TOPIC 5: Accounting for Leases - Lessee POV

Lecture 01 - Finance Lease - Lessee POV

Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix

General jutsu:

LEASE
A lease, under Appendix A of IFRS 16, is defined as a contract or part of a contract that conveys the right to use the underlying
asset for a period of time in exchange for consideration.

RIGHT TO CONTROL THE USE OF AN ASSET

A contract conveys the right to control the use of an asset if throughout the period of use, the customer has the right to:
a. Obtain substantially all of the economic benefits from the use of the identified asset.
b. Direct use of the identified asset.

MODELS OF LEASE

A. FINANCE LEASE
Under Appendix A, a finance lease is defined as a lease that transfers substantially all of the risks and rewards incidental to
ownership of an underlying asset. As stated earlier, all leases shall be accounted for by the lessee as finance lease .

IFRS 16, paragraph 22, provides that at the commencement date, a lessee shall recognize a right of use asset and a lease liability.
This means that a lessee is required to initially recognize a right of use asset for the right to use the underlying asset over the
lease term and a lease liability for the obligation to make payments.

Underlying asset - the subject of a lease for which the right to use that asset has been provided by the lessor to the lessee.
Lessee - the entity that obtains the right to use an underlying asset for a period of time in exchange for consideration.
Lessor - the entity that provides the right to use an underlying asset for a period of time in exchange for consideration.

Right of use asset - defined as an asset that represents the right of lessee to use an underlying asset over the lease term in a
finance lease.

INITIAL MEASUREMENT OF RIGHT OF USE ASSET

IFRS 16, paragraph 23, provides that the lessee shall measure the right of use asset at cost at commencement date.

Paragraph 24 provides that the cost of right of use asset comprises:

a. PV of lease payments or the initial measurement of the lease liability.
b. Lease payments made to lessor at or before commencement date, such as lease bonus, less any lease incentives received.
Lease incentives - payments by the lessor to the lessee associated with a lease or the reimbursement or assumption by the
lessor of the costs of the lessee. These should be deducted from the cost of the right of use asset.
c. Initial direct costs incurred by the lessee.
Initial direct costs - are incremental costs of obtaining a lease that would not have been incurred if the lease had not been
obtained.
 Leasehold improvements are separately accounted for and not included as initial direct cost.
d. Estimated cost of dismantling, removing, and restoring the underlying asset for which the lessee has a present obligation.

SUBSEQUENT MEASUREMENT OF RIGHT OF USE ASSET

IFRS 16, paragraph 29, provides that a lessee shall measure the right of use asset applying the cost model. The lessee shall
measure the right of use asset at cost less accumulated depreication and impairment loss. The carrying amount is adjusted for
any remeasurement of the lease liability.

DEPRECIATION OF RIGHT OF USE ASSET

The lessee shall apply normal depreciation policy for right of use asset. IFRS 16, paragraph 32, provides that the lessee shall
depreciate the right of use asset over the useful life of the underlying asset under the following conditions:
a. The lease transfers ownership of the underlying asset to the lessee at the end of the lease term.
b. The lessee is reasonably certain to exercise a purchase option .

If there is no transfer of ownership to the lesse or if the purchase option is not reasonably certain to be exercised, then the
lessee shall depreciate the right of use asset over the shorter between the useful life of the asset and the lease term .

B. OPERATING LEASE
IFRS 16, paragraph 5, provides that a lessee is permitted to make an accounting policy election to apply the operating lease
accounting in two optional exemptions:

a. Short-term lease - a lease that has a term of 12 months or less at the commencement date of the lease (not including a
purchase option).

b. Low value lease - A lessee shall assess the value of an underlying asset based on the value of the asset when it is new
regardless of the age of the asset being leased.

PROBLEM On January 1, 2020, Mixx Company entered into a lease for a new warehouse.

Lease payments are P800,000 a year for 5 years, payable in advance starting January 1, 2020. The warehouse has an estimated
life of 10 years. The entity paid initial direct cost of P100,000 on January 1, 2020.

The realty taxes of P40,000 a year are to be paid by the entity.

The lease provides for neither transfer of title to the lessee upon expiration of the lease term nor a purchase option.

The underlying asset is reverted to the lessor at the expiration of the lease term.

The interest rate implicit in the lease is 10%. The relevant present value factors are:
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
PV of an ordinary annuity of 1 in advance at 10% for 5
4.17
periods

REQUIRED Prepare journal entries on the books of Mixx Company for 2020 and 2021.
 Finance lease liabilities are measured in amortized cost.

Annual lease payment PHP 800,000.00

Multiplied by: PV of an ordinary annuity of 1 in advance
4.17
at 10% for 5 periods
Present value of the right of use asset PHP 3,336,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Beginning PHP 3,336,000.00
Jan 1, 2020 PHP 800,000.00 PHP - PHP 800,000.00 PHP 2,536,000.00
Jan 1, 2021 PHP 800,000.00 PHP 253,600.00 PHP 546,400.00 PHP 1,989,600.00
Jan 1, 2022 PHP 800,000.00 PHP 198,960.00 PHP 601,040.00 PHP 1,388,560.00
Jan 1, 2023 PHP 800,000.00 PHP 138,856.00 PHP 661,144.00 PHP 727,416.00
Jan 1, 2024 PHP 800,000.00 PHP 72,584.00 PHP 727,416.00 PHP -
Jan 1, 2025

2020
Jan 1 Leased warehouse PHP 3,436,000.00
Liability for finance lease PHP 3,336,000.00
Cash PHP 100,000.00

Liability for finance lease PHP 800,000.00

Cash PHP 800,000.00

Dec 31 Interest expense PHP 253,600.00

Liability for finance lease PHP 546,400.00
Realty tax PHP 40,000.00
Cash PHP 40,000.00
Interest payable PHP 800,000.00

Depreciation PHP 687,200.00

Accumulated depreciation - leased warehouse PHP 687,200.00

2021
Jan 1 Interest payable PHP 800,000.00
Cash PHP 800,000.00

Dec 31 Interest expense PHP 198,960.00

Liability for finance lease PHP 601,040.00
Realty tax PHP 40,000.00
Cash PHP 40,000.00
Interest payable PHP 800,000.00
 Depreciation PHP 687,200.00
Accumulated depreciation - leased warehouse PHP 687,200.00

On January 1, 2020, Overland Company closed a lease contract for newly constructed terminals and freight storage facilities.
PROBLEM Although the terminals have a composite life of 10 years, the lease runs for 5 years with a transfer of title to the lessee upon
expiration of the lease.

The annual lease payment is P1,000,000 payable at the end of each year starting December 31, 2020. The lessee must also make
an annual payment of P75,000 for taxes and P125,000 for insurance.

The lessee incurred initial direct costs of P150,000 including P50,000 commission paid to the broker that arranged the lease. As
an incentive to the lessee, the lessor agreed to reimburse the lessee for the commission of P50,000.

The contract was negotiated to assure the lessor a 10% rate of return.

PV of an ordinary annuity of 1 at 10% for 5 periods 3.79

PV of an ordinary annuity of 1 in advance at 10% for 5
4.17
periods

REQUIRED Prepare journal entries on the books of Overland Company for 2020 and 2021 in connection with the finance lease.

Annual lease payment PHP 1,000,000.00

Multiplied by: PV of an ordinary annuity of 1 at 10% for 5
3.79
periods
Present value of the right of use asset PHP 3,790,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 3,790,000.00
Dec 31, 2020 PHP 1,000,000.00 PHP 379,000.00 PHP 621,000.00 PHP 3,169,000.00
Dec 31, 2021 PHP 1,000,000.00 PHP 316,900.00 PHP 683,100.00 PHP 2,485,900.00
Dec 31, 2022 PHP 1,000,000.00 PHP 248,590.00 PHP 751,410.00 PHP 1,734,490.00
Dec 31, 2023 PHP 1,000,000.00 PHP 173,449.00 PHP 826,551.00 PHP 907,939.00
Dec 31, 2024 PHP 1,000,000.00 PHP 92,061.00 PHP 907,939.00 PHP -

2020
Jan 1 Right of use asset (3,790,000 + (150,000 - 50,000)) PHP 3,890,000.00
Prepaid insurance PHP 125,000.00
Liability for finance lease PHP 3,790,000.00
Cash PHP 225,000.00
 Entry includes payment of insurance, initial direct
cost, and the reimbursement of the broker's
commission

Dec 31 Interest expense PHP 379,000.00

Liability for finance lease PHP 621,000.00
Realty tax PHP 75,000.00
Cash PHP 1,075,000.00

Depreciation PHP 389,000.00

Insurance expense PHP 125,000.00
Accumulated depreciation - right of use asset PHP 389,000.00
Prepaid insurance PHP 125,000.00

2021
Jan 1 Prepaid insurance PHP 125,000.00
Cash PHP 125,000.00

Dec 31 Interest expense PHP 316,900.00

Liability for finance lease PHP 683,100.00
Realty tax PHP 75,000.00
Cash PHP 1,075,000.00

Depreciation PHP 389,000.00

Insurance expense PHP 125,000.00
Accumulated depreciation - right of use asset PHP 389,000.00
Prepaid insurance PHP 125,000.00

PROBLEM On January 1, 2020, Veronica Company negotiated a 15-year lease for a building. It has a useful life of 20 years.

Before occupancy, the lessee incurred leasehold improvements of P600,000 with useful life 5 years.

The lessee is required to restore the building upon expiration of the lease. The present value of estimated cost of restoration is
P644,000 discounted at 7%.

Annual payments of P1,000,000 are payable to the lessor on December 31 of each of the 15 years of the lease term. The lease
was negotiated to assure the lessor a 10% rate of return.

PV of an ordinary annuity of 1 at 10% for 15 periods 7.606

PV of an ordinary annuity of 1 in advance at 10% for 15
8.367
periods

REQUIRED Prepare journal entries on the books of Veronica Company for 2020.
 Annual lease payment PHP 1,000,000.00
Multiplied by: PV of an ordinary annuity of 1 at 10% for 5
7.606
periods
Present value of the right of use asset PHP 7,606,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 7,606,000.00
Dec 31, 2020 PHP 1,000,000.00 PHP 760,600.00 PHP 239,400.00 PHP 7,366,600.00
Dec 31, 2021 PHP 1,000,000.00 PHP 736,660.00 PHP 263,340.00 PHP 7,103,260.00
Dec 31, 2022 PHP 1,000,000.00 PHP 710,326.00 PHP 289,674.00 PHP 6,813,586.00
Dec 31, 2023 PHP 1,000,000.00 PHP 681,358.60 PHP 318,641.40 PHP 6,494,944.60
Dec 31, 2024 PHP 1,000,000.00 PHP 650,761.56 PHP 349,238.44 PHP 6,145,706.16
Dec 31, 2025 PHP 1,000,000.00 PHP 615,837.72 PHP 384,162.28 PHP 5,761,543.88
Dec 31, 2026 PHP 1,000,000.00 PHP 577,421.49 PHP 422,578.51 PHP 5,338,965.36
Dec 31, 2027 PHP 1,000,000.00 PHP 535,163.64 PHP 464,836.36 PHP 4,874,129.00
Dec 31, 2028 PHP 1,000,000.00 PHP 488,680.00 PHP 511,320.00 PHP 4,362,809.00
Dec 31, 2029 PHP 1,000,000.00 PHP 437,548.00 PHP 562,452.00 PHP 3,800,357.00
Dec 31, 2030 PHP 1,000,000.00 PHP 381,302.80 PHP 618,697.20 PHP 3,181,659.80
Dec 31, 2031 PHP 1,000,000.00 PHP 319,433.08 PHP 680,566.92 PHP 2,501,092.88
Dec 31, 2032 PHP 1,000,000.00 PHP 251,376.39 PHP 748,623.61 PHP 1,752,469.27
Dec 31, 2033 PHP 1,000,000.00 PHP 176,514.03 PHP 823,485.97 PHP 928,983.29
Dec 31, 2034 PHP 1,000,000.00 PHP 71,016.71 PHP 928,983.29 PHP 0.00

2020
Jan 1 Right of use asset PHP 8,250,000.00
Leasehold improvements PHP 600,000.00
Liability for finance lease PHP 7,606,000.00
Cash PHP 600,000.00
Estimated liability for restoration cost PHP 644,000.00

Dec 31 Interest expense PHP 760,600.00

Liability for finance lease PHP 239,400.00
Cash PHP 1,000,000.00

Depreciation PHP 670,000.00

Accumulated depreciation - right of use asset PHP 550,000.00
Accumulated depreciation - leasehold improvements PHP 120,000.00

PROBLEM On January 1, 2020, Letty Company leased a machine with the following provisions.

Annual lease payment in advance at the beginning of

PHP 1,000,000.00
each year, starting January 1, 2020
 Years of lease term 10 years
Useful life of the machine 15 years
Implicit interest rate in the lease 12%
PV of an ordinary annuity of 1 at 12% for 10 periods 5.650
PV of an ordinary annuity of 1 in advance at 12% for 10
6.328
periods
PV of 1 at 12% for 10 periods 0.322

The entity has an option to purchase the machine on January 1, 2030 by paying P200,000.

At the commencement date, it is reasonably certain that the purchase option will be exercised.

REQUIRED Prepare journal entries on the books of Letty Company for 2020 and 2021.

Present value of lease payment (1,000,000 x 6.328) PHP 6,328,000.00

Present value of purchase option (200,000 x 0.322) PHP 64,400.00
Present value of the right of use asset PHP 6,392,400.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Beginning PHP 6,392,400.00
Jan 1, 2020 PHP 1,000,000.00 PHP - PHP 1,000,000.00 PHP 5,392,400.00
Dec 31, 2020 PHP 1,000,000.00 PHP 647,088.00 PHP 352,912.00 PHP 5,039,488.00
Dec 31, 2021 PHP 1,000,000.00 PHP 604,738.56 PHP 395,261.44 PHP 4,644,226.56
Dec 31, 2022 PHP 1,000,000.00 PHP 557,307.19 PHP 442,692.81 PHP 4,201,533.75
Dec 31, 2023 PHP 1,000,000.00 PHP 504,184.05 PHP 495,815.95 PHP 3,705,717.80
Dec 31, 2024 PHP 1,000,000.00 PHP 444,686.14 PHP 555,313.86 PHP 3,150,403.93
Dec 31, 2025 PHP 1,000,000.00 PHP 378,048.47 PHP 621,951.53 PHP 2,528,452.40
Dec 31, 2026 PHP 1,000,000.00 PHP 303,414.29 PHP 696,585.71 PHP 1,831,866.69
Dec 31, 2027 PHP 1,000,000.00 PHP 219,824.00 PHP 780,176.00 PHP 1,051,690.70
Dec 31, 2028 PHP 1,000,000.00 PHP 1,051,690.70 PHP -
Dec 31, 2029

2020
Jan 1 Right of use asset PHP 6,392,400.00
Liability for finance lease PHP 6,392,400.00

Liability for finance lease PHP 1,000,000.00

Cash PHP 1,000,000.00

Dec 31 Interest expense PHP 647,088.00

Interest payable PHP 647,088.00

Depreciation PHP 426,160.00

Accumulated depreciation PHP 426,160.00
 2021
Jan 1 Interest payable PHP 647,088.00
Liability for finance lease PHP 352,912.00
Cash PHP 1,000,000.00

Dec 31 Interest expense PHP 604,738.56

Interest payable PHP 604,738.56

Depreciation PHP 426,160.00

Accumulated depreciation PHP 426,160.00

On January 1, 2020, Lessee Company entered into a lease with Lessor Company for a new equipment. The lease stipulates that
PROBLEM
annual payments of P1,000,000 will be made for five years starting December 31, 2020.

Lessee Company guaranteed a residual value of P474,060 at the end of the 5-year period. The equipment will revert to the lessor
at the lease expiration.

The implicit rate for the lease is 16% after considering the guaranteed residual value. The economic life of the equipment is 10
years.

Present value of 1 at 16% for 5 periods 0.4761

Present value of an ordinary annuity of 1 at 16% for 5
3.2743
periods

REQUIRED Prepare a schedule of the annual payments showing reduction of liability every year. (Round to the nearest ones place)

Present value of lease payment (1,000,000 x 3.2743) PHP 3,274,300.00

Present value of guaranteed residual value (474,060 x
PHP 225,700.00
0.4761)
Present value of the right of use asset PHP 3,500,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 3,500,000.00
Dec 31, 2020 PHP 1,000,000.00 PHP 560,000.00 PHP 440,000.00 PHP 3,060,000.00
Dec 31, 2021 PHP 1,000,000.00 PHP 489,600.00 PHP 510,400.00 PHP 2,549,600.00
Dec 31, 2022 PHP 1,000,000.00 PHP 407,936.00 PHP 592,064.00 PHP 1,957,536.00
Dec 31, 2023 PHP 1,000,000.00 PHP 313,205.76 PHP 686,794.24 PHP 1,270,741.76
Dec 31, 2024 PHP 1,000,000.00 PHP 203,318.68 PHP 796,681.76 PHP 474,060.00

REQUIRED Prepare journal entries on the books of Lessee Company for 2020 and 2021.
 2020
Jan 1 Right of use asset PHP 3,500,000.00
Liability for finance lease PHP 3,500,000.00

Dec 31 Interest expense PHP 560,000.00

Liability for finance lease PHP 440,000.00
Cash PHP 1,000,000.00

Depreciation PHP 605,188.00

Accumulated depreciation PHP 605,188.00

2021
Dec 31 Interest expense PHP 489,600.00
Liability for finance lease PHP 510,400.00
Cash PHP 1,000,000.00

Depreciation PHP 605,188.00

Accumulated depreciation PHP 605,188.00

Prepare journal entry on December 31, 2024, end of lease term, to record the return of the equipment to the lessor. Assume
REQUIRED
that the fair value of the equipment is equal to the guaranteed residual value.

2024
Dec 31 Interest expense PHP 203,318.00
Liability for finance lease PHP 796,682.00
Cash PHP 1,000,000.00

Depreciation PHP 605,188.00

Accumulated depreciation PHP 605,188.00

Accumulated depreciation PHP 3,025,940.00

Liability for finance lease PHP 474,060.00
Right of use asset PHP 3,500,000.00

Prepare journal entry on December 31, 2024, end of lease term, to record the return of the equipment to the lessor. Assume
REQUIRED
that the fair value of the equipment is only P300,000.

2024
Dec 31 Interest expense PHP 203,318.00
Liability for finance lease PHP 796,682.00
Cash PHP 1,000,000.00

Depreciation PHP 605,188.00

Accumulated depreciation PHP 605,188.00
 Accumulated depreciation PHP 3,025,940.00
Liability for finance lease PHP 474,060.00
Loss on finance lease PHP 174,060.00
Right of use asset PHP 3,500,000.00
Cash PHP 174,060.00

Prepare journal entry on December 31, 2024, end of lease term, to record the return of the equipment to the lessor. Assume
REQUIRED
that the fair value of the equipment is P500,000.

2024
Dec 31 Interest expense PHP 203,318.00
Liability for finance lease PHP 796,682.00
Cash PHP 1,000,000.00

Depreciation PHP 605,188.00

Accumulated depreciation PHP 605,188.00

Accumulated depreciation PHP 3,025,940.00

Liability for finance lease PHP 474,060.00
Right of use asset PHP 3,500,000.00

Macedon Company leased many assets and capitalized most of the leased assets. On December 31, 2020, the entity had the
PROBLEM
following balances in relation to a piece of specialized equipment:

Right of use asset PHP 4,000,000.00

Accumulated depreciation PHP 2,465,000.00
Lease liability PHP 1,300,000.00

Depreciation has been recorded up to the end of the year, and no accrued interest is involved.

On December 31, 2020, the entity decided to purchase the equipment for P1,600,000 and paid cash to complete the purchase.

REQUIRED Prepare journal entry to record the actual purchase of the equipment on the books of Macedon Company.

Right of use asset PHP 4,000,000.00

Less: Accumulated depreciation PHP 2,465,000.00
Carrying amount PHP 1,535,000.00
Cash payment PHP 1,600,000.00
Total consideration PHP 3,135,000.00
Less: Lease liability PHP 1,300,000.00
Cost of the equipment purchased PHP 1,835,000.00

Equipment PHP 1,835,000.00

 Accumulated depreciation PHP 2,465,000.00
Lease liability PHP 1,300,000.00
Right of use asset PHP 4,000,000.00
Cash PHP 1,600,000.00

Dexter Company has maintained a policy of acquiring equipment by leasing and the entity entered into a lease on January 1,
PROBLEM
2020 for an equipment.

The lease stipulates an annual rental payment of P600,000 to be paid every December 31 starting December 31, 2020. The lease
contains neither a transfer of title nor a purchase option.

The equipment has a residual value of P300,000 at the end of the 5-year lease period but is unguaranteed by the lessee. The
economic life of the equipment is 8 years.

The implicit interest rate is 12% after considering the unguaranteed residual value. The present value of an ordinary annuity of 1
at 12% for 5 periods is 3.60.

REQUIRED Prepare journal entries on the books of Dexter Company for 2020.

Annual lease payment PHP 600,000.00

Multiplied by: PV of an ordinary annuity of 1 at 12% for 5
3.60
periods
Present value of the right of use asset PHP 2,160,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 2,160,000.00
Dec 31, 2020 PHP 600,000.00 PHP 259,200.00 PHP 340,800.00 PHP 1,819,200.00
Dec 31, 2021 PHP 600,000.00 PHP 218,304.00 PHP 381,696.00 PHP 1,437,504.00
Dec 31, 2022 PHP 600,000.00 PHP 172,500.48 PHP 427,499.52 PHP 1,010,004.48
Dec 31, 2023 PHP 600,000.00 PHP 121,200.54 PHP 478,799.46 PHP 531,205.02
Dec 31, 2024 PHP 600,000.00 PHP 68,794.98 PHP 531,205.02 PHP (0.00)

2020
Jan 1 Right of use asset PHP 2,160,000.00
Liability for finance lease PHP 2,160,000.00

Dec 31 Interest expense PHP 259,200.00

Liability for finance lease PHP 340,800.00
Cash PHP 600,000.00

Depreciation PHP 432,000.00

Accumulated depreciation PHP 432,000.00
 2021
Dec 31 Interest expense PHP 218,304.00
Liability for finance lease PHP 381,696.00
Cash PHP 600,000.00

Depreciation PHP 432,000.00

Accumulated depreciation PHP 432,000.00

Prepare journal entry on December 31, 2024 to record the return of the equipment to the lessor as required by the contract. The
REQUIRED
fair value of the equipment is P200,000.

2024
Dec 31 Accumulated depreciation PHP 2,160,000.00
Right of use asset PHP 2,160,000.00

A lease is initiated on January 1, 2XX3 for an equipment that reverts back to the lessor at the end of the agreement. Lessee pays
P 100,000 every year beginning December 31, 2XX3. An additional P 2,000 is paid annually at the beginning of the year by the
lessee for insurance. Both parties use income/expense method in recording transactions. The value of the equipment on January
PROBLEM
1, 2XX3 is P 270,000. Lessee guarantees a P 20,306 residual value on December 31, 2XX5 to the lessor. The actual salvage value at
the end of the lease term is P 2,000 and the lessee pays the lessor for the difference. The lessee’s incremental borrowing rate is
10% and the implicit rate is calculated to be 8.76%.

REQUIRED Prepare journal entries on the books of the lessee.

PV of ordinary annuity of 1 for 3 periods at 8.76% 2.54

Multiplied by annual payment PHP 100,000.00
PV of leased equipment PHP 254,216.11 94% FINANCE LEASE

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2023 PHP 270,000.00
Dec 31, 2023 PHP 100,000.00 PHP 23,652.00 PHP 76,348.00 PHP 193,652.00
Dec 31, 2024 PHP 100,000.00 PHP 16,963.92 PHP 83,036.08 PHP 110,615.92
Dec 31, 2025 PHP 100,000.00 PHP 9,690.08 PHP 90,309.92 PHP 20,306.00
PHP 50,306.00 PHP 249,694.00

2023
Jan 1 Leased equipment PHP 270,000.00
Lease liability PHP 270,000.00

Insurance expense PHP 2,000.00

Cash PHP 2,000.00
Dec 31 Interest expense PHP 23,652.00
Lease liability PHP 76,348.00
Cash PHP 100,000.00

Depreciation expense PHP 83,231.33

Accumulated depreciation PHP 83,231.33

2024
Jan 1 Insurance expense PHP 2,000.00
Cash PHP 2,000.00

Dec 31 Interest expense PHP 16,963.92

Lease liability PHP 83,036.08
Cash PHP 100,000.00

Depreciation expense PHP 83,231.33

Accumulated depreciation PHP 83,231.33

2025
Jan 1 Insurance expense PHP 2,000.00
Cash PHP 2,000.00

Dec 31 Interest expense PHP 9,690.08

Lease liability PHP 90,309.92
Cash PHP 100,000.00

Depreciation expense PHP 83,231.33

Accumulated depreciation PHP 83,231.33

Lease liability PHP 20,306.00

Accumulated depreciation PHP 249,694.00
Leased equipment PHP 270,000.00

Loss on finance lease PHP 18,306.00

Cash PHP 18,306.00
 TOPIC 5: Accounting for Leases - Lessee POV
Lecture 02 - Other Accounting Issues on Finance Lease - Lessee POV
Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix

EXTENSION OPTION
PROBLEM Cavalier Company entered into a lease of building on January 1, 2020 with the following information:

Annual rental payable at the end of each year PHP 600,000.00

Lease term 5 years
Useful life of building 20 years
Implicit interest rate 9%
PV of an ordinary annuity of 1 at 9% for 5 periods 3.890

The lease contained an option for the lessee to extend the lease for a further 5 years. At the commencement date, the extension
is not reasonably certain.

After 3 years, on January 1, 2023, the lessee decided to extend the lease for a further 5 years.

New annual rental payable at the end of each year PHP 800,000.00
New implicit interest rate 12%
PV of an ordinary annuity of 1 at 12% for 5 periods 3.605
PV of 1 at 12% for 2 periods 0.797
PV of an ordinary annuity of 1 at 12% for 2 periods 1.690

REQUIRED Prepare journal entries for 2020 and the remeasurement of the liability on 2023.

Before extension
Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 2,334,000.00
Dec 31, 2020 PHP 600,000.00 PHP 210,060.00 PHP 389,940.00 PHP 1,944,060.00
Dec 31, 2021 PHP 600,000.00 PHP 174,965.40 PHP 425,034.60 PHP 1,519,025.40
Dec 31, 2022 PHP 600,000.00 PHP 136,712.29 PHP 463,287.71 PHP 1,055,737.69
Dec 31, 2023 PHP 600,000.00 PHP 95,016.39 PHP 504,983.61 PHP 550,754.08
Dec 31, 2024 PHP 600,000.00 PHP 49,245.93 PHP 550,754.07 PHP 0.00

After extension
Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2023 PHP 3,312,548.00
Dec 31, 2023 PHP 600,000.00 PHP 397,505.76 PHP 202,494.24 PHP 3,110,053.76
Dec 31, 2024 PHP 600,000.00 PHP 373,206.45 PHP 226,793.55 PHP 2,883,260.21
 Dec 31, 2025 PHP 800,000.00 PHP 345,991.23 PHP 454,008.77 PHP 2,429,251.44
Dec 31, 2026 PHP 800,000.00 PHP 291,510.17 PHP 508,489.83 PHP 1,920,761.61
Dec 31, 2027 PHP 800,000.00 PHP 230,491.39 PHP 569,508.61 PHP 1,351,253.00
Dec 31, 2028 PHP 800,000.00 PHP 162,150.36 PHP 637,849.64 PHP 713,403.36
Dec 31, 2029 PHP 800,000.00 PHP 86,596.63 PHP 713,403.37 PHP (0.00)

Present value of the remaining 2 years lease term before

PHP 1,014,000.00
extension (600,000 x 1.690)
Present value of the extended lease term
Present value of the new 5 year term (800,000 x 3.605)
PHP 2,884,000.00
starting Jan 1, 2025
Multiplied by PV of 1 at 12% for 2 periods 0.797 PHP 2,298,548.00
Total present value - January 1, 2023 PHP 3,312,548.00
Less: Present value on December 31, 2022 PHP (1,055,737.69)
Increase in finance lease liability PHP 2,256,810.31

2020
Jan 1 Right of use asset PHP 2,334,000.00
Liability for finance lease PHP 2,334,000.00

Dec 31 Interest expense PHP 210,060.00

Liability for finance lease PHP 389,940.00
Cash PHP 600,000.00

Depreciation PHP 466,800.00

Accumulated depreciation PHP 466,800.00

2023
Jan 1 Right of use asset PHP 2,256,810.31
Liability for finance lease PHP 2,256,810.31

Dec 31 Interest expense PHP 397,505.76

Liability for finance lease PHP 202,494.24
Cash PHP 600,000.00

Depreciation ((2,334,000 - (466,800 x 3) + 2,256,810.31) /

PHP 455,772.90
(10-3)
Accumulated depreciation PHP 455,772.90

VARIABLE PAYMENTS
PROBLEM On January 1, 2020, Gold Company entered into a 5-year lease of a floor of a building with the following terms:
 Annual rental for the first two years payable at the end of each year PHP 200,000.00
Annual rental for the next three years payable at the end of each year PHP 300,000.00
Initial direct cost paid by lessee PHP 100,000.00
Leasehold improvement PHP 250,000.00
Present value of restoration cost required by contract PHP 50,000.00
Useful life of building 20 years
Implicit interest rate 8%
Discount rate for the restoration cost 5%
PV of an ordinary annuity of 1 at 8% for two periods 1.783
PV of an ordinary annuity of 1 at 8% for three periods 2.577
PV of 1 at 8% for two periods 0.857

REQUIRED Prepare journal entries for 2020 and the lease payment on December 31, 2022.

Present value of annual rentals for the first two years

Present value as of January 1, 2020 (200,000 x 1.783) PHP 356,600.00
Present value of annual rentals for the next three years
Present value as of January 1, 2022 (300,000 x 2.577) PHP 773,100.00
Multiply by PV of 1 at 8% for two periods 0.857 PHP 662,546.70
Lease liability - January 1, 2020 PHP 1,019,146.70

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 1,019,146.70
Dec 31, 2020 PHP 200,000.00 PHP 81,531.74 PHP 118,468.26 PHP 900,678.44
Dec 31, 2021 PHP 200,000.00 PHP 72,054.27 PHP 127,945.73 PHP 772,732.71
Dec 31, 2022 PHP 300,000.00 PHP 61,818.62 PHP 238,181.38 PHP 534,551.33
Dec 31, 2023 PHP 300,000.00 PHP 42,764.11 PHP 257,235.89 PHP 277,315.43
Dec 31, 2024 PHP 300,000.00 PHP 22,684.56 PHP 277,315.44 PHP (0.00)

2020
Jan 1 Right of use asset PHP 1,169,146.70
Leasehold improvement PHP 250,000.00
Lease liability PHP 1,019,146.70
Cash PHP 400,000.00
Entry includes the direct costs, leasehold
improvement, and the restoration cost

Dec 31 Interest expense PHP 81,531.74

Lease liability PHP 118,468.26
Cash PHP 200,000.00

Depreciation PHP 283,829.34

Accumulated depreciation - right of use asset PHP 233,829.34
 Accumulated depreciation - leasehold improvement PHP 50,000.00

2022
Dec 31 Interest expense PHP 61,818.62
Lease liability PHP 238,181.38
Cash PHP 300,000.00

Depreciation PHP 283,829.34

Accumulated depreciation - right of use asset PHP 233,829.34
Accumulated depreciation - leasehold improvement PHP 50,000.00

LEASE MODIFICATION - INCREASE IN SCOPE, TREATED AS NEW SEPARATE LEASE

PROBLEM On January 1, 2020, Pinky Company entered into a lease agreement with the following information:

Floor space 1,500 square meters

Annual rental payable at the end of each year PHP 200,000.00
Implicit rate on the lease 12%
Lease term 12 years
Present value of an ordinary annuity of 1 for 12% for 12 periods 6.1944

On January 1, 2022, Pinky Company and the lessor agreed to amend the original terms of the lease with the following
information:

Floor space 2,000 square meters

Increase in rental payable at the end of each year PHP 300,000.00
Implicit rate on the lease 10%
Present value of an ordinary annuity of 1 for 10% at 9 periods 5.7590

The increase in rental for the additional 2,000 square meters is equivalent to the current market rent.

REQUIRED Prepare journal entries for 2020 and 2022 pertaining to the lease modification.

2020
Jan 1 Right of use asset (200,000 x 6.1944) PHP 1,238,880.00
Lease liability PHP 1,238,880.00

Dec 31 Interest expense (1,238,880 x 12%) PHP 148,665.60

Lease liability (200,000 - 90,979.20) PHP 51,334.40
Cash PHP 200,000.00

Depreciation PHP 103,240.00

Accumulated depreciation - 1,500 square meters PHP 103,240.00
 On January 1, 2022, the entity shall account for the modification as a separate lease. No adjustment is made to the 1,500 square
meters lease because of the modification.

2023
Jan 1 Right of use asset (300,000 x 5.7590) PHP 1,727,700.00
Lease liability PHP 1,727,700.00

Dec 31 Interest expense (1,727,700 x 10%) PHP 172,770.00

Lease liability PHP 127,230.00
Cash PHP 300,000.00

Depreciation PHP 191,966.67

Accumulated depreciation - 1,500 square meters PHP 191,966.67

LEASE MODIFICATION - EXTENSION OF LEASE TERM BUT WITH THE SAME ANNUAL RENTAL PAYMENT
PROBLEM On January 1, 2020, Justine Company leased an office building with the following terms:

Annual rental payable at the end of each year PHP 300,000.00

Implicit rate on the lease 10%
Lease term and useful life of the building 4 years
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17

On January 1, 2022, the entity and the lessor agreed to amend the original terms of the lease with the following information:

Annual rental payable at the end of each year PHP 300,000.00

Implicit rate on the lease 12%
Extension of lease term 3 years
Present value of an ordinary annuity of 1 at 10% for 5 periods 3.605

REQUIRED Prepare journal entries for 2020 and 2022 pertaining to the lease modification.

Before extension
Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 (300,000 x 3.17) PHP 951,000.00
Dec 31, 2020 PHP 300,000.00 PHP 95,100.00 PHP 204,900.00 PHP 746,100.00
Dec 31, 2021 PHP 300,000.00 PHP 74,610.00 PHP 225,390.00 PHP 520,710.00
Dec 31, 2022 PHP 300,000.00 PHP 52,071.00 PHP 247,929.00 PHP 272,781.00
Dec 31, 2023 PHP 300,000.00 PHP 27,219.00 PHP 272,781.00 PHP -

After extension
Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
 Jan 1, 2022 (300,000 x 3.605) PHP 1,081,500.00
Dec 31, 2022 PHP 300,000.00 PHP 129,780.00 PHP 170,220.00 PHP 911,280.00
Dec 31, 2023 PHP 300,000.00 PHP 109,353.60 PHP 190,646.40 PHP 720,633.60
Dec 31, 2024 PHP 300,000.00 PHP 86,476.03 PHP 213,523.97 PHP 507,109.63
Dec 31, 2025 PHP 300,000.00 PHP 60,853.16 PHP 239,146.84 PHP 267,962.79
Dec 31, 2026 PHP 300,000.00 PHP 32,037.21 PHP 267,962.79 PHP 0.00

2020
Jan 1 Right of use asset PHP 951,000.00
Lease liability PHP 951,000.00

Dec 31 Interest expense PHP 95,100.00

Lease liability PHP 204,900.00
Cash PHP 300,000.00

Depreciation PHP 237,750.00

Accumulated depreciation PHP 237,750.00

2022
Jan 1 Right of use asset (1,081,500 - 520,710) PHP 560,790.00
Lease liability PHP 560,790.00

Dec 31 Interest expense PHP 129,780.00

Lease liability PHP 170,220.00
Cash PHP 300,000.00

Depreciation ((951,000 - (237,750 x 2 years) + 560,790) /

PHP 207,258.00
(4 years + 3 years -2 years already used))
Accumulated depreciation PHP 207,258.00

LEASE MODIFICATION - DECREASE OF SCOPE OF THE LEASE

PROBLEM On January 1, 2020, Madelle Company entered into a lease for floor space with the following information:

Floor space 5,000 square meters

Annual rental payable at the end of each year PHP 200,000.00
Implicit rate on the lease 10%
Lease term 5 years
Present value of an ordinary annuity of 1 at 10% for 5 periods 3.7908

On January 1, 2022, Madelle Company and the lessor agreed to amend the original terms of the lease with the following
information:

Floor space 3,750 square meters

 Annual rental payable at the end of each year PHP 150,000.00
Implicit rate on the lease 8%
Present value of an ordinary annuity of 1 for 8% at 3 periods 2.5771

The increase in rental for the additional 2,000 square meters is equivalent to the current market rent.

REQUIRED Prepare journal entries for 2020 and 2022 pertaining to the lease modification.

Before decrease of scope

Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 (200,000 x 3.7908) PHP 758,160.00
Dec 31, 2020 PHP 200,000.00 PHP 75,816.00 PHP 124,184.00 PHP 633,976.00
Dec 31, 2021 PHP 200,000.00 PHP 63,397.60 PHP 136,602.40 PHP 497,373.60
Dec 31, 2022 PHP 200,000.00 PHP 49,737.36 PHP 150,262.64 PHP 347,110.96
Dec 31, 2023 PHP 200,000.00 PHP 34,652.00 PHP 165,348.00 PHP 181,762.96
Dec 31, 2024 PHP 200,000.00 PHP 18,237.05 PHP 181,762.95 PHP 0.00

After decrease of scope

Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2022 (150,000 x 2.5771) PHP 386,565.00
Dec 31, 2022 PHP 150,000.00 PHP 30,925.20 PHP 119,074.80 PHP 267,490.20
Dec 31, 2023 PHP 150,000.00 PHP 21,399.22 PHP 128,600.78 PHP 138,889.42
Dec 31, 2024 PHP 150,000.00 PHP 11,110.58 PHP 138,889.42 PHP (0.00)

Since the floor space was reduced to 3,750 square meters, then the scope of the lease also reduced by 25% ( 1 - (3,750/5,000)).

Decrease in carrying amount of lease liability (497,373.60 x 25%) PHP 124,343.40

Less: Decrease in carrying amount of right of use asset
Original cost of the right of use asset PHP 758,160.00
Less: Accumulated depreciation for consumed years PHP 303,264.00
Multiplied by: Decrease rate 25% PHP 113,724.00
Termination gain PHP 10,619.40

Present value of lease payments on January 1, 2022 as a

PHP 386,565.00
result of the decrease in scope (150,000 x 2.5771)
Less: Remaining old lease liability (497,373.60 x 75%) PHP 373,030.20
Increase in lease liability PHP 13,534.80

2020
Jan 1 Right of use asset PHP 758,160.00
 Lease liability PHP 758,160.00

Dec 31 Interest expense PHP 75,816.00

Lease liability PHP 124,184.00
Cash PHP 200,000.00

Depreciation PHP 151,632.00

Accumulated depreciation PHP 151,632.00

2022
Jan 1 Lease liability PHP 124,343.40
Accumulated depreciation PHP 75,816.00
Right of use asset PHP 189,540.00
Termination gain PHP 10,619.40

Right of use asset PHP 13,534.80

Lease liability PHP 13,534.80

Dec 31 Interest expense PHP 30,925.20

Lease liability PHP 119,074.80
Cash PHP 150,000.00

Depreciation PHP 118,235.60

Accumulated depreciation PHP 118,235.60

LEASE MODIFICATION - CHANGE IN RENTAL

PROBLEM On January 1, 2020, Yuri Company leased a machine with the following information:

Annual rental payable at the end of each year PHP 100,000.00

Implicit rate on the lease 6%
Lease term 5 years
Present value of an ordinary annuity of 1 at 10% for 5 periods 4.2124

On January 1, 2022, Yuri Company and the lessor agreed to amend the original terms of the lease by reducing the annual lease
payment by P20,000 and increasing the implicit rate to 8%.

The present value of an ordinary annuity of 1 at 8% for 3 periods is 2.5771.

REQUIRED Prepare journal entries for 2020 and 2022 pertaining to the lease modification.

Before change in rental

Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
 Jan 1, 2020 (100,000 x 4.2124) PHP 421,240.00
Dec 31, 2020 PHP 100,000.00 PHP 25,274.40 PHP 74,725.60 PHP 346,514.40
Dec 31, 2021 PHP 100,000.00 PHP 20,790.86 PHP 79,209.14 PHP 267,305.26
Dec 31, 2022 PHP 100,000.00 PHP 16,038.32 PHP 83,961.68 PHP 183,343.58
Dec 31, 2023 PHP 100,000.00 PHP 11,000.61 PHP 88,999.39 PHP 94,344.19
Dec 31, 2024 PHP 100,000.00 PHP 5,655.80 PHP 94,344.20 PHP (0.00)

After change in rental

Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2022 (80,000 x 2.5771) PHP 206,168.00
Dec 31, 2022 PHP 80,000.00 PHP 16,493.44 PHP 63,506.56 PHP 142,661.44
Dec 31, 2023 PHP 80,000.00 PHP 11,412.92 PHP 68,587.08 PHP 74,074.36
Dec 31, 2024 PHP 80,000.00 PHP 5,925.65 PHP 74,074.35 PHP 0.00

2020
Jan 1 Right of use asset PHP 421,240.00
Lease liability PHP 421,240.00

Dec 31 Interest expense PHP 25,274.40

Lease liability PHP 74,725.60
Cash PHP 100,000.00

Depreciation PHP 84,248.00

Accumulated depreciation PHP 84,248.00

2022
Jan 1 Lease liability PHP 61,137.26
Right of use asset PHP 61,137.26

Dec 31 Interest expense PHP 16,493.44

Lease liability PHP 63,506.56
Cash PHP 80,000.00

Depreciation PHP 63,868.91

Accumulated depreciation PHP 63,868.91
 TOPIC 6: Accounting for Leases - Lessor POV
Lecture 01 - Direct Finance Lease - Lessor POV
Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix

Iceberg Company is in the business of leasing new and sophisticated equipment. At the beginning of current year, an equipment
PROBLEM
was delivered to a lessee under a direct financing lease with the following provisions:

Cost of equipment PHP 3,390,000.00

Annual rental payable at the end of the year PHP 600,000.00
Useful life and lease term 10 years
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for 10
5.650
periods
Present value of an ordinary annuity of 1 at 11% for 10
5.889
periods

The entity incurred and paid initial direct costs at P143,400 in negotiating and arranging the lease. The equipment will revert to
Iceberg Company by the end of the lease.

REQUIRED Compute the total financial revenue to be recognized over the lease term and determine the new implicit interest rate.

Gross rentals (600,000 x 10) PHP 6,000,000.00

Less: Net investment in the lease
Cost of right of use asset PHP 3,390,000.00
Initial direct cost PHP 143,400.00 PHP 3,533,400.00
Unearned interest income (total financial revenue) PHP 2,466,600.00

Since there is an initial direct cost in the net investment in the lease, the implicit rate would decrease. Thus, the 12% implicit
interest rate cannot be used anymore.

The new implicit rate is computed by trial and error or through the interpolation process.

The procedure is determine the present value of gross rentals that would equate the net investment in the lease using a particular
rate.

Using the given present value of an ordinary annuity of 1 at 11% for 10 periods,
Annual rental PHP 600,000.00
Multiplied by given PV 5.889
Net investment in the lease PHP 3,533,400.00
 Therefore, the new implicit rate is 11% since the total lease liability matches the net investment in lease.

Other method is by simply dividing the net investment in the lease by the annual rental.
Net investment in the lease PHP 3,533,400.00
Divided by: annual rental PHP 600,000.00
Present value of ordinary annuity of 1 5.889

If we are going to be searching this value on the PV of ordinary annuity of 1 table, we can see that this value is attributable to the
rate of 11% for 10 periods.

Therefore, the total financial revenue is P2,466,600 and the new implicit rate is 11%.

REQUIRED Prepare the journal entries for the current year.

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2020 PHP 3,533,400.00
Dec 31, 2020 PHP 600,000.00 PHP 388,674.00 PHP 211,326.00 PHP 3,322,074.00
Dec 31, 2021 PHP 600,000.00 PHP 365,428.14 PHP 234,571.86 PHP 3,087,502.14
Dec 31, 2022 PHP 600,000.00 PHP 339,625.24 PHP 260,374.76 PHP 2,827,127.38
Dec 31, 2023 PHP 600,000.00 PHP 310,984.01 PHP 289,015.99 PHP 2,538,111.39
Dec 31, 2024 PHP 600,000.00 PHP 279,192.25 PHP 320,807.75 PHP 2,217,303.64
Dec 31, 2025 PHP 600,000.00 PHP 243,903.40 PHP 356,096.60 PHP 1,861,207.04
Dec 31, 2026 PHP 600,000.00 PHP 204,732.77 PHP 395,267.23 PHP 1,465,939.81
Dec 31, 2027 PHP 600,000.00 PHP 161,253.38 PHP 438,746.62 PHP 1,027,193.19
Dec 31, 2028 PHP 600,000.00 PHP 112,991.25 PHP 487,008.75 PHP 540,184.44
Dec 31, 2029 PHP 600,000.00 PHP 59,815.56 PHP 540,184.44 PHP 0.00
PHP 2,466,600.00

2020
Jan 1 Equipment PHP 143,400.00
Cash PHP 143,400.00

Lease receivable PHP 6,000,000.00

Equipment PHP 3,533,400.00
Unearned interest income PHP 2,466,600.00

Dec 31 Cash PHP 600,000.00

Unearned interest income PHP 388,674.00
Interest income PHP 388,674.00
 Lease receivable PHP 600,000.00

Jolo Company is in the business of leasing new sophisticated equipment. As a lessor, the company expects a 12% return on the
PROBLEM
net investment. All leases are classified as direct financing.

At the end of the lease term, the equipment will revert to Jolo Company.

On January 1, 2020, an equipment is leased to a lessee with the following information.

Cost of equipment to Jolo PHP 5,250,000.00

Residual value - unguaranteed PHP 600,000.00
Annual rental payable in advance PHP 900,000.00
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2020

REQUIRED Prepare the journal entries for 2020, 2021, 2027, and 2028's return of the equipment from the lessee.

Since the equipment reverts to the lessor at the end of the lease term, the residual value is recognized, whether guaranteed or
not.

Gross rentals (900,000 x 8) PHP 7,200,000.00

Add: Residual value PHP 600,000.00
Gross investment PHP 7,800,000.00
Less: Cost of equipment PHP 5,250,000.00
Unearned interest income PHP 2,550,000.00

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Beginning PHP 5,250,000.00
Jan 1, 2020 PHP 900,000.00 PHP 900,000.00 PHP 4,350,000.00
Dec 31, 2020 PHP 900,000.00 PHP 522,000.00 PHP 378,000.00 PHP 3,972,000.00
Dec 31, 2021 PHP 900,000.00 PHP 476,640.00 PHP 423,360.00 PHP 3,548,640.00
Dec 31, 2022 PHP 900,000.00 PHP 425,836.80 PHP 474,163.20 PHP 3,074,476.80
Dec 31, 2023 PHP 900,000.00 PHP 368,937.22 PHP 531,062.78 PHP 2,543,414.02
Dec 31, 2024 PHP 900,000.00 PHP 305,209.68 PHP 594,790.32 PHP 1,948,623.70
Dec 31, 2025 PHP 900,000.00 PHP 233,834.84 PHP 666,165.16 PHP 1,282,458.54
Dec 31, 2026 PHP 900,000.00 PHP 153,895.03 PHP 746,104.97 PHP 536,353.57
Dec 31, 2027 PHP 63,646.44 PHP 600,000.00
PHP 2,550,000.00
 2020
Jan 1 Lease receivable PHP 7,800,000.00
Equipment PHP 5,250,000.00
Unearned interest income PHP 2,550,000.00

Cash PHP 900,000.00

Lease receivable PHP 900,000.00

Dec 31 Unearned interest income PHP 522,000.00

Interest income PHP 522,000.00

2021
Jan 1 Cash PHP 900,000.00
Lease receivable PHP 900,000.00

Dec 31 Unearned interest income PHP 476,640.00

Interest income PHP 476,640.00

2027
Jan 1 Cash PHP 900,000.00
Lease receivable PHP 900,000.00

Dec 31 Unearned interest income PHP 63,646.44

Interest income PHP 63,646.44

2028
Jan 1 Equipment PHP 600,000.00
Lease receivable PHP 600,000.00

REQUIRED Prepare the journal entry for 2028 for the return of the leased equipment from the lessee if its fair value is P500,000.

2028
Jan 1 Equipment PHP 500,000.00
Loss on finance lease PHP 100,000.00
Lease receivable PHP 600,000.00

PROBLEM Macedonia Company entered into a leasing business and acquired a specialized machine for P3,000,000 cash.
 On January 1, 2020 the entity leased the machine to another entity for a period of 6 years, after which the machine is returned to
Macedonia Company for disposition. The expected unguaranteed residual value of the machine is P200,000.

The lease terms are arranged so that a return of 12% is earned by Macedonia Company.

The first lease payment is made on January 1, 2020 and subsequent payments are made each December 31. The relevant present
value factors are:

PV of ordinary annuity of 1 in advance at 12% for 6 periods 4.6048

PV of 1 at 12% for 6 periods 0.5066

REQUIRED Prepare journal entries on 2020 and 2025.

The annual payment of the lessee is not given. Therefore, to compute:

Cost of machine PHP 3,000,000.00

Less: PV of the residual value (200,000 x 0.5066) PHP 101,320.00
Net investment to be recovered from rental PHP 2,898,680.00
Divided by: PV of the ordinary annuity of 1 in advance 4.6048
Annual rental payment PHP 629,490.97

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Beginning PHP 3,000,000.00
Jan 1, 2020 PHP 629,490.97 PHP 629,490.97 PHP 2,370,509.03
Dec 31, 2020 PHP 629,490.97 PHP 284,461.08 PHP 345,029.88 PHP 2,025,479.15
Dec 31, 2021 PHP 629,490.97 PHP 243,057.50 PHP 386,433.47 PHP 1,639,045.68
Dec 31, 2022 PHP 629,490.97 PHP 196,685.48 PHP 432,805.48 PHP 1,206,240.20
Dec 31, 2023 PHP 629,490.97 PHP 144,748.82 PHP 484,742.14 PHP 721,498.06
Dec 31, 2024 PHP 629,490.97 PHP 86,579.77 PHP 542,911.20 PHP 178,586.86
Dec 31, 2025 PHP 21,413.14 PHP 200,000.00
PHP 976,945.80

2020
Jan 1 Lease receivable PHP 3,976,945.80
Equipment PHP 3,000,000.00
Unearned interest income PHP 976,945.80

Cash PHP 629,490.97

Lease receivable PHP 629,490.97
 Dec 31 Cash PHP 629,490.97
Unearned interest income PHP 284,461.08
Interest income PHP 284,461.08
Lease receivable PHP 629,490.97

2025
Dec 31 Unearned interest income PHP 21,413.14
Interest income PHP 21,413.14

Equipment PHP 200,000.00

Lease receivable PHP 200,000.00

Alpha Company buys equipment for leasing to various manufacturing entities. On January 1, 2020, Alpha Company leased an
PROBLEM
equipment to Beta Company.

The cost of the equipment to Alpha Company was P1,377,480 which approximates the fair value on the lease date. The expected
economic life of the equipment is also 4 years.

The lease payments stipulated in the lease are P440,000 per year in advance for a 4-year period of the lease. The payments
include P40,000 executory costs per year.

The title to the equipment remains in the hands of Alpha Company at the end of the lease term, although only nominal residual
value is expected at that time.

The implicit rate in the lease is 11% and the fiscal year of Alpha Company ends on December 31 each year.

REQUIRED Prepare journal entries for years 2020 to 2023.

Present value (d)

Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Beginning PHP 1,377,480.00
Jan 1, 2020 PHP 400,000.00 PHP 400,000.00 PHP 977,480.00
Dec 31, 2020 PHP 400,000.00 PHP 107,522.80 PHP 292,477.20 PHP 685,002.80
Dec 31, 2021 PHP 400,000.00 PHP 75,350.31 PHP 324,649.69 PHP 360,353.11
Dec 31, 2022 PHP 400,000.00 PHP 39,646.89 PHP 360,353.11 PHP (0.00)
PHP 222,520.00
2020
Jan 1 Lease receivable PHP 1,600,000.00
Equipment PHP 1,377,480.00
 Unearned interest income PHP 222,520.00

Cash PHP 400,000.00

Lease receivable PHP 400,000.00

Dec 31 Cash PHP 440,000.00

Unearned interest income PHP 107,522.80
Interest income PHP 107,522.80
Lease receivable PHP 400,000.00
Lease income PHP 40,000.00

2021
Dec 31 Cash PHP 440,000.00
Unearned interest income PHP 75,350.31
Interest income PHP 75,350.31
Lease receivable PHP 400,000.00
Lease income PHP 40,000.00

2022
Dec 31 Cash PHP 440,000.00
Unearned interest income PHP 39,646.89
Interest income PHP 39,646.89
Lease receivable PHP 400,000.00
Lease income PHP 40,000.00

2023
Jan 1 No entry on the return of the equipment since it has no more residual value.

A lease is initiated on January 1, 2XX3 for an equipment that reverts back to the lessor at the end of the agreement. Lessee pays P
100,000 every year beginning December 31, 2XX3. An additional P 2,000 is paid annually at the beginning of the year by the lessee
for insurance. Both parties use income/expense method in recording transactions. The value of the equipment on January 1, 2XX3
PROBLEM
is P 270,000. Lessee guarantees a P 20,306 residual value on December 31, 2XX5 to the lessor. The actual salvage value at the end
of the lease term is P 2,000 and the lessee pays the lessor for the difference. The lessee’s incremental borrowing rate is 10% and
the implicit rate is calculated to be 8.76%.

REQUIRED Prepare journal entries on the books of the lessor.

PV of ordinary annuity of 1 for 3 periods at 8.76% 2.54

Multiplied by annual payment PHP 100,000.00
PHP 254,216.11 94% FINANCE LEASE
 Present value (d)
Date Fixed payment (a) Interest (b) (d x %) Principal (c) (a - b)
(preceding d - c)
Jan 1, 2023 PHP 270,000.00
Dec 31, 2023 PHP 100,000.00 PHP 23,652.00 PHP 76,348.00 PHP 193,652.00
Dec 31, 2024 PHP 100,000.00 PHP 16,963.92 PHP 83,036.08 PHP 110,615.92
Dec 31, 2025 PHP 100,000.00 PHP 9,690.08 PHP 90,309.92 PHP 20,306.00
PHP 50,306.00 PHP 249,694.00

2023
Jan 1 Lease receivable PHP 270,000.00
Equipment PHP 270,000.00

Dec 31 Cash PHP 100,000.00

Interest income PHP 23,652.00
Lease receivable PHP 76,348.00

2024
Dec 31 Cash PHP 100,000.00
Interest income PHP 16,963.92
Lease receivable PHP 83,036.08

2025
Dec 31 Cash PHP 100,000.00
Interest income PHP 9,690.08
Lease receivable PHP 90,309.92

Equipment PHP 2,000.00

Lease receivable PHP 2,000.00

Cash PHP 18,306.00

Lease receivable PHP 18,306.00