MA.

CRHISTHIEN ARNAN BSA-2 ACC227 E-PORTFOLIO

Chapter 7
Leases (Part 1)

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. FALSE
4. TRUE
5. TRUE
6. TRUE
7. FALSE
8. FALSE
9. FALSE
10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solution:
The contract is a lease.

 Identified asset – the car is implicitly specified at the time that the asset is made available
for use by the customer.

 Right to obtain economic benefits from use – Customer X has the exclusive use of the
car throughout the duration of the contract.

 Right to direct the use – Customer X has the right to direct how and for what purpose the
asset is used throughout the period of use

2. Solution:

 The contract is not (does not contain) a lease because there is no identified asset.

3. Solutions:

 Requirement (a): Journal entries

PV of
Lease payments PV factors @10%, n=4 MLP
Annual rent 100,000 PV of an annuity due of ₱1 3.486852 348,685
Purch. Opt. 50,000 PV of ₱1 0.683013 34,151
382,836

Jan. 1, Right-of-use asset 382,836

20x1 Lease liability 282,836

1
 Cash 100,000

Amortization table:
Interest
Date Payments Amortization Present value
expense
Jan. 1, 20x1 382,836
Jan. 1, 20x1 100,000 - 100,000 282,836
Jan. 1, 20x2 100,000 28,284 71,716 211,120
Jan. 1, 20x3 100,000 21,112 78,888 132,232
Jan. 1, 20x4 100,000 13,223 86,777 45,455
Jan. 1, 20x5 50,000 4,545 45,455 0

Dec. Interest expense 28,284

31, Lease liability 28,284
20x1
Dec. Depreciation expense 71,567
31, [(382,836 – 25K) ÷ 5 yrs.] 71,567
20x1 Right of use asset
Jan. Lease liability 100,000
1, Cash 100,000
20x2

Subsequent entries follow the same pattern.

 Requirement (b): Carrying amounts

Right-of-use asset
382,836 – 71,567 = 311,269

Lease liability
211,120 + 100,000 = 311,120

4. Solution:
20x1 (12K x 9/12) 9,000
20x2 12,000
20x3 12,000
20x4 12,000
Total 45,000
Divide by: Lease term 4
Annual lease expense 11,250

2
 Jan. 1,
No entry
20x1
Dec. 31, Rent expense 11,250
20x1 Cash 9,000
Rent payable 2,250
Dec. 31, Rent expense 11,250
20x2 Rent payable 750
Cash 12,000
Dec. 31, Rent expense 11,250
20x3 Rent payable 750
Cash 12,000
Dec. 31, Rent expense 11,250
20x4 Rent payable 750
Cash 12,000

PROBLEM 3: EXERCISES
1. Solutions:

 Requirement (a):

Rental payments excluding maintenance costs (80,000 – 6,000) 74,000

Multiply by: PV of an ordinary annuity of P1 @14%, n=10 5.216116
Present value of minimum lease payments 385,993

Jan. Right of use asset 385,993

1, Lease liability 385,993
20x1

Amortization table:
Date Payments Int. expense Amortization Present value
1/1/x1 385,993
12/31/x1 74,000 54,039 19,961 366,032
12/31/x2 74,000 51,244 22,756 343,277

Dec. Lease liability 19,961

31, Interest expense 54,039
20x1 Cash 74,000

Dec. Repairs and maintenance expense 6,000

31, Cash 6,000
20x1
Dec. Depreciation expense (385,993 ÷ 10) 38,599
31, Right of use asset 38,599
20x1
Dec. Lease liability 22,756
31, Interest expense 51,244
20x2 Cash 74,000

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Dec. Repairs and maintenance expense 6,000
31, Cash 6,000
20x2
Dec. Depreciation expense (385,993 ÷ 10) 38,599
31, Right of use asset 38,599
20x2

 Requirement (b):

Current = 22,756
Noncurrent = 343,277

2. Solutions:

 Requirement (a):

Date Payments Int. expense Amortization Present value

1/1/x1 664,326
1/1/x1 200,000 - 200,000 464,326
1/1/x2 200,000 65,006 134,994 329,332
1/1/x3 200,000 46,106 153,894 175,439
1/1/x4 200,000 24,561 175,439 -

 Requirement (b):

Jan. Right of use asset (664,326 + 50,000) 714,326

1, Lease liability 464,326
20x1 Cash (200,000 + 50,000) 250,000
Dec. Interest expense 65,006
31, Lease liability 65,006
20x1
Dec. Depreciation expense (714,326 ÷ 4) 178,582
31, Right of use asset 178,582
20x1
Jan. Lease liability 200,000
1, Cash 200,000
20x2

 Requirement (c):

Right-of-use asset = (714,326 – 178,582) = 535,745

Lease liability = (329,332 + 200,000) = 529,332

3. Solutions:

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  Requirement (a):

Date Payments Int. expense Amortization Present value

1/1/x1 1,491,861
12/31/x1 300,000 134,267 165,733 1,326,128
12/31/x2 300,000 119,352 180,648 1,145,480
12/31/x3 300,000 103,093 196,907 948,573
12/31/x4 300,000 85,372 214,628 733,945
12/31/x5 800,000 66,055 733,945 0

 Requirement (b):

Jan. Right of use asset 1,491,86

1, Lease liability 1 1,491,86
20x1 1
Dec. Interest expense 134,267
31, Lease liability 165,733
20x1 Cash 300,000

Dec. Depreciation expense (1,491,861 ÷ 8) 186,483

31, Right of use asset 186,483
20x1

4. Solutions:

 Requirement (a):

Date Payments Int. expense Amortization Present value

1/1/x1 2,028,593
1/1/x1 400,000 - 400,000 1,628,593
1/1/x2 400,000 130,287 269,713 1,358,880
1/1/x3 400,000 108,710 291,290 1,067,590
1/1/x4 400,000 85,407 314,593 752,998
1/1/x5 400,000 60,240 339,760 413,237
1/1/x6 400,000 33,059 366,941 46,296
1/1/x7 50,000 3,704 46,296 0

 Requirement (b):

Jan. Right of use asset 2,028,59

1, Lease liability 3 1,628,59
20x1 Cash 3
400,000

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Dec. Interest expense 130,287
31, Lease liability 130,287
20x1
Dec. Depreciation expense (2,028,593 ÷ 6) 338,099
31, Right of use asset 338,099
20x1
Jan. Lease liability 400,000
1, Cash 400,000
20x2

5. Solutions:

Total rentals P 700,000

First six-month rent-free (100,000 x 6/12) ( 100,000)
Adjusted total rentals 600,000
Divide by: Lease term 3
Annual rent expense P200,000

The entries are:

Books of lessee – DEMENTED Co.
Jan. 1, 20x1
No entry
Dec. 31, 20x1
Rent expense 200,000
Cash 100,000
Rent payable 100,000
Dec. 31, 20x2
Rent expense 200,000
Rent payable 40,000
Cash 240,000

Dec. 31, 20x3

Rent expense 200,000
Rent payable 60,000
Cash 260,000

Dec. 31, 20x3

Rent expense 100,000
[10% x (3M – 2M)]
Rent payable 100,000
to record contingent rent payable

PROBLEM 4: CLASSROOM ACTIVITY

1. Solution:

6
  The contract contains a lease. The contract specifies an executive jet. The
customer decides how and for what purpose the jet is used which provides it with
the right to control the use of the jet.

2. Solution:

Year Payments PV of 1 @6% PV factors PV

20x1 200,000 n=1 0.9433962 188,679
20x2 240,000 n=2 0.8899964 213,599
20x3 280,000 n=3 0.8396193 235,093
637,372

Date Payments Int. expense Amortization Present value

1/1/x1 637,372
12/31/x1 200,000 38,242 161,758 475,614
12/31/x2 240,000 28,537 211,463 264,151
12/31/x3 280,000 15,849 264,151 -

Jan. Right of use asset 637,372

1, Lease liability 637,372
20x1
Dec. Interest expense 38,242
31, Lease liability 161,758
20x1 Cash 200,000

Dec. Depreciation expense (637,372 ÷ 3) 212,457

31, Right of use asset 212,457
20x1
Dec. Interest expense 28,537
31, Lease liability 211,463
20x2 Cash 240,000

Dec. Depreciation expense (637,372 ÷ 3) 212,457

31, Right of use asset 212,457
20x2
Dec. Interest expense 15,849
31, Lease liability 264,151
20x3 Cash 280,000

Dec. Depreciation expense (637,372 ÷ 3) 212,457

31, Right of use asset 212,457
20x3

3. Solutions:

 Requirement (a):

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 Year Payments
20x1 200,000
20x2 240,000
20x3 280,000
Total 720,000
Divide by: 3
Annual lease expense 240,000

Jan. No entry
1,
20x1
Dec. Rent expense 240,000
31, Cash 200,000
20x1 Rent payable 40,000

Dec. Rent expense 240,000

31, Cash 240,000
20x2
Dec. Rent expense 240,000
31, Rent payable 40,000
20x3 Cash 280,000

 Requirement (b):

General recognition Recognition exemption

Year Interest Depreciation Total Rent expense
20x1 38,242 212,457 250,700 240,000
20x2 28,537 212,457 240,994 240,000
20x3 15,849 212,457 228,306 240,000
Totals 82,628 637,372 720,000 720,000

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. B 6. A

2. D 7. B

3. C 8. C

4. D 9. D

5. B 10. D

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 PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B
Solution:
Annual rent 100,000
PV of ordinary annuity of 1 @10%, n=10 6.15
PV of minimum lease payments 615,000

2. B (100,000 x PV of ordinary annuity of 1 @10%, n=10) = 614,500

3. A
Solution:
Total consideration 52,000
Less: Payment for non-lease component (2,000)
Lease payments 50,000
Multiply by: PV of annuity due @9%, n=9 6.5348
Total 326,740
First payment due in advance (50,000)
Lease liability – Dec. 31, 20x1 276,740

4. C
Solution:
Cash flows PV factors PV
PV annuity due @12%,
Annual rent 10,000 n=10 6.3282 63,282
PO 10,000 PV of 1 @12%, n=10 0.3220 3,220
66,502
5. A
Solution:
Cash flows PV factors PV
Annual rent 13,000 PV annuity due @9%, n=5 4.2397 55,116
Guaranteed RV 10,000 PV of 1 @9%, n=5 0.6499 6,499
Total 61,615
First payment due immediately (13,000)
Lease liability – initial recognition 48,615

6. A (100,000 x PV ord. annuity @10%, n=5) = 379,000 (rounded-off)

(379,000 x 10%) = 37,900

7. B
Solution:
Date Payments Int. expense Amortization Present value
1/1/x7 112,500
12/31/x7 10,000 9,000 1,000 111,500

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8. B (10,000 x PV ordinary annuity @10%, n=10) = 61,446. The residual value is ignored
because it is unguaranteed, (i.e., guaranteed by a third party unrelated to the lessee
rather than by the lessee or a party related to the lessee)

9. B
Solution:
Date Payments Int. expense Amortization Present value
12/31/x8 135,000
12/31/x8 20,000 - 20,000 115,000
12/31/x9 20,000 11,500 8,500

10. B (108,000 ÷ 12) = 9,000

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