5/27/24, 9:27 AM 07.

-Leases-Exercises (1) (pdf) - CliffsNotes

07.-Leases-Exercises (1) .pdf

Helpful Unhelpful

Home / Accounting

INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

FINANCE LEASE - LESSEE

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 c. Lease liability but not right of use asset
b. Right of use asset but not lease liability d. Neither right of use asset not lease liability

2. Which of the following is not one of the criteria when determining whether a contract is or contains a lease?
a. Identified asset
b. Identified liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use

3. The lessee may apply the operating lease model under what condition?
a. Short-term lease c. Both short term and low value lease
b. Low value lease d. Under all circumstances

4. Evaluate the following statements related to low value lease.

I. The value of an underlying asset is based on the current value of the asset at its current age.
II. The term of a low value lease shall be less than twelve months.
III. An underlying asset does not qualify as low value lease if the nature of the asset is such that the asset is typically not of low
value when new.

a. Only one statement is correct c. All statements are correct

b. Only two statements are correct d. All statements are incorrect

5. Which of the following is not included in the definition of lease payments?

a. Any payment required by a bargain purchase option that is reasonably certain
b. Costs for services and taxes to be paid by and reimbursed to the lessor
c. Required rental payments over the lease term
d. Any amounts guaranteed by a party related to the lessee

6. In computing depreciation of a right of use asset under a lease, the lessee should deduct
a. The residual value guarantee and depreciate over the lease term
b. An unguaranteed residual value and depreciate over the lease term
c. The residual guarantee and depreciate over the useful life of the asset
d. An unguaranteed residual value and depreciate over the useful life of the asset

https://www.cliffsnotes.com/study-notes/5310384 1/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes
a. What
REQUIRED:
b.
c.
d. What total
amount
amountamount
should
of be
should be
interest
reported
expense
reported as depreciation
as cost
lease
should
ofliability
theberight
reported
at the
of the
of use
beginning
for
asset?
right theuse
of current
and year-end?
asset year?
for the current year?
PROBLEM 1

At the beginning of the current year, an entity leased a building from a lessor:

Annual rental payable at the end of each year P1,500,000

1
Purchase option that is reasonably certain to be exercised 1,000,000
INTERMEDIATE ACCOUNTING 2 /RGP, CPA.
Initial direct costs 405,000
Lease bonus paid to the lessor before commencement of the lease 300,000
Lease incentive received 50,000
Present value of restoration cost discounted at 8% for six periods 945,000
Lease term 6 years
Useful life of the building 10 years
Implicit interest rate 10%

PROBLEM 2

On January 1, 2023, an entity entered into a 5-year lease with a lessor. Annual lease payments of P1,200,000 including annual
executor costs of P200,000 are payable at the end of each year. The entity knows that the lessor expects an 8% implicit rate on the
lease. The entity has a 10% incremental borrowing rate. The equipment is expected to have a useful life of 10 years. In addition, a
third party has guaranteed to pay the lessor a residual value of P500,000 at the end of the lease.

REQUIRED:
a. On January 1 and December 31, 2023, what is the principal amount of the lease obligation?
b. What amount should be reported as interest expense for 2023?

PROBLEM 3

On December 31, 2023, an entity leased two automobiles for executive use. The lease required the entity to make five annual
payments of P1,500,000 beginning December 31, 2023. At the end of the lease term, the entity had a residual value guarantee of
the automobiles at P1,000,000. The interest rate implicit in the lease is 10%.

REQUIRED:
a. What is the lease liability on January 1 and December 31, 2024?
b. What is the current portion of the lease liability on December 31, 2024?
c. What is the interest expense for 2024?

PROBLEM 4

At the beginning of the current year, an entity entered into a 10-year lease for equipment. The entity accounted for the acquisition
as a finance lease for P5,900,000, which included a P400,000 residual value guarantee. At the end of the lease, the asset shall revert
back to the lessor. It is estimated that the fair value of the asset at the end of the 12-year useful life would be P500,000. What
amount should be recognized as straight line depreciation on the leased asset for the current year?
https://www.cliffsnotes.com/study-notes/5310384 2/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes
amount should be recognized as straight line depreciation on the leased asset for the current year?
IV. and
an unguaranteed
The
thanpresent
isthe
also
fairadded
valueresidual
to
of get
the the
underlying
purchase
value.
net investment
option,
asset atgiven
of
thethe
end
there
lessor
of is
itsin
auseful
reasonable
a sales-type
life, is certainty
added
lease.in of
order
its exercise
to get the
and
lease
it isliability
substantially
of the lessee
lower
a. Only one of the statements is true c. Only one of the statements is false
b. Only two of the statements is false FINANCE LEASE - LESSOR
d. All of the statements are true

MULTIPLE
2. CHOICE
In a lease that isTHEORIES:
recorded as a direct financing lease by the lessor, interest revenue
a. Should be recognized over the period of the lease on a straight-line basis.
1. b.
Which choice
Should bebest describes
recognized thethe
over following
period statements:
of the lease in an increasing rate.
I. An
c. unguaranteed
Should residual
be recognized overvalue is included
the period in lease
of the the gross investment rate.
in a decreasing under the sales-type lease and direct-financing lease.
II. Only
d. thebe
Should guaranteed
recognizedresidual value
in full as shall be
revenue included
at the lease'sininception.
the measurement of the lease liability.
III. The gross profit under a sales-type lease will differ between a lease having a guaranteed residual value and a lease having
3. Which of the following is a correct statement regarding one of the finance lease criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease must contain a bargain purchase option.
c. The lease term is 75% or more if the leased property's estimated economic life.
d. The fair value of the minimum lease payments is equal to 90% or more of the present value of the leased asset.

4. Which of the following would be included in the Lease Receivable account?

I. Guaranteed residual value
II. Unguaranteed residual value
III. Executory costs
IV. Rental payments
2
INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

a. I and IV only c. I, II and IV

b. I, III and IV d. None of the choices

5. The basic 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 depreciation recorded each year by the lessor.
c. Recognition of gross profit on the sale.
d. Allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

6. Initial direct cost incurred by a lessor in a sales type lease shall be

a. Charge to cost of sale in the first period the lease term
b. Deferred and allocated over the lease term on a straight line basis
c. Charged to unearned interest income in the first period of the lease term
d. Deferred and allocated over the lease term in proportion to the recognition of rent revenue

7. Net investment in the lease is equal to the

a. Gross investment in the lease plus unearned finance income
b The present value of lease payments less the present value of any unguaranteed residual value
https://www.cliffsnotes.com/study-notes/5310384 3/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes
b. The present value of lease payments less the present value of any unguaranteed residual value
TYL CORP.
leases
2020, an
areequipment
classified
is in the business
as
is leased
directof
financing
toleasing
anothernew
lease.
entity
hi-tech
Atwith
theequipment.
the
endfollowing
of the As
lease
information:
lessor,
term,
TYL,
theTYL
equipment
expects awill
12%revert
return
toon
TYL
the
CORP.
net investment.
on JanuaryAll
1,
c. The present value of the lease paymentsWe'll try Ads by
Cost of equipment to TYL CORP. Adnot to
closed show
by that ad again
P5,000,000
d. The present value of lease payments plus the present value of any unguaranteed residual value
Residual value - unguaranteed Stop seeing600,000
this ad
Annual rental payable in advance 900,000
PROBLEM 5 Initial direct costs Why this ad?250,000
Useful life and lease term 8 years
Implicit interest rate 12%

REQUIRED:
(a) What is the gross investment in the lease?
(b) What is the net investment in the lease?
(c) What is the total interest income over the lease term?
(d) What is the interest income for the current year?

PROBLEM 6

GG CORP. is a dealer in machinery. On January 1, 2020, a machinery is leased to another entity with the following provisions:

Annual rental payable at the end of each year P 800,000

Lease term 5 years
Useful life of machinery 5 years
Cost of the machinery 2,000,000
Initial direct costs 100,000
Estimated residual value 200,000
Implicit interest rate 10%

At the end of the lease term on December 31, 2024, the machinery will revert to GG CORP.

REQUIRED:
(a) What is the gross investment in the lease?
(b) What is the net investment in the lease?
(c) What is the gross profit on sale?
(d) What is the interest income for the current year?

3
INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

OPERATING LEASES

MULTIPLE CHOICE THEORIES:

1. Lease bonus under the operating lease

a. is amortized to income using the effective interest method
b. is initially treated as unearned rent by a lessor
c is treated as an outright gain by a lessor
https://www.cliffsnotes.com/study-notes/5310384 4/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes
c. is treated as an outright gain by a lessor
2. b.
d. The
Where
a. is recognized
there
land is
is aan
finance
lease
in profit
of
lease
land
operatingor lease
and
loss
andthe
over
building
building
and the
the remaining
andisthe
a finance
building title
is lease
tolease
the
termland
a finance using
is not
lease a very
transferred,
complex generally
formula the lease is treated as if
c. The land is a finance lease and the buckling is an operating lease
d. The land is an operating lease and the building is an operating lease

3. The lessor should report the leased asset under an operating lease and income there from as which of the following?
a. The asset should be kept off the statement of financial position and the lease income should go to reserves
b. The asset should be kept off the statement of financial position and the lease income should go to the income statement
c. The asset should be reported in the statement of financial position according to its nature and the lease income should
go to reserves
d. The asset should be reported in the statement of financial position according to its nature and the lease income should
go to the income statement

4. Lease payments under an operating lease shall be recognized as an income by the lessor on
a. Straight line basis over the lease term c. Sum of units basis
b. Diminishing balance basis d. Cash basis

5. Which statement characterizes an operating lease?

a. The lessee records depreciation and interest
b. The lessee records a lease obligation
c. The lessor transfers title of the underlying asset to the lessee for the duration of the lease term
d. The lessor records depreciation and lease revenue

PROBLEM 7

GGWP CORP. is engaged in leasing heavy equipment. On December 1, 2020, the entity bought a second hand heavy equipment
for P750,000. In December 31, 2020, the entity incurred P150,000 for a major overhaul to put the equipment in good running
condition. The equipment has an estimated useful life of 5 years and the entity is using the straight-line method of depreciation.

On April 1, 2021, GGWP leased the equipment to TYL CORP. for 3 years up to March 31, 2024. GGWP incurred insurance and
property taxes totaling P120,000 for 2021. Additionally, TYL paid P300,000 to GGWP as a lease bonus to obtain the three-year
lease. GGWP paid P90,000 commission associated with negotiating the lease. The annual lease payments are shown on the
following schedule:

March 31, 2022 P 600,000

March 31, 2023 900,000
March 31, 2024 1,200,000

REQUIRED: (1) Prepare the journal entries on the books of the lessor and lessee for the year 2020, 2021 and 2022 (2) What is to be
reported as net rental income by GGWP for the year 2021?

SALE AND LEASEBACK

MULTIPLE CHOICE THEORIES: Page 3 of 5

1. It is an arrangement whereby one party sells a property to another party and then immediately leases the property back from
the new owner.
a. Sale c. Leaseback
b. Lease d. Sale and leaseback

4
INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

https://www.cliffsnotes.com/study-notes/5310384 5/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes

2. In a sale and leaseback transaction, which of the following statements is incorrect?

S1: In a sale and leaseback transaction, both the seller-lessee and buyer-lessor shall determine whether the transaction
qualifies as a sale under PFRS 15
S2: The amount to be recognized by the seller-lessee as cost of right of use asset is the same whether the selling price is at,
below or above fair value

a. S1 only c. Both statements

b. S2 only d. None of the statements

3. In a sale and leaseback transaction, which of the following statements is incorrect?

S1: If the transfer qualifies as a sale under PFRS 15, the seller-lessee shall measure the right-of-use asset arising from the
leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the
seller-lessee and recognize only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor
S2: If the transfer does not qualify as a sale, the parties shall account for it as a financing transaction.

a. S1 only c. Both statements

b. S2 only d. None of the statements

PROBLEM 8

On January 1, 2020, SOP CORP. sells a building to FUBU CORP. and simultaneously leases it back. Additional information follows:

Fair value of the building P500,000

Carrying amount of the building 400,000
Remaining useful life of the building 10 years
Lease term 5 years
Annual rent payable at the end of each year 50,000
Implicit interest rate equal to the market rate 12%

The transfer qualifies as a sale.

REQUIRED: Prepare the journal entries to account the sale and leaseback transaction on both the books of the seller-lessee and
the buyer-lessor under the following assumptions:
(a) The sale price is P500,000
(b) The sale price is P550,000
(c) The sale price is P450,000
(d) Assuming the transfer does not qualify as a sale

-END-

https://www.cliffsnotes.com/study-notes/5310384 6/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes

5
INTERMEDIATE ACCOUNTING 2 /RGP, CPA.

W09 Quiz D&C 46-50

Test #3 Review Sheet(1) (1)

FNCEECON300v3Assign310.1Template

BUSI 4121 - Ch. 4

Grad Excel Class 4 Demo Start File

Chapter 1 and 8 In-ClassELEAZAR

AMORTIZATION-AND-SINKING-FUND group 4

Inquiry Portfolio Project Final Essay

350

Copy of ugh

https://www.cliffsnotes.com/study-notes/5310384 7/8
5/27/24, 9:27 AM 07.-Leases-Exercises (1) (pdf) - CliffsNotes

CIS105Lesson8Project1ALM2052205

Part II

CliffsNotes study guides are written by real teachers and professors, so no matter what you're studying, CliffsNotes can ease
your homework headaches and help you score high on exams.

About CliffsNotes Copyright, Community Guidelines, DSA & other Legal Resources Honor Code Advertise with Us Contact Us

Follow us:

© CliffsNotes, a Learneo, Inc. business Terms of Service Privacy Policy Do Not Sell My Personal Information Disclaimer Questions Sitemap

Documents Sitemap

https://www.cliffsnotes.com/study-notes/5310384 8/8