PROBLEM 28-11 Sales-Type Lease

On January 1, 2018, Money Co., a dealer of machines, leased a machine to for Nothing Co. Data
releasing to the lease is as follows:

Cost of the machinery ₱900,000

Useful life of equipment 5
Lease term 4
Annual rent payable at the end of the year 300,000
Interest rate implicit in the lease 8%
Residual value 50,000
Initial direct cost 10,000

The leased asset reverts to Money Co. at the end of the lease term. The lease is appropriately recorded as
sales type lease.

Questions:
Based on the above data, answer the following:
CASE NO. 1: Assuming the residual is guaranteed, answer the following:
1. How much is the total interest income to be earned over the lease term?
a. ₱219,620 c. ₱993,630
b. ₱ 1250,000 d. ₱36,750
2. How much is the total interest income in 2018?
a. ₱65,025 c. ₱46,227
b. ₱82,430 d. ₱100,000
3. How much is the profit on sale on December 31, 2018?
a. Nil c. ₱167,130
b. ₱120,380 d. ₱83,630
4. Assuming the residual decrease by P6,000, how much is the loss to be recognized in profit or loss
at the end of the lease?
a. Nil c. ₱300,032
b. ₱6,000 d. ₱50,000
CASE NO. 2: Assuming the residual is unguaranteed, answer the above questions:

PROBLEM 28-12 Direct Financing Lease – sale of Leased Asset

On January 1, 2018, Garfunkel Co., a lessor, sold equipment that it had been leasing under direct
financing lease. On the same date, data relating to sale and lease follow:

Sales price ₱400,000

Gross lease receivable 180,000
Unearned interest income 30,000
Implicit rate 12%

How much is the gain (or loss) on sale of the leased asset on January 1, 2018?
a. ₱ Nil c. ₱268,000
b. ₱220,000 d. ₱250,000

PROBLEM 28-13 Sale and Leaseback as Finance Lease

The following data relate to a sale and leaseback of equipment of Mrs. Robinson Co. on December 31.
2018:

Sales price (equal to the present value of rentals) ₱993,630

Cost of equipment 1,200,000
Accumulated depreciation 100,000
Annual rent payable 300,000
Estimated remaining life 5
Lease term 4
Implicit rate 8%

1. What amount of loss on sale and leaseback should Mrs. Robinson Co. recognized immediately as
of December 31, 2018?
a. Nil c. ₱206,370
b. ₱1106,370 d. ₱506,370
2. Assume instead that the cost of the equipment is ₱1,000,000 and the accumulated depreciation is
₱100,000, what amount of gain on sale and leaseback should Mrs. Robinson Co. recognized as of
December 31, 2018?
a. Nil c. ₱18,726
b. ₱93,630 d. ₱23,408

PROBLEM 28-14 Sale and Leaseback as Operating Lease – Treatment of Gain and Loss
The following data relate to a sale and leaseback as operating lease of equipment of Beegees Co. on
December 31, 2018:

Sales price ₱800,000

Cost of equipment 1,100,000
Annual rent payable 40,000
Estimated remaining life 10
Lease term 5

Questions:
Based on the above date, answer the following:
1. Assuming that the fair value amounted to ₱800,000, and accumulated depreciation of ₱600,000
what amount of gain on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018?
a. Nil c. ₱200,000
b. ₱300,000 d. ₱150,000
2. Assuming that the fair value amounted to ₱800,000, and accumulated depreciation of ₱100,000
what amount of loss on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018?
a. Nil c. ₱150,000
b. ₱100,000 d. ₱200,000
3. Assuming that the fair value amounted to ₱600,000, and accumulated depreciation of ₱650,000
what amount of gain on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018?
a. Nil c. ₱200,000
b. ₱350,000 d. ₱150,000
4. Assuming that the fair value amounted to ₱900,000, and accumulated depreciation of ₱700,000
what amount of gain on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018?
a. Nil c. ₱100,000
b. ₱400,000 d. ₱150,000
 5. Assuming that the fair value amounted to ₱900,000, and accumulated depreciation of ₱220,000
what amount of gain on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018?
a. Nil c. ₱100,000
b. ₱80,000 d. ₱150,000
6. Assuming that the fair value amounted to ₱900,000, and accumulated depreciation of ₱220,000
what amount of loss on sale and leaseback should Beegees Co. recognized immediately as of
December 31, 2018 if loss is compensated by future lease payments below market value?
a. Nil c. ₱100,000
b. ₱80,000 d. ₱150,000

COMPREHENSIVE PROBLEMS
PROBLEM 28-15
You were in the annual examination of the financial statements of TimMalna Co. as part of your audit,
you are assigned for the lease and its related account. The following accounts appear in the ledger:

Building (Leased Asset)

1/1/2018 1,351,805 1351,805 Bal. end, 12/31/2018

Lease Liability
12/31/2018 84,819 1,151,805 1/1/2018
Bal. end, 12/31/2018 1,066,986
Interest Expense
12/31/2018 115,181 115,181 Bal. end, 12/31/2018

Depreciation Expense
12/31/2018 135,181 135,181 Bal. end, 12/31/2018

Additional Information:
 The January 1, 2018 balance reflects the amount capitalized on December 31, 2017 when
TimMalna Co. leased a building from TimDuncan Co. for a lease term of 10 years. The building
has a useful life of 20 years. There is no transfer of ownership at the end of the leased asset’s
useful life and the fair value of the building on December 31, 2017 was ₱2,000,000. TimMalna
Co’s incremental borrowing rate is 10%. Lease payment of ₱200,000 is due every December 31,
starting 31, 2017?
 The beginning balance of the lease liability reflects the amount that was capitalized pn December
31, 2017 less the lease payment made on that date.
 The debit entries on December 31, 2018 in the lease liability and interest expense reflected the
amount paid on that date.
 Depreciation expense was also recorded using straight line method.

Questions:
Based on the above data, answer the following:
Case No. 1: Assume no other data are given, answer the following:
1. How much is the amount to be capitalized as building (leased asset) on December 31, 2017?
a. Nil c. ₱2,000,000
b. ₱1,351,805 d. ₱1,551,805
2. How much is the total lease related expenses in 2018?
a. ₱290,361 c. ₱580,000
 b. ₱200,000 d. ₱250,362
3. How much is the current liabilities as of December 31, 2018?
a. Nil c. ₱93,301
b. ₱1,066,986 d. ₱49,638
4. How much is the total leased related liabilities as of December 31, 2018?
a. Nil c. ₱71,301
b. ₱1,066,986 d. ₱1,215,685
5. What is the effect of the error, if any, on the net income in 2018?
a. Nil c. ₱252,362 understated
b. ₱20,000 overstated d. ₱50,362 understated
Case No. 2: Assume instead that the fair value of the asset is ₱1,500,000, answer questions 1-5 above.

PROBLEM 28-16
You were engaged in the annual examination of the financial statements of Batanes Co. as part of your
audit, you are assigned for the lease and its related account. The following data were gathered in the
records of the company:
 On January 2, 2018, Batanes Co. sold equipment with an estimated useful life of eleven years and
immediately leased it back for ten years. The equipment’s cost was ₱400,000 and has a carrying
amount of ₱350,000, the sales price which is equal to the present value of the lease payment was
₱379,695. The implicit rate in the lease is 12% Lease payments of ₱60,000 is due every January
2, Starting January 2, 2018. The following journal entries were made by the company relating to
this transaction:
1/2/2018
Cash 379,695
Accumulated depreciation 50,000
Equipment 400,000
Gain on sale of equipment 29,695
To record the sale.
1/2/2018
Rent expense 60,000
Cash 60,000
To record the annual rental.
No other journal entries were made by the company regarding this transaction.
 Also on January 2, 2018, Batanes Co. sold machinery with an estimated useful life of eleven
years and immediately leased it back for five years. The machine’s cost was ₱500,000 and has a
carrying amount of ₱350,000, the sales price which is equal to the fair value of the lease payment
was ₱400,000. Monthly lease payment of ₱5,000 is due at the end of each month. The following
journal entries were made by the company relating to this transaction:
1/2/2018
Cash 400,000
Accumulated Depreciation 150,000
Machine 500,000
Deferred gain on sale and leaseback 50,000
To record the sale
Rent expense was debited when the monthly payments were made. No other journal entries were
made by the company regarding this transaction.

Questions:
Based on the result of your audit, answer the following:
1. What is the necessary adjusting entry in 2018 relative to the equipment?
a. No adjusting entry
 b. A net credit to deferred gain on sale on leaseback of ₱26,725
c. A net credit to Lease liability of ₱350,000
d. A net debit to equipment of ₱350,000
2. What is the total lease- related expense to be recognized by Batanes for 2018?
a. ₱60,000 c. ₱76,333
b. ₱120,000 d. ₱136,333
3. What is the total lease-related liability on December 31, 2018?
a. ₱Nil c. ₱358,058
b. ₱298,058 d. ₱273,825
4. What is the total gain to be recognized on sale and leaseback in 2018?
a. ₱50,000 c. ₱60,000
b. ₱52,970 d. Nil
5. What is the necessary adjusting entry in 2018 relative to the machine?
a. No adjusting entry
b. A net credit to gain on sale and leaseback of ₱50,000
c. A net debit to deferred gain on sale and leaseback of ₱50,000
d. A net credit to gain on sale and leaseback of ₱10,000