ACTIVITY CHAPTER 7
1. Tecson Company, a dealer in machinery and equipment, leased equipment to
Trinidad Company on July 1, 2020. The lases is appropriately accounted for as a
sale by Tecson Company and as a purchase by Trinidad. The lease is for a tenyear
period equal to the useful life of the asset expiring June 30, 2029. The first of ten
equal annual payment of P250,000 was made on July 1,2020. Tecson Company had
purchased the equipment for P1,337,500 on January 1, 2020, and established a list
selling price of P1,687,500 on the equipment. The present value on July 1, 2020 of
the rent payments over the lease term discounted at 12% was P1,582,500. What
amount of profit on sale and interest income should be recorded for the year ended
December 31, 2020, respectively?
Ans. 245,000 and 79,950
Solution:
Present value of rentals – Sales revenue 1,582,500
Cost of equipment 1,337,500
Profit on sale 245,000
Present value – July 1, 2020 1,582,500
Payment on July 1, 2020, all applicable to principal (250,000)
Lease receivable – July 1, 2020 1,332,500
Interest income from July 1, 2020 to June 30, 2021
(12% x 1,332,500) 159,900
Interest income from July 1, 2020 to December 31, 2020
(159,900 x 6/12) 79,950
2. Tecson Company leased equipment to Trinidad Company on January 1, 2020.
The lease is for an eight-year period expiring December 31, 2026. The first of eight
annual payments of P900,000 was made on January 1, 2020. The entity had
purchased the equipment on December 29, 2019 for P4,800,000. The lease is
appropriately accounted for as a sales type lease. The present value on January 1,
2020 of all rent payments over the lease term discounted at a 10% interest rate was
P5,280,000.
What is the gross profit on sale for 2020?
Ans. 480,000
Solution:
Present value of rentals – sales revenue 5,280,000
Cost of sales 4,800,000
Gross profit on sale 480,000
3. Tecson Company leased equipment to Trinidad Company on January 1, 2020.
The lease is for an eight-year period expiring December 31, 2026. The first of eight
annual payments of P900,000 was made on January 1, 2020. The entity had
purchased the equipment on December 29, 2019 for P4,800,000. The lease is
appropriately accounted for as a sales type lease. The present value on January 1,
2020 of all rent payments over the lease term discounted at a 10% interest rate was
P5,280,000.
What amount of interest revenue should be recorded in 2021?
Ans. 391,000
Solution:
Present value – January 1, 2020 5,280,000
First payment on January 1, 2020 900,000
Lease receivable – January 1, 2020 4,380,000
Second payment on January 1, 2021 900,000
Interest for 2020 (10% x 4,380,000) (438,000) 462,000
Lease receivable – January 1, 2021 3,918,000
Third payment on January 1, 2022 900,000
Interest for 2021 (10% x 3,918,000) (391,800) 508,200
Lease receivable – January 1, 2022 3,409,800
4. On January 1, 2020, Tecson Company entered into a lease agreement with
Trinidad Company for a machine which was carried on the accounting records of
Tecson Company at P2,000,000. Total payments under the lease which expires on
December 31, 2028, aggregate P3,550,800 of which P2,400,000 represents cost of
the machine to Trinidad. Payments of P355,080 are due each January 1 of each
year. The interest rate of 10% which was stipulated in the lease is considered fair
and adequate compensation to Tecson Company for the use of its funds. Trinidad
expects the machine to have a 10-year life, no residual value and be depreciated on
a straight-line basis. The lease is conceived as a sales type lease. What is the total
income before income tax derived by Tecson Company from the lease for the year
ended December 31, 2020?
Ans. 604,492
Solution:
Present value of rentals 2,400,000
First payment on January 1, 2020 all applicable to principal 355,080
Lease receivable – January 1, 2020 2,044,920
Interest income for 2020 (2,044,920 x 10%) 204,492
Present value of rentals – cost of Trinidad (lessee) 2,400,000
Cost of asset to Tecson Company (lessor) 2,000,000
Gross profit on sale 400,000
Interest income for 2020 204,492
Total income of Tecson Company for 2020 604,492
5. Esteban Company entered into a finance lease on January 1, 2020. A third party
guaranteed the residual value of the asset under the lease estimated to be P120,000
on January 1, 2024, the end of the lease term. Annual lease payments are P100,000
due each December 31, beginning December 31, 2020. The last payment is due
December 31, 2023. Both the lessor and lessee used 10% as the interest rate. The
remaining useful life of the asset was six years at the commencement of the lease.
The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at
10% for 5 periods is 3.70. What is the lease receivable of the lessor and lease
liability of the lessee at the commencement of the lease?
Lease receivable/ Lease liability
Ans. Lease receivable: 453,400 Lease liability:379,000
Solution:
Present value of rentals (100,000 x 3.79) 379,000
Guaranteed residual value (120,000 x .62) 74,400
Lease receivable 453,400
The lease term is from January 1, 2020 to December 31, 2023 or 5 years. Thus, the present value
factors are determined for 5 periods.
Lessee
Lease liability (100,000 x 3.79) 379,000
