BSA-2ND YEAR

MIDTERM EXAMINATION IN INTERMEDIATE ACCOUNTING 2

Solve the following problems:

Part 1 – problem 11 – 10 Letty Company

Letty Company leased a machine on January 1, 2014 with the following

provisions:

Annual rental payable in advance at the

beginning of each year, starting January 1, 2014 1,000,000
Lease term 10
years
Useful life of machine 15 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, 2024 by

paying P200,000 which is sufficiently lower than the expected fair of the
machine on January 1, 2024. At the inception of the lease, it is reasonably
certain that the option will be exercised.

Required:
Prepare journal entries on the books of Letty Company for 2014. and
2015.

Solutions:

2014
Jan. 1 Right of use asset 6,392,400
Lease liability 6,392,400

Present value of rentals(1,000,000x6.328) 6,328,000

Present value of purchase option(200,000x.322) 64,400
Total Cost 6,392,400

This study source was downloaded by 100000893213307 from CourseHero.com on 11-07-2024 06:30:06 GMT -06:00

https://www.coursehero.com/file/148423703/MIDTERM-IA2-docx/
1 Lease liability 1,000,000
Cash 1,000,000

Dec. 31 Depreciation ( 6,392,400 / 15) 426,160

Accumulated depreciation 426,160

31 Interest Expense 647,088

Accrued Interest Expense 647,088

2015
Jan. 1 Accrued Interest Expense 647,088
Lease liability 352,912
Cash 1,000,000

Dec. 31 Depreciation ( 6,392,400 / 15) 426,160

Accumulated depreciation 426,160

31 Interest Expense 604,739

Accrued Interest Expense 604,739

Part 2 – problem 12 – 5 Jolo Company

Jolo Company is in the business of leasing new sophisticated equipment.

As lessor, Jolo Company expects a 12% return on the net investment. All
leases are classified as direct financing. At the end of the lease term, the
equipment will revert to Jolo Company. On January 1, 2014, an equipment
was leased to a lessee with the following information.

Cost of equipment to Jolo 5,250,000

Residual value- unguaranteed 600,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1,2014

Required:
1. Compute the total financial revenue

This study source was downloaded by 100000893213307 from CourseHero.com on 11-07-2024 06:30:06 GMT -06:00

https://www.coursehero.com/file/148423703/MIDTERM-IA2-docx/
2. Prepare a table of amortization for the lease receivable and interest
income.
3. Prepare journal entries for 2014 and 2015.
4. Prepare journal entries for 2021
5. Prepare journal entry on January 1, 2022 to record the return of the
equipment from the lessee. The fair value of the equipment on this
date is P500,000.

Solutions:

Requirement 1
Gross rentals (900,000 x 8) 7,200,000
Residual value 600,000
Gross investment–debit to lease receivable 7,800,000
Less: Net investment–cost of equipment 5,250,000
Total financial revenue 2,550,000

Requirement 2
Date Payment Interest Principal Present
Value
1/1/2020 5,250,000
1/1/2020 900,000 – 900,000 4,350,000
1/1/2021 900,000 522,000 378,000 3,972,000
1/1/2022 900,000 476,640 423,360 3,548,640
1/1/2023 900,000 425,837 474,163 3,074,477
1/1/2024 900,000 368,937 531,063 2,543,414
1/1/2025 900,000 305,210 594,790 1,948,624
1/1/2026 900,000 233,835 666,165 1,282,459
1/1/2027 900,000 153,895 746,105 536,354
1/1/2028 600,000 63,646 536,354 –
7,800,000 2,550,000

Requirement 3
2014
Jan. 1 Lease receivable 7,800,000
Equipment 5,250,000
Unearned interest income 2,550,000

1 Cash 900,000

This study source was downloaded by 100000893213307 from CourseHero.com on 11-07-2024 06:30:06 GMT -06:00

https://www.coursehero.com/file/148423703/MIDTERM-IA2-docx/
Lease receivable 900,000

Dec. 31 Unearned interest income 522,000

Interest income 522,000

2015
Jan. 1 Cash 900,000
Lease receivable 900,000

Dec. 31 Unearned interest income 476,640

Interest income 476,640

Requirement 4
2021
Jan. 1 Cash 900,000
Lease receivable 900,000
(Final payment)

Dec. 31 Unearned interest income 63,646

Interest income 63,646

Requirement 5
2022
Jan. 1 Equipment 500,000
Loss of finance lease 100,000
Lease receivable 600,000

This study source was downloaded by 100000893213307 from CourseHero.com on 11-07-2024 06:30:06 GMT -06:00

https://www.coursehero.com/file/148423703/MIDTERM-IA2-docx/
Powered by TCPDF (www.tcpdf.org)