Chapter 7 Leases PART 1 - Financial Accounting & Reporting (Fundamentals) PDF

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Chapter 7Leases (Part 1)PROBLEM 1: TRUE OR FALSE1. FALSE2. TRUE3. FALSE4. TRUE5. TRUE6. TRUE7. FALSE8. FALSE FALSE ( 10,000 x PV of an annuity due of 1 @10%, n=4)₱ ₱ FALSE [( 10,000 x PV of an annuity due of 1 @10%, n=4) – 10,000] ₱ ₱ or 10,000 x PV of an ordinary annuity of 1 @10%, n=₱ ₱ 3 PROBLEM ...

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Chapter 7 Leases (Part 1) PROBLEM 1: TRUE OR FALSE 1. FALSE 2. TRUE 3. FALSE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. FALSE 9. FALSE (₱10,000 x PV of an annuity due of ₱1 @10%, n=4) 10. FALSE [(₱10,000 x PV of an annuity due of ₱1 @10%, n=4) – 10,000] or ₱10,000 x PV of an ordinary annuity of ₱1 @10%, n= 3

PROBLEM 2: FOR CLASSROOM DISCUSSION 1. Solution: The contract is a lease. a. Identified asset – the car is implicitly specified at the time that the asset is made available for use by the customer. * Substitution right – Supplier Y’s substitution rights is not substantive because it is not available to him throughout the period of use. b.

Right to obtain economic benefits from use – Customer X has the exclusive use of the car throughout the duration of the contract.

c.

Right to direct the use – Customer X has the right to direct how and for what purpose the asset is used throughout the period of use

2. Solution: The contract is not (does not contain) a lease because there is no identified asset. * Substitution right – Supplier Y’s substitution rights is substantive.

1

3.

Solutions:

Requirement (a): Journal entries

Annual rent

100,000

Purch. Opt.

50,000

Jan. 1, 20x1

PV of MLP

PV factors @10%, n=4

Lease payments

PV of an annuity due of ₱1 PV of ₱1

348,68 5

3.48685 2 0.68301 3

34,151 382,83 6

382,83 6

Right-of-use asset Lease liability Cash

282,836 100,000

Amortization table: Date Jan. 1, 20x1 Jan. 1, 20x1 Jan. 1, 20x2 Jan. 1, 20x3 Jan. 1, 20x4 Jan. 1, 20x5 Dec . 31, 20x 1 Dec . 31, 20x 1 Jan. 1, 20x 2

Payment s

Interest expense

Amortization

100,000 100,000 100,000 100,000 50,000

28,284 21,112 13,223 4,545

100,000 71,716 78,888 86,777 45,455

Present value 382,836 282,836 211,120 132,232 45,455 0

Interest expense Lease liability

28,284

Depreciation expense

71,567

28,284

[(382,836 – 25K) ÷ 5 yrs.]

71,567

Right of use asset Lease liability Cash

100,00 0

Subsequent entries follow the same pattern. Requirement (b): Carrying amounts Right-of-use asset 382,836 – 71,567 = 311,269

2

100,00 0

Lease liability 211,120 + 100,000 = 311,120

4.

Solution:

20x1 (12K x 9/12) 20x2 20x3 20x4 Total Divide by: Lease term Annual lease expense

Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3 Dec. 31, 20x4

9,000 12,000 12,000 12,000 45,000 4 11,250

No entry 11,250

Rent expense Cash Rent payable Rent expense Rent payable Cash Rent expense Rent payable Cash Rent expense Rent payable Cash

9,000 2,250 11,250 750 12,000 11,250 750 12,000 11,250 750 12,000

3

PROBLEM 3: EXERCISES 1. Solutions: Requirement (a): Rental payments excluding maintenance costs (80,000 – 6,000) Multiply by: PV of an ordinary annuity of P1 @14%, n=10 Present value of minimum lease payments Jan. 1, 20x 1

Right of use asset Lease liability

74,000 5.216116 385,993

385,99 3

385,99 3

Amortization table: Date 1/1/x1 12/31/x1 12/31/x2

Dec . 31, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 2 Dec . 31, 20x 2 Dec .

Payments

Int. expense

Amortizatio n

74,000 74,000

54,039 51,244

19,961 22,756

Present value 385,993 366,032 343,277

19,961 54,039

Lease liability Interest expense Cash

74,000

Repairs and maintenance expense Cash

6,000 6,000

Depreciation expense (385,993 ÷ 10) Right of use asset

38,599

Lease liability Interest expense Cash

22,756 51,244

38,599

74,000

Repairs and maintenance expense Cash

Depreciation expense (385,993 ÷ 10) Right of use asset

4

6,000 6,000

38,599 38,599

31, 20x 2

Requirement (b):

Current = 22,756 Noncurrent = 343,277

2.

Solutions:

Requirement (a): Date 1/1/x1 1/1/x1 1/1/x2 1/1/x3 1/1/x4

Payment s

Int. expense

Amortizatio n

200,000 200,000 200,000 200,000

65,006 46,106 24,561

200,000 134,994 153,894 175,439

Requirement (b): Jan. Right of use asset (664,326 + 50,000) 1, Lease liability 20x Cash (200,000 + 50,000) 1 Dec . 31, 20x 1 Dec . 31, 20x 1 Jan. 1, 20x 2

Present value 664,326 464,326 329,332 175,439 -

714,32 6

Interest expense Lease liability

65,006

Depreciation expense (714,326 ÷ 4) Right of use asset

178,58 2

Lease liability Cash

200,00 0

464,32 6 250,00 0 65,006

Requirement (c): 5

178,58 2

200,00 0

Right-of-use asset = (714,326 – 178,582) = 535,745 Lease liability = (329,332 + 200,000) = 529,332 3.

Solutions:

Requirement (a): Date

Payment s

Int. expense

Amortizatio n

1/1/x1 12/31/x1 12/31/x2 12/31/x3 12/31/x4 12/31/x5

300,000 300,000 300,000 300,000 800,000

134,267 119,352 103,093 85,372 66,055

165,733 180,648 196,907 214,628 733,945

Present value 1,491,861 1,326,128 1,145,480 948,573 733,945 0

Requirement (b): Jan. 1, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 1

4.

Right of use asset Lease liability

1,491,86 1

Interest expense Lease liability Cash

134,267 165,733

Depreciation expense (1,491,861 ÷ 8) Right of use asset

186,483

1,491,86 1

300,000

186,483

Solutions:

Requirement (a): Date

Payments

Int. expense

Amortization

1/1/x1 1/1/x1 1/1/x2 1/1/x3 1/1/x4 1/1/x5 1/1/x6 1/1/x7

400,000 400,000 400,000 400,000 400,000 400,000 50,000

130,287 108,710 85,407 60,240 33,059 3,704

400,000 269,713 291,290 314,593 339,760 366,941 46,296

6

Present value 2,028,593 1,628,593 1,358,880 1,067,590 752,998 413,237 46,296 0

Requirement (b): Jan. Right of use asset 1, Lease liability 20x Cash 1 Dec Interest expense . Lease liability 31, 20x 1 Dec Depreciation expense (2,028,593 ÷ 6) . Right of use asset 31, 20x 1 Jan. Lease liability 1, Cash 20x 2

5.

2,028,59 3

1,628,59 3 400,000

130,287 130,287

338,099 338,099

400,000 400,000

Solutions:

Total rentals First six-month rent-free (100,000 x 6/12) Adjusted total rentals Divide by: Lease term Annual rent expense

The entries are: Books of lessee – DEMENTED Co. Jan. 1, 20x1 No entry Dec. 31, 20x1 Rent expense 200,000 Cash 100,000 Rent payable 100,000 Dec. 31, 20x2 Rent expense 200,000 Rent payable 40,000 Cash 240,000 Dec. 31, 20x3 Rent expense Rent payable Cash

200,000 60,000 260,000

7

P 700,000 ( 100,000) 600,000 3 P200,000

Dec. 31, 20x3 Rent expense

100,000

[10% x (3M – 2M)]

Rent payable 100,000 to record contingent rent payable

8

PROBLEM 4: CLASSROOM ACTIVITY 1. Solution: The contract contains a lease. The contract specifies an executive jet. The aviation company’s right to substitute another aircraft is not substantive because it would be uneconomic to exercise this right. The customer decides how and for what purpose the jet is used which provides it with the right to control the use of the jet. 2.

Solution: Year 20x1 20x2 20x3

Payments 200,000 240,000 280,000

PV of 1 @6% n=1 n=2 n=3

PV factors 0.9433962 0.8899964 0.8396193

Date

Payments

Int. expense

Amortization

1/1/x1 12/31/x1 12/31/x2 12/31/x3

200,000 240,000 280,000

38,242 28,537 15,849

161,758 211,463 264,151

Jan. 1, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 2 Dec . 31, 20x 2

Right of use asset Lease liability

PV 188,679 213,599 235,093 637,372 Present value 637,372 475,614 264,151 -

637,37 2

Interest expense Lease liability Cash

38,242 161,75 8

Depreciation expense (637,372 ÷ 3) Right of use asset

212,45 7

Interest expense Lease liability Cash

28,537 211,46 3

Depreciation expense (637,372 ÷ 3) Right of use asset

212,45 7

9

637,37 2

200,00 0

212,45 7

240,00 0

212,45 7

Dec . 31, 20x 3 Dec . 31, 20x 3 3.

Interest expense Lease liability Cash

15,849 264,15 1

Depreciation expense (637,372 ÷ 3) Right of use asset

212,45 7

280,00 0

212,45 7

Solutions:

Requirement (a):

Year

Payment s

20x1

200,000

20x2

240,000

20x3

280,000

Total

720,000

Divide by: Annual lease expense Jan. 1, 20x 1 Dec . 31, 20x 1 Dec . 31, 20x 2 Dec . 31, 20x 3

3 240,000

No entry

Rent expense Cash Rent payable

240,00 0

Rent expense Cash

240,00 0

Rent expense Rent payable Cash

240,00 0 40,000

10

200,00 0 40,000

240,00 0

280,00 0

Requirement (b):

Year 20x1 20x2 20x3 Totals

General recognition Depreciatio Interest n Total 250,70 38,242 212,457 0 240,99 28,537 212,457 4 228,30 15,849 212,457 6 720,00 0 82,628 637,372

Recognition exemption Rent expense 240,000 240,000 240,000 720,000

PROBLEM 5: MULTIPLE CHOICE - THEORY 1.

B

6.

A

2.

D

7.

B

3.

C

8.

C

4.

D

9.

D

5.

B

10.

D

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. B Solution: Annual rent PV of ordinary annuity of 1 @10%, n=10 PV of minimum lease payments

100,000 6.15 615,000

2. B (100,000 x PV of ordinary annuity of 1 @10%, n=10) = 614,500 3. A

11

Solution: Total consideration Less: Payment for non-lease component Lease payments Multiply by: PV of annuity due @9%, n=9 Total First payment due in advance Lease liability – Dec. 31, 20x1 *Answer choice is rounded-off

52,000 (2,000) 50,000 6.5348 326,740 (50,000) 276,740

4. C Solution: Cash flows Annual 10,00 rent 0 10,00 PO 0

PV factors PV annuity due @12%, n=10

PV 6.3282

63,282

PV of 1 @12%, n=10

0.3220

3,220 66,502

5. A Solution: Cash flows Annual rent Guaranteed RV

PV factors PV annuity due @9%, 13,000 n=5 10,000

PV 4.2397

55,116

PV of 1 @9%, n=5 0.6499 Total First payment due immediately

6,499 61,615 (13,000)

Lease liability – initial recognition

48,615

6. A (100,000 x PV ord. annuity @10%, n=5) = 379,000 (rounded-off) (379,000 x 10%) = 37,900

7. B Solution: Date 1/1/x7 12/31/x7

Payment s

Int. expense

Amortizatio n

10,000

9,000

1,000

Present value 112,500 111,500

8. B (10,000 x PV ordinary annuity @10%, n=10) = 61,446. The residual value is ignored because it is unguaranteed, (i.e., guaranteed by a third party unrelated to the lessee rather than by the lessee or a party related to the lessee)

9. B Solution:

12

Date 12/31/x8 12/31/x8 12/31/x9

Payment s

Int. expense

Amortizatio n

20,000 20,000

11,500

20,000 8,500

10. B (108,000 ÷ 12) = 9,000

13

Present value 135,000 115,000...