Quiz No. 14 LEASES Feb.

29, 2024

When using PV factors, round them off to four decimal places. Round off your final answers to the nearest
peso.

1) ABC Company entered into a lease contract with a non-cancellable period of 4 years. In addition, ABC
also has the option to extend the lease term for an additional 3 years. Annual lease payments of ₱750,000 are
due at the beginning of each year. Incremental borrowing rate is 9%. Under each of the following
independent scenarios, determine the initial measurement of the lease liability, the initial measurement of the
ROU asset, and the annual depreciation: (2 points each)

Some lease contracts contain provisions giving the lessee the option to extend the lease term and/or
pre-terminate the lease term. In these cases, the total lease term is determined as the non-cancellable
lease term, together with:
1) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that
option; and
2) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise
that option.

a. Extension option is reasonably expected to be exercised.

PV
factor Cash flows
4,114,42
5.4859 750,000 5 PV of annual lease payment
4,114,42
5 Initial measurement of the lease liability
4,114,42
5 Initial measurement of the ROU asset
7 Divide by: depreciation period of 7 years
587,775 Annual depreciation

Since the extension option will be exercised, the total lease term to be considered is 7 years = 4 years +
3-year extension period.

b. Extension option is not reasonably expected to be exercised.

PV
factor Cash flows
2,648,47
3.5313 750,000 5 PV of annual lease payment
2,648,47
5 Initial measurement of the lease liability
2,648,47
5 Initial measurement of the ROU asset
4 Divide by: depreciation period of 4 years
662,119 Annual depreciation

Total lease term to be considered is 4 years only.

2) ABC Company entered into a six-year lease agreement. The lease requires annual lease payments of
₱600,000 to be made every January 1 of each year, starting in 2023. In addition, ABC also has the option
whether to terminate the lease on December 31, 2026 (i.e., at the end of the 4th year), but it is required to
pay a ₱400,000 termination penalty. Incremental borrowing rate is 8%. Under each of the following
independent scenarios, determine the initial measurement of the lease liability, the initial measurement of the
ROU asset, and the annual depreciation: (2 points each)
a. ABC expects not to exercise the termination option.

PV
factor Cash flows
2,995,62
4.9927 600,000 0 PV of annual lease payment
2,995,62
0 Initial measurement of the lease liability
2,995,62
0 Initial measurement of the ROU asset
6 Divide by: depreciation period of 6 years
499,270 Annual depreciation

>The non-cancellable portion of the lease term is 4 years and the period subject to termination period
is 2 years. Since the termination option will not be exercised, the lease is set to run for 6 years.
>The number of periods used in the computation is based on the expectations of exercising the
termination option.
>No termination penalty shall be included in the computations if the lease term reflects the entity’s
expectation of not exercising the termination option.

b. ABC expects to exercise the termination option.

PV
factor Cash flows
0.735 400,000 294,000 PV of termination penalty
2,146,26
3.5771 600,000 0 PV of annual lease payment
2,440,26
0 Initial measurement of the lease liability
2,440,26
0 Initial measurement of the ROU asset
4 Divide by: depreciation period of 4 years
610,065 Annual depreciation

The amount of termination penalty shall be included only when the lease term reflects the entity’s
expectation of exercising the termination option.

3) On July 1, 2023, ABC Company entered into a 12-month lease of a commercial space. The following is
the schedule of semi-annual lease payments: December 31, 2023, ₱500,000; and June 30, 2024, ₱700,000.
Prepare one compound journal entry on December 31, 2023 and June 30, 2024, respectively. (2 points each)

There are leases exempt from the requirement of recognizing lease liability and ROU asset. These are
short-term leases and lease of low-value assets. Instead, the lease payments are recognized as rent
expense on a straight-line basis over the lease term unless another systematic basis applies.

Leases with lease term of 12 months or less are considered as short-term leases, provided there is no
related purchase option.

12/31/202
3 Rent expense [(500,000 + 700,000) / 2] 600,000
Cash 500,000
Rent payable 100,000
 6/30/2024 Rent expense [(500,000 + 700,000) / 2] 600,000
Rent payable 100,000
Cash 700,000

4) Due to work-from-home setup given as an option to its employees, ABC Company rented 100 laptops for
the next three years, starting January 1, 2023. Annual lease payments are due to be paid on the following
dates:
December 31, 2023 ₱1,400,000
December 31, 2024 1,000,000
December 31, 2025 810,000
Prepare one compound journal entry on December 31, 2023, December 31, 2024, and December 31, 2025,
respectively. (2 points each)

The assessment of whether an underlying asset is low-value or not shall be based on its value when it
is brand new. PFRS 16 does not mention the use of quantitative thresholds, but according to the
related Basis for Conclusions, the standard-setting body has in mind that low-value assets are those
with value of USD5,000 or less (roughly Php250,000 or less). Further, to be qualified as a lease of low-
value asset, the underlying asset shall not be subleased. Examples of low-value assets include, but not
limited to, laptops, tables, phones, small vehicles, and small items of furniture and equipment.

Rent expense [(1,400,000 + 1,000,000 + 810,000) /

12/31/2023 3] 1,070,000
Prepaid rent 330,000
Cash 1,400,000

Rent expense [(1,400,000 + 1,000,000 + 810,000) /

12/31/2024 3] 1,070,000
Cash 1,000,000
Prepaid rent 70,000

Rent expense [(1,400,000 + 1,000,000 + 810,000) /

12/31/2025 3] 1,070,000
Cash 810,000
Prepaid rent 260,000

5) On January 1, 2023, ABC Company entered into a five-year lease contract covering a land. Annual lease
payments are due every January 1 of each year, starting on January 1, 2023. Lease payment due for 2023 is
₱1,000,000 and shall be increased by 10% every year starting with January 1, 2025 lease payment.
Incremental borrowing rate of ABC is 6%. Initial direct costs incurred by ABC amounted to ₱450,000.
Determine the initial measurement of the lease liability and the initial measurement of the ROU asset. (2
points each)

The amounts of lease payments usually increase periodically (due to rental escalations) and that they
are usually payable more frequently.

PV factor Cash flows

1/1/202 1,000,00
3 1 0 1,000,000 PV of 1/1/2023 lease payment
1/1/202 1,000,00
4 0.9434 0 943,400 PV of 1/1/2024 lease payment
1/1/202 1,100,00
5 0.89 0 979,000 PV of 1/1/2025 lease payment
 1/1/202 1,210,00
6 0.8396 0 1,015,916 PV of 1/1/2026 lease payment
1/1/202 1,331,00
7 0.7921 0 1,054,285 PV of 1/1/2027 lease payment
4,992,601 Initial measurement of the lease liability
450,000 Add: initial direct costs
5,442,601 Initial measurement of the ROU asset

6) On January 1, 2023, ABC Company entered into a four-year lease agreement covering an office space.
Annual lease payment is ₱800,000 per year. Incremental borrowing rate is 8%. Under each of the following
independent scenarios, determine the initial measurement of the lease liability and the initial measurement of
the ROU asset: (2 points each)
a. Lease payments split and payable every January 1 and July 1 of each year (semi-annually), starting
on January 1, 2023.

PV factor Cash flows

7.0021 400,000 2,800,840 PV of lease payments
2,800,840 Initial measurement of the lease liability
2,800,840 Initial measurement of the ROU asset

Number of periods = 4 x 2 = 8
Periodic discount rate = 8% / 2 = 4%
Semi-annual lease payments = 800,000 / 2 = 400,000

b. Lease payments split and payable every January 1, April 1, July 1 and October 1 (quarterly) of each
year, starting on January 1, 2023.

PV factor Cash flows

13.8493 200,000 2,769,860 PV of lease payments
2,769,860 Initial measurement of the lease liability
2,769,860 Initial measurement of the ROU asset

Number of periods = 4 x 4 = 16
Periodic discount rate = 8% / 4 = 2%
Quarterly lease payments = 800,000 / 4 = 200,000