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Exercises on Lease accounting, Exercises of Financial Accounting

Here are some of the exercises on accounting for leases.

Typology: Exercises

2021/2022

Uploaded on 08/23/2023

ogawa-hikaru
ogawa-hikaru 🇵🇭

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ILLUSTRATIVE PROBLEMS REQUIREMENT NO. 2
PROBLEM NO. 2 Lessee, with BPO
Nuggets Enterprises has a long-standing policy of acquiring
company equipment by leasing. Early in 2020, the
company entered into a lease for a new equipment. The
lease stipulates that annual payments will be made for 5
years. The payments are to be made in advance on
December 31 of each year. At the end of the 5-year
period, Nuggets may purchase the equipment. The
estimated economic life of the equipment is 12 years.
Nuggets uses the calendar year for reporting purposes
and
straight-line depreciation for other equipment. In
addition,
the following information about the lease is also
available:
Annual lease payments (including
executory costs of P5,000)
P60,000
Purchase option price
P25,000
Estimated fair value of equipment
Interest expense
P 2,268
Lease liability 22,732
Cash P25,000
REQUIREMENT NO. 3
Interest expense
P 2,268
Lease liability 22,732
Accumulated depreciation
102,028
Loss on lease 117,840
Right of use asset P244,868
Amortization schedule:
Carrying
after 5 years P75 000
Implicit rate 10%
Date of first lease payment Jan. 1, 2020
REQUIRED:
1. Prepare the 2020 journal entries relating to the lease
Date Payment Interest Principal amount
on the books of Nuggets (Round off present value
12/31/22 55,000 11,424 43,576 70,665
factors to four decimal places.)
12/31/23 55,000 7,067 47,933 22,732
2. Prepare the journal entry to record the exercise of the 12/31/24 25,000 2,268 22,732
-
purchase option.
3. Prepare the journal entry at the end of the lease term
if the purchase option is not exercised.
SOLUTION:
REQUIREMENT NO. 1
January 1, 2020
To recognize asset and liability
Right of use asset P244,868
Lease liability
P244,868
To
record
initial
payment
Lease liability P55,000
Cash P55,000
To record payment for executory costs
Expenses
P5,000
Cash P5,000
December 31, 2020
To
record
the
second
payment
Interest expense
P18,987
Lease liability 36,013
Cash P55,000
To record payment for executory costs
Prepaid expenses P5,000
Cash P5,000
To
record
depreciation
Depreciation P20,406*
Accumulated depreciation
P20,406
*(P244,868/12)
PROBLEM NO. 1 Lessee, with GRV
On January 1, 2020, Nets Company entered into a lease
contract with Denver Company for a new equipment that
had a selling price of P2,120,000. The lease contract
provides that annual payments of P420,000 will be made
for 6 years. Nets made the first payment on January 1,
2020, subsequent payments are made on January 1 of
each year. Nets guarantees a r esidual value of P367,122
at the end of the lease term. After considering the
guaranteed residual value, the rate implicit in the lease
is determined to be 12%. Nets has an incremental
borrowing rate of 15%. The economic life of the
equipment is 9 years. Nets depreciates its equipment
using straight line method.
REQUIRED:
1.
Prepare the 2020 and 2021 journal entries relating to
the lease on the books of Nets (Round off present
value factors to four decimal places.)
2.
Prepare the journal entry at the end of the lease term
if the fair value of the leased asset is P400,000.
3.
Prepare the journal entry at the end of the lease term
if the fair value of the leased asset is P300,000.
SOLUTION:
REQUIREMENT NO. 1
January 1, 2020
To recognize asset and liability
Right of use asset P2,120,000
Lease liability P2,120,000
1/1/20 244,868
1/1/20 55,000
-
55,000 189,868
12/31/20 55,000 18,987 36,013 153,855
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ILLUSTRATIVE PROBLEMS REQUIREMENT^ NO.^2

PROBLEM NO. 2Lessee, with BPO Nuggets Enterprises has a long-standing policy of acquiring company equipment by leasing. Early in 2020, the company entered into a lease for a new equipment. The lease stipulates that annual payments will be made for 5 years. The payments are to be made in advance on December 31 of each year. At the end of the 5-year period, Nuggets may purchase the equipment. The estimated economic life of the equipment is 12 years. Nuggets uses the calendar year for reporting purposes and straight-line depreciation for other equipment. In addition, the following information about the lease is also available: Annual lease payments (including executory costs of P5,000) P60, Purchase option price P25, Estimated fair value of equipment Interest expense P 2, Lease liability 22, Cash P25, REQUIREMENT NO. 3 Interest expense P 2, Lease liability 22, Accumulated depreciation 102, Loss on lease 117, Right of use asset P244, Amortization schedule: Carrying after 5 years P75 000 Implicit rate 10% Date of first lease payment Jan. 1, 2020 REQUIRED:

  1. Prepare the 2020 journal entries relating to the lease Date Payment Interest Principal amount on the books of Nuggets (Round off present value (^) 12/31/22 55,000 11,424 43,576 70, factors to four decimal places.) (^) 12/31/23 55,000 7,067 47,933 22,
  2. Prepare the journal entry to record the exercise of the 12/31/24^ 25,000^ 2,268^ 22,732^ - purchase option.
  3. Prepare the journal entry at the end of the lease term if the purchase option is not exercised. SOLUTION: REQUIREMENT NO. 1 January 1, 2020 To recognize asset and liability Right of use asset P244, Lease liability P244, To record initial payment Lease liability P55, Cash P55, To record payment for executory costs Expenses P5, Cash P5, December 31, 2020 To record the second payment Interest expense P18, Lease liability 36, Cash P55, To record payment for executory costs Prepaid expenses P5, Cash P5, To record depreciation Depreciation P20,406* Accumulated depreciation P20, *(P244,868/12) PROBLEM NO. 1Lessee, with GRV On January 1, 2020, Nets Company entered into a lease contract with Denver Company for a new equipment that had a selling price of P2,120,000. The lease contract provides that annual payments of P420,000 will be made for 6 years. Nets made the first payment on January 1, 2020, subsequent payments are made on January 1 of each year. Nets guarantees a residual value of P367, at the end of the lease term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be 12%. Nets has an incremental borrowing rate of 15%. The economic life of the equipment is 9 years. Nets depreciates its equipment using straight line method. REQUIRED: 1. Prepare the 2020 and 2021 journal entries relating to the lease on the books of Nets (Round off present value factors to four decimal places.)
    1. Prepare the journal entry at the end of the lease term if the fair value of the leased asset is P400,000.
    2. Prepare the journal entry at the end of the lease term if the fair value of the leased asset is P300,000. SOLUTION: REQUIREMENT NO. 1 January 1, 2020 To recognize asset and liability Right of use asset P2,120, Lease liability P2,120, 1/1/20 244, 1/1/20 55,000 - 55,000 189, 12/31/20 55,000 18,987 36,013 153,

To record initial payment Lease liability P420, Cash P420, December 31, 2020 To record accrual of interest Interest expense P204, Interest payable P204, To record depreciation Depreciation P292,146* Accumulated depreciation P292, *[(P2,120,000-P367,122)/6] January 1, 2021 To record the second payment Interest payable P204, Lease liability 216, Cash P420, December 31, 2021 To record accrual of interest Interest expense P178, Interest payable P178, To record depreciation Depreciation P292, Accumulated depreciation P292, REQUIREMENT NO. 2 To record return of equipment to lessor Interest payable P 39, Lease liability 327, Accumulated depreciation 1,752, Right of use asset P2,120, REQUIREMENT NO. 3 To record return of equipment to lessor Interest payable P 39, Lease liability 327, Accumulated depreciation 1,752, Right of use asset P2,120, To record payment to lessor Loss on lease P67, Cash P67, Amortization schedule: Carrying Date 01.01. Payment Interest Principal amount 2,120, 01.01.20 420,000 - 420,000 1,700, PROBLEM NO. 3Lessor and Lessee , (Lessor, Direct Financing Lease) Assimilator Controls Corporation is in the business of leasing equipment. Assimilator Controls purchased new equipment on December 31, 2020. The equipment was delivered the same day (by prior arrangement) to Tantalum Investment Company, a lessee. The corporation accountant revealed the: following information relating to the lease transaction: Cost of equipment to Assimilator Controls P550, Estimated useful life and lease term 8 years Expected residual value (unguaranteed) P40, Assimilator Controls' implicit rate of interest 12% Tantalum’s incremental borrowing rate 14% Date of first lease payment Dec. 31, 2020 Annual lease payments P95, Additional information is as follows: (a) At the end of the lease, the equipment will revert to Assimilator Controls. (b) Tantalum is aware of Assimilator Controls' rate of implicit interest. (c) The lease rental consists of equal annual payments. REQUIRED: Prepare the 2020 and 2021 journal entries relating to the lease on the books of Assimilator Controls and Tantalum Investment Company LESSOR’S BOOKS December 31, 2020 Commencement of finance lease Finance lease receivable (FLR) P807, Equipment P550, Discount on FLR* 257, * Alternatively, “Unearned Interest Income” To record initial payment Cash P95, Finance lease receivable P95, December 31, 2021 To record the second payment Cash P95, Finance lease receivable P95, To record amortization of discount on FLR Discount on FLR P54, Interest income P54, LESSEE’S BOOKS December 31, 2020 P533, Cash P95, 01.01.21 420,000 204,000 216,000 1,484, 01.01.22 420,000 178,080 241,920 1,242,080 To^ recognize^ asset^ and^ liability 01.01.23 420,000 149,050 270,950 971,130 Right^ of^ use^ asset^ P533, 01.01.24 420,000 116,536 303,464 667,665 Lease^ liability 01.01.25 420,000 80,120 339,880 327,785 To^ record^ initial^ payment 01.01.26 367,122 39,337 327,785 - Lease^ liability^ P95,