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QUIZ - LEASES

Problem

1. At the beginning of current year, Tricia Company leased a new machine from Angel with the following
pertinent information:

Lease term 5 years

Annual rental payable at beginning of each year 500,000
Useful life of machine 8 years
Implicit interest rate in lease 12%
Present value of an annuity of 1 in advance for 5 periods at 12% 4.04
Present value of an ordinary annuity of 1 for 5 periods at 12% 3.60

The lease is not renewable and the machine reverts to Angel at the termination of the lease. The cost of
the machine on Angel’s accounting records is P3,755,000.

1. At the beginning of the lease term, what amount should be recorded as cost of right of
use asset?
a. 1,800,000
b. 2,020,000
c. 3,755,000
d. 2,100,000

2. What is the depreciation of the right of use for the current year?
a. 252,500
b. 404,000
c. 360,000
d. 751,000

2. Catherine Company entered into a nine-year lease on a warehouse on December 31, 2021.
Lease payment of P520,000 which included executory cost of P20,000 is due annually, beginning on
December 31, 2022 and every December 31 thereafter.

The cost of restoring the underlying asset to its original condition as required by the contract is
estimated at the present value of P200,000.

The interest rate implicit in the lease is 9%. The present value of an ordinary annuity of 1 for nine years
at 9% is 5.6.

1. What amount should be reported as lease liability on December 31, 2021?

a. 2,800,000
b. 2,912,000
c. 4,500,000
d. 4,680,000

2. What is the cost of the right of use asset?

a. 2,800,000
b. 3,000,000
c. 3,112,000
d. 4,700,000

3. Under what condition/s can the lessee be permitted to apply for an operating lease model?
a. Long-term lease and low value lease
b. Short-term lease and high value lease
c. Long-term and high value lease
d. Short-term and low value lease

4. Rose Co. leased machinery on January 1, 2021 for a 15-year period. The useful life of the machinery is
25 years. Equal payments of P500,000 are due every January 1 starting January 1, 2021. The present
value on January 1, 2021 of the lease payments over the lease term, discounted at 12% is P1,457,000.
The incremental borrowing rate was 15%. The lease was accounted as finance lease because of a
nominal bargain purchase option.

1. What is the interest expense for 2021?

a. 0
b. 957,000
c. 500,000
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d. 114,840

2. What is the depreciation expense for 2021?

a. 20,000
b. 38,280
c. 58,280
d. 97,133

5. Portion of the lease payment that is not fixed in amount but is based on a factor other than just the
passage of time, for example, percentage of sales, amount of usage, price index, market rate of interest.
a. Executory cost
b. Contingent rent.
c. Executory rent
d. Contingent cost

6. On January 1, 2021, Joshtin Corporation signed a five-year noncancelable lease for equipment. The
terms of the lease called for Joshtin to make annual payments of 60,000 at the end of each year for five
years with title to pass to Joshtin at the end of this period. The equipment has an estimated useful life of
7 years and no residual value. Joshtin uses the straight-line method of depreciation for all of its fixed
assets. Joshtin accordingly accounts for this lease transaction as a finance lease. The minimum lease
payments were determined to have a present value of 227,448 at an effective interest rate of 10%.

1. With respect to this capitalized lease, for 2021 Joshtin should record
a. rent expense of 60,000.
b. interest expense of 22,745 and depreciation expense of 45,489.
c. interest expense of 22,745 and depreciation expense of 32,493.
d. interest expense of 30,000 and depreciation expense of 45,489.

2. With respect to this capitalized lease, for 2022 Joshtin should record
a. interest expense of 22,745 and depreciation expense of 32,493.
b. interest expense of 20,469 and depreciation expense of 32,493.
c. interest expense of 19,019 and depreciation expense of 32,493.
d. interest expense of 14,469 and depreciation expense of 32,493.

7. An entity entered in to a finance lease on January 1, 2019. A third party guaranteed the residual value of
the asset under the lease estimated to be P1,200,000 on January 1, 2024, the end of the lease term.
Annual lease payments are P1,000,000 due each December 31, beginning December 31, 2019. The
last payment is due December 31, 2023. The remaining useful life of the asset was six years at the
commencement of the lease.

Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62, and
the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79.

1. What is the net lease receivable of the lessor at the commencement date of the lease?
a. 4,534,000
b. 3,790,000
c. 4,990,000
d. 2,590,000

2. What is the gross investment in the lease?

a. 5,000,000
b. 6,200,000
c. 3,800,000
d. 5,744,000

3. What is the total unearned interest income?

a. 2,410,000
b. 1,666,000
c. 1,210,000
d. 466,000

4. What is the interest income for 2019?

a. 379,000
b. 620,000
c. 453,400
d. 500,000
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8. Angel Company leased a new machine to Uly Company on January 1, 2021. The lease expires on
January 1, 2025. The annual rental is P1,150,000. Additionally, on January 1, 2021, Uly Company paid
P680,000 to Angel Company as lease bonus and 200,000 as a security deposit to be refunded upon
expiration of the lease.

What amount of rental revenue should be reported for 2021?

a. 1,320,000
b. 1,500,000
c. 1,150,000
d. 1,200,000

9. The date on which the lessee is entitled to exercise the right to use the underlying asset.
a. Date of lease agreement
b. Date of commitment of the parties to the principal provisions of the lease
c. Inception of the lease
d. Commencement of the lease

10. The excess of the fair value underlying asset at the inception of the lease over the carrying amount shall
be recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturer profit from a sales type lease
d. Manufacturer profit from a direct financing lease

11. A finance lease is recognized by the lessor as:

a. Direct financing lease
b. Either direct financing lease or indirect financing lease
c. Sales type lease
d. Either direct financing lease or sales type lease

12. At the end of the current year, Angel Company sold a machine with 12-year useful life to another entity
and simultaneously leased it back for 1 year.
Sale Price 500,000
Carrying Amount 420,000
Present Value of a reasonable lease rentals
(P5,000 for 12 months @ 11%) 56,300
What amount of gain on right transferred should be reported at the current year?
a. 56,300
b. 50,000
c. 20,000
d. 80,000

13. An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects
a 12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2019, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2019

1. What is the gross investment in the lease?

a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000
2. What is the net investment in the lease?
a. 5,004,000
b. 5,244,000
c. 5,500,000
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d. 5,740,000
3. What is the total financial revenue?
a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000
4. What amount should be recognized as interest income for 2019?
a. 600,480
b. 492,480
c. 536,760
d. 521,280
5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000

14. Joseph Company leases a machine from Jerome Corp. under an agreement which meets the criteria to
be a finance lease for Joseph. The six-year lease requires payment of 102,000 at the beginning of each
year, including 15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate
for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of
an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six
years at 8% is 4.99271. Joseph should record the leased asset at
a. 509,256.
b. 488,661.
c. 434,366.
d. 416,799.

15. Which of the following costs is capitalized as cost of right-of-use asset?

a. Taxes
b. Maintenance expense
c. Finder’s fee
d. Insurance expense

16. Which of the following is deducted when computing for the initial carrying amount of the right of use
asset?
a. Lease bonus
b. Lease incentive
c. Demolition or restoration
d. Initial direct cost

17. Lease income shall be recognized on a straight-line basis over the lease term, unless another
systematic basis is more representative of the time pattern in which use benefit derived from the leased
asset is diminished
a. Finance lease on the part of lessor
b. Finance lease on the part of lessee
c. Operating lease on the part of lessor.
d. Operating lease on the part of lessee

18. IFRS 16, paragraph 32, provides that the lessee shall depreciate the right of use asset over the useful
life of the underlying asset under which of the following conditions?
a. Lease transfers ownership of the underlying asset to the lessee at the end of lease term
b. Lessee is reasonably certain to exercise a purchase option
c. Both a and b
d. Answer not given

19. It is received by the lessor from the lessee that is recognized as unearned rent income to be amortized
over the lease term
a. Security deposit.
b. Lease bonus
c. Initial direct cost.
d. None of the above.

20. It is that portion of the residual value of the lease asset, the realization of which by the lessor is not
assured or is guaranteed solely by a party related to the lessor
a. Guaranteed residual value
b. Unguaranteed residual value
c. Residual value
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d. Bargain purchase option

21. At the beginning of the current year, Dianne Company leased a machinery with the following
information:

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

Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required
by contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. What is the initial lease liability?

a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000

2. What is the cost of right use asset?

a. 4,200,000
b. 4,250,000
c. 3,810,000
d. 3,900,000

3. What is the depreciation for current year?

a. 462,500
b. 925,000
c. 850,000
d. 965,000

4. What is the lease liability at year-end?

a. 2,510,000
b. 3,159,000
c. 2,861,000
d. 3,620,000

22. How should the lessee present the right of use asset?
a. As a revenue
b. As a disclosure
c. As a noncurrent separate line item
d. As an intangible asset

23. At the beginning of current year, Angel Company sold a machine and immediately leased it back. The
following data pertain to the sale and leaseback transaction:

Sale price at below fair value 4,000,000

Fair value of machine 4,500,000
Carrying amount of machine 3,600,000
Annual rental payable at the end of each year 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6%
For 3 periods 2.67

1. What is the initial lease liability?

a. 1,335,000
b. 1,500,000
c. 4,000,000
d. 5,000,000

2. What is the cost of right of use asset?

a. 3,600,000
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b. 1,468,000
c. 1,800,000
d. 2,880,000

3. What is the gain transferred to the buyer-lessor?

a. 900,000
b. 720,000
c. 533,000
d. 500,000

4. What is the net annual rent income of the buyer-lessor?

a. 500,000
b. 150,000
c. 250,000
d. 100,000

24. Initial direct cost incurred by lessor in an operating lease shall be

a. Compared to the carrying amount, whichever is higher
b. Compared to the carrying amount, whichever is lower
c. Deducted to the carrying amount
d. Added to the carrying amount.

25. Kaila Co. leased equipment to Oz Company on May 1, 2021. The lease expires on May 1, 2022. Oz
could have bought the equipment from Kaila for 3,200,000 instead of leasing it. Kaila's accounting
records showed a book value for the equipment on May 1, 2021, of 2,800,000. Kaila's depreciation on
the equipment in 2021 was 360,000. During 2021, Oz paid 720,000 in rentals to Kaila for the 8-month
period. Kaila incurred maintenance and other related costs under the terms of the lease of 64,000 in
2021. After the lease with Oz expires, Kaila will lease the equipment to another company for two years.

1. Ignoring income taxes, the amount of expense incurred by Oz from this lease for the year ended
December 31, 2021, should be
a. 296,000.
b. 360,000.
c. 656,000.
d. 720,000.
2. The income before income taxes derived by Kaila from this lease for the year ended December
31, 2021, should be
a. 296,000.
b. 360,000.
c. 656,000.
d. 720,000.