IA2 LIABILITIES p4 Lease V
IA2 LIABILITIES p4 Lease V
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What to discuss
I. Review:
1. Essential characteristics of a liability
2. Measurement of Liabilities
3. Classification of Liabilities
4. Presentation of Liabilities
5. Examples of Liabilities
II. Application (Illustration and Exercises) / Other Liabilities
I. Estimated Liabilities/ Deferred or Unearned Revenue
Current and Noncurrent liabilities
Long-term service contracts
Gift certificates payable
Subscriptions
Bonus Computation
Refundable deposits
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What to discuss
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What to discuss
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Lease
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Lease
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Lease
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Lease (cont)
Lessee – the entity that obtains the right to use an underlying asset
for a period of time in exchange for a consideration
Lessor – the entity that provides the right to use an underlying
asset for a period of time in exchange for a consideration
Underlying asset – the subject of a lease for which the right to use
that asset has been provided by the lessor to the lessee
Operating Lease – a lease that does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset
Finance Lease – a lease that transfers substantially all the risks
and rewards incidental to ownership of an underlying asset
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Lease (cont)
b. The lessee has an option to purchase the asset at a price which is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable. At the inception of the lease, it is reasonably certain that the
option will be exercised.
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Lease (c0nt)
d. The present value of the lease payments amounts to substantially all of the
fair value of the underlying asset at the inception of the lease.
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Lease (cont)
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Lease (accounting on the part of the lessee)
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Lease (accounting on the part of the lessee)
1Lease incentives – payments by the lessor to the lessee associated with a lease; or reimbursement; or
assumption by the lessor of the costs of the lease (e.g. lessor agrees to reimburse the lessee for the
commission paid by the lessee to a broker)
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Take note:
• 1. Leasehold improvements
• Not initial direct costs & not included in the cost of the right of use asset
• Separately accounted for as PPE and depreciated over the shorter between the
lease term and the life of the improvements
• 2. Any security deposit refundable upon the lease expiration is accounted for as an
asset by the lessee
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Lease (accounting on the part of the lessee)
3. Subsequent Measurement
• Measure the right of use asset applying the cost model:
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Lease (accounting on the part of the lessee)
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Lease (accounting on the part of the lessee)
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Lease (accounting on the part of the lessee)
interest rate implicit in the lease is the interest rate that causes the
present value of the lease payments and the unguaranteed residual
value to equal the fair value of the underlying asset and initial direct
costs of the lessor
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Lease (accounting on the part of the lessee)
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Lease (accounting on the part of the lessee)
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Prob 10-1 lessee
Requirement 1
2020 Right of use asset (800,000 x 4.17) 3,336,000
Jan 1 Lease liability 3,336,000
Right of use asset 100,000
Cash 100,000
Lease liability 800,000
Cash 800,000
Dec Depreciation (3,436,000/5 yrs) 687,200
31 Accumulated depreciation 687,200
Interest expense 253,600
Accrued interest payable 253,600
Taxes 40,000
Cash 40,000
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Prob 10-1 lessee
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Prob 10-1 lessee
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Prob 10-3 lessee (purchase option)
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Prob 10-3
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Prob 10-3
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Prob 10-4 lessee (leasehold improvement)
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Prob 10-7
Requirement 1
PV of rentals (420,000-20,000 x 3.6243) 1,449,720
PV of guaranteed residua value
(200,000 x .7629) 152,580
Total present value 1,602,300
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Prob 10-7
Requirement 2
2020 Right of use asset 1,602,300
Dec Lease liability 1,602,300
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Prepaid insurance 20,000
Lease liability 400,000
Cash 420,000
2021 Insurance expense 20,000
Jan 1 Prepaid insurance 20,000
Dec Prepaid insurance 20,000
31 Interest expense 84,161
Lease liability 315,839
Cash 420,000
Depreciation 350,575
Accumulated depreciation 350,575
(1,602,300-200,000/4)
Residual value guarantee of P200,000 is deducted from the cost to get the depreciable
amount. 29
Prob 10-7
Requirement 3
2024 Accumulated depreciation (350,575x4) 1,402,300
Dec Interest expense 13,091
31 Lease liability 186,909
right of use asset 1,602,300
Loss on finance lease 150,000
Cash 150,000
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Prob 10-29
Answer A
Right of use asset – Jan 1 2020 4,800,000
Accumulated depre –Jan 1 2026
(4,800,000-300,000/8 yrs x 6 yrs) (3,375,000)
Carrying amount – Jan 1 2026 1,425,000
Lease liability –Jan 1 2026 (purch option) (100,000)
Loss on finance lease 1,325,000
The entry to record the return of the asset to the lessor as a result of the
nonexercise of the purchase option is as follows:
Accumulated depreciation 3,375,000
Lease liability 100,000
Loss on finance lease 1,325,000
right of use of asset 4,800,000
On January 1, 2026, the balance of the lease liability is equal to the purchase
option of P100,000. If the purchase option is not exercised, a loss is recognized
equal to the difference between the carrying amount of the asset and the lease
liability
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Prob 10-30
Question 1: Answer B (1M x 4.31) P4,310,000
Question 2: Answer B
Lease liability 4,310,000
Initial direct cost 350,000
Lease incentive received (150,000)
Lease bonus 100,000
Cost of restoration 200,000
Cost of right of use asset 4,810,000
Question 3: Answer C
Annual depreciation (4,810,000 / 5 yrs) 962,000
Question 4: answer C
Date Payment 8% interest Principal Lease liability
1/1/2020 4,310,000
1/1/2020 1,000,000 - 1,000,000 3,310,000
1/1/2021 1,000,000 264,800 735,200 2,574,800
1/1/2022 1,000,000 205,984 794,016 1,780,784
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END
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