PAMANTASAN NG LUNGSOD NG PASIG

ALCALDE JOSE, PASIG 1600 METRO MANILA

SCHOOL YEAR- 2020

BY: PROF. COMBO
Assignment 3
Sales Type Lease – Lessor & Sales Leaseback

Name: BAGADIONG, ANGELIAN T.

Grd & Sec: BSA-2B

Problem 1- SALES TYPE LEASE- LESSOR

Universal Company used leases as a method of selling products. At the beginning of current
year, Universal Company leased equipment to National Company with the following information:
Annual rental payable at the end of each lease year 700,000
Cost of equipment to Universal 2,000,000
Unguaranteed residual value 400,000
Useful life of equipment and lease term 8 years
Implicit interest rate in the lease 12%
PV of an ordinary annuity of 1 for 8 periods at 12% 4.968
PV of 1 for 8 periods at 12% 0.404
At the end of the lease the equipment will revert to the lessor. Both lessor and lessee report on
a calendar year basis, depreciate all assets on the straight line, and use the perpetual inventory
system.
Required: Required: Prepare journal entries on the books of Universal Company and National
Company for the current year.

Book of Universal Company (Lessor)

1. Lease Receivable 6,000,000.00

Cost of Good Sold 1,838,400.00

Sales 3,477,600.00

Unearned Interest Income 2,360,800.00

Inventory 2,000,000.00

2. Cash 700,000.00

Lease Receivable 700,000.00

3.Unearned Interest Income 436,704.00

Interest Income 436,704.00

Book of National Company (Lessee)

1. Right of use asset 3,477,600.00

Lease Liability 3,477,600.00

2. Interest Expense 417,312.00

(12% x 3,477,600)

Lease Liability 282,688.00

Cash 700,000.00

3. Depreciation expense 434,700.00

Accumulated Depreciation 434,700.00

(3,477,600 / 8 years)

Problem 2 SALES TYPE LEASE- LESSOR

Vanderbilt Company is a dealer in machinery. The perpetual inventory system is used. At the
beginning of current year, a machinery was leased to Thunder Company with the following
provisions:
Annual rental payable at the end of each year 3,000,000
Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value guarantee 1,000,000
Initial direct cost paid by Vanderbilt 300,000
Implicit interest rate 12%
PV of an ordinary annuity of for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

Required:Prepare journal entries on the books of Vanderbilt Company and Thunder Company
for the current year
Book of Vanderblit Company (Lessor)

1. Lease Receivable 16,000,000.00

Cost of Good Sold 8,000,000.00

Sales 11,370,000.00

Unearned Interest Income 4,630,000.00

Inventory 8,000,000.00

2. Cost of Good Sold ( Initial Direct Costs) 300,000.00

Cash 300,000.00

3. Cash 3,000,000.00

Lease Receivable 3,000,000.00

4. Unearned Interest Income 1,364,400.00

Interest Income 1,364,400.00

Book of Thunder Company (Lessee)

1. Right of use asset 11,370,000.00

Lease Liability 11,370,000.00

2. Interest Expense 1,364,400.00

(12% x 11,370,000)

Lease Liability 1,635,600.00

Cash 3,000,000.00

3. Depreciation expense 2,074,000.00

Accumulated Depreciation 2,074,000.00

(11,370,000 - 1,000,000 / 5 years)

Problem 3 SALES AND LEASEBACK

At the beginning of current year, Pedro Company sold a machine and immediately leased it
back. The following data relate to the sale and leaseback transaction:
Sale price at above fair value 6,000,000
Fair value of machine 5,000,000
Carrying amount of machine 4,500,000
Annual rental payable at the end of each year 800,000
Remaining life of machine 10 years
Lease term 4 years
Implicit interest rate 8%
Present value of an ordinary annuity of 1 at 8% for four periods 3.312
There is no transfer of title to the lessee nor purchase option that is reasonably certain to be
exercised.
Required:
1. Compute the initial lease liability. 2,649,600.00
2. Compute the cost of right of use asset. 1,484,640.00
3. Determine the gain on right transferred to buyer-lessor. 335,040.00
4. Prepare journal entries on the books of seller-lessee for the current year.

Book of seller-lesse
1. Cash 6,000,000.00
Right of use Asset 1,484,640.00
Machinery 4,500,000.00
Lease Liability 2,649,600.00
Gain on right transferred 335,040.00
2. Interest Expense 211,968.00
(8% x 2,649,600)
Lease Liability 588,032.00
Cash 800,000.00
3. Depreciation expense 371,160.00
Accumulated Depreciation 371,160.00
(1,484,640 /4 yrs)

5. Prepare journal entries on the books of buyer-lessor for the current year.

Book of buyer-lessor
1. Machinery 5,000,000.00
Financial Asset 1,000,000.00
Cash 6,000,000.00
2. Cash 498,068.00
Rental Income 498,068.00
3. Cash 301,932.00
Financial asset 221,932.00
Interest Income (8% x 1M) 80,000.00
4. Depreciation (5,000,000/ 10) 500,000.00
Accumulated Depreciation 500,000.00
SOLUTION:

800,000 x 3.312
PV of machine
= 2,649,600.00

Date Payment Interest Principal Present Value

Jan.1 2,649,600.00

Dec. 31 2020 800,000.00 211,968.00 588,032.00 2,061,568.00

Dec. 31 2021 800,000.00 164,925.00 635,075.00 1,426,493.00

Dec 31. 2022 800,000.00 114,119.00 685,881.00 740,612.00

Dec. 31 2023 800,000.00 59,388.00 740,612.00 -

Annual
Rental
Fraction payment

Present Value of Lease Liability 2,649,600.00

Financial Asset 1,000,000.00 38% 800,000.00 301,932.00 Financial Asset

Adjusted PV of Lease Liability 1,649,600.00 62% 800,000.00 498,068.00 Interest Income

Date Payment Interest Principal PV

- 1,000,000.00
1.00 301,932.37 80,000.00 221,932.37 778,067.63
2.00 301,932.37 62,245.41 239,686.96 538,380.68
3.00 301,932.37 43,070.45 258,861.91 279,518.76
4.00 301,932.37 22,413.60 279,518.77 -0.00

Sales price 6,000,000.00

Fair Value 5,000,000.00
Excess Payment 1,000,000.00
Consider as Advance
Present Value of Lease Liability 2,649,600.00
Excess Payment -1,000,000.00
Adjusted PV of Lease Liability 1,649,600.00

Fair Value 5,000,000.00

Carrying Amount 4,500,000.00
Gain on Sales 500,000.00

Fair Value 5,000,000.00

Adjusted PV of Lease Liability 1,649,600.00
Right Transferred to the - Buyer 3,350,400.00

Cost of Equipment 4,500,000.00

Fraction
Gain to be recognized
Recognized 67% 335,040.00 (500,000*67%)

Not Recognized 33% 164,960.00 (500,000*33%)

Cost of Right of Use
Asset
Recognized 33% 1,484,640.00 (4,500,000*33%)
Not Recognized 67% 3,015,360.00 (4,500,000*67%)

Problem 4 SALES AND LEASEBACK

At the beginning of current year, Hazel Company sold a machine and immediately leased it
back.
The following data pertain to the sale and leaseback transaction:
Sale price at below fair value 4,000,000
Fair value of machine 5,000,000
Carrying amount of machine 3,500,000
Annual rental payable at the end of each 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 3 periods 2.67
The lease provides for neither transfer of title to the lessee upon lease expiration nor a purchase
option that is reasonably certain to be exercised.
Required:
1. Compute the initial lease liability. 1,335,000.00
2. Compute the cost of right of use asset. 1,634,500.00
3. Determine the gain on right transferred to buyer-lessor. 799,500.00
4. Prepare journal entries on the books of seller-lessee for the current year.
Book of seller-lesse
1. Cash 4,000,000.00
Right of use Asset 1,634,500.00
Machinery 3,500,000.00
Lease Liability 1,335,000.00
Gain on right transferred 799,500.00
2. Interest Expense 80,100.00
(6% x 1,335,000)
Lease Liability 419,900.00
Cash 500,000.00
3. Depreciation expense 544,833.00
Accumulated Depreciation 544,833.00
(1,634,500 /3 yrs)

5. Prepare journal entries on the books of buyer-lessor for the current year.

Book of buyer-lessor

1. Machinery 3,000,000.00

Financial Asset 1,000,000.00

Cash 4,000,000.00

2. Cash 130,996.00

Rental Income 130,996.00

3. Cash 369,004.00

Financial asset 309,004.00

Interest Income (6% x 1M) 60,000.00

4. Depreciation (5,000,000/ 10) 500,000.00

Accumulated Depreciation 500,000.00

Solution:

500,000 x 2.67 =
PV of machine
1,335,000.00

Date Payment Interest Principal PV

0 1,335,000.00
1 500,000.00 80,100.00 419,900.00 915,100.00
2 500,000.00 54,906.00 445,094.00 470,006.00
3 500,000.00 29,994.00 470,006.00 -
 Annual
Rental
Fraction payment

Present Value of Lease Liability 1,355,000.00

Financial Asset 1,000,000.00 74% 500,000.00 369,004.00 Financial Asse

Adjusted PV of Lease Liability 355,000.00 26% 500,000.00 130,996.00 Interest Incom

Fair Value 5,000,000.00

Sales at fair value 4,000,000.00
Excess Payment 1,000,000.00

Present Value of Lease Liability 1,335,000.00

Excess Payment 1,000,000.00
Adjusted PV of Lease Liability 2,335,000.00

Fair Value 5,000,000.00

Carrying Amount 3,500,000.00
Gain on Sales 1,500,000.00

Fair Value 5,000,000.00

Adjusted PV of Lease Liability 2,335,000.00
Right Transferred to the - Buyer 2,665,000.00

Cost of Equipment 3,500,000.00

Gain to be
recognized
Fraction
Recognized 53% 799,500.00 (1,500,000*53%)
Not Recognized 47% 700,500.00 (1,500,000*47%)
Cost of Right of Use
Asset
Fraction
Recognized 47% 1,634,500.00 (3,500,000*47%)
Not Recognized 53% 1,865,500.00 (3,500,000*53%)