Lobrigas, Claudine L.
BSIA-IV
Intermediqte Accounting 2
Unit 5: Topic 5 - Sale and Leaseback
Problem 12
At the beginning of the current year, Juan Company sold a machine and immediately
leased it back at market rental. The details of the sale and leaseback are:
Sale price at fair value 5,000,000
Fair value of machine 5,000,000
Carrying amount of machine 4,500,000
Annual rental payable at the end of each year 600,000
Remaining life of machine 10 years
Lease term 5 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 5 3.791
periods
The leaseback provides for neither transfer of title to the lessee nor a purchase option that
is reasonably certain to be exercised.
1. Compute the initial lease liability = (600,000 x 3.791) = P 2,274,600
2. Compute the cost of right of use asset = ( 2,274,600/5,000,000 x 4,500,000 ) = P
2,074,140
3. Determine the gain on right transferred to the buyer-lessor
Sales Price at Fair Value P 5,000,000
Less: Carrying amount of Machine 4,500,000
Total Gain 500,000
Fair value of Machine 5,000,000
Right retained by Seller - Lease (2,274,600)
Right return by Buyer - Lessor 2,725,400
Gain to be recognized ( Buyer - Lesser) (2,725,400/5,000,000 x
500,000)
= 272,540
4. What is the net annual rental income of the buyer-lessor? P600,000
5. What is the annual depreciation of the lessee? (2,074,140/5years) = P409,428
6. What is the interest expense of the seller-lessee for the current year? (2,274,600 x 10%)
= P 227,460
Problem 13
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 4 periods 3.312
There is no transfer of title to the lessee nor purchase option that is reasonably certain to
be exercised.
1. Compute the initial lease liability = (800,000 x 3.312) = P 2,649,600
2. Compute the cost of right of use asset = (1,649,600/5,000,000 x 4,500,000) = P
1,484,640
Sale price P 6,000,000
Fair value (5,000,000)
Excess sale price over fair value 1,000,000
Present value of rentals 2,649,600
Additional financing (1,000,000)
Present value related to lease 1,649,600
Cost of right of use asset (1,649,600/5,000,000 x 4,500,000) 1,484,640
Fair value 5,000,000
Carrying amount (4,500,000)
Total gain 500,000
Fair value 5,000,000
Right retained by seller-lessee (1,649,600)
Right transferred to buyer-lesser 3,350,400
Gain to be recognized (3,340,000/5,000,000 x 500,000) 335,040
3. Determine the gain on right transferred to the buyer-lessor = P335,040
4. What is the net annual rental income of the buyer-lessor? = P 498,068
Prsent Value Fraction Allocation
Rental income P 1,649,600 1,649,600/2,649,600 498,068
Financial asset 1,000,000 1,000,000/2,649,600 301,932
Total present vale 2,649,600 800,000
5. What is the annual depreciation of the lessee? = (1,484,640/4years) = P 371,160
6. What is the interest expense of the seller-lessee for the current year? = ( 2,649,600 x
8%) = P 211,968
Problem 14
At the beginning of the 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 year 500,000
Remaining life of machine 10 10years
Lease term 3years
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.
1. Compute the initial lease liability = (500,000 x 2.67) = P 1,335,000
2. Compute the cost of right of use asset = (2,335,000/5,000,000 x 3,500,000) = P
1,634,500
Fair value P 5,000,000
Sales price (4,000,000)
Excess fair value Over sales price 1,000,000
Present value of Lease liability P 1,335,000
Excess of fair value - prepayment of rental 1,000,000
Total lease Liability 2,335,000
Cost of right of use asset (2,335,000/5,000,000 x 3,500,000) 1,634,500
Fair value 5,000,000
Carrying amount (3,500,000)
Total gain 1,500,000
Fair value 5,000,000
Right retained by seller - Lessee excluding excess sales price (2,335,000)
Right transferred to buyer-lesser 2,665,000
Gain to be recognized (2,665,000/5,000,000 x 1,500,000) 799,500
3. Determine the gain on right transferred to the buyer-lessor = P 799,500
4. What is the net annual rental income of the buyer-lessor? = 500,000
5. What is the annual depreciation of the lessee? = (1,634,500/3years) = P544,833
6. What is the interest expense of the seller-lessee for the current year? = (1,335,000 x 6%)
= P80,100
