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GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 1
SESSION 11
APPLYING ACCOUNTING
STANDARDS AND
POLICIES ON LEASES
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 3
Learning Objective
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What is a Lease?
leased
asset
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Leasing Advantages
Lessor’s Low or no
May avoid Flexibility of borrowing rate downpayment
obsolescence of contracting. may be less than preserves
assets. lessee’s. capital.
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 6
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 7
Definition of Terms
1. The date from which the lessee is entitled to exercise its right to use the
leased asset is the
a. Inception of the lease
b. Lease Term
c. Commencement of the Lease Term
2. This is the earlier of the date of the lease agreement and the date of
commitment by the parties to the principal provisions of the lease.
a. Inception of the lease
b. Lease Term
c. Commencement of the Lease Term
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 8
Definition of Terms
3. The period over which an asset is expected to yield economic benefits
or service potential to one or more users
a. Useful Life
b. Lease Term
c. Economic Life
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 9
Definition of Terms
5. Refers to an additional payment made by a lessee in property, cash, or
both when a lease terminates
a. Unguaranteed Residual Value
b. Guaranteed Residual Value
c. Minimum Lease Payments
6. That portion of the residual value of the leased asset, the realization of
which by the lessor is not assured or is guaranteed solely by a party
related to the lessor.
a. Unguaranteed Residual Value
b. Guaranteed Residual Value
c. Minimum Lease Payments
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 10
Definition of Terms
7. The aggregate of, the minimum lease payments receivable by the lessor
under a finance lease; and any unguaranteed residual value accruing
to the lessor.
a. Useful Life
b. Net Investment in the Lease
c. Gross Investment in the Lease
8. Payments over the lease term that the lessee is, or can be, required to
make
a. Minimum Lease Payments
b. Initial Direct Costs
c. Contingent Rent
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 11
Definition of Terms
9. This is the discount rate that, at the inception of the lease, causes the
aggregate present value of: the MLP; and the unguaranteed residual
value to be equal to the FV of the leased asset and any initial direct costs
a. Lessee’s incremental borrowing rate of interest
b. Interest Rate Implicit in the Lease
c. Borrowing Rate
10. The gross investment in the lease discounted at the interest rate implicit
in the lease.
a. Inception of the lease
b. Net Investment in the Lease
c. Minimum Lease Payments
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 12
Classification of Leases
REWARDS RISKS
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Exercise 11-A
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Situation No. 1
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Situation No. 2
On January 1, 2014, an entity entered as lessee into a five-year
non-cancellable lease of farmland with a fair value of P100,000.
The lessee is required to pay the lessor P5,000 per year.
Situation No. 3
On January 1, 2014, an entity entered as lessee into a five-day non-
cancellable lease of a motor vehicle that has an economic life of five years.
On the same date (the inception of the lease), the fair value (cash cost) of
the motor vehicle is P100,000. The lessor charges the lessee P120 per day
for the use of the motor vehicle. At the end of the lease term, the lessee
returns the motor vehicle to the lessor.
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Situation No. 4
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Situation No. 5
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Ownership transferred at the end of lease term
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Leased assets cannot easily be replaced
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Exercise 11-B
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Finance Lease: LESSEE
Initial Recognition
DEBIT: CREDIT:
Leased Asset Lease Liability
Fair Value
Lower of current non-current
Present Value of Minimum
Lease payments
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Finance Lease: LESSEE
Subsequent Measurement
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Finance Lease: LESSOR
Initial Recognition
Debit: Credit:
Lease Receivable PPE
Deferred Finance Lease Revenue
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Finance Lease: LESSOR
Subsequent Measurement
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 25
Operating Lease
LESSEE LESSOR
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SAMPLE PROBLEM
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Sample Schedule of Amortization
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ACCOUNTING FOR FINANCE LEASE
ACCOUNTS LESSEE LESSOR
Cash - MDS, Regular 21,912
Cash-Collecting Officer 21,912
Finance Lease Receivable 21,912
Finance Lease Payable 9,912
Interest Expense 12,000
To record 1st To record collection of 1st
lease payment – Dec. 31, lease payment – Dec. 31,
2014 2014
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 30
ACCOUNTING FOR FINANCE LEASE
Note: For the 2nd to the 7th year, the illustrative entries shall be the same using
the amount of interest expense and the reduction of lease liability shall be based
on per amortization table while the annual depreciation expense shall be uniform
up to the 7th year.
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 31
ACCOUNTING FOR OPERATING LEASE
A 5-year operating lease is initiated on January 1st, 2015. Payments are P10,000.00 per
year, payable on December 31st each year. Cost of Equipment is P50,000 with a useful
life of 8 years. Give journal entries for the 1st year.
GAM: Accounting Session 11: Applying Accounting Standards and Policies on Leases Slide 11 - 32
ACCOUNTING FOR OPERATING LEASE
Accounts LESSEE LESSOR
Cash – Treasury/Agency
none
Deposits, Regular 10,000
Cash-Collecting Officer 10,000
To record remittance
to BTr (Dec. 31)
Depreciation-Machinery and
Equipment 5,937.50
none
Accumulated Depreciation -
Other Machinery and Equipment 5,937.50
To record depreciation
for the year (Dec. 31)
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Disclosures (Lessor)
Recognize: Recognize:
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