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A. On April 1, 2015, Ben Ten Company Leased Equipment To Ironman Corporation. The

Ben Ten leased equipment to Ironman for 8 years with annual payments of P80,000. It is a direct finance lease for Ben Ten. The implicit interest rate is 23.5%. Ironman recorded the asset and liability at P359,730. In 2015, Ironman recorded interest expense, depreciation expense, and reduced the liability. Ben Ten recorded a finance lease receivable, discounted the receivable, and recognized interest revenue. If the residual value was not guaranteed, Ironman would record the asset at P342,736 and take depreciation of P32,132 in 2015. The entries for Ben Ten are unaffected.

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422 views

A. On April 1, 2015, Ben Ten Company Leased Equipment To Ironman Corporation. The

Ben Ten leased equipment to Ironman for 8 years with annual payments of P80,000. It is a direct finance lease for Ben Ten. The implicit interest rate is 23.5%. Ironman recorded the asset and liability at P359,730. In 2015, Ironman recorded interest expense, depreciation expense, and reduced the liability. Ben Ten recorded a finance lease receivable, discounted the receivable, and recognized interest revenue. If the residual value was not guaranteed, Ironman would record the asset at P342,736 and take depreciation of P32,132 in 2015. The entries for Ben Ten are unaffected.

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A. On April 1, 2015, Ben Ten Company leased equipment to Ironman Corporation.

The
following information pertains to this lease:

 The term of non-cancelable lease is 8 years with no renewal option.


 The annual payment is P80,000; first payment is due April 1, 2015.
 Estimated useful life of the equipment is 10 years.
 The cash price of the equipment is P359,730 at April 1, 2015, which is the same as
the carrying amount of the asset in the books of Ben Ten.
 The residual value at the end of the lease term, which is guaranteed by Ironman, is
P80,000.

Both Ben Ten and Ironman use the calendar year as their reporting period.

Required:
a. What type of lease is this from the standpoint of Ben Ten?
Direct finance lease because the cash price is equal to the carrying value of the
asset.
b. What is the implicit interest rate on this lease?
Trial and error approach:
359,730=80,000 x PV of annuity due of 1 @23.5%, n=9
359,730=357,520 closest
The implicit interest rate is 23.5%
c. Prepare the entries in the books of Ironman for the years 2015 and 2016.
Date Annual Interest Reduction in Present value
payment expense capital
04/01/2015 - 359,730
04/01/2015 80,000 - 80,000 279,730
04/01/2016 80,000 65,737 14,263 265,467
04/01/2017 80,000 62,385 17,615 247,852

2015
April01 ROU-equipment 359,730
Financed lease liability 359,730
Financed lease liability 80,000
Cash 80,000
Dec.31 interest expense 49,303
Interest payable 49,303
(65,737 x 9/12=49,303)
Depreciation expense 26,225
Accumulated depreciation 26,225
(359,730-80,000)/8=34,966 x 9/12=26,225
d. Prepare the entries in the books of Ben Ten for the years 2015 and 2016.
2015
April01 financed lease receivable 720,000
Equipment for lease 359,730
Discount on finance lease receivable 180,270
Cash 80,000
Finance lease receivable 80,000
Dec.31 discount on finance lease receivable 49,303
Interest revenue 49,303
2016
April01 cash 80,000
Finance lease liability 80,000
Discount on finance lease liability 16,434
Interest revenue 16,434
Dec.31 discount on finance lease receivable 46,789
Interest revenue 46,789

e. Assume that the residual value of P80,000 is not guaranteed. At what amount should
the asset be recorded by Ironman? How much depreciation should Ironman take up
on this equipment for the year 2015?
The asset should be recorded at P342, 736
80,000 x 4.2842= P342, 736
The depreciation for 2015 is (342,726 /8) x 9/12 = 32,132
f. Assume that the residual value of P80,000 is not guaranteed. What difference, if any,
will be noted in the books of Ben Ten in recording the lease transactions?
There is no difference in journal entries, as for the lessor under direct finance lease
whether the residual value is guaranteed or unguaranteed it does not affect the
journal entries.

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