UNIVERSITY
OF SANTO TOMAS
UST - ALFREDO M. VELAYO COLLEGE OF ACCOUNTANCY
2ND TERM, ACADEMIC YEAR 2020-2021
IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING
ACCOUNTING FOR LEASES
BOOKS OF LESSEE
1. What accounting concept is principally applied to accounting for leases?
a. Completeness.
b. Neutrality.
c. Prudence.
d. Substance over form.
2. Which of the following arrangements contains or is considered a lease contract?
I. Supplier L provides Customer M the use of 5 delivery vans of particular type for a
term of 5 years. The contract specifies the vans and Customer M has the decision
where the goods will be delivered and the types of goods to be delivered. Customer
M can use the vans for whatever purpose, except for delivery of illegal drugs,
explosives, firearms and other items of similar nature. Supplier L is required to
substitute a van that may require repairs and maintenance service.
II. Accountantea Company enters into a contract with SuperMalls to use a space for a
kiosk (which Accountantea owns) to sell its milktea products for a three-year period.
The contract specifies the amount of the space, which may be located at any area in
the mall, provided that SuperMalls may change the location of Accountantea space
with a two-day notice. Minimal cost is incurred by SuperMalls in changing the space
allotted to Accountantea. Accountantea’s kiosk can be moved easily within the mall
and there are several available areas that would meet the space requirement specified
in the contract.
III. JetLag Company enters into a 15-year contract with Craftbuilders Company to use
three specified jumbo jets that will fly passengers from Manila to selected cities in
Asia Pacific. Jetlag makes the decisions about the use of the jumbo jets and the
destination of such flights. Craftbuilders owns a fleet of jumbo jets, such that it can
substitute any unit of jet for JetLag Company for reason of repairs, maintenance or
malfunction. In fact, Craftbuilders is obliged to substitute those jets in such cases.
IV. The contract between Indoplas and FastMover requires the latter to transport a
specified quantity of goods by using a specified type of car in accordance with a stated
time table for three years, renewable at the end of the term. FastMover provides the
delivery cars, driver and gasoline. The contract states the nature and quantity of goods
to be transported and the type of car to be used that suits the nature of the goods.
FastMover has a large pool of similar cars that can be used for this purpose. The cars,
when not in use, are parked at the FastMover’s premises.
a. I, II, III and IV
b. I, III, and IV
c. I and III
d. II and III
3. How should a lessee account for a lease?
a. At lease inception, the lessee shall classify the lease as either finance lease or operating
lease.
b. The lessee shall recognize, at lease commencement date, a right-of-use asset and a
lease liability.
c. The lessee shall recognize on a straight-line basis rent expense over the lease term.
d. The lessee shall record the lease contract using a memorandum entry.
4. The portion of the lease payments that is not fixed in amount but is based on a factor other
than just the passage of time such as percentage of sales, amount of usage, price index and
market rate of interest is called
a. bargain purchase option.
b. variable rent.
c. contingent rent.
d. executory costs.
5. Which of the following are 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 than its fair value at the date of option
exercise.
III. Contingent rentals
IV. Rental payments over the lease term.
a. I, II, III and IV
b. I, II and III
c. I, II and IV
d. I and II
6. When measuring the discounted amount of future rentals to be capitalized as part of the
initial amount assigned to 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 different discount rate and recorded in a different account from future
rentals.
7. 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 date of commencement.
II. Lease payments paid to the lessor at or before commencement date.
III. Variable lease payments based on sales revenue.
IV. Initial direct costs incurred by the lessee.
V. Any estimated dismantling or restoration costs, recognized as a provision.
a. I, II, III, IV and V
b. I, II, IV, and V
c. II, III and IV
d. I, II, III and IV
8. The lease liability of the lessee would be reduced periodically by the
a. lease payment less the portion allocable to interest.
b. lease payment plus the interest expense for the period.
c. lease payment less depreciation expense
d. lease payment.
9. A ten-year finance lease requires equal annual payments. The current portion of the lease
liability at the end of year 1 is
a. the annual lease payment for year 1.
b. the reduction of the lease liability in year 1.
c. the reduction of the lease liability in year 2.
d. one-tenth of the original lease liability.
10. Lessee Company leased a machine with an estimated useful life of 20 years from Lessor
Company. The 10-year non-cancellable lease provides that the title to the machine
transfers to Lessee Company at the end of the lease term. Lessee Company appropriately
recorded an asset and a liability in its records. Lessee Company should depreciate the
leased asset over
a. 10 years.
b. 15 years.
c. 20 years.
d. 50 years.
11. In a lease where there is neither transfer of title at the end of the lease term nor a bargain
purchase option, the lessee shall capitalize the leased asset and depreciate it over
a. the useful life of the leased asset.
b. lease term.
c. the shorter of the lease term and the useful life of the asset.
d. the longer of the lease term and the useful life of the leased asset.
12. 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 IFRS 16 Leases shall be
a. recorded partly as interest expense and partly a reduction of lease liability.
b. recorded as rent expense on a straight-line basis over the lease term.
c. recorded as reduction of lease liability.
d. allocated between interest expense and depreciation expense.
13. On July 1, 2022, Extreme Company signed a five-year lease for an equipment having a 12-
year economic life. The lease agreement provides for neither a transfer of title to Extreme
nor a bargain purchase option. The agreement calls for annual payments of P240,000
starting July 1, 2023. Incremental borrowing rate is 14% which approximates the rate
implicit in the lease. Fair value of the equipment at the inception of the lease is
P1,480,000. Present value factors are as follows:
PV of an ordinary annuity at 14% for five periods - 3.433
PV of an annuity due at 14% for five periods - 3.914
How much is the interest expense for the year ended December 31, 2022?
a. P115,248
b. P 65,755
c. P 57,674
d. P 0
14. Use the same information given in item 13. What is the amount of liability relating to the
lease agreement that Extreme would report in its December 31, 2022 statement of financial
position?
a. P939,360
b. P881,594
c. P823,644
d. P120,000
15. On December 31, 2022, Simon Company leased a new machine from Junction Company
with the following pertinent information:
Lease term 6 years
Useful life of machine 6 years
Annual rental payable every December 31 P500,000
Simon's incremental borrowing rate 15%
Implicit interest rate in lease (known by Simon) 12%
Present value of annuity 1 in advance for 6 periods at 12% 4.61
Present value of annuity 1 in advance for 6 periods at 15% 4.35
The machine reverts to Junction at the termination of the lease. The cost of the machine
on Junction’s accounting records is P3,755,000.
At what amount should Simon record the right-of-use asset at December 31, 2022?
a. P3,755,000
b. P2,305,000
c. P2,175,000
d. P0
16. Use the same information given in Item 15. What is the lease liability balance at December
31, 2023?
a. P1,805,000
b. P1,851,600
c. P1,581,600
d. P1,521,600
17. Use the same information given in Item 15. Assuming that Simon uses straight-line method
of depreciation, how much is the depreciation expense for year ended December 31, 2023?
a. P384,167
b. P362,500
c. P288,125
d. P271,875
18. Dominic Company leased a new machine from Isidore Company on May 1, 2022, under a
lease with the following information:
Lease term 10 years
Useful life of machine 12 years
Annual rental payable every December 31 P400,000
Implicit interest rate in lease 14%
Present value of annuity 1 in advance for 10 periods at 12% 5.95
Present value of 1 for 10 periods at 14% 0.27
Dominic has the option to purchase the machine on May 1, 2032 by paying P500,000,
which approximates the expected fair value of the machine on the option exercise date. On
May 1, 2022, Dominic should record the right-of-use asset at
a. P2,515,000.
b. P2,380,000.
c. P2,245,000.
d. P1,980,000.
19. On January 2, 2022, Raphael Mining Company (lessee) entered into a 5-year lease for
drilling equipment. Raphael accounted for the acquisition at P2,400,000, which includes
a P100,000 bargain purchase option. At the end of the lease, Raphael expects to exercise
the bargain purchase option. Raphael estimates that the equipment’s fair value will be
P200,000 at the end of its 8-year life. Raphael regularly uses straight-line depreciation on
similar equipment. For the year ended December 31, 2022, what amount should Raphael
recognize as depreciation expense on the leased asset?
a. P480,000
b. P460,000
c. P300,000
d. P275,000
20. On January 1, 2022, Bello Enterprises acquired a machine by signing a four-year lease.
Annual rentals of P1,742,174 are payable at the beginning of each year starting January 1,
2022. Bello guarantees the residual value of P1,200,000 at the end of the lease term. The
asset’s useful life is 5 years, at the end of which, the asset’s scrap value is expected to be
P80,000. Bello uses straight-line method to depreciate this asset. The lessor’s implicit
interest rate is 10%, which is known to Bello.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of 1 discounted at 10% for 5 periods is 0.62092.
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.
Present value of ordinary annuity at 10% for 4 periods is .16987.
At what amount should this machine be recorded by Bello on January 1, 2022?
a. P6,074,699
b. P6,124,373
c. P6,342,077
d. P6,894,311
21. Use the same information given in Item 20. How much depreciation should Bello
Enterprises record on this machine for the year 2022?
a. P1,208,875
b. P1,362,862
c. P1,423,578
d. P1,518,675
22. On January 1, 2022, Belle Enterprises acquired a machine by signing a four-year lease.
Annual rentals of P1,742,174 are payable at the beginning of each year starting January 1,
2022. Belle does not guarantee the residual value of P1,200,000 at the end of the lease
term. The asset’s useful life is 5 years, at the end of which, the asset’s scrap value is
expected to be P80,000. Belle uses straight-line method to depreciate this asset. The
lessor’s implicit interest rate is 10%, which is known to Bello.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of 1 discounted at 10% for 5 periods is 0.62092.
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.
Present value of ordinary annuity at 10% for 4 periods is 3.16987.
At what amount should this machine be recorded by Belle on January 1, 2022?
a. P6,074,699
b. P6,124,373
c. P6,342,077
d. P6,894,311
23. Use the same information given in Item 22. How much depreciation should Belle
Enterprises record on this machine for the year 2022?
a. P1,208,875
b. P1,362,862
c. P1,423,578
d. P1,518,675
24. On January 1, 2022, Bella Company acquired a machine by signing a four-year lease.
Annual rentals of P1,742,174 are payable at the beginning of each year starting January 1,
2022. Bella is given the 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 6
years, at the end of which the asset’s scrap value is expected to be P80,000. Bella uses
straight-line method to depreciate this asset.
With an implicit interest rate of 10%, Bella appropriately recorded the machine and the
related liability on January 1, 2022 at P6,245,450.
On December 31, 2025, the end of the lease term, Bella failed to exercise the purchase
option.
How much loss, if any, should Bella recognize as a result of the failure to exercise the
purchase option?
a. P0
b. b. P 885,150
b. P1,000,000
c. P1,885,150
25. Louis Company leased a machine from Millennium Company on January 1, 2021. The
first annual payment was made on January 1, 2022. The machine has an economic life of
six years. The lease agreement requires four annual payments of P33,000, including
P3,000 annual payment for repairs and maintenance. The machine will be returned to
Millennium Company at the end of the lease term and Louis Company guarantees a
residual value of P5,000. Interest implicit in the lease is 10%, which is known to Louis.
For the year ended December 31, 2022, what would Louis Company record in relation to
the lease?
a. an interest expense of P9,851
b. an interest expense of nil
c. an interest payable of P9,851
d. an interest expense of P7,836
26. Use the same information given in Item 25. How much annual depreciation expense
should Louis Company record?
a. P24,628
b. P16,419
c. P23,378
d. P15,585
27. Use the same information given in Item 25. In its notes to the financial statements at
December 31, 2023, Louis Company would disclose minimum lease payments of
a. P104,000
b. P 99,000
c. P 95,000
d. P 65,000
BOOKS OF LESSOR:
28. Listed below are four lease situations:
I II III IV
Asset’s fair value
(in million pesos) P12 P12 P10 P8
Asset’s useful life (years) 10 10 10 10
Bargain purchase option None None None None
Lease term (in years) 6 5 6 4
Present value of minimum
lease payments P11 P8M ? P5M
Which of the foregoing leases shall be classified as operating lease from the standpoint of
the lessor?
a. I, II, III and IV
b. I, II and IV
b. II and IV
c. III and IV
29. Which of the following lease arrangements would most likely be accounted for as an
operating lease by the lessor?
a. The lease agreement runs for 15 years and the economic life of the leased property is
20 years.
b. The present value of the minimum lease payments is P73,600 and the fair value of the
leased asset is P80,000.
c. The lease agreement allows the lessee the right to purchase the leased asset for P100.00
when 60% of the asset’s useful life has expired.
d. The lessee may renew the three-year lease for an additional three years at the same
rental.
30. In an operating lease, rent collected in advance by the lessor should be treated as
a. accrued asset.
b. accrued liability.
c. prepaid expense.
d. unearned income.
31. How should a lessor account for a non-refundable lease bonus paid by a 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 life of the lease
32. Initial direct costs incurred by the lessor in connection with specific leasing activities as in
negotiating and securing leasing arrangements, in a direct finance 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.
33. Which of the following shall be included in the gross investment in lease in a direct finance
lease?
I. Bargain purchase option
II. Guaranteed residual value
III. Unguaranteed residual value
a. I only.
b. I or II.
c. II or III.
d. I, II or III.
34. Which of the following distinguishes a dealer’s or manufacturer’s lease from the direct
finance lease?
a. The manner in which rental receipts are recorded as rental revenue.
b. The amount of the depreciation recorded each year by the lessor.
c. The recognition of the manufacturer or dealer’s profit at the commencement of the
lease.
d. The allocation of initial direct costs by the lessor to periods benefited by the lease
arrangements.
35. 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 lease’s inception
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 effective interest method.
d. does not arise.
36. 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 period of the lease using the interest
method.
d. should be deferred and transferred to profit or loss during the last year of the lease
term.
37. James Company leased a new machine to Lake Co. on January 1, 2022. The lease expires
on January 1, 2027. The annual rental is P900,000. Additionally, on January 1, 2022, Lake
paid P500,000 to James as a lease bonus and P250,000 as a security deposit to be refunded
upon expiration of the lease. In James' 2022 statement of comprehensive income, the
amount of rental revenue should be
a. P1,400,000
b. P1,250,000
c. P1,000,000
a. P900,000
38. Peter Company leased office premises to Fox, Inc. for a five-year term beginning January
2, 2022. Under the terms of the operating lease, rent for the first year is P80,000 and rent
for years 2 through 5 is P125,000 per annum. However, as an inducement to enter the
lease, Peter granted Fox the first six months of the lease rent-free. In its 2022 statement of
comprehensive income, what amount should Peter report as rental revenue?
a. P120,000
b. P116,000
c. P108,000
d. P80,000
39. On July 1, 2022, Pat Co. leased a piece of land from Luke Corporation under a 3-year
operating lease. Total rent for the term of the lease will be P3,600,000, payable as follows:
12 months at P 50,000 = P 600,000
12 months at P 75,000 = P 900,000
12 months at P175,000 = P 2,100,000
All payments were made when due. How much is Luke’s rent revenue for the fiscal year
ended June 30, 2023?
a. P600,000
b. P900,000
b. P1,200,000
c. P2,100,000
40. Use the same information given in Item 39. What is the amount relating to rent reported
in Luke’s statement of financial position at June 30, 2024?
a. P900,000 Unearned Rent
b. P900,000 Rent Receivable
c. P1,500,000 Unearned Rent
d. P1,500,000 Rent Receivable
41. On August 1, 2022, Gabriel Company leased a machine to Way Company for a six-year
period 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. Gabriel appropriately recorded the lease as a direct financing lease.
Gabriel’s implicit interest rate is 10% and present value factors are as follows:
PV of an annuity due of P1 at 10% for 6 periods 4.800
PV of an annuity due of P1 at 10% for 8 periods 5.868
At the inception of the lease, the gross lease receivables account balance should be
a. P600,000.
b. P586,800.
c. P480,000.
b. P479,100.
42. Use the same information given in Item 41. 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
43. Michael Company leased equipment to Hay Corporation on July 1, 2022 for an eight-year
period expiring June 30, 2030. Equal payments under the lease are P600,000 and are due
on July 1 of each year. The first payment was made on July 1, 2022. The rate of interest
contemplated by Michael and Hay is 10%. The cash selling price of the equipment is
P3,520,000, and the cost of the equipment on Michael’s accounting records is P2,800,000.
The lease is appropriately recorded as a dealer’s lease. What is the amount of profit on the
sale that Michael should record for the year ended December 31, 2020?
a. P45,000
b. P90,000
c. P720,000
d. P1,280,000
44. Use the same information given in Item 43. What is the interest revenue reported in
Michael’s statement of comprehensive income for year ended December 31, 2022?
a. P146,000
b. P176,000
c. P292,000
d. P352,000
45. On January 1, 2022, Thelma Industries leased equipment to Trician Company for a four-
year period ending December 31, 2025. The equipment cost Thelma P300,000 and has an
expected useful life of five years. Annual payments are P118,951, which includes P10,000
executory costs. The equipment’s fair value is P400,000. The lessee guarantees the
residual value of P80,000. Lease payment is due every December 31 and Trician made the
first payment on December 31, 2022. Trician’s implicit interest rate is 10%.Thelma
incurred P15,000 costs to consummate the lease contract.
Present value of 1 discounted at 10% for 4 periods is 0.68301.
Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.
Present value of ordinary annuity of 1 at 10% for 4 periods is 3.16987.
How much profit, inclusive of interest revenue, should Thelma report from this lease for
the year ended December 31, 2022?
a. P100,000
b. P125,000
c. P140,000
d. P162,991
46. Use the same information given in item 45. How much should Thelma report as net
investment in lease on December 31, 2022 statement of financial position?
a. P291,049
b. P320,154
c. P321,049
d. P331,049
47. Glade Company leases computer equipment to customers under direct financing lease. The
equipment has no residual value at the end of the lease and the leases do not contain bargain
purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with
a fair value of P323,400. The present value of an annuity due of P1 at 8% for 5 years is
4.312. What is the total amount of interest revenue that Glade will earn over the life of the
lease?
a. P51,600
b. P75,000
c. P129,360
d. P139,450
SALE-LEASEBACK
48. Big Company sold its factory at a gain and simultaneously leased it back for 10 years. The
sales price is at fair value. The factory’s remaining useful life is 30 years. Based only on
this information and applying IFRS 16 Leases, at the time of sale, Big should report the
gain
a. in full in profit or loss.
b. an asset valuation allowance.
c. as the amount relating only to the right transferred to the buyer-lessor.
d. as a deferred credit.
49. On January 1, 2022, Marian Company sold a machinery to Marjorie Company for
P2,200,000, an amount that is equal to its fair value. Because of the entity’s commitments
to its customers to provide their needs for the next four years, Marian Company
simultaneously leased back the machinery. The transfer of the asset to the buyer qualifies
to be accounted for sale under IFRS 15. Information relating to this transaction follows:
Carrying amount of machinery- P1,700,000
Remaining useful life of machinery-8 years
Lease term-4 years
Annual rent payable at the end of each year-500,000
Market rate of interest-10%
How much is the gain on sale leaseback recognized by Marian Company at January 1,
2022?
a. P500,000
b. P360,216
c. P139,784
d. P125,000
50. Using the information in Item 49, what are the amounts recorded by Marian Company for
the right-of-use asset and lease liability, respectively, at January 1, 2022?
a. P1,224,734; P1,584,950
b. P1,584,950; P1,224,734
c. P2,051,112; P2,200,000
d. P2,200,000; P1,700,000
51. On January 1, 2022, Marian Company sold a machinery to Marjorie Company for
P2,400,000. Because of the entity’s commitments to its customers to provide their needs
for the next four years, Marian Company simultaneously leased back the machinery. The
transfer of the asset to the buyer qualifies to be accounted for as a sale under IFRS 15.
Information relating to this transaction follows:
Fair value of machinery 2,200,000
Carrying amount of machinery 1,700,000
Remaining useful life of machinery 8 years
Lease term 4 years
Annual rent payable at the end of each year 500,000
Market rate of interest 10%
How much is the gain on sale leaseback?
a. P139,784
b. P185,239
c. P259,334
d. P500,000
52. Use the same information given in Item 51. What are the amounts recorded by Marian
Company for the right-of-use asset and lease liability, respectively, at January 1, 2020?
a. P1,384,950; P2,000,000
b. P1,584,950; P2,000,000
c. P1,070,189; P1,384,950
d. P1,070,189; P1,584,950
53. On January 1, 2022, Marian Company sold a machinery to Marjorie Company for
P1,900,000. Because of the entity’s commitments to its customers to provide their needs
for the next four years, Marian Company simultaneously leased back the machinery. The
transfer of the asset to the buyer qualifies to be accounted for as a sale under IFRS 15.
Information relating to this transaction follows:
Fair value of machinery 2,200,000
Carrying amount of machinery 1,700,000
Remaining useful life of machinery 8 years
Lease term 5 years
Annual rent payable at the end of each year 500,000
Market rate of interest 10%
How much is the gain on sale leaseback?
a. P71,602
b. P139,784
c. P185,239
d. P500,000
54. Use the same information given in Item 53. What are the amounts recorded by Marian
Company 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
55. Use the same information given in Item 53. How much is the interest expense recognized
by Marian Company for the year ended December 31, 2022?
a. P158,495
b. P188,595
c. P145,655
d. P220,000
END OF HANDOUT
