Accounting for Leases

Problem I
Margot Company owns office space held for leasing. The carrying amount of this property on January 1, 2009 is
P2,000,000 and has an estimated useful life of 10 years. Margot computes depreciation on the straight-line basis. On
January 2, 2009 Margot entered into a lease contract with German Company for a term of three years until December 31,
2011. The lease fee is P100,000 per month, under an agreement for an increase annually at a rate of 5%. Margot also
requires a nonrefundable deposit of P300,000 to be paid in advance upon occupancy. Margot paid P120,000 commissions
and other fees with negotiating the lease. Margot Company should report net rental income for 2009 at

Problem II
Virginie Company leased equipment for six years, agreeing to pay P800,000 at the start of the lease term of January 1,
2009 and P800,000 annually on each January 1 for the next five years. The implicit rate in the lease, which is known by
Virginie is 10%, while the incremental borrowing rate is 12%. Virginie has the option to purchase the machine on
December 31, 2014 by paying P350,000 which is significantly less than the P600,000 expected fair value of the machine
on the options exercise date. What is the principal lease liability to be reported in Virginies December 31, 2009 statement
of financial position?

Problem III
On January 1, 2010 Mary Jane signs a 10-year noncancelable lease agreement to lease a storage building from Peter
Parker. The lease requires equal rental payments of P720,000 beginning on January 1, 2010. This yearly rental payment
includes P24,705.10 of executory costs related to taxes on the property. Other data pertaining to this agreement are as
follows:
The fair value of the building on January 1, 2010 is P4,400,000.
The building has an estimated economic life of 12 years with an unguaranteed residual value of P100,000. Mary
Jane depreciates similar buildings on straight-line method.
The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.
Mary Janes incremental borrowing rate is 12% per year. The lessors implicit rate is not known by Mary Jane.
The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1
6.32825
Present value of an ordinary annuity of 15.65022
Present value of 1
0.32197
1. What amount of lease liability should be recognized at the inception of the lease?

2. What is the book value of the lease storage building at December 31, 2011?

3. How much should be shown as current liabilities in the statement of financial position of Mary Jane at December
31, 2011

4. What is the noncurrent portion of the lease liability on December 31, 2011?

5. What is the amount of interest expense that should be recognized for the year ended December 31, 2010?

Problem IV
Twilight Company prepares the following lease payments schedule for the lease of a machine from Vulturi Company. The
machine has an economic life of six years. The lease agreement requires four annual payments of P33,000 and the
machine will be returned to Vulturi Company at the end of the lease term. The lease payments schedule is as follows:

July 1 2008
July 1 2009
July 1 2010
July 1 2011
July 1 2012

Minimum Lease
Payment

Interest Expense

Reduction
Liability

30,000
30,000
30,000
35,000
125,000

9,851
7,836
5,620
3,181
26,488

20,149
22,164
24,380
31,819
98,512

Balance of
Liability
98,512
78,363
56,199
311,819
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1. In the notes to the accounts at June 30, 2010, twilight Company would disclose future lease payments of what
amount?

2. On June 30, 2009 what would Twilight Company record in relation to the lease?
a. An interest expense of P9,851
b. An interest expense of nil
c. An interest payable of P9,851
d. An interest payable of 7,836
3. How much annual depreciation expense would Twilight record?

4. If Vulturi (the lessor) records a lease receivable of P102,237, the variance between this receivable and the liability
of P98,512 recorded by Twilight Company could be due to what?
a. Initial direct costs paid by Vulturi
b. An unguaranteed residual value
c. Both initial direct costs paid by Vulturi and an unguaranteed residual value
d. Neither initial direct costs paid by Vulturi and an unguaranteed residual value
5. Assume that the July 1, 2009 lease payment included an additional amount of P3,000 for exceeding a limit for
machine usage hours specific in the lease agreement. Twilight would account for this charge by recognizing it as
what?
a. An expense and disclosing the amount in the notes
b. Additional executory costs
c. Revenue
d. A reduction in the lease liability
Problem V
Clark Company leased a machine from Peter Corporation on January 1, 2012. The first annual payment was made on
January 1, 2013. The machine has an economic life of six years. The lease agreement requires four annual payments of
P33,000 including P3,000 annual payment for repairs and maintenance. The machine will be returned to Peter
Corporation at the end of the lease term and Clark Company guarantees a residual value of P5,000. Interest implicit in the
lease is 10%, which is known to Clark.
1. For the year ended December 31, 2013, how much interest payable would Clark Company record in relation to
the lease?

2. How much annual depreciation expense should Clark Company record?

3. In its notes to the financial statements at December 31, 2014, Clark Company would disclose minimum lease
payments of