Problem 3. Direct Financing Lease with Residual ValueOn January 1, 20x1,ABC Financing Coleased equipment to XYZ,Inc.Information on the lease is shown below:Cost of EquipmentP330, 6475 yearsUseful Life of Equi pmentLease Term4 yearsAnnual Rent Payable at the end of each year100,000Interest Rate Implicit in the lease10%Residual Value20,000The equipment will revert back toАВС atthe end of the lease term.The lease is classified as direct financing lease.Requirements:Compute forthe following assuming the residual valueis (1) guar anteed and (2) unguaranteeda.Gross Investment in the lease on January 1, 20x1Net Investment in the lease on January 1, 20x1Unearned Interest income on January 1, 20x1b.c.d.Prepare the journal entries on January 1, 20x1 and December31, 20х1е.Prepare the journal entry on December 31, 20x4 if the fairvalue of the residual valuei.P20,000ii.P5,000

It is a type of lease in which, a lessor acquires assets and leases them with an intention to…

On January 1, 20x1, ABC Financing Co leased equipment to XYZ, Inc. Information on the lease is shown below: Cost of Equipment Useful Life of Equipment Lease Term Annual Rent Payable at the end of each year Interest Rate Implicit in the lease Residual Value P330, 647 5 years 4 years 100,000 10 % 20,000 The equipment will revert back to ABC at the end of the lease term. The lease is classified as direct financing lease.

On January 1, 20x1, ABC Financing Co leased equipment to XYZ, Inc. Information on the lease is shown below: Cost of Equipment Useful Life of Equipment Lease Term Annual Rent Payable at the end of each year Interest Rate Implicit in the lease Residual Value P330, 647 5 years 4 years 100,000 10 % 20,000 The equipment will revert back to ABC at the end of the lease term. The lease is classified as direct financing lease.

FINANCIAL ACCOUNTING

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Chapter1: Financial Statements And Business Decisions

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

Problem 3. Direct Financing Lease with Residual Value
On January 1, 20x1,
ABC Financing Co
leased equipment to XYZ,
Inc.
Information on the lease is shown below:
Cost of Equipment
P330, 647
5 years
Useful Life of Equi pment
Lease Term
4 years
Annual Rent Payable at the end of each year
100,000
Interest Rate Implicit in the lease
10%
Residual Value
20,000
The equipment will revert back to
АВС at
the end of the lease term.
The lease is classified as direct financing lease.
Requirements:
Compute for
the following assuming the residual value
is (1) guar anteed and (2) unguaranteed
a.
Gross Investment in the lease on January 1, 20x1
Net Investment in the lease on January 1, 20x1
Unearned Interest income on January 1, 20x1
b.
c.
d.
Prepare the journal entries on January 1, 20x1 and December
31, 20х1
е.
Prepare the journal entry on December 31, 20x4 if the fair
value of the residual value
i.
P20,000
ii.
P5,000

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Step 1: Direct financing lease:

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Step 2: (a) Determine Gross investment in the lease on January 1, 20x1:

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Step 3: (b) Determine Net investment in the lease on January 1, 20x1:

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Step 4: (c) Determine Unearned interest income on January 1, 20x1

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Step 5: Working Notes:

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Step 6: (d) Prepare the journal entries on Jan 1, 20X1 and Dec 31, 20X1:

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Step 7: (e) Prepare the journal entries on Jan 1, 20X4 and Dec 31, 20X4:

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