LEASES – Lessor’s Perspective

Operating Lease
1. On January 1, 2018, Lee Company leased a building to Brilliant Company under an operating lease for ten years at P500,000
per year, payable at the first day of each lease year. Lee paid P150,000 to a real estate broker as a finder fee. The building is
depreciated P120,000 per year. Lee incurred insurance and property tax expense totaling P90,000 for the year. What is the net
rental income for 2018?
A. 275,000 B. 290,000 C. 350,000 D. 365,000

2. Thunder Company purchased a tractor on January 1, 2018 at a cost of P1,600,000 for the purpose of leasing it. The tractor is
estimated to have a useful life of 5 years with residual value of P100,000. Depreciation is on a straight line basis. On April 1,
2018, Thunder entered into a lease contract for the lease of the tractor for a term of two years up to March 31, 2020. The
lessee paid P600,000, the lease fee for one year. Thunder paid P120,000 commission associated with negotiating the lease,
P15,000 minor repairs and P10,000 transportation of the tractor to the lessee during the year. What amount of net rent revenue
should be reported for the current year?
A. 80,000 B. 85,000 C. 160,000 D. 235,000

3. As an incentive to enter a non-cancelable operating lease for office premises for 10 years, Lomi Company as lessor has offered
the lessee a rent-free period of two years. Annual rental payment under the lease commencing in the third year is P500,000.
What amount of lease income should be recognized by Lomi in the first year?
A. 0 B. 400,000 C. 450,000 D. 500,000

4. Ralph Company leased office premises to Wreck Company for a five year term beginning January 1, 2018. Under the terms of
the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is P1,250,000 per annum. However, as an
inducement to enter the lease, Ralph granted Wreck the first six months of the lease rent-free. What amount should Ralph
report as rental income for 2018?
A. 800,000 B. 1,080,000 C. 1,160,000 D. 1,200,000

Use the following information to answer items 5 and 6:

On January 1, 2020, Juris Company leased a building to Jay Company for a ten-year term at an annual rental of P1,000,000. At inception
of the lease, Juris received P4,000,000 covering the first two years’ rent and a security deposit of P2,000,000. This deposit will not be
returned to Jay upon expiration of the lease but will be applied to payment of rent for the last two years of the lease.

5. What portion of the P4,000,000 should be reported as current liability on December 31, 2020?
A. 0 B. 1,000,000 C. 2,000,000 D. 3,000,000

6. What portion of the P4,000,000 should be reported as non-current liability on December 31, 2020?
A. 0 B. 2,000,000 C. 3,000,000 D. 4,000,000

Use the following information to answer items 7 and 8:

On July 1, 2019, Herr Company leased a delivery truck from Bie Company under a 3-year operating lease. Total rent for the term of the
lease will be P360,000 payable as follows:

First 12 months @ P5,000 per month 60,000

Next 12 months @ P7,500 per month 90,000
Last 12 months @ P17,500 per month 210,000

All payments were made when due.

7. What is the rent revenue for the year ended June 30, 2020?
A. 30,000 B. 50,000 C. 60,000 D. 120,000

8. On June 30, 2021, what amount should be reported as accrued rent receivable?
A. 0 B. 90,000 C. 120,000 D. 210,000

Use the following information to answer items 9 and 10:

Bae Company, lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in
advance on January 1 of each year as shown in the following schedule:

January 1, 2018 1,000,000

January 1, 2019 1,000,000
January 1, 2020 1,400,000
January 1, 2021 1,700,000
January 1, 2022 1,900,000
Total 7,000,000

9. What is the rent income for 2018?

A. 1,000,000 B. 1,400,000 C. 1,500,000 D. 2,000,000

10. On December 31, 2021, what amount should be reported as accrued rent receivable?
A. 0 B. 400,000 C. 500,000 D. 700,000

Use the following information to answer items 11 to 13:

On January 1, 2018, Ant-Man Company leased a machine to Wasp Company for a four-year period. The annual rentals will be paid by
the lessee beginning December 31, 2018. The lease agreement called for a 10% increase in annual rental per annum. The rental due on
December 31, 2021 was P266,200.

11. What is the rental payment due on December 31, 2019?

FARQ 220-1 Page 1 of 4
 A. 181,818 B. 200,000 C. 220,000 D. 242,000

12. What is the rental income for the year ended 2020?
A. 200,000 B. 220,000 C. 232,050 D. 242,000

13. What amount shall be reported as accrued rent payable on December 31, 2019?
A. 0 B. 32,050 C. 34,150 D. 44,100

Finance Lease

Direct Financing Lease

Use the following information to answer items 14 to 18:
Stuart Company is in the business of leasing new sophisticated equipment. As a lessor, the entity expects a 12% return. At the end of
the lease term, the equipment will revert to Stuart Company.

On January 1, 2018, an equipment is leased to another entity under a direct financing lease.

Cost of equipment to Stuart 5,500,000

Residual value – unguaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2018

Use two decimal places for PV factors.

14. What is the gross investment in the lease?

A. 5,500,000 B. 5,900,000 C. 7,676,000 D. 8,076,000

15. What is the unearned interest income on January 1, 2018?

A. 1,616,000 B. 1,776,000 C. 2,176,000 D. 2,576,000

16. What is the interest income for 2018?

A. 322,000 B. 496,860 C. 544,860 D. 660,000

17. What is the carrying value of the lease receivable as of December 31, 2019?
A. 3,661,463 B. 4,125,860 C. 4,620,963 D. 5,085,360

18. What is the interest income for 2021?

A. 376,961 B. 439,376 C. 492,101 D. 495,103

Use the following information to answer items 19 to 24:

Will Company entered into a finance lease on January 1, 2018. A third party guaranteed the residual value of the asset under the lease
estimated to be P1,200,000 on January 1, 2023, the end of the lease term. Annual lease payments are P1,000,000 due each December
31 beginning December 31, 2018. The last payment is due December 31, 2022. The remaining useful life of the asset was six years at
the commencement of the lease. Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is 0.62, and
the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.

19. What is the net lease receivable of the lessor at the commencement of the lease?
A. 2,590,000 B. 3,790,000 C. 4,534,000 D. 4,990,000

20. What is the total interest that the company will earn over the lease term?
A. 466,000 B. 1,210,000 C. 1,666,000 D. 2,410,000

21. What is the carrying value of the lease receivable as of December 31, 2019?
A. 3,386,140 B. 3,987,400 C. 4,386,140 D. 4,987,400

22. What amount should be included in non-current assets in relation to the lease on December 31, 2019?
A. 661,386 B. 2,000,000 C. 2,724,754 D. 3,386,140

23. What is the interest income 2020?

A. 199,723 B. 272,475 C. 338,614 D. 398,740

24. What amount should be included in current assets in relation to the lease on December 31, 2020?
A. 727,525 B. 1,000,000 C. 1,997,229 D. 2,724,754

25. On January 1, 2016, Bruce Company acquired a specialized packaging machine for P6,000,000 and leased it for a period of 6
years, after which the machine is to be returned to Bruce. The unguaranteed residual value of the packaging machine is
P400,000. The lease term is arranged so that a return of 12% is earned by Bruce. The first lease payment is due on January 1,
2016. The PV of 1 at 12% for six periods is 0.51; PV of an annuity in advance of 1 at 12% for six periods is 4.60; and the PV of
an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment required to yield the desired return?
A. 1,260,000 B. 1,304,348 C. 1,410,219 D. 1,459,854
FARQ 220-1 Page 2 of 4
On December 31, 2014, King Neptune Co., a lessor, sold an equipment that it had been leasing under a direct financing lease. On January
1, 2014, after the receipt of the P325,000 lease payment for the year, the following account balances were associated with the lease:

Lease receivable 2,925,000

Unearned interest income 500,000
Net lease receivable 2,425,000

The interest rate implicit in the lease is 10%. On December 31, 2014, the company sold the leased equipment to the lessee for P1,625,000
cash.

26. What is the loss on sale of equipment that should be recognized on December 31, 2014?
A. 800,000 B. 1,042,500 C. 1,125,000 D. 1,400,000

Sales-type Lease
Use the following information to answer items 27 to 33:
Wamboo Company is a dealer in machinery. On January 1, 2018, a machinery was leased to another company with the following
provisions:

Annual rental payable at the end of each year 3,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value – unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

At the end of the lease term on December 31, 2022, the machinery will revert to Wamboo Company. Wamboo incurred initial direct
cost of P300,000 in finalizing the lease agreement.

27. What amount shall be reported as (1) sales and (2) cost of goods sold in 2018?
A. (1) 10,800,000; (2) 7,730,000 B. (1) 11,370,000; (2) 8,300,000
C. (1) 11,370,000; (2) 7,730,000 D. (1) 10,800,000; (2) 7,430,000

28. What amount shall be reported as (1) sales and (2) cost of goods sold in 2018 assuming the residual value is guaranteed?
A. (1) 10,800,000; (2) 7,730,000 B. (1) 11,370,000; (2) 8,300,000
C. (1) 11,370,000; (2) 7,730,000 D. (1) 10,800,000; (2) 7,430,000

29. What amount shall be reported as gross profit on sale in 2018?

A. 2,500,000 B. 3,070,000 C. 3,370,000 D. 7,700,000

30. What is the interest income for 2018?

A. 926,000 B. 1,296,000 C. 1,364,400 D. 1,400,400

31. What amount should be included in current assets in relation to the lease on December 31, 2018?
A. 1,635,600 B. 1,831,872 C. 3,000,000 D. 9,734,400

32. What is the carrying value of the lease receivable as of December 31, 2019?
A. 7,902,528 B. 8,278,848 C. 9,734,400 D. 10,070,400

33. What amount should be included in non-current assets in relation to the lease on December 31, 2019?
A. 5,850,832 B. 6,000,000 C. 7,902,528 D. 9,000,000

Use the following information to answer items 34 and 35:

Superfast Company used leases as a method of selling its products. In 2018, the company completed construction of a jet plane. On
January 1, 2018, the jet plane was leased to Jett W. on a contract specifying that ownership of the jet will transfer to the lessee at the
end of the lease period.

Cost of the jet plane 800,000

Fair value of the jet plane at commencement of lease 1,300,000
Lease payments payable in advance 150,000
Estimated residual value 200,000
Implicit interest rate 12%
Date of first lease payment January 1, 2018
Lease term 20 years
PV of an annuity due of 1 at 12% for 20 periods 8.37
PV of an ordinary annuity of 1 at 12% for 20 periods 7.47
PV of 1 at 12% for 20 periods 0.10

34. What is the total interest that the company will earn over the lease term?
A. 1,744,500 B. 1,924,500 C. 1,944,500 D. 2,200,000

35. What is the total income derived by the company from the lease for the year 2018?
A. 455,500 B. 588,160 C. 606,160 D. 608,160

Use the following information to answer items 36 to 39:

FARQ 220-1 Page 3 of 4

Tokyo Company adopted the policy of leasing as the primary method of selling its only product, a large-sized helicopter. The company
constructed such a helicopter for Mishima Company at a total cost of P85,000,000. The terms of the lease provided for annual advance
payments of P25,000,000 to be paid over 10 years with the ownership transferring to the lessee at the end of the lease period. It is
estimated that the helicopter will have a residual value of P16,000,000 at that date.

The lease payments began January 1, 2018. Tokyo Company incurred initial direct cost of P5,000,000 in financing the lease agreement
with Mishima. The cash sale price of the helicopter is P148,750,000. Financing the construction was at a 14% rate. The PV of an annuity
due of 1 at 14% for 10 periods is 5.95, the PV of 1 at 14% for 10 periods is 0.27.

36. What is the gross profit on sale that should be recognized by Tokyo Company?
A. 42,750,000 B. 47,750,000 C. 58,750,000 D. 63,750,000

37. What is the unearned interest income on January 1, 2018?

A. 85,250,000 B. 96,250,000 C. 117,250,000 D. 101,250,000

38. What is the interest income for 2019?

A. 16,250,500 B. 17,325,000 C. 20,240,500 D. 20,825,000

39. What is the carrying value of the lease receivable on December 31, 2020?
A. 97,351,070 B. 107,325,500 C. 122,351,070 D. 132,325,500

FARQ 220-1 Page 4 of 4