Answer is b,b
Solution: a. Gross rentals 959,500 x 8
7,676,000 Residual Value
400,000 Gross Investment
8,076,000 Net investment – equal to the
cost of the equipment 5,500,000
Unearned interest income – January 1, 2015 2,576,000
b. Present value of rentals equal to the cost of the equipment
5,500,000 First Payment on January 1, 2015
959,500 Lease Receivable
4,540,500 Interest Income for 2015 4,540,000 x 12
544,860
SALES TYPE LEASE – LESSOR
1. Dolce Amore Company leased equipment to Faye Company on January 1, 2016.
The lease is for an eight-year period expiring December 31, 2023. The first of eight equal annual payments of P900,000 was made on January 1, 2016. The
entity had purchased the equipment on December 29, 2015 for P4,800,000. The lease is appropriately accounted for as sales type lease. The present value on
January 1, 2016 of all rent payments over the lease term discounted at a 10 interest rate was P5,280,000.
Q1: What is the gross profit on sale for 2016?
a. 1,920,000 c. 480,000
b. 2,400,000 d. 240,000
Q2: What amount of interest revenue should be recorded in 2016? a. 462,000
c. 438,000 b. 480,000
d. 391,800
Answer is c,c
Solution: Present value of rentals – sales revenue
5,280,000 Cost of sales
4,800,000 Gross profit on sale
480,000 Present Value – January 1, 2016
5,280,000 First Payment on January 1, 2016
900,000 Lease Receivable – January 1, 2016
4,380,000 Second payment on January 1, 2017
900,000
Interest for 2016 10 x 4,380,000 438,000
462,000 Lease Receivable – January 1, 2017
3,918,000
2. COOLang Company adopted the policy of leasing as the primary method of
selling its products. The entity’s main product is a small helicopter that is very popular among politicians and entity managers. COOLang Company constructed
such a helicopter for LAOS Company at a cost of P8,500,000.
The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership transferring to the lessee at the end of
the leased period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date.
The lease payments began January 1, 2016, COOLang Company incurred initial direct cost of P500,000 in financing the lease agreement with LAOS. The sale
price of the helicopter is P14,875,000.
Financing the construction was at a 14 rate. The present value of an annuity due of 1 at 14 for 10 periods is 5.95.
Q1: What is the gross profit on sale that should be recognized by COOLang Company?
a. 5,875,000 c. 4,275,000
b. 6,375,000 d. 4,775,000
Q2: What is the unearned interest income on January 1, 2016? a. 10,125,000
c. 9,625,000 b. 11,725,000
d. 8,525,000
Q3: What is the interest income for 2016? a. 2,082,500
c. 2,306,500 b. 1,732,500
d. 1,956,500
Answer is a,a,b
Solution:
Sale Price 14,875,000
Cost of good sold 8,500,000
Initial direct cost 500,000
Gross profit on sale 5,875,000
Gross rentals 2,500,000 x 10 25,000,000
Present value of rentals – equal to sale price 14,875,000
Unearned Interest Income – January 1, 2016 10,125,000
Present value of rentals 14,875,000
Advance rental payments on January 1, 2016 2,500,000
Lease Receivable – January 1, 2016 12,375,000
Interest Income for 2016 12,375,000 x 14 1,732,500
3. HunterXHunter Company used leases as a method of selling products. In 2016,
