FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA.

FAR 21: LEASES

MULTIPLE CHOICE THEORIES:

1. Under PFRS, a lessee is required to account for all leases as finance lease and recognize
a. Right of use asset and lease liability
b. Right of use asset but not lease liability
c. Lease liability but not right of use asset
d. Neither right of use asset nor lease liability

2. The cost of right of use asset comprises all, except:

a. The present value of lease payments
b. Lease payment made to the lessor on or before the commencement date
c. Initial direct costs incurred by the lessee
d. Estimated cost of dismantling and restoring the underlying asset for which the lessee has no present obligation

3. The right of use asset is reported as

a. Noncurrent asset as a separate line item
b. Property, plant, and equipment
c. Intangible asset
d. Investment property

4. A lessee with a lease containing a purchase option that is reasonably certain to be exercised should depreciate the
right of use asset over
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or lease term, whichever is shorter
d. Useful life of the asset or lease term, whichever is longer

5. The following circumstances will normally result to a lease being classified as a finance lease, except:
a. There is a transfer of ownership over the underlying asset at the end of the lease term
b. There is a bargain purchase option
c. The lease term is for the major part of the economic life of the underlying asset, even if there is no transfer of
ownership at the end of the lease term
d. At the inception date, the present value of lease payments amounts to at least half of all of the fair value of the
underlying asset

6. The primary difference between a direct-financing lease and a sales-type 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

7. All of the following would be included in the lease receivable, except

a. Guaranteed residual value
b. Unguaranteed residual value
c. A purchase option that is reasonably certain
d. All would be included

8. In a direct financing lease, unearned interest income

a. Should be amortized over the lease term using the effective interest method
b. Should be amortized over the lease term using the straight-line method
c. Does not arise
d. Should be recognized at the lease expiration

9. The following statements are true related to a manufacturer’s lease, except

a. This type of lease is usually offered by captive leasing companies
b. Net investment in the lease is equal to the cost of production of the underlying asset.
c. Through this type of lease, the lessor has an objective of increasing the sales of its inventory items
d. Net investment in the lease includers the present value of the unguaranteed residual value
FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 1
 10. When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating
lease?
a. When received
b. At the inception of the lease
c. At the lease expiration
d. Over the lease term

11. The underlying asset in an operating lease

a. Shall be revalued to its fair value on the commencement date
b. Shall be subjected to impairment on the commencement date
c. Shall be depreciated only during the period when it is leased out to a lease
d. Shall not be derecognized

12. Lessors are required to account for lease receipts from operating leases as
a. Revenue, over a reducing balance over the lease term
b. Income, on the inception of the lease
c. Income, over a straight-line basis over the lease term
d. Revenue, at the end of the lease term

13. In an operating lease, the initial direct costs incurred shall be amortized over
a. The period of the lease
b. The remaining useful life of the underlying asset
c. The simple average of lease term and remaining useful life of the underlying asset
d. Initial direct costs are not amortized but fully expensed during the period these were incurred

14. If the selling price of the asset is higher than its fair value and the sale and leaseback transaction has transferred the
control over the asset, the following statements are correct, except:
a. The difference between the selling price of the asset and its fair value is presumed to be additional financing
(i.e. loan payable) from the buyer-lessor in the seller-lessee’s books
b. The lease liability in the seller-lessee’s books is equal to the present value of the periodic payments
c. The buyer-lessor shall record the asset at its fair value, regardless of the purchase price paid for it
d. The periodic payments shall be split in the seller-lessee’s books into amounts applied to the amortization of
lease liability and amounts applied to the amortization of the loan payable

15. If the sale and leaseback is accounted as a sale and the amount of selling price is equal to the fair value of the sold
asset, the amount of right of use asset is equal to
a. The amount of lease liability
b. The carrying amount of the asset sold
c. The carrying amount of the asset sold times the initial amount of lease liability over the fair value of the sold
asset
d. The fair value of the sold asset times the initial amount of lease liability over the carrying amount of the sold
asset

MULTIPLE CHOICE PROBLEMS:

1. At the beginning of the current year, MANGYAN COMPANY leased an equipment from a lessor with the following
pertinent information:

Annual rental payable at the end of each year 1,000,000

Initial direct costs paid 400,000
Lease bonus paid to lessor before commence of the lease 300,000
Lease incentive received 100,000
Discounted amount (at 8%) of restoring building as required by
contract 700,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of the asset 8 years
Implicit interest rate 10%

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 2

 What is the lease liability at year end? (Round-off PV factors at 2 decimal places)
a. P3,169,000 c. P3,719,000
b. P3,510,000 d. P3,950,000

What is the depreciation of the right of use asset for the current year?
a. P550,000 c. P1,000,000
b. P675,000 d. P1,080,000

2. BADJAO COMPANY leased an equipment from a lessor on January 1, 2024 under a lease with the following pertinent
information:

Annual rental payable at the end of each year 500,000

Lease term 8 years
Useful life of the equipment 10 years
Implicit interest rate 12%

BADJAO has the option to purchased the equipment on January 1, 2032 by paying P400,000 which is significantly
less than the expected fair value of the equipment on the option exercise date. On January 1, 2024, BADJAO incurred
initial direct cost of P300,000.

BADJAO should initially record the equipment at (Round-off PV factors at 2 decimal places)
a. P2,945,000 c. P2,645,000
b. P2,785,000 d. Zero

3. On January 1, 2024, TAUSUG COMPANY leased two automobiles for executive use. The lease requires TAUSUG to
make five annual payments of P1,000,000 beginning January 1, 2024. At the end of the lease term, December 31,
2027. TAUSUG guarantees the residual value of the automobiles at P500,000. The lease qualifies as a finance lease.
The interest implicit in the lease is 10%.

The finance lease liability on December 31, 2024 should be (Round-off PV factors at 2 decimal places)
a. P3,928,030 c. P3,100,000
b. P3,510,000 d. P2,828,000

4. On January 1, 2024, AETA FINACING COMPANY leased out a building to another entity for a lease term of ten years,
even though the building’s economic life is 20 years. annual lease payments of P2,500,000 are due to be paid every
December 31 of each year, starting in 2024. Ownership over the building will be transferred to the lessee by the end
of the lease term. The company acquired the building for P17,558,954 shortly before the start of the lease. In
addition, initial direct costs of P841,264 were incurred. When considered, these costs will change the implicit rate
from 7% to 6%.

The amount of interest income to be recognized for the year 2025 shall be
a. P1,140,166 c. P1,104,013
b. P1,229,127 d. P1,020,254

The amount if net investment in the lease as of December 31, 2025 shall be
a. P17,004,231 c. P16,288,013
b. P15,524,485 d. P14,928,248

5. MARANAO COMPANY leased out one of its manufactured equipment for seven years. Annual lease payments of
P1,500,000 are due on the first day of each year, starting in 2024. The equipment has a total useful life of nine years.
estimated residual value of the equipment at the end of the lease term is P1,000,000, of which P600,000 is
guaranteed by the lessee. Implicit interest rate is 7% while the production costs totaled P6,000,000.

The amount of sales revenue to be recognized during 2024 shall be

a. P9,272,560 c. P9,472,498
b. P9,023,460 d. P9,127,834

The amount of cost of goods sold to be recognized shall be

a. P5,689,700 c. P6,000,000
b. P5,479,400 d. P5,750,900

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 3

 6. On January 1, 2024, IGOROT COMPANY signed the first ever lease contract underlying a portion of its newly
constructed office building with useful life of 20 years. Annual lease payment of P1,500,000 is due every December
31 of each year for the next five years. As this lessee is the first occupant in the building, the lease payment related
to first twelve months of the lease term was waived in the form of lease incentive. In addition, the lessor incurred
initial direct costs of P600,000. The building was completed last October 1, 2023 for total construction costs of
P10,000,000.

The net amount of income from the lease for the year 2024 shall be
a. P620,000 c. P580,000
b. P880,000 d. P980,000

The balance in the accrued rent receivable or unearned rent income as of December 31, 2025 shall be
a. P900,000 rent receivable c. P600,000 rent receivable
b. P900,000 unearned rent d. P600,000 unearned rent

The carrying amount of the building as of December 31, 2025 shall be

a. P8,875,000 c. P9,369,000
b. P9,000,000 d. P9,235,000

7. TAGALOG COMPANY purchased a machinery from KAPAMPANGAN COMPANY for P10,000,000 on January 1, 2024.
KAPAMPANGAN carried the machinery on its books at P9,000,000 but has an original cost of P12,000,000 and fair
value of P10,500,000. Immediately after the sale, KAPAMPANGAN signed a five-year lease contract with TAGALOG
covering the same machinery. Annual lease payments of P1,400,000 are due every January 1, starting in 2024.
TAGALOG and KAPAMPANGAN had incremental borrowing costs of 7% and 8% respectively.

The amount of lease liability to be initially recognized in the books of KAPAMPANGAN COMPANY shall be
a. P6,642,095 c. P6,536,978
b. P6,142,095 d. P6,036,978

The amount of right of use asset to be initially recognized in the books of KAPAMPANGAN COMPANY shall be
a. P5,174,553 c. P5,264,653
b. P5,603,124 d. P5,693,224

The amount of gain on sale and leaseback to be recognized in the books of KAPAMPANGAN COMPANY on January
1, 2024 shall be
a. P566,146 c. P551,129
b. P637,575 d. P622,558

-END OF HANDOUTS-

FINANCIAL ACCOUNTING AND REPORTING REVIEW /RGP, CPA. 4