunded upon expiration of
the lease. On April 1, 2022, the lessee additionally paid ₱1,200,000 as a lease bonus. On April 1, 2022,
the entity paid ₱600,000 to a broker as a finder fee. During 2022, the entity paid property tax of
₱200,000 and ₱50,000 insurance on the building. What is the net rental income of the lessor?
a. 1,400,000
b. 1,075,000
c. 800,000
d. 500,000

Problem 2
On July 1, 2022, an entity leased an equipment to a lessee under a 3-year operating lease. Total rent for
the lease term is ₱7,200,000, payable ₱100,000 monthly for the first lease year, ₱150,000 monthly for
the second lease year and ₱350,000 monthly for the third lease year. The fiscal ends June 30.
1. What amount should be reported as rent revenue for the year ended June 30, 2023?
a. 2,400,000
b. 1,200,000
c. 600,000
d. 900,000
2. What amount should be reported as accrued rent receivable on June 30, 2024?
a. 1,200,000
b. 1,800,000
c. 4,200,000
d. 0

Problem 3
At the beginning of current year, an entity sold a machine with remaining life of 10 years and
immediately leased it back for 5 years at the prevailing market rental.

Sale price at fair value 7,500,000

Carrying amount of equipment 6,000,000
Annual rental payable at the end of each year 1,000,000
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 5 periods 4.21

1. What is the initial lease liability?

a. 4,210,000
b. 7,500,000
c. 6,000,000
 d. 3,000,000
2. What is the cost of right of use asset?
a. 3,368,000
b. 3,290,000
c. 6,000,000
d. 3,750,000
3. What is the gain on right transferred?
a. 658,000
b. 826,400
c. 750,000
d. 375,000
4. What is the annual depreciation of the right of use asset?
a. 673,600
b. 336,800
c. 842,000
d. 421,000

Problem 4
On June 1, 2022, Lessor Company entered into a lease agreement for a new building with a lessee. The
lease is accounted for as an operating lease and fully executed on that day. According to the terms of the
lease, payments of ₱200,000 per month are scheduled to begin on September 1, 2022 and to continue
each month thereafter. The lease term spans 5 years effective on June 1, 2022. The entity has a calendar
year-end. What amount should be reported as lease income for 2022?
a. 2,280,000
b. 1,330,000
c. 800,000
d. 760,000

Problem 5
At the beginning of current year, an entity sold a building with remaining life of 20 years and immediately
leased it back for 5 years.

Sale price at above fair value 6,000,000

Fair value of building 5,000,000
Carrying amount of building 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for five periods 3.60

1. What is the cost of right of use asset?

a. 2,880,000
b. 1,880,000
c. 1,692,000
d. 4,500,000
2. What is the gain on right transferred?
a. 312,000
b. 500,000
c. 800,000
d. 400,000
3. What amount should be reported as gross rental income of the buyer-lessor for current year?
a. 522,222
b. 277,778
c. 800,000
d. 400,000

Problem 6
At the beginning of current year, an entity sold a building with remaining life of 30 years and immediately
leased it back for 5 years.

Sale price at below fair value 18,000,000

Fair value of building 20,000,000
Carrying amount of building 24,000,000
Annual rental payable at the end of each year 1,000,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for five periods 3.60

1. What is the cost of right of use asset?

a. 3,000,000
b. 2,880,000
c. 5,760,000
d. 6,720,000
2. What amount should be reported as loss on right transferred?
a. 4,000,000
b. 2,880,000
c. 4,320,000
d. 6,000,000
3. What is the net rental income of the lessor?
a. 1,000,000
b. 2,000,000
c. 400,000
d. 200,000