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Lease Accounting Solution for Robbin Company

The document outlines the lease accounting for Robbin Company, detailing a 10-year lease with annual payments of P1,000,000 and an implicit interest rate of 12%. The total lease liability and right-of-use asset are calculated to be P6,650,000, with annual depreciation of P475,000 over 14 years. It also includes journal entries for the years 2024 and 2025 to record the acquisition, payments, interest accruals, and depreciation.

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156 views1 page

Lease Accounting Solution for Robbin Company

The document outlines the lease accounting for Robbin Company, detailing a 10-year lease with annual payments of P1,000,000 and an implicit interest rate of 12%. The total lease liability and right-of-use asset are calculated to be P6,650,000, with annual depreciation of P475,000 over 14 years. It also includes journal entries for the years 2024 and 2025 to record the acquisition, payments, interest accruals, and depreciation.

Uploaded by

cyriljosanne2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Problem 10-2 (AICPA Adapted) — Lease Accounting Solution

Facts (from problem):


- Annual lease payment in advance (beginning of each year) starting Jan 1, 2024: P1,000,000
- Lease term: 10 years
- Useful life of machine: 14 years
- Implicit interest rate in the lease: 12%
- PV of annuity due at 12% for 10 periods = 6.328
- PV of 1 at 12% for 10 periods = 0.322
- Option to purchase machine on Jan 1, 2034 by paying P1,000,000 — reasonably certain to be exercised.

Computation of Lease Liability and Right-of-Use Asset


PV of rentals = P1,000,000 × 6.328 = P6,328,000
PV of purchase option = P1,000,000 × 0.322 = P322,000
Lease liability (Jan 1, 2024) = P6,328,000 + P322,000 = P6,650,000
Right-of-use asset (cost) = Lease liability = P6,650,000

Depreciation
Depreciable amount = P6,650,000
Depreciation (useful life 14 years) = P6,650,000 / 14 = P475,000 per year

Amortization Schedule (key dates) — showing 2024 and 2025 movements


Lease liability (Jan 1, 2024) P6,650,000
Payment on Jan 1, 2024 (advance) (P1,000,000)
Lease liability after payment (Jan 1, 2024) P5,650,000
Interest for 2024 (12% × P5,650,000) P678,000 (accrued at Dec 31, 2024)
Payment on Jan 1, 2025 (pay interest accrued + payment) - Cash P1,678,000
Lease liability after Jan 1, 2025 payment P4,650,000
Interest for 2025 (12% × P4,650,000) P558,000 (accrued at Dec 31, 2025)

Journal entries — Robbin Company (2024)


1. To record the acquisition of the machine under a finance lease:
Right-of-use asset P6,650,000
Lease liability P6,650,000
2. To record the first payment on January 1, 2024:
Lease liability P1,000,000
Cash P1,000,000
3. To accrue the interest for 2024 on December 31, 2024:
Interest expense P678,000
Accrued interest payable P678,000
4. To record the depreciation for 2024:
Depreciation expense P475,000
Accumulated depreciation P475,000

Journal entries — Robbin Company (2025)


1. To record cash payment on January 1, 2025 (pay interest accrued and the lease payment):
Accrued interest payable P678,000
Lease liability P1,000,000
Cash P1,678,000
2. To accrue the interest for 2025 on December 31, 2025:
Interest expense P558,000
Accrued interest payable P558,000
3. To record the depreciation for 2025:
Depreciation expense P475,000
Accumulated depreciation P475,000

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