Problems related to

ACCOUNTING BY THE LESSEE Noel A. Bergonia, CPA, MBA

PROBLEM 1 PV of lease liability
(P100,000 x 3.1699) 316,990
On January 2, 2019, Jin Corporation leased six Initial payment 1/2/2019 100,000
Right of use of asset, 1/2/2019 416,990
computers for use in its engineering department.
The lease period is five years, and the estimated Partial Amortization Table
economic life of the leased property is six years. Date Lease payments Interest expense Lease Liability
01/02/2019 316,990
The lease does not contain automatic title transfer
01/02/2020 100,000 31,699 248,689
and a bargain purchase option. Annual lease 01/02/2021 100,000 24,869 173,558
payments are payable in advance every January
01/02/2019 Right-of-use asset 416,990
2 in the amount of P100,000. The incremental Cash 100,000
borrowing rate for Jin Corporation is 12% and Lease liability 316,990
the implicit interest rate (known to Jin) is 10%. 12/31/2019 Interest expense 31,699
The company uses straight-line depreciation for Lease liability 31,699

this type of equipment. (Use four-decimal places Depreciation expense 83,398

for the PV factors) Accumulated depreciation 83,398
416,990/ 5
▪What is the capitalized cost of the right of use asset?
▪How much is the interest expense recognized in profit or loss for Lease liability 1/2/2019 316,990
the year 2019 and 2020? Accrual of interest 31,699
▪What is the depreciation expense of the right of use asset for the Lease liability 12/31/2019 348,689
year 2019?
▪How much is the lease liability in 2019 and 2020? NOEL A. BERGONIA, CPA, MBA
PROBLEM 1
On January 2, 2019, Jin Corporation leased six
computers for use in its engineering department.
The lease period is five years, and the estimated
economic life of the leased property is six years. 01/02/2020 Lease liability 100,000
Cash 100,000
The lease does not contain automatic title transfer
and a bargain purchase option. Annual lease 12/31/2020 Interest expense 24,869
payments are payable in advance every January Lease liability 24,869
2 in the amount of P100,000. The incremental
borrowing rate for Jin Corporation is 12% and Depreciation expense 83,398
the implicit interest rate (known to Jin) is 10%. Accumulated depreciation 83,398
416,990/ 5
The company uses straight-line depreciation for
this type of equipment. (Use four-decimal places Lease liability 12/31/2019 348,689
for the PV factors) Payment (100,000)
▪What is the capitalized cost of the right of use asset? Accrual of interest 24,869
▪How much is the interest expense recognized in profit or loss for Lease liability 12/31/2020 273,558
the year 2019 and 2020?
▪What is the depreciation expense of the right of use asset for the
year 2019?
▪How much is the lease liability in 2019 and 2020? NOEL A. BERGONIA, CPA, MBA
PROBLEM 2 PV of lease payments
(100,000 x 3.1699)
PV of the Guaranteed Residual Value (P30,000 x .6209)
316,990
18,627
On January 2, 2019, J-Hope Corporation leased six Lease liability 335,617
Initial payment 100,000
computers for use in its engineering department. The
Right of use of asset, 1/2/2019 435,617
lease period is five years, and the estimated economic
life of the leased property is six years. The lease does Date Lease payments Interest expense Lease Liability
not contain automatic title transfer and a bargain 01/02/2019 335,617
01/02/2020 100,000 33,562 269,179
purchase option. Annual lease payments are payable in 01/02/2021 100,000 26,918 196,097
advance every January 2 in the amount of P100,000.
01/02/2019 Right-of-use asset 435,617
The incremental borrowing rate for J-Hope Corporation Cash 100,000
is 12% and the implicit interest rate (known to J-Hope) is Lease liability 335,617
10%. The company uses straight-line depreciation for
12/31/2019 Interest expense 33,562
this type of equipment. (Use four-decimal places for the Lease liability 33,562
PV factors). Assume that the lessee guarantees a
residual value of P30,000 at the end of the lease term. Depreciation expense 81,123
Accumulated depreciation 81,123
▪What is the capitalized cost of the right of use asset? (435,617-30,000)/5
▪How much is the interest expense recognized in profit or loss for
the year 2019 and 2020? Lease liability 1/2/2019 335,617
▪What is the depreciation expense of the right of use asset for the Accrual of interest 33,562
year 2019? Lease liability 12/31/2019 369,179
▪How much is the lease liability in 2019 and 2020? NOEL A. BERGONIA, CPA, MBA
PROBLEM 2
On January 2, 2019, J-Hope Corporation leased six
computers for use in its engineering department. The
lease period is five years, and the estimated economic
life of the leased property is six years. The lease does
01/02/2020 Lease liability 100,000
not contain automatic title transfer and a bargain Cash 100,000
purchase option. Annual lease payments are payable in
advance every January 2 in the amount of P100,000. 12/31/2020 Interest expense 26,918
The incremental borrowing rate for J-Hope Corporation Lease liability 26,918
is 12% and the implicit interest rate (known to J-Hope) is
Depreciation expense 81,123
10%. The company uses straight-line depreciation for Accumulated depreciation 81,123
this type of equipment. (Use four-decimal places for the (435,617-30,000)/5
PV factors). Assume that the lessee guarantees a
Lease liability 12/31/2019 369,179
residual value of P30,000 at the end of the lease term. Payment (100,000)
▪What is the capitalized cost of the right of use asset? Accrual of interest 26,918
▪How much is the interest expense recognized in profit or loss for Lease liability 12/31/2020 296,097
the year 2019 and 2020?
▪What is the depreciation expense of the right of use asset for the
year 2019?
▪How much is the lease liability in 2019 and 2020? NOEL A. BERGONIA, CPA, MBA
PROBLEM 3 PV of lease payments
(90,000 x 3.1699)
PV of the BPO (P25,000 x .6209)
285,291
15,523
On January 2, 2019, Jin Corporation leased six Lease liability 300,814
Initial payment 90,000
computers for use in its engineering department. The Right of use of asset, 1/2/2019 390,814
lease period is five years, and the estimated economic Partial Amortization Table
life of the leased property is six years. Annual lease Date Lease payments Interest expense Lease Liability
payments are payable in advance every January 2 in 01/02/2019 300,814
the amount of P90,000. The incremental borrowing rate 01/02/2020 90,000 30,081 240,895
01/02/2021 90,000 24,089 174,984
for Jin Corporation is 12% and the implicit interest rate
(known to Jin) is 10%. The company uses straight-line 01/02/2019 Right-of-use asset 390,814
Cash 90,000
depreciation for this type of equipment (Use four- Lease liability 300,814
decimal places for the PV factors). Assume that the
12/31/2019 Interest expense 30,081
bargain purchase option of P25,000 at the end of the Lease liability 30,081
lease term.
Depreciation expense 65,136
▪What is the capitalized cost of the right of use asset? Accumulated depreciation 65,136
390,814/6
▪How much is the interest expense recognized in profit or loss for
the year 2019 and 2020? Lease liability 1/2/2019 300,814
▪What is the depreciation expense of the right of use asset for the Accrual of interest 30,081
year 2019? Lease liability 12/31/2019 330,895
▪How much is the lease liability in 2019 and 2020?
NOEL A. BERGONIA, CPA, MBA
PROBLEM 3
On January 2, 2019, Jin Corporation leased six
computers for use in its engineering department. The 01/02/2020 Lease liability 90,000
lease period is five years, and the estimated economic Cash 90,000
life of the leased property is six years. Annual lease
12/31/2020 Interest expense 24,089
payments are payable in advance every January 2 in Lease liability 24,089
the amount of P90,000. The incremental borrowing rate
for Jin Corporation is 12% and the implicit interest rate Depreciation expense 65,136
(known to Jin) is 10%. The company uses straight-line Accumulated depreciation 65,136
390,814/6
depreciation for this type of equipment (Use four-
decimal places for the PV factors). Assume that the Lease liability 12/31/2019 330,895
bargain purchase option of P25,000 at the end of the Payment (90,000)
lease term. Accrual of interest 24,089
Lease liability 12/31/2020 264,985
▪What is the capitalized cost of the right of use asset?
▪How much is the interest expense recognized in profit or loss for Cost 390,814
the year 2019 and 2020? Accumulated depreciation (130,272)
▪What is the depreciation expense of the right of use asset for the CV, 12/31/2020 260,542
year 2019?
▪How much is the lease liability in 2019 and 2020?
NOEL A. BERGONIA, CPA, MBA
PROBLEM 4 PV of lease liability
(700,000 x 5.3282) 3,729,740
On July 1, 2019, the Jung-Kook Corp., signs a 10-year Initial payment 700,000
non-cancelable lease agreement for a storage building Right of Use, 7/1/2019 4,429,740
owned by Lisa Inc. The following information pertains to
07/01/2019 Right of Use Asset 4,429,740
the lease agreement.
Prepaid Taxes and Insurance 50,000
➢Annual rental payment is P750,000 beginning July 1,
Cash 750,000
2019. The rental payment includes P50,000 for taxes Lease liability 3,729,740
and insurance.
➢The fair value of the building on July 1, 2019 is 12/31/2019 Interest expense 223,784
P4,478,000. Lease liability 223,784
3,729,740 x 12% x 6/12
➢The building has an estimated economic life of 12
years. Depreciation expense 221,487
➢Unguaranteed residual value at the end of 10 years is Accumulated depreciation 221,487
P150,000. 4,429,740/10 x 6/12
➢Implicit rate is 12%.
Taxes and Insurance expense 25,000
Prepaid Taxes and Insurance 25,000
▪How much is the right of use asset on July 1, 2019?
50,000 x 6/12
▪How much is the depreciation expenses in 2019?
▪How much is the interest expense for 2019? Total Expense = 223,784 + 221,487 + 25,000 = 470,271
NOEL A. BERGONIA, CPA, MBA
PROBLEM 5 Present value of the lease payments
Make It Right Company leases an automobile with a (20,000 x 39.1961) 783,922
fair value of P872,500 from Love Your Self Motors, Present value of GRV
Inc., on the following terms: (118,000 x 0.6080) 71,744
1. Noncancelable term of 50 months. Lease liability/ROU 855,666
2. Rental of P20,000 per month (at end of each
month).
Right of Use- Automobile 855,666
3. Estimated residual value after 50 months is
Lease liability 855,666
P118,000. It was guaranteed by Make It Right
Company.
4. Estimated economic life of the automobile is 60
months. Depreciation expense- ROU 14,753
5. The implicit rate in the lease is 12% a year (1% a Accumulated depreciation- ROU 14,753
month). (855,666 - 118,000)/50

▪Record the lease on Make It Right Company’s books at Lease liability 11,443
the date of inception. Interest expense (855,666 x 1%) 8,557
▪Record the first month’s depreciation on Make It Right Cash 20,000
Company’s books (assume straight-line).
▪Record the first month’s lease payment.
NOEL A. BERGONIA, CPA, MBA
PROBLEM 6
Assume that on January 1, 2020, Boy With Luv Corp. signs a 10-
Yearly payment
Executory costs
Minimum annual lease payment
72,000
(2,471)
69,529
year noncancelable lease agreement to lease a storage building PV of lease payments
from Jamias Vu Company. Boy With Luv’s corporate year-end is 69,529 x 5.32825 370,468
December 31. The following information pertains to this lease Payment at the commencement of the lease 69,529
agreement. Right of use- Building 439,997
rounded off to
1. The agreement requires equal rental payments of P72,000 440,000
beginning on January 1, 2020. Partial Amortization Table
2. The fair value of the building on January 1, 2020, is Date Lease payments Interest expense Lease Liability
P440,000. 01/01/2020 370,471
3. The building has an estimated economic life of 12 years, with 01/01/2021 69,529 44,457 345,399
01/01/2022 69,529 41,448 317,317
an unguaranteed residual value of P10,000. Boy With Luv
01/01/2023 69,529 38,078 285,866
depreciates similar buildings on the straight-line method.
January 1, 2020
4. The lease is nonrenewable. At the termination of the lease, the
building reverts to the lessor. Right of Use- Building 440,000
5. Boy With Luv’s incremental borrowing rate is 12% per year. Executory Costs 2,471
The lessor’s implicit rate is not known by Boy With Luv. Lease Liability 370,471
6. The yearly rental payment includes P2,471 of executory costs Cash 72,000
related to taxes on the property. December 31, 2020
Prepare the journal entries (including the computations) on the Depreciation expense- ROU 44,000
lessee’s books to reflect the signing of the lease agreement, to record Accumulated depreciation- ROU 44,000
the payments and expenses until 2021 and the entry at the end of 440,000 ÷ 10
the lease term. NOEL A. BERGONIA, CPA, MBA
PROBLEM 6
Assume that on January 1, 2020, Boy With Luv Corp. signs a 10- December 31, 2020
year noncancelable lease agreement to lease a storage building Interest expense 44,457
from Jamias Vu Company. Boy With Luv’s corporate year-end is Lease Liability 44,457
December 31. The following information pertains to this lease
agreement. January 1, 2021

1. The agreement requires equal rental payments of P72,000 Lease Liability 69,529
beginning on January 1, 2020. Executory Costs 2,471
2. The fair value of the building on January 1, 2020, is Cash 72,000
P440,000.
December 31, 2021
3. The building has an estimated economic life of 12 years, with
Depreciation expense- ROU 44,000
an unguaranteed residual value of P10,000. Boy With Luv
Accumulated depreciation- ROU 44,000
depreciates similar buildings on the straight-line method.
440,000 ÷ 10
4. The lease is nonrenewable. At the termination of the lease, the
building reverts to the lessor. Interest expense 41,448
5. Boy With Luv’s incremental borrowing rate is 12% per year. Lease Liability 41,448
The lessor’s implicit rate is not known by Boy With Luv.
6. The yearly rental payment includes P2,471 of executory costs December 31, 2029
related to taxes on the property. Accumulated depreciation- ROU 440,000
Prepare the journal entries (including the computations) on the Right of use- Building 440,000
lessee’s books to reflect the signing of the lease agreement, to record
the payments and expenses until 2021 and the entry at the end of
the lease term. NOEL A. BERGONIA, CPA, MBA
PROBLEM 7

We will not capitalize any asset

No depreciation
Record the rent expense
Rent expense should be equal per period

Rent expense > Payment = Accual

Rent expense < Payment = Deferral/Prepaid

NOEL A. BERGONIA, CPA, MBA

PROBLEM 8

On January 1, 2020, Jimin Corporation signed a

ten-year operating lease for an office space at
P450,000 per year. The lease included a
provision for additional rental payment of 5% of
annual company sales in excess of P5,000,000.
Jimin Corporation’s sales for the year ended
December 31, 2020 were P9,000,000. Upon
execution of the lease, Jimin Corporation paid
P140,000 as a bonus for the lease.

How much is the rent expense for 2020?

NOEL A. BERGONIA, CPA, MBA

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NOEL A. BERGONIA, CPA, MBA