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1. Lease Accounting - Lessee

Lease Accounting - Lessee (theories and problems)
Course

Accountancy (BSA)

52 Documents
Students shared 52 documents in this course
Academic year: 2020/2021
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St. Mary's College of Tagum, Inc.

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BASIC PRINCIPLES - LEASE ACCOUNTING

1.

Lease is defined as a contract part of a contract that conveys the right to use the underlying asset for a period of time in exchange for consideration

1. The term of a low value lease means less than 12 months FALSE The lessee may apply the operating lease model under what condition? Both short-term and low value lease An underlying asset does not qualify as low value lease if the nature of the asset is such that the asset is typically not of low value when new TRUE The value of an underlying asset is based on the value of the asset when new regardless of age of the asset. TRUE

1. Lease incentives - are payments by the lessor to the lessee associated with a lease or the reimbursement or assumption by the lessor of the costs of the lessee. right of use asset - is defined as an asset that represents the right of a lease to use an underlying asset over the lease term in a finance lease Initial direct costs - are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained.

1. Variable payments - are payments made by the lessee for the right to use the underlying asset during the lease term that vary because of the changes in facts or circumstances occurring after the commencement date other than passage of time. residual value guarantee - is the guarantee made to the lessor by a party unrelated to the lessor that the value of an underlying asset at the end of the lease term will be at least a specified amount. fixed payments- are payments made by the lessee to the lessor for the right to use an underlying asset during the lease term. executory costs - are ownership expenses such as maintenance, taxes and insurance for the underlying asset. Unguaranteed residual value - is that portion of the residual value of the underlying asset, the realization of which by the lessor is not assured or is guaranteed solely by a party related to the lessor.

1. On January 1, 2020, Mixx Company entered into a lease for a new warehouse. Lease payments are P800,000 a year for 5 years, payable in advance starting January 1, 2020. The warehouse has an estimated life of 10 years. The entity paid initial direct cost of P100,000 on January 1, 2020. The realty taxes of P40,000 a year are to be paid by the entity. The lease provides for neither transfer of title to the lessee upon expiration of the lease term nor a purchase option. The underlying asset is reverted to the lessor at the expiration of the lease term. 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 - 3. PV of an annuity of 1 in advance at 10% for 5 periods - 4.

1. What amount is debited to right of use asset on Jan. 1, 2020? 3,436, 2. How much is net credit to lease liability on Jan. 1, 2020 2,536, 3. What is the annual depreciation? 687, 4. How much is interest accrued in 2020? 253, 5. What is the balance of lease liability at the end of 2021? 1,989, 6. How much is interest accrued in 2021? 198, 7. What is the carrying amount of the right of use asset at the end of 2021? 2,061,

On January 1, 2020, Letty Company leased a machine with the following provisions Annual lease payment in advance at the beginning of each year, starting January 1, 2020 - P1,000,  Lease term - 10 years  Useful life of machine - 15 years  Implicit interest rate in the lease -12%  PV of an ordinary annuity of 1 at 12% for 10 periods - 5.  PV of an annuity of 1 in advance at 12% for 10 periods - 6.  PV of 1 at 12% for 10 periods - 0. The entity has an option to purchase the machine on January 1, 2030 by paying P200,000. At the commencement date, it is reasonably certain that the purchase option will be exercised. 1. What amount is debited to right of use asset on Jan. 1, 2020? 6,392, 2. How much is net credit to lease liability on Jan. 1, 2020? 5,392, 3. What is the annual depreciation? 426, 4. How much is interest accrued in 2020? 647, 5. What is the balance of lease liability at the end of 2021? 5,039, 6. How much is interest accrued in 2021? 604, 7. What is the carrying amount of the right of use asset at the end of 2021? 5,540,

On January 1, 2020, Overland Company closed a lease contract for newly constructed terminals and freight storage facilities. Although the terminals have a composite life of 10 years, the lease runs for 5 years with a transfer of title to the lessee upon expiration of the lease. The annual lease payment is P1,000,000 payable at the end of each year starting December 31, 2020. The lessee must also make an annual payment of P75,000 for taxes and P125, for insurance. The lessee incurred initial direct cost of P150,000 including P50,000 commission paid to the broker that arranged the lease. As an incentive to the lessee, the lessor agreed to reimburse the lessee for the commission of P50,000. The contract was negotiated to assure the lessor a 10% rate of return. The present value of an ordinary annuity of 1 at 10% for five periods is 3. The present value of an annuity of 1 in advance at 10% for five periods is 4. 1. What amount is net debit to right of use asset on Jan. 1, 2020? 3,890, 2. How much is credited to lease liability on Jan. 1, 2020? 3,790, 3. What is the annual depreciation? 389, 4. How much is interest incurred in 2020? 379, 5. What is the balance of lease liability at the end of 2021? 2,485, 6. How much is interest incurred in 2021? 316, 7. What is the net book value of the right of use asset at the end of 2021? 3,112,

OTHER LEASE ACCOUNTING ISSUES

1.

Cavalier Company entered into a lease of building on January 1, 2020 with the following information:

The lease contained an option for the lease to extend the lease for a further 5 years. At the commencement date, the exercise of the extension option is not reasonably certain. After 3 years on January 1, 2023, the lessee decided to extend the lease for a further 5 years.

Prepare the table of amortization for 2020, 2021 and 2022. Date Payment Interest Principal Lease Liability Jan. 1, 2020 2,334, Dec. 31, 2020 600,000 210,060 389,940 1,944, Dec. 31, 2021 600,000 174,965 425,035 1,519, Dec. 31, 2022 600,000 136,712 463,288 1,055,

Write the entry for Jan. 1, 2020. Right of use asset 2,334, Lease liability 2,334,

Write the entry to record payment of lease on Dec. 31, 2020. Interest expense 210, Lease liability 389, Cash 600,

Write the entry to record depreciation on Dec. 31, 2020. Depreciation expense 466, Accumulated Depreciation 466,

Compute the following. 1. Total present value of the lease liability on January 1, 2023 3,312, 2. Increase in lease liability on Jan. 1, 2023 2,256, 3. New carrying amount of the right of use asset on Jan. 1, 2023 3,190,

Prepare the table of amortization for 2023 to 2029. Date Payment Interest Principal Lease Liability Jan. 1, 2023 3,312, Dec. 31, 2023 600,000 397,506 202,494 3,110, Dec. 31, 2024 600,000 373,206 226,794 2,883, Dec. 31, 2025 800,000 345,991 454,009 2,429, Dec. 31, 2026 800,000 291,510 508,490 1,920, Dec. 31, 2027 800,000 230,491 569,509 1,351, Dec. 31, 2028 800,000 162,150 637,850 713, Dec. 31, 2029 800,000 86,598 713,402 -

Write the entry on Jan. 1, 2023. Right of use asset 2,256, Lease liability 2,256,

Write the entry to record payment of lease on Dec. 31, 2023. Interest expense 397, Lease liability 202, Cash 600,

Write the entry to record depreciation on Dec. 31, 2023. Depreciation expense 455, Accumulated Depreciation 455,

1. On January 1, 2020, Gold Company entered into a 5-year lease of a floor of a building with the following terms:

Prepare the table of amortization. Date Payment Interest Principal Lease Liability Jan. 1, 2020 1,019, Dec. 31, 2020 200,000 81,532 118,468 900, Dec. 31, 2021 200,000 72,054 127,946 772, Dec. 31, 2022 300,000 61,819 238,181 534, Dec. 31, 2023 300,000 42,764 257,236 277, Dec. 31, 2024 300,000 22,684 227,316 0

Write the entry for Jan. 1, 2020. Right of use asset 1,169, Lease Liability 1,019, Cash 100, Estimated liability for restoration cost 50,

Write the entry to record depreciation on Dec. 31, 2020. Depreciation expense 151, Accumulated Depreciation 151,

Compute the following. 1. Carrying amount of the right of use asset on Dec. 31, 2021 454, 2. Termination gain or (loss) 10,620/10,620 gain 3. Increase in lease liability 13,

Write the entry on Jan. 1, 2022. Accumulated depreciation 75, Lease liability 110, Right of use asset 176, Termination gain 10,

Write the entry to record payment of lease on Dec. 31, 2022. Interest expense 30, Lease liability 119, Cash 150,

Write the entry to record depreciation on Dec. 31, 2022. Depreciation expense 118, Accumulated Depreciation 118,

1. On January 1, 2020, Pinky Company entered into a lease agreement with the following information:

On January 1, 2023, Pinky Company and the lessor agreed to amend the original terms of the lease with the following information:

The increase in rental for the additional 2,000 square meters is equivalent to the current market rent. Write the entry for Jan. 1, 2020. Right of use asset 1,238, Lease Liability 1,238,

Write the entry to record payment of lease on Dec. 31, 2020. Interest expense 148, Lease liability 51, Cash 200,

Write the entry to record depreciation on Dec. 31, 2020. Depreciation expense 103, Accumulated Depreciation 103,

Write the entry for Jan. 1, 2023. Right of use asset 1,727, Lease Liability 1,727,

Write the entry to record payment of lease on Dec. 31, 2023. Interest expense 172, Lease liability 127, Cash 300,

Write the entry to record depreciation on Dec. 31, 2023. Depreciation expense 191, Accumulated Depreciation 191,

1. On January 1, 2020, Justine Company leased an office building with the following terms:

On January 1, 2022, Justine Company and the lessor agreed to amend the original terms of the lease with the following information:

Prepare the table of amortization for 2020 and 2021 Date Payment Interest Principal Lease Liability Jan. 1, 2020 951, Dec. 31, 2020 300,000 95,100 204,900 746, Dec. 31, 2021 300,000 74,610 225,390 520,

Write the entry for Jan. 1, 2020. Right of use asset 951, Lease Liability 951,

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1. Lease Accounting - Lessee

Course: Accountancy (BSA)

52 Documents
Students shared 52 documents in this course

University: St. Mary's College of Tagum, Inc.

Was this document helpful?
BASIC PRINCIPLES - LEASE ACCOUNTING
1.1
Lease is defined as a contract part of a contract that conveys the right to use the underlying
asset for a period of time in exchange for consideration
1.2
The term of a low value lease means less than 12 months FALSE
The lessee may apply the operating lease model under what condition? Both short-term and
low value lease
An underlying asset does not qualify as low value lease if the nature of the asset is such that the
asset is typically not of low value when new TRUE
The value of an underlying asset is based on the value of the asset when new regardless of age
of the asset. TRUE
1.3
Lease incentives - are payments by the lessor to the lessee associated with a lease or the
reimbursement or assumption by the lessor of the costs of the lessee.
right of use asset - is defined as an asset that represents the right of a lease to use an
underlying asset over the lease term in a finance lease
Initial direct costs - are incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained.
1.4
Variable payments - are payments made by the lessee for the right to use the underlying asset
during the lease term that vary because of the changes in facts or circumstances occurring after
the commencement date other than passage of time.
residual value guarantee - is the guarantee made to the lessor by a party unrelated to the
lessor that the value of an underlying asset at the end of the lease term will be at least a
specified amount.
fixed payments- are payments made by the lessee to the lessor for the right to use an
underlying asset during the lease term.
executory costs - are ownership expenses such as maintenance, taxes and insurance for the
underlying asset.
Unguaranteed residual value - is that portion of the residual value of the underlying asset, the
realization of which by the lessor is not assured or is guaranteed solely by a party related to the
lessor.
1.5
On January 1, 2020, Mixx Company entered into a lease for a new warehouse. Lease payments
are P800,000 a year for 5 years, payable in advance starting January 1, 2020. The warehouse
has an estimated life of 10 years. The entity paid initial direct cost of P100,000 on January 1,
2020. The realty taxes of P40,000 a year are to be paid by the entity. The lease provides for
neither transfer of title to the lessee upon expiration of the lease term nor a purchase option.
The underlying asset is reverted to the lessor at the expiration of the lease term. 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 - 3.79
PV of an annuity of 1 in advance at 10% for 5 periods - 4.17

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