INACCT3

ACCOUNTING FOR LEASES

QUIZ

MULTIPLE CHOICE:

1. Listed below are some lease cases:

Case 1 Case 2 Case 3 Case 4
Asset’s fair value P12M P11M P10M P8M
Asset’s useful life 10 yrs 9 yrs 9 yrs 10 yrs
Bargain purchase option None None None None
Term of lease 6 yrs 5 yrs 6 yrs 4 yrs
Present value of lease payments P11M P8M ?? P5M

Which of the above cases shall be classified as operating lease on the point-of-view of the lessor?
A 1, 2, 3, 4
B 1, 2, 4
C 2, 4
D 3, 4

2. How should a lessor account for a non-refundable lease bonus paid by the lessee on signing an operating
lease?
A Recognized as rent income when received
B Recognized as rent income during the year of commencement
C Deferred when received and recognized as income in the final year of the lease term
D Recognized as rent income over the term of the lease

3. Which of the following is included in the measurement of the lessee’s lease liability?
I. Amount guaranteed by the lessee or by a party related to the lessee
II. Payment required to exercise an option of the lessee to purchase the asset at a price which is
expected to be sufficiently lower that its fair value at the date of option exercise
III. Contingent rentals
IV. Rental payments over the lease term
A I, II, III, IV
B I, II, III
C I, II, IV
D I, II

4. Which of the following arrangements would most likely be accounted for as an operating lease by the lessor?
A The contract runs for 15 years, and the economic life of the leased asset is 20 years
B The present value of the lease payments is P72,800 and the fair value of the lease asset is P80,000
C The contract allows the lessee the right to buy the leased asset for P200,000 when 65% of the leased
asset’s useful life has expired
D The lessee may renew the three-year lease for an additional three years at the same rental

5. BARTO leased a machine with an estimated economic life of twenty years from LOME. The ten-year
noncancellable lease provides that the title to the machine shifts to the lessee at the end of the lease term.
BARTO appropriately recorded an asset and a liability at the commencement of the contract. BARTO should
depreciate the leased property over
 A 10 years
B 15 years
C 20 years
D Either lease term or useful life, whichever is shorter

6. When measuring the discounted amount of future rentals to be capitalized as part of the initial amount assigned
to the right-of-use-asset, identifiable payments to cover taxes, insurance and maintenance should be
A Included with future rentals to be capitalized
B Excluded from future rentals to be capitalized
C Capitalized but at a different discount rate and for a relevant period that tends to be different from the
future rental payments
D Capitalized but at a different discount rate and recorded in a different account from future rentals

7. SUMAR leased a new machine to ARGO on January 1, 2023 until January 1, 2028. The annual lease payment
is P900,000. Additionally, on January 1, 2023, ARGO paid SUMAR P500,000 as a lease bonus and P250,000
as a security deposit to be refunded on January 1, 2028. In SUMAR’s statement of comprehensive income,
the amount of rental revenue should be
A P1,400,000
B P1,250,000
C P1,000,000
D P900,000

8. Which of the following distinguishes a dealer’s or manufacturer’s lease from the direct financing lease?
A The manner in which the rental receipts are recorded as rental revenue
B The amount of depreciation recorded each year by the lessor
C The recognition of the manufacturer’s or dealer’s profit at the commencement of the lease
D The allocation of the initial direct costs by the lessor to periods benefitted by the lease arrangements

9. In a lease that is recorded as a manufacturer’s lease or dealer’s lease by the lessor, gross profit
A Should be recognized in full in profit or loss at the lease’s commencement
B Should be recognized in profit or loss over the period of the lease using the straight-line method
C Should be recognized in profit or loss over the term of the lease using the interest method
D Should be deferred and transferred to profit or loss during the last term of the lease

10. On July 1, 2022, PEDRO signed a 5-year lease for an equipment having a twelve-year useful life. The lease
contract provides for neither a transfer of title to PEDRO nor a bargain purchase option. The contract calls
for annual payments of P240,000 starting July 1, 2023. Incremental borrowing rate is 14% which
approximates the rate implicit in the contract. Fair value of the lease asset at the inception of the lease is
P1,480,000. How much is the interest expense for the year ended December 31, 2022?
A P115,248
B P65,755
C P57,674
D P0

11. On July 1, 2022, BALBIN leased a parcel of land from AQUILING under a three-year operating lease. Total
rent for the term of the lease will be P3,600,000, payable as follows: 12 months at P50,000; 12 months at
P75,000, and 12 months at P175,000. All payments were made when due. How much is AQUILING’s rent
income for the fiscal year ended June 30, 2023?
A P600,000
B P900,000
C P1,200,000
D P2,100,000
12. ALANO leased a new equipment from YERRO on May 1, 2022, under a contract with the following terms:
(1) 10-year lease term; (2) 12-year useful life of asset; (3) P400,000 annual rental payable at the beginning of
each year; (4) 14% implicit interest. ALANO has the option to purchase the equipment on May 1, 2032 by
paying P500,000 which approximates the expected fair value of the asset on the option exercise date. On May
1, 2022, ALANO should record the leased asset at
A P2,515,000
B P2,380,000
C P2,245,000
D P1,980,000

13. On January 1, 2022, BASMAYOR acquired a machine by signing a four-year lease. Annual payments of
P1,742,174 are payable at the beginning of each year starting January 1, 2022. BASMAYOR does not
guarantee the residual value of P1,200,000 at the end of the lease contract. The asset’s useful life is five years,
at the end of which, the asset’s scrap value is expected to be P80,000. BASMAYOR uses the straight-line
method to record depreciation. The lessor’s implicit interest rate is 10% which is known to the lessee. At
what amount should this machine be recorded by BASMAYOR on January 1, 2022?
A P6,074,699
B P6,124,373
C P6,342,077
D P6,894,311

14. On January 2, 2022, BENIGAY entered into a five-year lease for a drilling apparatus. BENIGAY accounted
for the acquisition at P2,400,000., which includes a P100,000 bargain purchase option. At the end of the lease
term, BENIGAY expects to exercise the purchase option. BENIGAY estimates that the apparatus’ fair value
will be P200,000 at end of its eight-year useful life. BENIGAY regularly uses straight0line method to
depreciate similar asset. For the year ended December 31, 2022, what amount should BENIGAY recognize
as depreciation expense on the lease asset?
A P480,000
B P460,000
C P300,000
D P275,000

15. On January 1, 2022, CALOMOT leased a machine to CLAMOR for a four-year period ending on December
31, 2025. The machine cost CALOMOT P300,000 and has a useful life of 5 years. Annual payments of
P118,951, which includes P10,000 executory costs. The machine’s fair value is P400,000. The lessee
guarantees the residual value of P80,000. Lease payment is due every December 31 and CLAMOR made the
first payment of December 31, 2022. CLAMOR’s implicit interest rate is 10%. CALOMOT incurred P15,000
costs to consummate the lease contract. How much profit, inclusive of interest income, should CALOMOT
report from this lease for the year ended December 31, 2022?
A P100,000
B P125,000
C P140,000
D P162,991

16. On July 31, 2022, MUTIA leased a machine to GABRIEL for a 6-year term requiring payments of P100,000
at the beginning of each year. The machine cost P480,000, which is the fair value at the lease date, and has a
useful life of eight years with no residual value. MUTIA appropriately recorded the lease as a direct financing
lease. MUTIA’s implicit interest rate is 10%. At the inception of the lease, the gross lease receivables account
should have a balance of
A P600,000
B P586,800
C P480,000
 D P479,100

17. DIMAANO leases computer equipment to customers under direct financing lease. The equipment has no
residual value at the end of the lease term and the contract does not contain bargain purchase option.
DIMAANO wishes to earn eight percent interest on a five-year lease of equipment with a fair value of
P323,400. What is the total amount of interest revenue that DIMAANO will earn over the life of the lease?
A P51,600
B P75,000
C P129,360
D P139,450

18. ENRIQUEZ leased a machine from ESPIRITU on January 1, 2021. The first annual payment was made on
January 1, 2022. The machine has a useful life of six years. The lease contract requires four annual payments
of P33,000, including a P3,000 annual payment for repairs and maintenance. The machine will revert to the
lessor at the end of the lease contract and lessee guarantees a residual value of P5,000. Interest implicit in the
contract is 10% and is known to ENRIQUEZ. On January 1, 2024, the lease payment included an amount of
P5,000 for exceeding a limit for machine usage hours specified in the lease contract. ENRIQUEZ would
account for this charge as
A An expense in its 2023 statement of comprehensive income
B An expense in its 2024 statement of comprehensive income
C A reduction in the lease liability
D Additional executory costs

19. FIGUEROA leased a machine from GUBAN on January 1, 2021. The first annual payment was made on
January 1, 2022. The machine has a useful life of six years. The lease contract requires four annual payments
of P33,000, including a P3,000 annual payment for repairs and maintenance. The machine will revert to the
lessor at the end of the lease contract and lessee guarantees a residual value of P5,000. Interest implicit in the
contract is 10% and is known to FIGUEROA. For the year ended December 31, 2022, what would
FIGUEROA record in relation to the lease?
A An interest expense of P9,851
B A zero interest expense
C An interest payable of P9,851
D An interest payable of P7,836

20. On January 1, 2022, JAVIER sold an equipment to KUSAIN for P1,900,000. Because of the entity’s
commitment to its customers to provide their needs for the next four years, JAVIER simultaneously leased
back the equipment from KUSAIN. The transfer of the asset to the buyer qualifies to be accounted for as a
sale under PFRS 15. Information relating to this transaction follows: (1) fair value of equipment, P2,200,000;
(2) carrying value of equipment, P1,700,000; (3) remaining useful life of equipment is eight years; (4) lease
term is five years; (5) annual rental payable at the end of each year is P500,000; (6) market rate of interest is
10%. How much is the gain on sale-leaseback?
A P71,602
B P139,784
C P185,239
D P500,000

21. On January 1, 2022, MIMAY leased a machine to PAYUMO for a four-year period ending on December 31,
2025. The machine cost MIMAY P300,000 and has a useful life of 5 years. Annual payments of P118,951,
which includes P10,000 executory costs. The machine’s fair value is P400,000. The lessee guarantees the
residual value of P80,000. Lease payment is due every December 31 and PAYUMO made the first payment
of December 31, 2022. PAYUMO’s implicit interest rate is 10%. MIMAY incurred P15,000 costs to
 consummate the lease contract. How much should MIMAY report as net investment in the lease on December
31, 2022 statement of financial position?
A P291,049
B P320,154
C P321,049
D P331,049

22. On January 1, 2022, PLATON acquired an equipment by signing a four-year lease contract. Annual rentals
of P1,742,174 are payable at the beginning of each year starting January 1, 2022. Lessee guarantees the
residual value of P1,200,000 at the end of the lease term. The asset’s useful life is five years, at the end of
which, the asset’s scrap value is expected to be P80,000. PLATON uses straight-line method to depreciate
this asset. The lessor’s implicit interest rate is 10% which is known to the lessee. How much depreciation
should PLATON record on this asset for the year 2022?
A P1,208,875
B P1,362,862
C P1,423,578
D P1,518,675

23. RESUELLO leased office premises to SABADO for a five-year contract beginning on January 2, 2022. Under
the terms of the operating lease, rent for the first year is P80,000 and the rent for the second year through the
fifth year is P125,000 per annum. However, as an inducement to enter the lease, RESUELLO granted
SABADO the first six month of the lease rent-free. In the 2022 statement of comprehensive income, what
amount should RESUELLO report as rent income?
A P120,000
B P116,000
C P108,000
D P80,000

24. In a lease where there is either a transfer of title at the end of the lease term or a bargain purchase option, the
lessee shall capitalize the asset and depreciate the same over
A The economic life of the asset
B The term of the lease
C The economic life of the asset or the term of the lease whichever is shorter
D The term of the lease or the economic life of the asset whichever is longer

25. Which of the following shall be included in the initial measurement of the right-of-use-asset?
I. Present value of lease payments not yet collected at the commencement date
II. Present value of lease payments paid to the lessor at or before the commencement date
III. Variable lease payments based on sales revenue
IV. Initial direct costs incurred by lessee
V. Any estimated dismantling or restoration costs, recognized as a provision
A I, II, III, IV, V
B I, II, IV, V
C II, III, IV
D I, II, III, IV

26. The equal monthly rental payments made by the lessee in a short-term lease for which the lessee applies the
recognition and measurement exemptions in PFRS 16 Leases shall be
A Recorded partly as interest expense and partly a reduction of lease liability
B Recorded as rent expense
C Recorded as reduction of lease liability
D Allocated between interest expense and depreciation expense
27. Initial direct costs incurred by the lessor in connection with specific leasing activities as in negotiating and
securing leasing arrangements, in a direct financing lease, are
A Included in the initial measurement of the finance lease receivable and reduce the amount of income
over the lease term
B Recognized as an expense, usually as part of the cost of sales
C Recorded as deferred costs and amortized over the useful life of the asset
D Ignored

28. In a lease that is recorded as a manufacturer’s lease or dealer’s lease by the lessor, interest revenue
A Should be recognized in full as revenue at the inception of the lease
B Should be recognized over the period of the lease using the straight-line method
C Should be recognized over the period of the lease using the interest method
D Does not arise

29. SORIANO sold its factory at a gain and simultaneously leased it back for ten years. The sales price is at fair
value. The factory’s remaining useful life is thirty years. Based only on this information and applying PFRS
16 Leases, at the time of sale, SORIANO should report the gain
A In full in profit or loss
B As an asset valuation allowance
C As the amount relating only to the right transferred to the buyer-lessor
D As a deferred credit

30. On January 1, 2022, SUAN acquired an equipment by signing a four-year lease contract. Annual rental
payments of P1,742,174 are payable at the beginning of each year starting January 1, 2022. SUAN is given
an option to buy the machine for P250,000 at December 31, 2025, when the asset’s market price is expected
to be P1,250,000. The asset’s useful life is six years, at the end of which, the scrap value of the asset is
expected to be P80,000. SUAN uses the straight-line method to depreciate this asset. With an implicit interest
rate of 10%, SUAN appropriately recorded this asset and related liability on January 1, 2022 at P6,245,450.
On December 31, 2025, the end of the lease term, SUAN did not exercise the purchase option. How much
loss, if there is any, should SUAN recognize as a result of the failure to exercise the purchase option?
A NIL
B P885,150
C P1,000,000
D P1,885,150

31. TEJANO leased machinery to TOMES on July 1, 2022 for an eight-year period expiring on June 30, 2030.
The contract calls for annual lease payments of P600,000 and are due every July 1 beginning on July 1, 2022.
The interest rate contemplated by TEJANO and TOMES is 10%. The cash selling price of the machinery is
P3,520,000, and the cost of the machinery in the books of TEJANO is P2,800,000. The lease is appropriately
accounted for as a dealer’s lease. What is the amount of profit on the sale that TEJANO should record for the
year ended December 31, 2022?
A P45,000
B P90,000
C P720,000
D P1,280,000

32. VILLANUEVA leased a machine from AVILA on January 1, 2021. The first annual payment was made on
January 1, 2022. The machine has a useful life of six years. The lease contract requires four annual payments
of P33,000, including a P3,000 annual payment for repairs and maintenance. The machine will revert to the
lessor at the end of the lease contract and lessee guarantees a residual value of P5,000. Interest implicit in the
contract is 10% and is known to VILLANUEVA. If AVILA recorded the net investment in lease higher than
the liability initially recorded by VILLANUEVA, the difference could be due to
 A Initial direct costs
B An unguaranteed residual value
C Both initial direct costs and an unguaranteed residual value
D None of the above

33. On July 31, 2022, MUTIA leased a machine to GABRIEL for a 6-year term requiring payments of P100,000
at the beginning of each year. The machine cost P480,000, which is the fair value at the lease date, and has a
useful life of eight years with no residual value. MUTIA appropriately recorded the lease as a direct financing
lease. MUTIA’s implicit interest rate is 10%. How much is the interest revenue relating to the lease for the
year ended December 31, 2022?
A P48,000
B P35,417
C P25,000
D P15,833

34. On January 1, 2022, JAVIER sold an equipment to KUSAIN for P1,900,000. Because of the entity’s
commitment to its customers to provide their needs for the next four years, JAVIER simultaneously leased
back the equipment from KUSAIN. The transfer of the asset to the buyer qualifies to be accounted for as a
sale under PFRS 15. Information relating to this transaction follows: (1) fair value of equipment, P2,200,000;
(2) carrying value of equipment, P1,700,000; (3) remaining useful life of equipment is eight years; (4) lease
term is five years; (5) annual rental payable at the end of each year is P500,000; (6) market rate of interest is
10%. What are the amounts recorded by JAVIER for the right-of-use-asset and lease liability, respectively,
at January 1, 2022?
A P1,456,552; P1,584,950
B P1,456,552; P1,885,950
C P1,456,552; P1,284,950
D P1,884,950; P1,456,552

35. FIGUEROA leased a machine from GUBAN on January 1, 2021. The first annual payment was made on
January 1, 2022. The machine has a useful life of six years. The lease contract requires four annual payments
of P33,000, including a P3,000 annual payment for repairs and maintenance. The machine will revert to the
lessor at the end of the lease contract and lessee guarantees a residual value of P5,000. Interest implicit in the
contract is 10% and is known to FIGUEROA. How much annual depreciation expense should FIGUEROA
record?
A P24,628
B P16,419
C P23,378
D P15,585

36. On December 31, 2022, LENY leased a new machine from ISKO with the following terms: (1) six-year lease
term; (2) six-year asset useful life; (3) P500,000 annual lease payments due every December 31; (4) 15%
lessor’s incremental borrowing rate (5) 12% implicit interest rate known to lessee. The asset will revert to
the lessor at the termination of the lease. The cost of the asset in ISKO’s accounts is P3,755,000. At what
amount should LENY record the asset?
A P3,755,000
B P2,305,000
C P2,175,000
D NIL

END OF QUIZ