Professional Documents
Culture Documents
AUDIT OF LEASES
Estimated Time: 3.0 HOURS
*Use Louwers 4th edition
InterAfrica Development Company had a lease contract with the city government.
The lease contract of the Company is covered by a City Resolution enacted by the
City Council. The resolution enumerates the following:
Term of the lease - July 1, 2000 to July 1, 2025
Lease payments
As of December 31, 2011, the Bank has paid a total of P1,650,000. There has been
no accrual set up during the year and rent expense for the period ended December
31, 2011 amounted to P180,000.
Required:
a. Considering the information enumerated above, what do you think is the
accounting policy being employed by the Company?
b. How much rental expense should have been recognized during the period?
c. What is the correct balance accrued/prepaid rent expense as of December 31,
2011?
d. Propose adjusting journal entries to correct the errors noted, if necessary.
e. Assuming a lease bonus has been paid upon inception of the lease, what
would be its treatment under IAS 17?
Auditing Practice II
Workbook
Justin Timberleke entered into an operating sale and leaseback transaction. Details
of the transaction are as follows:
Sales Price
Carrying Amount
Monthly lease payment
P 420,000
520,000
37,316
Estimated Life
Lease Term
Implicit Rate
12 years
1 year
12%
The Company deferred the loss despite the absence of future cheap rentals to offset
the loss.
Required:
a. Should the loss be deferred? If no, under what circumstances should the loss
be deferred. Propose adjusting journal entry.
b. Assuming fair value and sales price is P530,000, how much gain should be
recognized in profit or loss and how much be deferred?
c. Assuming sales price is P540,000, fair value of the equipment is P530,000,
how much gain should be deferred?
Problem 6-3: Accounting for Finance Lease; Initial Recognition and Subsequent
Measurement
On January 1, 2012, Judee Co. leased a machine from Explorer Co. The lease
qualifies as finance lease and requires 10 annual payments of P 100,000 beginning
immediately. The lease specifies an interest rate of 12% and a purchase option of P
10,000 at the end of the tenth year, even though the machines estimated value on
that date is P 20,000. Judee Co.s incremental borrowing rate is 14%. The useful life
of the equipment is 10 years.
Required:
a. What should Spicy Co. record as lease liability at the beginning of the lease
term?
b. What is the carrying value of the lease liability as of December 31, 2012?
c. What is the carrying value of the equipment as of December 31, 2012?
Auditing Practice II
Workbook
Required:
Compute for the following:
1. Cost of the warehouse.
2. Carrying value of lease liability had it been booked as finance lease as of
December 31, 2012
a. Current
b. Noncurrent
3. Propose adjustments assuming books are not yet close for the year ended
December 31, 2012
Problem 6-5:
Direct Financing Lease, Initial Recognition and Subsequent
Measurement, Reconstruction
On December 31, 2012, Sir Kit, Inc. (SKI) purchased machinery for P1.5 million and
delivered the same to So Sir, Inc. (SSI), the lessee. The following are the related
information for the lease:
a. SKIs implicit rate is 11%, which is known to SSI. SSI incremental borrowing
rate is 14% at December 31, 2012.
b. The machinery has an estimated useful life of 8 years, which is also the lease
term. At the expiration of the lease, the machinery which has a nonguaranteed residual value of P150,000 will revert to SKI.
c. Lease rentals consist of 8 equal annual payments starting December 31,
2012.
d. Both use the straight line basis for depreciation. SKI accounts this as a direct
financing lease while SSI accounts this as finance lease.
Compute for the following:
1. Annual lease payment
2. SSIs depreciation expense in 2013.
3. SSIs interest expense in 2013.
4. Unearned interest income by SKI at the start of the lease.
Problem
6-6:
Direct
Financing,
with
residual
value;
Reconstruction
Problem 6-7: Sales Type Lease, Initial Recognition and Subsequent Measurement
Required:
Based on the foregoing and the result of your audit, compute for the following:
1. How much is the total interest income from lease that will be earned by Gryffindor,
Inc.?
2. How much should Gryffindor, Inc. report as profit on the sale?
3. How much should be reported by Snape Co. as liability under finance lease as of
December 31, 201?
4. How much should be reported by Snape Co. under current liabilities as liability
under finance lease as of December 31, 2012?
5. How much interest expense should be reported by Snape Co. in relation to the
lease for the year ended December 31, 2012?
Jaime Zobel De Sy, a very well known business magnate, acquired land and
constructed a multi-purpose hall for a total amount of P6,750,000. On January 2,
2010, when the construction was already completed, the facility and land on which it
was constructed were sold to a Coach Events Inc. for P7,500,000. Immediately after
the sale, Jaime entered into a 10 year non cancelable lease agreement with the
events company that requires equal annual lease payments at the end of each year
beginning December 31, 2010. The interest rate implicit on the lease is 10%. Straight
line depreciation is used for a period of 15 years. Title to the property will be
transferred to Jaime at the termination of the lease agreement.
During the period, Jaimes new accountant derecognized the asset, erroneously
charged all payments as rental expense. Depreciation has not been recognized and
there was no initial set up of finance lease liability.
Required:
Prepare an audit working paper for the year ended December 31, 2010 to summarize
the correct balance of finance lease liability, property plant and equipment, and
expenses related to the lease. Prepare necessary audit adjustments.
Auditing Practice II
Workbook