OPERATING LEASE_ LESSOR

Illustrative 1: Pepper Company owns an office building and normally charges tenants P 3,000 per
square meter per year for office space.
Because the occupancy rate is low, Pepper Company agreed to lease 1,000 square meters to Ivana
Company at 1,200 per square meter for the first year of a three-year operating lease. Rent for the
remaining years will be at the P 3,000 rate.
Pepper Company moved into the building on January 1, 2022 and paid the first year's rent in
advance.
Required: What amount of rental revenue should be reported in the income statement for the year
ended September 30, 2022?
a. 2,400,000 c. 1,800,000
b. 1,200,000 d. 900,000

Illustrative 2: Pepper Company leased an office to Ivana Company for a five-year term beginning
January 1, 2022.
Under the terms of the operating lease, rent for the first year is P 800,000 and rent for years 2
through 5 is P 1,250,000 per annum.
However, as an inducement to enter the lease, Pepper Company granted Ivana Company the first
six months of the lease rent-free.
Required: What amount should be reported as rental income for 2022?
a. 1,200,000 c. 1,080,000
b. 1,160,000 d. 800,000

Illustrative 3: On January 1, 2017, Pepper Company leased a building to Ivana Company under a
four-year operating lease. The monthly rental for 2017, 2018, 2019, and 2020 is P 100,000, P
150,000, P 200,000 and P 250,000, respectively. Rentals are payable at the end of each month. All
rental payments within the year were made when due.
Required: What amount should be reported as rent receivable from Ivana Company on December
31, 2018?
a. 1,000,000 c. 1,200,000
b. 600,000 d. 900,000

Illustrative 4: On January 1, 2022, Pepper Company leased a building to Ivana Company under
an operating lease for ten years at P 500,000 per year, payable the first day of each lease year.
Pepper Company paid P 150,000 to a real estate broker as initial direct costs. the building is
depreciated P 120,000 per year. Pepper Company insurance and property tax expense totaling P
90,000 for 2022.
Required: What is the net rent income for 2022?
a. 275,000 b. 290,000
c. 350,000 d. 365,000

Illustrative 5: Pepper Company leased a new machine to Ivana Company on January 1, 2022. The
lease expires on January 1, 2027. The annual rental is P 900,000. Additionally, on January 1, 2022,
Ivana Company paid P 500,000 to Pepper Company as a lease bonus and P 250,000 as a security
to be refunded upon expiration of the lease.
Required: What amount should be reported as rent revenue for the current year?
a. 1,400,000 b. 1,250,000
c. 1,000,000 d. 900,000
DIRECT AND SALES TYPE LEASE _ LESSOR

Illustrative 1:
On January 1, 2022, Pepper Company leased a machinery to Ivana Company with the following
details:
Cost of Machinery P 1,518,650
Lease Term 4 years
Useful life of the machinery 4 years
Implicit interest rate before initial direct cost 12%
Implicit interest rate after initial direct cost 10%
Present value of annuity of 1 for 4 years at 12% 3.0373
Present value of annuity of 1 for 4 years at 10% 3.1699

On January 1, 2022, Pepper Company paid initial direct cost of P 66,300.

Required:
1. How much is the Gross Investment?
2. How much is the Net Investment?
3. How much is the Unearned Interest Income?
4. How much is the carrying amount of the Lease Receivable on December 31, 2022? 5. How
much is the current portion of the Lease Receivable on December 31, 2022?
6. How much is the noncurrent portion of the Lease Receivable on December 31, 2022?

Illustrative 2:
On January 1, 2022, Pepper Company leased a machinery to Ivana Company with the following
details:
Cost of Machinery P 3,760,100
Residual Value Guarantee 400,000
Useful life and lease term 4 years
Implicit interest rate 10%
PV of 1 at 10% for 4 periods 0.6830
PV of an annuity of 1 at 10% for 4 periods 3.1699
PV of an annuity due of 1 at 10% for 4 periods 3.4869

The annual rental is payable in advance on January 1 of each year starting January 1, 2022.
Required:
1. How much is the annual rental?
2. How much is the Gross Investment?
3. How much is the Net Investment?
4. How much is the Unearned Interest Income?
Illustrative 3:
On January 1, 2022, Pepper Company leased a machinery to another entity with the following
details:
Cost of Machinery P 3,449,600
Residual Value Guarantee 500,000
Useful life and lease term 5 years
Implicit interest rate 8%
PV of 1 at 8% for 5 periods 0.681
PV of an annuity of 1 at 8% for 5 periods 3.993
PV of an annuity due of 1 at 8% for 5 periods 4.312

The annual rental is payable in advance on January 1 of each year starting January 1, 2022.
The lease provides for a transfer of title to the lessee at the end of the lease term.
Required:
1. How much is the annual rental?
2. How much is the Gross Investment?
3. How much is the Net Investment?
4. How much is the Unearned Interest Income?

Illustrative 4:
Pepper Company is a dealer in machinery. On January 1, 2022, a machinery was leased to Ivana
Company with the following provisions:
Annual rental payable at the end of each year P 800,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery 2,000,000
Estimated Residual Value 200,000
Initial Direct Cost paid by lessor 100,000
Implicit interest rate 10%
Present value of annuity of 1 for 5 years at 10% 3.7908
Present value of 1 for 5 periods at 10% 0.6209

At the end of the lease term on December 31, 2026, the machinery will revert to Pepper Company.
Required:
Scenario A: Residual Value is Guaranteed
1. How much is the Gross Investment?
2. How much is the Net Investment?
3. How much is the Unearned Interest Income?
4. How much is the Sales?
5. How much is the Cost of Goods Sold?
6. How much is the gross profit?
7. How much is the carrying amount of the Lease Receivable on December 31, 2022?

Scenario B: Residual Value is Unguaranteed

1. How much is the Gross Investment?
2. How much is the Net Investment?
3. How much is the Unearned Interest Income?
4. How much is the Sales?
5. How much is the Cost of Goods Sold?
6. How much is the gross profit?
7. How much is the carrying amount of the Lease Receivable on December 31, 2022?
Illustrative 5:
Pepper Company is a dealer in equipment. On January 1, 2022, an equipment is leased to Ivana
Company with the following provisions:
Annual rental payable at the end of each year P 500,000
Lease term 4 years
Useful life of machinery 5 years
Cost of machinery 1,000,000
Purchase Option 200,000
Initial Direct Cost paid by lessor 100,000
Implicit interest rate 8%
Present value of annuity of 1 for 4 years at 8% 3.312
Present value of 1 for 4 periods at 8% 0.735

It is reasonably certain that the lessee will exercise the purchase option on December 31, 2025.
Required:
1. How much is the Gross Investment?
2. How much is the Net Investment?
3. How much is the Unearned Interest Income?
4. How much is the Sales?
5. How much is the Cost of Goods Sold?
6. How much is the gross profit?

Illustrative 6:
Pepper Company sold an equipment that it had been leasing under a sales type lease for P
3,500,000.
The following balances are associated with the finance lease on the books of Pepper on the date of
the sale:
Lease Receivable P 5,000,000
Unearned Interest Income 1,200,000

Required: How much is the gain or loss on the actual sale of the equipment?

Leases_ Lessee’s POV

Illustrative 1:
On January 1, 2022, Pepper Company leased a machinery for 4 years. The useful life of the
machinery is 5 years. The lease is at annual rental or fixed payment of P 100,000 payable at the
end of each year. The implicit rate of interest is 12%. The lease provides for a transfer of
ownership of the underlying asset to the lessee at the end of the lease term.
Required:
1. What is the initial lease liability?
2. What is the cost of the right of use asset?
3. How much is the depreciation expense for the year 2022?
4. How much is the carrying amount of the right of use asset at the end of 2022?
5. Prepare an amortization schedule
Illustrative 2:
Pepper Company leased an equipment on January 1, 2022 with the following information:
Fixed Annual Payment at the end of each year P 1,000,000
Lease Term 4 years
Useful life of equipment 5 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 4 periods at 10% 3.16987
Present value of 1 for 4 periods at 10% 0.683

Pepper Company has guaranteed a P 200,000 residual value on December 31, 2025.
Required:
1. What is the initial lease liability?
2. What is the cost of the right of use asset?
3. How much is the depreciation expense for the year 2022?
4. How much is the carrying amount of the right of use asset at the end of 2022?
5. Prepare an amortization table.
6. How much is the loss on finance lease if the fair value of the equipment on December 31, 2025
is only P 150,000.
7. How much is the gain on finance lease if the fair value of the equipment on December 31, 2025
is P 250,000.

Illustrative 3:
Pepper Company leased an equipment on January 1, 2022 with the following information: Fixed
Annual Payment in advance at the beginning of each lease year
P1,000,000
Initial Direct Cost Paid on January 1, 2022 250,000
Lease Incentive Received 150,000
Residual Value Guarantee 300,000
Lease Term 5 years
Useful life of equipment 6 years
Implicit interest rate 8%
Present value of an annuity due of 1 for 5 periods at 8% 4.3121
Present value of 1 for 4 periods at 10% 0.6806
Required:
1. What is the initial lease liability?
2. What is the cost of the right of use asset?
3. How much is the depreciation expense for the year 20227
4. How much is the interest expense for the year 2022?
Illustrative 4:
Pepper Company Leased a Machine on January 1, 2022 with the following pertinent information:
Fixed Annual Payment at the end of each year P 1,000,000
Lease Term 10 years
Useful life of equipment 12 years
Incremental borrowing rate 14%
Implicit interest rate 12%
Present value of an ordinary annuity of 1 for 10 periods at 14% 5.216
Present value of an ordinary annuity of 1 for 10 periods at 12% 5.650
Present value of 1 for 10 periods at 14% 0.270
Present value of 1 for 10 periods at 12% 0322

Pepper Company has the option to purchase the machine upon the lease expiration on January 1,
2022 by paying P 500,000.
The lessee is reasonably certain to exercise the purchase option at the commencement date of the
lease.
The estimated residual value of the machine at the end of the 12-year useful life is P 600,000.
Required:
1. What is the initial lease liability?
2. What is the cost of the right of use asset?

Illustrative 5:
Pepper Company purchased an equipment that it had been leasing under a finance lease for P
4,000,000.
The balances of certain accounts on the date of actual purchase are as follows:
Right of Use Asset P 5,000,000
Accumulated Depreciation 1,500,000
Lease Liability 3,800,000

What is the cost of the equipment purchased?

Sales and Leaseback

Illustrative 1:
At the beginning of the current year, Pepper Company sold a machinery with a
remaining life of 10 years for P 2,000,000 which is equal to the fair value of the
machinery. Pepper Company immediately leased the machinery back for 1 year at
the prevailing annual rental of P 300,000. The machinery has a cost of P
3,000,000 and an accumulated depreciation of P 1,200,000.
Required:
1. How much is the gain or loss on the sale that the seller - lessee must recognize?
2. How much is the rent expense that the seller - lessee must recognize?
3. How much is the rent income that the buyer - lessor must recognize?
Illustrative 2:
An asset with carrying amount of P 5,000,000 was sold at its fair value of P
6,000,000. The seller immediately leased back the building from the buyer with
annual rental of P 750,000 for ten years with lease payment, payable at the end of
each of the next ten years. On this date, the market rate of interest is 10%.
Required: Determine the following on the books of Seller – Lessee
1. Initial measurement of lease liability
2. Cost of right of use asset.
3. Total gain
4. Gain to be recognized
5. Gain not to be recognized

Illustrative 3:
An asset with carrying amount of P 5,000,000 was sold at P 6,500,000. The fair value
of the asset on the date of sale is P 6,000,000. The seller immediately leased back the
building from the buyer with annual rental of P 750,000 for ten years with lease
payment, payable at the end of each of the next ten years. On this date, the market
rate of interest is 10%. Required: Determine the following on the books of Seller -
Lessee
1. Initial measurement of lease liability
2. Cost of right of use asset.
3. Total gain
4. Gain to be recognized
5. Gain not to be recognized

Illustrative 4:
An asset with carrying amount of P 5,000,000 was sold at 5,500,000) The fair value
of the asset on the date of sale is P 6,000,000. The seller immediately leased back the
building from the buyer with annual rental of P 750,000 for ten years with lease
payment, payable at the end of each of the next ten years. On this date, the market
rate of interest is 10%. Required: Determine the following on the books of Seller -
Lessee
1. Initial measurement of lease liability
2. Cost of right of use asset.
3. Total gain
4. Gain to be recognized
5. Gain not to be recognized