Intermediate Accounting Part 3

Prelim – Lease Accounting for Lessor Lease Accounting  Why does it is important for us because at some point it becomes complicated because of the recognition of the Asset.  PAS 17 may issue for the recognition of the asset because matagal na yung lease term o ginagamit.  For example ang useful life ay 5 years pero ginagamit mo na yung asset for almost the entirety of the useful life like 4 years out of 5 years. Almost 80% na ng asset ginagamit na pero you’re not recognizing the asset.  The new standard that the asset must be recognized not the asset per se but the right on the asset. Lease on the part of the lessor can be classified as Operating Lease or Finance Lease. Lessor – Nagpaparenta Leasse- Nagrerenta Expect if: 1. The asset that we’re talking about is trivial like small amount. Immovable items. No need to finance lease operational lang. 2. Ang lease term ay isang taon walang effect sa useful life ng asset expect kapag ang useful life din ay isang taon. Lessor: we still have the same accounting treatments. Qualification to be recognized as Finance Lease: (At least 1): 1. Ratio = Lease Term/ Useful Life - Baka kasi substantial na siya na gumagamit to the point konti nalang natitirang buhay ng asset. In terms of Useful Life the ratio is at least 75%. - Operating Lease ginagamit mo an activity nito sa operation mo lang kaya 1 year. Ang finance lease ginagamit ito to obtain funds. More than 1 year. 2. Ratio = PV of Lease Payments/Fair Value of Assets - At least 90% 3. Transfer of title – which is no doubt kasi nilipat na ang titulo. 4. Bargain Purchase Option – Probable to be executed.

Binibigyan ng option ang lease. At the inception at the time ng pagagree ni lessor and lease. In the form of writing. Finance Lease – 2 types – Objective to generate funds -

1. Direct Financing Lease – Incidental activity 2. Sales Type – Dealer (Seller) primary activity which one way to sell the merchandise. Answer to Problem 13-1 (Direct Financing Lease) -

There was no intention to transfer the title but you need to justify why it is finance lease:

Useful Life = 10 years; Lease Term= 10 years Ratio = 100% Answer: This is classified as finance lease because of the qualification number 1. And since this is finance lease the asset of the lessor is not subject to depreciation. Kasi majority ng buhay na sa lease. 1. Gross Investment- Total Collection + Bargain Purchase Option (if any) - This is incidental activity which is this is use to generate funds. 2. Net Investment – Cost of Equipment + Initial Direct Cost - Present Value of Rental Collection is deemed to be equal to the COST OF THE EQUIPMENT - Pag direct financing deretcho kana ng cost of equipment. Pero since may dinadagdag na initial direct cost na appektuhan ang interest rate na gagamitin. We might need to adjust the value of interest rate. That’s why merong 11% and 12% Example: Annual Rental Payable 600,000 Multiply by: PV of OA of 1 12% x 5.650 Equal to Cost of Equipment 3,390,000 3. Unearned Interest – Gross Investment – Net Investment. - Dahil ito ay financing may interest portion kasi hindi naman immediate ang pagtanggap ng funds. Dahil pautay utay ang pagtanggap ng rent collection ang future collection may interest.

Gross Investment - No bargain option Annual Rental Payable 600,000 Lease Term x 10 yrs. Gross Investment 6,000,000 Net Investment Cost of Equipment 3,390,000 Add: Initial Direct Cost 143,400 Net Investment 3,533,400 Unearned Interest Gross Investment Less: Net Investment Unearned Interest

6,000,000 (3,533,400) 2,466,600

Assuming the transaction happened on January 1, 2021: Lease Receivable 6,000,000 Equipment 3,390,000 Cash in Bank 143,400 Unearned Interest 2,466,600 Information: 1. Lease Receivable – Value of Gross Investment 2. Equipment- Value of Net Investment - Tatanggalin sa record kasi di na magagamit na which is walang depreciation. 3. Cash in Bank – Value of Net Investment *If the net investment is adjusted by initial direct cost then the implicit interest rate must also be adjusted. This is the process in computing the new interest rate: (Objective is to get the new PV Factor) Annual Payment x PV Factor = Net Investment P600, 000 x PV Factor = P3, 533,400 PV factor = P3, 533,400 / P600, 000 = 5.889 To find the new interest rate: 1. PV Factor = 5.889 2. Lease Term = 10 years PV Factor Table for Ordinary Annuity New Implicit Interest = 11%

Date

Collection

11% Interest

Principal

Jan 1 2020 Dec 31, 2020 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023 Dec. 31, 2024 Dec. 31, 2025 Dec. 31, 2026 Dec. 31, 2027 Dec. 31, 2028 Dec. 31, 2029

Carrying Amount

600,000

388,674

211,326

3,533,400 Net Investment 3,322,074

600,000

365,428.14

234,571.86

3,087,502.14

600,000

339,625.24

260,374.76

2,827,127.38

600,000

310,984.01

289,015.99

2,538,111.39

600,000

279,192.25

320,807.75

2,217,303.64

600,000

243,903.40

356,096.60

1,861,207.04

600,000

204,732.77

395,267.23

1,465,939.81

600,000

161,253.38

438,746.62

1,027,193.19

600,000

112,991.25

487,008.75

540,184.44

600,000

59,815.56

540,184.44

6,000,000

2,466,600

3,533,400

0 Balancing Figure 6,000,000

Gross

Unearned

Net

December 31, 2020 - Journal Entries Annual Collection of Rent Cash in Bank Lease Receivable Amortization of Interest Unearned Interest Interest Income

600,000 600,000

388,674 388,674

Presentation in the Statement of Financial Position 44196 Lease Receivable (6M – 600K) 5,400,000 Less: Unearned Interest (2,466,600 – 388,674) 2,077,926 Carrying Amount 3,322,074 December 31, 2021 - Journal Entries Annual Collection of Rent Cash in Bank Lease Receivable

600,000 600,000

Amortization of Interest Unearned Interest Interest Income

365,428.14 365,428.14

Presentation in the Statement of Financial Position 44561 Lease Receivable (5,400M – 600K) 4,800,000 Less: Unearned Interest (2,077,926 – 365,428.14) 1,712,497.86 Carrying Amount 3,087,502.14 December 31, 2022 - Journal Entries Annual Collection of Rent Cash in Bank Lease Receivable

600,000 600,000

Amortization of Interest Unearned Interest Interest Income

339,625.24 339,625.24

Presentation in the Statement of Financial Position 44926 Lease Receivable (4,800M – 600K) 4,200,000 Less: Unearned Interest (1,712,497.86 – 339,625.24) 1,372,872.62 Carrying Amount 2,827,127.38 Answer to Problem 13-2 (Direct Financing Lease) -

There was no intention to transfer the title but you need to justify why it is finance lease:

Useful Life = 8 years; Lease Term= 8 years Ratio = 100% Answer: This is classified as finance lease because of the qualification number 1. And since this is finance lease the asset of the lessor is not subject to depreciation. Kasi majority ng buhay na sa lease. 1. Gross Investment- Total Collection + Bargain Purchase Option (if any) - This is incidental activity which is this is use to generate funds. - Residual Value wether guaranteed or not. Walang kaso kay lessor. If unguaranteed hindi si lease ang magshoushoulder or bibii ng asset at the end of this life. Disposal price nalang. - Kapag guaranteed si lease na ang bibili hanggang matapos.

2. Net Investment – Cost of Equipment + Initial Direct Cost - Present Value of Rental Collection is deemed to be equal to the COST OF THE EQUIPMENT - Pag direct financing deretcho kana ng cost of equipment. Pero since may dinadagdag na initial direct cost na appektuhan ang interest rate na gagamitin. We might need to adjust the value of interest rate. That’s why merong 11% and 12% 3. Unearned Interest – Gross Investment – Net Investment. - Dahil ito ay financing may interest portion kasi hindi naman immediate ang pagtanggap ng funds. Dahil pautay utay ang pagtanggap ng rent collection ang future collection may interest. Gross Investment - No bargain option Annual Rental Payable 900,000 Lease Term x 8 yrs. Gross Investment 7,200,000 Add: Residual Value 600,000 Gross Investment 7,800,000 Net Investment Cost of Equipment Add: Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

5,250,000 0 5,250,000

7,800,000 (5,250,000) 2,550,000

Assuming the transaction happened on January 1, 2021: Lease Receivable 7,800,000 Equipment 5,250,000 Unearned Interest 2,550,000 Information: 1. Lease Receivable – Value of Gross Investment 2. Equipment- Value of Net Investment - Tatanggalin sa record kasi di na magagamit na which is walang depreciation. 3. Cash in Bank – Value of Net Investment

*If the net investment is adjusted by initial direct cost then the implicit interest rate must also be adjusted. This is the process in computing the new interest rate: (Objective is to get the new PV Factor) Annual Payment x PV Factor = Net Investment 1st Collection in Advance - NO INTEREST ALLOTTED - January 1, 2020: Cash in Bank 900,000 Lease Receivable 900,000

Date

Collection

11% Interest

Principal

Carrying Amount

Jan 1 2020 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026 Jan. 1, 2027

   

900,000.00

0

900,000.00

5,250,000 Net Investment 4,350,000

900,000.00

522,000.00

378,000.00

3,972,000

900,000.00

476,640.00

423,360.00

3,548,640

900,000.00

425,836.80

474,163.20

3,074,476.80

900,000.00

368,937.22

531,062.78

2,543,414.02

900,000.00

305,209.68

594,790.32

1,948,623.70

900,000.00

233,834.84

666,165.16

1,282,458.54

900,000.00

217,541.46

682,458.54

600,000.00 Balancing Figure

7,200,000 Gross

2,550,000 Unearned

4,650,000 Net

The last figure is the UNGUARANTEED RESIDUAL VALUE. Pag si lease ang magsasaot 0 ang balancing figure. First collection ay walang interest Irerecognized na ang interest even if hinid pa nangyayari kasi accrual.

December 31, 2020 - Amortization of Interest / Accrual of Interest Unearned Interest 522,000 Interest Income 522,000 Statement of Financial Position Presentation

Cash in Bank Lease Receivable

900,000 900,000

Statement of Financial Position Presentation Jan 1, 2021

Lease Receivable (6,900M – 900K) Less: Unearned Interest (2,550M – 522K) Carrying Amount

6,000,000 2,028,000 3,972,000

Note: By the end of the period hindi talaga nagkakatugma ang Carrying amount ng nasa amortization table at ng present sa statement of financial position. Ang pag present ng lease receivable ay katulad ng pag present sa noninterest bearing note. Nag kakatugma sila by the January 1. Prior year ang accrual ng interest. December 31, 2021 - Amortization of Interest / Accrual of Interest Unearned Interest 476,640 Interest Income 476,640 Statement of Financial Position Presentation Dec 31, 2021

Lease Receivable (6,900M – 900K) Less: Unearned Interest (2,028M – 476,640) Carrying Amount

6,000,000 1,551,360 4,448,640

January 1, 2022 – Journal Entry: Cash in Bank 900,000 Lease Receivable 900,000 Statement of Financial Position Presentation Jan 1, 2022

Lease Receivable (6,000M – 900K) Less: Unearned Interest (2,028M – 476,640) Carrying Amount

5,100,000 1,551,360 3,548,640

December 31, 2022 - Amortization of Interest / Accrual of Interest Unearned Interest 425,836.80 Interest Income 425,836.80

Dec 31, 2020

Lease Receivable (7,800M – 900K) Less: Unearned Interest (2,550M – 522K) Carrying Amount January 1, 2021 – Journal Entry:

6,900,000 2,028,000 4,872,000

Statement of Financial Position Presentation

Dec 31, 2022

Lease Receivable (6,000M – 900K) Less: Unearned Interest (1,551,360 – 425,836.80) Carrying Amount

5,100,000 1,125,523.2 3,974,476.8

January 1, 2023 – Journal Entry: Cash in Bank 900,000 Lease Receivable 900,000 Statement of Financial Position Presentation Jan 1, 2022

Lease Receivable (5,100M – 900K) Less: Unearned Interest (1,551,360 – 425,836.80) Carrying Amount

4,200,000 1,125,523.2 3,074,476.8

January 1, 2027 - Annual Collection Cash in Bank 900,000 Lease Receivable 900,000 January 1, 2028 - Return of the Leased Asset Equipment (At Fair Value) Loss on Finance Lease Lease Receivable

500,000 100,000 600,000

Equipment (At Fair Value) 700,000 Gain on Finance Lease 100,000 Lease Receivable 600,000 If gain this will be the journal entry. Answer to Problem 13-4 (Direct Financing Lease) -

There was no intention to transfer the title but you need to justify why it is finance lease:

Useful Life = 4 years; Lease Term= 4 years Ratio = 100% *Executory Cost- Not treated as part of lease payments and therefore treated only as EXPENSE. Ito ay maintenance cost lang na kailngan bayaran in order na yung equipment nagana. Ihihiwalay ang 40,000 dahil ito ay treated as expense. Expense ang treatment – Lessee; Income naman treated – Lessor

1. Gross Investment- Total Collection + Bargain Purchase Option (if any) - This is incidental activity which is this is use to generate funds. - Residual Value wether guaranteed or not. Walang kaso kay lessor. If unguaranteed hindi si lease ang magshoushoulder or bibii ng asset at the end of this life. Disposal price nalang. - Kapag guaranteed si lease na ang bibili hanggang matapos. 2. Net Investment – Cost of Equipment + Initial Direct Cost - Present Value of Rental Collection is deemed to be equal to the COST OF THE EQUIPMENT - Pag direct financing deretcho kana ng cost of equipment. Pero since may dinadagdag na initial direct cost na appektuhan ang interest rate na gagamitin. We might need to adjust the value of interest rate. That’s why merong 11% and 12% 3. Unearned Interest – Gross Investment – Net Investment. - Dahil ito ay financing may interest portion kasi hindi naman immediate ang pagtanggap ng funds. Dahil pautay utay ang pagtanggap ng rent collection ang future collection may interest. Gross Investment - No bargain option Annual Rental Payable 440,000 Less: Executory Cost (40,000) Total Annual Rental Payable 400,000 Lease Term x 4 yrs. Gross Investment 1,600,000 Net Investment Cost of Equipment Add: Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

1,377,340 0 1,377,340

1,600,000 (1,377,340) 222,520

Assuming the transaction happened on January 1, 2021 to record the lease contract: Lease Receivable 1,600,000 Equipment 1,377,340 Unearned Interest 222,520

Whether guaranteed or unguaranteed this is how we compute it kasi yung equipment is makukuha natin in 2 ways: - Dalawa ang paraan para ma collect yung economic benefit ng asset: 1. Renta 2. Benta -

Information: 1. Lease Receivable – Value of Gross Investment 2. Equipment- Value of Net Investment - Tatanggalin sa record kasi di na magagamit na which is walang depreciation. 3. Cash in Bank – Value of Net Investment

Formula:

1st Collection in Advance - NO INTEREST ALLOTTED - January 1, 2020: Cash in Bank 400,000 Lease Receivable 400,000

-

Annual Collection x PV Factor for Annuity = Net Investment Annual Collection x PV Factor for Annuity = Net Investment – PV of Residual Value (PV of 1) -

Annuity kasi annual installment ang payment. The present value not the residual value perse. PV Of 1 isang beses lang kasi one time transaction.

Annual Collection x 5.335 = P4, 361,200 – (200,000 x 0.466)

Payment for Executory Cost received from Lessee: Cash in Bank 40,000 Rent Income 40,000

Annual Collection x 5.335 = P4, 361,200 – 93,200 Annual Collection x 5.335 = 4,268,000 (Net Investment allotted to rent collection) Annual Collection = 4,268,000/ 5.335

Date

Collection

11% Interest

Principal

Carrying Amount

Annual Collection = P800, 000 Kahit hindi gumawa ng amortization table pwedeng short version na gawin macocompute pa din.

Jan 1 2020 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023

400,000.00

0

400,000.00

1,377,340 Net Investment 977,480

400,000.00

107,522.80

292,477.20

685,002.80

400,000.00

75,350.31

324,649.69

360,353.11

400,000.00

39,646.89

360,353.11

0

1,600,000 Gross

222,520 Unearned

1,377,340 Net

December 31, 2020 - Amortization of Interest / Accrual of Interest Unearned Interest 107,522.80 Interest Income 107,522.80

1. Implicit Interest Rate – Lessor - Use it first in all transaction. PRIORITY 2. Incremental Borrowing Rate – Lessee - If there is no Implicit Rate then use this. - To compute the first year; Use Net Investment Formula: 2020 Interest Income = Carrying Amount (Net Investment) x Implicit Interest Rate 2020 Interest Income = P4, 361,200 x 10% 2020 Interest Income = 436,120.00 Letter A

Answer to Problem 13-6 (Direct Financing Lease) -

If revert to the lessor. Useful Life = 8 years; Lease Term= 8 years No annual rent

2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Rate) – Collection 2020 Carrying Amount = P4,361,200 x 1.1 P800,000

Dec 31, 2027

2020 Carrying Amount = 3,997,320.00

-

2021 Interest Income = P3,997,320 x 10% 2021 Interest Income = 399,732.00

800,000.0 0

709,008.2 200,000.00 2 90,991.78 6,400,000 2,238,800 4,161,200 At the end of the year ang ilalagay ay yung Residual Value

Guaranteed Residual Value – Amortization Table

2021 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Rate) – Collection 2020 Carrying Amount = 3,997,320 x 1.1 – P800,000 2020 Carrying Amount = 3,597,052.00 2022 Interest Income = P3,597,052 x 10% 2022 Interest Income = 359,705.20 2022 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Rate) – Collection 2022 Carrying Amount = 3,597,052 x 1.1 – P800,000 2022 Carrying Amount = 3,156,757.20 2023 Interest Income = P3,156,757.20 x 10% 2023 Interest Income = 315,675.72 2023 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Rate) – Collection 2023 Carrying Amount = 3,156,757.20 x 1.1 – P800,000 2023 Carrying Amount = 2,672,432.92 Unguaranteed Residual Value –Amortization Table Date

Collection

10% Interest

Principal

Jan 1 2020 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026

800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0

436,120.0 0 399,732.0 0 359,705.2 0 315,675.7 2 267,243.2 9 213,967.6 2 155,364.3 8

363,880.0 0 400,268.0 0 440,294.8 0 484,324.2 8 532,756.7 1 586,032.3 8 644,635.6 2

Carrying Amount 4,361,200 Net Investment 3,997,320.00

Date

Collection

10% Interest

Principal

Jan 1 2020 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025 Dec 31, 2026 Dec 31, 2027 Dec 31, 2027

-

800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0 800,000.0 0

436,120.0 0 399,732.0 0 359,705.2 0 315,675.7 2 267,243.2 9 213,967.6 2 155,364.3 8 90,991.78

363,880.0 0 400,268.0 0 440,294.8 0 484,324.2 8 532,756.7 1 586,032.3 8 644,635.6 2 709,008.2 2

Carrying Amount 4,361,200 Net Investment 3,997,320.00 3,597,052.00 3,156,757.20 2,672,432.92 2,139,676.21 1,553,643.83 909,008.22 200,000.00

0 200,000.00 200,000.00 0 6,400,000 2,238,800 4,161,200 At the end of the year ang value ay 0 dahil mapupunta kay lessee ang asset siya ang magbabayad ng residual value. Proof lang na binayaran ni lessee.

Answer to Problem 13-7 (Direct Financing Lease) Gross Investment - No bargain option Annual Rental Payable 1,750,000 Lease Term x 5 yrs. Total Annual Payable 8,750,000 Add: Residual Value 275,000 Gross Investment 9,025,000 Letter B.  Regardless if it is guaranteed or not guaranteed isasama Net Investment Cost of Equipment 6,000,000 Add: Initial Direct Cost 0 Net Investment 6,000,000 Letter C.

3,597,052.00 3,156,757.20 2,672,432.92 2,139,676.21 1,553,643.83 909,008.22

Unearned Interest Gross Investment Less: Net Investment Unearned Interest Letter A.

9,025,000 (6,000,000) 3,025,000

If the collection is not advance / year end:



Basis of first year for the formula is Net Investment

Interest Income = Carrying Amount prior to amortization x implicit interest rate Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) - Annual Collection Formula: 2020 Interest Income = Carrying Amount prior to amortization x implicit interest rate 2020 Interest Income = P6,000,000 x 15% 2020 Interest Income = 900,000 Letter C. 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = P6,000,000 x 1.15 – P1,750,000 2020 Carrying Amount = 5,150,000 Formula: 2021 Interest Income = Carrying Amount prior to amortization x implicit interest rate 2021 Interest Income = P5,150,000 x 15% 2021 Interest Income = 772,500 2021 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2021 Carrying Amount = P5,150,000 x 1.15 – P1,750,000 2021 Carrying Amount = 4,172,500 Answer to Problem 13-5 (Direct Financing Lease) -

*When the problem is silent, the implicit interest rate is already adjusted. There was no intention to transfer the title but you need to justify why it is finance lease:

Useful Life = 8 years; Lease Term= 8 years 1. What is the gross investment in the lease? Solution: Gross Investment - No bargain option Annual Rental Payable 900,000 Lease Term x 8 yrs. Gross Investment 7,200,000 Add: Residual Value 600,000 Gross Investment 7,800,000 Letter B

2. What is the net investment in the lease? Solution: Net Investment Cost of Equipment 5,000,000 Add: Initial Direct Cost 250,000 Net Investment 5,250,000 Letter B. 3. What is the total interest income over the lease term? Unearned Interest Gross Investment Less: Net Investment Unearned Interest Letter A.

7,800,000 (5,250,000) 2,550,000

4. What is the interest income for the current year? If the collection is advance / beginning:  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P5,250,000 -900,000) x 12% 2020 Interest Income = 522,000 Letter B. 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P5,250,000 -900,000) x 1.12 2020 Carrying Amount = 4,872,000 2021 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit

interest rate 2021 Interest Income = (P4,872,000-900,000) x 12% 2021 Interest Income = 476,640

Gross Investment - No bargain option Annual Rental Payable 500,000 Lease Term x 6 yrs. Gross Investment 3,000,000

2021 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2021 Carrying Amount = (P4,872,000- 900,000) x 1.12 2021 Carrying Amount = 4,448,640

Net Investment Cost of Equipment Add: Initial Direct Cost Net Investment

Problem 13-13 - Transfer of Title * Deretcho na kay lessee yung titulo; Moreof walang ng mangyayaring benta deretcho na agad kay lessee. Lahat ng economic benefit ay itratransfer so no need ot subtract the residual value so ignored it. Rules: *Residual Value is ignored if there is a transfer of title. * Solve ng annual payment; Ordinary Annuity Annual Collection x PV Factor = Net Investment Annual Collection x 2.855 = P7, 994,000 Annual Collection = P7, 994,000/ 2.855 Annual Collection = 2,800,000.00 Letter C. Gross Investment - No bargain option Annual Rental Payable 2,800,000 Lease Term x 4 yrs. Gross Investment 11,200,000 Net Investment Cost of Equipment Add: Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

7,994,000 0 7,994,000

11,200,000 (7,994,000) 3,206,000

Problem 13-14 - Transfer of Title *Residual Value is ignored if there is a transfer of title. Annual Collection x PV Factor = Net Investment Annual Collection x 4.60 = P2, 300,000 Annual Collection = P2, 300,000/ 4.60 Annual Collection = 500,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

2,300,000 0 2,300,000

3,000,000 (2,300,000) 700,000

If the collection is advance / beginning:  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P2,300,000-500,000) x 12% 2020 Interest Income = 216,000 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P2,300,000-500,000) x 1.12 2020 Carrying Amount = 2,016,000

SALES TYPE - FINANCE LEASE - LESSOR  Direct financing lease is more of accidental activity. But sales types is more of main activity it is one way for you to sale the asset.  Seller or Dealer - Lessor  To recognize profit under finance lease aside from interest. -

Gross Investment = Total Rent Collections + Residual Value / Option Net Investment = Present Value of Lease Payments or Fair Value of Asset – LOWER Sales = Net Investment Cost of Sales = Cost of Asset + Initial Direct Cost

Problem 14-1 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = Cash Selling Price – Fair Value  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 600,000 Lease Term x 8 yrs. Gross Investment 4,800,000 Net Investment Cash Selling Price Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

3,520,000 3,520,000

Gross Profit Sales Less: Cost of Sales Gross Profit Unearned Interest Add: Gross Profit Total Income under Sales Type

Net Investment Cost of Equipment Add Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

2,800,000 50,000 2,850,000

4,800,000 (2,850,000) 1,950,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 4,800,000 Sales 3,520,000 Unearned Interest 1,280,000 Cost of Sales 2,850,000 Merchandise Inventory 2,800,000 Cash in Bank 50,000 -

Sales – Equivalent to Net Investment Net Investment 3,520,000 Sales 3,520,000

-

2,800,000 50,000 2,850,000

1,280,000 670,000 1,950,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 600,000 Lease Term x 8 yrs. Gross Investment 4,800,000

4,800,000 (3,520,000) 1,280,000

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

3,520,000 2,850,000 670,000

-

-

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Cash in Bank is Initial Direct Costs Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest.

-

Pag first year ang basis ng carrying amount ay ang net investment

If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P3,520,000-600,000) x 10% 2020 Interest Income = 292,000 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P3,520,000-600,000) x 1.10 2020 Carrying Amount = 3,212,000 Formula: 2021 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2021 Interest Income = (P3,212,000-600,000) x 10% 2021 Interest Income = 261,200 2021 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2021 Carrying Amount = (P3,212,000-600,000) x 1.10 2021 Carrying Amount = 2,873,200 For In Advance: if December 31 - no chance for accrual for 1st year 1st Year Carrying Amount = Net Investment - Annual Collection *No interest Income sa 1st Year

Subsequent Year Carrying Amount = same na po ng ORDINARY ANNUITY FORMULA pati pag compute ng interest income. Problem 14-2 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = List Selling Price is not Fair Value this is list price hindi siya official price kasi pwede pa maadjust so the Net investment is the PV of Rent Payment Discounted at 12%  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 500,000 Lease Term x 10 yrs. Gross Investment 5,000,000 Net Investment PV of Rent Payment Net Investment

3,165,000 3,165,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

5,000,000 (3,165,000) 1,835,000

Sales – Equivalent to Net Investment Net Investment 3,165,000 Sales 3,165,000 Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

2,675,000 0 2,675,000

Gross Profit Sales Less: Cost of Sales Gross Profit

3,165,000 2,675,000 490,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

1,835,000 490,000 2,325,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 500,000 Lease Term x 10 yrs.

Gross Investment

Net Investment Cost of Equipment Add Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

5,000,000

2,675,000 0 2,675,000

5,000,000 (2,675,000) 2,325,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 5,000,000 Sales 3,165,000 Unearned Interest 1,835,000 Cost of Sales 2,675,000 Merchandise Inventory 2,675,000 -

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din.

If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula:

2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P3,165,000-500,000) x 12% 2020 Interest Income = 319,800 2020 Carrying Amount = Carrying Amount prior to amortization - Annual Collection x (1+Implicit Interest rate) 2020 Carrying Amount = (P3,165,000-500,000) x 1.12 2020 Carrying Amount = 2,984,800 Formula: 2021 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2021 Interest Income = (P2,984,800-500,000) x 12% 2021 Interest Income = 298,176 2021 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2021 Carrying Amount = (P2,984,800-500,000) x 1.12 2021 Carrying Amount = 2,782,976 For In Advance: if December 31 - no chance for accrual for 1st year 1st Year Carrying Amount = Net Investment - Annual Collection *No interest Income sa 1st Year Subsequent Year Carrying Amount = same na po ng ORDINARY ANNUITY FORMULA pati pag compute ng interest income. Problem 14-10 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = Selling price vs Present Value – WHICHEVER IS LOWER  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 500,000 Lease Term x 8 yrs.

Gross Investment

Net Investment Selling Price PV of Lease Payments Net Investment

4,000,000

Unearned Interest

Cost of Sales 2,000,000 Merchandise Inventory 2,000,000 2,900,000 2,780,000 - LOWER 2,780,000

-

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

4,000,000 (2,780,000) 1,220,000

-

Sales – Equivalent to Net Investment Net Investment 2,780,000 Sales 2,780,000

-

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

-

2,000,000 0 2,000,000

Gross Profit Sales Less: Cost of Sales Gross Profit

2,780,000 2,000,000 780,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

1,220,000 780,000 2,000,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 500,000 Lease Term x 8 yrs. Gross Investment 4,000,000 Net Investment Cost of Equipment Add Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

1,220,000

2,000,000 0 2,000,000

4,000,000 (2,000,000) 2,000,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 4,000,000 Sales 2,780,000

-

-

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din.

1. What amount of profit on the sale should be reported for the current year? Letter B. 780,000 Problem 14-11 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = PV of Lease payment is used because the list price is not valid.  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost  Between Implicit rate and Incremental Borrowing Rate the first that you need to use is the implicit rate after the Incremental Rate. If there is no Implicit Rate then you can use Incremental Borrowing rate Sales Type Gross Investment - No bargain option Annual Rental Payable 300,000 Lease Term x 8 yrs. Gross Investment 2,400,000 Net Investment PV of Lease Payments Net Investment Unearned Interest Gross Investment Less: Net Investment

1,700,000 1,700,000

2,400,000 (1,700,000)

Unearned Interest

700,000

-

Sales – Equivalent to Net Investment Net Investment 1,700,000 Sales 1,700,000

-

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

-

1,100,000 0 1,100,000

Gross Profit Sales Less: Cost of Sales Gross Profit

1,700,000 1,100,000 600,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

700,000 600,000 1,300,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 300,000 Lease Term x 8 yrs. Gross Investment 2,400,000 Net Investment Cost of Equipment Add Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

1,100,000 0 1,100,000

2,400,000 (1,100,000) 1,300,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 2,400,000 Sales 1,700,000 Unearned Interest 700,000 Cost of Sales 1,100,000 Merchandise Inventory 1,100,000 -

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory

-

Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din.

If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P1,700,000-300,000) x 11% 2020 Interest Income = 154,000 1. What amount of profit on the sale should be reported for the current year? Letter B. 600,000 2. What amount of interest income should be reported in the current year? Letter D. 154,000 Problem 14-12 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = Cash Selling Price – Fair Value  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 600,000 Lease Term x 8 yrs. Gross Investment 4,800,000

Net Investment Cash Selling Price Net Investment

3,520,000 3,520,000

Cash in Bank 600,000 Lease Receivable -

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

4,800,000 (3,520,000) 1,280,000

-

Sales – Equivalent to Net Investment Net Investment 3,520,000 Sales 3,520,000

-

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

-

2,800,000 0 2,800,000

Gross Profit Sales Less: Cost of Sales Gross Profit

3,520,000 2,800,000 720,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

1,280,000 720,000 2,000,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 600,000 Lease Term x 8 yrs. Gross Investment 4,800,000 Net Investment Cost of Equipment Add Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

2,800,000 0 2,800,000

4,800,000 (2,800,000) 2,000,000

-

-

600,000

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment

If other than January 1  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate x Pro Rata July- December (6 months)/12 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) + Computed Interest Income Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate x Pro rata of Months 2020 Interest Income = (P3,520,000-600,000) x 10% x 6/12 2020 Interest Income = 146,000 2020 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) + Computed Interest Income 2020 Carrying Amount = (P3,520,000-600,000) + 146,000 2020 Carrying Amount = 3,066,000

July 1, 2020 - Commencement of the Lease PERPETUAL INVENTORY SYSTEM Lease Receivable 4,800,000 Sales 3,520,000 Unearned Interest 1,280,000

Formula: 2021 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2021 Interest Income = (P3,066,000-600,000) x 10% 2021 Interest Income = 246,600

Cost of Sales 2,800,000 Merchandise Inventory 2,800,000 First Payment of Lessee

2021 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) x(1 +

implicit rate) 2021 Carrying Amount = (P3,066,000-600,000) x 1.10 2021 Carrying Amount = 2,712,600 Problem 14-6 – Sales Type  Gross investment = Total Rent Collection + Residual value/ Bargain Option  Net Investment = PV of Annuity 1 in advance  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 700,000 Lease Term x 8 yrs. Gross Investment 5,600,000 Net Investment Annual Payments Multiply by: PV of Annuity Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

700,000 x 5.868 4,107,600

5,600,000 (4,107,600) 1,492,400

Annual Rental Payable Lease Term Gross Investment Net Investment Cost of Equipment Add Initial Direct Cost Net Investment

Cost of Sales 3,700,000 Merchandise Inventory 3,700,000 First Payment of Lessee Cash in Bank 700,000 Lease Receivable -

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

-

-

-

Unearned Interest Add: Gross Profit Total Income under Sales Type

4,107,600 3,700,000 407,600 1,492,400 407,600 1,900,000

Direct financing lease Gross Investment - No bargain option

5,600,000 (3,700,000) 1,900,000

July 1, 2020 - Commencement of the Lease PERPETUAL INVENTORY SYSTEM Lease Receivable 5,600,000 Sales 4,107,600 Unearned Interest 1,492,400

-

Gross Profit Sales Less: Cost of Sales Gross Profit

3,700,000 0 3,700,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

Sales – Equivalent to Net Investment Net Investment 4,107,600 Sales 4,107,600

3,700,000 0 3,700,000

700,000 x 8 yrs. 5,600,000

700,000

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment

If other than January 1  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate x Pro Rata April- December (9 months)/12 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) + Computed Interest Income Formula:

2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate x Pro rata of Months 2020 Interest Income = (P4,107,600- 700,000) x 10% x 9/12 2020 Interest Income = 255,570

Multiply by: PV of OA 1 Rent PV of OA

2020 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) + Computed Interest Income 2020 Carrying Amount = (P4,107,600- 700,000) + 255,570 2020 Carrying Amount = 3,663,170

Rent PV of OA Add: Residual Value PV of 1 Net Investment

Formula: 2021 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2021 Interest Income = (P3,663,170- 700,000) x 10% 2021 Interest Income = 296,317 2021 Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) x(1 + implicit rate) 2021 Carrying Amount = (P3,663,170- 700,000) x 1.10 2021 Carrying Amount = 3,259,487 Problem 14-4 – GUARANTEED RESIDUAL VALUE  Gross investment = Total Rent Collection + Residual value whether guaranteed or unguaranteed / Bargain Option - Mababawi pa din ni Lessor kasi ito.  Net Investment = *PV of Lease Payments (Rental + Residual Value). Isang beses ang residual value normally ang residual value ay ginagamit ang PV of 1  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost Sales Type Gross Investment - No bargain option Annual Rental Payable 3,000,000 Lease Term x 5 yrs. Total Rent Payable 15,000,000 Add: Residual Value 1,000,000 Gross Investment 16,000,000

Net Investment Annual Payments

3,000,000

x 3.60 10,800,000

Residual Value 1,000,000 Multiply by: PV of 1 for 5 period x 0.57 Residual Value PV of 1 for 5 periods 570,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

10,800,000 570,000 11,370,000

16,000,000 (11,370,000) 4,630,000

Sales – Equivalent to Net Investment Net Investment 11,370,000 Sales 11,370,000 Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

8,000,000 300,000 8,300,000

Gross Profit Sales Less: Cost of Sales Gross Profit

11,370,000 8,300,000 3,070,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

4,630,000 3,070,000 7,700,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 3,000,000 Lease Term x 5 yrs. Total Rent Payable 15,000,000 Add: Residual Value 1,000,000 Gross Investment 16,000,000 Net Investment Cost of Asset Add: Initial Direct Cost Net Investment

8,000,000 300,000 8,300,000

Unearned Interest Gross Investment

16,000,000

Less: Net Investment Unearned Interest

(8,300,000) 7,700,000

July 1, 2020 - Commencement of the Lease PERPETUAL INVENTORY SYSTEM Lease Receivable 16,000,000 Sales 11,370,000 Unearned Interest 4,630,000

Cost of Sales 8,300,000 Merchandise Inventory Cash in Bank First Payment of Lessee Cash in Bank 3,000,000 Lease Receivable -

8,000,000 300,000

3,000,000

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment

If the collection is Year end  Carrying amount of year end Interest Income = Carrying Amount prior to amortization x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization x (1+Implicit Interest rate) – Annual Collection Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = P11,370,000 x 12% 2020 Interest Income = 1,364,400

– 3,000,000 2020 Carrying Amount = P11,370,000 x 1.12 – 3,000,000 2020 Carrying Amount = 12,734,400 – 3,000,000 2020 Carrying Amount = 9,734,400 Concept: 1. In all computation whether guaranteed or not we need to consider it in gross investment and net investment. 2. Tapos pag yearend iba ang formula. Problem 14-3 – UNGUARANTEED RESIDUAL VALUE  Gross investment = Total Rent Collection + Residual value whether guaranteed or unguaranteed / Bargain Option - Mababawi pa din ni Lessor kasi ito.  Net Investment = *PV of Lease Payments (Rental + Residual Value). Isang beses ang residual value normally ang residual value ay ginagamit ang PV of 1  Sales = Value ng Net Investment  Cost of Sales = Cost of Asset + Initial Direct Cost  Dinededuct ang residual value sa sales at cost of sales ay yun ang naipepresent ng talagang kinita kay lessee hindi kita ang residual value kasi hindi naman obligado na si lesse ang magbabayad. Ganon din sa Cost of sales. Sales Type Gross Investment - No bargain option Annual Rental Payable 700,000 Lease Term x 8 yrs. Total Rent Payable 5,600,000 Add: Residual Value 400,000 Gross Investment 6,000,000 Net Investment Annual Payments Multiply by: PV of OA 1 Rent PV of OA

700,000 x 4.968 3,477,600

Residual Value 400,000 Multiply by: PV of 1 for 5 period x 0.404 Residual Value PV of 1 for 8 periods 161,600 2020 Carrying Amount = (Carrying Amount Prior to Amortization x (1+ Implicit interest rate) – Annual Collection 2020 Carrying Amount = P11,370,000 x (1+.12)

Rent PV of OA Add: Residual Value PV of 1 Net Investment

3,477,600 161,600 3,639,200

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

6,000,000 (3,639,200) 2,360,800

Sales – Equivalent to Net Investment Net Investment 3,639,000 Less: Residual Value Unguaranteed (400,000* 0.404) Sales 3,477,600 Less the PV of Residual Value Cost of Sales Cost of Asset 2,000,000 Less: Residual Value Unguaranteed (400,000 * 0.404) Cost of Sales 1,838,400

Cost of Sales 1,838,400 Sales 3,477,600 Unearned Interest 2,360,800 Merchandise Inventory 2,000,000 Lease Receivable is equal to Gross Investment - Sales is equal to the value of net investment - Merchandise Inventory is the value of Equipment deemed to be inventory - Walang difference gaano ang sales type at direct financing - Pag in advance ang first payment ay walang interest. - Pag first year ang basis ng carrying amount ay ang net investment Problem 14-5 – Transfer of Title

Gross Profit Sales Less: Cost of Sales Gross Profit

3,477,600 1,838,400 1,639,200

-

-

Unearned Interest Add: Gross Profit Total Income under Sales Type

2,360,800 1,639,200 4,000,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 700,000 Lease Term x 8 yrs. Total Rent Payable 5,600,000 Add: Residual Value- Unguaranteed 400,000 Gross Investment 6,000,000 Net Investment Cost of Asset Add: Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

2,000,000 0 2,000,000

6,000,000 (2,000,000) 4,000,000

Residual Value and Bargain Options is TOTALLY IGNORED IN ALL COMPUTATIONS This is just a smooth transaction.

Sales Type Gross Investment - No bargain option Annual Rental Payable 3,328,710 Lease Term x 5 yrs. Gross Investment 16,643,550 Net Investment PV of Lease Payments Multiply by: PV of OA Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

16,643,550 (11,999,999.55) 4,643,550.45

Sales – Equivalent to Net Investment Net Investment 11,999,999.55 Sales 11,999,999.55 Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

July 1, 2020 - Commencement of the Lease PERPETUAL INVENTORY SYSTEM Lease Receivable 6,000,000

3,328,710 X 3.605 11,999,999.55

Gross Profit Sales Less: Cost of Sales

8,000,000 200,000 8,200,000

11,999,999.55 8,200,000

Gross Profit

3,799,999.55

Unearned Interest Add: Gross Profit Total Income under Sales Type

4,643,550.45 3,799,999.55 8,443,550

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 3,328,710 Lease Term x 5 yrs. Gross Investment 16,643,550 Net Investment Cost of Equipment Add Initial Direct Cost Net Investment

8,000,000 200,000 8,200,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

16,643,550 (8,200,000) 8,443,550

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 16,643,550 Sales 11,999,999.55 Unearned Interest 4,643,550.45 Cost of Sales 8,200,000 Merchandise Inventory 8,000,000 Initial Direct Cost 200,000 -

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din.

If the collection is Year end  Carrying amount of year end

Interest Income = Carrying Amount prior to amortization x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization x (1+Implicit Interest rate) – Annual Collection Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = P11,999,999.55 x 12% 2020 Interest Income = 1,439,999.946 2020 Carrying Amount = (Carrying Amount Prior to Amortization x (1+ Implicit interest rate) – Annual Collection 2020 Carrying Amount = P11,999,999.55 x (1+.12) – 3,328,710 2020 Carrying Amount = P11,370,000 x 1.12 – 3,328,710 2020 Carrying Amount = 13,439,999.50 – 3,328,710 2020 Carrying Amount = 10,111,289.50 Problem 14-14 – Transfer of Title -

-

Residual Value and Bargain Options is TOTALLY IGNORED IN ALL COMPUTATIONS This is just a smooth transaction.

Sales Type Gross Investment - No bargain option Annual Rental Payable 1,500,000 Lease Term x 20 yrs. Gross Investment 30,000,000 Net Investment PV of Lease Payments Multiply by: PV of OA Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

1,500,000 X 8.37 12,555,000

30,000,000 (12,555,000) 17,445,000

Sales – Equivalent to Net Investment Net Investment 12,555,000 Sales 12,555,000 Cost of Sales Cost of Asset 8,000,000

Add: Initial Direct Cost Cost of Sales Gross Profit Sales Less: Cost of Sales Gross Profit

0 8,000,000

12,555,000 8,000,000 4,555,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

17,445,000 4,555,000 22,000,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 1,500,000 Lease Term x 20 yrs. Gross Investment 30,000,000 Net Investment Net Investment Add: Initial Direct Cost Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

8,000,000 0 8,000,000

30,000,000 (8,000,000) 22,000,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 30,000,000 Sales 12,555,000 Unearned Interest 17,445,000 Cost of Sales 8,000,000 Merchandise Inventory 8,000,000 -

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment

First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din. If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) -

Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P12,550,0001,500,000) x 12% 2020 Interest Income = 1,326,000 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P12,550,0001,500,000) x 1.12 2020 Carrying Amount = 12,376,000 1. What is the gross investment in the lease? Answer: Letter A. 30,000,000 2. What is the net investment in the lease? Answer: Letter A. 12,555,000 3. What is the Gross Profit on sale of 2020? Answer: Letter B. 4,555,000 4. What is the interest income for 2020? Answer: 1,326,000 Problem 14-16 – Transfer of Title Residual Value and Bargain Options is TOTALLY IGNORED IN ALL COMPUTATIONS - This is just a smooth transaction. Sales Type Gross Investment - No bargain option Annual Rental Payable 2,000,000 Lease Term x 10 yrs. -

Gross Investment Net Investment PV of Lease Payments Multiply by: PV of OA Net Investment

20,000,000 2,000,000 X 6.33 12,660,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

20,000,000 (12,660,000) 7,340,000

Sales – Equivalent to Net Investment Net Investment 12,660,000 Sales 12,660,000 Cost of Sales Cost of Asset 9,000,000 Add: Initial Direct Cost 0 Cost of Sales 9,000,000 Gross Profit Sales Less: Cost of Sales Gross Profit

12,660,000 9,000,000 3,660,000

Unearned Interest Add: Gross Profit Total Income under Sales Type

7,340,000 3,660,000 11,000,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 2,000,000 Lease Term x 10 yrs. Gross Investment 20,000,000 Net Investment Net Investment Add: Initial Direct Cost Net Investment

9,000,000 0 9,000,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

20,000,000 (9,000,000) 11,000,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 20,000,000 Sales 12,660,000 Unearned Interest 7,340,000

Cost of Sales 9,000,000 Merchandise Inventory 9,000,000 Lease Receivable is equal to Gross Investment - Sales is equal to the value of net investment - Merchandise Inventory is the value of Equipment deemed to be inventory - Walang difference gaano ang sales type at direct financing - Pag in advance ang first payment ay walang interest. - Pag first year ang basis ng carrying amount ay ang net investment - First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din. If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) -

Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P12,660,0002,000,000) x 12% 2020 Interest Income = 1,279,200 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P12,660,0002,000,000) x 1.12 2020 Carrying Amount = 11,939,200 1. What is the total financial revenue (Unearned interest) over the lease term? Answer: Letter B. 7,340,000 2. What amount should be reported as gross profit on sale? Answer: Letter B. 3,660,000

3. What is the interest income for current year? Answer: Letter C. 1,279,200 Problem 14-8 – Bargain Option *Options are just OFFER made by the LESSOR REASONABLE CERTAINTY / PROBABLE na bilhin ang asset ni Lessee this is not the obligation sa part ni lessee. *Ang ilalagay lang ay probable na mangyayari para sa option. *Mataas na tsansa ni lessee. Wag isali pag walang chance na kukunin ang offer. In problem solving need to be stated the status bago iconsider ang option. *Consider the option in Gross investment and Net Investment. Sales Type Gross Investment - No bargain option Annual Rental Payable 800,000 Lease Term x 8 yrs. Gross Investment 6,400,000 Add: Option Reasonable 400,000 Gross Investment 6,800,000 Net Investment PV of Lease Payments Multiply by: PV of OA PV OF Lease Payment

800,000 X 5.87 4,696,000

PV of Option Multiply by: PV of 1 PV of Option

400,000 x 0.47 188,000

PV of Lease Payment Add: PV of Option Net Investment Unearned Interest Gross Investment Less: Net Investment Unearned Interest

Gross Profit Sales Less: Cost of Sales Gross Profit Unearned Interest Add: Gross Profit Total Income under Sales Type

1,916,000 1,784,000 3,700,000

Direct financing lease Gross Investment - No bargain option Annual Rental Payable 800,000 Lease Term x 8 yrs. Gross Investment 6,400,000 Add: Option Reasonable 400,000 Gross Investment 6,800,000 Cost of Sales Net Investment Add: Initial Direct Cost Net Investment

3,100,000 0 3,100,000

Unearned Interest Gross Investment Less: Net Investment Unearned Interest

6,800,000 (3,100,000) 3,700,000

January 1, 2020 - To recognize finance lease agreement - sales type –  PERPETUAL INVENTORY SYSTEM Lease Receivable 6,800,000 Sales 4,884,000 Unearned Interest 1,916,000 Cost of Sales 3,100,000 Merchandise Inventory 3,100,000

4,696,000 188,000 4,884,000

-

6,800,000 (4,884,000) 1,916,000

Sales – Equivalent to Net Investment Net Investment 4,884,000 Sales 4,884,000

-

Cost of Sales Cost of Asset Add: Initial Direct Cost Cost of Sales

4,884,000 3,100,000 7,984,000

3,100,000 0 3,100,000

-

Lease Receivable is equal to Gross Investment Sales is equal to the value of net investment Merchandise Inventory is the value of Equipment deemed to be inventory Walang difference gaano ang sales type at direct financing Pag in advance ang first payment ay walang interest. Pag first year ang basis ng carrying amount ay ang net investment First payment ay January 1 so ito ay in Advance dahil naganap ito noong January 1 din.

If the collection is advance / beginning: January 1 or before December 31  Interest of 2021 prior year kukunin  Carrying amount of year end Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate Carrying Amount = (Carrying Amount prior to amortization - Annual Collection) x (1+Implicit Interest rate) Formula: 2020 Interest Income = (Carrying Amount prior to amortization - Annual Collection) x implicit interest rate 2020 Interest Income = (P4,884,000-800,000) x 10% 2020 Interest Income = 408,400 2020 Carrying Amount = Carrying Amount prior to amortization x (1+Implicit Interest rate) Annual Collection 2020 Carrying Amount = (P4,884,000-800,000) x 1.10 2020 Carrying Amount = 4,492,400 Statement of Financial Position as of December 31, 2027 Lease Receivable Face Value 400,000 Less: Unearned Interest Carrying Amount 400,000

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Pag gumawa ng amortization ang pinaka dulo ay yung value ng option. Ang bearing ay if you have going to have statement of financial position. By the end of amortization ubos na ang unearned interest na amortization na natin lahat. From the beginning credit ang asset by means of merchandise inventory kaya kapag iexercised naman eto ang journal entry. Madadagdagan ka lang ng pera Pag di inexercised ang option walang madadatnan na pera babalik lang ang asset.

If the Option is exercised: Cash in Bank 400,000 Lease Receivable

400,000

If the Option is not exercised: Merchandise Inventory 250,000 Loss on Finance Lease 150,000 Lease Receivable 400,000

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The asset should measure at fair value. Yung DIFFERENCE NG EXPECTATION VS REALITY AY LOSS ITO.

SALES AND LEASEBACK - CONTRACT

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Accounting for lease on the part of lessor Direct Financing lease Sales Type This pertains to two transactions happening either subsequently or simultaneously. Binenta ito and then subsequently tayo din ang nag renta don sa object ng lease ng ating binenta. That arrangement is for seller to immediately obtain cash. Kung sa tingin niya mas maximize ang kanyang benefit dinederived niya sa asset by way of selling it then that is the best. Binebenta ang asset at sila din ang nag rerenta non so the reason for that is for the company to have an immediate relief of cash para meron na sila fund. Since ang decision ng company is to rent it para kumbaga masulit ang economic benefit. For emergency. *Traditio Constitutum Possessorium - sale of asset and subsequently retaining the physical ownership.

1. Sale Transaction 2. Lease Transaction *Weigh on the COST BENEFIT first before you decide to pursue this transaction. Because remember binenta mo na ang asset the legal ownership is transferred from you to buyer wala kana magagawa unless gusto mo bilhin kay buyer yun. Take note kaya mo ito ginagawa para sa immediate fund and kung ayaw bitawan ang asset do the lease contract. * For example binenta ng 100,000 pero nirerenta mo ng 120,000 maaring hindi sulit ang transaction yes nakaobtain ka nga ng 100,000 but the rent is not worth in total ang bayad ay 120,000. So if you decide the sales and lease back hanapin ang cost benefit. *Seller - Lessee; Buyer - Lessor

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Main Issue: How much should be recognized as GAIN OR LOSS ON SALE TRANSACTION? Remember after you sell the asset you will lease it rerentahan din ito even if you are no longer the owner of this but the physical ownership or present of that

particular is retained by you. Baka hindi need irecognized lahat ng gain or loss during the sales transaction because nasayo padin ang possession ng ownership. Problem 15-1 – Sales and Leaseback *Divide it in 2 section first is for the sales and the second one is the leaseback. Step 1 - Accounting for Sale Transaction Seller: German Company; Buyer: Sterling Company German Company - SELLER Selling Price 1,200,000 Less: Carrying Amount 1,000,000 Gain on Sale 200,000 Carrying Amount Add: Accumulated Dep. Cost Cash in Bank Accumulated Depreciation Equipment Gain on Sale

1,000,000 1,500,000 2,500,000 1,200,000 1,500,000 2,500,000 200,000

Sterling Company – BUYER – Kung magkano nabili Equipment 1,200,000 Cash in Bank 1,200,000 Step 2 - Accounting for Lease Lessee: German Company; Seller - Lessee Lessor: Sterling Company; Buyer - Lessor German Company - LESSEE - OPERATING LEASE SHORT TERM *By default - FINANCE LEASE; else, operating lease if Operating Lease 1) SHORT TERM (12 mos. or less); 2) LOW VALUE *If operating lease is the classification, there is no need to adjust the GAINS/LOSSES recognized in the sale transaction. *When the problem is silent the default is finance lease. It needs to be adjustment.

Rent Expense Cash in Bank

300,000 300,000

Sterling Company - LESSOR - OPERATING LEASE *4 Qualifications for FINANCE LEASE else OPERATING LEASE * Transfer of Title Lease Term = 1 year; Useful Life = 5 years; Ratio = 20% did not meet the minimum of 75% Formula: Lease Term/Useful Life 1/5 =20% Cash in Bank 300,000 Rent Income Depreciation Expense (P1,200,000 / 5 years) Accumulated Dep.

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300,000

240,000 240,000

Si lessor ang mag depreciate ng asset pag operating lease pero pag finance lease hindi depreciate. When the problem is silent ang depreciation method ay straight line.

Problem 15-2 – Sales and Leaseback *Divide it in 2 section first is for the sales and the second one is the leaseback. Step 1 - Accounting for Sale Transaction

Step 2 - Accounting for Lease Lessee: Canada Company; Seller - Lessee Lessor: Saigon Company; Buyer - Lessor Canada Company - LESSEE - OPERATING LEASE SHORT TERM *By default - FINANCE LEASE; else, operating lease if Operating Lease 1) SHORT TERM (12 mos. or less); 2) LOW VALUE *If operating lease is the classification, there is no need to adjust the GAINS/LOSSES recognized in the sale transaction. *When the problem is silent the default is finance lease. It needs to be adjustment. Rent Expense Cash in Bank

100,000 100,000

Saigon Company - LESSOR - OPERATING LEASE *4 Qualifications for FINANCE LEASE else OPERATING LEASE * Transfer of Title Lease Term = 3 year; Useful Life = 10 years; Ratio = 30% did not meet the minimum of 75% Formula: Lease Term/Useful Life 3/10 =30%

Seller: Canada Company; Buyer: Saigon Company

Cash in Bank 100,000 Rent Income

Canada Company - SELLER Selling Price Less: Carrying Amount Loss on Sale

500,000 480,000 20,000

Depreciation Expense (P500,000 / 10 years) Accumulated Dep.

Carrying Amount Add: Accumulated Dep. Cost

480,000 120,000 600,000

Cash in Bank Accumulated Depreciation Equipment Gain on Sale

500,000 120,000 600,000 20,000

Saigon Company – BUYER – Kung magkano nabili Equipment 500,000 Cash in Bank 500,000

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100,000

50,000 50,000

Si lessor ang mag depreciate ng asset pag operating lease pero pag finance lease hindi depreciate. When the problem is silent ang depreciation method ay straight line. Si lessee as operating lease hindi na need magadjust ng gain or loss.

Problem 15-9 – Sales and Leaseback POV of Seller - Lessee - Bain Company Seller (Lessee) – Bain Company Buyer (Lessor) – Ryan Company

*Divide it in 2 section first is for the sales and the second one is the leaseback. Step 1 - Accounting for Sale Transaction

Step 1 - Accounting for Sale Transaction

Seller (Lessee) – Juan Company Buyer (Lessor) – Market Company

Bain Company - SELLER Selling Price Less: Carrying Amount Gain on Sale

Juan Company - SELLER Selling Price Less: Carrying Amount Gain on Sale

360,000 330,000 30,000

Lease Transaction - OPERATING LEASE - SHORT TERM (12 MONTHS) *No adjustment needed for Gain on Sale since the lease contract is OPERATING LEASE * Clue: Lease it back for one year. Short term. 1. In the income statement for 2020, what amount should be reported as gain from the sale of the machine? Answer: Letter B. 30,000 Problem 15-10- Sales and Leaseback POV of Seller - Lessee - Lane Company Seller (Lessee) – Lane Company Buyer (Lessor) – Noll Company Step 1 - Accounting for Sale Transaction Selling Price 480,000 Less: Carrying Amount 360,000 Gain on Sale 120,000 Lease Transaction - OPERATING LEASE - LOW VALUE LEASE *No adjustment needed for Gain on Sale since the lease contract is OPERATING LEASE. * Clue: Low Value Lease 1. What amount should be reported as gain from the sale of the equipment for 2020? Answer: Letter A. 120,000

5,000,000 4,500,000 500,000

Cash in Bank Machinery Gain on Sale

5,000,000 4,500,000 500,000

Market Company – BUYER – Kung magkano nabili Machinery 5,000,000 Cash in Bank 5,000,000 Step 2 - Accounting for Lease Lessee: Juan Company; Seller - Lessee Lessor: Market Company; Buyer - Lessor Juan Company - LESSEE - OPERATING LEASE SHORT TERM *By default - FINANCE LEASE; else, operating lease if Operating Lease 1) SHORT TERM (12 mos. or less); 2) LOW VALUE *If operating lease is the classification, there is no need to adjust the GAINS/LOSSES recognized in the sale transaction. *When the problem is silent the default is finance lease. It needs to be adjustment. * Since this problem is not qualified in the requirements of operating lease then this would be a finance lease. * Finance Lease should be adjust the gain or loss. Formula for Lease Liability (PV of Lease Payments): - Annual Rent Payment x PV of OA of 1

Problem 15-3 - SALES PRICE = FAIR VALUE

Computation for Lease Liability: Annual Rent Payable 600,000 Multiply by: x 3.791 Lease Liability 2, 274,600 *The lease liability represents the RETAINED OWNERSHIP OF THE SELLER in the lease contract. Nirerecognized ang gain kapag alam natin di na tayo may ari. Things to be done: 1. Calculate the gain not to be recognized. 2. Calculate the Right of used asset. 3. Adjust the Gain on sale 4. And since this is finance lease it needs to be depreciated. Formula for Gain - Not to be recognized: = (Lease Liability / Fair Value) x Total Gain Computation for Gain – Not to be recognized: Lease Liability 2,274,600 Divide by: Fair Value / 5,000,000 Ratio 0.45492 Multiply by: Total Gain x 500,000 Gain not to be recognized 227,460 Formula for Right of used asset: = (Lease Liability / Fair Value) x Carrying Amount Computation for Right of used asset: Lease Liability 2,274,600 Divide by: Fair Value / 5,000,000 Ratio 0.45492 Multiply by: Carrying Amount x 4, 500,000 Right of Used Asset 2,047,140 Formula for Adjusted Gain on Sale = (Fair Value - Lease Liability) / Fair Value x Total Gain Computation for Adjusted Gain on Sale: Fair Value 5,000,000 Less: Lease Liability (2,274,600) Total Fair Value 2,725,400 Divide by Fair Value / 5,000,000 0.54508 Multiply by: Total Gain x 500,000 Adjusted Gain on Sale 272,540 

Sales price and Fair Value is equal.

Gain on Sale Right of Used Asset

227,460 2,047,140

Balancing

Figure

Lease Liability

2,274,600

Depreciation – Ang dinedepreciate ni lessee ay ang right of use hindi mismong asset. As a rule pag walang bargain option or transfer of title use the lower between Useful Life and Lease Term. If may bargain option or transfer of title na given then deretcho na ito sa useful life. When the problem is silent n method of depreciation ay straight line method. Depreciation Expense 409,428 Accumulated Depreciation 409,428 *Depreciated - RIGHT OF USED ASSET Amortization: Year End Interest Expense = Carrying Amount Prior to Amortization x Interest Rate Carrying Amount = Carrying Amount prior to Amortization x (1+Interest Rate) - Annual Payment 2020 Interest Expense = P2, 274,600 x 10% 227,460.00 2020 Carrying Amount = P2, 274,600 x 1.1 - P600, 000 1,902,060.00 2021 Carrying Amount = P1, 902,060 x 1.1 - P600, 000 1,492,266.00 Interest Expense 227,460 Lease Liability 227,460 Lease Liability Cash in Bank

600,000 600,000

Lessor - Market *4 Criteria to be classified as FINANCE LEASE *Lease Term = 5 years; Useful Life = 10 years; Ratio = 50% - OPERATING LEASE Cash in Bank Rent Income

600,000.00 600,000.00

Depreciation Expense 500,000.00 Depreciation of Machinery

Accumulated Depreciation 500,000.00 Rent Expense Cash in Bank

100,000 100,000

Market Company - LESSOR - OPERATING LEASE *4 Qualifications for FINANCE LEASE else OPERATING LEASE * Transfer of Title Lease Term = 3 year; Useful Life = 10 years; Ratio = 30% did not meet the minimum of 75% Formula: Lease Term/Useful Life 3/10 =30% Cash in Bank 100,000 Rent Income Depreciation Expense (P500,000 / 10 years) Accumulated Dep.

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100,000

50,000 50,000

Si lessor ang mag depreciate ng asset pag operating lease pero pag finance lease hindi depreciate. When the problem is silent ang depreciation method ay straight line. Si lessee as operating lease hindi na need magadjust ng gain or loss.

Direct Financing Lease

Format: Format Normal: Gross Investment (Total Rent Collection + Residual/Opt.) Less: Net Investment (Cost + Initial Direct Cost) Unearned Interest Information: 1. Gross Investment = Total Rent Collection (Annual Collection x Lease term) = Residual Value whether guaranteed or unguaranteed isasama - Guaranteed ibig sabihin si lessee ang mag shoulder - Unguaranteed naman ay balancing figure sa amortization = Bargain Option – Dapat probable. When the problem is silent then hindi ito probable. Need istate. 2. Net Investment = Cost of Equipment + Initial Direct Cost *If the net investment is adjusted by initial direct cost then the implicit interest rate must also be adjusted. This is the process in computing the new interest rate: (Objective is to get the new PV Factor) Formula: Annual Payment x PV Factor = Net Investment *But when it comes to problem solving the implicit rate is already adjusted no need to adjust even if the net investment is adjusted by initial direct cost. * The formula above is true in real life situation. * If the asset is finance lease no need to depreciate the asset. *If Advance ang First Collection ay no interest. *Executory Cost- Is only expense not treated as part of lease payments. PV of OA of 1 – Annual Rent Payable PV of 1 – Option/ Residual Value 1. Implicit Interest Rate – Lessor – Use it first eto ang PRIORITY. 2. Incremental Borrowing Rate – Lessee- If there is no Implicit rate then eto na gamitin. * To compute the Interest Income use Net investment value. *When it comes to transfer of title the residual value will be ignore. Sales Type

Gross Investment (Total Rent Collection + Residual Value) Less: Net Investment (Cash Selling Price – Fair Value ito) Unearned Interest Sales (Value ng Net Investment) Less: Cost of Sales (Cost of Equipment + Initial Direct Cost) Gross Profit Unearned Interest Add: Gross Profit Total Income under Sales Type Information: 1. Gross Investment = Total Rent Collection (Annual Collection x Lease term) = Residual Value whether guaranteed or unguaranteed isasama - Guaranteed ibig sabihin si lessee ang mag shoulder - Unguaranteed naman ay balancing figure sa amortization = Bargain Option – Dapat probable. When the problem is silent then hindi ito probable. Need istate. 2. Net Investment = Fair Value – Cash Selling Price = Ang list price ay hindi FV. = Present Value or Fair Value whichever is Lower. 3. Sales = Equal lang ang value nito sa net investment. 4. Cost of Sales = Cost of equipment + Initial Direct Cost = Pag Guaranteed no need na ibawas sa cost of sales.  Perpetual Inventory System ang Pagrecord.  Selling Price vs Present Value whichever is lower. Format Residual Value: Gross Investment Less: Net Investment Unearned Interest Sales Cost of Sales Gross Profit

Gross Investment Net Investment Unearned Interest Sales

Cost of Sales

Gross Profit

Guaranteed SIMILAR

Unguaranteed SIMILAR

SIMILAR SIMILAR

SIMILAR SIMILAR

DO NOT DEDUCT PV OF RESIDUAL DO NOT DEDUCT PV OF RESIDUAL SIMILAR

DEDUCT PV OF RESIDUAL DEDUCT PV OF RESIDUAL SIMILAR

FORMULA In Advance - January 1 or dates before December 31 Interest Income = (Carrying Amount Prior to Amortization - Annual Collection) x Interest Rate Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) x (1+Interest Rate) In Advance - December 31 meaning no more accrual 1st Year: Interest Income = NONE Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) Subsequent Years = same procedure for ORDINARY ANNUITY / YEAR-END In Advance - if Other Than January 1 1st Year: Interest Income = (Carrying Amount Prior to Amortization - Annual Collection) x Interest Rate x Pro-rata Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) + Computed Interest Income Subsequent Years: Interest Income = (Carrying Amount Prior to Amortization - Annual Collection) x Interest Rate Carrying Amount = (Carrying Amount Prior to Amortization - Annual Collection) x (1+Interest Rate)

Year End Computation: Interest Income = Carrying Amount Prior to Amortization x Interest Rate Carrying Amount = Carrying Amount Prior to Amortization x (1+Interest Rate) - Annual Collection

Sales and Leaseback

Accounting for Lease Qualification to be recognized as Finance Lease: (At least 1): 1. Ratio = Lease Term/ Useful Life - Baka kasi substantial na siya na gumagamit to the point konti nalang natitirang buhay ng asset. In terms of Useful Life the ratio is at least 75%. - Operating Lease ginagamit mo an activity nito sa operation mo lang kaya 1 year. Ang finance lease ginagamit ito to obtain funds. More than 1 year. 2. Ratio = PV of Lease Payments/Fair Value of Assets - At least 90% 3. Transfer of title – which is no doubt kasi nilipat na ang titulo. 4. Bargain Purchase Option – Probable to be executed. - Binibigyan ng option ang lease. At the inception at the time ng pagagree ni lessor and lease. In the form of writing.