Chapter 1

CHAPTER 4
LEASES
PROBLEMS
4-1.
(Hope Manufacturing Company and Charity Company)

(a)
Lessors Books (Hope Manufacturing Co.)
2013
Jan. 1
1
Dec. 31
Machinery for lease

Cash
Cash
Rent revenue
Unearned rent revenue
2 M/5 = 400,000
2 M x 30% = 600,000
Machinery for lease
Cash
2,200,000
2,200,000
600,000
400,000
200,000
60,000
60,000
Depreciation expense
Accumulated depreciation
Machinery for lease
(2.2 M 200,000)/10 200,000
60,000 / 5 years
12,000
Total
212,000
212,000
Cash
Rent revenue
2,000,000 x 20%
400,000
Machinery for lease
212,000
200,000
12,000
2014
Jan. 1
Dec. 31
400,000
200,000
12,000
Lessees Books (Charity Co.)

2013
Jan. 1
Rent expense
Prepaid rent
Cash
400,000
200,000
Rent expense
Cash
400,000
600,000
2014
Jan. 1
400,00
(b)
Statement of Comprehensive Income:
(In profit or loss section)
Rent revenue
Rent expense
Statement of Financial Position
Machine for lease, net of accum.
depreciation
Prepaid rent
Hope
Charity
400,000
212,000
400,000
2,048,000
200,000
200,000
Chapter 4 Leases
4-2.
(Blessed Realty)
a.
(7,500 x 4) + (10,000 x 3) + (12,000 x 3) + (15,000 x 2)
Total lease period
Monthly rent expense
No. of mos. from Sept. 1 Dec. 31, 2013
Rent expense for 2013
b.
4-3.

Rent payments made during 2013
Rent payable at December 31, 2013
42,000
30,000
12,000
(Faith Company)
a.
Monthly rental payment
No. of payments (60-6 mos free)
Total payments
Rent expense for 2013 (540,000 x 4/60)
or
Monthly rental
Less lease bonus (60,000/60 mos)
Rent expense per month
Rent expense for 2013 (9,000 x 4)
10,000
x 54
540,000
36,000
10,000
(1,000)
9,000
36,000
Rent expense for 2014 (9,000 x 12)

(b)
126,000
12 mos.
10,500
x4
42,000
108,000
Faith Company
2013
Dec. 31
Rent expense
Rent payable
36,000
36,000
9,000 x 4 = 36,000
2014
Mar. 1 -
Dec. 31
Dec. 1 monthly entry

Rent expense
Cash
10,000
10,000
Rent expense
Rent payable
8,000
8,000
Rent expense for 2013:

540,000 x 12/60
108,000
Payments in 2013
100,000
Increase in rent payable 8,000
Love Corporation
2013
Dec. 31
Rent receivable
Rent revenue
36,000
36,000
2014
Mar. 1 -
Dec. 31
Dec. 1 monthly entry

Cash
Rent revenue
10,000
10,000
Rent receivable
Rent revenue
8,000
8,000
43
Chapter 4 Leases
4-4.
(Way Company)
a.
Fixed annual rental
Additional rent 5% x (6M-5M)
Amortization of lease bonus (125,000/5 years)
b.
4-5.
Prepaid rent expense (125,000 25,000)

Security deposit (discounted for 4 years at 10%)
150,000 x 0.6830
100,000
102,450
(Truth Corporation)
a.
Rent revenue (920,000 x 9/12)
3,500,000/6 = 583,333; 583,333 x 9/12
Maintenance and other related costs
Income before income tax
b.
4-6.
960,000
50,000
25,000
1,035,000
690,000
(437,500)
(50,000)
202,500
Rent expense (920,000 x 9/12)
690,000
(Provident Company)
Lessors Books
2013
July 1
Oct. 1
1
Nov. 1
Dec. 1
31
31
Equipment for lease

Cash
1,500,000
1,500,000
Cash
Rent revenue
54,000
Cash
Rent revenue
30,000
Cash
Rent revenue
30,000
Cash
Rent revenue
30,000
Rent revenue
54,000 x 33/36 = 49,500
49,500
(1,500,000 / 10) x 6/12
75,000
54,000
30,000
30,000
30,000
49,500
75,000
Lessees Books
2013
Oct. 1
1
Nov. 1
Rent expense
Cash
54,000
Rent expense
Cash
30,000
Rent expense
Cash
30,000
54,000
30,000
30,000
44
Chapter 4 Leases
Dec. 1
31
4-7.
Rent expense
Cash
30,000
Prepaid rent
Rent expense
49,500
30,000
49,500
(Generous, Inc.)
260,000 x 4.2397
200,000 x 0.6499
Total capitalized cost
(a)
1,102,322
129,980
1,232,302
Amortization Table
Total Annual
Interest
Date
Payment
Expense
01/01/13
01/01/13
260,000
01/01/14
260,000
87,507
01/01/15
260,000
71,983
01/01/16
260,000
55,061
01/01/17
260,000
36,617
12/31/17
200,000
16,530*
*Adjusted; difference is due to rounding off.
Reduction in
Principal
260,000
172,493
188,017
204,939
223,383
183,470
Lease
Obligation
1,232,302
972,302
799,809
611,792
406,853
183,470
-
(b)
2013
Jan. 1
1
Dec. 31
31
Leased automobile
Finance lease obligation
Cash
Interest expense
Interest Payable
1,232,302
1,232,302
260,000
260,000
87,507
87,507
(1,232,302-200,000)/5
206,460

Interest payable
Cash
172,493
87,507
206,460
2014
Jan. 1
Dec. 31
31
Interest expense
Interest payable
260,000
71,983
71,983
206,460
206,460
(c)
Dec. 31
Interest expense
Leased automobile
*adjusted; balancing figure
1,032,300
16,532*
183,470
1,232,302
45
Chapter 4 Leases
(d)
Dec. 31
4-8.
Loss on finance lease

Interest expense
Leased automobile
Cash
50,000
1,032,300
16,532
183,470
1,232,302
50,000
(Diana Corporation)
(a)
86,680 x 4.1699
(b)
361,447
Amortization Table
Total Annual
Payment
Interest
Date
Expense
01/01/13
01/01/13
86,680
01/01/14
86,680
27,477
01/01/15
86,680
21,556
01/01/16
86,680
15,044
01/01/17
86,680
7,876*
Reduction in
Principal
86,680
59,203
65,124
71,636
78,804
Lease
Obligation
361,447
274,767
215,564
150,440
78,804
-
(c)
2013
Jan.
1
1
Dec. 31
31
Leased machine
361,447
361,447
Finance Lease Obligation

Cash
86,680
Interest expense
Interest payable
27,477
361,447/5 years
72,289

Interest payable
Cash
59,203
27,477
Interest expense
Interest payable
21,556
72,289
86,680
27,477
72,289
2014
Jan. 1
Dec. 31
31
86,680
21,556
(d)
Statement of Financial Position
Property, plant and equipment
Leased machine
Current liabilities:
Interest payable
46
72,289
2013
2014
361,447
72,289
361,447
144,578
27,477
59,203
21,556
65,124
Chapter 4 Leases
Noncurrent liabilities:
Income Statement
Interest expense
4-9.
215,564
150,440
27,477
72,289
21,556
72,289
(Riza, Inc.)
(a)
1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods
From Table VI across 12 periods, 7.4951 is under 10% interest rate.
(b)
Date
12/31/13
12/31/13
12/31/14
12/31/15
(c)
135,000
135,000
135,000
Interest
Expense
87,684
82,952
Reduction in
Principal
135,000
47,316
52,048
(1,011,840 40,000) / 15 years
(d)
12/31/13
12/31/14
(e)
Total Annual
Payment
P64,789
Leased equipment
1,011,840
1,011,840

Cash
135,000

Interest expense
Cash
47,316
87,684
(1,011,840 40,000) / 15
64,789
135,000
135,000
64,789
Lease obligation as of December 31, 2013:

Current portion
Noncurrent portion
4-10. (Shirley Corporation)

(a)
150,000 x 4.0373
240,000 x 0.5674
Total capitalized cost
(b)
Total Annual
Date
Payment
01/01/13
01/01/13
150,000
01/01/14
150,000
01/01/15
150,000
01/01/16
150,000
01/01/17
150,000
12/31/17
240,000
Lease
Obligation
1,011,840
876,840
829,524
777,476
P 47,316
829,524
605,595
136,176
741,771
Interest
Expense
71,013
61,534
50,918
39,028
25,736*
47
Reduction in
Principal
150,000
78,987
88,466
99,082
110,972
214,264
Lease
Obligation
741,771
591,771
512,784
424,318
325,236
214,264
-
Chapter 4 Leases
(c)
741,771 / 15 years
P49,451
(d)
2013
Jan. 1
1
Dec. 31
31
Leased machinery
741,771

Cash
150,000
741,771
150,000
Interest expense
Interest payable
71,013
49,451

Interest payable
Cash
78,987
71,013
Interest expense
Interest payable
61,534
49,451
71,013
49,451
2014
Jan. 1
Dec. 31
31
(e)
Dec. 31
(f)
Dec. 31
150,000
61,534
49,451
Interest expense
Machinery
Leased machinery
Cash
25,736
214,264
247,255
494,516
Interest expense
Loss on finance lease
Leased machinery
25,736
214,264
247,255
254,516
741,771
240,000
741,771
4-11. (Sam Company)

(a)
(b)
Present value of minimum lease payments

700,000 x 6.3282
P4,429,740
Annual depreciation (4,429,740/10)
P 442,974
48
Chapter 4 Leases
(c)
2013
July 1
1
Dec. 31
31
31
Building
4,429,740
4,429,740
Taxes and insurance expense

Cash
50,000
700,000
Interest expense
Interest payable
447,569 x 6/12
223,784
Depreciation expense-Building
Accum. Depreciation-Building
221,487
Prepaid taxes and insurance

25,000
750,000
223,784
221,487
25,000
2014
July 1
Dec. 31
31

Interest payable
Interest expense
Cash
50,000
223,784
223,785
252,431
Interest expense
Interest payable
417,277 x 6/12
208,639
Accum. Depreciation-building
442,974
Date
July 1, 2013
July 1, 2013
July 1, 2014
July 1, 2015
750,000
208,639
442,974
Amortization Table
Periodic
Applied to
Payment
Interest
Principal
P700,000
700,000
700,000
P447,569
417,277
P700,000
252,431
282,723
Balance of
Principal
P4,429,740
3,729,740
3,477,309
3,194,586
4-12. (Joy Company)

a.
2013
Aug. 1
1
1
Finance lease receivable

Equipment for lease
Unearned interest revenue
605,000
480,000
125,000

Cash
1,900
Cash
100,000
49
1,900
100,000
Chapter 4 Leases
Dec. 31

Interest revenue
38,190 x 5/12
15,912
15,912
Partial Amortization Table

Date
08/01/13
08/01/13
08/01/14
(b)
Periodic
Payment
100,000
100,000
Interest
38,190
Reduction in
Principal
100,000
61,810
As of December 31, 2013:

Total
Current
P505,000
P100,000
107,188
22,278
P397,812
P 77,722
Current portion:
Principal due in 2014
Accrued interest, 12/31/13 (38,190 x 5/12)
4-13.
Balance of
Principal
481,900
381,900
320,090
Non-current
P405,000
84,910
P320,090
P 61,810
15,912
(Jackie Chan and Chris Tucker)

Annual Lease Payment:
Fair value of asset
PV of BPO = 40,000 x .6209
PV of periodic payment
PV factor (Annuity due for 5 years at 10%)
Periodic payment
Date
Jan. 1, 2013
Jan. 1, 2013
Jan. 1, 2014
Jan. 1, 2015
P600,000
24,836
P575,164
4.1699
P137,932
Periodic
Payment
Interest
Reduction in
Principal
P137,932
137,932
137,932
P46,207
37,034
P137,932
91,725
100,898
Balance of
Principal
P600,000
462,068
370,343
269,445
Depreciable cost = P600,000 P20,000 = P580,000

2013 Depreciation = P580,000 x 6/21 = P165,714
2014 Depreciation = P580,000 x 5/21 = 138,095
(a)
Books of Chris Tucker
2013
Jan. 1 Leased equipment

1 Finance lease obligation
Cash
600,000
600,000
137,932
137,932
Dec 31 Interest expense

Interest payable
46,207
46,207
31 Depreciation expense Leased equipment

Accum. depr. Leased equipment
50
165,714
165,714
Chapter 4 Leases
2014
Jan. 1 Finance lease obligation

Interest payable
Cash
91,725
46,207

Interest payable
37,034
137,932
37,034
Accum. depr. Leased equipment
138,095
138,095
(b) Books of Jackie Chan

2013
Jan. 1 Finance lease receivable

Equipment for lease
Cash
729,660
600,000
129,660
137,932

Dec 31 Unearned interest revenue
Interest revenue
137,932
46,207
46,207
2014
Jan. 1 Cash
137,932

Interest revenue
137,932
37,034
37,034
4-14. (Ben Ten and Ironman)

(a)
Direct finance lease
(The cash price equals the carrying value of the asset; hence, there is
no gross profit).
(b)
The rate is approximately 8%. The PV factor is P539,730/80,000 =

6.7466; in line 9 (which is 8 annual payments of P80,000 + 1 payment
for guaranteed residual value of same amount), the corresponding
interest rate is 8%.
(c)
Partial amortization table
Date
April 1, 2013
April 1, 2013
April 1, 2014
April 1, 2015
Periodic
Payment
Interest
Reduction in
Principal
80,000
80,000
80,000
36,778
33,321
80,000
43,222
46,679
51
Balance of
Principal
P539,730
459,730
416,508
369,829
Chapter 4 Leases
Ironman
2013
Apr. 1
1
Dec. 31
31
Equipment
539,730
539,730

Cash
80,000
Interest expense
Interest payable
36,778 x 9/12
27,584
(539,730-80,000)/8 = 57,466
57,466 x 9/12 = 43,100
43,100
Interest expense (36,778-27,584)

Interest payable
Cash
9,194
27,584
43,222
Interest expense
Interest payable
33,321 x 9/12
24,991
(539,730-80,000)/8 = 57,466
57,466
80,000
27,584
43,100
2014
Apr. 1
Dec. 31
31
80,000
24,991
57,466
(d) Books of Ben Ten

2013
Apr. 1
1
Dec. 31

Equipment for lease
80,000x 8 = 640,000;
640,000 + 80,000 GRV = 720,000
720,000
180,270
539,730
Cash
80,000

Interest revenue
27,584
Cash
80,000
80,000
27,584
2014
Apr. 1
1

Interest revenue
52
80,000
9,194
9,194
Chapter 4 Leases
Dec. 31

Interest revenue
32,893 x 9/12
24,991
24,991
(e)
The asset shall be recorded at P496,512 which is 80,000 x 6.2064.

Depreciation for 2013 = 496,512/8 x 9/12 = 46,548
(f)
No difference in journal entries. To the lessor, under the direct finance

lease, it does not matter whether the residual value is guaranteed or
unguaranteed.
4-15. (Prudent Company)

(a)
Sales price
Cost of machine
Gross profit
1,011,840
784,500
227,340
(b)
Gross investment (135,000 x 12)

Sales
Total financial revenue over the lease term
(c)
Interest revenue for 2012

(1,011,840 135,000) x 10% x 6/12
(d)
1,620,000
1,011,840
608,160
43,842

Less Unearned interest revenue
Net finance lease receivable, December 31, 2013
1,485,000
564,318
920,682
4-16. (Glad Manufacturing Company)

(a)
2013
Apr. 1

Cost of sales
Sales
Finished goods inventory
1,500,000
893,350
426,380
1,026,970
940,000
175,000 x 8 = 1,400,000
1,400,000 + 100,000 = 1,500,000
940,000(100,000 x0.4665)=893,350
175,000 x 5.8684 = 1,026,970
100,000 x 0.4665 = 46,650
1,026,970 + 46,650 = 1,073,620
1,500,000 1,073,620 = 426,380
1
Dec. 31
Cash
175,000

Interest revenue
89,862 x 9/12
67,397
53
175,000
67,397
Chapter 4 Leases
2014
Jan. 1
Interest revenue
Apr. 1
Dec. 31
67,397
67,397
Cash
Interest revenue
175,000
89,862

Interest revenue
61,011
175,000
89,862
61,011
81,348 x 9/12
Partial amortization table

Date
April 1, 2013
April 1, 2013
April 1, 2014
April 1, 2015
Periodic
Payment
Interest
Reduction in
Principal
175,000
175,000
175,000
89,862
81,348
175,000
85,138
93,652
Balance of
Principal
P1,073,620
898,620
813,482
719,830
*The compound entry may also be presented as follows:

Apr. 1
1,400,000
Sales
1
1
(b)
(i)
(ii)
(c)
Cost of sales
Finished goods inventory
940,000

Cost of sales
100,000
1,026,970
373,030
940,000
Sales
Cost of Sales (940,000 46,650)
Gross profit on sales
Interest Revenue for 2012 (see journal entries)
Sales (1,026,970 + 46,650)

Cost of sales (cost of the asset)
46,650
53,350
1,026,970
893,350
133,620
67,397
1,073,620
940,000
4-17. Ruby Company

a.
Manufacturers or dealers lease, because FV exceeds CV.
The
difference represents gross profit, which characterizes a dealers or
manufacturers lease.
b.
Present value of MLP = 850,365 x 4.6048

Present value of residual value = 166,300 x .5066
Total present value
Carrying value of leased asset
Gross Profit
Lease arrangement cost
Interest income 377,756 x 3/12
Total income in 2013
54
P3,914,080
84,248
P3,998,328
3,200,000
P 798,328
(
85,000)
94,439
P 807,767
Chapter 4 Leases
c.
Amortization Table
Date
Oct. 1, 2013
Oct. 1, 2013
Oct. 1, 2014
Oct. 1, 2015
Periodic
Payment
Interest
Reduction in
Principal
P850,365
850,365
850,365
P377,756
321,042
P850,365
472,609
529,323
Balance of
Principal
P3,998,328
3,147,963
2,675,354
2,146,031
2013
Oct. 1 Finance lease receivable (850,365 x 6) + 166,300

Cost of goods sold (3,200,000 84,248)
Inventory
Sales
5,268,490
3,115,752
3,200,000
3,914,080
1,270,162
1 Selling expense
Cash
85,000
85,000
1 Cash
850,365
Dec. 31
850,365

Interest revenue
94,439
94,439
2014
Oct. 1 Cash
850,365
850,365

Interest revenue
(377,756 94,439) + (321,042 x 3/12)
d.
363,578
363,578
Amortization Table for Emerald

Date
Oct. 1, 2013
Oct. 1, 2013
Oct. 1, 2014
Oct. 1, 2015
Periodic
Payment
Interest
Reduction in
Principal
850,365
850,365
850,365
367,646
309,720
850,365
482,719
540,645
Balance of
Principal
P3,914,080
3,063,715
2,580,996
2,040,351
2013
Oct. 1 Leased equipment

3,914,080
3,914,080

Cash
850,365
850,365

Interest payable
367,646 x 3/12 = 91,912
31 Depreciation expense
3,914,080/6 x 3/12
91,912
91,912
163,087
163,087
55
Chapter 4 Leases
2014
Oct. 1 Interest payable

Interest expense 367,646 91,912
Cash
Dec.31 Interest expense
Interest payable
309,720 x 3/12
91,912
275,734
482,719
850,365
77,430
77,430
652,347
652,347
4-18. (Metro Industries)

Correction to the problem: the equipments fair value is P368,606, instead of
P400,000.
(a)
Sales = (99,046 x 3.1699) + (80,000 x.6830) =
P368,606
(b)
Sales
P368,606
Cost of equipment sold
(300,000)
Selling expense
( 15,000)
Interest income (368,606 x 10%)
36,861
Total profit from lease
P 90,467
(c)
Depreciation expense recorded by Western
(368,606 80,000) / 4 =
P 72,152
4-19. (Legend Company)
(a)
Selling price of the machinery (150,000 x 4.0373)
(b)
Deferred gain on January 1, 2013 (605,595 411,750)
(c)
Depreciation expense for 2013 (605,595 / 5 years)
(d)
Interest expense for 2013 (605,595 150,000) x 12%
(e)
Gain on sale-leaseback for 2013 (193,845 / 5 years)
605,595
193,845
121,119
54,671
38,769
4-20. (Honest Company)

(a)
2013
July
July 1
Dec. 31
Cash
Equipment
Gain on sale leaseback
540,000
350,000
800,000
90,000
Rent expense
Cash
80,000
Prepaid rent
Rent expense
40,000
80,000
40,000
56
Chapter 4 Leases
(b)
2013
July
1
Dec. 31
31
Cash
Equipment
Gain on sale leaseback
Unearned profit on sale leaseback
540,000
350,000
800,000
50,000
40,000
Rent expense
Cash
80,000
Prepaid rent
Rent expense
40,000
80,000
40,000
Unearned profit on sale leaseback

Profit on sale leaseback
5,000
5,000
(40,000/4) x 6/12
(c)
2013
July
1
Dec. 31
Cash
Loss on sale leaseback
Equipment
400,000
350,000
50,000
800,000
Rent expense
Cash
80,000
Prepaid rent
Rent expense
40,000
80,000
40,000
(d)
2013
July
1
Dec. 31
31
Cash
Deferred loss on sale leaseback
Equipment
350,000
350,000
100,000
800,000
Rent expense
Cash
80,000
Prepaid rent
Rent expense
40,000
Rent expense/Loss on sale leaseback
12,500
80,000
40,000
Deferred loss on sale leaseback

100,000 x 6/48 = 12,500
12,500
MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
B
D
C
D
D
D
A
C
MC9
MC10
MC11
MC12
MC13
MC14
MC15
MC16
C
A
C
A
D
B
A
C
MC17
MC18
MC19
MC20
MC21
MC22
MC23
MC24
57
C
A
C
C
C
A
A
D
Chapter 4 Leases
Problems
MC25
MC26
MC27
MC28
MC29
MC30
C
C
D
D
C
B
MC31
MC32
B
D
MC33
MC34
A
B
MC35
MC36
MC37
MC38
MC39
MC40
MC41
B
D
D
C
A
D
B
MC42
MC43
A
D
MC44
MC45
MC46
MC47
MC48
MC49
C
A
B
D
A
D
MC50
MC51
MC52
C
D
A
MC53
MC54
MC55
MC56
MC57
MC58
A
B
B
B
MC59
MC60
D
B
900,000 + (500,000 / 5 yrs) = 1,000,000

40,000 + (125,000 x 4) = 540,000; 540,000 / 5 yrs = 108,000
This is an operating lease; thus, there is no interest expense involved.
240,000 x 6/12 = 120,000
3,600,000 / 3 yrs = 1,200,000
3,600,000 x 2/3 = 2,400,000; 600,000 + 900,000 = 1,500,000
2,400,000 1,500,000 = 900,000
500,000 x 4.61 = 2,305,000
2,305,000 500,000 283,400 = 1,521,600;
500,000 (12% x 1,805,000)=283,400
2,305,000 / 6 = 384,167
1,350,000-200,000=1,150,000; 1,150,000 x 10% = 115,000
200,000-115,000 = 85,000
400,000 x 5.95 = 2,380,000
(2,400,000 200,000) / 8 yrs = 275,000
(1,742,174 x 3.48685) + (1,200,000 x .68301) = 6,894,311
(6,894,311 1,200,000)/4 = 1,423,578
1,742,174 X 3.48685 = 6,074,699
6,074,699/4 = 1,518,675
CV = 6,245,450 [(6,245,450 80,000)/6 X 4 ] = 2,135,150
2,135,150 1,250,000 = 885,150
100,000 x 6 = 600,000
100,000 x 4.8 = 480,000; 480,000 100,000 = 380,000
380,000 x 10% x 5/12 = 15,833
3,520,000 2,800,000 = 720,000
3,520,000 600,000 = 2,920,000; 2,920,000 x 10% x 6/12 = 146,000
400,000 300,000 15,000 + (400,000 X 10%) = 125,000
400,000 (108,951 40,000 interest) = 331,049
323,400 / 4.312 = 75,000; 75,000 x 5 = 375,000; 375,000 323,400 = 51,600
98,512 x 10% = 9,851; 30,000-9,851 =20,149; 98,512-20,149=78,363
78,363 x 10% = 7,836
(98,512-5,000) / 4 = 23,378
(30,000 x 2) + 5,000 = 65,000
Initial direct costs increase the net investment in lease recorded by the lessor;
although an unguaranteed residual value is considered by the lessor and not by
the lessee, the terms of the lease already indicated that the residual value is
guaranteed.
This excess over the limited hours should be accrued by the end of 2014, even if
payment would be made at January 1, 2015
550,000 400,000 =150,000 ; in the absence of any information, sales price is
presumed to be at fair value.
4,800,000 3,600,000 = 1,200,000
1,200,000 /12 x 6/12 = 50,000
150,000 100,000 = 50,000; 50,000 x 9/10 = 45,000
800,000 710,000 = 90,000 deferred on Mar. 31; 710,000 650,000 = 60,000
immediate gain on Mar. 31; 60,000 + [(90,000/12) x 9/12] = 65,625
If selling price is at fair value, full amount of gain is recognized immediately.
Additional information, lease term is 12 years out of total life of 25 years.
Deferred loss = 650,000 470,000; amortized loss = (180,000/12) x 9/12 =
11,250; 180,000 11,250 = 168,750
58

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CHAPTER 4

(Hope Manufacturing Company and Charity Company)

Machinery for lease

Lessees Books (Charity Co.)

Rent expense for 2013

Rent expense for 2014 (9,000 x 12)

Dec. 1 monthly entry

Rent expense for 2013:

Dec. 1 monthly entry

Prepaid rent expense (125,000 25,000)

Rent expense (920,000 x 9/12)

Equipment for lease

Finance lease obligation

Loss on finance lease

Finance Lease Obligation

Finance lease obligation

(1,011,840 40,000) / 15 years

Finance lease obligation

Finance lease obligation

Lease obligation as of December 31, 2013:

4-10. (Shirley Corporation)

*Adjusted; difference is due to rounding off.

Finance lease obligation

Finance lease obligation

4-11. (Sam Company)

Present value of minimum lease payments

Annual depreciation (4,429,740/10)

Taxes and insurance expense

Prepaid taxes and insurance

Taxes and insurance expense

4-12. (Joy Company)

Finance lease receivable

Unearned interest revenue

Unearned interest revenue

Partial Amortization Table

As of December 31, 2013:

(Jackie Chan and Chris Tucker)

Depreciable cost = P600,000 P20,000 = P580,000

Books of Chris Tucker

Jan. 1 Leased equipment

Dec 31 Interest expense

31 Depreciation expense Leased equipment

Jan. 1 Finance lease obligation

Dec 31 Interest expense

(b) Books of Jackie Chan

Jan. 1 Finance lease receivable

Finance lease receivable

Dec 31 Unearned interest revenue

4-14. (Ben Ten and Ironman)

The rate is approximately 8%. The PV factor is P539,730/80,000 =

Finance lease obligation

Interest expense (36,778-27,584)

(d) Books of Ben Ten

Finance lease receivable

Unearned interest revenue

Unearned interest revenue

Unearned interest revenue

The asset shall be recorded at P496,512 which is 80,000 x 6.2064.

No difference in journal entries. To the lessor, under the direct finance

4-15. (Prudent Company)

Gross investment (135,000 x 12)

Interest revenue for 2012

Finance lease receivable

4-16. (Glad Manufacturing Company)