Problem 12-3 (AICPA Adapted)

On March 20, 2020, Barnes Company purchased a machine for P2,400,000 for the purpose of leasing it
to others.

The machine is expected to have a 10-year life and no residual value. It will be depreciated on the
straight line basis computed to the nearest month.

The machine was leased to Rally Company on April 1, 2020 tor four years, at a monthly rental of
P36,000.

There is no provision for renewal of the lease or purchase of the machine by the lessee upon expiration
ot the lease.

Barnes Company paid P120,000 initial direct costs associated with negotiating the lease in March 2020.

Required:

1. Prepare journal entries on the books of the lessor for 2020.

2. Present the machinery in the statement of financial position of Barnes Company on December 31,
2020.

Problem 12-4 (IAA)

Dorey Company purchased a machine on January 1, 2020 for P5,000,000 for the express purpose of
leasing it.

The machine was expected to have a 10-year life with no residual value and the straight line method of
depreciation is used.

On March 1, 2020, Dorey Company leased the machine to Anne Company tor P1,200,000 a year for a 4-
year period ending February 28, 2024.

Dorey Company paid a total of P60,000 for maintenance and received P1,200,000 from Anne Company
on March 1, 2020.

Dorey Company retains title to the property and plans to lease it to someone else after the 4-year lease
period.

Required:

1. Prepare journal entries on the books Dorey Company.

2. Determine the net rent income of Dorey Company.

Problem 12-5 (ACPA Adapted)

On January 1, 2020, Condor Company purchased a new machine for P4,800,000 and leased it to East
Company the same day. The machine has an estimated useful life of 12 years and will be depreciated by
the straight line method.

The lease is for a three-year period expiring January 1, 2023 at an annual rental of P850,000.
Additionally, East Company paid P300,000 to Condor ompany as a lease bonus to obtain the three-year
lease.

During 2020, Condor Company paid insurance of P80,000 for the leased machine.

Required:

Prepare journal entries on the books of the lessor for the year ended December 31, 2020.

Problem 12-6 (PHILCPA Adapted)

Manila Company is engaged in leasing heavy equipment. On December 1, 2020, the entity bought a
second hand heavy equipment for P375,000.

In December 2020, the entity incurred P75,000 for a major overhaul to put the equipment in good
running condition.

The equipment is available for the intended use on December 31, 2020. The equipment has an
estimated useful life of 5 years. Depreciation is on a straight line basis.

On April 1, 2021, Manila Company leased the equipment to Makati Company for 2 years up to March 31,
2023. The lease fee is P15,000 per month. Makati Company paid P180,000 on April 1, 2021, the lease fee
tor one year.

During 2021, Manila Company spent P7,000 for minor repairs and P3,000 for transportation of the
equipment to Makati Company.

Required:

Prepare journal entries on the books of lessor for 2020 and 2021.

Problem 12-7 (AICPA Adapted)

As an inducement to enter a lease, Aris Company, a lessor, grants Ronald Company, a lessee, nine monts
of free rent under a five year operating lease

The lease is effective on April 1, 2020 and provides tor

monthly rental of P100,000 to begin January , 2021

Required:

Prepare journal entries on the books of the lessor over the 5-year lease term.

Problem 12-8 (AICPA Adapted)

On October 1, 2020, Dean Company leased office space at a monthly rental of P300,000 for 10 years
expiring September 30, 2030.

As an inducement for Dean Company to enter into the lease, the lessor permitted Dean Cumpany to
occupy the premises rent-tree from October 1 to December 31, 2020

Required:

Prepare journal entries on the books of the lessor for 2020, 2021 and the last year 2030.

Problem 12-9 (AICPA Adapted)

On January 1, 2020, Glee Company leased a delivery truck from Charice company under a 3-year
operating lease.

Total rent for the term of the lease is P3,600,000, payable P50,000 monthly for 2020, P75,000 monthly
for 2021, and P175,000 monthly for 2022. All payments were made when due.

Required:

Prepare Journal entries on the books of the lessor over the 3-year lease term

Problem 12-10 (AICPA Adapted)

Conn Company owns an office building and normally charges tenants P3,000 per square meter per year
for office space.

Because the occupancy rate is low, Conn Company agreed to lease 1,000 square meters to Hanson
Company at P1,200 per square meter tor the first year of a three-year operating lease. Rent for
remaining years will be at the P3,000 rate.

Hanson Company moved into the building on January 1, 2020, and paid the first year's rent in advance.

What amount of rental revenue should be reported in the income statement for the year ended
September 30, 2020?

a. 2,400,000

b. 1,200,000

c. 1,800,000

d. 900,000

Problem 12-11 (AICPA Adapted)

Wall Company leased an office to Fox Company for a

five-year term beginning January 1, 2020.

Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5
is P1,250,000 per annum.
However, as an inducement to enter the lease, Wall Company granted Fox Company the first six months
of the lease rent-free.

What amount should be reported as rental income for 2020?

a. 1,200,000

b. 1,160,000

c. 1,080,000

d. 800,000

Problem 12-12 (LAA)

On January 1, 2020, Abba Company leased a building to Bee Company under a four-year operating lease.

The monthly rental for 2020, 2021, 2022 and 2023 is P100,000, P150,000, P200,000 and P250,000,
respectively.

Rentals are payable at the end of each month. All rental

payments within the year were made when due.

What amount should be reported as rent receivable from Bee Company on December 31, 2021?

a. 1,000,000

b. 1,200,000

c. 600,000

d. 900,000

Problem 12-13 (IAA)

Abe Company, lessor, leased an equipment under an

operating lease.

The lease term is 5 years and the lease payments are made in advance on January 1 of each year as
shown in the following schedule

January 1, 2020

January 1, 2021

danuary 1, 2022

January 1, 2023

January 1, 2024

1,000,000
1,000,000

1,400,000

1,700,000

1,900,000

On December 31, 2021, what amount should be reported a rent receivable?

a. 1,400,000

b. 800,000

c. 400,000

d. 0

Problem 12-14 (AICPA Adapted)

At the beginning of current year, Wren Company leased a building to Brill Company under an operating
lease for ten years at P500,000 per year, payable the first day of each lease year. Wren Company paid
P150,000 to a real estate broker as initial direct cost.

The building is depreciated P120,000 per year. Wren

Company incurred insurance and property tax expense

totaling P90,000 for the current year.

What is the net rent income for the current year?

a. 275,000

b. 290,000

c. 350,000

d. 365,000

Problem 12-15 (AICPA Adapted)

At the beginning of current year, Rapp Company leased a new machine to Lake Company for 5 yearsThe
annual rental is P900,000.

Additionally, Lake Company paid P500,000 to Rapp Company as a lease bonus and, P250,000 as a
security deposit to be refunded upon expiration of the lease.

What amount should be reported as rent revenue for the current year?

a. 1,400,0000

b. 1,250,000

c. 1,000,000
d. 900,000

Problem 12-16 (AICPA Adapted)

At the beginning of current year, Jade Company purchased a new machine for P4,800,000 and leased it
to East the same day. The machine has an estimated 12-year life and will be depreciated P400,000 per
year. The lease is for a three-year period at an annual rental of P850,000.

Additionally, East paid P300,000 to Jade as a lease bonus to obtain the three-year lease. Jade incurred
insurance expense of P80,000 for the leased machine during the current year.

What is the operating profit of the lessor on the leased asset for the current year?

a. 670,000

b. 550,000

c. 470,000

d. 370,000

Problem 12-17 (AICPA Adapted)

On January 1, 2020, Glen Company leased a building to Dix Company for a ten-year term at an annual
rental of P500,000,

At inception of the lease, Glen received P2,000,000 covering the first two years' rent of P1,000,000 and a
security deposit of P1,000,000.

This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of
rent for the last two years of the lease.

What amount should be reported as current and noncurrent liability in the December 31, 2020
statement of financial position?

Current liability

500,000

1,000,000

1,000,000

Noncurrent liability

2,000,000

1,000,000

1,000,000

500,000
Problem 12-18 (AICPA Adapted)

Barnel Company owns and manages apartments. On signing a lease, each tenant must pay the first
month and last month rent and a P50,000 refundable security deposit.

The security deposit is rarely refundable in total because cleaning costs of Pl5,000 per apartment are
almost always deducted

About 30% of the time, the tenants are also charged for damages to the apartment which typically cost
P10,000.

If a one-year lease is signed on a P90,000 per month apartment, what amount should be reported as
refundable security deposit?

a. 140,000

b. 50,000

c. 35,000

d. 32,000

Problem 12-19 (LAA)

On July 1, 2020, Hutch Company leased equipment to Elder Company for a one-year period expiring
June 30, 2021 for P60,000 a month.

On July 1, 2021, Hutch leased this piece of equipment to Toil Company for a three-year period expiring
June 30, 2024 for P75,000 a month.

The original cost of the equipment was P4,800,000. The equipment, which has been continually on lease
since July 1, 2017, is being depreciated on a straight line basis over an eight-year period with no residual
value.

What is the amount of net rental income that would be

reported by Hutch Company for the year ended December 31, 20211?

a. 210,000

b. 450,000

c. 810,000

d. 360,000

Problem 12-20 (IAA)

On May 1, 2020, Hug Company leased equipment to Rave Company which expires on May 1, 2021. Rave
could have bought the equipment from Hug for P3,200,000 instead of leasing it.

Hug's accounting records showed a carrying amount for the equipment on May 1, 2020 of P2,800,000.
Hug's depreciation on the equipment in 2020 was P360,000.
During 2020, Rave paid P720,000 in rentals to Hug for the 8-month period. Hug incurred maintenance
and other related costs under the terms of the lease of P64,000 in 2020.

After the lease with Rave expires, Hug will lease the

equipment to another entity tor two years.

What is the pretax income derived by Hug for 2020?

a. 296,000

b. 360,000

C. 656,000

d. 720,000

Problem 12-21 Multiple choice (AICPA Adapted)

1. Rent received in advance by the lessor in an operating lease should be recognized as revenue

a. When received

b. At the lease inception

c. At the lease expiration

d. ln the period specified by the lease

2. When should a lessor recognize in income a nonrefundable lease bonus paid by a lesseee?

a. When received

b. At the inception of the lease

c. At the lease expiration

d. Over the lease term

3. Lease payments under an operating lease shall be recognized as an income by the lessor on

a Straight line basis over the lease term

b. Diminishing balance basis

c. Sum of units basis

d. Cash basis

4. In an operating lease that is recorded by the lessor, the equal monthly rental payments should be

a. Recorded as reduction of depreciation.

b. Allocated between reduction in lease receivable and interest expense.

c. Recorded as reduction in the lease receivable.

d. Recorded as a rental income.

5. Which statement characterizes an operating lease

a. The lessee records depreciation and interest.

b. The lessee records a lease obligation

c. The lessor transfers title of the underlying asset the lesee for the duration of the lease term.

d. The lessor records depreciation and lease revenue

Problem 12-22 Multiple choice (IFRS)

1. The classification of a lease is normally carried out

a. At the end of the lease term

b. After a "cooling off" period of one year

C. At the inception of the lease

d. When the entity deems it to be necessary

2. The classification of a lease as either operating or finance lease is based on

a. The length of the lease.

b. The transfer of the risks and rewards of ownership.

C. The lease payments being at least 50% of fair value.

d. The economic life of the underlyıng asset.

3. All of the following situations would prima facie lead to a lease being classified as a fiinance lease,
except

a. Transfer of ownership to the lessee.

b. Option to purchase at a value below the fair value of

the underlying asset.

c. The lease term is for a major part of the asset's life.

d. The present value of the lease paynments is 50% of the fair value of the asset.

4. In case of lease of land and building, the lease payments should be split

a. According to relative fair value of the two elements.

b. Based on the useful Iife of the two elements.

c. Using the sum of digits method.

d. According to method devised by the entity.

5. Where there is a lease of land and building and the title to the land is not transterred, generally the
lease is

treated as if

a. The land is finance lease.

b. the land is finance and the building is operating.

c. The land is operating and the building 18 finance.

d. The land and building are an operating lease.

Problem 12-23 Multiple choice (LAA)

1. The accounting concept that is principally used to classify leases into operating and finance on the
part or lessor is

a. Substance over form

b. Prudence

c. Neutrality

d. Completeness

2. Which statement is correct regarding the lease capitalization criteria?

a. The lease transfers ownershıp to the lessor.

b. The lease contains a purchase option.

C. The lease term is equal to at least 75% of the economic life of the underlyıng asset.

d. The lease payments are at least 90% of fair value of asset.

3. Which condition would require ease capitalization?

a. The lease does not transfer title to the lessee.

b. There is an uncertain purchase option.

c.The present value of the ease payments is significantly more than the fair value of the asset.

d. The lease term is below the useful life of asset.

4. One of the four determinative criteria for a finance lease specifies that the lease term be equal to or
greater than

a. The economic life of the underlying asset.

b. 90 percent of the economic life of the asset.

C. 75 percent of the economic life of the asset.

d. 50 percent of the economic life of the asset.

5. One of the four determinative criteria for a finance lease is that the present value at the beginning of
the lease term of the lease payments equals or exceeds

a. The fair value of the underlying asset

b. 90 percent of the fair value of the underlying asset

c. 75 percent ot the fair value of the underlying assev

d. 50 percent of the fair value of the underlying asse

Problem 18-1 (IAA)

At the beginning of current year, Shakira Company had thefollowing balances in the memorandum
records with respect to a defined benetit plan

5,000,0000

6,000,000

Fair value of plan assets

Projected benefit obligation

During the year, the accountant had determined that current service cost is P1,550,000.

The discount rate is recognized at 10% and the expected return on plan assets is 12%.

The actual return on plan assets for the year is P650,000. The entity contributed P1,200,000 to the plan
at the end of the year.

Required:

1. Determine the employee benefit expense for the current year.

2. Determine the "remeasurement" at year-end.

3. Prepare journal entry to record the employee benefit expense.

4. Determine the balance of the prepaid/accrued benetit cost at year-end.

5. Reconcile the balance of the prepaid/accrued benefit cost with memorandum records.
Problem 18-2 (IAA)

At the beginning of current year, Shiela Company had the following balances in the memorandum
records related to a defined benefit plan:

Fair value of plan assets

Projected benefit obligation

5,750,000

6,500,000

The actuary provided the following information for the

current year:

Current service cost

Settlement discount rate

Expected return on plan assets

Actual return on plan assets

Contribution to the plan

Benefits paid to retirees

600,000

10%

8%

700,000

900,000

100,000

Required:

1. Determine the employee benefit expense for the current year.

2. Determine the "remeasurement" at year-end.

3. Prepare journal entry to record the employee benefit expense.

4. Determine the balance ot the prepaid/accrued benefit cost at year-end.

5. Reconcile the prepaid/accrued benefit cost with the memorandum records.

Problem 18-3 (IAA)

At the beginning of current year, Rachel Company provided the following data in connection with a
detined benefit plan:

Fair value of plan assets

Projected benefit obligation

6,700,000

7,600,000

The accountant revealed the following information for the current year:

Current service cost

Past service cost

Discount rate

Actual return on plan assets

Contribution to the plan

Benefits paid to retirees

1,450,000

300,000

10%

500,000

1,500,000

800,000

Required:

1. Determine the employee benefit expense for the current year.

2. Determine the remneasurement at year-end to be

recognized as component of other comprehensive income.

3. Prepare journal entry to record the employee benefit expense.

4. Compute the balance of the prepaid/accrued benefit cost at year-end.

5. Reconcile the general ledger of the entity with the memorandum ledger.