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On January 1, 2015, Mixx Company entered into a lease for a new warehouse.
Rental payments are P800, 000 a year for 5 years, payable in advance starting January 1, 2015.
The warehouse has an estimated life of 10 years. The entity paid initial direct cost of P100, 000
on January 1, 2015.
The realty taxes of P40, 000 a year are to be paid by the entity.
The entity has the option to purchase the property at the conclusion of the lease for a nominal
amount.
The interest rate implicit in the lease is 10%. The relevant present value factors are:
PV of an ordinary annuity of 1 at 10% for 5 periods
PV of an annuity of 1 in advance at 10% for 5 periods
3.79
4.17
Required:
Prepare journal entries on the books of Mixx Company for 2015 and 2016.
1, 000, 000
10 years
15 years
12%
5.650
6.328
0.322
The entity has the option to purchase the machine on January 1, 2025 by pairing P200, 000
which is sufficiently lower than the expected fair value of the machine on January 1, 2025. At the
inception of the lease, it is reasonably certain that the option will be exercised.
Required:
Prepare journal entries on the books of Letty Company for 2015 and 2016.
7.606
8.367
Required:
Prepare journal entries on the books of Veronica Company for 2015.
The economic life of the equipment is 10 years. The present value factors at 16% for five periods
are:
Present value of 1
Present value of an ordinary annuity of 1
0.4761
3.2743
Required:
1. Prepare a schedule of the annual payments showing reduction of liability every year.
2. Prepare journal entries on the books of Lessee Company for 2015 and 2016.
3. Prepare journal entry on December 31, 2019, end of lease term, to record the return of the
equipment to the lessor. Assume the fair value of the equipment is equal to the guaranteed
residual value.
4. Prepare journal entry on December 31, 2019 to record the return of the equipment to the
lessor assuming the fair value of the equipment is only P300, 000.
5. Prepare journal entry on December 31, 2019 to record the return of the equipment to the
lessor assuming the fair value of the equipment is P500, 000.
On December 31, 2015, Eden Company leased an equipment to Eve Company. On this date,
Eden Company purchased the equipment at the fair value of P1, 700, 000. The lease agreement
contained the following clauses:
Annual rent payable in advance on
December 31 of each year
Estimated residual value at the end of lease term
Residual value guaranteed by lessee
Lease term
Economic life of equipment
Implicit interest rate
PV of an annuity of 1 in advance at 7% for 4 periods
PV of 1 at 7% for 4 periods
420, 000
300, 000
200, 000
4 years
6 years
7%
3.6243
.7629
The lease is cancelable but the cancelation will require a monetary penalty equivalent to two
years rental payments on the part of the lessee.
Included in the annual rental is an amount of P20, 000 to cover reimbursement for insurance paid
by the lessor.
The directors of Eve Company have indicated that they intend to return the asset to Eden
Company at the end of the lease term.
Required:
1.
2.
3.
4.
Required:
1. Determine whether the lease is an operating lease or a finance lease.
2. Prepare journal entries on the books of Dexter Company for 2015.
3. Prepare journal entry on December 31, 2019 to record the return of the equipment to the
lessor as required by the contract. The fair value of the equipment is P200, 000.
4, 000, 000
2, 465, 000
1, 300, 000
Depreciation has been recorded up to the end of the year, and no accrued interest is involved.
On December 31, 2015, the entity decided to purchase the equipment for P1, 600, 000 and paid
cash to complete the purchase.
Required:
Prepare journal entry to record the actual purchase of the equipment on the books Macedon
Company.
1/1/2015
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Minimum lease
payment
Interest
expense
Reduction
liability
300, 000
300, 000
300, 000
300, 000
98, 515
78, 366
56, 203
31, 766
201, 485
221, 634
243, 797
268, 234
Balance of
liability
985, 150
783, 665
562, 031
318, 234
50, 000
Required:
1. What amount would Troy Company disclose as future lease payments in the notes to
financial statements on December 31, 2015.
1, 650, 000
1, 596, 500
1, 662, 500
1, 584, 000
10 years
500, 000
15 years
10%
6.76
6.15
4, 000, 000
The lease has no renewal option, and the possession of the machine reverts to Saxe Company
when the lease terminates.
At the commencement of the lease, what amount should be recognized as finance lease liability?
a. 4, 000, 000
b. 3, 380, 000
c. 3, 075, 000
d.
0
The estimated seven-year useful equipment life coincides with the lease term.
The first of the seven equal annual P800, 000 lease payments was paid on December 31,
2015.
The implicit interest rate is 12%.
Tigers incremental borrowing rate is 14%.
Present values of an annuity of 1 in advance for seven periods are 5.11 at 12% and 4.89 at
14%.
400, 000
10 years
12 years
14%
5.95
0.27
East Company has the option to purchase the machine on January 1, 2025, by paying P500, 000
which approximates the expected fair value of the machine on the option exercise date.
What is the initial cost of the leased asset to be recognized by East Company?
a.
b.
c.
d.
2, 515, 000
2, 380, 000
2, 245, 000
1, 980, 000
2, 700, 000
3, 000, 000
3, 600, 000
4, 000, 000
Casanova Company leased a warehouse with adjoining land for a period of 15 years. The fair
values of the leasehold interests in the land and the warehouse are P5, 000, 000 and P2, 500, 000
respectively. The land has an indefinite economic life whereas the warehouse has a useful life of
15 years. Title to the land is not expected to pass at the end of the lease. At what amount should
the asset in relation to finance lease be recognized in the financial statements?
a. 7, 500, 000
b. 5, 000, 000
c. 2, 500, 000
d.
0
6.328
0.322
What amount should be recorded as lease liability at the beginning of the lease term?
a.
b.
c.
d.
621, 600
648, 600
665, 000
697, 200
2, 800, 000
2, 912, 000
4, 500, 000
4, 680, 000
3, 500, 000
2, 431, 500
2, 283, 200
2, 485, 000
the present value of the lease payments is P1, 125, 000 at the 8% interest rate implicit in the
lease. What amount should be reported as lease liability on December 31, 2015?
a.
b.
c.
d.
1, 025, 000
1, 115, 000
1, 125, 000
2, 900, 000
payments at the inception of the lease and before the first annual payment was P4, 170, 000. The
lease is appropriately accounted for as a finance lease.
On December 31, 2016, what amount should be reported as lease liability?
a.
b.
c.
d.
3, 170, 000
3, 150, 000
2, 853, 000
2, 487, 000
4.240
3.890
0.650
What amount should be reported as finance lease liability immediately after the first required
payment?
a.
b.
c.
d.
4, 862, 000
4, 407, 000
3, 562, 000
3, 107, 000
d. 5, 968, 500