Scribd
Upload
802 views2 pages

Diana's 5-Year Noncancelable Lease Accounting

Diana Corporation signed a 5-year lease for a machine from Calpol Company on January 1, 2019. The terms of the lease require Diana to make annual payments of P86,680. Diana recorded the leased asset at P361,447 on its books. Over the lease term, Diana will amortize the principal through annual reductions and record interest expense. Diana is also required to restore the machine at the end of the lease for an estimated P20,000.

Uploaded by

Avox Everdeen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
802 views2 pages

Diana's 5-Year Noncancelable Lease Accounting

Diana Corporation signed a 5-year lease for a machine from Calpol Company on January 1, 2019. The terms of the lease require Diana to make annual payments of P86,680. Diana recorded the leased asset at P361,447 on its books. Over the lease term, Diana will amortize the principal through annual reductions and record interest expense. Diana is also required to restore the machine at the end of the lease for an estimated P20,000.

Uploaded by

Avox Everdeen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

A.

On January 1, 2019, Diana Corporation signed a 5-year noncancelable lease for a


machine with Calpol Company. The terms of the lease called for Diana to make annual
payments of P86,680 at the beginning of each year starting January 1, 2019. The
machine has an estimated useful life of 6 years and a P50,000 unguaranteed residual
value at the end of the five-year lease term. The machine reverts to the lessor at the end
of the five-year lease term. Diana uses the straight line method of depreciation for all of
tis plant assets. The rate implicit in this contract, which is known to Diana is 10%. The
fair value of the machine on January 1, 2019 is P392,490. Diana incurred directly
attributable cost of P10,000 to install the machine. Diana has a constructive obligation to
restore the machine to a condition still suitable for use at the end of the lease term.
Estimated cost of restoration is P20,000. (Use a discount rate of 10% to measure the
provision).

Required:
a. What amount should Diana record the leased asset at January 1, 2019?
Answer:
Capitalized cost of the leased asset (86,680 x 4.1699) = P 361, 447
b. Prepare an amortization table over the five-year lease term
Answer:

Date Total amount Interest Reduction in Lease


payment expense principal obligation
01/01/19 - - - 361,447
01/01/19 86,680 - 86,680 274,767
01/01/20 86,680 27,477 59,203 215,564
01/01/21 86,680 21,556 65,124 150,440
01/01/22 86,680 15,044 71,636 78,804
01/01/23 86,680 7,876 78,804 -

c. Prepare the entries in the books of Diana for the years 2019 and 2020,
including December 31 adjustments.
Answer:
2019
Jan. 1 Lease machine 361,447
Finance lease obligation 361,447
Finance lease obligation 86,680
Cash 86,680
Dec. 31 Interest expense 27,477
Interest payable 27,477
Depreciation expense 72,289
Accumulated depreciation 72,289

2020
Jan. 1 Finance lease obligation 59,203
Interest payable 27,477
Cash 86,680
Dec. 31 Interest expense 21,556
Interest payable 21,556
Depreciation expense 72,289
Accumulated depreciation 72,289

You might also like