390696737 12 Leases doc PDF

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ST. THOMAS MORE COLLEGE – CLARKVilla Sol Subdivision Angeles City, Philippines Tel. No. (045) 321 - 0727 A Professional Business SchoolFINANCIAL ACCOUNTING AND REPORTINGExercises on LeasesFINANCE LEASE - LESSEE In connection with your review of Jonli Enterprises, you noted that the company has a lon...

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ST. THOMAS MORE COLLEGE – CLARK  A Professional Business School 

TMC Building, New York St. Villa Sol Subdivision Angeles City, Philippines Tel. No. (045) 321 - 0727 

FINANCIAL ACCOUNTING AND REPORTING Exercises on Leases FINANCE LEASE - LESSEE

1. In connection with your review of Jonli Enterprises, you noted that the company has a long standing policy of acquiring company equipment by leasing. Early in 2011, the company entered into a lease for a new milling machine. The lease stipulates the annual payments will be made for 5 years. The payments are to be made in advance on December 31 of each year. At the end of the 5-year period, Jonli may purchase the machine. The estimated economic life of the equipment is 12 years. Jonli uses the calendar year for reporting purposes and straight-line depreciation for other equipment. In addition, the following information about the lease is also available:

Annual lease payment (including executory costs of P 10,000) Purchase option price Estimated fair market value of machine after 5 years Implicit rate Date of first lease payment

P 120,000 50,000 150,000 10% January 2, 2012

***Questions: Based on the foregoing and the result of your audit, compute for the following: (Round off present value factors to four decimal places.) A. Amount to be capitalized as an asset for the lease of the milling machine: b. 489,734 a. 382,835 c. 458,689 d. 508,689 B. Liability under finance lease as of December 31, 2012: a. 261,838 c. 273,560 b. 307,707

d. 379,736

C. Amount to be reported under current portion of the finance lease as of December 31, 2012: c. P 79,230 d. 83,816 a. 72,026 b. 82,644 D. Interest expense for the year 2012: a. 0 b. 34,870

c. 33,804

d. 37,793

E. Depreciation expense for the year 2012: b. 40,811 a. 37,336

c. 38,224

d. 97,948

OPERATING LEASE – LESSOR

2. Wall Company leased office premises to Fox Company for five-year term beginning January 1, 2013. Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is P1,250,000 per annum. However, as an inducement to enter the lease, Wall granted

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ST. THOMAS MORE COLLEGE – CLARK  A Professional Business School 

TMC Building, New York St. Villa Sol Subdivision Angeles City, Philippines Tel. No. (045) 321 - 0727 

Fox the first six months of the lease rent-free. What amount should Wall report as rental income for 2013?

a. 1,200,000

b. 1,160,000

c. 1,080,000

d. 800,000

FINANCE LEASE – LESSOR DIRECT FINANCING LEASE

For items no. 3-4, 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 01, 2013, an equipment is leased to another entity under a direct financing lease.

Cost of equipment to Camia Residual value - unguaranteed Annual rental payable in advance Useful life and lease term Implicit interest rate First lease payment

5,500,000 400,000 959,000 8 years 12% January 01, 2013

3. What is the unearned interest income on January 1, 2013?

a. 2,576,000

Solution: Gross rentals (959,500 x 8) Residual value

b. 2,176,000

c. 1,776,000

d. 1,616,500

7,676,000 400,000

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ST. THOMAS MORE COLLEGE – CLARK  A Professional Business School 

Gross investment Net investment - equal to the cost of the equipment Unearned interest income - January 1, 2013

TMC Building, New York St. Villa Sol Subdivision Angeles City, Philippines Tel. No. (045) 321 - 0727 

8,076,000 5,500,000 2,576,000

4. What is the interest income for 2013?

a. 322,000

b. 544,860

c. 660,000

Solution: Present value of rentals - equal to the cost of the equipment or net investment First payment on January 1, 2013 (all principal payments) Lease receivable - January 1, 2013 Interest income for 2013 (4,540,000 x 12%)

d. 496,860

5,500,000 959,000 4,540,000 544,860

5. On January 1, 2013, 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 internst rate on the leases 15%. The lease is properly classified as a direct financing lease. The annual payments of P1,730,541 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 P400,000. The residual value is unguaranteed.

The PV of 1 at 15% for 5 periods is .4972, and the PV of an ordinary annuity of 1 at 15% for 5 periods is 3.3522. At the commencement the lease, what would be the lease receivable on the part of the lessor and lease liability on the part of the lessee?

Lease receivable

Lease liability

Lease receivable

Lease liability

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ST. THOMAS MORE COLLEGE – CLARK  A Professional Business School 

a. 6,000,000 b. 5,801,120

6,000,000 5,801,120

c. 6,000,000 d. 5,801,000

5,801,120 6,000,000

Solution: Lessor PV of lease payments (1,730,541 x 3.3522) Unguaranteed residual value (400,000 x .4972) Lease receivable equal to the cost of asset

5,801,120 198,880 6,000,000

Gross lease payments (1,730,541 x 5) Unguaranteed residual value Gross investment Net investment (Cost f asset) Unearned interest income

8,652,705 400,000 9,052,705 6,000,000 3,052,705

Lessee Lease liability (1,730,541 x 3.3522)

TMC Building, New York St. Villa Sol Subdivision Angeles City, Philippines Tel. No. (045) 321 - 0727 

5,801,120

SALES TYPE LEASE

For items no.6-8, Reagan Company used leases as a method of selling products. In 2013, the entity completed construction of a passenger ferry. On January 1, 2013, 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. Other terms of the agreement are as follows:

Original cost of the ferry Fair value of ferry lease date Lease payments payable in advance Estimated residual value Implicit interest rate Date of first lease payment Lease term Present value of an annuity due of 1 at 10% for 20 periods Present value of 1 at 12% for 20 periods

8,000,000 12,555,000 1,500,000 2,000,000 12% January 1, 2013 20 years 8.37 0.10...