1.

Initial direct costs are immediately recognized as an expense by the lessor

when the costs are incurred in conjunction with an operating lease.
FALSE

2. Any lease that contains a purchase option must be treated as a finance

lease by the lessor.
FALSE

3. Rapp Co. leased a new machine to Lake Co. on January 1, 20x1. The
lease expires on January 1, 20x6. The annual rental is P90,000. Additionally,
on January 1,20x1, Lake paid P50,000 to Rapp as a lease bonus and
P25,000 as a security deposit to be refunded upon expiration of the leas. In
Rapp's 20x4 income statement, the amount of rental revenue should be
100,000

4. Farm Co. leased equipment to Union Co. on July 1,2011, and properly
recorded the sales-type lease at P135,000, the present value of the lease
payments discounted at 10%. The first of eight annual lease payments of
P20,000 due at the beginning of each year was received and recorded on July
3, 2011. Farm had purchased the equipment for P110,000. What amount of
interest revenue from the lease should Farm report in its 2011 income
statement?
6,750

5. On January 1, 20x6, Park Co. signed a 10-year operating lease for office
space at P96,000 per year. The lease included a provision for additional rent
of 5% of annual company sales in excess of P500,000. Park's sales for the
year ended December 31,20x6, were P600,000. Upon execution of the leas,
Park paid P24,000 as a bonus for the lease. Park's rent expense for the year
ended December 31,20x6 is
103,400

6. If a lease provides for the transfer of ownership over the leased asset or a
purchase option that is reasonably certain as to exercise
the lessee shall depreciate the leased asset over its useful life

7. Winn Co. manufactures equipment that is sold or leased. On December

31,20x6, Winn leased equipment to Bart for a five- year period ending
December 31,2x11, at which date ownership of the leased asset will be
transferred to Bart. Equal payments under the lease are P22,000 (including
P2,000 payment for non-lease components of the contract) and are due on
December 31 of each year. The first payment was made on December
31,20x6. Collectability of the remaining lease payments is reasonably assured,
and Winn has no material cost uncertainties. The normal sales price of the
equipment is P77,000, and the cost is P60,000. For the year ended December
31,20x6, what amount of income should Winn realize from the lease
transaction?
17,000

8. In a sale and leaseback transaction that qualifies as a sale under PFRS 16,
the seller-lessee recognizes only the amount of any gain or loss that relates to
the rights transferred to the buyer-lessor.
TRUE

9. Rent (lease) income under an operating lease may be computed as

Sum of lease payments over the lease term, excluding payments for
non-lease components of the plus lease bonus received divided by the
lease term.

10. Termination penalties are included in the lease payments if the lease term
reflects the lessee exercising an option to terminate the lease.
TRUE

11. Net investment in the lease is equal to the

The present value of lease payments plus the present value of any
unguaranteed residual value

12. An office equipment representative has a machine for sale or lease. If you
buy the machine, the cost is P7,596. If you lease the machine, you will have
to sign a non- cancelable lease and make 5 payments of P2,000 each. At the
time of the last payment you will receive title to the machine. The first
payment will be made on the first day of the lease. The interest rate implicit in
this lease is approximately
16%

13. Under an operating lease, the lease bonus paid by the lessee to the lessor
is deferred by the lessor and amortized over the lease term as a reduction to
lease income.
FALSE

14. Peg Co. leased equipment from Howe Corp. on July 1, 20x5, for an eight-
year period expiring June 30, 2x03. 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, 20x5. The rate of interest contemplated by Peg and Howe is 10%. The
cash selling price of the equipment is P3,520,000, and the cost of the
equipment on Howe's accounting records is P2,800,000. The lease is
appropriately recorded as a sales-type lease. What is the amount of profit on
the sale and interest revenue that Howe should record for the year ended
December 31, 20x5?
Profit on sale=720,000; Interest revenue=146,000

15. Lease bonus under an operating lease

is initially treated as unearned rent by a lessor

16. Which of the following will lead to finance lease classification by a lessor?
Any of these

17. On June 1, 20x0, Oren Co. entered into a five- year nonrenewable lease,
commencing on that date, for office space and made the following payments
to Cant Properties: Bonus to obtain lease P30,000; First month's rent P10,000;
Last month's rent P10,000. In its income statement for the year ended June
30, 20x0 what amount should Oren report as rent expense?
10,500

18. When rental payments vary over the term of an operating lease, the lessor
should recognize lease income on a straight line basis, unless there is
another method that is more appropriate.
TRUE

19. The lessor uses the implicit interest rate in determining the present value
of the lease payments.
TRUE

20. A lessor recognized interest (finance) income on a finance lease in

a decreasing manner

21. Initial direct costs incurred by the lessor under an operating lease
are capitalized and derecognized when the lease term is over

22. Howe Co. leased equipment to Kew Corp. on January 2, 20x9, for an
eight-year period expiring December 31,2x16. Equal payments under the
lease are P600,000 and are due on January 2 of each year. The first payment
was made on January 2, 20x9. The list selling price of the equipment is
P3,520,000 and its carrying cost on Howe's books is P2,800,000. The lease is
appropriately accounted for as a sales-type lease. The present value of the
lease payments at an imputed interest rate of 12% (the market rate) is
P3,300,000. What amount of profit on the sale should Howe report for the
year ended 31,20x9?
500,000

22. A lessor's net investment in a finance lease is computed as

present value of (a)

24. The inception of the lease is defined as the date of the lease agreement,
or the date of an earlier written commitment.
TRUE

25. Rent income (lease income) under operating leases are normally
recognized using
straight line method

26. On July 1, 20x6, Gee, Inc., leased a delivery truck from Marr Corp. under
a 3-year operating lease. Total rent for the term of the lease will be P36,000,
payable as follows: 12 months at P500 =P6,000; 12 months at P750 = 9,000;
12 months at P1,750 =21,000. All payments were made when due. In Marr's
June 30, 20x8, balance sheet, the accrued rent receivable should be reported
as
9,000

27. The commencement of the lease term is defined as the date on which the
leased property is actually transferred to the lessee.
TRUE

28. Which of the following is correct regarding the accounting for operating
leases?
When the lessor incurs initial direct costs, the leased asset should be
depreciated based on a straight line method in order to parallel the
recognition method for rent income under PFRS 16.

29. Both finance and operating leases are subject to capitalization.

FALSE
30. Glade Co. leases computer 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 options. Glade wishes to earn
8% interest on a five-year lease of equipment with a fair value of P323,400.
The first rental payment is due at the lease commencement. What is the total
amount of interest revenue that Glade will earn over the life of the lease?
51,600