21 Finance Lease Lessee

FINANCE LEASE – LESSEE
LECTURE DRILLS
Problem 1
At the beginning of current year, an entity leased a building from a lessor with the following pertinent
information:
Annual rental payable at the end of each year 2,000,000

Purchase option that is reasonably certain to be exercised 1,500,000
Lease bonus paid to lessor before commencement of the lease 500,000
Lease incentive received 100,000
Initial direct cost 900,000
Estimated cost of restoring building as required by contract 2,500,000
Leasehold improvement 3,000,000
Lease term 5 years
Useful life of building 10 years
Implicit interest rate 8%
PV of an ordinary annuity of 1 for 5 periods at 8% 3.99
Present value of 1 for 5 periods at 8% 0.68
1. What is the cost of the right of use asset?

a. 12,800,000
b. 12,000,000
c. 15,000,000
d. 14,200,000
2. What is the lease liability at year-end?
a. 7,720,000
b. 7,000,000
c. 8,800,000
d. 8,000,000
3. What is the depreciation of the right of use asset for current year?
a. 1,200,000
b. 1,500,000
c. 2,400,000
d. 3,000,000
Problem 2
On January 1, 2022, an entity leased two automobiles for executive use. The lease required the entity to
make five annual payments of ₱2,000,000 beginning December 31, 2022. At the end of the lease term,
December 31, 2026, the entity had a residual value guarantee of the automobiles at ₱1,000,000. The
interest rate implicit in the lease is 10% and the present value factors at 10% for 5 periods are 4.17 for an
annuity due, 3.79 for an ordinary annuity and 0.62 for present value of 1.
1. What is the lease liability on December 31, 2022?

a. 7,020,000
b. 5,722,000
c. 7,580,000
d. 6,338,000
2. What is the current portion of the lease liability on December 31, 2022?
a. 2,000,000
b. 1,298,000
c. 820,000
d. 500,000
3. What is the interest expense for 2023?

a. 758,000
b. 820,000
c. 834,000
d. 702,000
Problem 3
On January 1, 2022, an entity entered into a 5-year lease with a lessor. Annual lease payments of
₱1,200,000 including annual executory cost of ₱200,000 are payable at the end of each year. The entity
knows that the lessor expects an 8% implicit rate on the lease. The equipment is expected to have a
useful life of 10 years. In addition, a third party has guaranteed to pay the lessor a residual value of
₱500,000 at the end of the lease. The present value of an ordinary annuity of 1 for 5 years is 3.99 at 8%
and the present value of 1 at 8% for 5 periods is 0.68. On December 31, 2022, what is the principal
amount of the lease obligation?
a. 3,990,000
b. 3,309,200
c. 3,676,400
d. 3,971,040
Problem 4
On December 31, 2022, an entity signed a 7-year finance lease for an airplane. The airplane’s fair value
was ₱8,415,000. The entity made the first annual lease payment of ₱1,530,000 on December 31, 2022.
The entity’s incremental borrowing rate was 12% and the interest rate implicit in the lease known to the
lessee was 9%. The rounded present value factors for an annuity due are 5.50 at 9% for 7 years and 5.10
at 12% for 7 years.
1. What amount should be reported as lease liability on December 31, 2022?

a. 8,415,000
b. 7,803,000
c. 6,885,000
d. 6,273,000
2. What amount should be reported as interest expense for 2023?

a. 619,650
b. 826,200
c. 757,350
d. 841,500
3. In recording the December 31, 2023, by what amount should the lease liability be reduced?
a. 856,800
b. 520,200
c. 910,350
d. 703,800
Problem 5
At the beginning of current year, an entity entered into a 5-year finance lease for an equipment. The
equipment had a useful life of 8 years. The entity accounted for the acquisition of the finance lease at
₱4,500,000 which included a ₱600,000 bargain purchase option that is reasonably certain to be
exercised. The expected fair value of the equipment is ₱1,500,000 at the end of 5 years and ₱500,000 at
the end of 8-year useful life. What amount of straight-line depreciation should be recognized for the
current year?
a. 425,000
b. 500,000
c. 800,000
d. 600,000
Problem 6
At the beginning of current year, an entity entered into an 10-year lease for an equipment. The entity
accounted for the acquisition as a finance lease for ₱4,900,000 which included a ₱200,000 residual value
guarantee. At the end of the lease, the asset will revert back to the lessor. It is estimated that the fair
value of the asset at the end of the 12-year useful life would be ₱100,000. What amount should be
recognized as straight-line depreciation on the leased asset for the current year?
a. 470,000
b. 400,000
c. 490,000
d. 580,000

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FINANCE LEASE – LESSEE

Annual rental payable at the end of each year 2,000,000

1. What is the cost of the right of use asset?

1. What is the lease liability on December 31, 2022?

3. What is the interest expense for 2023?

1. What amount should be reported as lease liability on December 31, 2022?

2. What amount should be reported as interest expense for 2023?

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