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Lessee lecture notes

Bachelor Science in Accounting Technology (Father Saturnino Urios University)

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P 146
Chapter 11: Lessee Accounting

Problem 11-1
At the beginning of the current year, Lessee Company leased a machinery with the following
information:

Annual rental payable at the end of the year 1,000,000

Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required
by contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. What is the initial lease liability?

a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000
2. What is the cost of right use asset?
a. 4,200,000
b. 4,250,000
c. 3,810,000
d. 3,900,000
3. What is the depreciation for current year?
a. 462,500
b. 925,000
c. 850,000
d. 965,000
4. What is the lease liability at year-end?
a. 2,510,000
b. 3,159,000
c. 2,861,000
d. 3,620,000

Problem 11-2
At the beginning of current year, Panorama Company leased a building from a lessor with the
following pertinent information:

Annual rental payable at the end of each year

Initial direct cost paid
Lease incentive received
Leasehold improvement
Purchase option that is reasonably certain to be exercised
Lease term
Useful life of building
Implicit interest rate
PV of an ordinary annuity of 1 at for 5 periods at 10%
Present value of 1 for 5 periods at 10%

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

a. 4,500,000

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b. 4,400,000
c. 4,700,000
d. 4,600,000
2. What is the depreciation for current year?
a. 880,000
b. 900,000
c. 550,000
d. 575,000
3. What is the interest expense for current year?
a. 410,000
b. 379,000
c. 450,000
d. 429,000
4. What is the lease liability at year-end?
a. 3,510,000
b. 3,169,000
c. 3,950,000
d. 3,719,000

Problem 11-3
At the beginning of current year, Ashe Company entered into a ten-year noncancelable lease
requiring year-end payments of P1,000,000.

Ashe’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Ashe, is
10%.

Present vale factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%.

On same date, Ashe Company paid initial direct cost of P200,000 in negotiating and securing the
leasing arrangement.

Ownership of the property remains with the lessor at expiration of the lease. There is no purchase
option.

The leased property has an estimated economic life of 12 years.

1. What amount should be capitalized initially as cost of the right of use asset?
2. What amount should be recognized initially as lease liability?
3. What is the annual depreciation of the right of use asset?

Problem 11-4
Neal Company entered into a nine-year lease on a warehouse on December 31, 2019.

Lease payment of P520,000 which included executory cost of P20,000 is due annually, beginning on
December 31 thereafter.

The cost of restoring the underlying asset to its original condition as required by the contract is
estimated at the present value of P200,000.

The interest rate implicit in the lease is 9%. The present value of an ordinary annuity of 1 for nine
years at 9% is 5.6.
1. What amount should be reported as lease liability on December 31, 2019?
2. What is the cost of the right of use asset?

Problem 11-5
At the beginning of the current year, Day Company leased a new machine from Parr with the
following pertinent information:

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Lease term
Annual rental payable at beginning of each year
Useful life of machine
Implicit interest rate in lease
Present value of an annuity of 1 in advance for 5 periods at 12%
Present value of an ordinary annuity of 1 for 5 periods at 12%

The lease is not renewable and the machine reverts to Parr at the termination of the lease. The cost
of the machine on Parr’s accounting records is P3,755,000.

1. At the beginning of the lease term, what amount should be recorded as cost of right of use asset?
2. What amount should be reported as depreciation of the right of use asset for the current year?

Problem 11-6
Robbin Company leased a machine with remaining useful life of 14 years from Ready Leasing
Company. The lease required 10 annual payments of P1,000,000 beginning immediately.

The lease specified an interest rate of 12% and a purchase option of P1,000,000 at the end of the
tenth year. The lessee is reasonably certain to exercise the purchase option.

Present value of an annuity due (in advance) of 1 at 12% for 10 periods

Present value of 1 at 12% for 10 periods

1. What amount should be recorded initially as cost of the right of use asset?
2. What amount should be reported as annual depreciation of the right of use asset?

Problem 11-7
At the beginning of current year, Nori Mining Company entered into a 5-year lease for drilling
equipment. The entity accounted for the acquisition at the present value of lease payment of
P2,400,000 which included a P100,000 purchase option.

At the end of the lease, the entity is certain to exercise the purchase option.

The entity estimated that the equipment’s fair value will be P200,000 at the end of the 8-year life. The
entity regularly used straight line depreciation on similar equipment.

What amount should be recognized as depreciation expense on the right of use asset for the current
year?

Problem 11-8
Helen Company recorded the cost right of use asset at P4,500,000.

The underlying asset had a useful life of 8 years and the lease term is 5 years.

The asset is expected to have a fair value of P1,500,000 at the end of 5 years and a fair value of
P500,000 at the end of 8 years.

The lease agreement provided for the transfer of title of the underlying asset to the lessee at the end
of the lease term.

What amount of depreciation expense should be recorded for the first year of the lease?

Problem 11-9
At the beginning of current year, Cola Company signed an 8-year noncancelable lease for a new
machine requiring P750,000 annual payment at the beginning of each year.

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The machine has a useful life of 12 years with residual value of P150,000.

Aggregate lease payments have a present value of P5,400,000 based on an appropriate interest rate.

Title passes to Cola Company at the lease expiration date. The straight line method of depreciation is
used for all plant assets.

What amount should be recognized as depreciation of the right of use asset for the current year?

Problem 11-10
At the beginning of the current year, Kosovo Company entered into a 10-year lease for an equipment.

The entity accounted for the acquisition at the present value of lease payment of P4,900,000 which
included a P200,000 residual value guarantee.

At the end of the lease, the asset will revert back to the lessor.

It is estimated that the asset’s fair value at the end of the 12-year useful life will be P100,000.

The entity regularly used the straight line depreciation on similar equipment.

What amount should be recognized as depreciation expense of the right of use asset for the current
year?

Problem 12-1
On January 1, 2019, Babson Company leased two automobiles for executive use. The lease required
Babson to make five annual payments of P1,300,000 beginning January 1, 2019.

At the end of the lease term, December 31, 2023, the entity guaranteed the residual value of
automobiles at P1,000,000.

The interest rate implicit in the lease is 9/5. Present value factors for the 9% rate implicit in the lease
are:

What amount should be reported as lease liability immediately after the first required payment?

Problem 12-2
On December 31, 2019, Action Company signed a 7-year finance lease for an airplane. The airplane’s
fair value was P8,415,000.

The entity made the first annual lease payment of P1,530,000 on December 31, 2019.

The entity’s incremental borrowing rate was 12%, and the interest rate implicit in the lease, which
was known by Action, was 9%. the rounded present value factors for an annuity due are:

1. What amount should be reported as lease liability on December 31, 2019?

2. What amount should be reported as interest expense for 2020?

Problem 12-3
Oak Company leased equipment for the entire nine-year useful life, agreeing to pay P500,000 at the
start of the lease term on December 31, 2019, and P500,000 annually on each December 31 for the
next eight years.

The present value on December 31, 2019 of the nine lease payments over the lease term using the
rate implicit in the lease which Oak knows to be 10% was P3,165,000.

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The December 31, 2019 present value of the lease payments using Oak’s incremental borrowing rate
of 12% was P2,985,000. Oak made a timely second lease payment.

What amount should be reported as lease liability on DEcember 31, 2020?

Problem 12-4
On December 31, 2019, Roe Company leased a machine from Colt for a five-year period.

Equal annual payments under the lease are P1,050,000 including P50,000 annual executory cost and
are due on December 31 of each year.

The first payment was made on December 31, 2019 and the second payment was made on December
31, 2020. The five lease payments are discounted at 10% over the lease term.

The present value of minimum lease payments at the inception of the lease and before the first
annual payment was P4,170,000.

On December 31, 2020, what amount should be reported as lease liability?

Problem 12-5
On December 31, 2019, Ames Company leased equipment for 10 years. The entity contracted to pay
P400,000 annual rent on December 31, 2019, and on December 31 of each of the next nine years.

The lease liability was recorded at P2,700,000 on December 31, 2019, before the first payment.

The equipment’s useful life is 12 years, and the interest rate implicit in the lease is 10%. The entity
used the straight line method to depreciate all equipment.

1. In recording the December 31, 2020 payment, by what amount should the lease liability be reduced?
2. What amount should be reported as interest expense for 2020?

Problem 12-6
Miracle Company leased machinery with useful life of 10 years for 10 years on January 1, 2019. At
that date, the fair value of the machinery was P4,900,000.

Annual rentals of P700,000 are payable in advance on January 1 and the interest rate implicit in the
lease is 9%.

1. What amount should be reported as total liability (principal and interest) on December 31, 2019?
2. What amount should be reported as interest expense for 2019?

Problem 12-7
On January 1. 2019, Day Company entered into a 10-year lease agreement with Ward Company for
industrial equipment. Annual lease payments of P1,000,000 are payable at the end of each year.

The lessor expected a 10% return on the lease which is the implicit rate in the lease.

The equipment is expected to have an estimated useful life of 10 years.

In addition, a third party has guaranteed to pay Ward a residual value of P500,000 at the end of the
lease.

On December 31, 2019, what amount should be reported as principal lease liability?

Problem 12-8
On December 31, 2019, Rafferty Company leased equipment with annual lease payments of P200,000
due December 31 for 10 years.

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The equipment’s useful life is 10 years and the interest rate implicit in the lease is 10%.

The lease obligation was recorded on December 31, 2019 at P1,350,000 and the first lease payment
was made on that date.

What amount should be included in current liabilities in relation to the lease on December 31, 2019?

Problem 12-9
At the current year-end, Mercedez Company purchased a machinery that it had been leasing under a
finance arrangement.

The right of use asset and lease liability were originally recorded at P2,000,000.

At the time of the purchase, the accumulated depreciation on the right of use asset was P800,000 and
the remaining balance of the lease liability was P1,300,000.

The underlying asset was purchased for P1,440,000 cash.

What amount should be debited as cost of the machinery on the date of purchase?

Problem 12-10
On January 1, 2019, Yemen Company leased an equipment for 6 years from another entity.

The entity recorded the right of use asset at P4,800,000 which included a purchase option of
P100,000. On this date, Yemen Company is certain to exercise the option.

The equipment had an eight-year useful life and a fair value of P300,000 at end of the useful life.

On January 1, 2025, the entity did not exercise the purchase option.

What amount should be recognized as loss on finance lease in 2025?

Problem 12-11
Trojan Company prepared the following lease payments schedule for the lease of a machine from
another entity. The machine had an economic life of six years. The lease agreement required four
annual payments of P33,000 and the machine will be returned to the lessor at the end of the lease
term.
1. What is the amount of executory cost?
2. What is the residual value guarantee?
3. On June 30, 2020, what would Trojan Company record in relation to the lease?
4. What is the annual depreciation expense?

Problem 13-1
Alyanna Company entered into a lease of building on January with the following information:

The lease contained an option for the lessee to extend for a further 5 years.

At the commencement date, the exercise of the extension option is not reasonably certain.
1. What amount should be reported as lease liability on December 31?
2. What amount should be reported as depreciation for 2019?
3. What amount should be reported as new lease liability on January 1, 2022?
4. What is the carrying amount of right of use asset on January 1?
5. What amount should be reported as depreciation for 2022?

Problem 13-2

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On January 1, 2019, Variety Company entered into an 8-year lease of a floor of a building with useful
life of 15 years with the following terms:

The lease provides for neither a transfer of title to the lessee nor a purchase option.

1. What amount should be reported as lease liability on January 1?

2. What amount should be reported as interest expense for 2019?
3. What amount should be reported as interest expense for 2020?
4. What amount should be reported as lease liability on December 31, 2022?

Problem 13-3
On January 1, Milan Company entered into a lease agreement with the following information:

On January 1, the lessee and the lessor agreed to amend the original terms of the lease with the
following information:

1. What amount should be reported as lease liability on January 1?

2. What amount should be reported as additional lease liability on January 1, 2022?
3. What amount should be reported as total interest expense for 2022?

Problem 13-4
On January 1, Jones Company entered into a lease for floor space with the following information:

On January 1, the lessee and the lessor agreed to amend the original terms of the lease with the
following information:

1. What amount should be reported as lease liability on December 31 before the modification?
2. What amount should be reported as termination gain or loss on January 1?
3. What amount should be reported as increase in the lease liability due to the modification on
January 1?

Problem 13-5
On January 1, Hoyt Company leased an office building with the following terms:

On January 1, the lessee and the lessor agreed to amend the original terms of the lease with the
following information:

1. What amount should be reported as lease liability on December 31?

2. What amount should be reported as increase in the lease liability as a result of the modification on
January 1?
3. What amount should be reported as depreciation for 2021?

Problem 13-6
On January 1, Yoga Company leased machine with the following information:

On January 1, the lessee and the lessor agreed to amend the original terms of the lease by reducing
the lease payment by P20,000 and increasing the implicit rate to 8%.

The present value of an ordinary annuity of 1 at 8% for 3 periods is 2.5771.

1. What amount should be reported as lease liability on December 31 before the modification?
2. What amount should be reported as modified lease liability on January 1?
3. What amount should be reported as interest expense for 2021?
4. What amount should be reported as depreciation of the right of use asset for 2021?

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