Chapter 15

Sales type lease – lessor

PROBLEM 15-1
At the beginning of current year, Howe Company leased equipment to Kew Company
for an eight-year period:

Equal payments under the lease are P500,000 and are due at beginning of each year.
The first payment was made at the beginning of current year.

The selling price of the equipment is P2,900,000 and the carrying amount is
P2,000,000. The lease is appropriately accounted for as a sales type lease.

The present value of the lease payments at an implicit interest rate of 12% is
P2,780,000.

What amount of gross income on sale should be reported for the current year?

a) 900,000
b) 780,000
c) 240,000
d) 333,600

PROBLEM 15-2
Meg Company leased equipment from Wee Company on July 1, 2019 for an eight-year
period expiring June 30, 2027

Equal payments under the lease are P600,000 and are due on July 1 of each year. The
first payment was made on July 1, 2019. The rate of interest contemplated by Meg and
Wee is 10%

The cash selling price of the equipment is P3,520,000 and the carrying amount is
P2,800,000. The lease is appropriately recorded as a sales type lease.

1) What amount of gross income on sale should be recorded for the year ended
December 31, 2019?
a) 600,000
b) 720,000
c) 360,000
d) 300,000

2) What amount of interest revenue should be recorded for the year ended December
31, 2019?
a) 292,000
b) 146,000
c) 352,000
d) 176,000
Problem 15-3
Hitech Company, a dealer in machinery and equipment, leased equipment to Quality
Company on July 1, 2019.

The lease is appropriately accounted for as a sale by Hitech and as a purchase by

Quality

The lease is for a ten-year period equal to the useful life of the asset expiring June 30,
2029. The first of ten equal annual payments of P250,000 was made on July 1, 2019.

Hitech had purchased the equipment for P1,337,500 on January 1, 2019 and
established a list selling price of P1,687,500 on the equipment.

The present value on July 1, 2019 of the rent payments over the lease term discounted
at 12% was P1,582,500.

1) What amount of gross income on sale should be recorded for the year ended
December 31, 2019?
a) 250,000
b) 245,000
c) 350,000
d) 175,000

2) What amount of interest income should be recorded for the year ended December
31, 2019?
a) 159,900
b) 189,900
c) 94,950
d) 79,950

Problem 15-4
Vanderblit Company is a dealer in machinery. On July 1, 2019, a machinery was leased
to another entity with the following provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
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

At the end of the lease term on December 31, 2023, the machinery will revert to
Vanderblit.
Vanderblit incurred initial direct cost of P300,000 in finalizing the lease agreement.

1) What amount should be reported as unearned interest income on January 1, 2019?

a) 4,630,000
b) 4,200,000
c) 5,200,000
d) 3,630,000

2) What amount should be reported as gross income on sale in 2019?

a) 7,700,000
b) 3,070,000
c) 2,500,000
d) 3,370,000

3) What amount should be reported as interest income for 2019?

a) 1,364,400
b) 1,296,000
c) 1,800,000
d) 926,000

Problem 15-5
Reagan Company used leases as a method of selling products. In 2019, the entity
completed construction of a passenger ferry.

On January 1, 2019, the ferry was leased to the Super Ferry Line on a contract
specifying that ownership of the ferry will transfer to the lessee at the end of the lease
period.

Annual lease payments do not include executory costs.

Original cost of the ferry 8,000,000

Fair value of ferry at lease date 13,000,000
Lease payments payable in advance 1,500,000
Estimated residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2019
Lease term 20 years
Present value of an annuity due of 1 at 10% for 20 periods 8.37
Present value of 1 at 12% for 20 periods 0.10

1) What amount should be reported as unearned interest income on January 1, 2019?

a) 17,445,000
b) 19,245,000
c) 19,445,000
d) 22,000,000
2) What amount should be reported as gross income on sale for 2019?
a) 6,555,000
b) 4,555,000
c) 4,755,000
d) 4,335,000

3) What amount should be reported as interest income for 2019?

a) 1,506,600
b) 1,524,600
c) 1,326,600
d) 1,350,600

Problem 15-6
Marianas Company adopted the policy of leasing as the primary method of selling its
products. The entity’s main product is a small helicopter that is very popular among
politicians and entity managers.

Marianas Company constructed such a helicopter for Jade Company at a cost of

P8,500,000

The terms of the lease provided for annual advance payments of P2,500,000 to be paid
over 10 years with the ownership transferring to the lessee at the end of the lease
period.

It is estimated that the helicopter will have a residual value of P1,600,000 at that date

The lease payments began January 1, 2019. Marianas Company incurred initial direct
cost of P500,000 in financing the lease agreement with Jade. The cash sale price of the
helicopter is P14,875,000

Financing the construction was at a 14% rate. The present value of an annuity due of 1
at 14% for 10 periods is 5.95

1) What amount should be reported as gross income on sale for 2019?

a) 5,875,000
b) 6,375,000
c) 4,275,000
d) 4,775,000

2) What amount should be reported as unearned interest income on January 1, 2019?

a) 10,125,000
b) 11,725,000
c) 9,625,000
d) 8,525,000

3) What amount should be reported as interest income for 2019?

a) 2,082,500
b) 1,732,500
c) 2,306,500
d) 1,956,500
Problem 15-7
On January 1, 2019, Easter Company leased equipment to Faye Company. The lease
is for an eight-year period expiring December 31, 2026.

The first of eight equal annual payments of P900,000 was made on January 1, 2019.

Easter Company had purchased the equipment for P4,800,000. The lease is
appropriately accounted for as a sales type lease.

The present value on January 1, 2019 of all rent payments over the lease term
discounted at a 10% interest rate was P5,280,000

1) What amount should be reported as gross income on sale for 2019?

a) 1,920,000
b) 2,400,000
c) 480,000
d) 240,000

2) What amount of interest revenue should be recorded in 2019?

a) 528,000
b) 438,000
c) 490,800
d) 340,980

3) What amount of interest revenue should be recorded in 2020?

a) 490,000
b) 480,000
c) 438,000
d) 391,800

Problem 15-8
On January 1, 2019, Gallant Company entered into a lease agreement with Blacksheep
Company for a machine which was carried in the accounting records of Gallant at
P2,000,000.

Total payments under the lease which expires on December 31, 2028, aggregate
P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep.

Payments of P355,080 are due each January 1 of each year.

The interest rate of 10% which was stipulated in the lease is considered fair and
adequate compensation to Gallant for the use of its funds.
Blacksheep expects the machine to have a 10-year life, no residual value and be
depreciated on a straight line basis. The lease is conceived as a sales type lease.

1) What amount should be recognized by Gallant as gross income from sale for the year
ended December 31, 2019?
a) 1,150,800
b) 1,550,000
c) 400,000
d) 355,080

2) What amount should be recognized as interest income by Gallant for the year ended
December 31, 2019?
a) 244,080
b) 200,000
c) 204,492
d) 240,000

3) What amount should be reported as pretax total income by Gallant from the lease for
the year ended December 31, 2019?
a) 204,492
b) 604,492
c) 355,080
d) 755,080

CHAPTER 16
Direct financing lease – lessor
Problem 16-1
Camia Company is in the business of leasing new sophisticated equipment. As lessor,
the entity expects a 12% return.

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

On January 1, 2019 an equipment is leased to another entity under a direct financing

lease.

Cost of equipment to Camia 5,000,000

Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2019

1) What is the gross investment in the lease?

a) 7,200,000
b) 7,800,000
c) 5,000,000
d) 5,250,000

2) What amount should be reported as unearned interest income on January 1, 2019?

a) 2,550,000
b) 1,950,000
c) 3,150,000
d) 1,500,000

3) What amount should be reported as interest income for 2019?

a) 594,000
b) 522,000
c) 630,000
d) 450,000

Problem 16-2
At the beginning of current year, Lessor Company leased a machine to Lessee
Company. The machine had an original cost of P6,000,000. The lease term was five
years and the implicit interest rate on the lease was 15%.

The lease is properly classified as a direct financing lease. The annual lease payments
of P1,750,000 are made each December 31.

The machine reverts to Lessor at the end of the lease term, at which time the residual
value of the machine will be P275,000.
The residual value is unguaranteed.

1) At the commencement of the lease, what would be the next lease receivable on the
part of the lessor?
a) 6,275,000
b) 8,750,000
c) 6,000,000
d) 5,725,000

2) What is the gross investment in the lease?

a) 8,750,000
b) 9,025,000
c) 6,000,000
d) 8,475,000

3) What amount should be reported as total unearned interest income?

a) 3,025,000
b) 2,750,000
c) 2,475,000
d) 6,000,000
4) What amount should be reported as interest income for the current year?
a) 1,312,500
b) 1,353,750
c) 900,000
d) 450,000

Problem 16-3
Lyle Company entered into a finance lease on January 1, 2019. A third party
guaranteed the residual value of the asset under the lease estimated to be P1,200,000
on January 1, 2024, the end of the lease term.

Annual lease payments are P1,000,000 due each December 31, beginning December
31, 2019. The last payment is due December 31, 2023.

The remaining useful life of the asset was six years at the commencement of the lease.

Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5
periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.

1) What is the net lease receivable of the lessor at the commencement of the lease?
a) 4,534,000
b) 3,790,000
c) 4,990,000
d) 2,590,000

2) What is the gross investment in the lease?

a) 5,000,000
b) 6,200,000
c) 3,800,000
d) 5,744,000

3) What amount should be reported initially as total unearned interest income?

a) 2,410,000
b) 1,666,000
c) 1,210,000
d) 466,000

4) What amount should be reported as interest income for 2019?

a) 379,000
b) 620,000
c) 453,400
d) 500,000

Problem 16-4
At the beginning of current year, Glade company leased computer equipment to Blass
Company under a direct financing lease.

The equipment has no residual value at the end of the lease and the lease does not
contain bargain purchase option.

The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of
P3,234,000. The present value of an annuity due of 1 at 8% for 5 years is 4.312

1) What is the total interest revenue that Glade will earn over the lease term?
a) 1,293,600
b) 1,394,500
c) 516,000
d) 750,000

2) What amount should be reported as interest revenue for the current year?
a) 258,720
b) 198,720
c) 103,200
d) 646,800

Problem 16-5
Cassandra Company acquired a specialized packaging machine for P3,000,000 cash
and leased it under a direct financing lease for a period of six years, after which the
machine is to be returned to Cassandra Company.

The unguaranteed residual value of the machine is P200,000.

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

The PV of 1 at 12% for six periods is .51, and the PV of an annuity in advance of 1 at
12% for six periods is 4.60.

What is the annual lease payment payable in advance required to yield the desired
return?

a) 630,000
b) 652,174
c) 608,695
d) 732,000

Problem 16-6
Irene Company decided to enter the leasing business. The entity acquired a specialized
packaging machine for P2,300,000.
On January 1, 2019, the entity leased the machine under a direct financing lease for a
period of six years, after which title to the machine is P200,000

The six annual lease payments are due each January 1 and the first payment was
made on January 1, 2019. The residual value of the machine is P200,000

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

The present value of 1 at 12% for six periods is 0.51, and the present value of an
annuity in advance of 1 at 12% for six periods is 4.60.

What is the annual lease rental payable in advance required to yield the desired return?
a) 500,000
b) 477,826
c) 383,333
d) 460,000

Problem 16-7
On January 1, 2019, Ultra Company leased equipment to another entity under a sales
type finance lease. Rentals are payable at the end of each year, beginning December
31, 2019. The lease term is 6 years and the useful life of the equipment is 8 years.

The fair value of the equipment is P1,273,800 while the cost is P800,000. The implicit
rate in the lease is 12% which is known to the lessee.

The lessee has the option to purchase the equipment for P80,000 at the end of the
lease term. It is reasonably certain that the lessee will exercise the purchase option.

The present value of 1 at 12% for 6 periods is 0.51 and the present value of an ordinary
annuity at 12% for 6 periods is 4.11.

1) What is the annual rental payment?

a) 194,647
b) 184,720
c) 300,000
d) 309,927

2) What amount should be reported initially at total financial revenue?

a) 606,200
b) 447,882
c) 388,320
d) 920,000

3) What amount should be reported as gross income from the sale?

a) 606,200
b) 473,800
c) 553,800
d) 0

4) What amount should be reported as interest income for 2019?

a) 152,856
b) 216,000
c) 147,960
d) 101,033

Problem 16-8
At the beginning of current year, Yolk Company signed a ten-year noncancelable lease
agreement to lease a storage building to a lessee under a sales type lease. The
agreement required equal rental payments at the end of each year.

The fair value of the building is P3,075,000. However, the carrying amount of the
building is P2,460,000.

The building has an estimated economic life of 10 years with no residual value. At the
termination of the lease, the title to the building will be transferred to the lessee.

Yolk Company set the annual rental to insure a 10% rate of return. The implicit rate of
the lessor is known by the lessee.

The annual total lease payment included P100,000 of executory cost related to taxes on
the property. The present value of an ordinary annuity of 1 at 10% for 10 periods is 6.15

1) What is the minimum annual lease payment?

a) 400,000
b) 600,000
c) 500,000
d) 300,000

2) What is the total annual lease payment?

a) 500,000
b) 700,000
c) 400,000
d) 600,000

Chapter 17
Sales and Leaseback
Problem 17-1
At year-end, Bain Company sold a machine with 12-year useful life to another entity and
simultaneously leased it back for one year.

Sales price 360,000

Carrying amount 330,000
Present value of reasonable lease rentals
(P3,000 for 12 months @12%) 34,100

What amount of gain on right transferred should be reported in the current year?
a) 34,100
b) 30,000
c) 4,100
d) 0

Problem 17-2
At the beginning of current year, East Company sold an equipment with remaining
useful life of 10 years and immediately leased it back for 4 years at the prevailing
market rental.

Sales price at fair value 6,000,000

Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for
Four periods 3.17

1) What amount should be reported as initial lease liability?

a) 2,536,000
b) 3,200,000
c) 3,000,000
d) 0

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

a) 1,902,000
b) 2,598,000
c) 2,536,000
d) 0

3) What amount should be reported as gain on right transferred to the buyer-lessor?

a) 866,000
b) 634,000
c) 750,000
d) 0

4) What amount should be reported as annual depreciation of the right of use asset?
a) 475,500
b) 190,200
c) 634,000
d) 253,600

5) What is the net annual rental income of the buyer-lessor?

a) 800,000
b) 200,000
c) 600,000
d) 400,000

Problem 17-3
At the beginning of current year,