FATHER SATURNINO URIOS UNVERSITY

Accountancy Program Carl Vincent L. Alaan, CPA

Name: ______________________________________________________ Schedule: _______________

True or False. Write True if the statement is True. If the statement is False, write False and encircle the word or phrase that made the statement false.

1. After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless the right-of-use asset relates to a
class of PPE to which the lessee applies a revaluation model, in which case all right-of-use assets relating to that class of PPE can be
depreciated. False, revalued
2. A lessor recognizes finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return
on the net investment. True
3. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain some of the economic benefits
from that use. False, substantially all
4. Lessors shall classify each lease as an operating lease or a finance lease. True
5. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
Otherwise, a lease is classified as an operating lease. True
6. A lease is classified as operating lease if the leased assets are of a specialized nature such that only the lessee can use them without
major modifications being made. False, finance lease
7. A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. True
8. If the ownership of the asset reverts to the lessor, it may still qualify as finance lease when the lease term is for the major part of the
economic life of the asset. True
9. The remeasurements are treated as adjustments to the right-of-use asset. True
10. A lessor recognizes operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit
from use of the underlying asset is diminished, another systematic basis. True

Problem-Solving

Problem 1

A Company entered into a lease of building on January 1, 2023 with the following information:

Annual rental payable at the end of each year 500,000

Lease term 5 years
Useful life building 20 years
Implicit interest rate 10%

The lease contained an option for the lessee to extend for a further 5 years. At the commencement date, the exercise of the extension option is not
reasonably certain. After 3 years on January 1.2026. the lessee decided to extend the lease for a further 5 years.

New annual rental payable at the end of each year 600,000

New implicit interest rate 8%

Round off present value factors at 2 decimal places.

a. What should be reported as depreciation for 2023? 379,000

b. What should be reported as lease liability on December 31, 2025? 867,245
c. What should be reported as new lease liability on January 1, 2026? 2,081,595
d. What is the carrying amount of right of use asset on January 1, 2026? 2,839,595
e. What should be reported as depreciation for 2026? 405,656
f. What should be reported as interest expense on December 31, 2026? 235,907

Problem 2

On January 1, 2023. B Company entered into a lease agreement with the following information:
Floor space 150 square meters
Annual rental payable at the end of each year 200,000
Implicit rate in the lease 12%
Lease term 12 years

On January 1, 2026, the lessee and the lessor agreed to amend the original terms of the lease with the following information:
Additional floor space 200 square meters
Increase in rental payable at the end of each year 300,000
Implicit rate in the lease 10%

Round of present value factors to two decimal places.

a. What should be reported as lease liability on January 1, 2023? 1,238,000

b. What should be reported as additional lease liability on January 1, 2026? 1,728,000
c. What should be reported as total interest expense for 2026? 300,530
d. What is the journal entry to record the additional floor space covered on January 1, 2026?
Right of Use Asset 1,728,000
Lease Liab 1,728,000

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 FATHER SATURNINO URIOS UNVERSITY
Accountancy Program Carl Vincent L. Alaan, CPA
Problem 3

C Company owns an office building and normally charges tenants P3,000 per square meter per year for office space. Because the occupancy rate is
low. C Company agreed to lease 1,000 square meters to D Company at P1,200 per square meter for the first year of a three-year operating lease.
Rent for remaining years will be at the P3,000 rate.
At the beginning of current year, D Company moved into the building and paid the first year's rent in advance. A security deposit was paid at the
inception of the lease amounting to P500,000. D is also liable to pay annual insurance and real property taxes amounting to P80,000 and P8,000
respectively.

a. What amount of rental revenue should C Company report in the income statement for the current year ended September 30? 1,800,000
b. Assuming insurance was paid at the beginning of current year, what is the journal entry to record the expiration of insurance assuming Pre-
Paid insurance was debited upon payment?
Insurance Expense 60,000
Prepaid Insurance 60,000
c. What is the correct treatment of security deposit? Liability

Problem 4

E Company, a lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on
January 1 of each year as shown in the following schedule:

January 1, 2023 1,000,000

January 1. 2024 1,000,000
January 1, 2025 1,400,000
January 1, 2026 1,700.000
January 1. 2027 1.900,000
Total Rentals 7,000,000

a. What amount should be reported as rent income for 2023? 1,400,000

b. On December 31, 2024, what amount should be recognized as accrued rent receivable? 800,000

Problem 5

At the beginning of current year, F Company leased equipment to another entity under a sales type lease. Rentals are payable at the end of each
year, beginning December 31 of the current year. The lease term is 6 years and the useful life of the equipment is 8 years.

The fair value ofthe equipment is P1,273,800 while the cost is P800.000. The implicit rate in the lease is 12% which is known to the lessee. The
lessee had the option to purchase the equipment for P80,000 at the end of the lease term. It is reasonably certain that the lessee will exercise the
purchase option.

Round off present value factors to 2 decimal places.

a. What amount should be recognized as annual rental payment? 300,000

b. What amount should be reported as total financial revenue? 606,200
c. What amount should be reported as gross income from sale? 473,800
d. What amount should be reported as interest income for the current year? 152,856

Problem 6

On January 1, 2023, G Company leased an equipment to a lessee under a direct financing lease. The cost of the equipment to G Company was
P1,550,000. The lease payments stipulated in the lease are P500,000 per year payable at the end of each year over a 4-year period of the lease.
The title to the equipment remains in the hands of G Company at the end of the lease term, although only nominal residual value is expected at that
time. The implicit interest rate in the lease is 11%. The fiscal year of G Company ends December 31.

a. What amount should be reported as total financial revenue over the lease term? 450,000
b. What amount should be reported as interest income for the current year? 170,500
c. What is the carrying amount of the lease receivable on December 31, 2023? 1,220,500
d. What is the carrying amount of the current portion of the lease receivable on December 31, 2023? 365,745

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 Problem 1
PV factor OA 10% 5 periods 3.79
PV factor OA 8% 5 periods 3.99
PV of 1 8% for 2 periods 0.86
PV factor OA of 1 at 8% 2 periods 1.78

Cost of Right of Use Asset (500,000 x 3.79) 1,895,000

Depreciation for 2023 (1,895,000 /5) 379000

Date Payment Interest Principal Present Value

1,895,000
12/31/2023 500,000 189,500 310500 1,584,500
12/31/2024 500,000 158,450 341550 1,242,950
12/31/2025 500,000 124,295 375705 867,245

PV of Old Rentals [500,000 x 1.78] 890,000

PV of New [(600,000 x 3.99)(0.86) 2,058,840
Total PV Jan 1, 2026 2,948,840
PV Dec 31, 2025 867,245
Increase in lease liab 2,081,595

Right of Use Asset 1,895,000

Accum Dep (379,000 x 3) 1,137,000
Carrying amount before remeasurement 758,000
Increase in lease liab 2,081,595
New Carrying amount 2,839,595

Depreciation 2026 [ 2,839,595/7 ] 405656

Interest Expense [2,948,840 x 8%] 235907

Problem 2

PVOA 12% 12 periods 6.19

PVOA 10% 9 periods 5.76

Lease liab - 2023 [200,000 x 6.19] 1238000

Date Payment Interest Principal Lease Liab

1/1/2023 1,238,000
12/31/2023 200,000 148560 51,440 1,186,560
12/31/2024 200,000 142387.2 57,613 1,128,947
12/31/2025 200,000 135473.664 64,526 1,064,421
12/31/2026 200,000 127730.5037 72,269 992,151

Lease liab - extension [300,000 x 5.76] 1728000

1/1/2026 1,728,000

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 12/31/2026 300,000 172,800 127200 1,600,800

Int on original 127730.5037

Int on extension 172,800
300530.5037

Problem 3
1st Year [ 1,200 x 1000] 1,200,000
2nd year [3,000 x 1,000] 3,000,000
3rd Year [3,000 x 1,000] 3,000,000
Total 7,200,000

Revenue for the year [7,200 /3 x 9/12] 1,800,000

Insurance 80,000 1 year

Insurance for the year [80,000 x 9/12] 60,000

Insurance Expense 60,000

Prepaid Insurance 60,000

Problem 4

Annual rental income [7,000,000/5] 1,400,000

Rent income for 2023 & 2024 2,800,000

Rent received 2023 2024 2,000,000
Rent receivable 800,000

Problem 5

PV of 1 12% 6 periods 0.51

PV OA 12% 6 periods 4.11

Fair value of asset 1,273,800

PV of Bargain option [80,000 x 0.51] 40,800
Net investment 1,233,000
/ PV factor 4.11
Annual lease payment 300000

Gross Rentals 1,800,000

Absolute amount of Purch Option 80,000
Gross investment in lease 1,880,000
Net Investment in lease 1,273,800
Total unearned interest income 606,200

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 Sales 1,273,800
Cost of Goods Sold 800,000
Gross Profit 473,800

Net Investment x Implicit Rate

1,273,800 x 12% 152856

Problem 6

Gross Rentals [500,000 x 4] 2,000,000

Net Investment 1,550,000
Unearned interest income 450,000

1,550,000 x 11% 170500

Payment Interst Principal Present Value

1,550,000
500,000 170500 329,500 1,220,500
500,000 134255 365,745 854,755

Current Portion 365,745

Non Current Portion 489,010
Total 854,755

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