SOL. MAN.

Chapter 7 Leases (PART 1) 2021

Intermediate Accounting 2 (Don Honorio Ventura Technological State

University)

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Chapter 7
Leases (Part 1)
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. TRUE
3. FALSE - When assessing the right to obtain
substantially all of the economic benefits from the use
of an asset, an entity considers only the economic
benefits within the defined scope of its rights to use
the asset.
4. TRUE
5. FALSE
6. TRUE
7. FALSE
8. TRUE

9. FALSE (₱10,000 x PV of an annuity due of ₱1

@10%, n=4)
10. FALSE [(₱10,000 x PV of an annuity due of ₱1
@10%, n=4) – 10,000] or (₱10,000 x PV of an
ordinary annuity of ₱1 @10%, n=3)

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. D
3. D
4. D – The contractual restrictions pertain only to
the supplier’s protective rights.
5. C
6. C
7. D
8. B – reasonably “certain”
9. C (5 yrs. + 2-yr. extension) = 7
Baa Co. will most certainly exercise the renewal option
because there is an economic incentive to do so, i.e.,
the leasehold improvements, which have a significant
value, can only be realized through continued
occupancy of the leased property.

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10. C
11. D
12. C
13. A
14. D
15. B
16. A
17. B
18. B – From the perspective of Daddy, the contract
contains two lease components: (1) a lease of the
backhoe together with the accessories and (2) a
lease of the dump truck (which is useable
independently from the backhoe).
The administrative tasks are not treated as a
separate component of the contract. The itemized
payment for the administrative tasks is included in the
total consideration that is allocated to (1) and (2) above.

19. D
20. C

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PROBLEM 3: EXERCISES
1. Solution:
1. Identified asset – the contract specifies a
particular executive jet. The aviation company’s
right to substitute another aircraft is not substantive
because it would be uneconomic to exercise this
right.
2. Right to obtain economic benefits from use – the
customer has the exclusive use of the jet throughout
the period of use
3. Right to direct the use – the customer decides
how and for what purpose the jet is to be used.

❖ Based on the foregoing, the customer has the right to

control the use of the jet. Therefore, the contract is a
lease.

2. Solutions:
Requirement (a):
➢ Initial measurements of Lease liability and
Right-of- use asset

200,00
Fixed payments 0
Multiply by: PV of an ordinary annuity of ₱1
2.4868
@10%, n=3
5
497,37
Present value of lease payments
0

The entry to record the lease is as follows:

Jan. Right-of-use asset 497,3
1, Lease liability 70 497,37
20x1 0

➢ Subsequent measurement – Lease liability

Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 497,370
12/31/ 200,000 49,737 150,263 347,107
x1
12/31/ 200,000 34,711 165,289 181,818
x2

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12/31/ 200,000 18,182 181,818 0

x3

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➢ Subsequent measurement – Right-of-use asset

Cost 497,370
Divide by: Shorter of lease term and useful
life 3
Annual depreciation 165,790

The entries on December 31, 20x1 are as follows:

Dec. Interest expense 49,73
31, Lease liability 7
20x1 Cash 150,2 200,00
63 0
Dec. Depreciation expense 165,7
31, Right-of-use 90 165,79
20x1 asset 0
Dec. Interest expense 34,71
31, Lease liability 1
20x2 Cash 165,2 200,00
89 0
Dec. Depreciation expense 165,7
31, Right-of-use 90 165,79
20x2 asset 0

Requirement (b):
➢ Lease liability – 12/31/x1 = 347,107
➢ Current: 165,289
➢ Noncurrent: 181,818

➢ Right-of-use asset – 12/31/x1 = (497,370 - 165,790) =

331,580

3. Solution:
Requirement (a):
20x1 (18,000 x 10/12)* 15,000
20x2 20,000
20x3 22,000
Total lease payments 57,000
Divide by: Lease term (including rent-free
period) 3
Annual expense 19,000

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* The first two months are rent-free.

Journal entries:
Jan.
1, No entry
20x1
Dec. Rent expense (Lease 19,00
31, expense) Cash 0 15,000
20x1 Rent payable (squeeze) 4,000

Dec. Rent expense (Lease 19,00

31, expense) Rent payable 0
20x2 (squeeze) 1,000 20,000
Cash
Dec. Rent expense (Lease 19,00
31, expense) Rent payable 0
20x3 (squeeze) 3,000 22,000
Cash

Requirement (b):
➢ Rent payable, ₱3,000

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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Solution:
Rentals due at the beginning of the year:
200,00
Annual rent 0
6.75
PV of annuity due of 1 @10%, n=10 9024
1,351,8
PV of lease payments 05

Paymen Interes Amortizat Present

Date ts t ion value
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
1/1x3 200,000 106,699 93,301 973,685

➢ Right-of-use asset as of Dec. 31, 20x1: 1,351,805 x

9/10
= 1,216,625
➢ Lease liability as of Dec. 31, 20x1: 1,066,986 +
200,000
= 1,266,986

Rentals due at the end of the year:

200,00
Annual rent 0
PV of ordinary annuity of 1 @10%, 6.14
n=10 4567
1,228,9
PV of lease payments 13

Paymen Interes Amortizat Present

Date ts t ion value
1/1/x1 1,228,913
12/31x 200,000 122,891 77,109 1,151,804
1
12/31/ 200,000 115,180 84,820 1,066,984
x2

➢ Right-of-use asset as of Dec. 31, 20x1: 1,228,913 x

9/10
= 1,106,022
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➢ Lease liability as of Dec. 31, 20x1: 1,151,804

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2. D
Rentals due at the beginning of the year:
Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
106,69
1/1x3 200,000 9 93,301 973,685

➢ Depreciation: 1,351,805 ÷ 10 = 135,181

Rentals due at the end of the year:

Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,228,913
12/31x 200,000 122,891 77,109 1,151,804
1
115,18
12/31/ 200,000 0 84,820 1,066,984
x2

➢ Depreciation: 1,228,913 ÷ 10 = 122,891

3. A
Rent due at beginning:
Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986

Total lease liability as of 12/31/x1 (1,066,986 1,266,98

+ 200,000) 6
Allocation:
Current (payment due on 1/1/x2) 200,000
Noncurrent (PV on 1/1/x2) 1,066,98

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6
1,266,98
As 6
allocated

Rent due at end:

Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,228,913
12/31x 200,000 122,891 77,109 1,151,804
1
12/31/ 200,000 115,180 84,820 1,066,984
x2

4. A
PV factors @10%,
Lease payments n=10 PV
Fixed 200,00 PV of ord. annuity of 6.1445 1,228,91
payments 0 1 67 3
Payable on
guaranteed 30,000( 0.3855
RV a)
PV of 1 43 11,566
1,240,47
9

(a)
80,000 guaranteed residual value - 50,000 estimate = 30,000
amount expected to be payable on the residual value guarantee

➢ Right-of-use asset as of Dec. 31, 20x1: 1,240,479 x

9/10
= 1,116,431

➢ Lease liability:
Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,240,479
12/31x 200,000 124,048 75,952 1,164,527
1
12/31/ 200,000 116,453 83,547 1,080,980
x2

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5. B
Lease payments PV factors @10%, n=8 PV

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Fixed
200,00 PV of ord. annuity of 5.3349 1,066,98
payments 0 1 26 5
Payable on
guaranteed 10,000( 0.4665
RV b)
PV of 1 07 4,665
1,071,65
0

(a)
80,000 guaranteed residual value - 70,000 estimate = 10,000
amount expected to be payable on the residual value guarantee

Carrying amount of lease liability on Dec.

31, 20x2 (c) 1,080,980
Revised carrying amount on Jan. 4, 20x3 1,071,650
Adjustment – decrease 9,330
(c)
See original amortization table above

➢ Right-of-use asset:
Right-of-use asset, 1/4/x3 (1,240,479 x 992,
8/10) 383
(9,
Adjustment 330)
983,
Revised carrying amount, 1/4/x3 053

Divide by: 8
122,
Revised annual depreciation 882

983,
Revised carrying amount, 1/4/x3 053
(122,
Depreciation in 20x3 882)
86
Right-of-use asset, 12/31/x3 0,171

➢ Lease liability:
Paymen Interes Amortizat Present
Date ts t ion value
1/4/x3 1,071,650
12/31/ 200,000 107,165 92,835 978,815
x3

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6. C
PV factors @10%,
Lease payments n=10 PV
Fixed 200,00 PV of annuity due of 1,351,
6.7590
payments 0 1 24 805
Purchase 100,00 0.3855
option 0 PV of 1 43 38,554
1,390,3
5
9

Paymen Interes Amortizat Present

Date ts t ion value
1/1/x1 1,390,359
1/1/x1 200,000 - 200,000 1,190,359
119,03
1/1x2 200,000 6 80,964 1,109,395

7. A

❖ Initial
measurement: PV factors @10%,
n=10 PV
Lease payments
Fixed 200,00 PV of annuity due 6.7590 1,351,8
payments 0 (a) of 1 24 05
Purchase 380,00 0.3855 146,50
option 0 PV of 1 43 6
1,498,
311

Payments for activities or costs that do not transfer

(a)

goods or services to the lessee (e.g., the ₱5,000

insurance cost in the problem) are not a separate
component of the contract. The payments for these
items are included in the total consideration that is
allocated to the separately identified components of the
contract.

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1,498,31
Initial amount of lease liability 1

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Add: Initial direct cost 30,000

1,528,31
Right-of-use asset – Jan. 1, 20x1 1

❖ Subsequent measurement:
Paymen Interes Amortizat Present
Date ts t ion value
1/1/x1 1,498,311
1/1/x1 200,000 - 200,000 1,298,311
1/1x2 200,000 129,831 70,169 1,228,142

➢ Lease liability as of Dec. 31, 20x1:

1,228,142 + 200,000 = 1,428,142

➢ Right-of-use asset as of Dec. 31, 20x1:

1,528,311 x 11/12 = 1,400,952

8. C
Allocation of total consideration:
Stand-alone prices Allocation
156,00 (200K x 160,0
Rent 0 156/195) 00
(200K x 40,00
Maintenance 39,000 39/195) 0
200,0
Totals 195,000 00

Lease liability as of Jan. 1, 20x1:

160,00
Annual rent 0
6.75
PV of annuity due of 1 @10%, n=10 9024
1,081,4
PV of lease payments
44

Paymen Interes Amortizat Present

Date ts t ion value
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1/1/ 1,081,444
x1
1/1/ 160,000 - 160,000 921,444
x1
1/1x2 160,000 92,144 67,856 853,558

Journal entry:
Jan Right-of-use asset 1,081,
. 1, Maintenance expense (Prepaid 444
20 asset) 40,000 200,0
x1 Cash 00
Lease liability 921,4
44

Total lease-related expenses in 20x1:

Interest expense 92,144
Depreciation (1,081,444 ÷ 10) 108,144
Maintenance 40,000
Total lease-related expenses in 240,288
20x1

9. A
Journal entry:
Jan Right-of-use asset 1,181,
. 1, Maintenance expense (Prepaid 444
20 asset) 40,000 200,0
x1 Cash 00
Lease liability 921,4
Provision for restoration costs 44
(ARO) 100,0
00

10. D
❖ Initial measurement of lease liability & right-
of-use asset:
Annual payments (due at beg. of each
yr.) 200,000
PV of an annuity due of 1 @10%, 6.7590
n=10 24
1,351,8
Total 05

❖ Amortization table:

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Paymen Interes Amortizat Present

Date ts t ion value
1/1/x1 1,351,805
1/1/x1 200,000 - 200,000 1,151,805
1/1x2 200,000 115,181 84,819 1,066,986
1/1x3 200,000 106,699 93,301 973,685

➢ 20x3:
❖ The revised lease payments are computed as follows:
200,00
Original payments 0
108/10
Multiply by: Change in CPI 0
216,00
Revised lease 0

payments
❖ The revised lease liability is computed as follows:
Revised lease payments 216,000
5.86841
PV of an annuity due of 1 @10%, n=8 9
1,267,5
Revised carrying amount – 1/1/x3 78

❖ Adjustment to the lease liability (and right-of-use

asset):
Carrying amount of lease liability - 1,173,6
1/1/x3 (a) 85
1,267,5
Revised carrying amount - 1/1/x3 78
Adjustment (Increase) 93,893
Carrying amount of lease liability – 1/1/x3: ₱973,685 carrying
(a)

amount on 1/1/x3 after 3rd payment add back ₱200,000 = ₱1,173,685

carrying amount on 1/1/x3 before 3rd payment.

❖ Revised amortization table:

Inter Amortizat Present
Date Payments est ion value
1/1/ 1,267,578
x3
1/1/ 216,000 - 216,000 1,051,578
x3
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1/1/ 216,000 105,1 110,842 940,736

x4

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58

➢ Lease liability as of end of Year 3:

940,736 + 216,000 = 1,156,736

➢ Right-of-use asset as of end of Year 3:

1,351,80
Initial measurement
5
Depreciation in Years 1 & 2 [(1,351,805 ÷
(270,361
10)
)
x 2 yrs.]
1,081,44
Carrying amount at the end of Year 2 4
Adjustment 93,893
1,175,33
Revised carrying amount
7
(146,917
Depreciation in Year 3 (1,175,337 ÷ 8 yrs.)
)
1,028,4
Right-of-use asset at end of Year 3
20

11. A
➢ Initial measurement:
Payment PV of 1 PV
Year s @10% factors PV
20x1 150,000(a) n=1 0.909091 136,364
20x2 230,000(b) n=2 0.826446 190,083
20x3 260,000(c) n=3 0.751314 195,342
521,789
(a)
200,000 x 9/12 = 150,000
(b)
200,000 + 30,000 = 230,000
(c)
230,000 + 30,000 = 260,000

➢ Subsequent measurement: Lease liability

Payme Int. Amortizat Present
Date nts expense ion value
1/1/x1 521,789
12/31/x 52,179 97,821 423,968
1 150,000
12/31/x 42,397 187,603 236,365
2 230,000
12/31/x
3 260,000 23,635 236,365 -

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➢ Subsequent measurement: Right-of-use asset

Initial amount of lease liability 521,789
Lease bonus 20,000
Initial measurement of right-of-use asset 541,789
Divide by: 3
Annual depreciation 180,596

52,
Interest expense 179
180,
Depreciation expense
596
Contingent rent [5% x (9M – 8M)] 50,000
282,
Total lease-related expenses in 20x1 775

12. D
Paymen
Year ts
Lease bonus 20,000
150,0
20x1 00
230,0
20x2 00
260,0
20x3 00
660,0
Total 00

Divide by: 3
Annual lease 220,0
expense 00

220,
Annual lease expense 000
Contingent rent [5% x (10M – 8M)] 100,000
320,
Total lease-related expenses in 20x2 000

Lease bonus 20,000

20x1 150,000

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20x2 230,000

Total payments to date 400,000

Total lease expenses to date
(220K x 2) 440,000
Rent payable as of Dec. 31,
20x2 40,000

Alternative solution: Journal entry

Debit Credit
440,00
Rent expenses 0
Cash 400,000
Rent payable
(squeeze) 40,000

RECONCILIATION:

13. B
➢ Scenario 8.1:
PV factors @10%,
Lease payments n=10 PV
Fixed 200,00 PV of annuity due of 6.7590 1,351,
payments 0 1 24 805
Payable on
guaranteed 20,000( 0.3855
RV a)
PV of 1 43 7,711
1,359,51
Initial measurement of right-of-use 6
asset
Divide by: Shorter of useful life and lease term 10
Annual depreciation 135,952

(a)
100,000 guaranteed residual value - 80,000 estimate = 20,000
amount expected to be payable on the residual value guarantee

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➢ Scenario 8.2:
PV factors @10%,
Lease payments n=10 PV
Fixed 200,00 PV of annuity due of 6.7590 1,351,
payments 0 1 24 805
Purchase 100,00 0.3855
option 0 PV of 1 43 38,554
1,390,35
Initial measurement of right-of-use asset 9
Less: Residual value at the end of 12th year 60,000
1,330,35
Depreciable amount 9
Divide by: Useful life 12
Annual depreciation 110,863

14. A

15. B

STEP 1: Make a pro-forma amortization table and place

available information:
Paymen Interes Amortizat Present
Date ts t ion value
12/31/
x1
1/1x2 200,000 1,066,986
1/1x3 200,000

This is the lease liability as of

12/31/x1, net of current portion.

STEP 2: Squeeze
Paymen Interes Amortizat Present
Date ts t ion value
12/31/
x1
1/1x2 200,000 1,066,986
1/1x3 200,000 106,699 93,301 973,685

Optional reconciliation:
Total lease liability as of 12/31/x2 (973,685 + 1,173,78
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200,000) 5
Allocation:
Current (payment due on 1/1/x3) 200,000
Noncurrent (PV on 1/1/x3) 973,685
1,173,68
As allocated 5

PROBLEM 5: CLASSROOM ACTIVITY

Solution:
Requirement (a):
Identifying a lease
Essential Guidance
elements
1. Identified asset - The leased premises are an
identified asset because they
are physical distinct (i.e., the
5th, 6th and 7th floors of the
building).

2. Right to obtain - Broccoli, Inc. has the exclusive

substantially all use of the leased premises
of the throughout the duration of the
economic contract. Therefore, Broccoli,
benefits Inc. has the right to obtain
substantially all of the
economic benefits of the leased
premises.
3. Right to direct - Broccoli, Inc. has the right to
the use direct how and for what
purpose the asset is used
throughout the period of use
because the asset’s use is
predetermined (i.e., as office
space) and the lessor is
precluded from changing that
predetermined use.

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* Protective rights: The

contractual restrictions on the
improvements and alterations on
the leased premises are designed
simply to protect the lessor’s
interest in the asset.

❖ Conclusion: The contract is a lease.

Requirement (b):
➢ Initial measurement:
Fixed payments 300,000
Multiply by: PV of an annuity due of ₱1
@39%, n=3 2.236996
Total 671,099

Notes:
➢ The 39% is the lessee’s incremental borrowing rate.
➢ The lease term is 3 years.
- The termination option is disregarded because
Broccoli, Inc. is reasonably certain not to exercise
it.
- The renewal option is also disregarded because
it does not meet the definition of a “non-
cancellable period” under PFRS 16. The lease is
enforceable only during the first three years. After
that, each of the lessor and the lessee can
unilaterally elect not to extend the arrangement
and doing so imposes no penalty. Moreover, the
renewal is subject to new terms and conditions,
and thus creates a new contract different from the
existing one.

Jan. Right-of-use asset 671,0

1, Cash 99 300,00
20x1 Lease liability 0
to record the lease, together 371,09
with the payment of the first annual
9
rent due at the beginning of the
year

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Security deposit paid 50,000

Multiply by: PV of ₱1 @39%, n=3 0.372354
Present value of security deposit receivable 18,618

Jan. Security deposit 50,00

1, Unrealized loss – “Day 1” 0
20x1 difference 31,38 50,000
Cash 2 31,382
Unearned interest (50,000 –
18,618)
to record the payment of the
security deposit

Side notes:
The security deposit is disclosed as follows:
Security deposit 50,000
Unearned interest (31,382)
Carrying amt. - Jan. 1, 20x1 18,618

The “Day 1” difference is recognized in full (in profit or

loss) on January 1, 20x1. The Unearned interest will be amortized
as interest income over the lease term.
Under the PFRS, refundable deposits are considered as
loans and receivable financial asset measured at amortized
cost using the effective interest rate method. The initial
recognition may result to day-one loss.
source: https://www.grantthornton.com.ph/globalassets/spdf_illustrative-fs-
compilation.pdf

➢ Subsequent

measurement: Lease

liability:
Interes
Paymen t Amortizati Present
Date ts expens on value
e
Jan. 1,
20x1 671,099
Jan. 1,
20x1 300,000 - 300,000 371,099
Jan. 1,
20x2 300,000 144,729 155,271 215,828
Jan. 1,
20x3 300,000 84,172 215,828 0
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Right-of-use asset:
➢ 671,099 ÷ 3 yrs. = 223,700 annual depreciation

Security deposit:
Interest Unearned Present
Date income interest value
Jan.
1, 18,618
20x1
Jan. 1,

IGNORED
20x2 7,261 25,879
Jan. 1,
20x3 10,093 35,972
Jan. 1,
20x4 14,028 50,000

Other journal entries:

Dec. Interest expense 144,7
31, Lease liability 29 144,72
20x1 to recognize interest 9
expense
Dec. Depreciation expense 223,7
31, Right-of-use 00 223,70
20x1 asset 0
to recognize
depreciation expense
Dec. Unearned interest 7,26
31, Interest income 1 7,26
20x1 to record the winding-up of 1
discount on the security deposit
Jan. Lease liability 300,0
1, Cash 00 300,00
20x2 to record the lease 0
payment for 20x2

Requirement (c):
Broccoli, Inc.
Statement of financial
position As at Dec. 31, 20x1
Noncurrent assets
447,
Right-of-use asset (671,099 – 223,700) 399
Security deposit (see amortization table above and side 25,
note below) 879
Current liabilities:
300,
liability (a) by angelika reyes
Lease Downloaded 000
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Noncurrent
liabilities: 215,
828

Lease liability as of Dec. 31, 20x1:

(a)

➢ Using amortization table: 215,828 + 300,000 =

515,828
➢ Using journal entries: 371,099 + 144,729 adjustment
= 515,828

Current portion: (the payment due on 1/1/x2) or

(155,271 from amortization table + 144,729
300,0
adjustment on 12/31/x1)
00
Noncurrent portion: (515,828 total liability –
300,000 current portion) or (215,828 amortization on
215,8
1/1/20x3)
28
515,
Total lease liability, 12/31/x1
8
28

Broccoli, Inc.
Statement of comprehensive income
For the year ended Dec. 31, 20x1
Unrealized loss – “Day 1” difference 31,382
Interest income (see amortization table 7,2
above) 61
223,7
Depreciation expense 00
Interest expense (see amortization table
above) 144,729

Side note:
The security deposit is disclosed in the notes as
follows: Security deposit 50,000
Unearned interest (31,382 -
7,261) (24,121)
Carrying amt. - Dec. 31, 20x1 25,879

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PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:

Identifying a lease
Essential Guidance
elements
1. Identified asset - The car is implicitly
specified at the time that the
asset is made available for
use by the customer.

- Substitution right –
Supplier Y’s substitution
rights is not substantive
because it is not available to
Supplier Y throughout the
period of use.

Based on the foregoing, the

car is an identified asset.
2. Right to obtain - Customer X has the exclusive
substantially all use of the car throughout the
of the duration of the contract.
economic Therefore, Customer X has
benefits the right to obtain
substantially all of the
economic benefits of the car.

3. Right to direct Customer X has the right to

the use direct how and for what
purpose the asset is used
throughout the period of use

❖ Conclusion: The contract is a lease.

2. Solution:
Identifying a lease

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Essential Guidance
elements
1. Identified asset - There is no identified asset
because Supplier Y’s
substitution rights are
substantive.

2. Right to obtain
substantially all
(irrelevant)
of the
economic
benefits
3. Right to direct
the use (irrelevant)
❖ Conclusion: The contract is NOT (does NOT
contain) a lease.

3. Solutions:

Requirement (a): Journal entries

Lease payments PV factors @10%, n=4 PV
Annual 100,0 PV of annuity due 3.48685
rent 00 of 1 2 348,685
Purch. 50,0 0.68301
opt. 00 PV of 1 3 34,151
382,83
6

Jan. Right-of-use asset 382,8

1, Lease liability 36 282,83
20x1 Cash 6
100,00
0

Amortization
table:
Interes
t Amortizati Present
Paymen expens on value
Date ts
e
Jan. 1,
20x1 382,836
Jan. 1,
20x 100,000 - 100,000 282,836
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Jan.
1, 100,000 28,284 71,716 211,120
20x2
Jan.
1,
20x3 100,000 21,112 78,888 132,232
Jan.
1,
20x4 100,000 13,223 86,777 45,455
Jan. 50,00
1,
20x5 0 4,545 45,455 0

De Interest expense 28,28

c
Lease liability 4 28,28
.
31, 4
20
x1
De Depreciation expense [(382,836 – 25K) 71,56
c ÷ 5 yrs.] 7 71,56
.
Right of use asset 7
31,
20
x1
Jan. Lease liability 100,0
1, Cash 00 100,0
20x
2 00

Requirement (b): Partial financial statements

Chirp Co.
Statement of financial
position As at Dec. 31, 20x1
Noncurrent assets
Right-of-use asset (382,836 – 71,567) 311,269
Current liabilities:
Lease liability (a) 100,000
Noncurrent liabilities:
Lease liability (a) 211,120

Lease liability as of Dec. 31, 20x1:

(a)

➢ Using amortization table: 211,120 + 100,000 =

311,120
➢ Using journal entries: 282,836 + 28,284 adjustment =
311,120

Current portion: (the payment due on 1/1/x2) or on

(71,716 from amortization table + 28,284 adjustment 12/31/x1)
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Noncurrent portion: (311,120 total liability –

100,0
00
100,000 current portion) or (PV on Jan. 1, 20x2 in 211,1

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amort. table) 20
311,1
Total lease liability, 12/31/x1 20

Chirp Co.
Statement of comprehensive income
For the year ended Dec. 31, 20x1
Depreciation expense 28,284
Interest expense (see amortization table
above) 71,567

4. Solution:
20x1 (12K x 9/12) 9,000
20x2 12,000
20x3 12,000
20x4 12,000
Total 45,000
Divide by: Lease
term 4
Annual lease 11,25
expense 0

Jan. 1,
20x1 No entry
Dec. Rent expense 11,25
31, Cash 0 9,000
20x1 Rent payable 2,250
Dec. Rent expense 11,25
31, Rent payable 0
20x2 Cash 750 12,000
Dec. Rent expense 11,25
31, Rent payable 0
20x3 Cash 750 12,000
Dec. Rent expense 11,25
31, Rent payable 0
20x4 Cash 750 12,000

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