Scribd
Upload
330 views4 pages

Lease 2. Incremental Borrowing Rate of The Lessee Is Used in The Absence of Implicit Interest

Initial measurement of a lease liability is at the present value of lease payments on the commencement date. Subsequent measurement is at amortized cost. Lease payments include fixed payments, variable payments, purchase options, residual value guarantees, and termination penalties. Interest on the lease liability is computed using the effective interest method and lease payments are apportioned between interest and reduction of the liability. An example shows a 4-year lease with annual fixed payments of P100,000. The right-of-use asset is initially measured at the present value of P303,730. Depreciation is recorded annually and interest expense and reduction of the liability are recorded with each payment.

Uploaded by

Queen Valle
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
330 views4 pages

Lease 2. Incremental Borrowing Rate of The Lessee Is Used in The Absence of Implicit Interest

Initial measurement of a lease liability is at the present value of lease payments on the commencement date. Subsequent measurement is at amortized cost. Lease payments include fixed payments, variable payments, purchase options, residual value guarantees, and termination penalties. Interest on the lease liability is computed using the effective interest method and lease payments are apportioned between interest and reduction of the liability. An example shows a 4-year lease with annual fixed payments of P100,000. The right-of-use asset is initially measured at the present value of P303,730. Depreciation is recorded annually and interest expense and reduction of the liability are recorded with each payment.

Uploaded by

Queen Valle
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
You are on page 1/ 4

Lease Liability

Initial Measurement of Lease Liability >>>>> at the present value of lease payments on
commencement date (PFRS 16.par 26) and subsequently, at amortized cost.

Important Notes on the computation of present value ( in the order of priority)

1. The lease payments shall be discounted using the interest rate implicit in the
lease
2. Incremental borrowing rate of the lessee is used in the absence of implicit interest
rate

Components of lease payments


 Fixed lease payments
 Variable lease payments
 Exercise price of purchase option if the lessee is reasonably certain to exercise the
purchase option
 Amount expected to be payable by the lessee under a residual value guarantee
 Termination penalties if the lease term reflects the exercise of termination option

Subsequent Measurement of lease liability >>>> the lessee shall measure lease liability
based on amortized cost

As a general rule:

>>> Interest on the lease liability is computer using the effective interest method
>>> Lease payments are apportioned between interest and a reduction of the lease
liability

FIXED PAYMENTS>>>> payments made by lessee to the lessor during the lease term at fixed
amounts.

Illustrative Example 1 – FINANCE LEASE (Fixed Payment)

On January 01, 2020, Company A leased a machinery for 4 years having the same useful life as
the term of lease. The annual rental is P100,000 at the end of each year. With an implicit
interest rate of 12%, the lease contract further states that Company A will assume ownership of
the machinery at the end of 4 years.

Step 1: Compute for the present value of the annual payment

Present value = P100,000 x present value of an ordinary annuity of 1 for 4 years


= P100,000 x 3.073
= P303,730
***Present value of 3.073 is derived from the mathematical table of present value of an
annuity

Journal Entry on January 01, 2020:

Right of Use Asset 303,730.00


Lease Liability 303,730.00

Step 2: Compute for the depreciation of the Right of use asset


Given that, the lease transfers ownership, depreciation will be computed using useful
life(incidentally, useful life is equal to the lease contract in this example)

Journal Entry on December 31, 2020 to record depreciation:


Depreciation 75,932
Accumulated Depreciation 75,932
(P303,730/4years)

Step 3: Subsequent Journal Entries after January 01, 2020

Notes:
 The annual rental of P100,000 shall be treated as payment of principal and interest
 The interest is computed as the difference between the face value of gross fixed
payments of P400,000 over 4 years and the present value of P303,730 or P96,270

Presented below for a better understanding and as guide for the other subsequent entries is
the table of amortization:

Present
Date Payment Interest Principal Value
1/1/2020 0     303,730
12/31/2020 100,000 36,448 63,552 240,178
12/31/2021 100,000 28,821 71,179 168,999
12/31/2022 100,000 20,280 79,720 89,279
12/31/2023 100,000 10,721 89,279 0
TOTAL 400,000 96,270 303,730  

Explanations:
Payment = annual rental fixed payments
Interest = present value x 12% or P36,448
Principal = part of rental after deducting interest (for 2020 Interest =
P100,000-36,448)
Present Value = is the balance of the lease liability after deducting annual
principal payment. For Dec. 31, 2020, present
value is P303,730 less P63,552 equals P240,178.

The subsequent entries related to the above illustrative case follow:

12/31/202 36,44
0 Interest Expense 8
63,55
Lease Liability 2
Cash 100,000

Depreciation Expense 75,932


12/31/202 Accumulated 75,932
0 Depreciation

12/31/202 28,82
1 Interest Expense 1
71,17
Lease Liability 9
Cash 100,000

Same entry and amount to


12/31/202 record depreciation as in
1 12/31/2020

12/31/202 20,28
2 Interest Expense 0
79,72
Lease Liability 0
Cash 100,000

12/31/202 10,72
3 Interest Expense 1
89,27
Lease Liability 9
Cash 100,000

If a Statement of Financial Position will be prepared as of Dec. 31, 2020, the right of use asset
will be presented as a separate line item under noncurrent assets as:

Right of Use Assets P303,730


Less Accumulated Depreciation (75,932)
--------------------------------------------------------------
Carrying Amount (Net Book Value) P227,798
--------------------------------------------------------------

Likewise, the Lease Liability would be reported partly as Current Liabilities for the amount of
P71,179 and partly Noncurrent Liabilities for P168,999 (P79,720 + P89,279)

You might also like