Chapter 28

Lease
Review Questions – Computational

Problem 28-1: Finance Lease – Lease Liability

1. A
(P 26,000 – 1,000) x 6.0 P 150,000

Problem 28-2: Finance Lease with Purchase Option

Questions:
1. A
Present Value of periodic payment (P 120,000 x 3.4018) P 408,220
Add: Present Value of bargain purchase option (20,000 x 0.6355) 12,710
Present value of minimum lease payments P 420,926

Question No. 2 to 4

Date Annual Interest Amortization Present Value

payment Expense
12/31/2021 P 420,926
12/31/2021 P 120,000 P 120,000 300,926
12/31/2022 120,000 P 36,111 83,889 217,037
12/31/2023 120,000 26,044 93,956 123,082
12/31/2024 120,000 14, 770 105,230 17,851
12/31/2025 20,000 2,142 17,858 (6)

2. B
3. C
4. B

Problem 28-3: With Guaranteed Residual Value and Initial Direct Costs

Questions:
 1. C
Present Value of periodic payment (130,000 x 3.4869) P 453,297
Add: Present Value of guaranteed residual value (50,000 x 0.683) 34,150
Present value of minimum lease payments 487,447
Add: Initial direct cost 40,000
Cost of the Machinery P 527,447

Question no. 2 to 4

Date Annual Interest Amortization Present Value

payment Expense
12/31/2021 P 487,447
12/31/2021 P 130,000 P 130,000 357,447
12/31/2022 130,000 P 35,745 94,255 263,192
12/31/2023 130,000 26,319 103,681 159,511
12/31/2024 130,000 15,951 114,049 45,462
12/31/2025 50,000 4,538 45,462 0

2. B
3. C
4. B

Problem 28-4: Finance Lease – Depreciation

Questions:
1. A
Cost of the lease asset P 487,447
Less: Estimated residual value end of the useful life of the asset 60,000
Depreciable cost 427,447
Divide by: Useful life 8
Depreciation P 53,431

2. B
Cost of the lease asset P 487,447
Less: Estimated residual value end of the useful life of the asset 50,000
Depreciable cost 437,447
Divide by: Useful life 4
Depreciation P 109,362

Problem 28-5: Computation of Periodic Lease Payments

1. B
Fair value P 800,000
Less: Present value of guaranteed residual value 59,630
Total 740,370
Divide by: Present Value of Annuity Due 4.8897
Periodic lease payments P 151,414

Problem 28-6: Lease Modification

Questions:
1. A
The lease modification is accounted as a separate lease.

2. B
PV of the lease liability (P180,000 x 6.4632) P1,163,378

3. C
Date Annual Interest Expense Amortization Present Value
payment
12/31/201 1,163,378
7
12/31/201 180,000 58,169 121,831 1,041,547
8
12/31/201 180,000 52,077 127,923 913,624
9
12/31/202 180,000 45,681 134,319 779,305
0

4. C
PV of the modified lease liability (P390,000 - 180,000) x 3.4651 P727,672

Date Annual Interest Amortization Present Value

payment Expense
01/01/2021 727,672
12/31/2021 210,000 43,660 166,340 561,332

5. C
P727,672/4 P181,918
Problem 28-7: Lease Modification

Questions:
1. B
The lease modification is not accounted as a separate lease.

2. C
PV of the lease liability (P300,000 x 6.4632) P1,938,964

3. B
Date Annual Interest Amortization Present Value
payment Expense
12/31/2017 1,938,964
12/31/2018 300,000 96,948 203,052 1,735,912
12/31/2019 300,000 86,796 213,204 1,522,708
12/31/2020 300,000 76,135 223,865 1,298,843

Question No. 4
Question No. 5

Problem 28-8: Unequal Rental Payments

1. C
2019 P 20,000
2020 18,000
2021 16,000
2022 14,000
Total Rent 68,000
Divide by: Number of years 4
Rent expense per year P 17,000

Problem 28-9: Operating Lease – Unequal Rental Payments

1. A
07/01/18 to 06/30/19 P 60,000
07/01/19 to 06/30/20 90,000
07/01/20 to 06/30/21 210,000
Total 360,000
Divide by: Lease term 3
Rent income per year P 120,000
Rent income to date (120,000 x 2) P 240,000
Less: Collection to date (60,000 + 90,000) 150,000
Rent receivable P 90,000

Problem 28-10: Operating Lease – Comprehensive

Case No. 1
1. B
Monthly rental P 25,000
Multiply by: Number of months used in 2021 12
Rental income - 2021 P 300,000

Case No. 2
2. C
Period rent-one year P 300,000
Amortization of lease bonus (180,000/3) 60,000
Rental expense P 360,000

Case No. 3
3. D
Total lease payments [(3 x 12)-6 x 25,000] P750,000
Divided by: Lease term 3
Rental expense P250,000

4. D
Total payments to date, 2021 (6 x 25,000) P150,000
Less: Rental collection to date (P25,000 x 18) 250,000
Accrued rent payable P100,000

Case No. 4
5. A
Total lease payments:
(P25,000 x 2 x 12) P 600,000
(P30,000 x 1 x 12) 360,000 P 960,000
Divided by: Lease term 3
Rental income - 2021 P 320,000

6. D
Total payments to date, 2021 P 300,000
Total expense to date, 2021 320,000
Accrued rent payable (P20,000)
Case No. 5
7. A
Rental revenue P 300,000
Less: Amortization of Initial direct cost (P120,000/3) P 40,000
Insurance and property tax expensed on leased 40,000
Depreciation of the leased asset 30,000 110,000
Net income P 190,000

Case No. 6
8. A
Period rent for one year P 300,000
Add: Contingent rent
1st [(2,500,000 - 1,000,000) x 10%] P 100,000
2nd [(6,000,000 - 2,500,000) x 8%] 280,000 380,000
Total rent expense P 680,000

Problem 28-11: Direct Financing Lease – Lessor

Questions:
1. C
Gross Investment:
Total Periodic Lease Payment (261,692 x 4) *P 1,046,775
Add: Unguaranteed Residual Value (URV) 150,000 P 1,196,775
Less: Cost of the equipment 1,000,000
Unearned interest income P 196,775

*1,046,770 OR 1,046,775

2. C
3. A

Amortization Table

Date Annual Interest Amortization Present Value

Collection Income
12/31/2021 P 1,000,000
12/31/2021 P 261,692 - P 261,692 738,308
12/31/2022 261,692 P 81,214 180,479 557,829
12/31/2023 261,692 61,361 200,331 357,498
12/31/2024 261,692 39,325 222,368 135,130
12/31/2025 150,000 14,864 135,136 (6)
PROBLEM 28-12: Direct Financing Lease - Sale of Leased Asset - With Initial Indirect
Cost

Questions:
1. A
Gross Investment:
Total Periodic Lease Payment (251,600 x 4) *P 1,006,402
Add: Unguaranteed Residual Value (URV) - P 1,006,402
Less: Cost of the equipment 924,128
Unearned interest income P 82,273

*4,796,278 OR *4,796,280

2. D
3. D

Cost of the equipment P 900,000

Add: Initial direct cost 24,128
Net cost of investment P 924,128

Amortization Table

Date Annual Interest Amortization Present Value

Collection Income
12/31/2021 P 924,128
12/31/2021 P 251,600 - P 251,600 672,528
12/31/2022 251,600 P 40,352 211,248 461,280
12/31/2023 251,600 27,677 223,923 237,757
12/31/2024 251,600 14,243 237,357 1

PROBLEM 28-13: Sales-Type Lease

Case No. 1
1. A
Gross Investment:
Total Periodic Lease Payment (P300,000 x 4) P 1,200,000
Add: Residual Value (P50,000 x 0.7350) 50,000 P 1,250,000
Present value of the leased asset:
Present value of minimum lease payments
(P300,000 x 3.3121) P 993,630
Add: Present value of residual value (P50,000 x 0.735) 36,750 1,030,380
Unearned interest income P 219,620
 2. B
Date Annual Interest Amortization Present Value
Collection Income
01/01/2021 P 1,030,380
12/31/2021 P 300,000 P 82,430 P 215,570 812,810
12/31/2022 300,000 65,025 234,975 577,835
12/31/2023 300,000 46,227 253,773 324,062
12/31/2024 350,000 25,906 324,094 50,000

3. B
Sales P 1,030,380
Less: Cost of goods sold P 900,000
Initial direct cost 10,000 910,000
Dealer’s profit P 120,380

4. A
Inventory 44,000
Cash 6,000
Lease receivable 50,000

Case No. 2
1. A
The total interest income to be earned over the lease term is the same whether the
residual value is guaranteed or unguaranteed.

2. B
The interest income of P82,430 is the same whether the residual value is guaranteed
or unguaranteed.

3. B
Sales P 993,630
Less: Net cost
Cost of goods sold P 900,000
Less: Present value of URV 36,750 863,250
Initial direct cost 10,000
Dealer’s profit P 120,380

4. B
Inventory 44,000
Loss on the sale type lease 6,000
Lease receivable 50,000

Problem 28-14: Direct Financing Lease – Sale of Leased Asset

 1. D
Sale Price P 400,000
Less: Lease Receivable (400,000 – 30,000) 150,000
Loss on Sale and Leaseback P 250,000

Problem 28-15: Finance Lease – Lessor

Questions:
1. C
Fair market value P 600,000
Add: additional cost 3,600
Net investment P 603,600

2. A
Net investment P 603,600
Less: Carrying amount 564,000
Gain on sale of machine P 39,600

3. A
4. C

Amortization Table

Date Collection Interest Amortization Present

Income Value
1/1/2021 P 603,600
12/31/2021 P 132,000 P 35,263 P 96,737 506,863
12/31/2022 132,000 29,398 102,602 404,261
12/31/2023 132,000 23,447 108,553 295,708
12/31/2024 132,000 17,151 114,849 180,859
12/31/2025 132,000 10,490 120,859 60,000

5. A
Annual payment P 132,000
Add: Residual value 60,000
Gross investment in the lease P 192,000

Problem 28-16: Sale and Leaseback as Finance Lease

Questions:
1. B
Selling Price P 993,630
Less: Carrying amount (1,200,000 – 100,000) 1,100,000
Loss on Sale and Leaseback P 106,370

2. D
Selling Price P 993,630
Less: Carrying amount (1,000,000 – 100,000) 900,000
Deferred gain on sale and leaseback 93,630
Divided by: Lease term 4
Loss on Sale and Leaseback P 23,408

Problem 28-17: Sale and Leaseback

Annual Lease payment P 50,000

Multiply by: PVOA @ 4%, n= 15 11.11839
Total present value of lease liability P 555,920

Questions:
1. A
Selling Price P 600,000
Less: Fair Market Value 500,000
Additional financing (Prepayments) P 100,000

2. B
P 480,000
x ( 555,920−100,000 )
500,000
¿ 0.96 x 455,920
= P 437,683

3. D
Cash 600,000
Right of use asset 437,683
Gain on rights transferred 1,764
Lease liability 555,920
Building 480,000

4. A
 Present value of lease liability P 555,920
Divide by: useful life 15
Depreciation expense P 37,061

5. A
Selling price P 600,000
Less: Fair Value 500,000
Total Gain P 100,000

COMPREHENSIVE PROBLEMS

Problem 28-18: Initial Measurement of Right-of-Use and Lease Liability

Questions:
1.
Annual lease payment P 100,000
Multiply by: FVOA 5.2064
PV of lease payment P 520,637
Add: First payment 100,000
Right of use of asset P 620,637

Right-of-use asset 620,637

Lease liability 520,637
Cash 100,000

2.
Right-of-use asset 620,637
Lease liability 520,637
Cash 100,000

Right-of-use asset 28,000

Cash 28,000

Cash 8,000
Right-of-use asset 8,000

3.
Right-of-use asset 680,637
Lease liability 520,637
Cash (100k+60k) 160,000

Security Deposit
(50k*0.5403) 27,013
Cash 27,013

Real property tax expense 9,000

Cash 9,000

4.
Annual lease payment P 100,000
Multiply by: FVOA 5.746638944
PV of lease payment P 574,664
Add: PV of purchase option
(60k*0.5402688) 32,416
Right of use of asset P 607,080

Right-of-use asset 607,080

607,08
Lease liability 0

5.
PV of lease payment
First 4 years
(100k*3.312126) P 331,213
Remaining 4 years
(130k*3.312126) 430,576
Total P 761,789

Right-of-use asset 761,789

761,78
Lease liability 9

6.
Annual lease payment P 100,000
Multiply by: FVOA 5.746638944
PV of lease payment P 574,664

Right-of-use asset 574,664

Lease liability 574,66
 4

Variable lease payment linked to future sale:

1M to 3M at 8% P 80,000
Excess of 3M at 5% 100,000
Total P 180,000

Lease expense 180,000

180,00
Cash 0

7.
Rent expense 100,000
100,00
Cash 0

Problem 28-19: Lease Modification – Different Cases

Case 1
Right-of-use asset 246,684
246,68
Lease liability 4

Increase in lease liability= 60k*4.1140732

PV of lease liability-original
lease P 411,141
Add: Increase in lease
liability 246,684
Total PV of lease liability P 657,825

CA of right-of-use asset-
original lease P 339,013
Add: Increase in lease
liability 246,684
Total CA of right-of-use asset P 585,697

Case 2
PV of modified lease liability
(100k*6.8051905) P 680,519
Less: PV of original lease (411,141)
liability
Increase in lease liability P 269,378

Right-of-use asset 269,378

269,37
Lease liability 8

Case 3
Proportionate decrease in
carrying amount (2k/5k) 40%

Decrease of pre-modification lease liability

PV of original lease liability P 411,141
Multiply by: Proportionate
decrease in CA 40%
Decrease in lease liability P 164,456

Reduction of pre-modification ROU

CA of ROU before
modification P 339,013
Multiply by: Proportionate
decrease in CA 40%
Decrease in CA of the ROU P 135,605

Lease liability 164,456

Right-of-use asset 135,605
Gain on lease
modification- P&L 28,851

Modification adjustment:
PV of modified lease liability
(80k*3.8886675) ₱ 311,093
Less: PV of remaining lease
liability (411,141-164,456) (246,685)
Increase in lease liability ₱ 64,408

Right-of-use asset 64,408

Lease liability 64,408

Case 4

PV of modified lease liability P 311,093

(80k*3.8886675)
Less: PV of remaining lease
liability- original lease (411,141)
Increase in lease liability (100,048)

Lease liability 100,048

100,04
Right-of-use asset 8

Problem 28-20: Sublease

Case 1
a. Intermediate lessor:
1/01/2021
Lease receivable (150k*6) 900,000
Accumulated Depreciation 226,009
Right-of-use asset 565,022
Unearned interest
income (900k-653,289) 246,711
Gain on subleasing 314,276
*150k*4.3552606)

12/31/21
Cash 150,000
Lease Receivable 150,000

Unearned interest income

(653,289*10%) 65,329
Interest income 65,329

b. Sublessee
1/01/2021
Right-of-use asset 653,289
Lease liability 653,289

12/31/21
Deprciation Expense 108,881.50
Accumulated
Depreciation 108,881.50
*653,289/6
Interest Expense
(653,289*10%) 65,329
Lease liability 84,671
Cash 150,000

Case 2
a. Intermediate lessor:
1/01/2021
No journal entry

12/31/21
Cash 150,000
Rent income 150,000

b. Sublessee
1/01/2021
Right-of-use asset 653,289
Lease liability 653,289

12/31/21
Deprciation Expense 108,881.50
Accumulated
Depreciation 108,881.50
*653,289/6

Interest Expense
(653,289*10%) 65,329
Lease liability 84,671
Cash 150,000

Problem 28-21: Sale and Leaseback – Recognition of Loss

Case 1
1. B
2. B
Annual lease payment P 120,000
Multiply by: 7.721734929
Total PV of lease liability P 926,608
Seller-Lessee:
Selling Price P 2,000,000
Less: FV (2,000,000)
Additional financing 0

FV P 2,000,000
Less: Carrying amount (2,150,000)
Loss (150,000)

FV % CA Loss
Rights retained P 926,608 46.33% P 996,104 (69,496)
Rights transferred P 1,073,392 53.67% P 1,153,896 (80,504)
Total 2,000,000 2,150,000 (150,000)

Carrying amount P 2,150,000

Divided by: FV 2,000,000
Percentage 107.50%
Multiply by: 926,608
Cost of right-of-use asset P 996,104

Journal entries seller-lessee

Cash 2,000,000
Right-of-use asset 996,104
Loss on rights
transferred- P&L 80,504
Lease Liability 926,608
Building 2,150,000

Interest Expense
(926,608*5%) 46,330
Lease liability 73,670
Cash 120,000

Journal entries buyer-lessor

Building at FV 2,000,000
Cash 2,000,000

Lease Receivable (120k*10) 1,200,000

Loss 800,000
Building 2,000,000
Case 2
3. B
4. A
Annual lease payment P 120,000
Multiply by: 7.721734929
Total PV of lease liability P 926,608

Seller-Lessee:
Selling Price P 2,000,000
Less: FV (1,800,000)
Additional financing 200,000

FV P 1,800,000
Less: Carrying amount (2,150,000)
Loss (350,000)

FV % CA Loss
Rights retained P 726,608 40.37% P 867,893 (141,285)
Rights transferred P 1,073,392 59.63% P 1,282,107 (208,715)
Total 1,800,000 2,150,000 (350,000)

Carrying amount P 2,150,000

Divided by: FV 1,800,000
Percentage 119.44%
Multiply by: 726,608
Cost of right-of-use asset P 867,893

Journal entries seller-lessee

Cash 2,000,000
Right-of-use asset 867,893
Loss on rights
transferred- P&L 208,715
Lease Liability 926,608
Building 2,150,000
Interest Expense
(926,608*5%) 46,330
Lease liability 73,670
Cash 120,000

Journal entries buyer-lessor

Building at FV 1,800,000
Cash 1,800,000

Lease Receivable (120k*10) 1,200,000

Loss 600,000
Building 1,800,000

Case 3
5. B
6. B
Annual lease payment P 120,000
Multiply by: 7.721734929
Total PV of lease liability P 926,608

Seller-Lessee:
Selling Price P 2,000,000
Less: FV (2,100,000)
Prepayments (100,000)

FV P 2,100,000
Less: Carrying amount (2,150,000)
Loss (50,000)

FV % CA Loss
Rights retained P 1,026,608 48.89% P 1,051,051 (24,443)
Rights transferred P 1,073,392 51.11% P 1,098,949 (25557)
Total 2,100,000 2,150,000 (50,000)

Carrying amount P 2,150,000

Divided by: FV 2,100,000
Percentage 102.38%
Multiply by: 1,026,608
Cost of right-of-use asset P 1,051,051
Journal entries seller-lessee
Cash 2,000,000
Right-of-use asset 1,051,051
Loss on rights
transferred- P&L 25,557
Lease Liability 926,608
Building 2,150,000

Interest Expense
(926,608*5%) 46,330
Lease liability 73,670
Cash 120,000

Journal entries buyer-lessor

Building at FV 2,100,000
Cash 2,100,000

Lease Receivable (120k*10) 1,200,000

Loss 900,000
Building 2,100,000

Problem 28-22: Sale and Leaseback – Recognition of Gain

SOLUTION:
Annual lease payment P 420,000
Multiply by: PVOA 10%, n= 4 years 3.1699
Total present value of lease liability P 1,331,400

CASE NO. 1
1. B.
Selling price P 2,600,000
Less: Fair value 2,600,000
Additional financing (Prepayments) -

Fair value P 2,600,000

Less: Carrying Amount 2,400,000
Total Gain P 200,000

Fair value % Carrying Amount Gain

Rights retained 1,331,400 0.5120 1,228,985 102,415
Rights transferred 1,268,600 0.4880 1,171,015 P 97,585
(squeeze)
Total 2,600,000 2,400,000 200,000

2. A.
Cost of rights of use asset = Carrying Amount/Fair value x Present value of annual
payments less additional financing add prepayments
Cost of rights of use asset = 2,400,000 / 2,600,000 x 1,331,400
Cost of rights of use asset = P 1,228,985

CASE NO. 2
3. D.
Selling price P 2,600,000
Less: Fair value 2,500,000
Additional financing ( Prepayments) P 100,000

Fair value P 2,500,000

Less: Carrying Amount 2,400,000
Total Gain P 100,000

Fair value % Carrying Gain

Amount
Rights retained 1,231,400 0.4926 1,182,144 49,256
Rights transferred 1,268,600 0.5074 1,217,856 P 50,744
(squeeze)
Total 2,500,000 2,400,000 100,000

4. A.
Cost of rights of use asset = Carrying Amount/Fair value x Present value of annual
payments less additional financing add prepayments
Cost of rights of use asset = 2,400,000 / 2,500,000 x (1,331,400-100,000)
Cost of rights of use asset = P 1,182,144

CASE NO. 3
5. D
Selling price P 2,600,000
Less: Fair value 3,000,000
Prepayments P (400,000)
Fair value P 3,000,000
Less: Carrying Amount 2,400,000
Total Gain P 600,000

Fair value % Carrying Gain

Amount
Rights retained 1,731,400 0.5771 1,385,120 346,280
Rights transferred 1,268,600 0.4229 1,014,880 P 253,720
(squeeze)
Total 3,000,000 2,400,000 600,000

6. A.
Cost of rights of use asset = Carrying Amount/Fair value x Present value of annual
payments less additional financing add prepayments
Cost of rights of use asset = 2,400,000 / 3,000,000 x (1,331,400+400,000)
Cost of rights of use asset = P 1,385,120

Problem 28-23

Questions:
1. A.
“Substantially all” test
Present value of Periodic Payment (200,000 x 6.75902) = 1,351,805

% age = 1,351,805/2,000,000 = 68%

Not substantially all.

Major part test

% age = 10/20 = 50%
The lease term does not amount to major part of the economic life if the asset.
Answer: Nil. The lease term does not classify as finance lease.

2. B
Rent expense = P 200,000

3. A
4. A
5. D
Depreciation expense overstated, net income understated (115,181)
Interest expense overstated, net income understated (135,181)
Rent expense understated, net income overstated 200,000
Net income understated (50,362)

Problem 28-24

Questions:
1. C
Present value of periodic payment (50,000 x 4.0373) - LOWER 201,865
Fair value of the leased asset 213,213

PAR. 20 OF PAS 17 states that: At the common cement of the lease term, lessees shall
recognize finance leases as assets and liabilities in their balance sheets at amounts equal to
the fair value of the leased property or, if lower, the present value of the minimum lease
payments, each determined at the inception of the lease. The discount rate to be used in
calculating the present value of the minimum lease payments is the interest rate implicit in
the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate
shall be used. Any initial direct costs of the lessee are added to the amount recognized as an
asset.

For numbers 2-4.

Date Annual Interest Amortization Present Value
Payment Expense
12/31/2020 P 201,865
12/31/2020 P 50,000 P 50,000 151,865
12/31/2021 50,000 P 18,224 31,776 120,089
12/31/2022 50,000 14,411 35,589 84,499
12/31/2023 50,000 10,140 39,860 44,639
12/31/2024 50,000 5,361 44,639 0

2. D
3. C
4. C
5. A
Depreciation expense (201,865/5) = P 40,373

Problem 28-25

Questions:
1. A
Annual lease payments = (Fair market value – Present value of Unguaranteed Residual
Value)/Annuity Due
Annual lease payments = [286,420 – (.5066 x 20,000)]/4.6048
Annual lease payments = P 60,000

2. C
Total minimum lease payments (60,000x6) P 360,000
Add: Unguaranteed residual value 20,000
Total lease receivable 380,000
Less: Fair market value of the leased asset 286,420
Total financial revenue P 93,580

3. A
Amortization table

Date Annual Interest Amortization Present Value

Collection income
01/01/2021 286,420
01/01/2021 60,000 60,000 226,420
12/31/2021 60,000 27,170 32,830 193,590

4. C
Present value of periodic lease payments (60,000 x 4.6048) P 276,288

Amortization table

Date Annual Interest Amortization Present Value

Collection income
01/01/2021 276,288
01/01/2021 60,000 60,000 216,288
12/31/2021 60,000 25,955 34,045 182,243

Depreciation expense (276,288/6) P 46,048

Add: Interest expense 25,955
Total expenses P 72,003

5. C
P 182,243. See amortization table in No. 4.
Problem 28-26

Questions:
1. B
Periodic Rent (12,000 x 12) P 144,000
Amortization of Lease Bonus (300,000/ 6) 50,000
Rent Expense P 194,000

2. C
Periodic Payment P 480,000
Contingent Rent:
1st (4,000,000 x 4%) P 160,000
2nd (6,000,000 – 4,000,000) x 5% 100,000 260,000
Amortization of lease bonus (500,000/ 5) 100,000
Total Rent Expense P 840,000

3. B
[(3 x 12) – 6] x 10,000
Rent Expense =
3
Rent Expense = P 100,000

4. B
Lease no. 1 (Rent expense overstated, asset understated)
(P 444,000 – P 194,000) (P 250,000)
Lease no. 2 (Rent expense overstated, asset understated) (400,000)
Asset Understated (P 650,000)

Rent expense per year – Lease 3 P 100,000

Less: Payment (10,000 x 6 months) 60,000
Accrued Rent Payable Under, Liability Understated (P 40,000)

5. C
Lease no. 1 (Rent expense overstated, net income understated) (P 250,000)
Lease no. 2 (Rent expense overstated, net income understated) (400,000)
Lease no. 3 (Rent expense understated, net income overstated)
(100,000 – 60,000) 40,000
Net Income Understated (P 610,000)
Problem 28-27

Questions:
1. B
The present value of annuity due of 12% for 10 periods can be computed as:
[1 – (1 + 12%)-9] + 1
12%
= 6.33

Annual Rentals P 1,440,000

Executory costs (49,410)
Minimum lease payments 1,390,590
Multiply by: Present value of annuity due 6.33
Present value of minimum lease payments P 8,802,438

Fair Value of the Property = P 8,800,000

(The difference is immaterial, implicit rate is 12% at P 8,800,000)

2. D
[12/31/2020 balance x (1 + Effective rate)] – Annual Payments = Balance

[(P 8,800,000 – P 1,390,590) x 1.12%] – P 1,390,590 = P 6,907,949

The current portion as of December 31, 2021 can be computed as:

(P 6,907,949 – P 1,390,590) x 12% = P 561,636

3. B
Balance – Current Portion = Non-Current Portion

= P 6,907,949 – P 561,636
= P 6,346,313

4. A
P 8,800,000/ 10 = P 880,000

5. A
Depreciation expense P 880,000
Interest expense (8,800,000 – 1,390,590) x 12 889,129
Executory costs 49,410
Total Lease- Related Expenses P 1,818,539

Problem 28-28

Questions:
1. B
12 months at P 5,000 P 60,000
12 months at P 7,500 90,000
12 months at P 17,500 210,000
Total P 360,000
Divided by: Number of years 3
Rent expense per year P 120,000

Rent Expense to date P 120,000

Less: Payment to date 60,000
Accrued Rent Payable P 60,000

2. B
Present value of periodic payment (400,000 x 5.9500) P 2,380,000
Fair Value of Leased Asset P 2,380,000

Cost is equal to P 2,380,000 (Fair value which is the same as the present value of
minimum lease payments)

Amortization Table
Date Annual Interest Amortization Present Value
Payment Expense
6/30/2021 P 2,380,000
6/30/2021 P 400,000 - P 400,000 P 1,980,000
6/30/2022 400,000 P 277,200 122,800 P 1,857,200

3. A
First Lease P 60,000
Second Lease 122,800
Current Liabilities P 182,800

4. A
Rent Expense P 120,000
Interest Expense 277,200
Depreciation Expense (2,380,000/ 10) 238,000
Total Lease-Related Expense P 635,200
Problem 28-29: Exercise of Guaranteed Residual Value

Questions:
1. C
Present Value of Periodic Payment (120,000 x 3.4437) P 413,244
Add: Present value of bargain purchase option (30,000 x 0.6587) 19,761
Present value of minimum lease payments 433,005
Add: Initial direct cost 20,000
Initial Cost of the Right of Use Asset P 453,005

2. B
Interest expense P 34,431
Executory cost 20,000
Depreciation 105,751
Total Lease-Related Expenses P 160,182
Amortization Table
Date Annual Interest Amortization Present Value
Payment Expense
12/31/2021 P 433,005
12/31/2021 P 120,000 - P 120,000 313,005
12/31/2022 120,000 P 34,431 85,569 227,436
12/31/2023 120,000 25,018 94,982 132,453
12/31/2024 120,000 14,570 105,430 27,023
12/31/2025 30,000 2,977 27,023 (0)

3. C
4. B
5. B
Gross amount of guaranteed residual value P 30,000
Less: Fair Value 25,000
Loss on Lease P 5,000

6. A
Zero/ Nil

7. C
Cost of leased asset P 453,005
Less: Accumulated depreciation 211,503
Carrying amount 241,503
Add: Cash Payment 200,000
Total Consideration 441,503
Less: Lease liability 227,436
Cost of the Asset Purchased P 214,067
Problem 28-30: Direct Financing Lease

Questions:
1. C
P3,224,000
Annual payment = = P750,000
4,312

Total Interest to be Earned [(P750,000 X 5) – P3,234,000] P 516,000

2. B
Interest Revenue 1st Lease (P3,234,000 – P750,000) X 8% P 198,720

3. A
The present value of annuity due of 12% over 8 years can be computed as:
[1 – (1 + 12%) -7 ]
+ 1 = 5.5638
12%

The present value of annuity due of 12% for 8 years can be computed as:
(1 + 12%) -8 = 0.4039
The total interest revenue is the difference the lease receivable and the present value of the
minimum lease payments.
Lease receivable (P959,500 x 8 + P400,000) P 8,076,000
Present value of lease:
Unguaranteed residual value (P400,000 x 0.4039) P 161,560
PV of lease payments (P959,500 x 5.5638) 5,338,466 5,499,966
Total Interest Over the Lease Term P 2,576,034
[(P959,500 x 8 + P400,000) P5,500,000)] P 2,576,000

4. B
Interest Revenue 2nd Lease (P5,500,000 – P959,500) X 12% P 544,860

Problem 28-31: Sales – Type Lease

Questions:
1. A.
Lease receivable (P3M x 5 + P1M) P 16,000,000
Present value of minimum lease payments:
Rental (3.60 x P3,000,000) P 10,800,000
 Unguaranteed residual value (0.57 x P1,000,000) 570,000 (11,370,000)
Total Unearned Interest Income P 4,630,000

2. B
Present value of minimum lease payments P 11,370,000
Cost of goods sold (P8,000,000 + P300,000) (8,300,000)
Profit on Sale P 3,070,000

3. A
Financial Revenue (P11,370,000 X 12%) P 1,364,400

4. B
Selling price P 7,040,000
Book value (5,600,000)
Gain on Sale P 1,440,000

5. B
Interest Revenue (P7,040,000 X 10% X 6/12) P 352,000

Problem 28-32: Financial Liability, Sale and Leaseback, Impairment Loss on PPE and
Investment in Associate

Questions:
1. B
Interest cost paid (50M x 12%) P 6,000,000
Less: Interest expense for the year (47,078,000 x 14%) 6,590,920
Finance Cost, Understated P (590,920)
Rounded off to P591,000
2. C
Profit accounted for on disposal of plant P 10,000,000
Profit to be booked (10M/5 x .5) 1,000,000
Profit on Sale and Leaseback, Overstated P 9,000,000

3. C
Depreciation per book (30M/15) P 2,000,000
Depreciation to be booked, 4/1/2020 to 9/30/2020
(30M/15x5) P 1,000,000
Depreciation to be booked, 10/1/2020 to 3/31/2021
(16M/5x5) 1,600,000 2,600,000
Depreciation, Understated P (600,000)
4. C
Carrying value as of October 1, 2020 (30M/15 x 10.5) P 21,000,000
Less: Recoverable amount 16,000,000
Impairment Loss P 5,000,000

5. C
Acquisition cost P 6,000,000
Dividend income (P20 x 50,000) (1,000,000)
Share in the net income (P10M x 25%) 2,500,000
Share in the comprehensive income (P2M x 25%) 500,000
Investment In Associate P 8,000,000

Problem 28-33

Questions:
1. D
Accounts Payable (P900,000+P50,000+P25,000) P 975,000

2. D
Total warranty expense (P1.4M x 12%) P 168,000
Less: Total actual expenditures 63,000
Warranty Liability, 12/31/2021 P 105,000

3. C
Legal services P 4,600
Add: Medical services 5,500
Payroll (14,400 / 12 x 8) 9,600
Royalties 3,900
Total Accrual P 23,600

4. D
Fair value (equal to present value MLP) P 490,000
Less: First payment 70,000
Total 420,000
Add: Interest accrued (P420,000 x 9%) 37,800
Total Lease Liability P 457,800

5. A
CV of Bonds Payable [(3,875,902*111%) – 400,000] P 3,902,251
Problem 28-34

Questions:
1. C
Unadjusted Accounts Payable P 450,000
Purchased goods, lost in transit FOB 60,000
shipping point
Purchased goods, FOB shipping point 45,000
Adjusted Accounts Payable P 555,000

2. A
Units Sold
October 32,000
November 28,000
December 40,000
Total 100,000
Multiplied by 2%
Total expected failures 2,000
Less: Recorded product failures
October 640
November 360
December 180 (1,180)
Expected future failures 820
Multiplied by P150
Estimated liability for warranty P 123,000

3. C
Date Principal Interest Amortization Carrying
Expense Amount
01/01/21 P 720,960
12/31/21 P 200,000 P 86,515 113,485 607,475
12/31/22 200,000 72,897 P 127,103 480,372
12/31/23 200,000 57,645 142,355 338,017
12/31/24 200,000 40,562 159,438 178,579
12/31/25 200,000 21,249 178,751 -

4. A
Present value of principal (4,000,000 x P2,732,000
0.6830
PV of interest payments (4,000,000 x 12% 1,521,552
x3.1699)
PV of Bonds Payable, 12/31/21 4,253,552

5. D
Date Principal Interest Amortization Carrying
Payment Expense Amount
01/01/21 P1,351,800
01/01/21 P200,000 - P200,000 1,151,800
01/01/22 P 115,180 P1,266,980

Problem 28-35

Questions:
1. D
Nil, notes payable are all classified as non-current liabilities.

2. D
Present value of lease payment= P60,000 x 6.3282= P379,692

Date Payment Interest Amortization Carrying

Expense Amount
12/31/2020 P 379,692
12/31/2020 P 60,000 - P 60,000 319,692
12/31/21 60,000 P38,363 21,637 298,055
12/31/22 60,000 35,767 23,233 273,822

3. B
Interest Expense, 2021= P 38,363 (see amortization above)

4. D
Accrued rent payable = P720,000/3= P240,000

Date Rent Expense Rent Expense Payment to Accrued Rent

To Date Date Payable
1/1-12/31/21 P 240,000 P 240,000 P 120,000 P 120,000
1/1-12/31/22 240,000 480,000 300,000 180,000
1/1-12/31/23 240,000 720,000 720,000 -

5. C
Estimated liability for income tax P 200,000
Note payable - bank 200,000
Estimated liability from contingencies P 400,000
Problem 28-36: Decommissioning Liability, Investment Properties

Questions:
1. C
Date Finance Cost Present Value
4/01/2016 P19,000,000
3/31/2017 P1,900,000 20,900,000
3/31/2018 2,090,000 22,990,000
3/31/2019 2,299,000 25,289,000
3/31/2020 2,528,900 27,817,900
3/31/2021 2,781,790 30,599,690

Date Finance Cost Present Value

4/1/2016 P25,000,000
9/30/2016 P1,250,000*
* (25,000,000 x 10% x 6/12) = P1,250,000

Finance Cost from 3/31/2021 to 2,781,790 x 6/12 P1,390,895

9/31/2021
Revised Finance Cost 1,250,000
Total finance cost P2,640,895

2. B
Depreciation October 1 to March 31 3,725,000
Depreciation April to Sept 2021 3,538,344
(*106,160,310/15 x 6/12)
Total depreciation P 7,263,344

3. B
Cost of the plant P 130,000,000
Add: Present value of decommissioning cost 19,000,000
Total P 149,000,000
Less: Accumulated depreciation (149M/20 x 37,250,000
5)
Carrying value, 3/31/2021
Less: Decrease due to revision of decom 111,750,000
liability 30,599,690
Present value of decommissioning 25,000,000 5,599,690
liability
Less: Revised estimate
Total *P 106,150,310
Less: Depreciation April to Sept 2021 3,538,344
(106,160,310/15 x 6/12)
Carrying value, 9/30/2021 P 102,611,966

4. B
2021 P 6,000,000
2022 6,300,000
2023 6,615,000
Total 18,915,000
Divide by: Total semi-annual payments 6
Semi-annual rent income P 3,152,500

5. B
Total income to date 3,152,500
Less: Total collection to date 3,000,000

Rent receivable P 152,500

Problem 28-37: Revaluation, Noncurrent Held for Sale and Lease

Questions:
1. B
Held for sale asset (12,800 – 9,800) P 3,000
Depreciation charge 75,780
TOTAL P 78,780

Depreciation for year:

Buildings (600,000 / 20) P 30,000
Plant (220,900 x 20%) 44,180
Leased machine (8,000 / 5 years) 1,600
Total Depreciation Expense P 75,780

2. A
Plant and machinery – cost 278,200
Accumulated depreciation 44,500
Less: Carrying amount of held for sale 12,800 220,900
Add: Leased machine 8,000
Less: Depreciation for year:
Plant (220,900 x 20%) 44,180
Leased machine (8,000 / years) 1,600 45,780
Carrying Amount P 183,120
3. C
Total depreciation of the building (600,000/20) P 30,000
Less: Depreciation based on cost (1.1m-700,000)/25 16,000
Piecemeal Realization P 14,000

4. C
Interest Present
Date Payment Amortization
Expense value
07/01/2020 P 8,000
07/01/2020 2,000 - 2,000 6,000
06/30/2021 1,500 (6,000 x8%) 480 1,020 4,980
06/30/2022 1,500 (4,980 x8%) 398 1,102 3,878