AC5-2015

CWC
Tarlac State University
College of Business and Accountancy
Accounting 5A
Assignment
LEASES PART 2
LEASES - THEORIES
Anuva Co. has the following rental agreements. You have been asked to advise the accounting
treatment for each of these items. Determine whether each of these agreements is an operating lease
or a finance lease.
1. Anuva rents equipment for three years for P20,000 per year. The equipment is valued at
P200,000. At the end of the rental term the equipment must be returned to the dealer.
2. Anuva rents equipment for five years for P80,000 per year. At the end of the rental term Anuva
can purchase the equipment for P500. At the date the contract was signed the equipment had a
value of P300,000. At the end of five years, it is expected the equipment will have a value of
P42,000.
3. Anuva received six months of free rent on an office building it was leasing for two years. Rent is
normally P1,500 per month.
4. Anuva rents equipment for eight years. The present value of the lease payments are P80,000.
The market value of the equipment is P90,000 and the useful life of the equipment is ten years.
5. Anuva rents equipment for ten years. At the end of the lease Anuva receives title to the
equipment.
6. Anuva rents equipment for seven years. The life of the equipment is ten years. The fair value of
the equipment is P100,000. The present value of the minimum lease payments is P85,000.
Direct Financing Lease
1-4: Venus Company is in the business of leasing new sophisticated equipment. As lessor, Venus
Company expects 10% return on its investment. All leases are classified as direct financing lease. At the
end of lease term, the equipment will revert to Venus company. On January 1,2015 an equipment is
leased to a lessee with the following information:
Cost of machinery
Residual Value-guaranteed
Useful life and lease term
Implicit interest rate
First lease payment

3,760,000
400,000
4 years
10%
January 1,2015

AC5-2015
CWC

Required:
1.
2.
3.
4.

Compute total financial revenue

Prepare a table of amortization of the lease receivable and interest income.
Prepare journal entries for 2015 and 2016.
Prepare journal entry on January 1,2019 to record the return of the equipment from
the lessee. The fair value of the equipment on this date is P500,000.

5-6: Neptune Company leases computer equipment to customers under a direct financing lease. The
equipment has no residual value at the end of the lease and the lease does not contain bargain purchase
option. Neptune Company wishes to earn 8% interest on a 5 year lease of equipment with a cost of
P3,234,000. On January 1,2015, Neptune Company leased the equipment to Saturn Company.
5. What is the total interest revenue that Neptune will earn over the lease term?
6. What is the interest revenue to be reported by Neptune for 2015?
7: Perseus Company owns an asset costing P5,239,000. The asset is leased on January 1,2015 to another
entity. Five annual lease payments are due each January 1, beginning January 1,2015. The lessee
guarantees the P2,000,000 residual value of the asset as of the end of the lease term on December
31,2019.
7. What is the annual lease payment?
8-10:Lon Co. is in the business of leasing new sophisticated computer systems. As a lessor of computers,
Lon Co. purchased a new system on December 31,2014. The system was delivered the same day (by
prior arrangement) to Gen Investment Co., a lessee. The corporation accountant revealed the following
information relating to the lease transaction:
Cost of system to Lon Co.
Estimated useful life and lease term
Expected residual value (unguaranteed)
Lons implicit interest rate of interest
Generals incremental borrowing rate
Date of first lease payment

550,000
8 years
40,000
12%
14%
Dec. 31,2014

Additional information is as follows:

i.
At the end of the lease, the system will revert to Lon Co.
ii.
Gen Investment Co. is aware of Lons rate of implicit interest
iii.
The lease rental consists of equal annual payments
8. The annual lease payment under the lease is
9. The total financial revenue to be earned by the lessor over the lease term is
10. The interest income to be recognized by the lessor in 2015 is: