Accounting For Operating Lease

ACCOUNTING FOR OPERATING LEASE
NOTES:
1. The lessee would account for a lease as operating lease if the lease term is less than one year
and the leased asset is of low value.
2. The lessor would account for a lease as operating lease by applying the INDICATORS OF A
FINANCE LEASE.
1. Bargain purchase option
2. Transfer of ownership from the lessor to the lessee at the end of the lease term
3. the lease term is at least 75% of the useful life of the leased asset
4. The Present value of the lease payments is at least 90% of the Fair value of the leased
asset.
5. The leased asset is specialized in nature that only the lessee can use it without
modifications. IF NONE OF THESE 5 INDICATORS OF FINANCE LEASE IS PRESENT IN THE LEASE, THE
LEASE IS TO BE CLASSIFIED BY THE LESSOR AS OPERATING LEASE.
3. Under operating lease, The lessee records Rent Expense. The lessee do not record
depreciation of the leased asset.
4. Under operating lease, The lessor records Rent Revenue. The lessor record depreciation of
the leased asset.
Answer to 3-17-OPERATING LEASE (point of view of the lessor)
a. Entries on LESSOR’S BOOKS (Provident Company) relating to the leased asset

July
1,2020 Equipment for lease 1,500,000
Cash 1,500,000
Purchase equipment for lease.
Oct.
1,2020 Cash 30,000
Rent Revenue 30,000
Received first month rent.
Oct.
1,2020 Cash 54,000
Unearned rent revenue 54,000
Received lease bonus from the lessee
NOTE: Lease bonus received by the lessor, is to be recognized by the lessor as rent revenue over
the lease term on a straight-line method. Thus, upon receipt, the lessor records it as unearned
rent revenue.
Repair and maintenance Expense 15,000

cash 15,000
To record repair costs incurred during the year.
Dec.
31,2020 Depreciation Expense (1,500,000/ 10 yrs x 6/12) 75,000
Accumulated Depreciation 75,000
To record depreciation for year 2020.
COMPUTATION OF INCOME FROM LEASE BY THE LESSOR FOR YEAR 2020:

Rent Revenue (30,000 x 3 months- Oct to Dec.) 90,000
Add: Portion of lease bonus (54,000/3 yrs.=18,000 x 3/12) 4,500
Total Rent Revenue for year 2020 94,500
Less: Expenses relating to leased asset
Repair and maintenance (15,000)
Depreciation of the leased asset (75,000)
Net income from lease for year 2020 4,500
3-16 ACCOUNTING FOR UNEVEN RENTAL PAYMENTS UNDER OPERATING LEASE by the LESSEE
NOTE: UNDER OPERATING LEASE, IF THE AMOUNT OF RENTALS ARE UNEVEN, The amount of rent
expense/rent income to be recognized by the lessee/lessor is computed on a straight-line basis.
Computation of Rent expense for the year 2020:

Terms of lease 12 months
Less: 2 months free rent 2
Number of payments to be made 10 months
Multiply by monthly rental P12,000
Total rent for one year P120,000
Divide by 12 months /12
Monthly rent expense to be recorded by the lessee P10,000
Multiply by no.of mos. starting from lease effective date to Dec. 31 4 mos.
Rent expense for year 2020 P40,000
Computation of Rent expense for the year 2020:

Monthly rent expense to be recorded by the lessee P10,000
Multiply by number of months from Jan. to August 2021 8 mos.
Rent expense for year 2021 P80,000
On Dec. 31, 2020, Faith Company (the lessee) will report Accrued rent expense of P computed as
follows:
Rent expense for year 2020 (pls. see computation above) P40,000
Amount paid as of December 31, 2020 (12,000 x 2) payment was
made starting Nov. 1 24,000
Accrued Rent Expense, December 31, 2020 16,000
COMPUTATIONS FOR:
MC # 21. Operating lease
Rent revenue by the lessor for year 2020:

Annual rental 900,000
Add: portion of lease bonus received from the lessee
(500,000/5 years lease term) 100,000
Rent revenue for year 2020 1,000,000
The security deposit is to be refunded to the lessee at the
end of lease term. Thus, it is not to be recognized as rent
revenue.
MC 22-Uneven rental payments under operating lease

Computation of rent revenue for year 2020
Rental for the first year 80,000
Less: six months rent free (80,000 x 6/12) 40,000
Amount to be received, 1st year of lease term 40,000
Add: Rentals for year 2 to year 5 (125,000 x 4 years) 500,000
Total rentals to be received over the 5 yrs lease term 540,000
/5 yrs.
Rent revenue to be recognized annually by the lessor 108,000
MC 25-Uneven rental payments under operating lease

Computation of rent revenue for fiscal year ending June 30, 2021
Total rentals to be received over the 3 yrs lease term:
(600,000 + 900,000 + 2,100,000) 3,600,000
Divide by the lease term 3 years
Rent revenue for fiscal year ended June 30, 2021 1,200,000
MC 26-
COMPARE THE AMOUNT OF RENT INCOME OF 1,200,000 WITH THE RENTALS RECEIVED AS OF
JUNE 30, 2021.
Rentals received as of June 30, 2021 (12 mos. at 50,000) 600,000
Rent receivable- June 30, 2021 900,000
AS OF JUNE 30, 2022:

Rentals received as of June 30, 2022:
(12 mos. at 50,000)------------------------------------600,000
(12 mos. at 75,000)------------------------------------900,000 1,500,000
Unearned rent revenue-June 30, 2022 300,000
IF THE RENTALS RECEIVED IS LESS THAN 1,200,000, THE DIFFERENCE IS RENT RECEIVABLE.
IF THE RENTALS RECEIVED IS > THAN 1,200,000, THE DIFFERENCE IS UNEARNED RENT REVENUE.
ACCOUNTING FOR SALE AND LEASEBACK
A sale and leaseback transaction involves the sale of an asset and leasing it back from the seller.
The buyer becomes the BUYER-LESSOR and the seller becomes the SELLER – LESSEE.
3-18 SALE AND LEASEBACK
Entries by the seller-lessee to record the sale-leaseback

Cash 700,000
Right-of-Use Machinery 432,568
Machinery 500,000
Gain on Sale Leaseback 26,973
Lease liability 605,595
To record the sale and leaseback
Lease liability 150,000

cash 150,000
To record 1st lease payment
Related computations:
1. Present value of lease payments (150,000 x 4.0373) P605,595
2. Fair value of right transferred:

Selling price 700,000
Less: Present value of lease payments 605,595
Fair value of right transferred 94,405
3. Capitalized cost of asset that was leaseback:

605,595/700,000 x carrying value of the asset sold = 432,568
4. Gain on sale
Selling price of the asset sold 700,000
Less: Carrying value of the asset sold 500,000
Gain on sale 200,000
5. Gain on Sale Leaseback

Fair value of right transferred 94,405
Divide by the selling price then multiply by the gain /700,000 x
on sale 200,000
Gain on Sale Leaseback 26,973

Accounting For Operating Lease

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ACCOUNTING FOR OPERATING LEASE

Answer to 3-17-OPERATING LEASE (point of view of the lessor)

a. Entries on LESSOR’S BOOKS (Provident Company) relating to the leased asset

Repair and maintenance Expense 15,000

COMPUTATION OF INCOME FROM LEASE BY THE LESSOR FOR YEAR 2020:

Computation of Rent expense for the year 2020:

Computation of Rent expense for the year 2020:

Rent revenue by the lessor for year 2020:

MC 22-Uneven rental payments under operating lease

MC 25-Uneven rental payments under operating lease

AS OF JUNE 30, 2022:

ACCOUNTING FOR SALE AND LEASEBACK

3-18 SALE AND LEASEBACK

Entries by the seller-lessee to record the sale-leaseback

Lease liability 150,000

2. Fair value of right transferred:

3. Capitalized cost of asset that was leaseback:

5. Gain on Sale Leaseback

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