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LESSEE ACCOUNTING
At the beginning of current year, Lessee Company leased a machinery with the following information: Annual rental payable at the end of each year 1 , 000 , 000 Residual value guarantee 500 , 000 Payment to lessor to obtain a long-term lease 300 , 000 Cost of dismantling and restoring the asset as required by contract at present value 390 , 000 Annual executory cost paid by lessee 50 , 000 Lease term 4 years Useful life of machinery 8 years Implicit interest rate 10 % Present value of an ordinary annuity of 1 at 10 % for 4 periods 3. 17 Present value of 1 at 10 % for 4 periods 0. 68
- What is the initial lease liability? a. 3 , 510 , 000 b. 3 , 170 , 000 c. 4 , 010 , 000 d. 4 , 000 , 000
- What is the cost of right use asset? a. 4 , 200 , 000 b. 4 , 250 , 000 c. 3 , 810 , 000 d. 3 , 900 , 000
- What is the depreciation for current year? a. 462 , 500 b. 925 , 000 c. 850 , 000 d. 965 , 000
- What is the lease liability at year-end? a. 2 , 510 , 000 b. 3 , 159 , 000 c. 2 , 861 , 000 d. 3 , 620 , 000
Solutions:
At the beginning of current year, Panorama company leased a buidiling from a lessor with the following pertinent information: Annual rental payable at the end of each year 1 , 000 , 000 Initial direct cost paid 400 , 000 Lease incentive received 100 , 000 Leasehold improvement 200 , 000 Purchase option that is reasonably certain to be exercised 500 , 000 Lease term 5 years Useful life of building 8 years
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At the beginning of current year, Ashe Company entered into a ten-year noncancelable lease requiring year-end payments of P 1 , 000 , 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 %. On same date, Ashe Company paid initial direct cost of P 200 , 000 in negotiating and securing the leasing arrangement. Ownership of the property remains with the lessor at expiration of the lease. There is no purchase option. The leased property has an estimated economic life of 12 years.
- What amount should be capitalized initially as cost of the right of use asset? a. 6 , 145 , 000 b. 6 , 345 , 000 c. 5 , 650 , 000 d. 5 , 850 , 000
- What amount should be recognized initially as lease liability? a. 5 , 145 , 000 b 6 , 145 , 000 c. 6 , 345 , 000 d. 5 , 650 , 000
- What amount should be recognized as annual depreciation of the right of use asset? a. 634 , 500 b. 614 , 500 c. 528 , 750 d. 585 , 000
Solutions:
Neal Company entered into a nine-year lease on a warehouse on December 31 , 2022. Lease payment of P 520 , 000 which included executory cost of P 20 , 000 is due annually, beginning on December 31 , 2023 and every December 31 thereafter. The cost of restoring the underlying asset to its original condition as required by the contract is estimated at the present value of P 200 , 000 The interest rate implicit in the lease is 9 %. The 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 , 2022? a. 2 , 800 , 000 b. 2 , 912 , 000 c. 4 , 500 , 000 d. 4 , 680 , 000
- What amount should be recognized initially as cost of the right of use asset? a. 2 , 800 , 000 b. 3 , 000 , 000 c. 3 , 112 , 000 d. 4 , 700 , 000 Solutions:
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Robbin Company leased a machine with remaining useful life of 14 years from Ready Leasing Company. The lease required 10 annual payments ofP 1 , 000 , 000 beginning immediately. The lease specified an interest rate of 12 % and a purchase option of P 1 , 000 , 000 at the end of the tenth year. The lessee is reasonably certain to exercise the purchase option. Present value of an annuity due (in advance) of 1 at 12 % for 10 periods 6. 328 Present value of 1 at 12 % for 10 periods 0. 322
- What amount should be recorded initially as cost of the right of use asset? a. 6 , 328 , 000 b. 7 , 328 , 000 c. 6 , 650 , 000 d. 5 , 650 , 000
- What amount should be reported as annual depreciation of the right of use asset? a. 665 , 000 b. 475 , 000 c. 632 , 800 d. 452 , 000 Solutions:
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At the beginning of current year, Nori Mining Company entered into a 5 - year lease for drilling equipment. The entity accounted for the acquisition at the present value of lease payments of P 2 , 400 , 000 which included a P 100 , 000 purchase option. At the end of the lease, the entity is certain to exercise the purchase option. The entity estimated that the equipment's fair value will be P 200 , 000 at the end of the 8 - year life. The entity regularly used straight line depreciation on similar equipment. What amount should be recognized as depreciation expense on the right of use asset for the current year? a. 480 , 000 b. 460 , 000 c. 300 , 000 d. 275 , 000 Solution:
Helen Company recorded the cost right of use asset at P 4 , 500 , 000. The underlying asset had a useful life of 8 years and the lease term is 5 years. The asset is expected to have a fair value of P 1 , 500 , 000 at the end of 5 years and a fair value of P 500 , 000 at the end of 8 years. The lease agreement provided for the transfer of title of the underlying asset to the lessee at the end of the lease term. What amount of depreciation expense should be recorded for the first year of the lease? a. 900 , 000 b. 800 , 000 c. 600 , 000 d. 500 , 000
At the beginning of current year, Kosovo Company entered into a 10 - year lease for an equipment. The entity accounted for the acquisition at the present value of lease payment of P 4 , 900 , 000 which included a P 200 , 000 residual value guarantee. At the end of the lease, the asset will revert back to the lessor. It is estimated that the asset's fair value at the end of the 12 - year useful life will be P 100 , 000. The entity regularly used the straight line depreciation on similar equipment. What amount should be recognized as depreciation expense of the right of use asset for the current year? a. 490 , 000 b. 400 , 000 c. 470 , 000 d. 480 , 000 Solutions:
At the beginning of current year, Cola Company signed an 8 - year noncancelable lease for a new machine requiring P 750 , 000 annual payment at the beginning of each year. The machine had a useful life of 12 years with residual value of P 300 , 000. Aggregate lease payments have a present value of P 5 , 400 , 000 based on an appropriate interest rate. Tirle passes to Cola Compuny at the lease expiration date. The straight line method of depreciation is used for all plant assets. What amount should be recognized as depreciation of the right of use asset for the current year? a. 450 , 000 b. 425. 000 c. 625 , 000 d. 637. 500 Solution:
LEASE LIABILITY
On January 1 , 2024 , Babson Company leased two automobiles for executive use. The lease required Babson to make five annual payments of P 1 , 300 , 000 beginning January 1 , 2024. At the end of the lease term, December 31 , 2028 , the entity guaranteed the residual value of the automobiles at P 1 , 000 , 000. The interest rate implicit in the lease is 9 %. Present value factors for the 9 % rate implicit in the lease are: For an annuity due with 5 payments in advance 4. 240 For an ordinary annuity with 5 payments 3. 890 Present value of 1 for 5 periods 0. 650 What amount should be reported as lease liability immediately after the first required payment? a. 4 , 862 , 000 b. 4 , 407 , 000 c. 3 , 562 , 000 d. 3 , 107 , 000 Solution:
On December 31 , 2024 , Action Company signed a 7 - year finance lease for an airplane. The airplane's fair value was P 8 , 415 , 000. The entity made the first annual lease payment of P 1 , 530 , 000 on December 31 , 2024. The entity's incremental borrowing rate was 12 %, and the interest rate implicit in the lease, which was known by Action Company was 9 %. The rounded present value factors for an annuity due are: 9 % for 7 years 5. 5 12 % for 7 years 5. 1
Solution:
On December 31 , 2023 , Roe Company leased a machine from Colt Company for a five-year period. Equal annual payments under the lease are P 1 , 050 , 000 including P 50 , 000 annual executory cost and are due on December 31 of each year. The first payment was made on December 31 , 2023 and the second payment was made on December 31 , 2024. The five lease payments are discounted at 10 % over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was P 4 , 170 , 000. On December 31 , 2024 , what amount should be reported as lease liability? a. 3 , 170 , 000 b. 3 , 150 , 000 c. 2 , 853 , 000 d. 2 , 487 , 000 Solution:
On December 31. 2023 , Ames Company leased equipment for 10 years. The entity contracted to pay P 400 , 000 annual rent on December 31 , 2023 , and on December 31 of each of the next nine years. The lease liability was recorded at P 2 , 700 , 000 on December 31 , 2023. before the first payment. The equipment's useful life is 12 years, and the interest rate implicit in the lease is 10 %. The entity used the straight line method to depreciate all equipment.
- In recording the December 31 , 2024 payment, by what amount should the lease liability be reduced? a. 270 , 000 b. 230 , 000 c. 225 , 000 d. 170 , 000
- What amount should be reported as interest expense for 2024? a. 270 , 000 b. 230. 000 c. 200 , 000 d. 0 Solutions:
What amount should be included in current liabilities in relation to the lease on December 31 , 2024? a. 115 , 000 b. 200 , 000 c. 85 , 000 d. 65 , 000 Solution:
On January 1 , 2023 , Nun Company leased machinery from Chin Company for a 10 - year period. The useful life of the asset is 20 years. Equal annual payments under the lease are P 200 , 000 and are due on January 1 of each year starting January 1 , 2023. The present value on January 1 , 2023 of the lease payments over the lease term discounted at implicit interest rate of 10 % was P 1 , 352 , 000. The lease provided for a transfer of title to the lessee upon expiration of the lease term.
- What amount should be reported as lease liability on December 31 , 2023? a. 1 , 352 , 000 b. 1 , 152 , 000 c. 1 , 067 , 200 d. 1 , 552 , 000
- What amount of lease liability should be reported as noncurrent on December 31 , 2023? a. 1 , 215 , 920 b. 1 , 090 , 240 c. 1 , 067 , 200 d. 973 , 920
- What amount should be reported as interest expense for 2023? a. 200 , 000 b. 115 , 200 c. 106 , 720 d. 0 Solutions:
At the current year-end, Mercedez Company purchased a machinery that it had been leasing under a finance arrangemnent. The right of use asset and lease liability were originally recorded at P 2 , 000 , 000. At the time of the purchase, the accumulated depreciation on the right of use asset was P 800. 000 and the remaining balance of the lease liability was P 1 , 300 , 000. The underlying asset was purchased for P 1 , 440 , 000 cash. What amount should be debited as cost of the machinery on the date of purchase? a. 1 , 340 , 000 b. 1 , 440. 000 c. 1 , 200 , 000 d. 2 , 000 , 000
REMEASUREMENT OF LEASE LIABILITY
Alyanna Company entered into a lease of building on January 1 , 2023 with the following information: Annual rental payable at the end of each year 500 , 000 Lease term 5 years Useful life building 20 years Implicit interest rate 10 % PV of an ordinary annuity of 1 at 10 % for 5 periods 3. 79 The lease contained an option for the lessee to extend for a further 5 years. At the commencement date, the exercise of the extension option is not reasonably certain. After 3 years on January 1. 2026 , the lessee decided to extend the lease for a further 5 years. New annual rental payable at the end of each year 600 , 000 New implicit interest rate 8 % PV of an ordinary annuity of 1 at 8 % for 5 periods 3. 99 PV of I at 8 % for 2 periods 0. 86 PV of an ordinary annuity of 1 at 8 % for 2 periods 1. 78
- What amount should be reported as depreciation for 2023? a. 379 , 000 b. 100 , 000 c. 94 , 750 d. 25 , 000
- What amount should be reported as lease liability on December 31 , 2025? a. 1 , 895 , 000 b. 1 , 584 , 500 c. 1 , 242 , 950 d. 867 , 245
- What amount should be reported as new lease liability on January 1 , 2026? a. 2 , 948 , 840 b. 2 , 058 , 840 c. 2 , 394 , 000 d. 3 , 261 , 245
- What is the carrying amount of right of use asset on Janaury 1 , 2026? a. 2 , 081 , 595 b. 2 , 839 , 595 c. 2 , 190 , 840 d. 1 , 608. 000
- What amount should be reported as depreciation for 2026? a. 405 , 656 b. 297 , 370 c. 379 , 000 d. 141 , 980 Solutions:
On January 1 , 2023 , Variety Company entered into an 8 - year lease of a floor of a building with useful life of 15 years with the following terms: Annual rental for the first three years payable at the end of each year 300 , 000 Annual rental for the next five years payable at the end of each year 400 , 000 Implicit interest rate 10 % PV of an ordinary annuity of I at 10 % for three periods 2. 49 PV of an ordinary annuity of 1 at 10 % for five periods 3. 79 PV of 1 at 10 % for three periods 0. 75 The lease provides for neither a transfer of title to the lessee nor a purchase option.
- What amount should be reported as lease liability on January 1 , 2023? a. 1 , 516 , 000 b. 2 , 263 , 000 c. 1 , 884 , 000 d. 1 , 697 , 250
