Accounting for Leases Problem I Margot Company owns office space held for leasing. The carrying amount of this property on January 1, 2009 is P2,000,000 P2,000,000 and has an estimate estimated d useful useful life of 10 years. Margot Margot computes computes depreciation depreciation on the straightlin straightline e !asis. !asis. "n January 2, 2009 Margot entered into a lease contract with #erman Company for a term of three years until $ecem!er %1, 2011. The lease fee is P100,000 per month, under an agreement for an increase annually at a rate of &'. Margot also re(uires a nonrefunda!le deposit of P%00,000 to !e paid in ad)ance upon occupancy. Margot paid P120,000 commissions and other fees with negotiating the lease. Margot Company should report net rental income for 2009 at
Problem II *irginie Company leased e(uipment for si+ years, agreeing to pay P00,000 at the start of the lease term of January 1, 2009 and P00,000 annually on each January 1 for the ne+t fi)e years. The implicit rate in the lease, which is -nown !y *irginie is 10', while the incremental !orrowing rate is 12'. *irginie has the option to purchase the machine on $ecem!er %1, 201 !y paying P%&0,000 which is significantly less than the P/00,000 e+pected fair )alue of the machine on the options e+ercise date. hat is the principal lease lia!ility to !e reported in *irginies $ecem!er %1, 2009 statement of financial position
Problem III "n January 1, 2010 Mary Jane signs a 10year noncancela!le lease agreement to lease a storage !uilding from Peter Par-er. The lease re(uires e(ual rental payments of P320,000 !eginning on January 1, 2010. This yearly rental payment includes P2,30&.10 of e+ecutory costs related to ta+es on the property. "ther data pertaining to this agreement are as follows4 The fair )alue of the !uilding on January 1, 2010 is P,00,000. The !uilding has an estimated economic life of 12 years with an unguaranteed residual )alue of P100,000. Mary Jane depreciates similar !uildings on straightline straightline method. The lease is nonrenewa!le. 5t the termination of the lease, the !u ilding re)erts to the lessor. Mary Janes incremental !orrowing rate is 12' per year. The The lessors implicit rate is not -nown !y Mary Jane.
The following present )alue factors are for 10 periods at 12' annual interest rate4 Present )alue of an annuity due of 1 /.%22& Present )alue of an ordinary annuity of 1 &./&022 Present )alue of 1 0.%2193 1. hat amount amount of lease lease lia!ili lia!ility ty should should !e recogni6ed recogni6ed at at the incepti inception on of the lease lease
2. hat is is the !oo- )alue )alue of the the lease storage storage !uildi !uilding ng at $ecem!er $ecem!er %1, %1, 2011 2011
%.
7ow much should !e shown as current lia!ilities in the statement of financial position of Mary Jane at $ecem!er %1, 2011
.
hat is the noncurrent portion of the lease lia!ility on $ecem!er %1, 2011
&.
hat is the amount of interest e+pense that should !e recogni6ed for the year ended $ecem!er %1, 2010
Problem IV Twilight Company prepares the following lease payments schedule for the lease of a machine from *ulturi Company. The machine has an economic life of si+ years. The lease agreement re(uires four annual payments of P%%,000 and the machine will !e returned to *ulturi Company at the end of the lease term. The lease payments schedule is as follows4
July 1 200 July 1 2009 July 1 2010 July 1 2011 July 1 2012
Minimum Lease Payment
Interest Expense
Reduction Liability
%0,000 %0,000 %0,000 %&,000 12&,000
9,&1 3,%/ &,/20 %,11 2/,
20,19 22,1/ 2,%0 %1,19 9,&12
Balance of Liability 9,&12 3,%/% &/,199 %11,19
1.
8n the notes to the accounts at June %0, 2010, twilight Company would disclose future lease payments of what amount
2.
"n June %0, 2009 what would Twilight Company record in relation to the lease a. 5n interest e+pense of P9,&1 !. 5n interest e+pense of nil c. 5n interest paya!le of P9,&1 d. 5n interest paya!le of 3,%/
%.
7ow much annual depreciation e+pense would Twilight record
.
8f *ulturi the lessor: records a lease recei)a!le of P102,2%3, the )ariance !etween this recei)a!le and the lia!ility of P9,&12 recorded !y Twilight Company could !e due to what a. 8nitial direct costs paid !y *ulturi !. 5n unguaranteed residual )alue c. ;oth initial direct costs paid !y *ulturi and an unguaranteed residual )alue d.
&.
5ssume that the July 1, 2009 lease payment included an additional amount of P%,000 for e+ceeding a limit for machine usage hours specific in the lease agreement. Twilight would account for this charge !y recogni6ing it as what a. 5n e+pense and disclosing the amount in the notes !. 5dditional e+ecutory costs c. =e)enue d. 5 reduction in the lease lia!ility
Problem V Clar- Company leased a machine from Peter Corporation on January 1, 2012. The first annual payment was made on January 1, 201%. The machine has an economic life of si+ years. The lease agreement re(uires four annual payments of P%%,000 including P%,000 annual payment for repairs and maintenance. The machine will !e returned to Peter Corporation at the end of the lease term and Clar- Company guarantees a residual )alue of P&,000. 8nterest implicit in the lease is 10', which is -nown to Clar-. 1.
>or the year ended $ecem!er %1, 201%, how much interest paya!le would Clar- Company record in relation to the lease
2.
7ow much annual depreciation e+pense should Clar- Company record
%.
8n its notes to the financial statements at $ecem!er %1, 201, Clar- Company would disclose minimum lease payments of
