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Problem 28 30

1. The total interest revenue Cabarroguis will earn over the 5-year lease term on the first lease is P516,000. The interest revenue to report for 2021 is P198,720. 2. The total interest revenue Cabarroguis will earn over the 8-year lease term on the second lease is P2,576,034. The interest revenue to report for 2021 is P544,860. 3. Cabarroguis uses the present value of an annuity formula to calculate the total interest to be earned on both direct financing leases.

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91 views

Problem 28 30

1. The total interest revenue Cabarroguis will earn over the 5-year lease term on the first lease is P516,000. The interest revenue to report for 2021 is P198,720. 2. The total interest revenue Cabarroguis will earn over the 8-year lease term on the second lease is P2,576,034. The interest revenue to report for 2021 is P544,860. 3. Cabarroguis uses the present value of an annuity formula to calculate the total interest to be earned on both direct financing leases.

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anneliban499
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You are on page 1/ 14

PROBL E M

28-3 0
DIRECT FINANCING LEASE
DIRECT FINANCING LEASE
A direct financing lease is a financing arrangement in which the lessor acquires assets and leases them
to its customers, with the intent of generating revenue from the resulting interest payments. A direct
financing lease is usually offered by financing institutions, such as equipment leasing companies.
Under this leasing arrangement, the lessor cannot be a manufacturer or dealer.

Accounting Considerations:

a. Gross Investment
b. Net investment in the lease
c. Unearned Interest Income
d. Initial Direct Cost
PROBLEM
Cabarroguis leases computer equipment to customers under direct financing lease.
First Lease
The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options.
Cabarroguis wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000. The present value of an
annuity due of 1 at 8% for 5 years is 4.312. On January 1, 2021, Cabarroguis Company leased the equipment to Quirino
Company.

Second Lease
Cabarroguis expects a 12% return on its net investment on this second lease. At the end of the lease term, the equipment
will revert to Cabarroguis Company. On January 1, 2021, computer equipment is leased to a lessee with the following
information:
Cost of equipment to Cabarroguis P 5,500,000
Residual value-unguaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2021
1. What is the total interest revenue that
cabarroguis will earn over the lease term on the
first lease?

Cost P 3,234,000
PV annuity due of 1 @ 8% for 5yrs 4.312
Annual Payment 750,000
Multiply by: years 5
Total: 3,750,000
Less: Cost 3,234,000
Total Interest to be earned – First Lease 516,000
Journal Entry
To record the direct financing lease:
Lease receivable 3,750,000
Equipment 3,234,000
Unearned interest Income. 516,000
2. What is the interest revenue to be reported by
Cabarroguis for the year 2021 on the First Lease?

Cost P 3,234,000
Less: Annual Payment 750,000
Total 2,484,000
Multiply by: interest rate 8%
Interest Revenue -2021 (First Lease) 198,720
Journal Entry
To record the interest income:
Unearned interest Income. 198,720
Interest Income. 198,720
Date Payment Interest. Principal. Present
Value
1/1/21 3,234,000
1/1/21 750,000 - 750,000 2,484,000
1/1/22 750,000 198,720 551,228 1,932,712
1/1/23 750,000 154,617 595,383 1,337,329
1/1/24 750,000 106,986 643,014 694,315
1/1/25 750,000 55,685 694,315 -
The PV annuity due of 12% over 8 years can be computed as:
[1 – (1+12%) -7] + 1 = 5.5638
12%

The present value of 12% for 8 years can also be computed as:
(1+12%)-8 = 0.4039
3. What is the total interest revenue that
Cabarroguis will earn over the lease term on the
second lease?

Lease receivable (P959,500 x 8 + P400,000) P


8,076,000
Present value of the lease payments:
Unguaranteed residual value
(P400,000 x 0.4039) P 161,560
Present value of lease payments
(P959,500 x 5.5638) 5,338,466 5,499,966
Total interest over the lease term P 2,576,034
This can be solved alternatively as:
Gross rentals (959,500 x 8) P 7,676,000
Add: Unguaranteed residual value 400,000
Gross Investment 8,076,000
Less: Cost of Equipment 5,500,000
Total Interest Revenue – Second Lease 2,576,000
Journal Entry

To record the direct financing lease


Lease Receivable 8,076,000
Equipment 5,500,000
Unearned Interest Inccome 2,576,000
4. What is the interest revenue to be reported by
Cabarroguis for the year 2021 on the Second Lease?

Cost of Equipment 5,500,000


Less: Annual rental payable in advance 959,500
Total 4,540,500
Multiply by: implicit interest rate 12%
Interest Revenue – 2021 (Second Lease) 544,860
Date Payment Interest. Principal. Present Value
1/1/21 5,500,000
1/1/21 959,500 - 959,500 4,540,500
1/1/22 959,500 544,860 414,640 4,125,860
1/1/23 959,500 495,103 464,397 3,661,463
1/1/24 959,500 403,376 556,124 3,105,339
1/1/25 959,500 372,641 586,859 2,518,480
1/1/26 959,500 302,218 657,282 1,861,198
1/1/27 959,500 223,344 736,156 1,125,042
1/1/28 959,500 135,005 824,496 300,547
1/1/29 400,000 99,453 300,547 -

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