SIM ACtivity sale and leaseback PDF

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Let’s CheckAnswer the following adapted problems: On December 31, 2019, Ben Company sold a machine to Ryan Company and simultaneously leased it back for one year. The entity provided the following information at this date: Sale price 504, Carrying Amount 462, Present value of reasonable lease rental...

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Let’s Check Answer the following adapted problems:

1. On December 31, 2019, Ben Company sold a machine to Ryan Company and simultaneously leased it back for one year. The entity provided the following information at this date: Sale price Carrying Amount Present value of reasonable lease rentals (P30,000 for 12 months @ 12%) Estimated remaining useful life

504,000 462,000 477,400 12 years

In the income statement for 2019, what amount should be reported as gain from the sale of the machine? a. 47,740 b. 42,000 c. 5,740 d. 0 2. On December 31, 2019, Lanie Company sold equipment to Noll Company simultaneously leased back for 3 years. The leaseback is appropriately considered low value lease. Sale price Carrying amount Estimated remaining economic life

576,000 504,000 5 years

What amount should be reported as gain from sale of equipment for 2019? a. 168,000 b. 84,000 c. 56,000 d. 0 Answer not in the choices: it should be 72,000= 576,000-504,000 3. On January 1, 2019, Lemon Company sold equipment to an unaffiliated entity at the fair value of P3,000,000. The equipment had a carrying amount of P2,700,000 and a remaining life of 10 years. That same day, Lee company leased back the equipment at P9,000 per month for 2 years with no option to renew the lease or repurchase of the equipment. The present value of the lease payments using the appropriate interest rate was 191,190 on January 1, 2019.

Q1 a. b. c. d.

What is the initial lease liability? 191,190 95,595 216,000 Zero because low value lease

a. b. c. d.

What is the cost of right of use asset? 216,000 172,071 191,190 Zero

a. b. c. d.

What is the annual depreciation of the right of use asset? 86,035.2 59,595 108,000 Zero

Q2

Q3

Q4 What is the gain on right transferred to the buyer-lessor? a. 300,000 b. 280,881 c. 150,000 d. Zero

Let’sAnalyze Answer the following adapted problems: Problem 1. Yasmin Company sold a machine and immediately leased it back at market rental on January 1, 2017. The following data are gathered in connection with the lease back transaction: Selling price 3,750,000 Fair value of machine 3,750,000 Carrying amount of machine 3,375,000 Annual rental 450,000 Remaining life of machine 10 years Lease term 5 years Implicit interest rate 10% Present value of an ordinary annuity of 1 at 10% for 5 periods 3.791 The lease back provides for neither transfer of title to the lessee nor a purchase option that is reasonably certain to be exercised. Required: Q1 Computetheinitialmeasurementofleaseliability.1705,950

Q2 Q3

Computethecostofrightofuseasset. = 1535,355 Determinethe gain onrighttotrasferredtothebuyer - lessor.= 204405

Problem 2 The following data are gathered from the sale and lease back transaction entered into on January 1, 2017 by Lovell Company, theseller: Selling price 3,600,000 Fair value of machine 3,000,000 Carrying amount of machine 2,700,000 Annual rental payable at the end of each year 480,000 Remaining life of machine 10 years Lease term 4 years Implicit interest rate 8% Present value of an ordinary annuity of 1 at 8% for 4 periods 3.312 Their agreement did not provide for transfer of title nor purchase option that is reasonably certain to be exercised. Q1 Computetheinitialleaseliability. = 1,589,760 Q2 Computethecostofrightofuseasset.= 890,784 Q3 Determinethe gain onrighttransferredtobuyer-lessor.= 201,024 Problem 3 At the beginning of current year, an entity sold an equipment with remaining life of 10 years and immediately leased it back for 4 years at the prevailing market rental. Sales price at fairvalue Carrying amount of equipment Annual rental payable at the end of eachyear Implicit interest rate 10% Present value of an ordinary annuity of 1 at 10% for four periods

5,400,000 4,050,000 720,000 3.17

Q1 What is the initial lease liability? = 720,000 (3.17)=2,282,400 Q2 What is the cost of right of use asset?= 2,282,400/5400,000*4,050,000= 1,711,800 Q3 What is the gain on right transferred? 5400,0002282400=3117600/5400,000*1350,000= 779400 Q4 What is the annual depreciation of the lessee?=1711800/4=427,950 Q5 Prepare the entries on the books of the lessee for the 4 years.=

In a Nutshell (Adapted) On January 1, 2019, Ramzel company sold a machine and immediately leased it back.

The following data pertain to the sale and leaseback transaction: Sales price at below fair value Fair value of machine Carrying amount of machine Annual rental payable at the end of each year Remaining life of machine Lease term Implicit interest rate Present value of an ordinary annuity of 1 at 6% For 3 periods

4,800,000 6,000,000 4,200,000 600,000 10 years 3 years 6% 2.673

The lease provides for neither trasnfer of title to the lessee upon lease expiration nor a purchase option that is reasonably certain to be exercised. Case 1 Sales price is below fair value = 600,000*2.67=1602000 Q1 Compute for the initial lease liability. Q2 Compute for the cost of right of use asset. = FV-SP= 6,000,000-4800,000= 1200,000 Initial Lease liab+ Excess = 1602,000- 1200,000= 2802,000 2802000/6,000,000*4200,000=1961400 Q3 Determine the gain on right transferred to buyer-lessor. FV-CA = 6,000,000-4200,000=1,800,000 FV-right retained= 6,000,000-2802,000=3198000/6,000,000*1800,000=959,400 Q4 Entries Seller-lessee’s book Cash 4800,000 Right of use Asset 1961,400 Machinery 4200,000 Lease Liability 1602000 Gain on right transferred 959400 Interest expense1602,000*6% 96,120 Lease liability 503,880 Cash 600,000 Depreciation 1961400/3 Accumulated depreciation Books of Buyer-lessor Machinery 4800,000 Cash 4800,000

653800 653800

Cash

600,000 Rental Income

600,000

Depreciation 480,000 Accumulated Depreciation

480,000

Q5 In not less than 20 words, be able to explain your answer from question 1 to 4. ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ___________...