JMJ

Marist Brothers
Notre Dame of Dadiangas University
Accountancy Program

Intermediate Accounting 2 May 7, 2021

Lease Ms. DM. Javellana, CPA, MBA

A. On January 1, 2019, Generous Inc. leased two automobiles for executive use. The lease
requires Generous to make five annual payments of P260,000 beginning January 1,
2019. At the end of the lease term, December 31, 2023, Generous guarantees that the
residual value of the automobiles will total P200,000. The property reverts to the lessor
at the end of the lease term. The estimated useful life of the automobiles is 6 years and
Generous uses straight line method for all of its assets. Generous incremental
borrowing rate is 10%. The interest rate implicit in the lease, which is known to
Generous, Inc., is 9%.

Required:
a. At what amount should Generous, Inc. record the right-of-use equipment on January
1, 2019?
Annual lease payment 260,000
1=PVAF (9%, 4years) 4.2397
1,102,327
Less:
Guaranteed residual value 200,000
PVIF (9%, 5 years) 0.64993
129,986
Fair Value of Asset 972,341

b. At what amount should the lease liability be recognized at January 1, 2019, after
making the first payment of P260,000 to the lessor?
Fair value of the asset 972,341
Installment amount 260,000
Lease liability recognized at Jan.01, 2019 712,341
c. Prepare an amortization table for the five-year term of the lease.
YEAR INSTALLMENT TOWARDS TOWARDS CLOSING
INTEREST PRINCIPLE PRINCIPLE
972,341
2019 260,000 - 260,000 712,341
2020 260,000 64,111 195,889 516,452
2021 260,000 46,481 213,519 302,932
2022 260,000 27,264 232,736 70,196
2023 260,000 6,318 253,682 183,486
2024 200,000 16,514 183,486 -
TOTAL 1,100,000 127,659 972,341

d. Prepare journal entries in the books of Generous, Inc. for years 2019 and 2020 to
record all transactions relating to the lease.
2019
Jan.01 Right-to-use equipment 972,341
Cash 260,000
Lease payable 712,341
To record the transaction at the inception of lease

Page 1 of 5
 Dec.31 Interest on lease 64,111
Lease payable 64,111
To record the interest expense

Right-to-use amortization expenses 194,468

Right-to-use equipment 194,468
To record amortization expenses for the year
2020
Jan.01 lease payable 260,000
Cash 260,000
To record the payment of lease rentals
Dec.31 Interest on lease 46,481
Lease payable 46,481
To record the interest expense

Right-to-use amortization expenses 194,468

Right-to-use equipment 194,468
The amortization expenses for the year
e. Prepare the journal entry at the end of the lease term to record the transfer of the
leased automobiles to the lessor.
Dec 31 Lease Payable 16,514
Interest on lease 16,514
To record the interest income

Right-to-use amortization expense 194,468

The right-to-use equipment 194,468
To record amortization expense for the year

Cash 150,000
Loss on transfer 50,000
Lease payable 200,000
To record transfer of asset to the lessor
f. Assuming that the residual value of the two automobiles amounted to P150,000 at
the end of the lease term, prepare the journal entry to record the transfer of the
leased automobiles to the lessor.
Dec.31 Loss on finance lease 50,000
Accumulated depreciation 861,359
Interest expense 16,514
Lease liability 194,468
ROU-automobiles 972,341
Cash 150,000

B. Jackie Chan Leasing signs an equipment lease contract with Chris Tucker on January 1,
2015. The following information pertains to the lease.

Lease term 5 years

Equipment’s useful life 6 years
Bargain option price P 40,000
Implicit rate, known by Chris Tucker 10%
Fair value of the asset at January 1, 2015 P600,000
Estimated recoverable value at the end of 5 years P 80,000
Estimated residual value at the end of 6 years P 20,000

Page 2 of 5
The cost of the asset to Jackie Chan Leasing is P600,000. Chris Tucker uses the sum-
of-years-digit method to depreciate this type of equipment. Annual lease payments are
made at the beginning of each year, starting January 1, 2015.
Fair value of asset 600,000
PV of bargain purchase option (40,000 x .6209) 24,836
PV of periodic payment 575,164
PV factor (annuity due for 5 years at 10%) 4.1699
Periodic payment P137, 932

Date Periodic interest Reduction in Present value

payment principal
01/01/2015 137,932 - 600,000
01/01/2015 137,932 - 137,932 462,068
01/01/2016 137,932 46207 91,725 370,343
01/01/2017 137,932 37,034 100,898 269,445

Required:
a. Give entries in the books of Chris Tucker for years 2015 and 2016 as a result of the
lease contract.
2015
Jan.01 leased equipment 600,000
Financed lease liability 600,000
Financed lease liability 137,932
Cash 137,932
Dec.31 interest expense 46,207
Interest payable 46,207
Depreciation expense-lease equipment 165,714
Accumulated depreciation-leased equipment 165,714
2016
Jan.01 financed lease liability 91,725
Interest payable 46,207
Cash 137,932
Dec.31 interest expense 37,034
Interest payable 37,034
Depreciation expense-leased equipment 138,095
Accumulated depreciation-leased equipment 138,095

b. Give the entries in the books of Jackie Chan Leasing for years 2015 and 2016.
2015
Jan.01 financed lease receivable 729,660
Equipment for lease 600,000
Discount on finance lease receivables 129,660
Cash 137,932
Financed lease receivable 137,932
Dec.31 discount on finance lease receivable 46,207
Interest revenue 46,207
2016
Jan.01 cash 137,932
Financed lease receivable 137,932
Dec.31 discount on financed lease receivable 37,034
Interest revenue 37,034

Page 3 of 5
C. On April 1, 2015, Ben Ten Company leased equipment to Ironman Corporation. The
following information pertains to this lease:

 The term of non-cancelable lease is 8 years with no renewal option.

 The annual payment is P80,000; first payment is due April 1, 2015.
 Estimated useful life of the equipment is 10 years.
 The cash price of the equipment is P359,730 at April 1, 2015, which is the same as
the carrying amount of the asset in the books of Ben Ten.
 The residual value at the end of the lease term, which is guaranteed by Ironman, is
P80,000.

Both Ben Ten and Ironman use the calendar year as their reporting period.

Required:
a. What type of lease is this from the standpoint of Ben Ten?
Direct finance lease because the cash price is equal to the carrying value of the
asset.
b. What is the implicit interest rate on this lease?
Trial and error approach:
359,730=80,000 x PV of annuity due of 1 @23.5%, n=9
359,730=357,520 closest
The implicit interest rate is 23.5%
c. Prepare the entries in the books of Ironman for the years 2015 and 2016.
Date Annual Interest Reduction in Present value
payment expense capital
04/01/2015 - 359,730
04/01/2015 80,000 - 80,000 279,730
04/01/2016 80,000 65,737 14,263 265,467
04/01/2017 80,000 62,385 17,615 247,852

2015
April01 ROU-equipment 359,730
Financed lease liability 359,730
Financed lease liability 80,000
Cash 80,000
Dec.31 interest expense 49,303
Interest payable 49,303
(65,737 x 9/12=49,303)
Depreciation expense 26,225
Accumulated depreciation 26,225
(359,730-80,000)/8=34,966 x 9/12=26,225
d. Prepare the entries in the books of Ben Ten for the years 2015 and 2016.
2015
April01 financed lease receivable 720,000
Equipment for lease 359,730
Discount on finance lease receivable 180,270
Cash 80,000
Finance lease receivable 80,000
Dec.31 discount on finance lease receivable 49,303
Interest revenue 49,303
2016

Page 4 of 5
 April01 cash 80,000
Finance lease liability 80,000
Discount on finance lease liability 16,434
Interest revenue 16,434
Dec.31 discount on finance lease receivable 46,789
Interest revenue 46,789

e. Assume that the residual value of P80,000 is not guaranteed. At what amount should
the asset be recorded by Ironman? How much depreciation should Ironman take up
on this equipment for the year 2015?
The asset should be recorded at P342, 736
80,000 x 4.2842= P342, 736
The depreciation for 2015 is (342,726 /8) x 9/12 = 32,132
f. Assume that the residual value of P80,000 is not guaranteed. What difference, if any,
will be noted in the books of Ben Ten in recording the lease transactions?
There is no difference in journal entries, as for the lessor under direct finance lease
whether the residual value is guaranteed or unguaranteed it does not affect the
journal entries.

Page 5 of 5