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Problem 11-8 (AICPA Adapted)On January 1, 2015, Mixx Company entered into a lease for a new warehouse.Rental payments are P800, 000 a year for 5 years, payable in advance starting January 1, 2015.The warehouse has an estimated life of 10 years. The entity paid initial direct cost of P100, 000 on Jan...

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Problem 11-8 (AICPA Adapted) On January 1, 2015, Mixx Company entered into a lease for a new warehouse. Rental payments are P800, 000 a year for 5 years, payable in advance starting January 1, 2015. The warehouse has an estimated life of 10 years. The entity paid initial direct cost of P100, 000 on January 1, 2015. The realty taxes of P40, 000 a year are to be paid by the entity. The entity has the option to purchase the property at the conclusion of the lease for a nominal amount. 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 PV of an annuity of 1 in advance at 10% for 5 periods

3.79 4.17

Required: Prepare journal entries on the books of Mixx Company for 2015 and 2016.

Problem 11-9 (AICPA Adapted) Overland Company closed a lease contract for newly constructed terminals and freight storage facilities on January 1, 2015. 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 rental is P1, 000, 000 payable at the end of each year starting December 31, 2015. The lessee must also make an annual payment of P75, 000 for taxes and P125, 000 for insurance. The contract was negotiated to assure the lessor a 10% rate of return. The present value of an annuity of 1 at 10% for five periods is 3.79. The present value of an annuity of 1 in advance at 10% for 5 periods is 4.17. Required: Prepare journal entries on the books of Overland Company for 2015 and 2016 in connection with the finance lease.

Problem 11-10 (AICPA Adapted) Letty Company leased a machine on January 1, 2015 with the following provisions.

Annual rental payable in advance at the beginning of each year, starting January 1, 2015 Lease term Useful life of machine Implicit interest rate in the lease PV of an ordinary annuity of 1 at 12% for 10 periods PV of an annuity of 1 in advance at 12% for 10 periods PV of 1 at 12% for 10 periods

1, 000, 000 10 years 15 years 12% 5.650 6.328 0.322

The entity has the option to purchase the machine on January 1, 2025 by pairing P200, 000 which is sufficiently lower than the expected fair value of the machine on January 1, 2025. At the inception of the lease, it is reasonably certain that the option will be exercised. Required: Prepare journal entries on the books of Letty Company for 2015 and 2016.

Problem 11-11 (AICPA Adapted) Veronica Company negotiated a long term lease for newly constructed building. On January 1, 2015, the entity took possession of the building. The building has useful life of 20 years. The lease runs for 15 years from January 1, 2015. The lease contains neither a transfer of title nor a bargain purchase option. 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. Present value factors are: PV of an ordinary annuity of 1 at 10% for 15 periods PV of an annuity of 1 in advance at 10% for 15 periods

7.606 8.367

Required: Prepare journal entries on the books of Veronica Company for 2015.

Problem 11-12 (IAA) On January 1, 2015, Lesse Company entered into a lease with Lessor Company for a new equipment that had a fair value of P3, 500, 000. The lease stipulates that annual payments of P1, 000, 000 will be made for five years starting December 31, 2015. 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 interest rate for the lease is 16% after considering the guaranteed residual value.

The economic life of the equipment is 10 years. The present value factors at 16% for five periods are: Present value of 1 Present value of an ordinary annuity of 1

0.4761 3.2743

Required: 1. Prepare a schedule of the annual payments showing reduction of liability every year. 2. Prepare journal entries on the books of Lessee Company for 2015 and 2016. 3. Prepare journal entry on December 31, 2019, end of lease term, to record the return of the equipment to the lessor. Assume the fair value of the equipment is equal to the guaranteed residual value. 4. Prepare journal entry on December 31, 2019 to record the return of the equipment to the lessor assuming the fair value of the equipment is only P300, 000. 5. Prepare journal entry on December 31, 2019 to record the return of the equipment to the lessor assuming the fair value of the equipment is P500, 000.

Problem 11-13 (IAA) Lawton Company leased a machinery with a fair value of P2, 800, 000 on January 1, 2015. The machinery has an estimated useful life of 8 years. The contract is a six-year noncancelable lease with a 10% implicit interest rate. The lease contains neither a transfer of title nor a bargain purchase option. The lease requires annual payments of P500, 000 beginning January 1, 2015. The entity guaranteed a residual value of P400, 000 when the machinery is returned to the lessor upon the lease expiration. The present value of an annuity due of 1 at 10% for six periods is 4.7908. The present value of 1 at 10% for 6 periods is .5645. Required: 1. 2. 3. 4.

Determine whether the lease is a finance lease. Prepare a table of amortization of the lease liability and interest expense. Prepare journal entries for 2015 and 2016. Prepare journal entry on January 1, 2021 to record the return of the machinery to the lessor. Assume the fair value of the asset is P450, 000. 5. Prepare journal entry on January 1, 2021 to record the return of the machinery to the lessor. Assume the fair value of the asset is P300, 000.

Problem 11-14 (IFRS)

On December 31, 2015, Eden Company leased an equipment to Eve Company. On this date, Eden Company purchased the equipment at the fair value of P1, 700, 000. The lease agreement contained the following clauses: Annual rent payable in advance on December 31 of each year Estimated residual value at the end of lease term Residual value guaranteed by lessee Lease term Economic life of equipment Implicit interest rate PV of an annuity of 1 in advance at 7% for 4 periods PV of 1 at 7% for 4 periods

420, 000 300, 000 200, 000 4 years 6 years 7% 3.6243 .7629

The lease is cancelable but the cancelation will require a monetary penalty equivalent to two years’ rental payments on the part of the lessee. Included in the annual rental is an amount of P20, 000 to cover reimbursement for insurance paid by the lessor. The directors of Eve Company have indicated that they intend to return the asset to Eden Company at the end of the lease term. Required: 1. 2. 3. 4.

Determine whether the cancelable lease is a finance lease. Prepare a table of amortization of the lease liability and interest expense. Prepare journal entries for 2015 and 2016 on the book of Eve Company. Prepare journal entry to record the return of the equipment to the lessor on December 31, 2019. Assume the fair value of the equipment is P50, 000.

Problem 11-15 (IAA) Dexter Company has maintained a policy of acquiring equipment by leasing. On January 1, 2015, Dexter Company entered into a lease agreement with Oceanic Company for an equipment with a fair value of P2, 200, 000. The lease stipulates an annual rental payment of P600, 000 to be paid every December 31 starting December 31, 2015. The lease contains neither a transfer of title nor a bargain 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: 1. Determine whether the lease is an operating lease or a finance lease. 2. Prepare journal entries on the books of Dexter Company for 2015. 3. Prepare journal entry on December 31, 2019 to record the return of the equipment to the lessor as required by the contract. The fair value of the equipment is P200, 000.

Problem 11-16 (IAA) Macedon Company leased many assets and capitalized most of the leased assets. On December 31, 2015, the entity had the following balances in relation to a piece of specialized equipment: Equipment under finance lease Accumulated depreciation Lease liability

4, 000, 000 2, 465, 000 1, 300, 000

Depreciation has been recorded up to the end of the year, and no accrued interest is involved. On December 31, 2015, 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 Macedon Company.

Problem 11-17 (IFRS) Troy Company prepared the following amortization schedule for the lease of a machine from another entity. The machine has an economic life of six years. The lease agreement requires four annual payments of P330, 000 including executor costs of P30, 000, and the machine will be returned to the lessor at the end of the lease term.

1/1/2015 12/31/2015 12/31/2016 12/31/2017 12/31/2018

Minimum lease payment

Interest expense

Reduction liability

300, 000 300, 000 300, 000 300, 000

98, 515 78, 366 56, 203 31, 766

201, 485 221, 634 243, 797 268, 234

Balance of liability 985, 150 783, 665 562, 031 318, 234 50, 000

Required: 1. What amount would Troy Company disclose as future lease payments in the notes to financial statements on December 31, 2015.

2. Prepare journal entry to record the finance lease on January 1, 2015. 3. Prepare journal entry on December 31, 2015 to record the minimum lease payment and the executor cost. 4. Prepare journal entry to record the depreciation for 2015. 5. Prepare journal entry to record the minimum lease payment and the executor cost on December 31, 2018. 6. Prepare journal entry to record the return of the machine to the lessor. Assume the fair value is the same as the guaranteed residual value.

Problem 11-18 (IFRS) Elysee Company leased a machine with a fair value of P1, 650, 000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease amounted to P12, 500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P1, 584, 000. At what amount should the machine be recognized initially by Elysee Company? a. b. c. d.

1, 650, 000 1, 596, 500 1, 662, 500 1, 584, 000

Problem 11-19 (AICPA Adapted) At the beginning of current year, Clay Company leased a new machine from Saxe Company. The following data relate to the lease transaction at the inception of the lease: Lease term Annual rental payable at beginning of each lease year Useful life of machine Implicit interest rate Present value of an annuity of 1 in advance for 10 periods at 10% Present value of annuity of 1 in arrears for 10 periods at 10% Fair value of the machine

10 years 500, 000 15 years 10% 6.76 6.15 4, 000, 000

The lease has no renewal option, and the possession of the machine reverts to Saxe Company when the lease terminates. At the commencement of the lease, what amount should be recognized as finance lease liability? a. 4, 000, 000 b. 3, 380, 000 c. 3, 075, 000 d. 0

Problem 11-20 (AICPA Adapted) At the beginning of current year, Ashe Company entered into a ten-year noncancelable lease requiring year-end payments of P100, 000. Ashe’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to Ashe, is 10%. Present value factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650 at 12%. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should be capitalized as cost of the leased property? a. 1, 000, 000 b. 614, 500 c. 565, 000 d. 0

Problem 11-21 (IAA) On December 31, 2015, Tiger Company leased equipment from another entity. Pertinent lease transaction data are as follows: • • • • •

The estimated seven-year useful equipment life coincides with the lease term. The first of the seven equal annual P800, 000 lease payments was paid on December 31, 2015. The implicit interest rate is 12%. Tiger’s incremental borrowing rate is 14%. Present values of an annuity of 1 in advance for seven periods are 5.11 at 12% and 4.89 at 14%.

What amount should be recorded as initial measurement of the equipment? a. 5, 600, 000 b. 4, 088, 000 c. 3, 912, 000 d. 0

Problem 11-22 (AICPA Adapted) East Company leased a new machine from North Company on January 1, 2015 under a lease with the following information: Annual rental payable at beginning of each lease year Lease term Useful life of machine Implicit interest rate Present value of an annuity of 1

400, 000 10 years 12 years 14%

in advance for 10 periods at 14% Present value of 1 for 10 periods at 14%

5.95 0.27

East Company has the option to purchase the machine on January 1, 2025, by paying P500, 000 which approximates the expected fair value of the machine on the option exercise date. What is the initial cost of the leased asset to be recognized by East Company? a. b. c. d.

2, 515, 000 2, 380, 000 2, 245, 000 1, 980, 000

Problem 11-23 (AICPA Adapted) At the beginning of current year, Stoic Company became the lessee of new equipment under a noncancelable six-year lease. The estimated economic life of the equipment is ten years. The fair value of the equipment at the inception of the lease was P4, 000, 000. The lease does not meet the criteria for classification as a finance lease with respect to transfer of ownership of the leased asset, or bargain purchase option, or lease term. Nevertheless, Stoic Company must classify this lease as a finance lease if, at inception of the lease, the present value of the minimum lease payments excluding executor cost is equal to at least what amount? a. b. c. d.

2, 700, 000 3, 000, 000 3, 600, 000 4, 000, 000

Problem 11-24 (IFRS) Mindoro Company leased a land and building for 20 years, the useful life of the building with effect from January 1, 2015. At that date, the fair value of the leasehold interest was P7, 500, 000 and of which P6, 000, 000 was attributable in the building. Annual rentals of P800, 000 are payable in advance on January 1. What amount should be recognized as an operating lease expense for the year ended December 31, 2015? a. 800, 000 b. 640, 000 c. 160, 000 d. 0

Problem 11-25 (IFRS)

Casanova Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and the warehouse are P5, 000, 000 and P2, 500, 000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not expected to pass at the end of the lease. At what amount should the asset in relation to finance lease be recognized in the financial statements? a. 7, 500, 000 b. 5, 000, 000 c. 2, 500, 000 d. 0

Problem 11-26 (AICPA Adapted) Robbin Company leased a machine from Ready Leasing Company. The lease qualified as finance lease and required 10 annual payments of P100, 000 beginning immediately. The lease specified an interest rate of 12% and a purchase option of P100, 000 at the end of the tenth year, even though the machine’s estimated value on that date was P200, 000. Present value of an annuity due (in advance) of 1 at 12% for 10 periods Present value of 1 at 12% for 10 periods

6.328 0.322

What amount should be recorded as lease liability at the beginning of the lease term? a. b. c. d.

621, 600 648, 600 665, 000 697, 200

(Problem 11-27 – 11-31 Hannah)

Problem 11-32 (AICPA Adapted) Neal Company entered into a nine-year finance lease on a warehouse on December 31, 2015. Lease payment of P520, 000 which included real estate taxes and other executor cost of P20, 000, are due annually, beginning on December 31, 2016 and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity of 1 for nine years at 9% is 5.6. What amount should be reported as lease liability on December 31, 2015? a. b. c. d.

2, 800, 000 2, 912, 000 4, 500, 000 4, 680, 000

Problem 11-33 (AICPA Adapted) Nun Company leased a machinery from Chin Company on January 1, 2015 for a 10-year period. The useful life of the asset is 20 years. Equal annual payments under the lease are P200, 000 and are due on January 1 of each year starting January 1, 2015. The present value on January 1, 2015 of the lease payments over the lease term discounted at 10% was P1, 352, 000. The incremental borrowing rate was 12%. The lease is appropriately accounted for as a finance lease because there is a very nominal bargain purchase option. 1. What is the finance lease liability to be reported as noncurrent on December 31, 2015? a. 1, 215, 920 b. 1, 090, 240 c. 1, 067, 200 d. 973, 920 2. What is the interest expense for 2015? a. 200, 000 b. 115, 200 c. 106, 720 d. 0 3. What is the depreciation for 2015? a. 135, 200 b. 115, 200 c. 67, 600 d. 20, 000

Problem 11-34 (AICPA Adapted) Oak Company leased equipment for the entire nine-year useful life, agreeing to pay P500, 000 at the start of the lease term on December 31, 2015 and P500, 000 annually on each December 31 for the next eight years. The present value on December 31, 2015, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak Company knows to be 10%, was P3, 165, 000. The December 31, 2015, present value of the lease payments using the incremental borrowing rate of 12% was P2, 985, 000. What amount should be reported as lease liability on December 31, 2016? a. b. c. d.

3, 500, 000 2, 431, 500 2, 283, 200 2, 485, 000

Problem 11-35 (AICPA Adapted) On January 1, 2015, Blaugh Company signed a long-term lease for an office building. The terms of the lease required Blaugh Company to pay P100, 000 annually, beginning December 31, 2015, and continuing each year for 30 years. The lease qualifies as a finance lease. On January 1, 2015,

the present value of the lease payments is P1, 125, 000 at the 8% interest rate implicit in the lease. What amount should be reported as lease liability on December 31, 2015? a. b. c. d.

1, 025, 000 1, 115, 000 1, 125, 000 2, 900, 000

Problem 11-36 (AICPA Adapted) On December 31, 2015, Rafferty Company leased equipment under a finance lease. Annual lease payments of P200, 000 are due December 31 for 10 years. The equipment useful life is 10 years, and the interest rate implicit in the lease is 10%. The lease obligation was recorded on December 31, 2015 at P1, 350, 000 and the first lease payment was made on that date. What amount should be included in current liabilities on December 31, 2015 in relation to the finance lease? a. 65, 000 b. 85, 000 c. 115, 000 d. 200, 000

Problem 11-37 (IFRS) Miracle Company leased machinery for the entire useful life of 10 years with effect from January 1, 2015. At that date, the fair value of the machinery was P4, 900, 000. Annual rentals of P700, 000 are payable in advance on January 1 of each year, beginning January 1, 2015 and the interest rate implicit in the lease is 9%. What total amount of lease liability including interest should be recognized in the statement of financial position on December 31, 2015? a. 4, 578, 000 b. 4, 641, 000 c. 700, 000 d. 0

Problem 11-38 (AICPA Adapted) On December 31, 2015, Roe Company leased a machine from Colt Company for a five-year per...