LESSEE ACOUNTING (FINANCE LEASE – LESSOR)
Illustrative 1: On January 1, 2022, Pepper Company leased a machinery to Ivana Company
with the following details:
Cost of Machinery
Lease term
Useful life of the machinery
Implicit interest rate before initial direct cost
Implicit interest rate after initial direct cost
Present value of annuity of 1 for 4 years at 12%
Present value of annuity of 1 for 4 years at 10%
P1,518,650
4 years
4 years
12% (for computation of annual rental)
10% (amortization, interest income)
3.0373
3.1699
On January 1, 2022, Pepper Company paid initial direct cost of P66,300.
Required:
1. How much is the Gross Investment?
Cost of the asset
1,518,650
/ PVF at 12%
3.0373
Annual rental
500,000
x
4 years
Gross Investment
2,000,000
2. How much is the Net Investment?
Cost of the asset
1,518,650
IDC
66,300
Net investment
1,584,950
3. How much is the Unearned Interest Income?
Gross Investment
2,000,000
Net Investment
(1,584,905)
UII
415,050
4. How much is the carrying amount of the Lease Receivable on December 31, 2022?
CA, end
= CA, beg x 1.ER – payment
CA, 1/1/22
= 1,584,950 x 1.10 – 500,000
CA, 12.31/22 = 1,243,445 x 1.10 – 500,000
CA, 12/31/23 = 867,790
5. How much is the current portion of the Lease Receivable on December 31, 2022?
CA, 12/31/22
1,243,445
Noncurrent
(867,790)
Current (residual) 375,655
6. How much is the noncurrent portion of the Lease Receivable on December 31, 2022?
Noncurrent
867,790
Illustrative 2: On January 1, 2022, Pepper Company leased a machinery to Ivana Company
with the following details:
Cost of Machinery
Residual value guarantee
Useful life and lease term
Implicit Interest rate
PV of 1 at 10% for 4 periods
PV of an annuity of 1 at 10% for 4 periods
PV of an annuity due of 1 at 10% for 4 periods
P3,760,100
400,000
4 years
10%
0.6830
3.1699
3.4869
The annual rental is payable in advance on January 1 of each year starting January 1, 2022.
Required:
1. How much is the annual rental?
Cost of the asset
3,760,100
PV of residual val(400Kx0.6830)
(273,200)
PV of rentals
3,486,900
/ PVF
3.4869
Annual rentals
1,000,000
2. How much is the gross investment?
Gross rentals (1M x 4yrs)
4,000,000
Residual value
400,000
Gross Investment
4,400,000
3. How much is the net investment?
Cost of asset
3,760,100
Net investment
3,760,100
4. How much is the unearned interest income?
Gross investment
4,400,000
Net investment
3,760,100
Unearned interest income
639,900
Illustrative 3: On January 1, 2022, Pepper Company leased a machinery to another entity with
the following details:
Cost of machinery
Residual value guarantee
Useful life and lease term
Implicit interest rate
PV of 1 at 8% for 5 periods
PV of an annuity of 1 at 8 % for 5 periods
PV of an annuity due of 1 at 8% for 5 periods
P3,449,600
500,000 (ignored)
5 years
8%
0.681
3.993
4.312
The annual rental is payable in advance on January 1 of each year starting January 1, 2022.
The lease provides for a transfer of title to the lessee at the end of the lease term.
Required:
1. How much is the annual rental?
Cost of machinery
3,449,600
/ PVF
4.312
Annual rentals
800,000
2. How much is the Gross Investment?
Gross investment (800K x 5 yrs)
4,000,000
3. How much is the Net Investment?
Net investment
3,449,600
4. How much is the Unearned Interest Income?
4,000,000 – 3,449,600 = 550,400
Illustrative 4: Pepper Company is a dealer (sales type lease) in machinery. On January 1,
2022, a machinery was leased to Ivana Company with the following provisions:
Annual rental payable at the end of each year
Lease term
Useful life of machinery
Cost of machinery
Estimated residual value
Initial Direct Cost paid by lessor
Implicit interest rate
Present value of annuity of 1 for 5 years at 10%
Present value of 1 for 5 periods at 10%
P800,000
5 years
5 years
2,000,000
200,000
100,000
10%
3.7908
0.6209
At the end of the lease term on December 31, 2026, the machinery will revert to Pepper
Company.
Required:
Scenario A: Residual value is Guaranteed
1. How much is the Gross Investment?
Gross rentals (800K x 5yrs)
4,000,000
Residual value
200,000
Gross investment
4,200,000
2. How much is the Net investment?
PV of rentals (800K x 3.7908)
3,032,640
PV of Resid val (200K x 0.6209)
124,180
Net Inv
3,156,820
3. How much is the Unearned Interest Income?
4,200,000 – 3,156,820 = 1,043,180
4. How much is the Sales?
Sales (Net Inv) = 3,156,820 (kasi walang given na fair value)
5. How much is the Cost of Goods Sold?
Cost of the asset
2,000,000
IDC
100,000
COGS
2,100,000
6. How much is the gross profit?
(Sales – COGS) 3,156,820 – 2,100,000 = 1,056,820
7. How much is the carrying amount of the Lease Receivable on December 31, 2022?
CA, beg (net inv) 3,156,820
CA end = 3,156,820 x 1.10 – 800,000
= 2,672,502
Scenario B: Residual Value is Unguaranteed
1. How much is the Gross Investment? 4,200,000
2. How much is the Net investment? 3,156,820
3. How much is the Unearned Interest Income? 1,043,180
4. How much is the Sales?
Net inv
3,156,820
PV of URV
124,820
Sales
3,032,000
5. How much is the Cost of Goods Sold?
Cost of the asset
3,000,000
IDC
100,000
PV of URV
(124,820)
COGS
1,975,180
6. How much is the gross profit?
Sales
3,032,000
COGS
1,975,180
GP
1,056,820
7. How much is the carrying amount of the Lease Receivable on December 31, 2022?
2,672,502
Illustrative 5: Pepper Company is a dealer in equipment (sales type lease). On January 1,
2022, an equipment is leased to Ivana Company with the following provisions:
Annual rental payable at the end of each year
Lease term
Useful life of machinery
Cost of machinery
Purchase Option
Initial Direct Cost paid by lessor
Implicit interest rate
PV of annuity of 1 for 4 years at 8%
PV of 1 for 4 years at 8%
P500,000
4 years
5 years
1,000,000
200,000
100,000
8%
3.312
0.735
It is reasonably certain that the lessee will exercise the purchase option on December 21, 2025.
Required:
1. How much is the Gross Investment?
Gross rentals (500K x 4yrs) 2,000,000
Option
200,000
Gross Inv
2,200,000
2. How much is the Net investment?
PV of rentals (500K x 3.312) 1,656,000
PV of Option (200K x 0.735) 147,000
Net inv
1,803,000
3. How much is the Unearned Interest Income?
Gross inv
2,200,000
Net inv
1,803,000
UII
397,000
4. How much is the Sales?
Net inv
1,803,000
5. How much is the Cost of Goods Sold?
Cost of the asset
1,000,000
IDC
100,000
COGS
1,100,000
6. How much is the gross profit?
Sales 1,803,000 – COGS 1,100,000 = GP 703,000
Illustrative 6: Pepper Company sold an equipment that it had been leasing under a sales type
lease for P3,500,000
The following balances are associated with the finance lease on the books of Pepper on the
date of the sale:
Lease receivable
P5,000,000
Unearned interest income
1,200,000
Required: How much is the gain or loss on the actual sale of the equipment?
CA of LR
5M – 1.2M = 3,800,000
Selling price vs. CA of LR
3,500,000 < 3,800,000
= Loss 300,000