MC-1.

Rent Expense for the year ended, 12/31/16

On January 1, 2016, Jessie Company signed a 5-year operating lease for office space at P3,600,000 per year.
The lease included a provision for additional rent of 10% of annual company sales in excess of P6,000,000.
Jessie’s sales for the year ended December 31, 2016 were P10,000,000. Upon execution of the lease, Jessie
paid P500,000 as a bonus for the lease. Jessie’s rent expense for the year ended December 31, 2016 is

Annual amount recognized 3,600,000

Bonus for lease (500,000 /5y) 100,000
Sales, 12/31/16 10,000,000
6,000,000
Annual comp sales in exc of 500k 4,000,000
10%
Additional rent 400,000
RENT EXPENSE, 12/31/16 P 4,100,000

MC-2. Net Rental Income for 2016

Mindoro Company purchased a new machine on January 1, 2016 at a cost of P2,000,000 for the purpose of leasing
it. The machine is estimated to have a useful life of ten years with a residual value of P200,000. Depreciation is
computed by Mindoro on a straight line basis. On January 2, 2016, Mindoro entered into a lease contract with
Oriental Company for a term of up to four years until December 31, 2019. The lease fee is P1,000,000 per year and
was paid in advance by Oriental. Mindoro paid P120,000 commissions associated with negotiating the lease and
receive an additional P400,000 as lease bonus. Mindoro Company should report net rental income for 2016 at

MC-3. Accrued Rent Receivable. 06/30/16

On July 1,2014, Gee, Inc. leased a delivery truck from Marr Corp. under a three year operating lease. Total rent for
the term of the lease will be P360,000, payable as follows:
12 months at P5,000 = P60,000
12 months at P7,500 = 90,000
12 months 1t P17,500 = 210,000
All payments were made when due. In Marr’s June 30, 2016 statement of financial position, the accrued rent
receivable should be reported as

Jul 1, 2014- start.

Jul 1, 2015 -12mos @ 5,000 60,000 first 12 mos
Jul 1, 2016 -12mos @7,500 P 90,000 second 12mos
Jul 1, 2017 -12mos @17,500 210,000 third 12 mos -END

MC-4. Expense recognized in profit loss, 12/31/15

The Junior Company leased a freehold building for 20 years with effect from 1 January 2016. The useful life of the
building is 40 years. As part of the negotiations for the lease the lessor granted Junior a rent-free period. Annual
rentals of P1.6 million are payable in advance on 1 January, commencing in 2018.
What expense should Junior recognize in profit loss in the year ended 31 December 2015?

Annual rentals 1,600,000

Term of lease 20 yrs
 Rent-free period (2016-2018) 2yrs 18 yrs
Total lease payments 28,800,000
divide by: Lease term 20 yrs
Net expense in P/L, 12/31/15 P 1,440,000

MC-5. Annual Depreciation Expense

The Chemsee Company leased a canning machine with a fair value of P165,000. The present value of the minimum
lease payments discounted at the rate implicit in the lease is P158,400. The initial direct costs incurred in negotiating
the lease, were P1,250. The asset has a useful life of 5 years and the lease is for a period of 4 years, after which the
asset can be acquired for a near zero cost, which is substantially below the expected value of the asset at that date.
The asset is depreciated on a straight line basis.
According to PAS17 Leases, what amount should be the annual depreciation expense?

MC-6.
On December 31, 2015, Sawyer Co. leased a machine from Bass, Inc. for its entire economic life of five years. Equal
annual payments under the lease are P525,000 (including P25,000 annual executory costs) and are due on December
31 of each year. The first payment was made on December 31, 2015, and the second payment was made on Decemb
31, 2016. The interest rate implicit in the lease is 10%. Sawyer learned that a third party guaranteed to pay Bass, Inc.
a residual value of P200,000 at the end of the lease term. In its December 31, 2016 statement of financial position,
Sawyer should report in the non-current liability section a lease liability of

MC-7. Total Lease Related Expenses

Bowtock has leased an item of plant under the following terms:
• Commencement of the lease – January 1, 2015
• Term of the lease – 5 years
• Annual payments in advance – P12,000
• Cash price and fair value of the asset – P52,000
• Implicit interest rate – 8% per annum
• Depreciation policy – 20% per annum
The total lease related expenses for the fiscal year ended September 30, 2016 is

Date Payment Interest Principal Carrying Amount

(Prev CA x 8%) (Paym - Int) (Prev CA - Princ)
1/1/2015 52,000
1/1/2015 12,000 — 12,000 40,000
1/1/2016 12,000 3,200 8,800 31,200
1/1/2017 12,000 2,496 9,504 21,696

MC-8. Total Finance Income from the lease

Camarines Company is a dealer in machinery. On January 1, 2016, a machine was leased to another entity with the
following provisions:
Annual rental payable at the end of each year P2,000,000
Lease term and useful life of machinery 5 years
 Cost of machinery P5,000,000
Residual value-unguaranteed P1,000,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
PV of 1 for 5 periods at 10% 0.62
At the end of the lease term, the machinery will revert to Camarines. The perpetual inventory system is used.
Camarines incurred initial direct costs of P200,000 in finalizing the lease agreement.

How much is the total finance income from the lease to be recognized by Camarines over the lease term?

MC-9. Profit on the sale

Camarines Company will recognize profit on the sale at

MC-10. Profit on the Sale and Amount of Interest Income

Good Company, a dealer in machinery and equipment, leased equipment to Luck, Inc., on July 1, 2016. The lease is
appropriately accounted for as a sale by Good and as a purchase by Luck. The lease is for a 10-year period (the
useful life of the asset). The first of 10 equal annual payments of P828,000 was made on July 1, 2016. Good had
purchased the equipment for P5,200,000 on July 1, 2015, and established a list selling price of P7,200,000 on the
equipment. Assume that the present value at July 1, 2016, of the rent payments over the lease term discounted at
8% (the appropriate interest rate) was P6,000,000

What is the amount of profit on the sale and the amount of interest income that Good should record for the year
ended December 31, 2016?

Profit on Sale:
Sales 6,000,000
Cost of Sales -5,200,000
Profit P 800,000

Interest Income:
Initial Carrying Amount 6,000,000
Initial Payment -828,000
Balance 5,172,000
x Discount 8%
x 1st eq annual paym 6/1 - 12/31/16 6mos/12mos
Income P 206,880

MC-11. Amount of depreciation and interest expense

Assuming that Luck, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense tha
Luck should record for the year ended December 31, 2016?

Depreciation Expense:
Initial Carrying Amount 6,000,000
÷ Lease term 10y
x 1st eq annual paym 6/1 - 12/31/16 6mos/12mos
 Depreciation P 300,000

Interest Expense: (same as Interest Income of Lessor)

Initial Carrying Amount 6,000,000
Initial Payment -828,000
Balance 5,172,000
x Discount 8%
x 1st eq annual paym 6/1 - 12/31/16 6mos/12mos
Interest Expense P 206,880

MC-12. Interest Rate implicit in the lease

Jenny Ltd leases a machine with a fair value of P109,444 to Rose Ltd for five years at an annual rental (in advance) of
P25,000, and Rose Ltd guarantees in full the estimated residual value of P15,000 on return of the asset. What would
be the interest rate implicit in the lease?

(INTERPOLATE aka TRIAL AND ERROR)

* using 12%
Annual Rental 25,000
*5y @ 12% PV of Annuity Due 4.0373
PV of Lease Payments 100,933

Grtd. Residual Value 15,000

*5y @ 12% PV of Single Payment 0.5674
PV of GRV 8,511
FV of leased asset P 109,444

MC-13. Year-end lease Payments

Soundesign Company entered into a lease of special equipment to LabCorp Company. The lease term was six years.
The equipment cost Soundesign P40,000 and Soundesign plans to earn a P4,000 dealer profit. Soundesign’s implicit
rate on the lease is 12 percent. As a result of this agreement, Soundesign will receive year-end lease payments of

44,000

MC-14. Annual Lease Payment

An asset with a market value of P100,000 is leased on January 1, 2016. Five annual lease payments are due each
January 1 beginning January 1, 2016. The lessee guarantees the P40,000 residual value of the asset as of the end of
the lease term on December 31, 2020. The lessor’s implicit interest rate is 8%. What is the annual lease payment?

MC-15. Total amount of interest income over the life of lease

Naga Company leases computer equipment to customers under direct financing leases. The equipment has no
residual value at the end of the lease and the leases do not contain bargain purchase options. Naga wishes to earn
14% interest on a 5-year lease of equipment with a cost of P1,955,000. The present value of an annuity due of 1 at
14% for 5 years is 3.91 Naga incurs initial direct cost of P65,000.
What is the total amount of interest income that Naga will earn over the life of the lease?

Cost 1,955,000
 ÷ PV of anuity due 3.91
x Lease term 5y
Total 2,500,000
Cost -1,955,000
Interest Income P 545,000

MC-16. Interest Income in the first year of lease

What is the interest income to be recognized in the first year of the lease?

MC-17. Operating Lease Expense

The Minor Company leased a freehold building for 20 years, the useful life of the building, with effect from 1 January
2016. At that date the fair value of the leasehold interest was P7.5 million of which P6.0 million was attributable to
the building. Annual rentals of P800,000 are payable in advance on 1 January.
How much should Minor recognize as an operating lease expense in the year ended 31 December 2016?

MC-18. Deferred Gain

On December 31, 2016, Ronnel Corp. sold to Alex Co. two depreciable assets and simultaneously leased them back.
Additional information pertaining to the sale-leasebacks follows:

Asset #1 Asset #2
Sales price P600,000 P1,000,000
Carrying amount, 12/31/16 P100,000 P550,000
Remaining useful life, 12/31/16 10 years 35 years
Lease term 8 years 3 years
Annual lease payments P100,000 P200,000

In its December 31, 2016 statement of financial position, what amount should Ronnel report as deferred gain on
these transactions?

MC-19. Profit on Sale of Land

Thunder Bay Ltd sells land that originally cost P150,000 to Victoria Ltd for P230,000 when the land's fair value is
P215,000, and then enters into a cancellable lease agreement to use the land for two years at an annual rental of
P2,000. In the current year, how much profit would Thunder Bay Ltd record on the sale of the land?

MC-20. Profit on Sale of Equipment

Porkee Corp. sells equipment with a carrying amount P150,000 to Chopee Corp. for P170,000 when the equipment’s
fair value is P100,000, and then enters into a cancellable operating lease agreement to use the equipment for two
years. In the current year, how much profit would Porkee Corp. record on the sale of the equipment?
 B.
3,600,000 per year.
ess of P6,000,000.
of the lease, Jessie
ber 31, 2016 is

for the purpose of leasing

00,000. Depreciation is
a lease contract with
s P1,000,000 per year and
egotiating the lease and
tal income for 2016 at

B.
rating lease. Total rent for

on, the accrued rent

016. The useful life of the

ent-free period. Annual
 B.
sent value of the minimum
costs incurred in negotiating
of 4 years, after which the
ue of the asset at that date.

mic life of five years. Equal

ts) and are due on December
yment was made on December
guaranteed to pay Bass, Inc.
ment of financial position,

to another entity with the

ntory system is used.

r the lease term?

B.
n July 1, 2016. The lease is
r a 10-year period (the
July 1, 2016. Good had
ice of P7,200,000 on the
e lease term discounted at

hould record for the year

A.
tion and interest expense that
annual rental (in advance) of
rn of the asset. What would

he lease term was six years.

profit. Soundesign’s implicit
ar-end lease payments of

payments are due each

f the asset as of the end of
he annual lease payment?

The equipment has no

tions. Naga wishes to earn
e of an annuity due of 1 at
g, with effect from 1 January
million was attributable to

December 2016?

aneously leased them back.

port as deferred gain on

n the land's fair value is

ars at an annual rental of
of the land?

0,000 when the equipment’s

se the equipment for two
e equipment?