07 Special Liabilities – Leases

Rent Revenue – With Rent Free

1) Marie Company grants Lyn Company first three months rent-free under a three-year operating lease. The lease is
effective April 1, 2021 and provides for a monthly rental of P12,000, payment of which will begin on July 1, 2021.

How much is the rent income reported in Marie Company’s profit or loss for the year ended December 31, 2021?
99,000

Rent Revenue – With Unequal Payment, Rent Receivable

Numbers 2 and 3
On January 1, 2019, Inside Company purchased equipment. On the same date, Inside Company leased the equipment
to another entity under an operating lease. The lease term is for 5 years with the following rental payments in advance:

January 1, 2019.................. .................. .................. .................. .................. .................. ................ 1,000,000

January 1, 2020.................. .................. .................. .................. .................. .................. ................ 1,000,000
January 1, 2021.................. .................. .................. .................. .................. .................. ................ 1,400,000
January 1, 2022.................. .................. .................. .................. .................. .................. ................ 1,700,000
January 1, 2023.................. .................. .................. .................. .................. .................. ................ 1,900,000

2) What is the gross rental income for the year ended December 31, 2019?
1,400,000

3) What amount of rent receivable is recognized on December 31, 2021?

800,000

Rent Revenue – With Lease Bonus And Contingent Rent

4) On January 1, 2016 Aguila Corporation signed a ten-year operating lease for an office space at P960,000 per year.
The lease included a provision for additional rental payment of 5% of annual company sales in excess of P5,000,000.
Lessee’s sales for the year ended December 31, 2016 were P6,000,000. Upon execution of the lease, Aguila
Corporation received P240,000 as a bonus for the lease.

How much rent revenue should Aguila recognize in profit or loss?

1,034,000

Rent Revenue – With Lease Related Expenses

5) On January 1, 2022, Cthulhuphant Company leased out a building to Dog Company under an operating lease for ten
years at P500,000 per year, payable the first day of each lease year. Cthulhuphant paid P150,000 to real estate
broker as a finder’s fee. The building is depreciated P120,000 per year. For 2022, Cthulhuphant incurred insurance
and property tax expense totaling P90,000.

The net income to be reported by Cthulhuphant is

275,000

Rent Revenue – With Lease Asset

Numbers 6 and 7
On January 1, 2021, Pugna, Inc. purchased equipment for P4,000,000. The equipment shall be leased out under
operating lease. The estimated useful life is 10 years and the estimated residual value is P480,000.
On July 1, 2021, the equipment was leased to Oblivion Co. under a 5-year operating lease. Annual rent is P800,000. The
first annual rent was made on that date. Initial direct cost incurred on negotiating the lease amounted to P80,000.
Insurance cost incurrent by Pugna in 2021, not reimbursable from lessee, amounted to P4,000.

6) How much is the rental income net of lease related expense in 2021?
36,000
7) How much is the carrying amount of the leased asset at December 31, 2021?
3,720,000

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Direct Finance – First Payment After One Period
Numbers 8, 9, 10, 11
On January 1, 2021, Feline Financing Co. leased equipment to Kuting, Inc. information on the lease is shown below:

Cost of equipment 1,200,000

Useful life of equipment 5 years
Lease term 4 years
Annual rental payable at the end of each year 440,000
Additional information:
The annual lease payment includes P36,196 pertaining to insurance taken by Feline on the equipment leased. Direct
costs incurred by Feline in negotiating the lease amounted to P80,000. The implicit rate, after adjustment for the
foregoing items, is 10%.

8) How much is the gross investment in the lease on January 1, 2021?

1,615,216
9) How much is the net investment in the lease on January 1, 2021?
1,280,000
10) How much is the unearned interest income on January 1, 2021?
335,216
11) How much is the carrying amount of lease receivable as of December 31, 2021?
1,004,196

12) How much is the interest income for the year ended December 31, 2021?
128,000

Direct Finance – First Payment In Advance

Numbers 13, 14, 15, 16 and 17
Desiree Company is in the business of leasing new sophisticated equipment. The lessor expects a 12% return on its net
investment. All leases are classified as direct financing lease.

At the end of the lease term, the equipment will revert to the lessor. On January 1, 2020, an equipment is leased to a
lessee with the following information:

Cost of equipment to the lessor 5,000,000

Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2020

Present value of 1 for 8 periods at 12% 0.41

Present value of ordinary annuity for 8 periods at 12% 4.97
Present value of annuity due for 8 periods at 12% 5.56
13) What is the gross investment in the lease?
7,800,000

14) What is the net investment in the lease?

5,250,000

15) What is the unearned interest income on January 1, 2020?

2,550,000

16) What is the interest income for 2020?

522,000

17) What is the carrying amount of lease receivable as of December 31, 2020?
4,872,000

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Direct Finance – First Payment In Advance, Working Back Periodic Lease Payment
Numbers 18, 19 and 20
Meow Company is in the business of leasing new sophisticated equipment. As a lessor, Meow expects a 12% return on
net investment with payments made in advance beginning January 1, 2021 and every January 1 thereafter. All leases are
classified as direct financing leases. At the end of the lease term, the equipment’s owner is not transferred to the lessee.
On January 1, 2021 equipment is leased to a lessee with the following information:

Cost of equipment to Meow 6,125,000

Residual value – unguaranteed 700,000
Useful life and lease term 8 years
Initial direct cost 176,400
A return of 12% is expected prior to the initial direct cost and a return of 11% is expected after the initial direct cost.

18) What is the gross investment in the lease?

9,100,000
19) What is the financial revenue in 2021?
577,654
20) What is the carrying amount of lease receivable on December 31, 2021?
5,829,054
Sales Type – GRV
Numbers 21, 22, 23 and 24
Alarcio Company is a dealer in equipment. On January 1, 2020, an equipment was leased to another entity with the
following provisions:

Annual rental payable at the end of each year 1,500,000

Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Guaranteed residual value 500,000
Implicit rate 12%
At the end of the lease term on December 31, 2024, the equipment will revert to the lessor. On such date, the fair value
of the asset is P350,000. The lessor incurred initial direct cost of P200,000 in finalizing the lease agreement. PV of an
ordinary annuity of 1 for 5 periods at 12% is 3.60, PV of 1 for 5 periods at 12% 0.57.

21) What is the gross investment in the lease?

8,000,000
22) What is the net investment in the lease?
5,685,000
23) What is the interest income to be recognized for 2020?
682,200
24) What amount should be reported as profit on sale for 2020?
1,485,000

Sales Type – URV

Numbers 25, 26 and 27
Bitag is a dealer in machinery. On January 1, 2023, a machinery was leased to another entity with the following provisions:
Annual rental payable at the end of each year .......... .......... .......... .......... .......... .......... ......... 2,000,000
Lease term and useful life of machinery .......... .......... .......... .......... .......... .......... .......... ....... 5 years
Cost of machinery.......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ......... 6,000,000
Residual value – unguaranteed.......... .......... .......... .......... .......... .......... .......... .......... .......... 1,000,000
Implicit interest rate.......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ....... 12%
PV of an ordinary annuity of 1 for 5 periods at 12%.............................. .......... .......... .......... ... 3.60
PV of 1 for 5 periods at 12%.......... .......... .......... .......... .......... .......... .......... .......... .......... ... 0.57
There is no transfer of title nor bargain purchase option.

25) What amount should be reported as sales revenue?

7,200,000
26) What is the interest income for 2023?
932,400
27) What amount of cost of goods sold should be reported?
5,430,000

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Lessee – With BPO
Numbers 28, 29, 30 and 31
On January 1, 2024, Gwen leased an equipment from a lessor with the following pertinent information:

Lessee – With BPO Lessee – With BPO

Lease term 8 years
Useful life of equipment 10 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 8 periods at 10% 5.33
Present value of 1 for 8 periods at 10% 0.47
The entity has the option to purchase the equipment on January 1, 2032 by paying P500,000 which is significantly less
than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that the entity
shall exercise the option. On January 1, 2024, the entity incurred initial direct cost of P200,000.

28) What is the initial cost of the equipment?

3,100,000
29) What is the interest expense for 2024?
290,000
30) What is the lease liability on December 31, 2024?
2,690,000
31) What is the depreciation for 2024?
310,000

Lessee – With GRV

Numbers 32, 33 and 34
On January 1, 2021, Wait Company leased equipment from a lessor with the following information:

Annual rental payable every December 31 2,000,000

Residual value guarantee 1,000,000
Initial direct cost 600,000
Estimated dismantling and restoration cost required by contract at present value 780,000
Annual executory cost paid by the entity 100,000

The lease term is four years while the equipment’s useful life is 8 years. The implicit rate in the lease, known by the
entity, is 10%.

§ The present value of an ordinary annuity of 1 at 10% for 4 periods is 3.17

§ The present value of 1 at 10% for 4 periods is 0.68 0.68

32) What is the initial lease liability?

7,020,000

33) What is the cost of the right of use asset?

8,400,000

34) What is the depreciation of the right of use asset for 2021?
1,850,000

Lessee – Depreciation, Revert Back

35) At the beginning of current year, Taguro entered into an 8-year lease for an equipment. The entity accounted for the
acquisition as a finance lease for P6,000,000 which included a P600,000 guaranteed residual value.

At the end of the lease, the asset will revert back to the lessor. It is estimated that the fair value of the asset at the
end of the 10-year life would be P400,000. The entity used the straight line depreciation.

What amount should be recognized as depreciation expense on the leased asset for the current year?
540,000

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Lessee – Depreciation, BPO
36) At the beginning of current year, Nicole Perez entered into an 8-year finance lease for an equipment. The entity
accounted for the acquisition of the finance lease at P5,000,000 which included a P500,000 bargain purchase option.

At the end of the lease, the entity expected to exercise the bargain purchase option. The expected fair value of the
equipment is P400,000 at the end of the 10-year useful life.
The straight line depreciation is used. What amount of depreciation should be recognized for the current year?
460,000

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