Chapter #22

Leases

TRUE OR FALSE

1. For the lessee to capitalize the purchase option as part of right-of-use asset, said purchase option should be at a price
which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at
the inception of the lease, it is reasonably certain the option will be exercised. False
2. The IASB intended the exemption to apply to leases for which the underlying asset, when new, is of low-value (such as
leases of tables and personal computers, small items of office furniture and telephones). At the time of reaching
decisions about the exemption in 2015, the IASB had in mind leases of underlying assets with a value, when new, in
the order of magnitude of US$5,000 or less. True
3. In general, assets of low value are fully depreciated in the year of the purchase or in the period of acquisition. True
4. At the commencement date, a lessee shall measure the right-of-use asset at cost. True
5. At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that
are not paid at that date. True
6. A lessee's debt to equity ratio and rate of return on assets are both affected by a lease on its commencement. False
7. At the inception of a lease, if it is reasonably certain that the lessee will exercise an option to renew a lease, the lease
term is the noncancelable period plus the renewal period for both the lessee and the lessor. True
8. If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an
estimated residual value when calculating the lease payments necessary to achieve a desired rate of return. False
9. The gross profit amount in a dealer's/manufacturer's lease is greater when a guaranteed residual value exists. False
10. Finance leases are agreements that are formulated outwardly as leases for lessors, but are installment purchases in
substance. True
11. Leasing equipment reduces the risk of obsolescence to the lessee, and passes the risk of residual value to the lessor.
True
12. A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the
expected fair value of a leased asset. False
13. Both a guaranteed and an unguaranteed residual value affect the lessee's computation of amounts capitalized as a
leased asset. False
14. When the lessee guarantees an estimated residual value of P100,000, the amount the lessee records as a right-of-use
asset and as a lease liability is increased by P100,000. False
15. Direct-financing leases are in substance the financing of an asset purchase by the lessee. True
16. The use of proportion of the lease term over the remaining economic life to classify a lease as a finance lease for a
lessor is consistent with the basic premise that most of the risks and rewards of ownership occur during the first say
75% of an asset's life. True
17. A capitalized leased asset is always depreciated by the lessee over the term of the lease. False
18. In accounting for leases under PFRS 16, usually it is either the lessee or the lessor (but not both) that will recognize
amortization on the leased asset. False
19. Executory costs should be excluded by the lessee in computing the lease liability. True
20. If the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the
end of the lease term, then it must be considered to be an operating lease. False

MULTIPLE CHOICE-THEORIES

1. These are incremental costs that are directly attributable to negotiating and arranging a lease.
A. Initial direct costs
B. Transaction costs
C. Cost of services
D. Executory costs

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2. It is a contract that transfers substantially all the risks and rewards incidental to ownership of an asset, although the
title may or may not eventually be transferred.
A. Lease
B. Finance lease
C. Operating lease
D. Lease purchase

3. Initial direct costs are expensed at the beginning of the lease in

A. a dealer's or manufacturer's lease
B. a sale-leaseback
C. an operating lease
D. none of these

4. Lessors are required to account for lease receipts from operating leases as
A. revenue, on a reducing balance over the lease term.
B. income, on inception date of the lease.
C. income, on a straight-line basis over the lease term.
D. revenue, at the end of the lease term.

5. Minimum lease payments are payments the lessee is obligated to make or can be expected to make in connection with
the leased property. In computing the minimum lease payments, all of the following would be included except
A. the present value of the cost of the leased asset.
B. the penalty for failure to renew or extend the lease.
C. purchase option.
D. rental payments.

6. Mirrodin Corp. has a rate of return on assets of 15% and a debt/equity ratio of 3 to 1 before entering into a lease. Not
including any indirect effects on earnings, when Mirrodin Corp. records the lease, the immediate impact on these
ratios
Return on Assets Debt/ Equity
A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase

7. Lessee Company leased a machine with an estimated useful life of 10 years from Lessor Company. The 5-year non-
cancelable lease provides that the title to the machine transfers to Lessee Company at the end of the lease term.
Lessee Company recorded the right-of-use asset and lease liability in its accounting books. The right-of-use asset
should be depreciated by Lessee Company over
A. 50 years.
B. 20 years.
C. 10 years.
D. 5 years.

8. When accounting for a lease incentive (bonus) received by the lessee under lease as expense approach, it is
A. a reduction in rental income over the lease term
B. an increase in rental expense over the lease term
C. a reduction in rental expense over the lease term
D. an increase in rental income over the lease term

9. In a lease that is recorded as a manufacturer's or dealer's lease by the lessor, interest revenue should be
A. recognized in full as revenue at the lease's inception

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 B. recognized over the period of the lease using the straight-line method
C. recognized over the period of the lease using the effective interest method
D. not be recognized in the account

10. The primary difference between a direct financing lease and a manufacturer's or dealer's lease is the
A. manner in which rental receipts are recorded as rental income
B. amount of the depreciation recorded each year by the lessor
C. recognition of manufacturer's or dealer's profit at the inception of the lease
D. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements

11. When should a lessor recognize as income a non-refundable lease bonus paid by a lessee on signing an operating
lease?
A. When received
B. At the inception of the lease
C. At the expiration of the lease
D. Over the lease term

12. Initial direct costs incurred by a lessor in consummating a manufacturer's or dealer's lease are
A. charged to unearned income in the first period of the lease term
B. charged to cost of sales in the first period of the lease term
C. deferred and allocated over the lease term in proportion to the recognition of rent revenue
D. deferred and allocated over the lease term on a straight-line basis.

13. Which one of the following is a correct statement of one of the indicators of a finance lease?
A. The lease transfers ownership of the property to the lessor.
B. The lease contains a purchase option.
C. The lease term is for the major part of the economic life of the leased property.
D. The minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased
property.

14. On January 1, Dissension Company leased a truck for a four-year period, at which time possession of the truck will
revert back to the lessor. Annual lease payments are P230,000 due on December 31 of each year, calculated by the
lessor using a 5% discount rate. If Dissension's revenues exceed a specified amount during the lease term, Dissension
will pay an additional P20,000 lease payment at the end of the lease. Dissension estimates a 60% probability of
meeting the target revenue amount. What amount, if any, should be added to the right-of-use asset and lease payable
under the contingent rent agreement?
A. No additional amount should be added.
B. An additional P10,000 should be added.
C. An additional P12,000 should be added.
D. An additional P20,000 should be added.

15. Lessors shall recognize assets held under a finance lease in a statement of financial position as a receivable at an
amount equal to the
A. gross investment in the lease
B. net investment in the lease
C. gross rentals
D. residual value, whether guaranteed or unguaranteed

16. When measuring the discounted amount of future rentals to be capitalized as part of the purchase, 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

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 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

17. An 8-year finance lease specifies equal minimum annual lease payments. Part of this payment represents interest and
part represents a reduction in the net lease liability. The portion of the minimum lease payment in the fourth year
applicable to the reduction of the net lease liability should be
A. the same as in the third year
B. less than in the third year
C. less than in the fifth year
D. more than in the fifth year

18. Which of the following items are part of the minimum payments from the standpoint of the lessee?
I. The minimum rental payments called for by the lease
II. Any guarantee the lessee is required to make at the end of the lease term regarding any deficiency from a
specified minimum
III. Any estimated residual value at the end of the lease term
IV. Any payment the lessee must make at the end of the lease term to purchase the leased property under a
purchase option

A. I, II and III
B. I, II, and IV
C. II, III and IV
D. I, III and IV

19. If the residual value of a leased asset is guaranteed solely by a party related to the lessor,
A. it is treated by the lessor as an unguaranteed residual value
B. the third party is also liable for any lease payments not paid by lessee
C. the net investment to be recovered by the lessor is reduced
D. it is treated by the lessee as an unguaranteed residual value but by the lessor as a guaranteed residual.

20. We classify a lease as a finance lease if

A. the present value of lease payments is less than the asset's book value
B. the present value of lease payments is less than the asset's fair value
C. the lessee obtains control of the use of the asset
D. the usual risks and rewards are retained by the lessor

21. Prophecy Company recorded a lease in March 2021 using an annuity due present value table. The company's
statement of cash flows for the year ending December 31, 2021 using the direct method will report
A. a cash inflow from investing activities
B. a cash outflow from financing activities
C. a cash outflow from investing activities
D. a cash inflow from operating activities

22. The cost of sales recognized at the commencement of the lease term by a manufacturer or dealer is equal to
A. carrying amount of the leased asset
B. carrying amount of the leased asset minus the unguaranteed residual value in absolute amount
C. carrying amount of the leased asset minus the present value of the d. unguaranteed residual value
D. carrying amount of the leased asset minus the present value of the guaranteed residual value

23. Which of the following statements regarding a lessee-guaranteed residual value is true?
A. The lessor's lease receivable should be increased by the amount of the residual value.

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 B. The lessor's lease receivable should be increased by the amount of the residual value to the extent that
guaranteed residual value is expected to exceed estimated residual value.
C. The lessee's right-of-use asset and lease liability at the beginning of the lease are not affected by the residual
value.
D. The lessee's right-of-use asset and lease liability at the beginning of the lease should be decreased by the
present value of the residual value to the extent that guaranteed residual value is expected to exceed estimated
residual value.

24. Gross investment in the lease is equal to

A. the minimum lease payments receivable by the lessor
B. the unguaranteed residual value accruing to the lessor
C. both the minimum lease payments receivable by the lessor under a finance lease and the unguaranteed residual
value accruing to the lessor
D. neither the minimum lease payments receivable by the lessor under a finance lease nor the unguaranteed
residual value accruing to the lessor

25. The equal annual end-of-year rental payments by the lessee should 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

26. Initial direct costs incurred by the lessor in an operating lease should be
A. expensed in the year of incurrence by including them in the cost of goods sold or by treating them as a selling
expense
B. deferred and recognized as reduction in the interest rate implicit in the lease
C. capitalized as part of asset cost and depreciated over the lease term
D. deferred and carried on the statement of financial position until the end of the lease term

27. Initial direct costs incurred by the lessee are

A. Added to the right-of-use asset and expensed over an amortization period
B. Recorded as an expense at the beginning of the lease
C. Deferred in a lease until the asset is returned to the lessor
D. A reduction to the lease liability at the beginning of the lease

28. If the lessee and lessor use different interest rates to account for a finance/sales- type lease, then
A. the lessee is unaware of the lessor's implicit rate
B. total expenses for the lessee will equal the lessor's total revenues
C. PFRS has been violated by at least one party
D. the lessee will report more net income for the year

29. Apocalypse Corp. is a lessee that entered into a lease in June 2021. How will the principal portion of Apocalypse
Corp.'s lease payment show up in the company's statement of cash flows for the year ending December 31, 2021?
A. a cash outflow from investing activities
B. a cash outflow from financing activities
C. a cash outflow from operating activities
D. no cash outflow

30. Scourge Enterprise is the lessee in connection with a finance lease. Scourge will not record
A. rent expense
B. amortization expense
C. interest expense

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 D. a right-of-use asset

MULTIPLE CHOICE PROBLEMS

A. On August 1, 2021, CAF Company leased two cars from Avis Cars for an initial period of 12 months with a provision
for a continuation of a month-to-month basis to be agreed by both parties two months prior to the expiration of the 12
months lease contract. PAF uses the "lease as expense" option to account for the transaction. Lease payments are to
be made as follows:

1st two months - P15,000 per month

Next three months - P12,000 per month
Next three months - P10,000 per month
Last four months - P7,500 per month

After the first year, the rent continues at P6,000 per month.

(1) How much is CAF Company's rent expense for the year ended December 31, 2021?
a. P10,500
b. P52,500
c. P66,000
d. P126,000
(2) How much is CAF Company's prepaid rent balance at December 31, 2021?
a. P13,500
b. P23,500
c. P55,500
d. P66,000

B. Auto Corporation purchased a machine on March 31, 2021 for P1,500,000 for the purpose of leasing it. The machine is
expected to have a six-year life, no salvage, and will be depreciated on a straight-line basis.

On April 1, 2021, under a cancelable lease, Auto Corporation leased the machine to Matic Company for P920,000 a
year for a three-year period ending on March 31, 2024. Auto Corporation incurred maintenance and other related
costs under the provisions of the lease of P50,000 relating to the year ended December 31, 2021. Matic Company paid
Auto Corporation P920,000 on April 1, 2021.

(3) What is the profit before income tax derived by Auto Corporation from this lease for the year ended December
31, 2021?
a. P452,500
b. P690,000
c. P390,000
d. P425,500

(4) What is the rent expense incurred by Matic Company for the year ended December 31, 2021?
a. P690,000
b. P766,667
c. P920,000
d. P0

(5) Assuming that the machine intended for leasing given in the problem was purchased by Auto Corporation on
January 1, 2021, all other data being the same, what is the profit before income tax reported by Auto Corporation
for the year ended December 31, 2021?
a. P390,000
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 b. P452,500
c. P690,000
d. P920,000

C. On July 1, 2021, Ray Company leased several pieces of furniture from Mirage Company under a one-year operating
lease effective on this date. Total rent for the term of the lease will be P93,000, payable as follows:

First 3 months at P12,000 per month

Next 6 months at P8,000 per month
Last 3 months at P3,000 per month

(6) What is Mirage Company's rent revenue for the year ended December 31, 2021?
a. P60,000
b. P46,500
c. P36,000
d. P93,000

(7) How much is the deferral or accrual reported in Mirage Company’s statement of financial position at December
31, 2021?
a. P13,500 accrued rent receivable
b. P13,500 unearned rent receivable
c. P46,500 prepaid rent
d. P46,500 accrued rent payable

D. Tucson Company grants Jazz Company first month rent-free under a one-year lease. The cost of the leased asset is
considered of low value in accordance with the provisions of PFRS 16 Leases. The lease is effective April 1, 2021 and
provides for a monthly rental of P12,000, payment of which will begin on May 1, 2021.

(8) How much is the rent expense reported in Jazz Company's profit or loss for the year ended December 31, 2021?
a. P132,000
b. P99,000
c. P88,000
d. P33,000

E. On January 1, 2021, Crosswind Corporation signed a ten-year lease for an equipment at P9,600 per year. The lease
included a provision for additional rental payment of 5% of annual company sales in excess of P500,000. Crosswind
Corporation's sales for the year ended December 31, 2021 were P600, 000. Upon execution of the lease, Crosswind
Corporation paid P2,400 as a bonus for the lease. The cost of the leased asset is considered of low value in accordance
with the provisions of PFRS 16 Leases.

(9) What is Crosswind’s rent expense for the year ended December 31, 2021?
a. P14,840
b. P14,600
c. P12,000
d. P9,600

F. Adventure Company, a calendar-year corporation, leases some of its equipment with costs considered of low value. In
one of its lease contracts that took effect on May 1, 2021, Adventure Company is required to pay rentals in advance as
follows:

May 1, 2021 - P10,000 May 1, 2024 - P17,000

May 1, 2022 - P12,000 May 1, 2025 - P19,000

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 May 1, 2023 - P14,000

(10)What are the amounts of Adventure Company's accrual or deferral relating to the lease on December 31, 2021
and December 31, 2022, respectively?
a. P4,400 accrued rent payable and P6,800 accrued rent payable
b. P400 prepaid rent and P2,000 accrued rent payable
c. P400 accrued rent payable and P2,000 prepaid rent
d. P400 prepaid rent and P2,400 accrued rent payable

G. On July 1, 2021, Pilot Company leased a machinery for five years at P1,500 per month. On that date, Pilot Company
paid the lessor the following amounts:

Refundable security deposit P3,500

First month's rent 1,500
Last month's rent 1,500
Nonrefundable reimbursement to lessor for
modifications to the leased premises 9,000

The market rate of interest for similar transaction at that time is 10%. Round off present value factor to two decimal
places. Pilot uses the "lease as expense" method for the machinery that is considered of low value.

(11)At how much should the lease security deposit be recorded on July 1, 2021?
a. P3,500
b. P2,279
c. P2,170
d. P1,500

(12)How much is the total expense relating to the lease reported in Pilot Company's profit or loss for the year 2021?
a. P12,130
b. P11,230
c. P10,033
d. P9,900

H. Innova Company leased office premises to Avanza, Inc. for a two-year term beginning March 1, 2020. Under the terms
of the operating lease, rent for the first lease year is P20,000 per month and will increase by 10% in the following
lease year.

(13) In its financial statements for the fiscal year ending June 30, 2021, what amount should Innova Company report
as rent revenue?
a. P240,000
b. P252,000
c. P260,000
d. P328,000

I. Anne Company owns office space held for leasing. The carrying amount of this property on January 1, 2021 is
P2,000,000 and has an estimated useful life of 10 years. Anne Company computes depreciation on the straight-line
basis. On January 2, 2021, Anne Company entered into a lease contract with Curtis Company for a term of three years
until December 31, 2023. The lease fee is P100,000 per month, under an agreement for an increase annually at the
rate of 5%. Anne Company also requires a refundable deposit of P300,000 to be paid in advance upon occupancy.
Anne Company paid P120,000 commissions and other fees with negotiating the lease.

(14)Anne Company should report net rental income for 2023 at

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 a. P1,221,000
b. P1,060,000
c. P1,021,000
d. P941,000

J. Pine Company leased equipment to Snead Company on July 1, 2021, for a one- year period expiring June 30, 2022, for
P40,000 a month. On July 1, 2022, Pine leased this piece of equipment to Orton Company for a three-year period
expiring June 30, 2025, for P50,000 a month. The original cost of the equipment was P3,200,000. The equipment,
which has been continually on lease since July 1, 2021, is being depreciated on a straight-line basis over an eight-year
period with no salvage value.

Both the lease to Snead and the lease to Orton are appropriately recorded as operating leases for accounting
purposes.

(15)What is the amount of income (expense) before income taxes that each would record as a result of the given facts
for the year ended December 31, 2022?
Pine Snead Orton
a. P140,000 P(240,000) P(300,000)
b. P140,000 P(240,000) P(500,000)
c. P540,000 P( 40,000) P(100,000)
d. P540,000 P(440,000 P(300,000)

K. On January 1, 2021, Rand Corporation signed a ten-year non-cancelable lease for a certain machinery. The terms of
the lease called for Rand Corporation to make annual payments of P100,000 at the end of each year for ten years with
title to pass to Rand at the end of this period. The machinery has an estimated useful life of 15 years and no salvage
value. Rand uses the straight-line method of depreciation for all of its property, plant and equipment. The lease
payments were determined to have a present value of P671,008 at an effective rate of 8%.

(16)With respect to this capitalized lease, Rand should record for 2021,
a. lease expense of P100,000.
b. interest expense of P44,734 and depreciation expense of P38,068.
c. interest expense of P53,681 and depreciation expense of P44,734.
d. interest expense of P45,681 and depreciation expense of P67,101.

L. On January 2, 2021, Exalta Corporation leased six computers for use in its engineering department. The lease period is
five years and the estimated economic life of the leased property is six years. The lease does not contain automatic
title transfer and purchase options. Annual lease payments are payable in advance every January 2 in the amount of
P90,000. The incremental borrowing rate for Exalta Corporation is 12% and the implicit interest rate (known to
Exalta) is 10%. The company uses straight-line depreciation for this type of equipment.

12% 10%
Present value of an ordinary annuity of 1 for 5 periods 3.60 3.79
Present value of an annuity due of 1 for 5 periods 4.04 4.17

(17)What is the cost of the right-of-use computers?

a. P324,000
b. P341,100
c. P363,000
d. P375,300

(18)How much is the interest expense recognized in profit or loss for the year 2021?
a. P28,530

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 b. P37,530
c. P34,110
d. P25,110

(19)What is the depreciation expense of the leased asset for the year 2021?
a. P75,060
b. P72,720
c. P68,220
d. P64,800

(20)Assume that the lessee guarantees a residual value of P30,000 at the end of the lease term. What is the
depreciation expense for 2021?
a. P75,060
b. P72,786
c. P65,946.
d. P65,655

(21) Independent of assumption in (20). Assume that the lease provides for an option to Exalta to purchase the leased
assets at a price of P30,000 at the end of the lease term and it is reasonably certain that Exalta will exercise that
option. What is the interest expense for the year 2021?
a. P30,393
b. P28,530
c. P35,973
d. P26,973

M. On December 31, 2021, Africa Company leased equipment for 10 years. It contracted to pay P400,000 annual rent on
December 31, 2021 and on December 31 of the next nine years. The lease liability was recorded at P2,700,000 on
December 31, 2021 before the first payment. The equipment's useful life is 12 years and the interest rate implicit in
the lease is 10%. Africa Company uses the double-declining balance method of depreciation.

(22)In recording the December 31, 2022 payment, by what amount should Africa Company reduce the lease liability?
a. P270,000
b. P230,000
c. P225,000
d. P170,000

(23)What is Africa Company's depreciation expense for the year 2022?

a. P540,000
b. P450,000
c. P270,000
d. P225,000

N. Kia Company acquires equipment under a non-cancelable lease at an annual rental of P45,000 payable in advance for
five years. Under the lease contract, Kia Company is given the option to purchase the asset for P75,000 at the end of
five years and Kia is reasonably certain to exercise this option. The appropriate interest rate is 12%. Present value of
1 at 12% for 5 periods is 0.5674. Present value of an annuity due of 1 at 12% for 5 periods is 4.0373.

(24)What is the capitalized cost of the right-of-use equipment and the first year's interest expense?
a. P224,234 and P21,508
b. P224,234 and P26,908
c. P204,771 and P21,508
d. P204,771 and P19,173

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O. Austin Company closed a lease contract for newly constructed terminals and 2021. Although the terminals have a
freight storage facilities on January 1, composite life of 15 years, the lease runs for 10 years with a purchase option of
P500,000 upon expiration of the lease and Austin got the Board's approval for the exercise of the option at the end of
the lease term.

The annual rental is P1,000,000 payable at the beginning of each lease year starting January 1, 2021. The lessee must
also make annual payments of P200,000 for taxes and insurance. The contract was negotiated to assure the lessor a
10% rate of return.

Present value of 1 for a single payment at 10% for 10 periods is 0.385.

Present value of an annuity due of 1 at 10% for 10 periods is 6.759.
Present value of an ordinary annuity of 1 at 10% for 10 periods is 6.145.

(25)What is the total lease liability, including accrued interest at December 31, 2021?
a. P5,337,500
b. P5,951,500
c. P6,951,500
d. P6,557,650

P. Lancer, Inc. leased machinery with a fair value of P250,000 from Lay Company on December 31, 2021. The contract is
a six-year non-cancelable lease with an implicit rate of 10%. The lease requires an annual payment of P50,000
beginning December 31, 2021. Lancer, Inc.'s incremental borrowing rate is 12%. The present value of an annuity due
of 1 for 6 periods at 10% is 4.7908 and the present value of an annuity due of 1 for 6 periods at 12% is 4.6048.

(26) How much is the lease liability that Lancer, Inc. should report in its December 31, 2021 statement off inancial
position?
a. P189,540
b. P200,000
c. P230,240
d. P239,540

Q. On June 1, 2021, Pajero Company signed a 10-year non-cancelable lease for a machine requiring annual payments at
the beginning of each lease year. The machine has a useful life of 15 years without salvage value. Title passes to
Pajero Company at the lease expiration date. Pajero Company's accounting year ends on December 31 and it uses
straight-line method of depreciation for all of its property, plant and equipment, computed to the nearest full month.
Aggregate lease payments have a present value of P2,520,000 on June 1, 2021 based on an appropriate rate of
interest.

(27)How much is the depreciation expense for the right-of-use machine for year 2021?
a. P252,000
b. P168,000
c. P147,000
d. P98,000

R. On December 31, 2021, Chrysler Company signed a five-year, non-cancelable lease for a machine with Hyundai
Company. The terms of the lease called for Chrysler Company to make annual payments of P80,000 in advance
starting on December 31, 2021 and every December 31 thereafter. The machine has an estimated useful life of six
years and a P40,000 unguaranteed residual value at the end of the five-year lease term. The machine reverts back to
the lessor at the end of the five-year lease term. Chrysler Company uses the straight-line method of depreciation for
all of its depreciable assets.

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 The rate implicit in this contract, which is known to Chrysler, is 12%. The market value of the machine is P340,000.
The present value of an annuity due of 1 at 12% for 5 periods is 4.037. The present value of 1 for a single payment at
12% for 5 periods is 0.567.

(28)What is the carrying amount of the right-of-use machine at December 31, 2022?
a. P258,368
b. P266,368
c. P269,133
d. P284,512

(29)What are the balances of the lease liability at December 31, 2021 and December 31, 2022, respectively?
a. P242,960 and P192,115
b. P242,960 and P162,960
c. P265,640 and P217,517
d. P265,640 and P185,640

S. An asset with a market value of P1,000,000 is leased on January 1, 2021. Five annual lease payments are due each
December 31 beginning December 31, 2021. The guaranteed residual value on December 31, 2024, the last day of the
lease term, is P400,000. The lessor's implicit interest rate is 8%.

(30)What is the annual lease payment?

a. P200,000
b. P182,456
c. P168,910
d. P120,000

T. The following information pertains to a lease contract signed by Lessee A and Lessor B on January 1, 2021 related to a
leased equipment. The contract has the following provisions:

Implicit rate of lessor, which is known to lessee 10%

Market value of equipment at lease inception P2,000,000
Carrying amount of equipment at lease inception P1,500,000
Useful life of equipment at inception 8 years
A party related to the lessor guarantees the entire
residual value of P 200,000
Annual lease payments for six years are due at each year
end beginning December 31, 2021 P 418,000

The lease term ends on December 31, 2026. Round off present value factor to three decimal places.

(31)What is the capitalized cost of the right-of-use equipment for Lessee A?

a. P2,000,000
b. P1,933,190
c. P1,820,390
d. P1,500,000

(32)What is the gross investment in the lease recorded by Lessor B on January 1, 2021?
a. P2,708,000
b. P2,508,000
c. P1,933,190
d. P1,820,390

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U. Land Company leases equipment to its customers under non-cancelable leases. On January 1, 2021, Land Company
leased equipment costing P4,000,000 to Rover Company for nine years. The rental cost was P440,000 payable in
advance semi-annually every January 1 and July 1, plus P20,000 semi-annually for executory costs. The equipment
had an estimated life of 12 years with an estimated unguaranteed residual value of P800,000. The implicit rate is 12%.

(33)How much is the lease liability recorded in Rover Company's books at January 1, 2021 prior to the first lease
payment?
a. P5,049,880
b. P4,764,320
c. P4,609,880
d. P4,324,000

(34)How much is the net investment in the lease in Land Company's books at January 1, 2021 prior to the first lease
payment?
a. P5,329,880
b. P5,044,320
c. P4,889,880
d. P4,604,320

V. On December 31, 2021, Tucson Company leased equipment to Santa Fe Company for a four-year period ending
December 31, 2025. The equipment cost Tucson Company P365,760 and has an expected useful life of five years. Its
normal sales price is P365,760. The lessee guarantees the residual value of P80,000. Lease payment is due every
December 31 and Santa Fe Company made the first payment on December 31, 2021. Tucson Company's implicit
interest rate is 10%.

(35)How much is the annual lease payment?

a. P104,892
b. P91,550
c. P89,223
d. P81,950

(36) Before the first payment on December 31, 2021, how much is the gross investment in the lease?
a. P356,892
b. P365,892
c. P436,892
d. P463,892

(37)How much interest revenue should Tucson Company recognize over the four- year lease term?
a. P71,132
b. P71,123
c. P98,123
d. P98,132

(38)How much is the net investment in the lease at December 31, 2022?
a. P276,537
b. P214,968
c. P304,191
d. P313,113

(39)If the residual value is not guaranteed, how much net investment in the lease shall be recognized on December
31, 2021?
a. P365,760

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 b. P356,760
c. P311,210
d. P311,120

W. Accord Company purchased a packing machine intended for leasing at a cost of P330,000. The machine was leased to
Civic Company on January 1, 2021 at an annual rental of P58,860 payable in advance over a period of 10 years. The
lease qualifies as a direct financing lease. There is no expected residual value for the asset. Implicit interest rate is
16%.

(40)How much is the total interest revenue that Accord Company will earn over the term of the lease term?
a. P588,600
b. P330,000
c. P258,600
d. P52,800

(41)What is the amount of interest revenue recognized in profit or loss by Accord Company for the year 2021 and
2022?
a. P43,382 and P40,906
b. P52,800 and P51,830
c. P43,832 and P40,609
d. P52,800 and P51,380

X. Citi Company uses lease as a means of selling its equipment. On July 1, 2021, the company leased an equipment to Allis
Company. The cost of the equipment to Citi Company was P684,000. The fair market value (which was the sales
price) was P792,200 at the time of the inception of the lease

Annual lease payments are P135,000 and are payable in advance for 8 years. The equipment has an expected
economic life of 10 years. At the end of the lease term, title to the equipment will pass to Altis Company. Implicit
interest rate is 10%.

(42)What is the manufacturer's profit recognized by Citi Company in 2021?

a. P102,800
b. P108,200
c. P287,800
d. P396,000

(43)What is Citi Company's total financial revenue pertaining to the lease?

a. P102,800
b. P108,200
c. P287,800
d. P396,000

(44)How much is the interest revenue recognized by Citi Company in 2021?

a. P32,860
b. P39,600
c. P65,720
d. P79.200

(45)Assume that at the end of the lease term, the title to the equipment will not pass to the lessee. The lessee (Altis
Company) however, guarantees a residual value of P50,000 at the end of the lease term. How much is the
manufacturer's profit and interest revenue recognized by Citi Company for the year 2021?
a. P40,776 and P131,525

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 b. P131,525 and P40,776
c. P34,026 and P131,525
d. P131,525 and P34,026

(46)Assume that at the end of the lease term, the title to the equipment will not pass to the lessee. The equipment is
expected to have an unguaranteed residual value of P50,000 at the end of the lease term. How much is the cost
of goods sold recognized by Citi Company pertaining to this lease?
a. P660,675
b. P684,000
c. P707,325
d. P734,000

Y. BMW Machineries, dealer of machinery and equipment, leased equipment to Best Products on July 1, 2021. The lease
is appropriately accounted for as a sale by BMW Machineries and a purchase by Best Products. The lease is for a 10-
year period (the useful life of the asset) expiring on June 30, 2031. The first of ten equal annual payments of P250,000
was made on July 1, 2021. BMW Machineries purchased the equipment for P1,337,500 on January 1, 2021 and
established a list selling price of P1,687,500 on the equipment. Assume that the present value at July 1, 2021 of the
rent payments over the lease term discounted at 12% was P1,582,500.

(47)What is the amount of gross profit on the sale and the amount of interest income that BMW Machineries should
record for the year ended December 31, 2021?
a. P245,000 and P94,950
b. P245,000 and P79,950
c. P350,000 and P79,950
d. P350,000 and P94,950

Z. Audi Corporation leased equipment to Great Company on January 1, 2021. The lease is for an eight-year period
expiring on December 31, 2028. The first of eight equal annual payments of P900,000 was made on January 1, 2021
and subsequent payments will be made every January 1 thereafter.

Audi Corporation had purchased the equipment on December 29,2020 for P4,800,000. Audi Corporation paid
P150,000 in connection with negotiating and arranging the lease. The lease is appropriately accounted for as a
dealer's lease by Audi. The present value at January 1, 2021 of all rent payments over the lease term discounted at a
10% interest rate was P5,280,000.

(48)What is the total income relating to the lease that Audi Corporation should recognize in 2021?
a. P330,000
b. P480,000
c. P768,000
d. P918,000

(49)What is Audi Corporation's net investment in the lease at December 31, 2021?
a. P4,818,000
b. P4,380,000
c. P4,309,000
d. P3,918,000

AA. Moore Company leased equipment from James Company on July 1, 2021, for an eight-year period expiring on June 30,
2029. Equal annual payments under the lease are P100,000 and are due on July 1 of each year. The first payment was
made on July 1, 2021. The rate of interest contemplated by Moore and James is 8%. The cash selling price of the
equipment is P620,625 and the cost of the equipment on James Company's accounting records was P550,000. The
lease is appropriately recorded as a sale for accounting purposes by James Company.

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 (50)What is the amount of profit on the sale and the interest income that James Company would record for the year
ended December 31, 2021?
a. P0 and P0
b. P70,625 and P20,825
c. P0 and P20,825
d. P70,625 and P24,825

BB. ABC Company, a manufacturer, leased to XYZ Company an asset that cost ABC Company P1,200,000. The lease
agreement requires five annual year-end rentals of P400,000. ABC Company used a 15% interest rate to compute the
rentals.

(51)The manufacturer's profit (or loss) that ABC Company recognized was
a. P140,860 loss
b. P140,860 gain
c. P180,000 gain
d. P800,000 gain

CC. Emlyn Company adopted the policy of leasing as the primary method of selling its product. The company's main
product is a small helicopter that is very popular among politicians and company officers. Emlyn Company
constructed such a helicopter for Vergel Company at a cost of P6,000,000. Financing the construction was at a 12%
rate. The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 5 years with the
ownership transferring to Vergel Company at the end of the lease period. It is estimated that the helicopter will have a
residual value of P1,500,000 at that date.

The lease payments begin on January 1, 2021. Emlyn Company incurred initial direct cost of P500,000 in financing
the lease agreement with Vergel Company. The present value of 1 at 12% for 5 periods is 0.57 and the present value of
an annuity of 1 in advance at 12% for 5 periods is 4.04.

(52)The profit on the sale to be recognized by Emlym Company should be

a. P3,600,000
b. P4,100,000
c. P4,455,000
d. P6,000,000

DD. Superman Company is engaged in leasing equipment. An equipment was delivered to a lessee on December 31, 2021
under a direct financing lease with the following terms and conditions:

Cost of equipment P5,680,000

Residual value (unguaranteed) 300,000
Useful life and lease term 8 years
Implicit interest rate 12%
Present value of an annuity due of 1 at 12% for 8 years 5.56
Present value of 1 at 12% for 8 years 0.40

The annual rental is P1,000,000 payable every December 31. The first payment is made on December 31, 2021. The
equipment will revert to the lessor upon the lease expiration.

(53)How much is the interest revenue for the year ended December 31, 2022?
a. P561,000
b. P561,600
c. P618,600

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 d. P681,600

EE. Blade Company leases printing equipment to customers under direct financing leases. The equipment has no residual
value at the end of the lease and the leases do not contain bargain purchase option. Blade Company wishes to earn
12% interest on a 5-year lease of equipment with a fair value of P484,440. The present value of an annuity due of 1 at
12% for 5 years is 4.037.

(54)What is the total amount of interest revenue that Blade Company will earn over the life of the lease?
a. P115,560
b. P115,650
c. P120,000
d. P235,560

FF. On January 1, 2021, Legend Company sold machinery costing P600,000 with an accumulated depreciation of
P250,000 for P1,000,000 which is also its fair value. The sale meets the requirements of PFRS 15. The remaining life of
the machine is five years. Legend Company immediately leased the machine back for P200,000 yearly, payable in
advance for five years. The implicit interest rate is 12%.

(55)How much is the gain on leaseback recorded on January 1, 2021?

a. P808,000
b. P650,000
c. P457,460
d. P124,800

(56)What is the depreciation expense of right-of-use machinery for the year 2021?
a. P56,560
b. P91,492
c. P161,492
d. P200,000

(57)What is the interest expense for the year 2021?

a. P72,960
b. P91,492
c. P96,895
d. P120,000

(58) Assuming the fair value of the asset at the date of sale is P900,000, how much is the gain on leaseback recorded
on January 1, 2021?
a. P808,000
b. P650,000
c. P124,800
d. P117,333

(59)Assuming the fair value of the asset at the date of sale is P1,100,000, how much is the gain on leaseback recorded
on January 1, 2021?
a. P650,000
b. P130,909
c. P124,800
d. P117,333
GG. On January 1, 2021, Legend Company sold machinery costing P800,000 with an accumulated depreciation of
P200,000 for P500,000 which is also its fair value. The sale meets the requirements of PFRS 15. The remaining life of

Page 17 of 18
the machine is twenty years. Legend Company immediately leased the machine back for P50,000 yearly payable at
the end of the year for five years. The implicit interest rate is 6%.

(60)How much should Legend recognize as lease liability on January 1, 2021?

a. P210,500
b. P250,000
c. P300,000
d. P0

(61) What is the amount capitalized as right-of-use machinery at the date of sale?
a. P210,500
b. P252,600
c. P289,500
d. P150,000

(62)How much is the loss on sale-leaseback?

a. P50,000
b. P50,820
c. P57,900
d. P0

(63)How much should the buyer-lessor recognize as Machinery on January 1, 2021?

a. P210,500
b. P500, 000
c. P600,000
d. P800,000

(64)What is the net rent income to be recognized by the buyer-lessor in 2021?

a. P20,000
b. P25,000
c. P37,370
d. P50,000

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