Borbon, Clarissa D.

BSA-2B

Problem 1 

On January 1, 2020, Petty Company leased a machine with the following provisions. 

Annual lease payment in advance at the beginning of each year,  starting January 1, 2020 1,000,000
Lease term 10 years Useful life of machine 12 years Implicit interest rate in the lease 12%   PV of an
ordinary annuity of 1 at 12% for 10 periods 5.650 PV of an annuity of 1 in advance at 12% for 10 periods
6.328 PV of 1 at 12% for 10 periods 0.322 .

The entity has an option to purchase the machine on January 1, 2030 by paying P200,000. At
the commencement date, it is reasonably certain that the purchase option will be exercised. 

Required: 
Prepare journal entries on the books of Petty Company for 2020 and 2021. 

COMPUTATIONS    
Fixed payment 1,000,000

Ordinary Annuity 6.328 0.12

PV of 1 0.322
Purchase Option 200,000

PV of lease payment 6,328,000

PV Purchase Option 64,400
Total Lease Liability 6,392,400

AMORTIZATION        
DATE PAYMENT INTEREST PRINCIPAL PRESENT VALUE
01/01/2020 6,392,400.00
01/01/2020 1,000,000 1,000,000.00 5,392,400.00
31/12/2020 1,000,000 647,088.00 -352,912.00 5,039,488.00
31/12/2021 1,000,000 604,738.56 -395,261.44 4,644,226.56
31/12/2022 1,000,000 557,307.19 -442,692.81 4,201,533.75
31/12/2023 1,000,000 504,184.05 -495,815.95 3,705,717.80
31/12/2024 1,000,000 444,686.14 -555,313.86 3,150,403.93
31/12/2025 1,000,000 378,048.47 -621,951.53 2,528,452.40
31/12/2026 1,000,000 303,414.29 -696,585.71 1,831,866.69
31/12/2027 1,000,000 219,824.00 -780,176.00 1,051,690.70
31/12/2028 1,000,000 126,202.88 -873,797.12 177,893.58
31/12/2029 0 21,347.23 21,347.23 199,240.81
 Journal Entry 2020
To record the acquisition of the equipmemt under a finance lease
Right to use asset 6,392,400.00
Liability 6,392,400.00
To record the first payment on January 1, 2020
Lease Liability 1,000,000.00
Cash 1,000,000.00
To accrue interest for 2020 on December 31, 2020
Interest Expense 647,088.00
Accrued Interest Payable 647,088.00
To record depreciation
Depreciation 532,700.00
Accumulated depreciation 532,700.00

Journal Entry 2021  

To record the second payment on January 1, 2021
Accrued Interest Payable 647,088.00
Lease Liability -352,912.00
Cash 1,000,000.00
To accrue interest for 2020 on December 31, 2020
Interest Expense 604,738.56
Accrued Interest Payable 604,738.56
To record depreciation
Depreciation 532,700.00
Accumulated depreciation 532,700.00

Problem 2 

On January 1, 2020, Summer Company negotiated a 15-year lease for a building. The building has useful 
life of 20 years. 
Before occupancy, the lessee incurred leasehold improvement of P600,000 with useful life 5 years. 

The lessee is required to restore the building upon expiration of the lease. The estimated cost of 
restoration is P644,000. 

Annual payments of P1,000,000 are payable to the lessor on December 31 of each of the 15 years of the 
lease term. The lease was negotiated to assure the lessor a 10% rate of return. 

PV of an ordinary annuity of 1 at 10% for 15 periods 7.606 

PV of an annuity of 1 in advance at 10% for 15 periods 8.367 

Required: 

Prepare journal entries on the books of Summer Company for 2020. 

 Return 10%
Annual payments 1,000,000
Periods 15
10%
PV ordinary annuity 7.606
PV of annuity 1 in advance 8.367
Leasehold improvement 600,000
Cost of Restoration 644,000

AMORTIZATION        
DATE PAYMENT INTEREST PRINCIPAL PRESENT VALUE
01/01/2020 7,606,000.00
31/12/2020 1,000,000 760,600.00 -239,400.00 7,366,600.00
31/12/2021 1,000,000 736,660.00 -263,340.00 7,103,260.00
31/12/2022 1,000,000 710,326.00 -289,674.00 6,813,586.00
Journal Entry 2020
To record the acquisition of the equipment under a operating lease
Right to use asset 7,606,000.00
Lease Liability 7,606,000.00

To record incurred leasehold improvement

Leasehold improvement 600,000.00
Cash 600,000.00

To record estimated cost of restoration

Right of use of asset 644,000.00
Cost of improvement 644,000.00

To record first payment 1/1/20

Interest Expense 760,600.00
Least Liability 239,400.00
Cash 1,000,000.00

To record depreciation for 2020

Depreciation 507,066.67
Accumulated Depreciation 507,066.67

To record depreciation of improvement

Depreciation of improvement 120,000.00
Accumulated Depreciation 120,000.00
 Problem 3 

On January 1, 2020, Berto Company leased a machinery with an estimated useful life of 8 years.

The contract is a six-year noncancelable lease with a 10% implicit interest rate. PV of an annuity

due of 1 at 10% for six periods 4.7908 

PV of 1 at 10% for six periods 0.5645

The lease contains neither a transfer of title to the lessee nor a purchase option.

The lease requires annual payments of P500,000 beginning January 1, 2020. 

The entity had a residual value guarantee of P400,000 when the machinery is returned to the lessor 
upon the lease expiration. 

Required: 

1. Prepare a table of amortization of the lease liability and interest expense. 

2. Prepare journal entries for 2020 and 2021. 

3. Prepare journal entry on January 1, 2026 to record the return of the machinery to the lessor. Assume 
the fair value of the asset is P450,000. 
4. Prepare journal entry on January 1, 2026 to record the return of the machinery to the lessor. Assume 
the fair value of the asset is P300,000.

Annual Payments 500,000

Residual Value 400,000
Lease Term 6
Useful Life 8
Implicit interest Rate 10%
PV of an annuity due of 1 4.7908
PV of 1 0.5645
percent 10%
periods 6

Computations
PV of rentals 2,395,400
PV of residual value 225,800
Lease Liability 1/1/20 2,621,200
Cost of right of use asset 2,121,200
AMORTIZATION        
DATE PAYMENT INTEREST PRINCIPAL PRESENT VALUE
01/01/2020 2,621,200.00
 -500,000.00 2,121,200.00
31/12/2021 500,000 212,120.00 -287,880.00 1,833,320.00
31/12/2022 500,000 183,332.00 -316,668.00 1,516,652.00
31/12/2023 500,000 151,665.20 -348,334.80 1,168,317.20
31/12/2024 500,000 116,831.72 -383,168.28 785,148.92
31/12/2025 500,000 78,514.89 -421,485.11 363,663.81
31/12/2026 400,000 36,366.38 -363,633.62 30.19

Jounal Entry 2020

01/01/2020 Right of use asset 2,621,200.00
Lease Liability 2,621,200.00

Lease Liability 500,000

Cash 500,000

31/12/2020 Interest Expense 212,120.00

Accrued Interest Payable 212,120.00

Depreciation 370,200
Accumulated Depreciation 370,200

Journal Entry 2021

01/01/2020 Right of use asset 1,516,652.00
Lease Liability 1,516,652.00

Interest Expense 183,332.00

Lease Liability (316,668)
Cash 500,000

31/12/2020 Interest Expense 183,332.00

Accrued Interest Payable 183,332.00

Depreciation 370,200
Accumulated Depreciation 370,200

Fair Value P 450,000

Journal Entry
Accumulated depreciation 2,121,200
 Lease Liability 363,663.81
Accrued Interest Payable 36,366.38
Equipment 2,621,200.00

Cash 50,000
Gain 50,000.00

Fair Value P 300,000

Journal Entry
Accumulated depreciation 2,121,200
Lease Liability 363,663.81
Accrued Interest Payable 36,366.38
Equipment 2,621,200.00

Cash 100,000
Gain 100,000