GUIDED EXERCISES

LEASE

1. On January 1, 2018, Mund Co. leased a building from Al Co. for a lease term of 10 years. The
building has a useful life of 20 years. The rate implicit in the lease is 10%. Lease payment of
P400,000 is due every December 31, starting December31, 2018. The lease is appropriately
classified as finance lease. The guaranteed residual value at the end of the lease term is
P100,000. Determine the total minimum lease payments and the present value of the minimum
lease payments.
a. Assuming that the leased asset will be transferred to the lessee at the end of the
lease term.
b. Assume instead that the leased asset will revert to the lessor at the end of the lease
term and the fair value of the leased asset is equal to the present value of the
minimum lease payments.
2. On January 1, 2018, Benguet Co. leased an asset with a fair value of P1,000,000 from Baguio Co.
for a lease term of 5 years. The lease specifies equal annual payments beginning on January 1,
2018. The lessee guarantees the P200,000 residual value of the asset at the end of the lease
term. The rate implicit on the lease is 12%. How much is the annual lease payments?

3. On January 2, 2019, Abra Company signed an eight-year noncancelable lease for a new machine
requiring P300,000 annual payments at the beginning of each year. The machine has a useful life
of 12 years with no salvage value. Title passes to Abra at the lease expiration date. Abra uses
straight line depreciation. Aggregate lease payments have present value on January 2, 2019 of
P1,080,000 based on an appropriate rate of interest. Compute for the amount of depreciation to
be recorded on 2019.

4. On December 31, 2019, Ifugao Co. leased an equipment with a cost of P2,000,000 to Kalinga Co.
for 5-years, which is also the useful life of the asset. The lease agreement specifies equal annual
payment of P467,273 beginning on December 31, 2018. At the end of the lease term, the
equipment will revert to Ifugao Co. A third party related to the lessee guarantees the residual
value of the equipment amounting to P200,000. The rate implicit in the lease is 12%.
a. How much is the total interest income to be earned over the lease term?
b. How much is the total interest income in 2019?
c. How much is the lease-related asset to be shown as current in the statement of financial
position on December 31, 2018?

5. On December 31, 2018, Ilocos Norte Co. leased an equipment with a cost of P2,000,000 to Laoag
Co. for 5-yearsm which is also the useful life of the asset. The leased agreement specifies equal
annual payment of P495,381 beginning on December 31, 2018. On the same date, Ilocos Norte
Co.. paid P65,687 incremental costs that are directly attributatble to negotiating and arranging a
lease. The rate implicit in the least is 12% but after considering the initial direct cost, the implicit
rate is adjusted at 10%.
a. How much is the total interest income to be earned over the lease term?
b. How much is the total interest income in 2019?
c. How much is the lease-related asset to be shown as current and noncurrent in the
statement of financial position on December 31, 2018?
 6. On January 1, 2018, Ilocos Sur Co. a dealer of machines, leased a machine to Candon Co. Data
relating to the lease are as follows:
Useful life of equipment 5
Lease term 5
Annual rent payable at end of the year 500,000
Interest rate implicit in the lease 10%
Residual value 150,000
Initial direct cost 20,000
The leased asset reverts to Ilocos Sur Co at the end of the lease term. The lease is appropriately
recorded as a sales type lease.
a. Assuming the residual value is guaranteed, how much is the total interest to be earned over
the lease term? ; how much is the total interest income in 2019?; how much is the profit on
sale on December 31, 2018?
b. Assuming the residual value is unguaranteed, how much is the total interest to be earned
over the lease term? ; how much is the total interest income in 2019? How much is the
profit on sale on December 31, 2018?
c.