This document contains 15 multiple choice questions regarding accounting for leases. The questions cover topics such as classifying leases as operating or finance, calculating rent expenses, gains/losses on sale-leaseback transactions, and determining assets and liabilities for lessees and lessors.
This document contains 15 multiple choice questions regarding accounting for leases. The questions cover topics such as classifying leases as operating or finance, calculating rent expenses, gains/losses on sale-leaseback transactions, and determining assets and liabilities for lessees and lessors.
This document contains 15 multiple choice questions regarding accounting for leases. The questions cover topics such as classifying leases as operating or finance, calculating rent expenses, gains/losses on sale-leaseback transactions, and determining assets and liabilities for lessees and lessors.
This document contains 15 multiple choice questions regarding accounting for leases. The questions cover topics such as classifying leases as operating or finance, calculating rent expenses, gains/losses on sale-leaseback transactions, and determining assets and liabilities for lessees and lessors.
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PRACTICAL ACCOUNTING 1
1. On January 1, 2014, Jane Company signed a 10-year operating lease
for office space at P960,000 per year. The lease included a provision for additional rent of 5% of annual sales in excess of P5,000,000. The entity's sales for the current year amounted to P6,000,000. Upon execution of the lease, the entity paid P240,000 as a bonus for the lease. What is the rent expense for the year ended December 31, 2014? a. P1,010,000 b. P1,034,000 c. P1,250,000 d. P984,000 2. On December 1, 2014, Troy Company leased office space for five years at P60,000 a month. On that date, the entity paid the lessor the following amounts : Rent security deposit First month rent Last month rent Installation of new walls and offices
80,000 60,000 60,000 360,000
What is the total expense relating to the utilization of office space for 2014? a. b. c. d.
120,000 140,000 60,000 66,000
3. On December 31, 2014, Jasper Company sold an equipment with an
estimated remaining useful life of 10 years. At the same time, the entity leased back the equipment for 2 years. The leaseback is an operating lease. Sale price
7,500,000
Carrying amount
5,000,000
Fair value of equipment on date of sale
6,000,000
What amount of gain should be reported in the income statement for
2014? a. 2,500,000 b. 1,500,000 c. 1,000,000 d. 1,750,000 4. On January 1, 2014, Kamahalan Company sold a machinery to another entity. The entity leased back the machinery for 12 years for use in the new farm that it is developing. The annual lease payment is P700,000 on January 1 of each year. The sale price of the machinery was P5,000,000 while the carrying amount as of the date of sale was Page 1 of 4
P3,500,000. The entity estimated that the remaining economic life of
the equipment is 15 years. The entity is a wholly owned subsidiary of a US Company. It is required to follow US GAAP in the reporting package for consolidation. What amount should be reported as deferred gain on December 31, 2014 in the reporting package for consolidation? a. 1,500,000 b. 1,375,000 c. 1,400,000 d. 0 5. On January 1, 2015, Baby Duck Company leased two automobiles for executive use. The lease required the entity to make five annual payments of P1,500,000 beginning January 1, 2014. At the end of the lease term, December 31, 2018, the entity guaranteed the residual value of the automobiles at P1,000,000. The lease qualified as a finance lease. The interest rate implicit in the lease is 10% and present value factors at 10% are as follows: For an annuity due with 5 payments
4.17
For an ordinary annuity with 5 payments 3.79
Present value of 1 for 5 periods
.62
What is the finance lease liability immediately after the first required payment? a. b. c. d.
4,412,500 5,375,000 6,062,500 4,805,000
6. On January 1, 2014, Bryan Company entered into a 6-year lease with a
lessor. Annual lease payments of P1,500,000 including annual executory cost of P300,000 are payable at the end of each year. The entity knows that the lessor expects a 10% return on the lease. The entity has 1 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of 6 years. In addition, a third party has guaranteed to pay the lessor a residual value of P500,000 ate the end of the lease. The present value of an ordinary annuity of 1 for 6 years at 10% is 4.35 and at 12% is 4.11. the present value of 1 at 10% for 6 periods is 0.56 and at 12% for 6 periods is 0.51. On December 31, 2014, what is the principal amount of the lease obligation? a. 5,220,000 b. 4,542,000 c. 4,323,840 d. 4,850,000
7. On January 1, 2014, Kim Company entered into an 8-year lease for an
equipment. The entity accounted for the acquisition as a finance lease for P6,000,000 which included a P600,000 guaranteed residual value. At the end of the lease, the asset will revert back to the lessor. It is estimated that the fair value of the asset at the end of the 10-year Page 2 of 4
useful life would be P400,000. The entity used the straight line depreciation. What amount should be recognized as depreciation expense on the leased asset for 2014? a. 675,000 b. 700,000 c. 540,000 d. 560,000 8. Kenneth Company acquired an asset costing P3,165,000. The asset is leased on January 1, 2014 to another entity. Five annual lease payments are due each December 31, beginning December 31, 2014. The unguaranteed residual value of the asset at the end of the lease term on December 31, 2018 is P500,000. The asset will revert back to the lessor at the end of the lease term. The lessor's implicit interest rate is 12%. The PV of 1 at 12% for 5 periods is .57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.6. What is the annual rental payment? a. 879,166 b. 740,278 c. 800,000 d. 500,000 For items 9-13 BABYLABS Company is a dealer in equipment. On January 1, 2014, a equipment was leased to another entity with the following provisions: Annual rental payable at the end of each year Lease term and useful life of machinery Cost of equipment Guaranteed residual value Implicit interest rate PV of an ordinary annuity of 1 for 5 periods at 12% PV of 1 for 5 periods at 12%
1,500,000 5 years 4,000,000 500,000 12% 3.60 .57
At the end of the lease term on December 31, 2018, the equipment will revert to the lessor. On such date, the fair value of the asset is P350,000. The perpetual inventory system is used. The lessor incurred initial direct cost of P200,000 in finalizing the lease agreement. 9. What a. b. c. d.
is the gross investment in the lease?
7,500,000 8,000,000 4,000,000 4,500,000
10.
What is the net investment in the lease?
5,400,000 5,685,000 4,000,000 3,500,000 What is the total finance lease revenue?
a. b. c. d. 11.
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a. b. c. d. 12. a. b. c. d. 13. a. b. c. d.
2,315,000 1,815,000 2,100,000 2,600,000 What is the interest income to be recognized for 2014? 682,200 648,000 900,000 960,000 What amount should be reported as profit on sale for 2014? 1,485,000 1,685,000 3,500,000 4,000,000
14. Dan Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. On January 1, 2014, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1, 2014. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. what is the annual lease payment payable in advance required to yield the desired return? a. 500,000 b. 477,826 c. 559,610 d. 460,000 15. As an inducement to enter a lease, a lessor grants Paul company, a lessee, nine months of free rent under a five-year operating lease. The lease is effective on July 1, 2014 and provides for monthly rental of P100,000 to begin April 1, 2015. In the income statement for the year ended June 30, 2015, what amount should be reported ass rent expense? a. 1,020,000 b. 900,000 c. 300,000 d. 255,000
