Chapter 8
Leases (Part 2)
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. TRUE
8. FALSE
9. TRUE
10. TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
Solution:
Requirement (a):
Gross investment = (50,000 x 3) = 150,000
Net investment = 50,000 x PV of ordinary annuity of 1 @10%, n= 3 = 124,343
Unearned interest = 150,000 - 124,343 = 25,658
Requirement (b):
Date
1/1/x1
12/31/x1
12/31/x2
12/31/x3
Jan. 1,
20x1
Dec.
31,
20x1
Collection
s
Interes
t
Amortizatio
n
50,000
50,000
50,000
12,434
8,678
4,545
37,566
41,322
45,455
Finance lease receivable
Equipment
Unearned interest income
Cash
Unearned interest
Finance lease receivable
Interest income
1
Present value
124,343
86,777
45,454
0
150,000
124,343
25,658
50,000
12,434
50,000
12,434
Dec.
31,
20x2
Dec.
31,
20x3
Cash
Unearned interest
Finance lease receivable
Interest income
Cash
Unearned interest
Finance lease receivable
Interest income
50,000
8,678
50,000
8,678
50,000
4,545
50,000
4,545
2. Solutions:
Annual rent income is computed using the straight line method as follows:
Total rentals
First six-month rent-free (100,000 x 6/12)
Adjusted total rentals
Divide by: Lease term
Annual rent income
The entries are:
Books of Lessor
Jan. 1, 20x1
No entry
Dec. 31, 20x1
Cash
100,000
Rent receivable 100,000
Rent income
200,000
Dec. 31, 20x2
Cash
240,000
Rent income
200,000
Rent receivable
40,000
Dec. 31, 20x3
Cash
260,000
Rent income
200,000
Rent receivable
60,000
Dec. 31, 20x3
Rent receivable 100,000
Rent income
100,000
[10% x (3M – 2M)]
to record contingent rent receivable
2
P 700,000
( 100,000)
600,000
3
P200,000
PROBLEM 3: EXERCISE
Solutions:
Requirement (a) – Gross investment on Jan. 1, 20x1
Gross investment in the lease is computed as follows:
Lease payment (220,000 – 18,098)
Multiply by: Lease term
Gross investment in the lease – Jan. 1, 20x1
P 201,902
4
P 807,608
Requirement (b) – Net investment on Jan. 1, 20x1
Net investment in the lease is computed as follows:
Lease payment (220,000 – 18,098)
PV of ordinary annuity of P1 @10%, n=4
Net investment in the lease – Jan. 1, 20x1
P 201,902
3.1698654
P 640,000
Net investment in the lease may also be computed as follows:
Cost of equipment
P 600,000
Initial direct cost
40,000
Net investment in the lease – Jan. 1, 20x1
P 640,000
Requirement (c) – Unearned interest income on Jan. 1, 20x1
Unearned interest income is computed as follows:
Gross investment in the lease
P807,608
Net investment in the lease
( 640,000)
Unearned interest income – Jan. 1, 20x1
P167,608
Requirement (d) – Amortization table
Date
1/1/x1
12/31/x1
12/31/x2
12/31/x3
12/31/x4
Collection
s
Interes
t
Amortizatio
n
201,902
201,902
201,902
201,902
64,000
50,210
35,041
18,354
137,902
151,692
166,861
183,548
3
Present value
640,000
502,098
350,406
183,544
0
PROBLEM 4: CLASSROOM ACTIVITY
1. Solution:
Requirement (a):
Gross investment = (80,000 x 3) = 240,000
Net investment = 80,000 x PV of ordinary annuity of 1 @10%, n= 3 = 198,948
Unearned interest = 240,000 – 198,948 = 41,052
Requirement (b):
Date
1/1/x1
1/1/x1
1/1/x2
1/1/x3
1/1/x4
Jan. 1,
20x1
Dec.
31,
20x1
Jan. 1,
20x2
Dec.
31,
20x2
Jan. 1,
20x3
Dec.
31,
20x3
Jan. 1,
20x4
Collection
s
Interes
t
Amortizatio
n
80,000
80,000
80,000
80,000
19,895
13,884
7,273
80,000
60,105
66,116
72,727
Cash
Finance lease receivable
Equipment
Unearned interest income
Present value
278,948
198,948
138,843
72,727
0
80,000
240,000
278,948
41,052
Unearned interest
Interest income
19,895
Cash
80,000
Finance lease receivable
Unearned interest
Interest income
13,884
Cash
80,000
19,895
Finance lease receivable
Unearned interest
Interest income
Cash
80,000
13,884
80,000
7,273
7,273
80,000
Finance lease receivable
4
80,000
2.
Solution:
Lease bonus
20,000
20x1 (100,000 x 6/12)
50,000
20x2
120,000
20x3
140,000
20x4
160,000
Total
490,000
Divide by:
4
Annual lease income
122,500
The entries are as follows:
Jan. 1,
20x1
Dec.
31,
20x1
Cash
Unearned rent income
Cash
Unearned rent income (20K ÷ 4)
Rent receivable (squeeze)
Rent income (Lease income)
20,000
Dec.
31,
20x2
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
120,000
5,000
Dec.
31,
20x3
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
140,000
5,000
Dec.
31,
20x4
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
160,000
5,000
5
20,000
50,000
5,000
67,500
122,500
122,500
2,500
122,500
22,500
122,500
42,500
6
PROBLEM 5: MULTIPLE CHOICE - THEORY
1.
2
.
3
.
4
.
5
.
6
.
7
.
8
.
9
.
10
.
E
B
A
C
D
B
B
B
A
B
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A
Solution:
Fair value (deemed equal to PV of LP)
Divide by: PV annuity due @8%, n=5
Annual lease payments
Multiply by: No. of payments in the lease
Gross investment in the lease
Less: Net investment in the lease
Unearned interest income
*Answer choice is rounded-off
2.
C (135,000 – 20,000) x 10% x 6/12 = 5,750
3. D
Solution:
PV = Cash flows x PV factor
7,596 = 2,000 x PV annuity due @ x%, n=5
First trial @ 12%:
(2,000 x PV annuity due @ 12%, n=5) = 7,596
(2,000 x 4.0373) = 7,596
8,075 is not equal to 7,596
7
323,400
4.3121
74,998
5
374,991
(323,400)
51,591
We need a lower amount. Therefore, we will increase the rate. Let us try
16%.
Second trial @ 16%:
(2,000 x PV annuity due @ 16%, n=5) = 7,596
(2,000 x 3.7982) = 7,596
7,596 is equal to 7,596. Therefore, the implicit interest rate is 16%.
4. A
Solution:
Sales
Cost of sales
Gross profit
77,000
(60,000)
17,000
5. B
Solution:
Sales (PV of MLP)
Cost of sales
Gross profit
3,300,000
(2,800,000)
500,000
6. B
Solution:
Sales
Cost of sales
Gross profit
3,520,000
(2,800,000)
720,000
Interest revenue = (600,000 x PV of annuity due @10%, n=5) = 3,521,040 –
600,000 first payment = 2,921,040 x 10% x 6/12 = 146,052
7.
B {10,000 + [(30,000 ÷ 5 years) x 1/12]} = 10,500
8. C [90,000 + (50,000 ÷ 5 years)] = 100,000
9. B
Solution:
Straight line rent income per year = 36,000 ÷ 3 = 12,000
Rent income per year
Multiply by:
Total rent income to date (July 1, 20x6 to June 30, 20x8)
Less: Total rent collections to date (6,000 + 9,000)
Rent receivable as of June 30, 20x8
10. C
8
12,000
2
24,000
(15,000)
9,000
Solution:
Annual rent
96,000
Contingent rent [(600,000 - 500,000) x 5%]
5,000
Amortization of lease bonus (24,000 ÷ 10)
Rent expense
2,400
103,400
9