SALES TYPE

LEASE - LESSOR
Sales type with bargain
purchase option
 Salome Company is a dealer in equipment. January 1, 2015, the entity leased
a equipment to another entity. The lease is appropriately recorded as a sales
Required: type lease.
1. Determine the unearned interest income January , 2015.
2. Determine the gross profit on sale.

Salome
3. Prepare journal entries for 2015 andrental
Annual 2016.payable at the beginning of each year 875,000
4. Prepare journal entry on December 31, 2022 to record the exercise of the
bargain purchase option by theLease term
lessee. 8 years

Company
5. Prepare journal entry on December 31,of2022
Useful life if the bargain purchase option
equipment
is not exercised by the lessee and the fair vale of the leased asset is P200,000.
Cost of equipment
10 years
3,100,000
Purchase option 300,000
Implicit interest rate 10%
PV of an annuity of 1 in advance at 10% for 8 periods 5.8684

13-10 PV of 1 at 10% for 8 periods 0.4665

It is reasonably certain that the lessee will exercise the purchase option on the
expiration of lease on December 31, 2022.
The perpetual inventory system is used by Salome Company.
 Actual sale of
underlying asset
When a lessor actually sells an asset that it has
been leasing under a finance lease, the difference
between the sale price and the carrying amount of
the lease receivable is recognized in profit or loss.

The carrying amount of the lease receivable is

equal to the balance of the lease receivable minus the
unearned interest income.
 On January 1, 2015, Esmeralda Company leased equipment to
another entity.

E sRequired:
m e r a l d a made at the end of each year.
The terms of the lease called for annual payment of P500,000 to be

C1.2. o m
Determinepthe a n
unearnedy interest income January 1, 2015.
The lease term is 5 years which is the useful life of equipment .
Determine the gross profit on sale.
3. Prepare journal entries for 2015,2016 and 2017
The lease to record the
is appropriately sales type
recorded leasetype
as a sales ad the actual
lease. The cost of
sale of the underlying asset. The periodic system is used.
the equipment is P1,000,000.
The implicit rate in the lease is 12%. The PV of an ordinary of 1 at
1 3 - 11 12% for 5 periods is 3.60
On July 1, 2017, Esmeralda Company “actually sold” the equipment
to the lessee for P1,200,000.
 DISCLOSURES FR FINANCE
LEASES - LESSOR
1. A reconciliation between the gross investment in the lease and the present value of
the minimum lease payments receivable at the end of the reporting period.
2. The gross investment in the lease and the present value of the minimum lease
Payments receivable the end of the reporting period for each of the following periods:
a. Not later than one year
b. Later than one year and not later than 5 years.
c. Later than 5 years.
3. Unearned finance income or unearned interest income.
4. Unguaranteed residual value according to the benefit of the lessor.
5. Accumulated allowance for collectible minimum lease payments receivable.
6. Contingent rents recognized as income in the period.
7. A general description of the lessor ’s material leasing arrangement.
 On January 1, 2015, Pamela Company leased equipment to another
entity under a finance lease. The terms of the leased called for annual
lease payments to be made in advance at the beginning of each year
starting January 1, 2015. the implicit interest rate for the transaction is

Pamela 12%.On July 1, 2017, the lessor actually sold the equipment t the
lessee and received P3,000,000 to complete the transaction. After the
Company January 1, 2017 payment was made, the balance of the “net lease
receivable” was P3,500,000.
1. What is the interest income to be recognized in 2017 ?
a. 210,000
13-24 b. 420,000
c. 360,000
d. 180,000
 1. What is the carrying amount of the lease receivable on July 1,
2017?
a. 3,500,000
b. 3,710,000

Pamela c. 3,290,000

Company
d. 3,920,000

2. What is the loss on sale of the leased asset to be recognized on

July 1, 2017?
a. 710,000
13-24 b. 500,000
c. 290,000
d. 0