LEASE

Finance Lease
Indicators:
a) Ownership of title is transferrable at the end of the lease term
b) Lease contains any bargain purchase option
c) Lease term - major part of the economic life of the leased asset
*Period over which an asset is expected to be used by user
*Number of production expected to be obtained from the asset
d) Lease Payments:
*Fixed Payments
*Variable lease payments
* Any residual values guarantees provided to the lessor
*Bargain purchase option
*Payments for penalties for terminationg the lease
e) Leased assets are of a specialized nature

Discount rate used to determine the present value of the asset = lesso

Operating Lease
- lease that does not transfer substantially the risks and rewards to the own

*Lessor recognizes income on a straight-line basis

*The amount of revenue that is to be recognized over the lease term includes an
from the lessee as a lease bonus
Lease Bonus - is granted by the lessor; should be deducted from rent re
*Initial Direct Costs - incremental costs that are directly attributable to negotiati
*Contingent Rentals - added to rent revenue in the period which they arise
*Executory Costs - costs charged to expense when incurred as a debit to regular
ased asset
sed by user
d from the asset

e of the asset = lessor's implici rate

s and rewards to the ownership of the asset

he lease term includes any amount received

be deducted from rent revenue

attributable to negotiating and arranging a lease.
od which they arise
rred as a debit to regular expense account
 260,000
a. 260,000 x 3.2397 842,322
200,000 x 0.6499 129,980
Total Capitalized Cost 1,232,302

b. 842,322 + 260,000 1,102,322

a. Amortization Table

Reduction In
Date Annual Payment Interest Principal
1/1/2019
1/1/2019 260,000 - 260,000
1/1/2020 260,000 87,507 172,493
1/1/2021 260,000 71,983 188,017
1/1/2022 260,000 55,061 204,939
1/1/2023 260,000 36,617 223,383
1/1/2023 200,000 *16530 183,470
*Difference due to rounding off
b.
1/1/2019 Right of use Equipment 1,232,302
Lease Liability
Cash

12/31/2019 Interest Expense 87,507

Lease Liability

Depreciation Expense 206,460

Accumulated Depreciation
1,232,302 - 200,000 5

1/1/2020
Lease Liability 260,000
Cash

12/31/2020 Interest Expense 71,983

Lease Liability

Depreciation Expense 206,460

Accumulated Depreciation
c. 12/31/2023 Accumulated Depreciation 1,032,302
Lease Liability 183,470
Interest Expense 16,532
Right of use Equipment

d. Lease Liability 1,032,302

Accumulated Depreciation 183,470
Interest Expense 16,532
Loss on Lease 50000
Right of use Equipment 1,232,304
Cash 50000
 0.683535

Lease Liablity
1,232,302
972,302
799,809
611,792
406,853
183,470
0

972,302
260,000

87,507

206,460

260,000

71,983

206,460
1,232,304
CHAVEZ

A. 86680 x 3.1699 274,767

86,680.00 86,680
Total Capitalized Cost 361,447

B. Date Annual Payment

1/1/2019
1/1/2020 86,680.00
1/1/2021 86,680.00
1/1/2022 86,680.00
1/1/2023 86,680.00

C. ROU Machine
Lease Liability

Lease Liability
Cash

Interest Expense
Lease Liability

Depreciation Expense
Accum. Depreciation

Lease Liability
Cash

Interest Expense
Lease Liability

Depreciation Expense
Accumulated Depreciation
Statement of Financial Position 2,019.00
Property, Plant and Equipment
Leased Machine 361,447.00
Accumulated Depreciation 72,289.00
Current Liabilities
Lease Liability-(Current Portion) 86,680.00
Non Current Liabilities
Lease Liability 215,564.00
Income Statement
Interest Expense 27,477.00
Depreciation Expense 72,289.00
Interest Reduction In Principal Lease Liablity
274,767.00
27,476.70 59,203.30 215,564.00
21,556.40 65,123.60 150,440.00
15,044.00 71,636.00 78,804.00
7,876.00 78,804.00 -

361,447.00
361,447.00

86,680.00
86,680.00

27,477.00
27,477.00

72,289.00
72,289.00

86,680.00
86,680.00

21,556.00
21,556.00

72,289.00
72,289.00
 2,020.00

361,447.00
144,578.00

86,680.00

150,440.00

21,556.00
72,289.00
4-3 Riza Inc.

A.
1011840/135000 7.4951111111

B.
Date Annual Payment Interest Expense

12/31/2019 135,000 -
12/31/2020 135,000 87,684
12/31/2021 135,000 82,952

C.
(1011840-40000)/15 years 64,789

D.
12/31/2019
Right-of-use Equipment 1,011,840
Finance Lease

Finance Lease 135,000

Cash

12/31/2020
Finance Lease 47,316
Interest Exp. 87,684
Cash

Depreciation Exp. 64,789

Acc. Depreciation

E.
Current Portion 47,316
Non-Current Portion 829,524
 PV an annuity for 12 periods and under 10% interest rate

Reduction in Principal Lease

135,000 876,840
47,316 829,524
52,048 777,476

1,011,840

135,000

135,000

64,789
1011840
135000
CANLAS

Payment on or before commencement 150,000

PV of fixed periodic payment
(150,000 x 3.0373) 455,595
PV of Bargain Purchase Option
(240,000 x .5674) 136,176
Total Capitalized Cost 741,771

Reduction in
Date Annual Payment Applied to Interest Principal Lease Liability
Obligation
1/1/2019 591,771
1/1/2020 150,000 71,013 78,987 512,784
1/1/2021 150,000 61,534 88,466 424,318
1/1/2022 150,000 50,918 99,082 325,236
1/1/2023 150,000 39,028 110,972 214,264
12/31/2023 240,000 25,736 214,264 (0)

a. At what amount should the asset be recorded on Januar 1, 2019?

741,771
c. How much depreciation will be taken up by Shirley for the year 2019?
741,771 / 15 49,451.40

d. Prepare the entries in the books of Shirley to record the foregoing for the years 2019 and 2020.
1/1/2019 Rigth-of-Use Equipment 741,771
Cash 150,000
Lease Liability 591,771

12/31/2019 Depreciation Expense 49,451

Accumulated Depreciation 49,451

Interest Expense 71,013

Lease Liability 71,013

1/1/2020 Lease Liability 150,000

Cash 150,000

12/31/2020 Depreciation Expense 49,451

Accumulated Depreciation 49,451

Interest Expense 61,534

Lease Liability 61,534

e. Assume that at the end of the lease term, Shirley exercised its purchase option. Give the entry for t
 12/31/2023 Lease Liability 214,264
Interest Expense 25,736
Cash 240,000

Equipment 494,514
Accumulated Depreciation - RoUE 247,257
Rigth-of-Use Equipment 741,771

f. Give the journal entry at the end of the lease term assuming that Shirley failed to exercise its barga
12/31/2019 Lease Liability 214,264
Interest Expense 25,736
Accumulated Depreciation - RoUE 247,257
Loss from failure to exercise BPO 254,514
Rigth-of-Use Equipment 741,771
the years 2019 and 2020.

se option. Give the entry for the exercise.

ey failed to exercise its bargain purchase option.
4-11. (Prince of Wales Inc.)

(a) Present value of minimum lease payments

750,000 x 6.3282

(b) Annual depreciation (4,746,150/10)

(c)
2019
July 1 Building
Finance lease obligation

Dec. 31 Interest expense

Interest payable
x 6/12

31 Depreciation expense-Building
Accum. Depreciation-Building

31 Prepaid taxes and insurance

Taxes and insurance expense
2020
July 1 Taxes and insurance expense
Interest payable
Interest expense
Finance lease obligation
Cash

Dec. 31 Interest expense

Interest payable
x 6/12
31 Depreciation expense
Accum. Depreciation-building
4-6 Buenaflor

a.) 08/01/19 Finance Lease Receivable

Equipment for lease
discount on finance lease receivable

Discount on finance lease Receivable

Cash

Cash
Finance lease receivable

12/31/2019 Discount on finance lease receivable

Interest income

8/1/2020 Discount on Finance lease receivable

Cash
Interest revenue
Finance lease receivable

12/31/2020 Discount on Finance lease receivable

Interest revenue

Partial amortization table

DATE PERIODIC PAYMENT INTEREST
8/1/2019 -
8/1/2009 100000 -
8/1/2020 100000 38,190
8/1/2021 100000 32,090
.
b.) Total
Finance lease receivable 605,000
discount on finance lease receivable 107,188
497,812
Current portion:
Principal due in 2020
Saccrurd interest in 10/31/19
 605,000
t for lease 480,000
on finance lease receivable 125,000

1,900
1,900

100,000
ase receivable 100,000

15,913
15,913

22,728
100,000
22,278
ase receivable 100,000

13,370
(32090*5/12) 13,370

REDUCTION IN PRINCIPAL BALANCE OF PRINCIPAL

- 481,900
100000 381,900
61,810 320,090
67,910 252,180

Current Non-current
100,000 505,000
22,278 84,910
77,722 420,090

61,810
15913
SOLIMAN

Jackie Chan Leasing and Chris Tucker

Lease Term
Equipment's Useful Life
Bargain option price
Implicit Rate, known by Chris Tucker
FV of the asset, Jan 1, 2015
Estimated recoverable value at the end of 5yrs
Estimated residual value at the end of 6yrs

*Cost of asset to Jackie Chan Leasing is P600,000

*Chris Tucker uses sum-of-the-years' digit method to depreciate this type of equipme

PV of Equipment 600,000
Baragain Purchase Option (5 years = 12%) 24,836
Net Investment 575,164
PV of Annuity Due (5 years = 10%) 4.1699
Annual Payment 137,932

Gross Rental (137,932 x 5 years) 689,662

Bargain Purchase Option 40,000
Gross Investment for Lease 729,662
PV of Equipment 600,000
Dicount on Finance Lease Receivable 129,662

10%
LEASE LIABILITY AMORTIZATION TABLE

Reduction to
Date Annual Payment Applied to Interest Principal Obligation
1/1/2015
1/1/2015 137,932 137,932
1/1/2016 137,932 46,207 91,726
1/1/2017 137,932 37,034 100,898

Required:
(a) Entries in the books of Chris Tucker for years 2015 and 2016 - LESSEE
1/1/2015 Lease Equipment
Finance Lease Obligation

Finance Lease Obligation

Cash
 12/31/2015 Interest Expense
Interest Payable

Depreciation Expense
Accumulated Depreciation

1/1/2016 Finance Lease Obligation

Interest Payable
Cash

12/31/2016 Interest Expense

Interest Payable

Depreciation Expense
Accumulated Depreciation

(b) Entries in the books of Jackie Chan Leasing for years 2015 and 2016 -
1/1/2015 Finance Lease Receivable
Equipment for Lease
Dicount on Finance Lease Receivable

Cash
Finance Lease Receivable

12/31/2015 Unearned Interest Revenue

Interest Revenue

1/1/2016 Cash
Finance Lease Receivable

12/31/2016 Unearned Interest Revenue

Interest Revenue
 5 years
6 years
P40,000
10%
P600,000
P80,000
P20,000

iate this type of equipment

Lease Liability
600,000
462,068
370,342
269,444

015 and 2016 - LESSEE

600,000
600,000

137,932
137,932
 46,207
46,207

165,714
165,714

91,726
46,207
137,932

37,034
37,034

138,095
138,095

years 2015 and 2016 - LESSOR

729,662
600,000
129,662

137,932
137,932

46,207
46,207

137,932
137,932

37,034
37,034
4-8

a. Finance Lease

b. Net Investment 459,730

Annual Payment / 80,000
5.7466

c. Ironman (Lessee)

Cash Payment
Present Value of Periodic Payments
80,000*5.2064 416,512
Present Value of Guaranteed Residual Value
80,000*0.5403 43,224
Capitalized Cost

4/1/2015 Right-of-use of Equipment

Cash
Lease Liability

12/31/2015 Depreciation Expense

Accumulated Depreciation

Interest Expense
Interest Liability

4/1/2016 Lease Liability

Interest Liability
Interest Expense
Cash

12/31/2016 Depreciation Expense

Accumulated Depreciation

Interest Expense
Interest Liability

D. Ben Ten (Lessor)

Gross Investment Receivable (80,000*7)

Guaranteed Residual Value
Gross Investment in Lease
Present Value (Net Investment in Lease)
Present Value of Periodic Payments
80,000*5.2064
Present Value of Guaranteed Residual Value
80,000*0.5403

4/1/2015 Cash
Finance Lease Receivable
Equipment for Lease
Discount on FL Receivable

12/31/2015 Interest Receivable

Interest Revenue

4/1/2016 Cash
Discount on FL Receivable
Finance Lease Receivable
Interest Receivable
Interest Revenue

12/31/2015 Interest Receivable

Interest Revenue

e. The answer will be the same

f. There will be no difference

 8%

80,000 Date Payment

4/1/2015
4/1/2016 80,000
4/1/2017 80,000
459,736 4/1/2018 80,000
539,736

539,736
80,000
459,736

43,100
43,100

27,584
27,584

43,221
27,584
9,195
80,000

43,100
43,100

24,991
24,991

560,000 Date Payment

 80,000 4/1/2015
640,000 4/1/2016 80,000
4/1/2017 80,000
4/1/2018 80,000
416,512
dual Value
43,224 459,736
180,264

80,000
640,000
539,730
180,264

27,584
27,584

80,000
36,779
80,000
27,584
9,195

24,991
24,991
Interest Principal Lease Liability
459,736
36,779 43,221 416,515
33,321 46,679 369,836
29,587 50,413 319,423

Interest Rev Red. In Investment Net Investment

 459,736
36,779 43,221 416,515
33,321 46,679 369,836
29,587 50,413 319,423
4-10
Glad manufacturing Company

a. Journal Entries
4/1/2015 Finance lease receivable 1,500,000
Cost of goods sold 893,350
Sales 1,026,970
Discount on finance lease 426,380
Finished goods 940,000

4/1/2015 Cash 175,000

Finance lease receivable 175,000

12/31/2015 unearned interest revenue 67,397

interest revenue 67,397

1/1/2016 interest revenue 67,397

unearned interest revenue 67,397

4/1/2016 Cash 175,000

unearned interest revenue 89,862
Finance lease receivable 175,000
interest revenue 89,862

12/31/2016 interest revenue 61,011

unearned interest revenue 61,011

b. (i) Sales 1,026,970

Cost of sales( 940,000-46,650) 893,350
Gross profit on sales 133,620

(ii) Interest Revenue for 2016 67,397

c. Sales (1,026,970 + 46,650) 1,073,620

Cost of sales (cost of the asset) 940,000

a. gross receivable
total periodic payment (175,000*8) 1,400,000
unguaranteed residual value 100,000
gross investment in lease 1,500,000

b. cost of goods sold

cost of equipment 940,000
Less: PV of unguaranteed residual value (46,650)
cost of goods sold 893,350

c. Sales is equal to PV of minimum lease payments

175,000 * 5.8684 1,026,970

d. unearned interest revenue

(175,000 * 8) + 100,000 1,500,000
(175,000*5.8684) + (100,000*.4665) 1,073,620
unearned interest revenue 426,380

Amortization table
Date Periodic payment Interest Reduction in Principal
4/1/2015
4/1/2015 175,000 175,000
4/1/2016 175,000 89,862 85,138
4/1/2017 175,000 81,348 93,652
Balance
1,073,620
898,620
813,482
719,830