Lease
Contract or part of a contract
Conveys the right to use the underlying asset
For a period of time in exchange for consideration
Right to control the use of an asset
1. Right to obtain substantially all the economic benefits from the use of the identified asset
2. Right to direct the use of the identified asset
o Siya mamimili kung pano gagamitin yung asset
Types of lease
Operating lease
o Does not transfer substantially all the risk and reward of ownership of an underlying
asset
o Lessor is still the owner of the asset
o Rent transaction
Finance lease
o Transfers substantially all the risks and reward of ownership
o Rent transaction in form but sales transaction in substance
Lease payments = Installment payments
o Note: Substance over form
o Criteria to become a finance lease (TOMS) (LESSOR’S PERSPECTIVE)
T – Transfer of ownership
Lease transfers the asset to the lessee at the end of the lease term
O – Option to purchase the asset
The lessee has the option to purchase the asset at a price sufficiently
lower at the FV of the date when the option becomes exercisable
NOTE: dapat stated sa problem na “at the inception of the lease, it must
be reasonably certain that lessee would exercise the option”
M – Material lease term
Lease term is the major part of the economic life of the asset
Lease term is at least 75% of the useful life of the asset
S – Substantial PV of lease payments
Present value of the lease payment amounts to substantially all of the
FV of the underlying asset
PV of the lease payments are at least 90% of the FV of the asset
T.O = asset is reverted to the lessee
Hindi na babalik kay lessor yung asset
M.S = asset is reverted back to the lessor
Babalik pa yung asset kay lessor
Operating lease – Lessor
Lease payments are recognized as income
o When problem is silent = Straight line basis
Every lease payment for each period is equal
o When given different lease payment amounts per period
Get the average of all lease payments
EXAMPLE:
Year 1 100,000
Year 2 150,000
Year 3 110,000
Total 360,000
Annual lease payment = 360,000/3 years
= 120,000
Cash Received Rent Income Asset / Liability
Year 1 100,000 120,000 20,000 Rent receivable
Year 2 250,000 240,000 10,000 Rent Payable
Year 3 360,000 360,000 -
If cash received > Rent Income, then Rent Receivable
If cash received < Rent Income, then Rent Payable
Owner is the Lessor
o Recognize the depreciation expense
Normally
Special concepts
o Initial Direct Cost Paid by the lessor
The lessor will NEVER recognize the initial direct cost paid by the lessee
Any hindi nagastos portion will be added to the carrying amount of the asset
Recognized as expense over the lease term
o Executory cost
Cost incurred by lessor in maintaining the asset
Maintenance
Depreciation
Taxes
ETC.
Expensed as incurred
o Refundable security deposits
Not recognized as income
Recognized as liability
Babalik kay lessee at the end of lease term
o Lease Bonus
Padulas
Additional payments paid made by the lessee
Treated as unearned revenue or liability
Recognize income over the lease term
Example:
Question 1: What amount of rental revenue should be reported in the income statement for the
year ended September 30, 2022?
Given: 3,000 per square meter per year Lease term: 1,000 square
1,200 per square meter for the first year meters for 3 years
Solution:
Year 1 (1,200 * 1,000) 1,200,000
Year 2 (3,000 * 1,000) 3,000,000
Year 3 (3,000 * 1,000) 3,000,000
Total 7,200,000
Annual lease payment = 7,200,000/3 years
= 2,400,000
Rent Income = 2,400,000 * 9/12
o = 1,800,000
NOTE: AWAYS CHECK YUNG DATES, DUN NAGKAKATALO
Question 2: What amount should be recorded as rental income for 2022?
Given: Lease term = 5 years First payment = 800,000
First 6 months of the lease is rent free Year 2-5 payments = 1,250,000 per year
Solution:
First year payment = 800,000 * 6/12
= 400,000
Year 1 400,000 Rental Income for 2022
Year 2 1,250,000 = 1,080,000
Year 3 1,250,000
Year 4 1,250,000
Year 5 1,250,000
Total 5,400,000 / 5 years = 1,080,000 Annual rental income
Question 3: What amount should be recorded as rent receivable from Ivana Company on
December 31, 2018?
Given: 4 year lease term
Monthly rental: 2017 100,000 1,200,000
2018 150,000 1,800,000
2019 200,000 2.400,000
2020 250,000 3,000,000
Total 8,400,000
Solution: = 8,400,000 / 4 years = 2,100,000 annual rental income
Cash Received Rent Income Asset / Liability
2017 1,200,000 2,100,000 900,000 Rent receivable
2018 3,000,000 4,200,000 1,200,000 Rent Receivable
Question 4: what is the net rent income for 2022?
Given: 10 year lease term
500,000 per year
Initial direct cost = 150,000
Depreciation = 120,000
Property tax for 2022 = 90,000
Solution:
Initial direct cost = 150,000 / 10 years
= 15,000
Rent Income 2022 500,000
Less: Initial direct cost (15,000)
Depreciation (120,000)
Property tax (90,000)
Net Rent Income 275,000
NOTE: AWAYS CHECK YUNG DATES, DUN NAGKAKATALO
Question 4 What if: what is the net rent income for 2022 of starting date is april 1, 2022?
Rent Income 2022 500,000 * 9/12 375,000
Less: Initial direct cost (15,000) * 9/12 (11,350)
Depreciation (120,000)
Property tax (90,000)
Net Rent Income 153,650
Question 5: What amount should be reported as rent revenue for the current year?
Given: 5 year lease term
o Annual rental: 900,000
o Lease Bonus: 500,000
o Securities: 250,000
Solution:
o Lease Bonus = 500,000 / 5 years
= 100,000 per year
Rent Income 900,000
Lease Bonus 100,000
Rent Revenue 1,000,000
Finance Lease – Lessor
Types
Direct finance lease
o Lessor is engage in the financing business
o Hindi nagbebenta talaga
o Financial institution
o Papautangin natin si lessee
o Income is only the interest income
Walang kita sa property
No gross profit since FV and cost are equal since kakabili lang
Financing income
o Gross investment
= Gross rentals + residual value
Gross rentals = annual rental * lease term
o Annual Rentals = Cost of asset – Present value of residual value/
PV factor
NOTE: ordinary annuity if hindi pa babayaran agad
Annuity due: Babayaran na agad on day 1
Residual value
o Added whether guaranteed or unguaranteed
o Only considered if there NO TRANSFER OF OWNERSHIP AND
BPO
Added to Gross rentals
o T = no added ; O = Option price ; M. S = Residual value
Rate priority: 1. Implicit rate
2. Incremental borrowing rate if wala Implicit
o Net Investment
= Cost of the investment + Initial direct cost paid by LESSOR
o Unearned interest income
= Gross investment – Net Investment
Net investment
Lessors shall recognize lease receivable equal to the net investment in
the lease
o Net investment is amortized using effective interest method
o effective interest method = interest income * Rate used
Total financing income that will be recognized over the lease term
o Sales, COGS, and profit
ZERO
Sales type lease
o Lessor is a manufacturer or dealer of properties
o Income
Gross profit
= sales – COGS
Interest income
Also financing income
Total income = gross profit + interest income
o Gross investment
= Gross rentals - residual value
Gross rentals = annual rental * lease term
o Annual Rentals = Cost of asset – Present value of residual value/
PV factor
NOTE: ordinary annuity if hindi pa babayaran agad
Annuity due: Babayaran na agad on day 1
Residual value
o Added whether guaranteed or unguaranteed
o Only considered if there NO TRANSFER OF OWNERSHIP AND
BPO
Added to Gross rentals
o T = no added ; O = Option price ; M. S = Residual value
Rate priority: 1. Implicit rate
2. Incremental borrowing rate if wala Implicit
o Net Investment
= PV of rentals + PV of residual value or option
Residual value or option depende kung ano in-add kay gross rental
o Unearned interest income
= Gross investment – Net Investment
Net investment
Lessors shall recognize lease receivable equal to the net investment in
the lease
o Net investment is amortized using effective interest method
o effective interest method = interest income * Rate used
Total financing income that will be recognized over the lease term
o Sales
WHEN RESIDUAL VALUE IS GUARANTEED
= Net investment or FV of Asset, whichever is LOWER
WHEN RESIDUAL VALUE IS UNGUARANTEED
Net investment or FV of Asset, whichever is LOWER xxx
PV of Unguaranteed Residual Value (xxx)
Sales xxx
o COGS
WHEN RESIDUAL VALUE IS GUARANTEED
= Cost of the asset + Initial Direct cost paid by the LESSOR
WHEN RESIDUAL VALUE IS UNGUARANTEED
Cost of the asset xxx
Initial direct cost xxx
PV of Unguaranteed Residual Value (xxx)
COGS xxx
o Gross Profit
GUARANTEED or UNGUARANTEED
= Sales – COGS
Examples:
NOTE: If problem is silent, assume na Direct Finance Lease
1. Gross investment
Annual rental = 1,518,650 / 3.0373
= 500,000
Gross Investment = 500,000 * 4 years
= 2,000,000
2. Net Investment
= 1,518,650 + 66,300
= 1,584,950
3. Unearned Interest Income
= 2,000,000 – 1,584,950
= 415, 050
4. Carrying amount of Lease Receivable on Dec 31, 2022
Carrying amount end = Carrying amount beg x (1 + Rate) – Payment
Carrying amount
1/1/2022 1,518,650 + 66,300 1,584,950
12/21/2022 1,584,950 * (1+0.1) – 500,000 1,243,445
5. noncurrent portion of the lease receivable on Dec 21, 2022
= 1,243,445 * (1+0.1) – 500,000
= 867,790
6. Current portion of the lease receivable on Dec 21, 2022
= 1,243,445 – 867,790
= 375,655
1. Annual rental
= 3,760,100 - (400,000 *0.6830)
= 3,486,900 / 3.4869
= 1,000,000
2. Gross Investment
= (1,000,000 * 4) + 400,000
= 4,400,000
3. Net Investment
= 3,760,100
4. Unearned Interest Income
= 4,400,000 – 3,760,100
= 639,900
1. Annual Rental
= 3,449,600 / 4.312
= 800,000
IGNORE RESIDUAL VALUE KASI MAY TRANSFER OF OWNERSHIP
2. Gross Investment
= 800,000 *5 years
= 4,000,000
3. Net Investment
= 3,449,600
4. Unearned Interest Income
= 4,000,000 - 3,449,600
= 550,400
1. Gross Investment
= (800,000 * 5) – (200,000)
= 4,200,000
2. Net Investment
= (800,000 * 3.7908) + (200,000 * 0.6209)
= 3,032,640 + 124,180
= 3,156,820
3. Unearned Interest Income
o = 4,200,000 – 3,156,820
o = 1,043,180
4. Sales
o = 3,156,820
5. COGS
= 2,000,000 + 100,000
= 2,100,000
6. Gross Profit
o = 3,156,820 - 2,100,000
o = 1,056,820
7. Carrying amount on December 21, 2022
o = 3,156,820 *(1+0.1) – 800,000
= 2,672,502
