Chapter 3 - Leases DISCUSSION QUESTIONS What is a contract considered a lease? What guidelines are observed to determine whether a contract identifies an asset in a lease? Determine whether each of the following contracts contains (or is) a lease. (a) (b) (ec) (d) Supplier L provides Customer M the use of 5 delivery vans of particular type for a term of 5 years. The contract specifies the vans and Customer M has the decision where the goods will be delivered and the types of goods to be delivered. Customer M can use the vans for whatever purpose, except for delivery of illegal drugs, explosives, firearms and other items of similar nature. Supplier L is required to substitute a van that may require repairs and maintenance service. Accountantea Company enters into a contract with SuperMalls to use a space for kiosk (which Accountantea owns) to sell its milktea products for a three-year period. The contract specifies the amount of the space, which may be located at any area in the mall, provided that SuperMalls may change the location of Accountantea space with a two-day notice. Minimal cost is incurred by SuperMalls in changing the space allotted to Accountantea. Accountantea’s kiosk can be moved easily within the mall and there are several available areas that would meet the space requirement specified in the contract. JetLag Company enters into a Craftbuilders Company to use thr: that will fly passengers from Mani Asia Pacific. Jetlag makes the de: the jumbo jets and the destinati r ation of such flights. Craftbuilders owns a fleet of jumbo jets, such that it cen shania any unit of jet for JetLag Company for reason of airs, maintenance or malfunction. In fa i i " “ 3 ty is obliged to substitute those jets in such cue ee 1S-year contract with ee specified jumbo jets ila to selected cities in cisions about the use of The contract between I latter to trans specified type Indoplas and F, Port a specified of car in accord: FastMover requires the quantity of goods by using a ance with a stated time table 239Chapter 3 - Leaner 10. 1. 12. 13. renewable at the end of the term the delivery cars, driver and gasoline ture and quantity of goods to be 10 be used that suits the pool of similar for three yew FastMover provides ‘The contract states the nati transported and the type of car t Nature of the goods. FastMover has a large aaa that can be used for this purpose. The cars, when not Inuse, are parked at the FastMover’s premises. et? At what amount should the lessee -of-use asset? What is a right-of-use ass initially recognize the right ould the lessee initially recognize a lease ‘At what amount sh the components in the measurement of the Viability? What are lease liability? What are variable lease payments? What variable lease ments are included in the measurement of the lease liability? Qywat variable lease payments are not included in the measurement of lease liability? Give possible financial statement classifications for the right-of luse asset recognized by the lessee. How are these assets measured on the statement of financial position? How does the lessee consider each of the following in depreciating the right-of-use asset? provision for transfer of title at the end of the lease term; {a) (b) bargain purchase option; () guaranteed residual value; and (a) unguaranteed residual value Under what circumstances can a lessee elect to apply the recognition and measurement exemptions for accounting for leases? Explain. What is the main objective of the disclosure i i requirements in IFRS 16 in the financial statements of the lessee and the lessor? What criterion must be met for a lease to be n accounted finance lease in the books of the lessor? wet What are the indicators that there is s i substantial transfer to the ae the risks and rewards incidental to the ownership of What are initial direct costs? Give examples.1a as. 16. 17. 18. 19, 21. 22. 23. 24. 25. 26. a7. Chapter 3 - Leases Explain the accounti a ing treatment by the or of the folla relating to an operating lease: 7 the fearon of the leon a. lease bonus paid by the lessee b. lease bonus granted by the lessor c. executory costs a initial direct cos Describe the accounting procedures for uneven rental payments collected by the lessor in an operating lease. ‘What are the required disclosures by the lessee and the lessor in an operating lease? ‘What is a bargain purchase option? What is the proper treatment of guaranteed residual value from the viewpoint of the lessor? Distinguish a direct financing lease from a dealer's lease. How are initial direct costs treated in a direct financing lease? How are the costs of negotiating and arranging a lease treated by the lessor in a dealer's or manufacturer's lease? What are the two types of revenues/income recognized by the lessor when the finance lease is a dealer's lease or manufacturer's lease? What are the required disclosures in the financial statements of the lessee? What are the required disclosures in the financial statements of the lessor in a finance lease? in an operating lease? What is a sale and leaseback transaction? Discuss the accounting procedures to be applied by a lessee when the transfer in a sale-leaseback transaction qualifies as a sale under IFRS 15 Revenue from Contracts with Customers. Discuss the accounting procedures to be applied by the seller- lessee and the buyer-lessor when the transfer of an asset in a sale-leaseback transaction does not qualify as a sale under IFRS 15 Revenue from Contracts with Customers.3-1. 3-2. PROBLEMS On January 1, 2020, Generous, Inc. leased two automobiles fo, executive use. The lease requires Generous to make five anni.) payments of P260,000 beginning January 1, 2020. At the en of the lease term, December 31, 2024, Generous guarantees that the residual value of the automobiles will total P200,000. The Property reverts to the lessor at the end of the lease term, The estimated useful life of the automobiles is 6 years and Generous uses straight-line method for all its assets. Generous’ incremental borrowing rate is 10%, The interest rate implicit in the lease, which is known to Generous, Inc., is 9%, REQUIRED: (a) At what amount should Generous, Inc. record the right-of use equipment on January 1, 2020? (2) At what amount should the lease liability be recognized at January 1, 2020, after making the first payment of 260,000 to the lessor? (}) Prepare an amortization table for the five-year term of the lease. (a) Prepare journal entries in the books of Generous, Inc. for years 2020 and 2021 to record alll transactions relating to the lease. (€) Prepare the journal entry at the end of the lease term to record the transfer of the leased automobiles to the lessor. o Assuming that the residual value of the two automobiles amounted to P150,000 at the end of the lease term, prepare the journal entry to record the transfer of the leased automobiles to the lessor. Fep.000 unguaranteed residual value at the end of the five year aug term. The machine reverts to the lessor at the end of the ae Jease term, _Diana uses the Straight-line method of concer Ca alee its Plant assets. The rate implicit in this } own to Diana, is 10%. The fair value of thi machine on January 1, 2020 is P392,490. Diana liearred 2423-4, Chapter 3 - Leases for use at the o end of the lease term. toration is P20,000. (Use a discount rate of 10% to measure the provision.) REQUIRED: (a) At what am . Sanuary 3. DOsU ee Diana record the leased asset at (b) Prepare an amortization table over the five-year lease term. ~Use the format exemplified in the textbook. (c) Prepare the entries in the books of Diana for the years 2020 and 2021, including December 31 adjustments. Riza, Inc. leased an equipment from Joey Company on December 31, 2020. The equipment has a fair value of P1,011,840 at this date. Annual lease payments are P135,000 and are payable each December 31. The first payment was made on December 31, 2020. At the end of the 12 year-lease term, title to the equipment will pass to Riza, Inc. The equipment has an estimated residual value of P40,000 at the end of the 15 year useful life. REQUIRED: (a) Whatis the lessor's implicit interest rate in this lease? (b) Prepare a partial amortization table for the first three years of the lease term. (c) How much depreciation will be taken up by Riza for the xyear.2020? (af Prepare the entries in the books of Riza to record the foregoing for the years 2020 and 2021. (e) How much of the lease liability on December 31, 2020 will be classified as current liabilities and non-current liabilities? On January 1, 2020, Shirley Corporation leased a machinery from Joel Company on a five-year lease term at P150,000 annual rental payments, paid in advance. There is a bargain purchase option on December 31, 2024 of P240,000. The economic life of the equipment is 15 years. The interest rate implicit in this lease, which is known to Shirley is 12%. 243Chapter. 3-5. REQUIRED: (a) (o) () (a) (e) 0 > saGeee ‘At what amount should the asset be recorded on January j, 2020? Prepare an amo! lease. How much depreciat year 2020? re the entries in the books of Shirley to record the {foregoing for the years 2020 and 2021. ‘Assume that at the end of the lease term, Shirley exercised its purchase option. Give the entry for the exercise. Give the journal entry at the end of the lease term assuming that Shirley failed to exercise its bargain purchase option. tization table for the entire term of the tion will be taken up by Shirley for the On July 1, 2020, the Prince of Wales, Inc. signs a 10-year non- cancellable lease agreement for a storage building owned by Colony, Inc. The following information pertains to the lease agreement. Annual rental payment is P750,000 beginning on July 1, 2020. This rental payment includes P50,000 for taxes and insurance. The fair value of the building on July 1, 2020 is P4,478,000. The building has an estimated economic life of 12 years. Unguaranteed residual value at the end of 10 years is P150,000. ’ Interest rate implicit on the lease is 10%. REQUIRED: (a) () () At what amount should Prir We ildis ruled anew ince of Wales record the building What is the annual depreciation on the building? Prepare the entries in the books of Prins fs ce of Wales to record the foregoing for the years 2020 and 202), The conband opts the calendar year as its reporting period. 2443-6. 3-7. Chapter 3 - Leases On August 1, 2 Company for’ peed Company leased a machine to Happy at. the begins Period requiring payments of P100,000 $460,000 ginning of each lease year. The machine cost ase.p0e, Which is the fair value at the lease date, and has a Eroviiee os eight years with no residual value. The lease Which is ene an option to purchase the machine for P5,000 which i sland icantly lower than the expected value of the asset at that time. ‘Joy incurred and paid initial direct cost of P1,900 py Company's implicit interest rate is 10%. Joy appropriately recorded the lease as a direct financing lease. REQUIRED: (2) Prepare journal entries in Joy’s books for the years 2020 and 2021, assuming that the company uses calendar year. (b) What are the current and noncurrent portions of the Net Investment in Lease reported in Joy Company's statement of financial position at December 31, 2020? Jane Company enters into a twelve-year lease of an office unit of a building, with an option to extend for an additional six years for an annual rental of P1,000,000, payable in advance. The contract specifies that the lease payment will increase every three years on the basis of the increase in the Consumer Price Index (CPI) from the preceding three years. The CPI at the commencement date is 125. ‘The rate implicit in the lease is not reliably determinable. Jane’s incremental borrowing rate is 5%, which reflects the fixed rate at which Jane could borrow an amount similar to the value of the office unit, in the same currency for the twelve-year term and with similar collateral. At the beginning of the fourth year, the CPI is 135 REQUIRED: (a) Journal entry at commencement of the lease (b) Journal entry at the end of the first year of the lease term (and financial year) * (c) Journal entries at the beginning and at the end of the fourth yearBea TN ji i lease contract 3-8, Jackie Chan Leasing signs an equipment lease cor with Chris Tucker on January 1, 2020. The following information pertains to the lease. Chapter 3 - Leases Lease term 5 years Equipment's useful life 6 years Bargain option price 40,000 Implicit rate, known by Chris Tucker 10% Fair value of the asset at January 1, 2020 600,000 Estimated recoverable value at the end of 5 years P80,000 Estimated residual value at the end of 6 years P20,000 The cost of the asset to Jackie Chan Leasing is P600,000. Chris “Tucker uses the sum-of-the years’ digit method to depreciate this type of equipment. Annual lease payments are made at the beginning of each year, starting January 1, 2020. REQUIRED: (a) Give the entries in the books of Chris Tucker for years 2020 and 2021 as a result of the lease contract. (2) Give the entries in the books of Jackie Chan Leasing for years 2020 and 2021. 3-9. On April 1, 2020, Ben Ten Company leased equipment to Ironman Corporation. The following information pertains to this lease: . The term of non-cancelable lease is 8 years with no renewal option. . The annual payment is P80,000; first payment is due April 1, 2020, 5 . Estimated useful life of the equipment is 10 years. . bs cash price of the equipment is P539,730 at April 1, 2020, which is the same as the carrying value of th asset in the books of Ben Ten. pivcecahines . The residual value at the end of the lease term, which is guaranteed by Ironman, is P80,000. Both Ben Ten and Ironman use th: i Beth Benen ¢ the calendar year as their3-10. 3-11. SRGREST 2: SaaS REQUIRED: (a) What is ‘ape of lease is this from the standpoint of Ben Ten? 0 What is the implicit interest rate on this lease? () Prepare the entries i _ Fespare the entries in the books of ironman for the years (d) Prepare the entrie Prepare the entries in the books of Ben Ten for the years fe) Assume that the residual value of P80,000 is not guaranteed. At what amount should the asset be recorded y Ironman? How much depreciation should Ironman take up on this equipment for the year 2020? o Assume that the residual value of P80,000: is not guaranteed. What difference, if any, will be noted in the books of Ben Ten in recording the lease transactions? Prudent Company uses leases as a means of selling its equipment. On July 1, 2020, the company leased a machine to Corolla Trading. The cost of the machine to Prudent was 784,500. The fair value (which was the sales price) was P1,011,840 at the time of the lease. ‘Annual lease. payments are P135,000 and are payable in ‘advance for 12 years. At the end of the lease term, title to the machine will pass to Corolla. Implicit interest rate is 10%. REQUIRED: Compute the following for Prudent Company (a). Manufacturer's profit recognized in the year 2020 {o) Total financial revenue pertaining to the lease (co) _ Interest revenue recognized in the year 2020 {d) Net Finance Lease Receivable balance, December (31, 2020 Glad Manufacturing Company leased a piece of equipment to 1 1, 2020. The lease is appropriately Great Company on April Grettled as a sale by Glad, The lease is for an 8-year period ending March 31, 2028. The first of 6 equal annual payments of P175G00 (excluding executory costs) was made on April 1, 2020. ment to Glad is P940,000, The equipment The cost of the equip! 1 life of 10 years with an unguaranteed has an estimated useful E é ‘ t fif the lease term, th i alue of P100,000. At the end of th , the Tabet oquipinent reverts to Glad Manufacturing Company. The interest rate implicit in the lease is 10%. REQUIRED: + Prepare all journal entries relating to the lease in the books be of Glad Company for the years 2020 and 2021 (b) Compute the following: () Gross profit on sales (i) Interest revenue for the year 2020 (c) What are the amounts of sales and cost of sales recorded by Glad Company at the commencement of the lease assuming that the residual value is guaranteed by the lessee? The following facts pertain to a non-cancelable lease agreement between Ruby Company (lessor) and Emerald Company (lessee): Fair value at October 1, 2020 4,000,000 Commencement date October 1, 2020 Annual lease payments due at the beginning of each lease year, starting October 1, 2020 P 850,365 Residual value at the end of 6-year lease term, not guaranteed by Emerald P 166,300 Estimated useful life 8 years Ruby’s implicit rate, known to Emerald 12% The carrying value of the asset is P3,200,000 in the books of Ruby Company at September 30, 2020. Ruby incurred P85,000 costs for arranging the lease contract. REQUIRED: (a) What type of lease is this, it what ‘ape of is from the standpoint of Ruby (b) Determine the total income recogni: year 2020 as a result of this lease. Seti Haha © Gin he entries in the books of Ruby for years 2020 and (4) Give the entries in the books years of Emerald for 2020 and 2021. Emerai straight-tis reciate laa peer vase iht-line method to depreci314. Chapter 3. Leases is » 2020, Met: equipment to Western Goer, Industrial Company leased December 31, 20237 GORPERY for a four-year period ending The oC equipment cost Metro | ri P300,000 and has an expected ‘useful life of five years, 2 Annual a. Lda are F109,046 {including P10,000 executory the ment’s fair value is P368,606. The lessee ses tes the residual value of P80,000. Lease payment is duc Denaie st and Western made the first payment on Metro — implicit interest rate, which is known to Western Company, is 10%. Metro incurred and paid oes in consummating the lease contract on January 1, REQUIRED: (a) How much sales should Metro Industries record from this transaction during 2020? (&) How much is the total profit reported in Metro Industrial Company's statement of comprehensive income for the year (©) How much depreciation expense should Wester Company record on this eqiipment for the year 2020? ‘Technocraft Company sells audio systems. It leases to Marina Sands Company on January 1, 2020 an audio equipment with carrying value of P9,000,000, under the following terms: : Guaranteed residual value of P2,000,000 at the end of the lease term of 5 years; . : Periodic payment every January 1 and July 1 of P1,328,622 starts on January 1, 2020; . Lessor’s annusl implicit interest rate, which is known by Marina Sands is 10%. Market rate of interest is also 10%. Technocraft incurs commission and other costs related to the lease amounting to P100,000.“naprer J: eases 3-15. 3-16. REQUIRED: (a) How much total profit should Technocraft recognize for the year ended December 31, 2020? (b) How much interest expense shall Marina Sands recognize for the year ended December 31, 2020? 7 () What amount shall. Marina ‘Sands report for the equipment at December 31, 2021? (4) What amount of interest revenue should Technocraft report for the year ended December 31, 2020? (e) What amount of financial asset shall Technocraft report at December 31, 2020? Hope Manufacturing Company leases a machine to the Charity Company at a total rental of P2,000,000, payable in 5 annual installments in the following declining pattern: 30% in first year, 20% in each of the next two years, and 15% in each of the last two years. The lease begins on January 1, 2020. The lease does not transfer substantially the risks and rewards incidental to the ownership of the asset. Hope incurred initial direct costs of P60,000 in obtaining the lease. The machine cost Hope P2,200,000 on January 1, 2020 and has an estimated life of 10 years with an estimated residual value of 200,000. Hope uses the straight-line depreciation method on its equipment. Hope Manufacturing Company reports on a calendar-year basis, REQUIRED: (@) Prepare journal entries relating to the lease in the books of Hope Manufacturing Company for years 2020 and 2021. fe) Identify the accounts and amounts that will be presented on the 2020 financial statements of Hope Manufacturing Company. Faith Company leases a machinery from Love Corporation under a twelve-month operating lease. As an inducement to enter the lease, Love Corporation grants Faith Company free rent for the first two months. The lease is effective September 1, 2020 and poe for monthly rental of P12,000 to begin on November 1, 250 on ender sa: ban3-17. 3-18. 3-19. Chapter 3 - Leases REQUIRED: fa) Com (a) eas peace Pen Expense reported in Faith Company’s tor loss for the years enced December 31- 2020 and os ieniber 31,2021, ‘assuming that Faith elected to apply exemptions under IFRS 16 Leases. ee oy : () Erepare entries for years 2020 and 2021 in the books of ‘aith Company and Love Corporation. ment on July 1, 2020 for ‘The equipment e date of Provident Company purchased an equip P1,500,000 cash for the purpose of leasing it. as an estimated useful life of 10 years from. th purchase. On October 1, 2020, Beneficial leased from Provident Company. this equipment for a period of three years, at a monthly rental of 30,000 payable in advance at the beginning of each month. Beneficial also paid P54,000 lease bonus to Provident. During the year 2020, Provident Company paid P15,000 for repairs of the equipment. REQUIRED: Using the income method, prepare jou Provident Company for the year 2020. mal entries in the books of On January 1, 2020, Legend Company sold machinery with carrying amount of 500,000 for P700,000, which is the fair cane: of the asset on this date, and then immediately leased the vas hine back for P150,000 annually, payable in advance for five years. The implicit rate is 12%. Prepare entries in the books of Legend Company to record the sale-leaseback. On January.1, 2020, Legrand Company sold machinery with carrying amount of P500,000 for P700,000. ‘The fair value of the sarct on this date has been determined to be 780,000. Legrand ininediately leased the machine back for 150,000 annually, payable in advance for five years. The implicit rate is 12%. 251Chapter 3 - Leases 3-20. REQUIRED: Prepare entries in the books of Legrand Company for the year 2020, including any necessary yearend adjustments. On January 1, 2020, Legit Company sold machinery with carrying amount of P500,000 for P700,000. The fair value of the asset on this date has been determined to be P650,000. Legit immediately leased the machine back for P150,000 annually, payable in advance for five years. The implicit rate is 12%. REQUIRED: Prepare entries in the books of Legit Company for the year 2020, including any necessary yearend adjustments.MC1 MC2 Mc3 Mc4 Chapter 3 - Leases MULTIPLE CHoIcE QUESTions Usted below are four lease situations pase fair value I " a . (in million pesos) "s 7 P12 BerinporctaseSeae, 42 Tio Mie Mp Lease term/in years)" “NONE None None None Present value of minimum 6 5 6 4 lease Payments Pll P8M ? PSM Which of the foregoi "going leases shall be lease from the standpoint of the lessor?) ne %* OPerating a 1,1, Mand Iv b. 1, Handiv © HandIv dq. Ml and Iv a. Completeness. b. Neutrality. c. Prudence. d. Substance over form. ‘The equal monthly rental payments made by the lessee in a short-term lease for which the lessee applies the recognition and measurement exemptions in IFRS 16 Leases shall be a. recorded partly as interest expense and partly a reduction of lease liability. b. _ recorded as rent expense. c. _recorded’as reduction of lease liability. - d. allocated between’ interest expense and depreciation expense. In an operating lease, rent collected in advance by the lessor should be treated as accrued asset. accrued liability. prepaid expense. unearned income. poopChapter 3 - Leases MCS MC6 ‘MC7 Mc8 ccount for a non-refundable lease bonus How should lessor account fo" 8 ron eee / paid by a lessee on signi Recognized as rent income when received . income during the year of b. Recognized as rent cement ’ i : c. Referred when received and recognized as income in the "final year of the lease term 2 4. Recognized as rent income over the life of the lease The portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time such as percentage of sales, amount of usage, price index and market rate of interest is called bargain purchase option. a. b. _ variable rent. c. contingent rent. d. —_executory costs. Which of the following are included in the measurement of the lessee’s lease liabilit 1." Amount guaranteed by the lessee or by a party related to the lessee M1. "Payment required to exercise an option of the lessee to : Purchase the asset at a price which is expected to be sufficiently lower than its fair value at the date of option exercise. Contingent rentals Rental payments over the lease term. 1, I, Mand Iv 1, and I I, Mand Vv Tand ff SB poo Which of the following lease arran, . ements would most i accounted for as an operating lease by the lessor? nt UKClY be & The lease agreement runs for 1 ‘ S: : : ite of the leased property is 20 eae See Be Seenamic . Present value of the minimum leas is © payments oe and the fair value of the leased asset is P80,000. agreement allows the lessee the right to Purchase the leased asset's useful life bas expinene P100.00 when 60% of the c. e lessee may renew th i ie three-; additional three years at the samc ae 254Chapter 4 laasen MC? Which of the followin % shall be inchude: ye initia ne, fdlowing shall be inctuded In the inital L Present value of lease 7 ow lease payments not yet collected at the od Lease payments paid to the lessor at or before revenue Wl Variable lease payments based on sal IV. Initial direct costs incurred by the lessee v. Any estimated dismantling or restoration comts, recognized as a provision. a 111,11, tv andv bd OLIV. andv ©. I, 1 and IV 1, 0, I and Iv MC10 When measuring the discounted amount of future rentals 10 = capitalized as part of the jnitial amount assigned to right-of-use asset, identifiable payments to cover taxes, insurance and maintenance should be a included with future rentals to be capitalized. be exciuded from future rentals to be capitalized. ce capitalized but at a different discount rate and for a relevant period that tends to be different from the future rental payments. 4. capitalized but at different discount rate and recorded in a different account from future rentals. MCiL ‘The \case liability of the lessee would be reduced periodically by the a Iease payment less the portion allocable to interest. b lease payment plus the interest expense for the period. c lease payment less depreciation expense a lease payment. MC12 A ten-year finance lease requires equal annual payments. “The ‘current portion of the lease liability at the end of year 1 is a the annual lease payment for year 1. b. the reduction of the lease liability in year 1. c. the reduction of the lease liability in year 2. 4. _ one-tenth of the original lease liability.Chapter 3 - Leases MC13 MC14 MC15 MC16 ine with an estimated useful life Lessee Company i¢0ne Company. The 10-year non-cancellaie of 20 yeorides that the title to the machine transfers to Lessee case Pry at the end of the lease term. Lessee Company cor eriately recorded an asset and a liability in its records saeree Company should depreciate the leased asset over a 10 years. b. 15 years. c. 20 years. d. SO years. In a lease where there is either transfer of title at the end of the lease term or a bargain purchase option, the lessee shall capitalize the leased asset and depreciate it over a the useful life of the leased asset. b. lease term. ; c. the shorter of the lease term and the useful life of the asset. da. the longer of the lease term and the useful life of the leased asset. Initial direct costs incurred by the lessor in connection with specific leasing activities as in negotiating and securing leasing arrangements, in a direct finance lease, are a included in the initial measurement of the finance lease receivable and reduce the amount of income over the lease term. b. =e as an expense, usually as part of the cost of sales, c recorded as deferred costs and amortized over the useful life of the asset. a. ignored. Which of the followin, in lease in a divece ane Shall be included in the gross investment inance lease? L I. ml. Bargain purchase option Guaranteed residual value Unguaranteed residual value Tonly, lor i, Tori, 1, Norm, poop 256went NCIS MC19 MC20 Chapter 3 - Leases Which of the foto at al facturer’s allowing di ean fron the direey eeMinguiahes a dealer's or manufacturer’ t finance lease? r a ie manner iy which rental receipts are recorded as b, The amount of the depreciation recorded each year by the iT © The recognition of the manufactur ’s profit a tee commencement ofthe leases wn® Prost at ke allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. 2 @ lease that is recorded as a manufacturer's lease or dealer’s lease by the lessor, interest revenue a should be recognized in full as revenue at the lease’s inception b. should be recognized over the period of the lease using the straight-line method. a should be recognized over the period of the lease using the effective interest method. d, does not arise. In a lease that is recorded as a manufacturer’s lease or dealer’s lease by the lessor, gross profit ‘a, _ should be recognized in full in profit or loss at the lease’s commencement b. __ should be recognized in profit or loss over the period of the lease using the straight-line method. ©. should be recognized in profit or loss over the period of the lease using the interest method. d. should be ‘deferred and transferred to profit or loss during the last year of the lease term. Big Company sold its factory at a gain and simultaneously leased it back for 10 years, The sales price is at fair value. The factory's remaining useful life is 30 years, Based only on this information and applying IFRS 16 Leases, at the time of sale, Big should report the gain a. _ in full in profit or loss. b. _anasset valuation allowance. c. _ as the amount relating only to the right transferred to the buyer-lessor. d. as adeferred credit. 257Chapter 3 - Leases new machine to Lake Co. on Janu, Mea) James Company lensed a new machin to Le, Co. 9 anny rental is P900,000. Additionally, on January 1, 2020, Lake paig P500,000 to James as a lease bonu: and P250,000 as a security deposit to be refunded upon expiration of the lease. In James’ 2020 statement of comprehensive income, the amount of rental revenue should be a. 1,400,000 b, 1,250,000 ce P1,000,000 a. P 900,000 MC22 Peter Company leased office premises to Fox, Inc. for a five-year term beginning January 2, 2020. Under the terms of the operating lease, rent for the first year is P80,000 and rent for years 2 through 5 is P125,000 per annum. However, as an inducement to enter the lease, Peter granted Fox the first six months of the lease rent-ffee. In its 2020 statement of comprehensive income, what amount should Peter report as rental revenue? a. P120,000 b. —-P116,000 ¢. P108,000 dP 80,000 MC23 On July 1, 2020, Extreme Company signed a five-year lease for an equipment having a 12-year economic life. The lease agreement provides for neither a transfer of title to Extreme nor @ bargain purchase option. The agreement calls for annual Payments of P240,000 starting July 1, 2021. Incremental borrowing rate is 14% which approximates the rate implicit in the lease. Fair value of the equipment at the inception of the lease is P1,480,000. Present value factors are as follows: PY of an ordinary annuity at 14% for five periods - 3.433 PV of an annuity due at 14% for five periods - 3.914MC24 MC25 MC26 Mc27 Chapter 3 - Leases Use the same information given in MC23. What is the amount of en aie Gas to the lease agreement that Extreme would report in its December 31, 2020 statement of financial position? a. —-P939,360 b. P881,594 & P823,644 d.—_-P120,000 On July 1, 2020, Pat Co. leased a piece of land from Luke Corporation under a 3-year operating lease. Total rent for the term of the lease will be P3,600,000, payable as follows: 12 months at P 50,000 = P 600,000 12 months at P 75,000 = P 900,000 12 months at P175,000 = P 2,100,000 All payments were made when due. How much is Luke’s rent revenue for the fiscal year ended June 30, 2021? a. P 600,000 b. — P_ 900,000 c. 1,200,000 d. —_-P2,100,000 Use the same information given in MC25. What is the amount reported in Luke’s statement of financial position at June 30, 2022? P 900,000 Unearned Rent P 900,000 Rent Receivable P1,500,000 Unearned Rent P1,500,000 Rent Receivable apgp On December 31, 2020, Simon Company leased a new machine from Junction Company with the following pertinent information: Lease term - 6 years; Useful life of machine - 6 years Annual rental payable every December 31 500,000 Simon's incremental borrowing rate 15% Implicit interest rate in lease (known by Simon) 12% Present value of annuity of 1 in advance for’6 periods at 12% - 4.61; at 15% - 4.35 259Chapter 3 - Leases MC28 Mc29 MC30 The machine reverts to Junction at the termination of the lease, The cost of the machine on Junetion’s accounting recorgs'® P3,755,000. At what amount should Simon record the right-of-use asse: g, December 31, 2020? a. P3,755,000 b. —-P2,305,000 c. P2,175,000 ad PO Use the same information given in MC27. What is the lease liability balance at December 31, 2021? a P1,805,000 b. -P1,851,600 c. 1,581,600 d. P1,521,600 Use the same information given in MC27. Assuming that Simon Goes Straight-line method of depreciation, how much is the depreciation expense for year ended December 31, 2021? a. P384,167 b. 362,500 c P288,125, d.- P271,875 Lease term ~ 10 years; Useful life of machine ~ 12 years anual rental payable at beginning of each year 400,000 Implicit interest rate 14% Present value of an annuity of 1 in advance for 10 Periods at 14% 5.95 Present value of 1 for 10 periods at 14% 0.27 a. 2,515,000, b. P2,380,000. ©. P2,245,000. 4 P1,980,000. 260i Chapter 3 - Mc31 MC32 Mc33 On January 2, 2020, Raphael Mining Company (lessee) entered into a 5-year lease for drilling equipment. Raphael accounted for the acquisition at P2,400,000, which includes a P100,000 bargain purchase option. At the end of the lease, Raphael expects to exercise the bargain purchase option. Raphael estimates that the equipments fair value will be P200,000 at the end of its 8-year life. Raphael regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2020, what amount should Raphael recognize as depreciation expense on the leased asset? a. 480,000 b. P460,000 c. P300,000 a. 275,000 On January 1, 2020, Bello Enterprises acquired a machine by signing a four-year lease. Annual rentals of P1,742,174 are payable at the beginning of each year starting January 1, 2020. Bello guarantees the residual value of P1,200,000 at the end of the lease term. The asset's useful life is 5 years, at the end of which, the asset’s scrap value is expected to be P80,000. Bello uses straight-line method to depreciate this asset. The lessor’s implicit interest rate is 10%, which is known to Bello. Present value of 1 discounted at 10% for 4 periods is 0.68301 Present value of 1 discounted at 10% for 5 periods is 0.62092. Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685. Present value of ordinary annuity at 10% for 4 periods is 3.16987. At what amount should this machine be recorded by Bello on January 1, 2020? a. 6,074,699 b. 6,124,373 c. 6,342,077 a. 6,894,311 Use the same information given in .MC32. How much depreciation should Bello Enterprises record on this machine for the year 2020? a. 1,208,875 b. ——-P1,362,862 c. —P1,423,578 a P1,518,675 261Chapter 3 - Leases C34 On January 1, 2020, Belle Enterprises acquired a machine 1, M : 8 MC 35 Use the same information given in MC34. MC36 pa . Annual rentals of P1,742,174.,. eit oer e of each year starting January 1, 2931" aaa co not guarantee the residual value of P1,200,000 ar the cidof the lease term. The asset's useful life ia 'S years, at qo end of which, the asset's scrap value is expected to be P8004) straight-line method to depreciate this asset. "Ti. veers plc interest rate is 10%, which is known to Bello, is iods is 0.68301 sent value of 1 discounted at 10% for 4 periods is Raat value of 1 discounted at 10% for 5 periods is 0.62092 Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685. Present value of ordinary annuity at 10% for 4 periods is 3.16987. At what amount should this machine be recorded by Belle on January 1, 2020? a. P6,074,699 b. —-P6,124,373 ©. P6,342,077 qd. P6,894,311 How much depreciation should Belle Enterprises record on this machine for the year 2020? a. 1,208,875 b. P1,362,862 ©. 1,423,578 4. P1,518,675 be P1,250,000. The asset’s useful life is 6 I ,( 7 years, at the end of Which the asset’s scrap value is expected to te P80,000. BellaMC37 MC38 Mc39 Chapter 3 - Leases How much loss, i » if any, should Bella recognize as a result of the failure to exercise the purchase option? a PO b. —-P_ 885,150 ¢. _ P1,000,000 d. 1,885,150 On August . Chidpany t 1, 2020, Gabriel Company leased a machine to Way atsthe ‘beginning oF ea period requiring payments of P100,000 which is the falta each year. The machine cost P480,000, Saursees aes lue at the lease date, and has a useful life of eight years with no residual value. Gabriel appropriately recorded the lease as a direct financing lease. Gabrie!s implicit st rate is 10% and present value factors are as follows: i, of an annuity due of Pl at 10% for 6 periods 4.800 of an annuity due of Pl at 10% for 8 periods 5.868 At the inception of the lease, tht ivabl ts orth IneeECD ol , the gross lease receivables account a. 600,000. b. P586,800. c P480,000. d. P479,100. How much is the Use the same information given in MC37. the year ended interest revenue relating to the lease for December 31, 2020? P48,000 P35,417 P25,000 P15,833 BG Ot p. Michael Company leased equipment to Hay Corporation on July 1, 2020 for an eight-year period expiring June 30, 2028- Equal payments undet the lease are P600,000 and are due ov July 1 of each year. The first payment was made on July 1, 2020. Michael and Hay is 10%. The Cash selling price of the equipment is P3,520,000, and the ae Of the equipment on Michael's accounting records is 2,800,000. The lease is appropriately recorded as a dealer's lease. The rate of interest contemplated by 263Chapter 3 - Leases MC40 MC41 What is the amount of profit on the sale that Michael shouig at record for the year ended December 31, 2020? P 45,000 P 90,000 P_ 720,000 1,280,000 Use the same information given in MC39. What is the interest revenue reported in Michael’s statement of comprehensive income for year ended December 31, 2020? a. b. c. d, P146,000 P176,000 292,000 P352,000 On January 1, 2020, Thelma Industries leased equipment to Trician Company for a four-year period ending December 31, 2023. The equipment cost Thelma P300,000 and has an expected useful life of five years. Annual payments are P118,951, which includes P10,000 executory costs. The equipment’s fair value is P400,000. The lessee guarantees the residual value of P80,000. Lease payment is due every December 31 and Trician made the first payment on December 31, 2020. Trician’s implicit interest rate is 10%. Boge Thelma incurred P15,000 costs to consummate the lease contract. pent ae of 1 discounted at 10% for 4 periods is 0.68301, sent value of annuity due of 1 for 4 periods ti i saat vale of Periods discounted at Present vah i it IY i Sresan °f Ordinary annuity of 1 at 10% for 4 periods is How much profit, inclusive of int ; ferest revenue, should Th report from this lease for the year ended December 31, 20209 "* 264mc42 MCc43 MC44 MC45 Chapter 3 - Leases How much should Thelma report as net investment in lease on + 2020 statement of financial position? a, P291,049 b. 320,154 c. P321,049 d.—— P331,049 Glade Company leases computer equipment to customers under direct financing lease. The equipment has no residual value at the end of the lease and the leases do not contain bargain Purchase options. Glade wishes to earn 8% interest on a five- year lease of equipment with a fair value of P323,400. The Present value of an annuity due of P1 at 8% for 5 years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease? a. P 51,600 b. PB _75,000 c. -P129,360 4. P139,450 Louis Company leased a machine from Millennium Company on January 1, 2019. The first annual payment was made on January 1, 2020. The machine has an economic life of six years. The lease agreement requires four annual payments of P33,000, including P3,000 annual payment for repairs and maintenance. The machine will be returned to Millennium Company at the end of the lease term and Louis Company guarantees a residual value of P5,000. Interest implicit in the lease is 10%, which is known to Louis. For the year ended December 31, 2020, what would Louis Company record in relation to the lease? an interest expense of P9,851 an interest expense of nil an interest payable of P9,851 an interest payable of P7,836 Beep Use the same information given in MC44. How much annual depreciation expense should Louis Company record? a. P24,628 b. —-P16,419 ¢, P23,378 4. P15,585 265chapter 9 Leaner C46 MCc4a7 C48 Mc49 ninMC44, In its notes to yy, ¢ same information @rember 31, 2021, Louis Company an payments of ana a 1 tater nancial ata sould disclose minimum lease a P104,000 b. P 99,000 ¢ " -P-95,000 4. P- 65,000 If Millenniv, information given in MC44 = Com ay forded the net investment in lease higher than the hability initially recorded by Louis Company, the variance could be due to & initial direct costs, b, aan unguaranteed residual value. ¢. both “a” and “b”, d. neither “a” nor “b". Use the same information given in MC44 and assume that on January 1, 2022, lease payment included an amount of P5,000 for exceeding a limit for machine usage hours specified in the lease agreement, Louis Company would account for this charge as & an expense in its 2021 statement of comprehensive income, b. an expense in its 2022 statement of comprehensive income. © @reduction in the lease liability, 4. additional executory costs, » Marian Ci simultaneously leased back the machinery. The transfer of the ‘asset to the buyer qualifies to be accounted for sal 15. Information relating to this transaction follows. ier ies Carrying amount of machin ery Remaining useful life 1,700,000 eat et fe of machinery Pies ‘nnual rent payable at tl 4 years Market rate ofintereat Ne °4 °F e8ch year one 1 266mcsoO MCS1 MC52 Chapter 9 Leaner How much Is the gain on sale te Gompany at January 1, 20207) sNshach Peoemnised by Marian a. 500,000 be P360,216. a P139,784 a. 128,000 Using the preceding data, what are the amounts recorded by Marian Company for the right-of-une anset and lease linbility, respectively, at January 1, 2020? a. P1,224,734; P1,584,950 b. P1,584,950; P1,224,734 c. P2,051,112; P2,200,000 da. 2,200,000; 1,700,000 On January 1, 2020, Marian Company sold a machinery to Marjorie Company for 2,400,000, Because of the entity’® commitments to its customers to provide their needs for the next four years, Marian Company simultaneously leased back the machinery. ‘The transfer of the asset to the buyer qualifies to be accounted for as a sale under IFRS 15. Information relating to this transaction follows: Fair value of machinery 2,200,000 Carrying amount of machinery 1,700,000 Remaining useful life of machinery 8 yea Lease term 4 years Annual rent payable at the end of each year 500,000 Market rate of interest 10% How much is the gain on sale leaseback? a P139,784 b. P185,239 c. P259,334 d. 500,000 What are the amounts recorded by Marian Company for the right-of-use asset and lease liability, respectively, at January 1, 20207 P1,384,950; P2,000,000 P1,584,950; P2,000,000 pone 267Chapter 3 - Leases MCc53 MC54 MCsS ary 1, 2020, Marian Company sold a machinery , Marjorie Company for P1,900,000. "Because of the enijg'” commitments to its customers to provide their needs for the nos four years, Marian Company simultaneously leased back iy! machinery. The transfer of the asset to the buyer qualifies to jh. accounted for asa sale under IFRS 15. Information relating 1° this transaction follows: Fair value of machinery : 2,200,000 Carrying amount of machinery 1,700,000 Remaining useful life of machinery 8 years Lease term 5 years Annual rent payable at the end of each year 500,000 Market rate of interest 10% How much is the gain on sale leaseback? a P 71,602 b. —-P139,784 c P185,239 d. —_ P500,000 Use the same information given in MCS3, What are the amounts recorded by Marian Company for the right-of-use asset and lease liability, respectively, at January 1, 2020? P1,456,552; P1,584,950 1,456,552; P1,885,950 P1,456,552; P1,284,950 1,884,950; P1,456,552 peop Use the same information given in MC53. How much is the interest expense recognized by Marian Company for the year ended December 31, 20207 a P158,495, bd. P1B8,595, © 145,655 4. P220,000 id