CHAPTER 14 SALES TYPE LEASE - LESSOR TECHNICAL KNOWLEDGE To understand a sales type lease on the part of lessor. To define gross investment and net investment in a sales type lease. To recognize gross income on sale and interest income in a sales type lease. 376Introduction The lessor in a sales type lease is actually a manufacturer or dealer that uses the lease as a means of facilitating the sale of product. ‘The accounting for a sales type lease exhibits many similarities to that for a direct financing lease. However, @ sales type lease involves ihe recognition of a manufacturer or dealer profit on the transfer of the asset to the lessee in addition to the recognition of interest income. SALES TYPE LEASE Gross investment in the lease is equal to the gross rentals for the entire lease term plus the absolute amount of the residual value, whether guaranteed or unguaranteed. Recall that this is the same gross investment in a direct financing lease. Net investment in the lease is equal to the present value of the gross rentals plus the present value of the residual value, whether guaranteed or unguaranteed. Unearned interest income is the difference between the gross investment and net investment in the lease. - Sales revenue is equal to the net investment in the lease (present value of lease payments) or fair value of the asset, whichever is lower. Cost of goods sold is equal to the cost of the asset sold minus the present value of unguaranteed residual value plus the initial direct cost paid by the lessor. Gross income is the usual formula of sales revenue minus cost of goods sold. Initial direct cost is expensed immediately in a sales type lease as component of cost of goods sold. 877Simple illustration Lessor Company is a dealer in machinery. At the beginning of current year, a machinery was leased to Lessee Company with the following provisions: Annual rental payable at the end of each year 400,000 Lease term b years Useful life of machinery 5 years Cost of machinery 1,000,000 Implicit interest rate 12% Present value of annuity of 1 for 5 years at 12% - 3.60 Gross rentals (400,000 x 5) 2,000,000 Present value of rentals (400,000 x 3.60) 1,440,000 Unearned interest income Present value of rentals- sales revenue Cost of machinery — cost of goods sold Gross income on sale A manufacturer or dealer lessor shall recognize income or loss for the period in accordance with the policy followed by the entity for outright sale. Journal entries for current year 1. To record the sale; Lease receivable 2,000,000 Sales 1,440,000 Unearned interest income 560,000 The gross income of P440,000 is not separately recorded . because it is included already in the sales revenue. 2, To record the cost of goods sold, assuming the perpétual system is used: Cost of goods sold 1,000,000 Inventory 1,000,000 3. To record the collection of the annual rental: ' Cash 400,000 Lease receivable 400,000 4. To record the interest income: Unearned interest income 172,800 Interest income (12% x 1,440,000) 172,800 878Sales type lease with residual value Lessor Company is a dealer in machinery. On January 1, 2024, a machinery is leased to another entity with the following provisions: Annual rental payable at the end of each year 800,000 Lease term 5years Useful life of machinery 5 years Cost of machinery 2,000,000 Residual value 200,000 Initial direct cost paid by lessor r 100,000 Implicit interest rate 10% Present value of an ordinary annuity of 1 for 5 periods at 10% 3.79 Present value of 1 for 5 periods at 10% 0.62 At the end of the lease term on December 31, 2028, the machinery shall revert to Lessor Company. The perpetual inventory system is used. The residual value may be guaranteed or unguaranteed. Residual value guarantee Gross rentals (800,000 x 5) 4,000,000 Residual value guarantee 200,000 * area Lease receivable — gross investment 4,200,000 Present value of gross rentals (800,000 x 3.79) 3,032,000 Present value of residual value guarantee (200,000 x .62) 124,000 Total present value ~ net investment 3,156,000 Lease receivable equal to gross investment 4,200,000 Total present value or net investment (8,156,000) Unearned interest income 1,044,000 3,156,000 Sales revenue equal to total present value Cost of goods sold — cost of machinery 2,000,000) Initial direct cost £300,800) Gross income 1,056,000Journal entries on January 1, 2024 Lease receivable 4,200,000 Cost of goods cold 2,000,000 Sales 3,156,000 Unearned interest income 1,044,000 Inventory 2,000,000 Cost of goods sold 100,000 Cash 100,000 The initial direct cost is charged directly to cost of goods sold. Sales 3,156,000 Cost of goods sold 2,100,000 Gross ineome 1,056,000 Cost of machnery sold 2,000,000 Initial direct cost 100,000 Cost of goods sold 2,100,000 Unguaranteed residual value Gross rentals (800,000 x 5) Unguaranteed residual value Lease receivable ~ gross investment Present value of gross rentals Present value of unguaranteed residual value Total present value — net investment Lease receivable Total present value or net investment Unearned interest income Observe that the lease receivable arid unearned interest income are the same whether the scenario is guaranteed or unguaranteed residual value. However, there is a difference in the computation of the sales revenue and cost of goods sold. 380Sales and cost of goods sold Under the residual value guarantee scenario, the present value of the residual value is ineluded in the sales revenue because the lessor knows that the entire asset has been sold. However, under the unguaranteed residual value scenario, the present value of the unguaranteed residual value is not included in the sales revenue. Accordingly, the present value of the unguaranteed residual value is deducted from the cost of the underlying asset in computing cost of goods sold. ‘The reason is that this portion of the leased asset is in effect "not sold" in the sense that the lessor shall be receiving back at the end of the lease term the underlying asset with unguaranteed residual value of P200,000 and present value of P124,000. Costof machinery 2,000,000 PV of unguaranteed residual value (124,000) Cost of machinery sold 1,876,000 Initial direct cost 100,000 Cost of goods sold Sales revenue equal to present value of gross rentals only, excluding the present value of the unguaranteed residual value 3,032,000 Cost of goods sold (1,976,000) Gross income 1,056,000 The gross income must be the same under the guaranteed and unguaranteed residual value scenario. Journal entries - unguaranteed residual value Lease receivable 4,200,000 Cost of goods sold 1,876,000 Sales 3,032,000 Unearned interest income 1,044,000 Inventory ‘ 2,000,000 f goods * 100,000 Costa ® ds sold on 381Table of amortization Table of amortization of the net lease receivable and interest income: Date Payment Interest Principal Present value Wy2024 3,156,000 12/31/2024 800,000 315,600 484,400 2,671,600 12/31/2025 800,000 267,160 532,840 2,138,760 12/31/2026 800,000 213,876 586,124 1,552,696 12/31/2027 800,000 155,264 644,736 907,900 12/31/2028 800,000 92,100* 709,900 200,000 * 10% x P907, 900 equals P90,790. There is a diference of P1,310 due to rounding of present value factor. December 31, 2024 Payment 800,000 Applicable to interest (10% x 3,156,000) _(315,600) Applicable to principal 484,400 Net lease receivable — January 1, 2024 3,156,000 Payment on December 31,2024 (_ 484,400) Carrying amount - December 31, 2024 2,671,600 Whether guaranteed or unguaranteed, the entries for the collection of the annual rental and the interest income are the same. : Journal entries - December 31, 2024 1. Cash 800,000 Lease receivable 800,000 2. Unearned interest income 315,600 Interest income 315,600 Journal entries - December 31, 2025 1. Cash 800,000 Lease receivable ‘ 800,000 2, Unearned interest income 267,160 Interest income 267,160 382Return of asset to lessor When the lease expires on December 31, 2028, the machinery shall revert to Lessor Company. Whether guaranteed or unguaranteed residual value, the entry on the books df the lessor is the same. Inventory (machinery) 200,000 Lease receivable 200,000 To complete the illustration, assume on December 31, 2028, end of lease term, the fair value of the machinery is only P150,000. Under the residual value guarantee scenario, the lessee shall make up for the deficiency by paying the difference. Cash 50,000 Inventory 150,000 Lease receivable 200,000 Under the unguaranteed scenario, the lessor shall recognize a loss for the difference. Loss on finance lease 50,000 Inventory 150,000 Lease receivable 200,000 It is to be pointed out that in the illustration the sales type lease provides that the underlying asset shall revert to the lessor upon termination of the contract. However, if the underlying asset shall not revert to the lessor, the residual value is completely ignored by the lessor in the computation of unearned interest income and gross income on the sale. The underlying asset shall remain with the lessee if the lease provides for either a purchase option that is reasonably certain to be exercised or transfer of title to the lessee upon the lease expiration. _ 383Sales type lease with purchase option An entity is a dealer in equipment. On January 1, 2024, an equipment is leased to another entity with the following provisions: Annual rental payable at the end of each year 500,000 Lease term years Useful life of equipment 5 years Cost of equipment 1,000,000 Initial direct cost paid by lessor 100,000 Purchase option ” 200,000 Implicit interest rate 8% PV of an ordinary annuity of 1 at 8% for 4 periods 3.312 PV of 1 at 8% for 4 periods 0.785 It is reasonably certain that the lessee shall exercise the purchase option on December 31, 2027. Computation Gross rentals (500,000 x 4) 2,000,000 Purchase option 200,000 Gross investment ~ lease receivable 2,200,000 Present value of gross rentals (500,000 x 3.312) 1,656,000 Present value of purchase option (200,000 x.735) 147,000 ‘Total present value — net investment 1,803,000 Gross investment Net investment Unearned interest income Sales equal io total present value or net investment 1,803,000 Cost of goods sold 1,100,000 Gross income Cost of equipment sold 1,000,000 Initial direct cost 100,000 Cost of goods sold 1,100,000 384Journal entry - January 1, 2024 If the perpetual system is used: Lease receivable 5 2,200,000 Cost of goods sold 1,100,000 Sales 1,803,000 Unearned interest income 397,000 Inventory 1,000,000 Cash 100,000 Table of amortization ‘Table of amortization of the net lease receivable and interest income: Date Payment Interest Principal Present value dan. 1,2024 1,803,000 Dec. 31,2024 500,000 144,240 355,760 1,447,240 Dec. 31,2025 500,000 115,779 384,221 1,063,019 Dec. 31,2026 500,000 85,042 414,958 648,061 Dec. 31,2027 500,000 51,939 448,061 200,000 Payment represents the annual rental. Interest is equal to the preceding present value times the interest rate. Thus, for 2024, P 1,803,000 times 8% equals P144,240, and so on. Principal is the portion of the annual rental payment after deducting interest. ‘Thus, for 2024, P500,000 minus P144,240 equals P355,760 and so on, Présent value is the balance of the present value after deducting the principal payment. Thus, on December 31, 2024, P1,803,000 minus P355,760 equals P 1,447,240 and soon. : 385Journal entries 2024 Dec. 31 Cash 500,000 Lease receivable 500,000 31 Unearned interest income 144,240 Interest income 144,240 2025 Dec. 31 Cash 500,000 ’ Lease receivable 500,000 31 Unearned interest income 115,779 Interest income 115,779 2026 Dec. 31 Cash 500,000 s Lease receivable 500,000 31 Unearned interest income 85,042 . Interestincome 85,042 2027 Dec. 31 Cash 500,000 Lease receivable 500,000 31 Unearned interest income 51,939 Interest income 51,939 Exercise of purchase option On December 31, 2027, if the entries are properly posted, the lease receivable had a balance of P200,000 equal to the purchase option and the unearned interest income had a zero balance. The purchase option is exercised by the lessee on December 31, 2027, The purchase option is accounted for as full payment of the lease receivable. Cash 200,000 Lease receivable 200,000 Nonexercise of purchase option The purchase option is not exercised by the lessee and the fair value of the underlying asset is P100,000 only. Inventory 100,000 Loss on finance lease 100,000 Lease receivable 200,000 386Actual sale of underlying asset. When a lessor actually sells an asset that it has been leasing under a finance lease, the difference between the sale price and the carrying amount of the lease receivable is recognized as gain or loss on disposal. The carrying amount of the lease receivable is equal to the balance of the lease receivable minus the unearned interest income. Illustration An entity actually sold an equipment that it had been leasing under a sales type lease for P3,500,000. The following balances are associated with the finance lease on the books of the lessor on the date of sale: Lease receivable 5,000,000 Unearned interest income 1,200,000> Computation : Sale price 3,500,000 Carrying amount of lease receivable: Lease receivable 5,000,000 Unearned interest income 2,200,000) 3,800,000 Loss on sale of leased equipment (300,000) Journal entry to record the actual sale Cash 3,500,000 Unearned interest income 1,200,000 Loss on sale of leased equipment 300,000 Lease receivable 5,000,000Disclosures - Lessor A lessor shall disclose the following amounts for the reporting period: 1. For finance lease: Selling profit or loss . Finance income on the net investment in the lease c. Income relating to variable lease payments not included in the measurement of the net investment in the lease oP 2. For operating lease, lease income, separately disclosing income relating to variable lease payments that do not depend on an index or rate Additional disclosures A lessor shall disclose additional qualitative and quantitative information about leasing activities necessary to assess the effect of leases on financial position, financial performance and cash flows. This additional information includes, but ‘is not limited to, information that helps users of financial statements to assess: 1. The nature of the lessor's leasing activities 2. How the lessor manages the risks associated with any rights it retains in the underlying asset. In particular, a lessor shall disclose its risk management strategy for the rights it retains in underlying asset, including any means by which the lessor reduces that risk.QUESTIONS 1. Explain a sales type lease. 2. Explain the following in a sales type lease: Gross investment in the lease . Net investment in the lease Unearned interest income . Sales revenue . Cost of goods sold Gross income Pease rp 3. Explain the treatment of initial direct cost paid by the lessor in a sales type lease. 4. Explain the treatment of residual value guarantee and unguaranteed residual value in a sales type lease. 5. Explain the treatment of purchase option in a sales type lease. 389PROBLEMS Problem 14-1 (IAA) Vanderbilt Company is a dealer in machinery. The perpetual inventory system is used. On January 1, 2024, a machinery was leased to Thunder Company with the following provisions: Annual rental payable at the end of each year 3,000,000 Lease term and useful life of machinery 5 years Cost of machinery 8,000,000 Residual value guarantee 1,000,000 Initial direct cost paid by Vanderbilt Company 300,000 Implicit interest rate 12% PV ofan ordinary annuity of | for 5 periods at 12% 3.60 PVof 1 for 5 periods at 12% on7 Required: Prepare journal entries on the books of Vanderbilt Company for 2024. Problem 14-2 (AICPA Adapted) On January 1, 2024, Fox Company, dealer in equipment, leased equipment to Tiger Company. The lease was appropriately accounted for as a sale by Fox Company and as a purchase by Tiger Company. The lease is for a 10-year period which approximated the useful life of the asset. The first of 10 equal annual payments of P500,000 was made on January 1, 2024. Fox Company purchased the equipment for P2,675,000 and established a list selling price of P3,375,000 on the equipment. Fox Company used the perpetual inventory system. The present value on January 1, 2024 of the rent payments over the lease term discounted at 12% was P3,165,000. Required: Prepare journal entries for 2024 and 2025 on the books of Fox Company. 390Problem 14-3 (IAA) France Company is a dealer in equipment. On January, 1, 2024, an equipment was leased to another entity with the following provisions: Annual rental payable at the end of each year 1,500,000 Lease term and useful life of equipment B years Cost of equipment 4,000,000 Residual value-unguaranteed 500,000 Implicit interest rate 12% PV ofan ordinary annuity of 1 at 12% for 5 periods 3.60 PV of 1 at 12% for 5 periods 0.57 a the end of the lease term the equipment shall revert to the lessor. : The entity incurred initial direct cost of P200,000 in finalizing the lease agreement. The perpetual inventory system is used. Required: Prepare journal entiies for 2024. Problem 14-4 (IAA) Reagan Company used leases as a method of selling products. On January 1, 2024, Reagan Company completed construction of a passenger ferry. On same date, the ferry was leased to the Super Ferry Line on a contract specifying that ownership of the ferry shall transfer to the lessee at the end of the lease period. Original cost of the ferry 8,000,000 Fair value of ferry at lease date 13,000,000 Lease payments in advance 1,500,000 Residual value 2,000,000 Implicit interest rate * 12% Dateoffirstlease payment January 1, 2024 Lease term 20 years Present value of an annuity due of 1 at 10% for 20 periods 8.37 Present value of 1 at 12% for 20 periods 0.10 The entity used the perpetual inventory system in recording sales and cost of goods sold. Required: \ Prepare journal entries for 2024. ‘ 391Problem 14-5 (IAA) Angola Company used leases as the primary method of selling products. The entity's main product is a small aircraft that is very popular among government officials and corporate executives. On January 1, 2024, Angola Company leased such aircraft costing P8,000,000 to the President of a big corporation. It is estimated that the aircraft will have a residual value of P500,000 after 5 years. The terms of the lease provided for annual rental of P3,328,710 to be paid over 5 years every December 31 of each year with the ownership of the aircraft transferring to the lessee at the end of the lease term. Angola Company incurred initial direct cost of P200,000 in finalizing the lease with the lessee. The perpetual inventory system is used. The implicit interest rate in the lease is 12%. The present value of an ordinary annuity of 1 for 5 periods at 12% is 3.605. Required: Prepare journal entries for 2024 relating to the sales type lease on the books of Angola Company. Problem 14-6 (IAA) Salome Company is.a dealer in equipment. On January 1, 2024, the entity leased an equipment to another entity. The lease is appropriately recorded as a sales type lease. The perpetual inventory system is used. Annual rental payable at the end of each lease year 800,000 Lease term Syears ‘Useful life of equipment 10 years Cost of equipment 3,100,000 Purchase option that is reasonably certain 400,000 Implicit interest rate 10% PV ofan ordinary annuity of 1 at 10% for 8 periods 5.33, PV of 1 at 10% for 8 periods ' 047 Required: 1. Prepare journal entries for 2024 and 2025. “2, Prepare [Link] on December 31, 2031 to record » the exercise of the bargain purchase option by the lessee. 3. Prepare journal entry on December 31, 2031 if the bargain urchase option is not exercised by the lessee and the fair value of the leased asset is P250,000. 392Problem 14-7 (AICPA Adapted) At the beginning of current year, Howe Company leased equipment to Kew:Company for an eight-year period. Equal payments under the lease are P500,000 and are due at the ginning of each year. The calling naib of the equipment ia P2,900,000 and the carrying amount is P2,000,000. The lease is appropriately accounted for as a sales type lease. The present value of the lease payments at an implicit interest rate of 12% is P2,780,000. 1. What amount should be reported as gross income on sale for the current year? a. 900,000 b. 780,000 2. What amount should be reported as interest income for current year? a. 333,600 b. 273,600 c. 348,000 d. 288,000 Problem 14-8 (IFRS) Gold Company leased equipment to Fair Company and properly recorded the sales type lease. The eight annual payments of P300,000 are due at the beginning of each year. The lessor had purchased the equipment for P1,100,000 and had a list price of P1,800,000. The present value of the lease payments is P1,700,000. The imputed interest rate on the lease was 11% and the lessee had an incremental borrowing rate of 10%. 1. What Amount should be reported as gross income on sale for the current year? a. 380,000 b. 600,000 ¢ 220,000 da. 0 2. What amount of interest income should be reported for the current year? . a. 165,000 b c d. 154,000Problem 14-9 (AICPA Adapted) On July 1, 2024, Meg Company leased equipment to Wee Company for ai ar period. Equal payments under the lease are P600,000 and are due on July 1 of each year. The first payment was made on July 1, 2024. The interest rate contemplated by Meg Company ani Wee Company was 10%. The cash selling price of the equipment is P3,520,000 and the cost of the equipment on Meg Company's accounting records was PAL 000. The lease was appropriately led as a sales type lease. 1. What amount of gross income on sale should be recognized? 2. What amount of interest revenue should be recorded for the year ended December 31, 2024? a. 292,000 b. 146,000 ¢. 352,000 d. 176,000 Problem 14-10 (IAA) On January 1, 2024, Dexter Company leased equipment to a lessee. The lease was for an eight-year period expiring December 31, 2031. The first of eight equal annual payments of P900,000 was made on January 1, 2024. . Dexter Pompany had previously purchased the equipment for P4,800,000. The lease was appropriately accounted for as a sales type lease by Dexter Company. ‘The present value on January 1, 2024 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000. 1. What amount should be recognized as gross income on sale in 2024? a. 1,920,000 b. 2,400,000 ¢, 480,000 d. 240,000 2, What amount of interest revenue should be recorded in 2025? a. 490,000 b. 480,000 ce. 438,000 d. 391,800Problem 14-11 (AICPA Adapted) On January 1, 2024, Gallant Company entered into a 10-year lease agreement with Blacksheep Company for a machine which was carried on the accounting records of Gallant Company at 2,000,000. Total payments under the lease aggregate P3,660,800 of which P2,400,000 represents cost of the machine to Blacksheep Company. Payments of P355,080 are due at the beginning of each lease year. The interest rate of 10% which was stipulated in the lease is considered fair and adequate compensation to Gallant Company. Blacksheep Company expected the machine to have a 10-year life, no residual value and be depreciated on a straight line basis. The lease qualified as a sales type lease. 1. What amount should be recognized by Gallant. Company as gross income on sale for 2024? a. 1,150,800 b. 800 c. "400, 000 d. 355,080 2. What amount of interest income should be recognized by Gallant Company for 2024? a. 244,080 b. 200,000 c. 204,492 d. 240,000 3. What amount of pretax total income should be recognized by Gallant Company for 2024? a, 204,492 b, 604,492 ¢, 355,080 d. 755,080Problem 14-12 (IAA) At the beginning of current year, Yolk Company signed a ten-year noncancelable lease agreement to lease a storage building to a lessee under a sales type lease. The agreement required equal rental payments at the end of each year. The fair value of the building at the inception of the lease was P3,075,000. However, the carrying amount of the building was P 2,460,000. The building had an estimated economic life of 10 years with no residual value. At the termination of the lease, the litle to the building shall be transferred to the lessee. Yolk Company set the annual rental to insure a 10% rate of return. The implicit rate is known to the lessee. The annual total lease payment included P100,000 of executory cost related to property taxes on the property. The present value of an ordinary annuity of 1 at 10% for 10 periods is 6.15. 1, What amount should be reported as annual lease rental? a. 400,000 b. 600,000 ec. 500,000 d. 300,000 2. What amount should be reported as total annual lease payment including the executory cost? a. 500,000 b. 700,000 c. 400,000 d. 600,000 3. What amount should be reported as gross income from the sale? a. 515,000 b. 600,000 c. 615,000 d. 0 4. What amount should be reported as unearned interest income at the beginning of current year? 1,925,000 4,500,000 " 2,540,000 1,325,000 aegpProblem 14-13 (IAA) At the beginning of current year, Ultra Company leased equipment to a lessee under a sales type lease. Rentals are payable at the end of each year, beginning December 31 of the current year. The lease term is 6 years and the useful life of the equipment is 8 years. The fair value of the equipment was P1,273,800 while the cost was P800,000. The implicit rate in the lease is 12% which is known to the lessee. The lessee had the option to purchase the equipment for P80,000 at the end of the lease term. Jt is reasonably certain that the lessee shall exercise the purchase option. The present value of 1 at 12% for 6 periods is 0.51 and the present value of an ordinary annuity of 1 at 12% for 6 periods is 4.11. 1. What amount should be recognized as annual rental payment? i a. 194,647 b, 184,720 ce. 300,000 d. 309,927 What amount should be reported initially as total financial revenue? a. 606,200 b. 526,200 c. 388,320 d. 920,000 3. What amount should be reported as gross income from the sale? . a. 606,200 b: 473,800 c. 553,800 d. 0 4. What amount should be reported as interest income for the current year? a, 152,856 b. 216,000 c. 147,960 d. 101,033 re 397Problem 14-14 (IAA) Rizza Company used leases as a method of selling product On January 1, 2024, the entity completed the construction of a machinery. On same date, the machinery was leased on a contract hey ng that ownership of the machinery shall e less transfer to t at the end of the lease period. Original cost of the machinery 9,000,000 Lease payments payable at beginning of each year 2,000,000 Estimated residual value 1,000,000 Implicit interest rate 12% Lease term l0yeare Present value of an annuity due of 1 at 12% for 10periods 6.33 Present value of 1 at 12% for 10 periods 0.32 1. The gross income on sale for 2024 is P3,660,000. I]. The interest income is P1,519,200 for 2024. a. Statements | and II are true b, Statements I and II are false. c, Only statement I is true d. Only statement II is true Problem 14-15 (IAA) On April 1, 2024, Oriental Company leased equipment to another entity. The lease was appropriately recorded as a sales type lease for an 8-year period with an implicit interest rate of 10%. The first of eight equal payments of P700,000 was made on April 1, 2024 The cost of the equipment to Oriental Company was * P3,700,000. The equipment had an estimated useful life of 8 years with no residual value. The present value of an annuity of 1 in advance at 10% for 8 periods is 5.868, The entity followed the calendar year and used the perpetual inventory system. . I. The gross income on sale is P407,600 for 2024. II. The interest income is P340,760 for 2024. III. The interest income is P304,836 for 2025. a. All statements are true b. All statements are not true a c. - Only statement I is true d.. Only statements II and III are true 398Problem 14-16 (IAA) Marianas Company adopted the policy of leasing as the primary method of selling products. The entity's main product is a small cargo vessel. On January 1, 2024, such cargo vessel was leased to Jade Company for 10 years at an annual rental of P2,500,000 payable at the end of each year starting December 31, 2024.., The cost of the cargo vessel is P8,500,000 with estimated residual value of P1,600,000 at the end of the lease term. At the end of the lease term, the ownership of the cargo vessel shall transfer to Jade Company. Marianas Company incurred initial direct cost of P500,000 in financing the lease agreement with Jade Company. The sale price of the cargo vessel is P14,125,000. ‘The implicit interest rate in the lease is 12%. The present value of an ordinary annuity due of 1 at 12% for 10 periods is 5.65. I, The gross income on sale is P5,125,000 for 2024. Il. The total financial revenue over the lease term is P10,875,000. IIL. The interest income should be reported at P1,695,000 for 2024. [Link] carrying amount of the lease receivable should be reported at P22,500,000 on December 31, 2024. All statements are true All statements are incorrect Only statements I, II and III are true |. Only statement I is true peop 399Problem 14-17 Multiple choice (IFRS) 1, Net investment in a sales type lease is equal to Gross investment in the lease less unearned finance income Cost of the underlying asset ‘The lease payments The lease payments less unguaranteed residual value er re nm Which statement characterizes a sales type lease? The lessor recognizes only interest revenue. . The lessor recognizes only dealer profit. c. The lessor recognizes a dealer profit at lease inception and interest revenue over the lease term. d. The lessor recognizes a dealer profit at lease inception and interest revenue over the useful life of the asset. oe ~ . The gross income on a finance lease transaction for lessors who are manufacturers or dealers should a. Not be recognized separately from finance income b. Be recognized in the normal way on the transaction ¢. Only be recognized at the end of the lease term d. Be recognized on straight line over the lease term 4, The excess of the fair value of asset over the carrying amount shall be recognized by the dealer lessor as a. Unearned income from a sales type lease b. Unearned income from a direct financing lease c. Manufacturer profit from a sales’ type lease d. Manufacturer profit froma direct financing lease = In a sales type lease, interest revenue should be a. Ignored b. Recognized over the lease term using interest method ¢, Recognized over the lease term using straight line d. Recognized in full as revenue at the inception of lease 400