1.

Subsequent measurement payments in advance

On January 1, 2014, X Co. entered into a 4-year lease agreement with
Y Co. for industrial equipment. Lease payment is Php100,000 payable
annually starting on January 1, 2014. X knows that the lessor
expects a 10% return on the lease. X has a 12% incremental borrowing
rate. The equipment is expected to have an estimated useful life of
5 years and a residual value of Php25,000. The lease agreement
contained a bargain purchase option at Php50,000 exercisable at the
end of the lease term. It is reasonably certain as of inception of
the lease that X will exercise the option in the future. X uses the
straight line method of depreciation.
Required:
a. Compute for the present value of the minimum lease payments and
make the journal entry to record the finance lease.
b. Prepare the amortization table related to the finance lease
liability and journalize all the relevant entries for 2014
(including adjustments related to the leased asset).
c. For January 1, 2018, journalize the entry to reflect the bargain
purchase option.
2. Subsequent measurement payments at year-end; and Actual purchase
of the leased asset.
On January 1, 2014, X Co. leased a machine from Y Co. Information on
the lease contract is shown below:
Annual lease payment payable at the end of each year
Lease term
Useful life
Implicit interest rate of lessor known by lessee
Incremental borrowing rate of lessee

Php200,000
5 years
5 years
10%
12%

The lease grants X a right to purchase the machine for Php20,000 at

the end of the lease term. The expected fair value of the machine at
the end of the lease term is Php50,000. It is reasonably certain on
inception of the lease that X will exercise the option at the end of
the lease term. X uses the straight line method of depreciation.
Required:
a. Compute for the present value of the minimum lease payments and
make the journal entry to record the finance lease.
b. Prepare the amortization table related to the finance lease
liability and journalize all the relevant entries for 2014
(including adjustments related to the leased asset).
c. Assume that on January 1, 2016 X Co. will purchase the leased
asset for Php500,000, determine the initial cost of the purchased
leased asset and the prepare the journal entry to record the
purchase transaction.

3. Lease of land and building

On January 1, 2014, X Co. entered into a lease of land and building.
Annual lease payments payable at each year-end is Php1,000,000. The
lease is for 10 years. The remaining useful life of the building is
12 years. The fair values of related leasehold interests are as
follows:
Land element
Building element

Php2,000,000
4,000,000
Php6,000,000

The implicit rate of interest on the lease is 10%.

Required:
a. Determine the proper classification of each of the element of the
lease and prepare the journal entry to be made in
January 1, 2014.
b. Assume that the separation of land and building elements is
impracticable due to the absence of a reliable allocation basis,
how should the lease be classified? Prepare the necessary journal
entry to be made in January 1, 2014.
4. Guaranteed residual value
On January 1, 2014, X Co. leased a building (the land element is
considered immaterial) under a lease with the following information:
Annual lease payment payable at the end of each year
Lease term
Useful life
Implicit interest rate

Php100,000
5 years
4 years
10%

X has guaranteed a Php20,000 residual value at the end of the lease

term. The leased assets will revert back to the lessor upon the
lease expiration.
Required:
a. Compute for the present value of the minimum lease payments and
make the journal entry to record the finance lease.
b. Prepare the amortization table related to the finance lease
liability and journalize all the relevant entries for 2014
(including adjustments related to the leased asset).
c. On the expiration of the lease, prepare the journal entry to
record the return of the leased asset to the lessor assuming:
1) The fair value of the leased asset on January 1, 2018 is
Php20,000.
2) The fair value of the leased asset on January 1, 2018 is
Php5,000.