LEASE

Chapter 28
LEARNING
OBJECTIVES
1. Identify and explain lease.
2. Differentiate operating and finance lease
3. Account for operating lease in the books of the
lessee and lessor.
4. Account for finance lease in the books of lessee
and lessor.
5. Differentiate lease accounting under full PFRS
and PFRS for SME.
Chapter 28: Lease 3

LEASE
Is a contract, or part of a contract , the
conveys the right to use an asset (the
underlying asset) for a period of time in
exchange for consideration.
IDENTIFYING A
LEASE

a. The right to obtain substantially

all of the economic benefits from
use of the identified asset; and
b. The right to direct the use of the
identified asset.
 Chapter 28: Lease 5

IDENTIFIED ASSET
The supplier has the substantive right to
substitute an asset only if:
a. The supplier has the practical ability to
substitute alternative assets throughout the
period of use; and
b. The supplier would benefit economically
from the exercise of its right to substitute the
asset.
Presentation title 6

ILLUSTRATION:
A coffee company (Customer) enters into a contract with an airport operator (Supplier) to
use a space in the airport to sell its goods for a three-year period. The contract states the
amount of space and that the space may be located at any one of several boarding areas
within the airport. Supplier has the right to change the location of the space allocated to
customer at any time during the period of use. There are minimal costs to Supplier
associated with changing the space for the Customer: Customer uses a kiosk (that it
owns) hat can be moved easily to sell its goods. There are many areas in the airport that
are available and that would mee the specifications for the space in the contract.

The contract does not contain a lease.

Presentation title 7

ILLUSTRATION:
Supplier has the substantive right to substitute the space Customer uses
because:

a. Supplierhas the practical ability to change the space used by Customer

throughout the period of use.
b. Supplier would benefit economically from substituting the space. There
would be minimal cost associated with changing the space used by
Customer because kiosk can be moved easily.
 Chapter 28: Lease 8

TYPE OF LEASE
1. Finance lease – is a lease that transfers
substantially all the risk and rewards
incidental to ownership of an asset.

2. Operating lease – is a lease that does not

transfers substantially all the risk and
rewards incidental to ownership of an asset.
 Chapter 28: Lease 9

A. LESSEE’S POINT OF VIEW

a lessee is required to account for all leases as finance
lease, except when the contract pf lease is a

a. short-term lease. A lease contract with a lease term

of twelve (12) months.
b. Low value lease. a lease for which the underlying
asset is of low value regardless of the lease term.
B. LESSOR’S POINT OF VIEW
A lessor may classify a lease as either finance or
operating lease.
 10

DATES RELEVANT TO A CONTRACT OF LEASE

Inception Date Commencement Date
The earlier between the date of The date when the lessee is entitled
agreement or commitment by the to exercise its right to the lease
parties on the terms of the lease asset.
contract.
Amount to be recognized at the Initial recognition of the assets,
commencement date are liabilities, income and expenses
determined. related to the lease.
Classification of the lease, as to
whether finance or operating lease
is determined.
 Presentation title 11

INITIAL MEASUREMENT: RIGHT-OF-USE ASSET

At the commencement date, a lessee shall measure the

right-of-use asset at cost which shall comprise:

a. The amount of the initial measure of the lease

liability.
b. Any lease payment made at or before the
commencement date, less any lease incentives
received.
c. Any initial direct cost incurred by the lessee; and
d. An estimate of cost to be incurred by the lessee in
dismantling and removing the underlying asset…
 Presentation title 12

INITIAL MEASUREMENT: LEASE LIABILITY

At the commencement date, a lessee shall

measure the lease liability at the present
value of the lease payment that are not
paid at that date. The lease payment shall
be discounted using the:

a. Interest rate implicit in the lease.

b. Lessee’s incremental borrowing rate.
Presentation title 13

ILLUSTRATION:

On January 1, 2021, Felicity Company entered into a ten-

year non-cancelable lease, commencing on that date, for
office space. The office space has a useful life of 50years
and the lease specifies a rent of ₱120,000 per year. The
interest rate implicit on the lease is 5%. Assume the
following independent cases, prepare the necessary
journal entry at the commencement date on the books of
lessee: (Carry over all decimal places in the computation of
present value)
Presentation title 14

ILLUSTRATION:
1. Assume that the lease payment shall be made every January 1 and the first lease
payment was made on January 1, 2021.
2. Assume that the lease payment shall be made every January 1 and that the first lease
payment was made on January 1, 2021. also assume that the lessee made the
following additional payment:
Payment to a former tenant occupying the floor building ₱15,000
Commission paid to real estate agent 5,000
Leasehold improvement (5-year useful life) 14,000
As incentive to the lessee, the lessor made the ff. reimbursements
lessee’s leasehold improvement ₱7,000
commission paid to real estate agent 5,000
Presentation title 15

ILLUSTRATION:
3. Assume that the lease payment shall be made every January 1 and that the first lease
payment was made on January 1, 2021 also assume that lessee paid ₱60,000 lease bonus
to obtain the lease, security deposit of ₱40,000 to be refunded upon expiration of the
lease and ₱10,000 real property tax on the underlying asset.
4. Assume that the lease payment shall be made every December 31 and that the first
lease payment is to be made on December 31, 2021 also assume that the lessee has a
purchase option of ₱50,000 and it is certain that the company will exercise this option.
5. Assume that the lease payment shall be made every December 31 and that the first
lease payment is to be made on December 31, 2021 also assume that, base on some
benchmark interest rate, rent for the first four years will be ₱120,000 per year and
₱140,000 per year for the last six years.
Presentation title 16

ILLUSTRATION:
6. Assume that the lease payment shall be made every December 31 and
that in addition to the annual rent of ₱120,000, the lessor and the lessee
agreed on the following additional terms:
Additional rent is computed at 6% of net sales over ₱1,500,000 up to
₱3,000,000 and 5% of net sales over ₱3,000,000 per calendar year. Net
sales for 2021 were ₱5,000,000.

7. Assume instead that the lease term is for twelve months and the company
opted to treat the payment as rent expense.
SUBSEQUENT MEASUREMENT: ROU 17

a. For right-of-use asset that is considered as property, plant

and equipment, the lessee shall use either the:
i. Cost model – cost less accumulated depreciation and any
accumulated impairment losses adjusted for any
remeasurement of the lease liability.
ii. Revaluation model – revalued amount being the FV at the
date of revaluation less any subsequent accumulated
depreciation and accumulated impairment loss.
b. The right-of-use asset that is considered as an investment
property, the lessee shall use either:
iii. Cost model
iv. Fair value model
 Presentation title 18

DEPRECIATION OF RIGHT OF USE ASSET

If there is transfer of ownership or If there is NO transfer of ownership or

purchase option purchase option

Life to be used:
Based on the leased asset’s useful life Based on the leased asset’s useful life or
lease term, whichever is shorter.

Residual value
Estimated amount expected to be realized Gross amount of guaranteed residual
upon disposal of the asset at the end of its value, if applicable (asset reverts back to the
useful life lessor)
 Presentation title 19

ILLUSTRATION: LESSEE – DEPRECIATION OF ROU

On December 31, 2020, Kalinga Co. signed a 4-year noncancelable lease for the right of use
of a new machine. The company appropriately recorded the cost of the right of use asset for
₱267,845. The machine has a useful life of 10 years. Kalinga regularly uses straight line
depreciation on similar asset.

CASE NO. 1: Assuming the cost of the machine includes ₱ 20,000 gross bargain purchase
option. At the end of the lease, Kalinga expects to exercise the bargain purchase option.
CASE NO. 2: Assume instead that the cost of the machine includes ₱20,000 gross
guaranteed residual value.

Required: For each case above, compute for the depreciation expense to be reported on
December 31, 2021.
SUBSEQUENT MEASUREMENT: LEASE 20

LIABILITY
After the commencement date, a lessee shall
measure the lease liability by:
a. Increasing the carrying amount to reflect
interest on the lease liability;
[Link] carrying amount to reflect the lease
payments made; and
c. Remeasuring the carrying amount to reflect
any reassessment or lease modification or to
reflect revised in-substance fixed lease
payments.
 Presentation title 21

ILLUSTRATION: LESSEE – LEASE LIABILITY

On December 31, 2020, Apayao Company signed a four-year noncancelable lease for the
right of use of a new machine, requiring ₱150,000 annual payments beginning December
31, 2021. The machine has a useful life of 10 years, with no salvage value. The rate implicit
on the lease is 12%. Apayao has a bargain purchase option amounting to ₱30,000 and it is
reasonably certain that the company will exercise this option.

Required: Compute for the following:

1. The amount to be capitalized as ROU on Dec. 31, 2021
2. Depreciation expense on the lease in 2022
3. The amount to be shown in the current liability section of the balance sheet on Dec. 31,
2022
4. The amount to be shown in the noncurrent liability section of the balance sheet on Dec.
31, 2022
REASSESSMENT OF LEASE LIABILITY 22

After the commencement date, a lessee remeasures the

lease liability to reflect changes to the lease payments.

A lessee shall remeasure the lease liability by

discounting the revised lease payments using a revised
discount rate, if either:
a. There is a change in the lease term; or
b. There is a change in the assessment of an option to
purchase the underlying asset, assessed considering
the events and circumstances in the context of a
purchase option.
REASSESSMENT OF LEASE LIABILITY 23

A lessee shall remeasure the lease liability by

discounting the revised lease payments if either:
a. There is a change in the amount expected to
be payable under a residual value guarantee.
b. There is a change in future lease payments
resulting from a change in an index or a rate
used to determine those payments, including
for example a change to reflect changes in
market rental rates following a market rent
review.
ILLUSTRATION: 24

Assume the following data before remeasurement of lease liability:

Present value of the lease liability before remeasurement ₱650,000
Carrying amount of the ROU 370,000
CASE NO.1: Assume that the present value of lease liability as remeasured amounted to
₱700,000. The journal entry is:
Right of use asset (₱700,000-650,000) ₱ 50,000
Lease liability ₱50,000
To record the increase in lease liability
CASE NO.2: Assume that instead that the present value of lease liability as remeasured is
₱70,000. The journal entry is
Lease liability (₱650,000-70,000) ₱580,000
Right-of-use asset ₱370,000
Income from remeasurement of lease liability ₱210,000
To record the decrease in lease liability
LEASE MODIFICATIONS 25

May either be:

a. Accounted for as a separate lease
b. Not accounted for as a separate lease
ACCOUNTED FOR AS A SEPARATE LEASE 26

A lessee shall account for a lease modification as a

separate lease if both:

a. The modification increases the scope of the lease by

adding the right to use one or more underlying assets;
and
b. The consideration for the lease increases by an
amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments
to that stand-alone price to reflect the circumstances of
the particular contract.
ILLUSTRATION 1: ACCOUNTED FOR AS A SEPARATE LEASE 27

On January 1, 2018, Lessee Company enters into a 10-year lease for 5,000 square meters of
office space for annual lease payment of ₱150,000 every December 31. the lessee’s
incremental borrowing rate at the commencement date is 10%.
On January 1, 2022, when the present value of the lease liability is ₱653,289 and the
carrying amount of the ROU asset is ₱533,011, Lessee and Lessor agree to amend the
original lease for the remaining six years to include an additional 3,000 square meters of
office space in the same building for additional ₱90,000 pe year. The increase in total
consideration for the lease is commensurate with the current market rate for the new 3,000
sqm. of office space, adjusted for the discount that Lessee receives reflecting that lessor
does not incur costs that it would otherwise have incurred if leasing the same space to a new
tenant (for example, marketing costs). Assume that the lessee’s incremental borrowing rate
did not change.

Required: Determine how to account the lease modification and prepare the necessary
journal entries.
ILLUSTRATION 2: MODIFICATION THAT INCREASES THE SCOPE OF THE 28
LEASE BY EXTENDING THE CONTRACTUAL LEASE TERM

On January 1, 2018, Lessee Company enters into a 10-year lease for 5,000 square
meters of office space for annual lease payment of ₱150,000 every December 31. the
lessee’s incremental borrowing rate at the commencement date is 10%.
On January 1, 2022, when the present value of the lease liability is ₱653,289 and the
carrying amount of the ROU asset is ₱533,011, Lessee and Lessor agree to amend
the original lease by extending the contractual lease term by five years.
The annual lease payments are unchanged (₱150,000 payable at the end of 5 th and
15th year). Lessee’s incremental borrowing rate at the beginning of 2022 is 12% per
annum.

Required: Determine how to account the lease modification and prepare the
necessary journal entries.
LEASE MODIFICATION: NOT ACCOUNTED FOR AS A SEPARATE LEASE 29

Not accounted for as a separate lease may either be:

a. Decrease in the scope of lease term
b. Other lease modifications

Accounting procedures:
c. Allocate the consideration in the modified contract;
d. Determine the lease term of the modified lease; and
e. Remeasure the lease liability by discounting the revised lease
payments using a revised discount rate.
Decrease in the scope of lease term 30

the lessee shall account for the

remeasurement of the lease liability by
decreasing the carrying amount of the ROU
asset to reflect the partial or full termination of
the lease for lease modifications that decrease
the scope of the lease.

Other lease modifications

the lessee shall account for it by making a
corresponding adjustment to the ROU asset for
all other lease modifications.
ILLUSTRATION 3: MODIFICATION THAT DECREASES THE SCOPE OF THE 31
LEASE

On January 1, 2018, Lessee Company enters into a 10-year lease for 5,000 square
meters of office space for annual lease payment of ₱150,000 every December 31. the
lessee’s incremental borrowing rate at the commencement date is 10%.
On January 1, 2022, when the present value of the lease liability is ₱653,289 and the
carrying amount of the ROU asset is ₱533,011, Lessee and Lessor agree to amend
the original lease to reduce the space only 2,500 sqm. of the original space starting
from the end of the first quarter of 2022. the annual fixed lease payments (from Jan.
1, 2022 to Dec. 31, 2027) are ₱90,000. Lessee’s incremental borrowing rate at
the beginning of 2022 is 12% per annum.

Required: Determine how to account the lease modification and prepare the
necessary journal entries.
ILLUSTRATION 4: MODIFICATION THAT IS A CHANGE IN CONSIDERATION 32
ONLY

On January 1, 2018, Lessee Company enters into a 10-year lease for 5,000 square
meters of office space for annual lease payment of ₱150,000 every December 31. the
lessee’s incremental borrowing rate at the commencement date is 10%.
On January 1, 2022, when the present value of the lease liability is ₱653,289 and the
carrying amount of the ROU asset is ₱533,011, Lessee and Lessor agree to amend
the original lease to reduce the lease payments from ₱150,000 per year to
₱100,000 per year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the beginning of 2022 is
12% per annum. The annual lease payments are payable at the end of each year.

Required: Determine how to account the lease modification and prepare the
necessary journal entries.
FINANCIAL STATEMENT PRESENTATION: LESSEE 33

A lessee shall either present in the statement of

financial position, or disclose in the notes:
1. right-of-use assets separately from other assets.
a. include ROU asset within the same line item as
that within which the corresponding underlying assets
would be presented if they were owned; and
b. disclose which line items in the balance sheet
include those ROU assets.

2. Lease liability separately from other liabilities.

FINANCIAL STATEMENT PRESENTATION: LESSEE 34

In the statement of profit or loss and other

comprehensive income, a lessee shall present interest
expense on the lease liability separately from the
depreciation charge of ROU asset.

In the statement of cash flows, a lessee shall classify:

a. Cash payments for the principal portion of the lease
liability within financing activities;
b. Cash payments for the interest portion of the lease
liability;
ACCOUNTING FOR OPERATING LEASE 35

Payments Made by Lessee

• Periodic rental Rental income

• Unequal rental payments Total collections will be recognized as rental income

over lease term
• Lease bonus Recognized as a liability (unearned rent income) and
to be amortized over the lease term.
• Contingent rent Added to rent income in the period which they arise

• Refundable security Recognized as a liability (non-current) and may be

deposit affected by time value of money.
 ACCOUNTING FOR OPERATING LEASE 36

Other cost incurred

If paid by the lessee if paid by the lessor
Initial direct costs Ignore Capitalized as part of the cost
(e.g., professional fees of leased asset and to be
and commission) recognized as expense over the
lease term on the same basis as
the lease income.
Executory cost (e.g., Recognize as income equal to Expense
property taxes, the amount paid by the lessee.
insurance and At the same time, the lessor
maintenance costs) shall recognize expense for the
payment made to other parties
related to the executory costs.
ACCOUNTING FOR OPERATING LEASE 37

Other items related to an operating lease

Leased assets Continued to be recognized in the books

and will be depreciated using method as
required by the lessor’s policy.

Leasehold Ignore.
improvements
ILLUSTRATION: OPERATING LEASE (WITH LEASE BONUS) 38

On June 1, 2021 Alexander Company entered into 5-year

nonrenewable lease, commencing on that date, for office space and
made the following collections from the lessee:

Bonus to obtain lease ₱300,000

First month’s rent ₱100,000
Last month’s rent ₱100,000

Required: in its income statement for the year ended June 30, 2021,
what amount should Alexander report as rent income?
ILLUSTRATION: OPERATING LEASE (COMPREHENSIVE) 39

On June 1, 2021 Fredelyn Company entered into 5-year nonrenewable

operating lease, commencing on that date, for office space. The office space
has a useful life of 50 years and the lease specifies a rent of ₱20,000 per month.

Required: assume the following independent cases and compute for what is
asked for each cases:

1. How much is the total rent income in 2021?

2. Assuming that the lessor grants nine months of free rent, how much is the
total rent income in 2021? How much is the rent receivable or unearned
rent income at the end of 2022?
ILLUSTRATION: OPERATING LEASE (COMPREHENSIVE) 40

3. Assume instead that in the first two years, rent will be ₱20,000 per month
but in the last three years, it will be ₱25,000 per month. How much is the total
rent income in 2021? How much is the rent receivable or unearned rent income
at the end of 2022?
4. Assume that lessee paid ₱60,000 lease bonus to obtain the lease and security
deposit of ₱40,000 to be refunded upon expiration of the lease. How much is
the total rent income in 2021?
5. Assume instead that the lessor paid initial direct cost of ₱6,000 and incurred
insurance and property tax expense in 2021 totaling ₱30,000. the depreciation
of the office space for the year 2021 is ₱30,000. How much is the net income
to be recognized by the lessor as a result of this lease in 2021?
ILLUSTRATION: OPERATING LEASE (COMPREHENSIVE) 41

6. Assume that in addition to the monthly rent of ₱20,000 per month,

the lessor and lessee agreed on the following additional terms:
Additional rent is computed at 6% of net sales over ₱1,500,000
up to ₱3,000,000 and 5% of net sales over ₱3,000,000 per calendar
year. Net sales for 2021 were ₱5,000,000.

How much is the rent income in 2021?

ILLUSTRATION: OPERATING LEASE (WITH CONTINGENT RENT 42

AND LEASE BONUS)

On January 1, 2021, Felicity Company, the lessor, signed a
10-year operating lease for space at ₱960,000 per year. The
lease included a provision for additional rent of 5% of annual
company sales in excess of ₱5,000,000. The lessee’s sales for
the year ended Dec. 31, 2021 were ₱6,000,000. Upon
execution of the ease, Felicity received ₱250,000 as a bonus
for the lease, Felicity’s rent income for the year ended
December 31, 2021 is
ACCOUNTING FOR FINANCE LEASE: BOOK OF THE LESSOR 43

Types: Direct Financing Lease Sales Type Lease

Definition Does not involve a manufacturer’s Involves the recognition of a
or dealer’s profit. manufacturer’s or dealer’s profit
or loss on the transfer of the
asset to the lessee.
Initial direct cost Included in the initial Expensed immediately (or added
measurement of the net lease to the cost of sales account.)
receivable or net investment.

Effect if there is New implicit rate will be -

initial direct cost computed using interpolation.
(Note that the PV is higher thus
the new implicit rate is lower than
the old implicit rate.)
ILLUSTRATION: DIRECT FINANCING LEASE – NO INITIAL 44

DIRECT COST
On Dec. 31, 2021, Ifugao Co. leased an equipment with a cost of ₱2,000,000 to
Kalinga Co. for 5-years, which is also the useful life of the asset. The lease
agreement specifies equal annual payment of ₱467,273 beginning on Dec. 31,
2021.
At the end of the lease term, the equipment will revert to Ifugao Co. A third
party related to the lessee guarantees the residual value of the equipment
amounting to ₱200,000. The rate implicit in the lease is 12%.
Required:
1. How much is the total interest income to be earned over the lease term?
2. How much is the total interest income in 2022?
3. How much is the lease-related asset to be shown as current in the balance sheet on Dec.
31, 2021?
ILLUSTRATION: DIRECT FINANCING LEASE – WITH INITIAL 45

DIRECT COST
On Dec. 31, 2021, Ilocos Norte Co. leased an equipment with a cost of
₱2,000,000 to Laoag Co. for 5-years, which is also the useful life of the asset.
The lease agreement specifies equal annual payment of ₱495,381 beginning on
Dec. 31, 2021. On the same date, Ilocos Norte Co. paid ₱65,687 incremental
costs that are directly attributable to negotiating and arranging a lease.
The rate implicit in the lease is 12% but after considering the initial direct cost, the implicit
rate is adjusted at 10%.
Required:
1. How much is the total interest income to be earned over the lease term?
2. How much is the total interest income in 2022?
3. How much is the lease-related asset to be shown as current & noncurrent in the balance
sheet on Dec. 31, 2021?
SALES-TYPE LEASE 46

FORMULAS:
Lessor: Direct financing and sales-type leases
Lease payments Lease payments (LPs):
receivable/gross investment: Total periodic lease payments
(periodic payment x lease term) XX
Add: Guaranteed residual XX
or bargain purchase option XX
Add: Unguaranteed residual value XX
Total lease receivable XX
Net investment or PV of gross PV of LP:
investment PV of lease payment XX
PV of GRV XX
PV of BPO XX
Add: PV of URV XX
Total net investment XX
SALES-TYPE LEASE 47

FORMULAS:
Lessor: Direct financing and sales-type leases
Unearned interest income Total lease receivable or gross receivable XX
Less: Net investment XX
Unearned interest income XX
Gross profit or manufacturer’s Sales (=PV of LP or Sales Price) XX
profit (only for sales-type lease) Less: Cost of Sales XX
Less: Initial direct cost (if any) XX
Gross profit or manufacturer’s profit XX
SALES-TYPE LEASE 48

Guaranteed Residual Unguaranteed Residual

Value Value

Gross amount included in the lease

Yes Yes
receivable?

Present value amount included in the

Yes No
Sales?

Present value amount deducted in the

No Yes
Cost of Sales?
ILLUSTRATION: SALES-TYPE LEASE 49

On January 1, 2021, Ilocos Sur Co., a dealer of machines, leased a machine to

Candon Co. Data relating to the lease are as follows:

Useful life of equipment 5

Lease term 5
Annual rent payable at the end of the year 500,000
Interest rate implicit in the lease 10%
Residual Value 150,000
Initial direct cost 20,000

The leased asset reverts to Ilocos Sur Co. at the end of the lease term. The lease
is appropriately recorded as sales type lease.
ILLUSTRATION: SALES-TYPE LEASE 50

Required:
Case no. 1: Assuming the residual value is guaranteed, answer the following:
1. How much is the total interest income to be earned over the lease term?
2. How much is the total interest income in 2022?
3. How much is the profit on sale on Dec. 31, 2021?

Case no. 2: Assuming the residual value is unguaranteed, answer the above
questions:
4. How much is the total interest income to be earned over the lease term?
5. How much is the total interest income in 2022?
6. How much is the profit on sale on Dec. 31, 2021?
SUBLEASES 51
Account for the lease either Operating or Finance Lease
Owner/Head Lessor
Intermediate lessor’s point of view
Account the head lease as:
Right-of-use asset xx
HEAD LEASE Lease Liability xx

Assuming the Sublease is treated as finance lease*:

Head Lease/ Lease receivable xx
intermediate lessor or Loss on subleasing xx
Sublessor
Unearned interest income xx
Right-of-use asset xx
SUBLEASE Gain on subleasing xx

Sub-lessee’s point of view

Account the sublease as:
SUBLESSEE
Right-of-use asset xx
Lease liability xx
ILLUSTRATION: SUBLEASE CLASSIFIED AS A FINANCE LEASE 52

On January 1, 2018, Lessee Company enters into a 10-year lease for 5,000
square meters of office space for annual lease payment of ₱150,000 every
December 31. The rate implicit in the lease at the commencement date is 10%.
On January 1, 2022, when the present value of the lease liability is ₱653,289
and the cost of ROU asset is ₱921,685 and accumulated depreciation of
₱368,674, the Lessee (immediate lessor) subleases 5,000sqm of office space
for the remaining terms of six years to the sublessee for ₱180,000 when the
implicit rate of 9%.

CASE NO. 1: Assuming the intermediate lessor treats the sublease as a finance
lease.
CASE NO. 2: Assuming the intermediate lessor treats the sublease as an
operating lease.
SALES AND LEASEBACK 53

Transfer of the asset is sale

a. the seller-lessee shall measure the ROU asset arising
from the leaseback at the proportion of the previous
carrying amount of the asset that relates to the ROU
retained by the seller-lessee.
b. The buyer-lessor shall account for the purchase of the
asset applying applicable standards, and for the lease
applying the lessor accounting requirements in this
standard.

Selling Price xx Fair value xx

Less: FV xx Less: CA xx
Additional financing xx Total gain(loss) on sale
and leaseback xx
ILLUSTRATION: SALE AND LEASEBACK 54

On January 1 of the current year, Bitcoin Company sells a building to TRAIN Company. At
the same time, Bitcoin Company enters into contract with TRAIN Company for the right to
use the building. Data relating to the sale and leaseback are as follows:
Selling Price 2,000,000
Carrying amount 1,000,000
Annual lease payment at the end of lease term 120,000
Implicit rate 4.50%
Lease term 18 years
Assume the FV of building is:
Case no.1: ₱2,000,000
Case no.2: ₱1,800,000
Case no. 3: ₱2,100,000
Required: Prepare all the necessary entries.
SALES AND LEASEBACK 55

Transfer of the asset is not a sale

a. the seller-lessee shall continue to recognize the
transferred asset and shall recognize a financial
liability equal to the transfer proceeds.
Cash xx
Financial liability xx
b. The buyer-lessor shall not recognize the transferred
asset and shall recognize a financial asset equal to
the transfer proceeds. The journal entry is:
Financial asset (receivable) xx
Cash xx
THANK
YOU!