CHAPTER 14 OPERATING LEASE – LESSOR

PROBLEM 14-1
At the beginning of the current year, Wren Company leased a building to Brill Company under an operating
lease for ten years at P500,000 per year, payable on the first day of each lease. The building is depreciated
P120,000 per year.
Wren Company paid P150,000 to a real estate broker as a finder fee. Wren Company incurred insurance and
property tax expenses totaling P90,000 for the year.
What amount should be reported as net rent income in the current year?

ANSWER: SOLUTION
Rent Income 500,000
Less: Amortization of finder fee (150,000/10) 15,000
Depreciation 120,000
Insurance and property tax 90,000 225,000
Net rent income 275,000

PROBLEM 14-2
At the beginning of the current year, Rapp Company leased a new machine to Lake Company for 5 years. The
annual rental is P900,000.
Additionally, Lake Company paid P500,000 to Rapp Company as a lease bonus and P250,000 as security
deposit to refunded upon expiration of the lease.
What amount of rental revenue should be reported for the current year?

ANSWER: SOLUTION
Annual rental 900,000
Amortization lease bonus (500,000/ 5) 100,000
Total rental revenue 1,000,000

PROBLEM 14-3
At the beginning of the current year, Jade Company purchased a new machine for P4,800,000 and leased it to
East Company the same day. The machine has an estimated 12-year life and will be depreciated P400,000 per
year. The lease is for a three-year period at an annual rental of P850,000.
Additionally, East Company paid P300,000 to Jade Company as a lease bonus to obtain the three-year lease.
Jade Company incurred insurance expense of P80,000 for the leased machine during the current year.
What amount should be reported as pretax income on the leased asset for the current year?
ANSWER: SOLUTION
Annual rental 850,000
Amortization of lease bonus (300,000/3) 100,000
Total 950,000
Less: Depreciation 400,000
Insurance 80,000 480,000
Pretax income 470,000

PROBLEM 14-4
On January 1, 2023, Highland Company owned a building held as investment property using the cost model.
The carrying amount of the building was P9,000,000 with remaining useful life of 10 years. On April 1, 2023,
the entity leased the building to a lessee for three years at monthly rental of P200,000.
The lessee paid the rental for one year of P2,400,000 and P2,000,000 security deposit to be refunded upon of
the lease.
On April 1, 2023, the lessee additionally paid P1,200,000 as a lease bonus. On April 1, 2023, the entity paid
P600,000 to a broker as a finder fee. During 2023, the entity paid property tax of P200,000 and P50,000
insurance on the building.
What amount should be reported as net rental income of the lessor?

ANSWER: SOLUTION
Rental from April 1 to December 31 (200,000 x 9) 1,800,000
Lease bonus (1,200,000 / 3 years x 9 /12) 300,000
Total rental income 2,100,000
Less: Property tax 200,000
Insurance 50,000
Finder fee (600,000/3 x 9/12) 150,000
Depreciation (9,000,000/10) 900,000 1,300,000
Net rental income 800,000

PROBLEM 14-5
On July 1, 2023, Hutch Company leased equipment to Elder Company for a one-year period expiring June 30,
2024, for P60,000 a month.
On July 1, 2024, Hutch Company leased the same equipment to Tower Company for a three-year period for
P75,000 a month.
The original cost of the equipment was P4,800,000 with a useful life of 8 years and no residual value.
What amount of net rental income should be reported by Hutch Company for the year ended December 31,
2024?
ANSWER: SOLUTION
Rent Elder Company (60,000 x 6) 360,000
Rent Tower Company (75,000 x 6) 450,000
Total rent income for 2024 810,000
Depreciation (4,800,000 / 8) (600,000)
Net rental income 210,000

PROBLEM 14-6
On May 1, 2023, Hug Company leased equipment to Rave Company which expires on May 1, 2024. Hug
Company’s accounting records showed a carrying amount for the equipment on May 1, 2023, of P2,800,000.
Hug Company’s depreciation on the equipment for 2023 was P360,000.
During 2023, Rave Company paid P720,000 in Rentals to Hug Company for the 8-month period. Hug Company
incurred maintenance and other related costs of P60,000 in 2023.
What amount should be reported as net rental income for 2023?

ANSWER: SOLUTION
Rental May 1 to December 31, 2023, 720,000
Depreciation (360,00)
Maintenance and other related cost (60,000)
Net rental income 300,000

PROBLEM 14-7

At the beginning of the current year, Glen Company leased a building to Dix Company for a ten-year term at an
annual rental of P500,000.
At inception of the lease, Glen Company received P2,000,000 covering the first two years’ rent of P1,000,000
and a security deposit of P1,000,000.
The deposit will not be returned to Dix Company upon expiration of the lease but will be applied to payment of
rent for the last two years of the lease.

1. What portion of the P2,000,000 should be reported as current liability at the current year-end?
2. What portion of the P2,000,000 should be reported as noncurrent liability at current year-end?
ANSWER: SOLUTION
QUESTION 1
The second year’s rent of P500,000 which was received in the current year is unearned rent income and
therefore shown as a current liability at current year-end.

QUESTION 2
The deposit of P1,000,000 is unearned rent deposit classified as noncurrent liability because it is applied
to payment of rent for the last two years of the lease.

PROBLEM 14-8
Conn Company owns an office building and normally charges tenants P3,000 per square meter per year for
office space.
Because the occupancy rate is low, Conn Company agreed to lease 1,000 square meters to Hanson Company at
P1,200 per share meter for the first year of a three-year operating lease. Rent for the remaining years will at the
P3,000 rate.
At the beginning of the current year, Hanson Company moved into the building and paid the first year’s rent in
advance.
What amount of rental revenue should Conn Company report in the income statement for the current year ended
September 30?

ANSWER: SOLUTION
First year (1,200 x 1,000) 1,200,000
Second year (3,000 x 1000) 3,000,000
Third year (3,000 x 1,000) 3,000,000
Total rental revenue 7,200,000

Average annual rental (7,200,000 / 3) 2,400,000

Rental revenue from January 1 to September 30

(2,400,000 x 9/12) 1,800,000
PROBLEM 14-9
At the beginning of the current year, Wall Company leased office premises to Fox Company for a five-year
term.
Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is
P1,250,00 per annum.
However, as an inducement to enter the lease, Wall Company granted Fox Company the first six months of the
lease rent-free.
What amount should be reported as rental income for the current year?

ANSWER: SOLUTION
First year (800,000 x 6/12) 400,000
Second Year through fifth year (1,250,000 x 4) 5,500,000
Total rent income 5,400,000

Average annual rental income (5,400,000 / 5) 1,080,000

PROBLEM 14-10
On June 1, 2024, Anton Company, as lessor, entered into a real estate lease agreement for a new building. The
lease is accounted for as an operating lease and fully executed on that day.
According to the terms of the lease, rentals of P300,000 per month are scheduled to begin on November 1,
2024. As an incentive, the period from June 1 to October 31, 2024, is rent free. The lease term spans 5years.
Anton Company has a calendar year-end.
What amount should be reported as rent income for 2024?

ANSWER: SOLUTION
Total months (5 years x 12) 60 months
Rent free from June 1 to October 31 (5)
Remaining months 55

Total rental over lease term (300,000 x 55) 16,500,000

Average annual rent (16,500,000 / 5 years) 3,300,000

Rent income from June 1 to December 31 (3,300,000 x 7/12) 1,925,000

PROBLEM 14-11
On July 1, 2023, Gee Company leased a delivery truck to Marr Company under a 3-year operating lease.
Total rent for the term of the lease will be P7,200,000 payable at the end of the lease year.
12 moths at P100,000 = P1,200,000
12 moths at P150,000 = P1,800,000
12 months at P350,000 = P4,200,000
All payments were made when due.

1. What amount should be reported as rent revenue for the year ended June 30, 2024?
2. On June 30, 2025, what amount should be reported as accrued rent receivable?

ANSWER: SOLUTION
QUESTION 1
Annual rent revenue (7,200,000 / 3years) 2,400,000
QUESTION 2
Rent revenue from July 1, 2023, to June 30, 2025
(2,400,000 x 2 years) 4,800,000
Less: Rental received when due:
First 12 months 1,200,000
Second 12 months 1,800,000 3,000,000
Accrued rent receivable – June 30, 2025, 1,800,000

PROBLEM 14- 12
Abe Company, lessor, leased equipment under an operating lease. The lease term is 5 years, and the lease
payments are made in advance on January 1 of each year as shown in the following schedule:

January 1, 2023, 1,000,000

January 1, 2024, 1,000,000
January 1, 2025, 1,400,000
January 1, 2026, 1,700,000
January 1, 2027, 1,900,000
Total rentals 7,000,000
 1. What amount should be reported as rent income for 2023?
2. On December 31, 2024, what amount should be recognized as accrued rent receivable?

ANSWER: SOLUTION
QUESTION 1
Average annual rental (7,000,000 / 5) 1,400,000

QUESTION 2
Rent income for 2023 and 2024 (1,400,000 X 2) 2,800,000
Rent received for 2023 and 2024 (1,000,000 + 1,000,000) 2,000,000
Accrued rent receivable – December 31, 2024, 800,000

PROBLEM 14-13
On January 1, 2023, Abba Company leased a building to Bee Company under a four-year operating lease.
The monthly rental for 2023,2024,2025, and 2026 is P100,000, P150,000, P200,000, and P250,000,
respectively.
Rentals are payable at the end of each month. All rental payments within the year were made when due.

1. What amount should be reported as rent income for 2023?

2. On December 31, 2024, what amount should be reported as rent receivable?

ANSWER: SOLUTION
QUESTION 1
2023 (100,000 X 12) 1,200,000
2024 (150,000 X 12) 1,800,000
2025 (200,000 X 12) 2,400,000
2026 (250,000 X 12) 3,000,000
Total rent over the lease term 8,400,000

Average annual rent income (8,400,000 / 4) 2,100,000

QUESTION 2
Rent income for 2023 and 2024 (2,100,000 x 2) 4,200,000
Rent collected in 2023 and 2024 (1,200,000 + 1,800,000) (3,000,000)
Rent receivable – December 31, 2024, ` 1,200,000
PROBLEM 14-14
As an inducement to enter a lease. Aris Company, a lessor, granted a lessee nine months of free rent under a
five-year operating lease.
The lease is effective on April 1, 2023, and provided for monthly rental of P100,000 to begin January 1, 2024.

1. What amount should be reported as rent income for 2023?

2. What amount should be reported as rent receivable on December 31, 2024?

ANSWER: SOLUTION
QUESTION 1
2023 Rent receivable 765,000
Rent income 765,000

Total rent (100,000 x 51 months) 5,100,000

Average annual rent (5,100,000 /5) 1,020,000
Rent from April 1 to December 31, 2023 (1,020,000 x 9/12) 765,000

QUESTION 2
2024 Cash (100,000 x 12) 1,200,000
Rent income 1,020,000
Rent receivable 180,000

Rent receivable – December 31, 2024

(765,000 – 180,000) 585,000
PROBLEM 14-15
On October 1, 2023, Dean Company leased office space to a lessee at a monthly rental of P3,000 for 10 years
expiring September 30, 2033.
As an inducement for the lessee to enter into the lease, Dean Company permitted the lessee to occupy the
premises rent free from October 1 to December 31, 2023.

1. What amount should be reported as rent income for 2023?

2. What amount should be reported as rent receivable on December 31, 2024?

ANSWER: SOLUTION
QUESTION 1
2023 Rent receivable 877,500
Rent income 877,500

Total rent (P300,000 x 117 remaining months) 35,100,000

Average annual rent (35,100,000 / 10) 3,510,000
Rent from October 1 to December 31, 2023
(3,510,000 x 3/12) 877,500

QUESTION 2
2024 Cash (300,000 x 12) 3,600,000
Rent income 3,510,000
Rent receivable 90,000

Rent receivable – December 31, 2024 (877,500 – 90,000) 787,500