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Problem Solving-Lease

Problem 1: 1) Report lease liability of $4,360,000 2) Report right of use asset of $4,760,000 3) Report interest expense of $436,000 4) Report depreciation of right of use asset of $476,000 Problem 2: 1) Report lease obligation of $1,200,000 2) Report interest expense of $96,000 Problem 3: 1) Report lease liability on December 31, 2024 of $2,860,000 2) Report current portion of lease liability of $1,500,000 3) Report interest expense for 2024 of $176,

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135 views

Problem Solving-Lease

Problem 1: 1) Report lease liability of $4,360,000 2) Report right of use asset of $4,760,000 3) Report interest expense of $436,000 4) Report depreciation of right of use asset of $476,000 Problem 2: 1) Report lease obligation of $1,200,000 2) Report interest expense of $96,000 Problem 3: 1) Report lease liability on December 31, 2024 of $2,860,000 2) Report current portion of lease liability of $1,500,000 3) Report interest expense for 2024 of $176,

Uploaded by

gadingancielomarie
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PROBLEM 1

At the beginning of the current year, JJ Co. entity leased a building from a lessor.

Annual rental payable at the end of each year 1, 500, 000

Purchase option that is reasonably certain to be exercised 1, 000, 000

Initial direct cost 405, 000

Lease bonus paid to lessor before commencement of the lease 300, 000

Lease incentive received 50, 000

Present value of restoration cost discounted at 8% for 6 periods 945, 000

Lease term 6 years

Useful life of building 10 years

Implicit interest rate 10%

PV of 1 for 6 periods at 10% 0.56

PV of ordinary annuity of 1 for 6 periods @ 10% 4.36

Requirements:

1. Compute for the amount of lease liability to be reported at year-end?


2. What amount should be reported as cost of the right of use asset?
3. Compute for the interest expense that should be reported for the current year.
4. What amount should be reported as depreciation of the right of use asset for the current year?

PROBLEM 2:

On January 1, 2023, BORAH Co. entered into a 5-year lease with a lessor. Annual lease payments of 1,
200, 000, including annual executory cost of 200, 000 are payable at the end of each year. The entity
knows that the lessor expects an 8% implicit rate on the lease and the entity has a 10% incremental
borrowing rate. The equipment is expected to have a 10 years useful life. In, addition, a third party has
guaranteed to pay the lessor a residual value of 500, 000 at the end of the lease. The present value of an
ordinary annuity of 1 for 5 years is 3.99 @ 8% and 3.79 @ 10%. The present value of 1 @ 8% for 5
periods is 0.68 and @ 10% for 5 periods is 0.62.

Requirements:

1. What is the principal amount of the lease obligation on December 31, 2023?
2. What amount should be reported as interest expense for 2023?
PROBLEM 3:

On December 31, 2023, AKOUH NATO Co. leased out two automobiles for executive use. The lease
required the entity to make 5 annual payments of 1, 500, 000 beginning on December 31, 2023. At the
end of the lease term, the entity had a residual value guarantee of the automobiles at 1, 000, 000. The
interest rate implicit in the lease is 10% and the Present value factors are:

PV of an ordinary annuity of 1 for 5 periods @ 10% 3.79

PV of an annuity due of 1 for 5 periods @ 10% 4.17

PV of 1 for 5 periods @ 10% 0.62

Requirements:

1. Compute the lease liability on December 31, 2024.


2. What is the current portion of the lease liability on December 31, 2024?
3. What is the interest expense for 2024?

PROBLEM 4:

At the beginning of the current year, SEE RAH ULO Co. entered into a 10-year lease for an equipment.
The entity accounted for the acquisition as a finance lease for 5, 900, 000 which included 400, 000
residual value guarantee. At the end of the lease, the asset shall revert back to the lessor. It is estimated
that the fair value of the asset at the end of its 12-year useful life would be 500, 000. What amount
should be recognized as straight line depreciation on the leased asset for the current year?

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