Volume 3 Chapter 3 - Leases (Solution Manual) PDF

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Summary

CHAPTER 3LEASES a. A contract of lease b. Not a contract of lease c. A contract of lease d. Not a contract of lease Two conditions must be satisfied to determine whether there is a lease contract - There is an identified asset - The customer has the right to obtain substantially all of the economic ...

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CHAPTER 3 LEASES

3.

a. b. c. d.

A contract of lease Not a contract of lease A contract of lease Not a contract of lease

Two conditions must be satisfied to determine whether there is a lease contract • There is an identified asset • The customer has the right to obtain substantially all of the economic benefits from the use of the asset. Problems 3-1.

(Generous, Inc.) (a)

Cash payment P 260,000 Present value of remaining payments (260,000 x 3.2397) 842,322 Present value of guaranteed residual value (200,000 x 0.6499) 129,980 Capitalized cost of right-of-use equipment/automobiles P1,232,302

(b)

Lease liability at January 1, 2020 after the first payment 842,322 + 129,980

P972,302

(c)

Date 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 12/31/24

Total Annual Payment

Amortization Table Interest Expense

260,000 260,000 260,000 260,000 200,000

87,507 71,983 55,061 36,617 16,530*

Reduction in Principal 172,493 188,017 204,939 223,383 183,470

Lease Liability 972,302 799,809 611,792 406,853 183,470 -

*Adjusted; difference is due to rounding off.

(d) 2020

Jan. 1

Dec. 31 31

Right-of-Use Automobiles Lease Liability Cash Interest Expense Lease Liability

1,232,302 972,302 260,000 87,507 87,507

Depreciation Expense Accumulated Depreciation-ROU Auto (1,232,302-200,000)/5

206,460

Lease Liability Cash

260,000

206,460

2021

Jan. 1

Dec. 31 31

Interest Expense Lease Liability Depreciation Expense Accumulated Depreciation

260,000 71,983 71,983 206,460 206,460

Chapter 3 – Leases

(e) Dec. 31

Accumulated Depreciation (206,460 x 5) Interest Expense Lease Liability Right-of-Use Automobiles *adjusted; balancing figure

1,032,300 16,532* 183,470

Impairment Loss Accumulated depreciation Interest Expense Lease Liability Right-of-Use Automobiles Cash

50,000 1,032,300 16,532 183,470

1,232,302

(f) Dec. 31

3-2.

1,232,302 50,000

(Diana Corporation) (a)

Cash paid at commencement Initial direct costs paid by lessee PV of remaining lease payments (86,680 x 3.1699) PV of estimated restoration costs (20,000 x 0.6209) Capitalized cost of the right-of-use asset

P 86,680 10,000 274,767 12,418 P383,865

(b)

Date 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 12/31/24

Total Annual Payment 86,680 86,680 86,680 86,680 20,000

Amortization Table Interest Expense 28,719 22,922 16,547 9,533 1,814*

Reduction in Principal 57,961 63,758 70,133 77,147 18,186

Lease Liability 287,185 229,224 165,466 95,333 18,186 -

*Adjusted; difference is due to rounding off.

(c) 2020

Jan.

1

Dec. 31

31

Right-of-Use Equipment Cash (86,680 + 10,000) Lease Liability (274,767 + 12,418)

383,865 96,680 287,185

Interest Expense Lease Liability

28,719

Depreciation Expense Accumulated Depreciation 383,865/5 years

76,773

Lease Liability Cash

86,680

Interest Expense Lease Liability

22,922

Depreciation Expense Accumulated Depreciation

76,773

28,719

76,773

2021

Jan. 1 Dec. 31

31

86,680

22,922 76,773

28

Chapter 3 – Leases

3-3.

(Riza, Inc.) (a)

1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods From Table VI across 12 periods, 7.4951 is under 10% interest rate. OR 1,011,840 – 135,000 = 876,840 876,840/135,000 =6.4951 (Table IV, 11 periods = 10%)

(b)

Amortization Table Total Annual Interest Payment Expense

Date 12/31/20 12/31/21 135,000 87,684 12/31/22 135,000 82,952 12/31/23 135,000 77,748 *1,011,840 – 135,000 = 876,840 (c)

12/31/21

3-4.

47,316 52,048 57,252

Depreciation expense for 2021 (1,011,840 – 40,000) / 15 years

(d) 12/31/20

(e)

Reduction in Principal

Right-of-Use Equipment Cash Lease Liability

Lease Liability 876,840* 829,524 777,476 720,224

P64,789

1,011,840 135,000 876,840

Lease Liability Interest Expense Cash

47,316 87,684

Depreciation Expense Accumulated Depreciation

64,789

135,000 64,789

Lease Liability as of December 31, 2020: Current portion Noncurrent portion

47,316 829,524

(Shirley Corporation) (a)

Payment at commencement PV of periodic payments (150,000 x 3.0373) PV of bargain purchase option (240,000 x 0.5674) Total capitalized cost

P150,000 455,595 136,176 P741,771

(b)

Date 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 12/31/23

Total Annual Payment 150,000 150,000 150,000 150,000 240,000

Amortization Table Interest Expense 71,013 61,534 50,918 39,028 25,736*

Reduction in Principal 78,987 88,466 99,082 110,972 214,264

Lease Liability 591,771 512,784 424,318 325,236 214,264 -

*Adjusted; difference is due to rounding off.

(c)

Depreciation expense for 2020 (741,771 / 15 years)

29

P49,451

Chapter 3 – Leases

(d) 2020

Jan. 1

Dec. 31

31

Right-of-Use Machinery Lease Liability Cash

741,771 591,771 150,000

Interest Expense Lease Liability

71,013

Depreciation Expense Accumulated Depreciation

49,451

71,013

49,451

2021

Jan. 1

Dec. 31

31 (e) Dec. 31

(f) Dec. 31

3-5.

Lease Liability Cash

150,000 150,000

Interest Expense Lease Liability

61,534

Depreciation Expense Accumulated Depreciation

49,451

61,534 49,451

Interest Expense Lease Liability Accumulated Depreciation (49,451 x 5) Machinery (741,771 – 247,255) Right-of-Use Machinery Cash

25,736 214,264 247,255 494,516

Interest Expense Lease Liability Accumulated Depreciation Loss on Failure to Exercise BPO Right-of-Use Machinery (Loss = 494,516-240,000)

25,736 214,264 247,255 254,516

741,771 240,000

741,771

(Prince of Wales, Inc.) (a)

Cash paid PV of future payments (700,000 x 5.7590) Capitalized cost of the building

P 700,000 4,031,300 P4,731,300

(b)

Annual depreciation = P4,731,300/10

P 473,130

(c) 2020

July 1 Right-of-Use Building Taxes and Insurance Expense Cash Lease Liability

4,731,300 50,000 750,000 4,031,300

Dec. 31 Interest Expense Lease Liability 4,031,300 x 10% x ½

201,565

31 Depreciation Expense 236,565 Accumulated Depreciation – RoU Building 473,130 x 6/12

30

201,565

236,565

Chapter 3 – Leases

Dec. 31

Prepaid Taxes and Insurance Taxes and Insurance Expense

25,000 25,000

2021

July 1 Lease Liability Interest Expense Taxes and Insurance Expense Cash

498,435 201,565 50,000 750,000

Dec. 31 Interest Expense 186,721 Lease Liability 4,031,300 – (700,000 – 403,130) x 10% x 6/12

186,721

31 Depreciation Expense 473,130 Accumulated Depreciation – RoU Building

3-6.

473,130

(Joy Company) (a) 2020

Aug. 1

1

1 Dec. 31

Finance Lease Receivable Equipment for Lease Discount on Finance Lease Receivable

605,000 480,000 125,000

Discount on Finance Lease Receivable Cash

1,900 1,900

Cash Finance Lease Receivable

100,000 100,000

Discount on Finance Lease Receivable Interest Revenue 381,900 x 10% x 5/12

15,912

Discount on Finance Lease Receivable Cash Interest Revenue (38,190 x 7/12) Finance Lease Receivable

22,278 100,000

15,912

2021

Aug. 1

Dec. 31

22,278 100,000

Discount on Finance Lease Receivable Interest Revenue (32,090 x 5/12)

13,370 13,370

Partial Amortization Table Date 08/01/20 08/01/20 08/01/21 08/01/22 (b)

Periodic Payment 100,000 100,000 100,000

Interest 38,190 32,090

Reduction in Principal 100,000 61,810 67,910

Balance of Principal 481,900 381,900 320,090 252,180

As of December 31, 2020: Total Finance Lease Receivable P505,000 Discount on Finance Lease Rble 107,188 P397,812 Current portion: Principal due in 2021 Accrued interest, 12/31/20 (38,190 Total

31

Current P100,000 22,278 P 77,722

x 5/12)

Non-current P405,000 84,910 P320,090 P 61,810 15,912 P 77,722

Chapter 3 – Leases

3-7.

(Jane Company) (a)

(b)

(c)

Right-of-Use Asset Cash Lease Liability (1.0M x 8.3064)

9,306,400 1,000,000 8,306,400

Interest Expense Lease Liability 8,306,400 x 5%

415,320

Depreciation Expense Accumulated Depreciation 9,306,400/12

775,553

Right-of-Use Asset Lease Liability

597,060

415,320

775,553

597,060

Lease Liability Cash

1,080,000 1,080,000 Partial Amortization Table for 3 years

Date 01/01/Y1 01/01/Y2 01/01/Y3 01/01/Y4

Periodic Payment

Interest 415,320 386,086 355,390

1,000,000 1,000,000 1,000,000

Reduction in Principal 584,680 613,914 644,610

PV of revised liability before this payment Revised lease payment, starting beginning of Y4 1,000,000 x 135/125 = 1,080,000 PV of 8 future payments at 5% 1,080,000 x 6.4632 Total CV of lease liability, beg of 4th year 7,107,806 + 355,390 Adjustment (or 80,000 x 7.4632 = 597,056)

Balance of Principal 8,306,400 7,721,720 7,107,806 6,463,196

1,080,000 6,980,256 8,060,256 7,463,196 597,060

At end of year 4 Interest Expense Lease Liability 6,980,256 x 5%

349,013 349,013

Depreciation Expense 841,873 Accumulated Depreciation 841,873 9,306,400- (775,533 x 3) + 597,060 9 = 841,873 Revised Amortization Table, year 4

Date Revised LL 01/01/Y4 01/01/Y5

Periodic Payment

Interest

Reduction in Principal

1,080,000 1,080,000

349,013

730,987

32

Balance of Principal 8,060,256 6,980,256 6,249,269

Chapter 3 – Leases

3-8.

(Jackie Chan and Chris Tucker) Annual Lease Payment: Fair value of asset PV of BPO (40,000 x .6209) PV of periodic payment PV factor (Annuity due for 5 years at 10%) Periodic payment

P600,000 24,836 P575,164 ÷4.1699 P137,932

Amortization Table Date Jan. 1, 2020 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022

Periodic Payment

Interest

Reduction in Principal

137,932 137,932 137,932

46,207 37,034

137,932 91,725 100,898

Balance of Principal 600,000 462,068 370,343 269,445

Depreciable cost = P600,000 – P20,000 = P580,000 2020 Depreciation = P580,000 x 6/21 = P165,714 2021 Depreciation = P580,000 x 5/21 = 138,095 (a)

Books of Chris Tucker (Lessee)

2020

Jan. 1 Right-of-Use Equipment Lease Liability Cash

600,000 462,068 137,932

Dec 31 Interest Expense Lease Liability

46,207 46,207

31 Depreciation Expense – RoU Equipment Accum. Depr. – RoU Equipment

165,714 165,714

2021

Jan. 1 Lease Liability Cash

137,932 137,932

Dec 31 Interest Expense Lease Liability

37,034 37,034

Depreciation Expense – RoU Equipment Accum. Depr.– RoU Equipment

(b)

138,095 138,095

Books of Jackie Chan (Lessor)

2020

Jan. 1 Finance Lease Receivable Equipment for Lease Discount on Finance Lease Receivable (137,932 x 5) + 40,000 = 729,660 1 Cash

729,660 600,000 129,660 137,932

Finance Lease Receivable

137,932

Dec 31 Discount on Finance Lease Receivable Interest Revenue

33

46,207 46,207

Chapter 3 – Leases

2021

Jan. 1 Cash

137,932 Finance Lease Receivable

137,932

Dec 31 Discount on Finance Lease Receivable Interest Revenue

3-9.

37,034 37,034

(Ben Ten and Ironman) (a)

Direct finance lease (The cash price equals the carrying value of the asset; hence, there is no gross profit).

(b)

The rate is approximately 8%. The PV factor is P539,730/80,000 = 6.7466; in line 9 (which is 8 annual payments of P80,000 + 1 payment for guaranteed residual value of same amount), the corresponding interest rate is 8%. Partial Amortization Table Date April 1, 2020 April 1, 2020 April 1, 2021 April 1, 2022

(c)

Periodic Payment

Interest

Reduction in Principal

80,000 80,000 80,000

36,778 33,321

80,000 43,222 46,679

Lease Liability P539,730 459,730 416,508 369,829

Books of Ironman (Lessee) 2020

Apr. 1

Dec. 31

Dec. 31

Right-of-Use Equipment Cash Lease Liability

539,730 80,000 459,730

Interest Expense Lease Liability 36,778 x 9/12

27,584

Depreciation Expense Accumulated Depreciation (539,730-80,000)/8 = 57,466 57,466 x 9/12 = 43,100

43,100

Interest Expense (36,778 x 3/12) Lease Liability (43,222 + 27,584) Cash

9,194 70,806

Interest Expense Lease Liability 33,321 x 9/12

24,991

Depreciation Expense Accumulated Depreciation (539,730-80,000)/8 = 57,466

57,466

27,584

43,100

2021

Apr. 1

Dec. 31

31

80,000 24,991

34

57,466

Chapter 3 – Leases

(d)

Books of Ben Ten (Lessor) 2020

Apr. 1

1 Dec. 31

Finance Lease Receivable Discount on Finance Lease Receivable Equipment for Lease (80,000 x 8) + 80,000 GRV = 720,000

720,000 180,270 539,730

Cash Finance Lease Receivable

80,000

Discount on Finance Lease Receivable Interest Revenue

27,584

Cash Finance Lease Receivable

80,000

80,000

27,584

2021

Apr. 1

1

Dec. 31

3-10.

Discount on Finance Lease Receivable Interest Revenue

9,194

Discount on Finance Lease Receivable Interest Revenue 32,893 x 9/12

24,991

9,194 24,991

(e)

The asset shall be recorded at P496,512 which is 80,000 x 6.2064. Depreciation for 2020 = 496,512/8 x 9/12 = 46,548

(f)

No difference in journal entries. To the lessor, under the direct finance lease, it does not matter whether the residual value is guaranteed or unguaranteed.

(Prudent Company) (a)

Sales price Cost of machine Gross profit

P1,011,840 784,500 P 227,340

(b)

Gross investment (135,000 x 12) Sales Total financial revenue over the lease term

P1,620,000 1,011,840 P 608,160

Interest revenue for 2020 (1,011,840 – 135,000) x 10% x 6/12

P

Finance Lease Receivable (1,620,000 – 135,000) Less Discount on Finance Lease Receivable (608,160-43,842) Net Finance Lease Receivable, December 31, 2020

P1,485,000 564,318 P 920,682

(c) (d)

3-11.

80,000

43,842

(Glad Manufacturing Company) (a) 2020

Apr. 1

Finance Lease Receivable(175,000x8)+100,000 Cost of Sales 940,000-(100,000 x .4665) Discount on Finance Lease Receivable Sales (175,000 x 5.8684) Finished Goods Inventory

35

1,500,000 893,350 426,380 1,026,970 940,000

Chapter 3 – Leases

175,000 x 8 = 1,400,000 1,400,000 + 100,000 = 1,500,000 940,000–(100,000 x 0.4665)=893,350 175,000 x 5.8684 = 1,026,970 100,000 x 0.4665 = 46,650 1,026,970 + 46,650 = 1,073,620 1,500,000 – 1,073,620 = 426,380 1 Dec. 31

Cash Finance Lease Receivable

175,000 175,000

Discount on Finance Lease Receivable Interest Revenue 89,862 x 9/12

67,397 67,397

2021

Apr. 1

Dec. 31

Cash Discount on Finance Lease Receivable (89,862 x 3/12) Finance Lease Receivable Interest Revenue

175,000 22,465 175,000 22,465

Discount on Finance Lease Receivable Interest Revenue 81,348 x 9/12

61,011 61,011

Partial Amortization Table Date April 1, 2020 April 1, 2020 April 1, 2021 April 1, 2022

Periodic Payment

Interest

Reduction in Principal

175,000 175,000 175,000

89,862 81,348

175,000 85,138 93,652

Balance of Principal P1,073,620 898,620 813,482 719,830

*The compound entry may also be presented in separate entries as follows: Apr. 1

1

1

(b)

(c)

3-12.

Finance Lease Receivable Sales Discount on Finance Lease Receivable

1,400,000 1,026,970 373,030

Cost of Sales Finished Goods Inventory

940,000

Finance Lease Receivable Cost of Sales Discount on Finance Lease Receivable

100,000

940,000 46,650 53,350

(i)

Sales Cost of Sales (940,000 – 46,650) Gross profit on sales

P1,026,970 893,350 P 133,620

(ii)

Interest Revenue for 2020 (see journal entries)

P

Sales (1,026,970 + 46,650) Cost of sales (cost of the asset)

67,397

P1,073,620 P 940,000

(Ruby Company and Emerald Company)

36

Chapter 3 – Leases

a.

Manufacturer’s or dealer’s lease, because FV exceeds CV. The difference represents gross profit, which characterizes a dealer’s or manufacturer’s lease.

b.

Present value of MLP (850,365 x 4.60478) (Adjusted) Present value of residual value (166,300 x .50663) Total present value Carrying value of leased asset Gross Profit Lease arrangement cost Interest income (377,956 x 3/12) Total income in 2020

c.

Books of Ruby Company (Lessor)

P3,915,747 84,253 P4,000,000 3,200,000 P 800,000 ( 85,000) 94,489 P 809,489

Amortization Table Date Oct. 1, 2020 Oct. 1, 2020 Oct. 1, 2021 Oct. 1, 2022