AGUILAN

1. Rapp Co. leased a new machine to Lake Co. on January 1, year 1. The lease is an operating
lease and expires on January 1, year 6. The annual rental is Php90,000. Additionally, on
January 1, year 1, Lake paid Php50,000 to Rapp as a lease bonus and Php25,000 as a security
deposit to be refunded upon expiration of the lease. In Rapp’s year 1 income statement, the
amount of rental revenue should be
a. Php140,000
b. Php125,000
c. Php100,000
d. Php90,000

Solution:
Annual Rental 90,000
Lease Bonus (50,000/5) 10,000
Rental Revenue, year1 100,000

2. Wall Co. leased office premises to Fox, Inc. for a fiveyear term beginning January 2, year 1.
Under the terms of the operating lease, rent for the first year is Php8,000 and rent for years
two through five is Php12,500 per annum. However, as an inducement to enter the lease, Wall
granted Fox the first six months of the lease rent-free. In its December 31, year 1 income
statement, what amount should Wall report as rental income?
a. Php12,000
b. Php11,600
c. Php10,800
d. Php8,000

Solution:
Rental for year1(8,000/2) 4,000
Rental for year2-5(12,500x4) 50,000
54,000
No. of years /5years
Rental Income, year1 10,800
3. On January 1, year 1, Wren Co. leased a building to Brill under an operating lease for ten
years at Php50,000 per year, payable the first day of each lease year. Wren paid Php15,000 to a
real estate broker as a finder’s fee. The building is depreciated Php12,000 per year. For year 1,
Wren incurred insurance and property tax expense totaling Php9,000. Wren’s net rental income
for year 1 should be
a. Php27,500
b. Php29,000
c. Php35,000
d. Php36,500

Solution:
Rental revenue 50,000
Depreciation expense (12,000)
Executory costs (9,000)
Finder’s fee (15,000 ÷ 10) (1,500)
Net rental income 27,500

4. On July 1, year 1, Gee, Inc. leased a delivery truck from Marr Corp. under a three-year
operating lease. Total rent for the term of the lease will be Php36,000, payable as follows:
12 months at Php500 = Php6,000
12 months at Php750 = 9,000
12 months at Php1,750 = 21,000
All payments were made when due. In Marr’s June 30, year 3 balance sheet, the accrued rent
receivable should be reported as
a. Php0
b. Php9,000
c. Php12,000
d. Php21,000

Solution:
Accruals (36,000x1/36x24) 24,000
Collections (6,000+9,000) (15,000)
Accrued Rent Receivable 9,000
5. As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine
months of free rent under a five-year operating lease. The lease is effective on July 1, year 1 and
provides for monthly rental of Php1,000 to begin April 1, year 2. In Hompson’s income
statement for the year ended June 30, year 2, rent expense should be reported as
a. Php10,200
b. Php9,000
c. Php3,000
d. Php2,550

Solution:
Rent Receivable (1,000x51) 51,000
No. of Years /5years
Rent Expense 10,200

ALEGARBES
1. On January 1, year 1, Park Co. signed a ten-year operating lease for office space at Php96,000
per year. The lease included a provision for additional rent of 5% of annual company 514
Module 13: Present Value sales in excess of Php500,000. Park’s sales for the year ended
December 31, year 1, were Php600,000. Upon execution of the lease, Park paid Php24,000 as a
bonus for the lease. Park’s rent expense for the year ended December 31, year 1, is
a. Php98,400
b. Php101,000
c. Php103,400
d. Php125,000

Solution:
Base rental 96,000
Lease bonus (24,000 ÷ 10) 2,400
Cont. rental [5% × (600,000 – 500,000)] 5,000
103,400
2. On December 1, year 1, Clark Co. leased office space for five years at a monthly rental of
Php60,000. On the same date, Clark paid the lessor the following amounts: First month’s rent
Php60,000 Last month’s rent 60,000 Security deposit (refundable at lease expiration) 80,000
Installation of new walls and offices 360,000 What should be Clark’s year 1 expense relating to
utilization
of the office space?
a. Php60,000
b. Php66,000
c. Php120,000
d. Php140,000

Solution:
Rent Expense 60,000
Amortization Expense(360,000x1/6) 6,000
Total Expenses 66,000

3. Star Co. leases a building for its product showroom. The ten-year nonrenewable lease will
expire on December 31, year 11. In January year 6, Star redecorated its showroom and made
leasehold improvements of Php48,000. The estimated useful life of the improvements is eight
years. Star uses the straight-line method of amortization. What amount of leasehold
improvements, net of amortization, should Star report in its June 30, year 6 balance sheet?
a. Php45,600
b. Php45,000
c. Php44,000
d. Php43,200

Solution:
Cost 48,000
Amortization (48,000x1/6x1/2) (4,000)
44,000

4. On January 2, year 1, Ral Co. leased land and building from an unrelated lessor for a ten-year
term. The lease has a renewal option for an additional ten years, but Ral has not reached a
decision with regard to the renewal option. In early January of year 1, Ral completed the
following improvements to the property:
Description Estimated life Cost
Sales office 10 years Php47,000
Warehouse 25 years 75,000
Parking lot 15 years 18,000
Amortization of leasehold improvements for year 1 should be
a. Php7,000
b. Php8,900
c. Php12,200
d. Php14,000

Solution:
Cost (47,000 + 75,000 + 18,000) 140,000
No. of years /10 years
14,000

5. On January 1, year 1, Nobb Corp. signed a twelve-year lease for warehouse space. Nobb has
an option to renew the lease for an additional eight-year period on or before January 1, year 5.
During January year 3, Nobb made substantial improvements to the warehouse. The cost of
these improvements was Php540,000, with an estimated useful life of fifteen years. At
December 31, year 3, Nobb intended to exercise the renewal option. Nobb has taken a full
year’s amortization on this leasehold. In Nobb’s December 31, year 3 balance sheet, the
carrying amount of this leasehold improvement should be
a. Php486,000
b. Php504,000
c. Php510,000
d. Php513,000

Solution:
Cost 540,000
Amortization(540,000/15) (36,000)
504,000
AMBALADA
1.On December 1, 2011, Burol Corporation leased office space for 10 years at a monthly rental
of Php90,000. On that date Perez paid the landlord the following amounts:
Rent deposit Php 90,000
First month's rent 90,000
Last month's rent 90,000
Installation of new walls and offices 495,000
Php765,000
The entire amount of Php765,000 was charged to rent expense in 2011. What amount
should Burol have charged to expense for the year ended December 31, 2011?
a. Php90,000
b. Php94,125
c. Php184,125
d. Php495,000

Solution:

First month’s rent Php90,000

Installation of new walls and offices
(495,00 ÷ 12 /10) 4,125
Rent Expense Php 94,125

2. On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain
machinery. The terms of the lease called for Dean to make annual payments of
Php100,000 at the end of each year for ten years with title to pass to Dean at the end of
this period. The machinery has an estimated useful life of 15 years and no salvage value.
Dean uses the straight-line method of depreciation for all of its fixed assets. Dean
accordingly accounted for this lease transaction as a capital lease. The lease payments
were determined to have a present value of Php671,008 at an effective interest rate of
8%. With respect to this capitalized lease, Dean should record for 2011
a. lease expense of Php100,000.
b. interest expense of Php44,734 and depreciation expense of Php38,068.
c. interest expense of Php53,681 and depreciation expense of Php44,734.
 d. interest expense of Php45,681 and depreciation expense of Php67,101.

Solution:
PV of Machinery Php 673,008
Interest Rate 8%
Interest Expense Php 53,681

On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a
storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably
predictable and no important uncertainties surround the amount of costs yet to be incurred by
the lessor. The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is Php3,000,000; however, the book
value to Holt is Php2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey
depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual
rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey,
Inc.
(f) The yearly rental payment includes Php10,000 of executory costs related to taxes on the
property.

3. What is the amount of the minimum annual lease payment? (Rounded to the nearest
dollar.)
a. Php188,237
b. Php478,236
c. Php488,236
d. Php498,236

Solution:
Fair Value of Asset Php 3,000,000
÷PV of Ordinary Annuity ÷ 6.014457
Rent Expense Php 488,236
 4. What is the amount of the total annual lease payment?
a. Php188,237
b. Php478,237
c. Php488,237
d. Php498,237

Rent Expense Php 488,236

Executory Costs 10,000
Lease Payment Php 498,236

5. Yancey, Inc. would record depreciation expense on this storage building in 2011 of
(Rounded to the nearest dollar.)
a. Php0.
b. Php250,000.
c. Php300,000.
d. Php488,237.

Fair Value of Equipment Php 3,000, 000

Lease term ÷ 10
Depreciation Php 300,000

AQUINO
1. Metcalf Company leases a machine from Vollmer Corp. under an agreement which
meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment
of Php102,000 at the beginning of each year, including Php15,000 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. Metcalf should record the leased asset at
a. Php509,256.
b. Php488,661.
 c. Php434,366.
d. Php416,799.

First month’s rent Php102,000

Executory costs ( 15,000)
Rent Expense Php 87,000
PV of annuity due in 6 years at 8% ÷ 4.99271
2. On December 31, 2011, Lang Corporation leased a ship from Fort Company for an eight-
year period expiring December 30, 2019. Equal annual payments of Php200,000 are due
on December 31 of each year, beginning with December 31, 2011. The lease is properly
classified as a capital lease on Lang 's books. The present value at December 31, 2011 of
the eight lease payments over the lease term discounted at 10% is Php1,173,685.
Assuming all payments are made on time, the amount that should be reported by Lang
Corporation as the total obligation under capital leases on its December 31, 2012
balance sheet is
a. Php1,091,054.
b. Php1,000,159.
c. Php871,054.
d. Php1,200,000.

Lease Liability—beg.
(1,173,685 – 200,00) Php 973 685
First Payments Php200,000
Interest Expense
(973,685 x 10%) 97, 369 (102,632)
Lease Liability—end Php 871,054

Use the following information for questions 18 and 19.

On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Sauder to make annual payments of Php50,000 at the
beginning of each year for five years with title to pass to Sauder at the end of this period. The
equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the
straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for
this lease transaction as a capital lease. The minimum lease payments were determined to have
a present value of Php208,493 at an effective interest rate of 10%.

3. In 2011, Sauder should record interest expense of

a. Php15,849.
b. Php29,151.
c. Php20,849.
d. Php34,151.

Solution:
Lease Liability—beg. 2011 Php208,493
First Payment ( 50,000)
Lease Liability—end. 2011 Php158,493
Interest rate 10%
Interest Expense Php 15, 849
4. In 2012, Sauder should record interest expense of
a. Php10,849.
b. Php12,434.
c. Php15,849.
d. Php17,434.

Solution:
Lease Liability—beg. 2012 Php 158,493
First Payment Php 50,000
Interest Expense (15,849) 34,151
Lease Liability—end. 2012 Php 124,342
Interest rate 10%
Interest Expense Php 12,434
5. On December 31, 2011, Kuhn Corporation leased a plane from Bell Company for an
eight-year period expiring December 30, 2019. Equal annual payments of Php150,000
are due on December 31 of each year, beginning with December 31, 2011. The lease is
 properly classified as a capital lease on Kuhn’s books. The present value at December
31, 2011 of the eight lease payments over the lease term discounted at 10% is
Php880,264. Assuming the first payment is made on time, the amount that should be
reported by Kuhn Corporation as the lease liability on its December 31, 2011 balance
sheet is
a. Php880,264.
b. Php818,290.
c. Php792,238.
d. Php730,264.

Lease Liability—beg. Php880,264

First Payment (150,000)
Lease Liability—end. Php 730,264

ARCAY
Use the following information for questions 21 and 22.

On January 1, 2011, Ogleby Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Ogleby to make annual payments of Php60,000 at the end of
each year for five years with title to pass to Ogleby at the end of this period. The equipment has
an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of
depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a
capital lease. The minimum lease payments were determined to have a present value of
Php227,448 at an effective interest rate of 10%.

1. With respect to this capitalized lease, for 2011 Ogleby should record
a. rent expense of Php60,000.
b. interest expense of Php22,745 and depreciation expense of Php45,489.
c. interest expense of Php22,745 and depreciation expense of Php32,493.
d. interest expense of Php30,000 and depreciation expense of Php45,489.

Lease Liability Php 227,448

Interest rate 10%
 Interest Expense Php 22,745

Lease Liability Php 227,448

Useful life ÷ 7
Depreciation Expense Php 32,493

2. With respect to this capitalized lease, for 2012 Ogleby should record
a. interest expense of Php22,745 and depreciation expense of Php32,493.
b. interest expense of Php20,469 and depreciation expense of Php32,493.
c. interest expense of Php19,019 and depreciation expense of Php32,493.
d. interest expense of Php14,469 and depreciation expense of Php32,493.

Solution:
Lease Liability—beg Php227,448
First Payment Php60,000
Interest Expense (Php22,745) (37,255)
Lease Liability—end Php190,193
Interest rate 10%
Interest Expense—end Php 19,019

3. Emporia Corporation is a lessee with a capital lease. The asset is recorded at Php450,000
and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a market value of Php150,000 at the end of 5 years, and a market value of
Php50,000 at the end of 8 years. The lease agreement provides for the transfer of title
of the asset to the lessee at the end of the lease term. What amount of depreciation
expense would the lessee record for the first year of the lease?
a. Php90,000
b. Php80,000
c. Php60,000
d. Php50,000
Cost Php450,000
Residual Value (50,000)
Depreciable Amount Php400,000

Annual Depreciation
(400,000÷ 8) Php50,000

4. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of Php86,038, with the first payment due at lease inception. The
lease does not transfer ownership, nor is there a bargain purchase option. The
equipment has a 4-year useful life and no salvage value. If Pisa, Inc.’s incremental
borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is
8%, what is the amount recorded for the leased asset at the lease inception?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. Php307,767
b. Php272,728
c. Php284,969
d. Php300,000

Lease Liability
(86,038 x 3.57710) Php 307,767

5. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of Php86,038, with the first payment due at lease inception. The
lease does not transfer ownership, nor is there a bargain purchase option. The
equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental
borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is
8%. Assuming that this lease is properly classified as a capital lease, what is the amount
of interest expense recorded by Pisa, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
 a. Php0
b. Php24,621
c. Php17,738
d. Php22,798

Lease Liability
(86,038 x 3.57710) Php307,767
First Payments (86,038)
Lease Liability—end Php221,638
Interest rate x 8%
Interest Expense Php17,738.

ASAYTUNO
1. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of Php86,038, with the first payment due at lease inception. The
lease does not transfer ownership, nor is there a bargain purchase option. The
equipment has a 4 year useful life and no salvage value. Pisa, Inc.’s incremental
borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is
8%. Assuming that this lease is properly classified as a capital lease, what is the amount
of principal reduction recorded when the second lease payment is made in Year 2?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. Php86,038
b. Php61,417
c. Php63,240
d. Php68,300

Lease Liability—beg
(86,038 x 3.57710) Php307,767
First Payment Php86,038
Interest Expense ( 17,738)
Lease Liability –end. Php 68, 300

2. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of Php86,038, with the first payment due at lease inception. The
lease does not transfer ownership, nor is there a bargain purchase option. The
equipment has a 4-year useful life and no salvage value. Pisa, Inc.’s incremental
borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is
8%. Pisa, Inc. uses the straight-line method to depreciate similar assets. What is the
amount of depreciation expense recorded by Pisa, Inc. in the first year of the asset’s
life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a. Php0 because the asset is depreciated by Tower Company.
b. Php71,242
c. Php76,942
d. Php75,000

Lease Liability—beg
(86,038 x 3.57710) Php307,767

Annual Depreciation
(307,767÷ 4) Php76,942

3. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011
it leased equipment with a cost of Php200,000 to Silver Point Co. The 5-year lease calls
for a 10% down payment and equal annual payments at the end of each year. The
equipment has an expected useful life of 5 years. Silver Point’s incremental borrowing
rate is 10%, and it depreciates similar equipment using the double-declining balance
 method. The selling price of the equipment is Php325,000, and the rate implicit in the
lease is 8%, which is known to Silver Point Co. What is the amount of interest expense
recorded by Silver Point Co. for the year ended December 31, 2011?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Php29,250
b. Php23,400
c. Php26,000
d. Php32,500

Lease Liability
(325,000 x 10% x 3.99271) Php 73,259
PV of Ordinary Annuity at 8% at 5 periods x 3.99271
Lease Liability—end Php 292,502
Interest rate x 8%
Interest Expense Php23,400.

4. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011
it leased equipment with a cost of Php200,000 to Silver Point Co. The 5-year lease calls
for a 10% down payment and equal annual payments of Php73,259 at the end of each
year. The equipment has an expected useful life of 5 years. Silver Point’s incremental
borrowing rate is 10%, and it depreciates similar equipment using the double-declining
balance method. The selling price of the equipment is Php325,000, and the rate implicit
in the lease is 8%, which is known to Silver Point Co. What is the book value of the
leased asset at December 31, 2011, and what is the balance in the Lease Liability
account?

Book Value of Balance in Lease

Leased Asset Liability
a. Php325,000 Php219,243
b. Php260,000 Php248,491
c. Php195,000 Php242,643
d. Php208,000 Php248,491
Lease Liability—beg. (73,259 x 3.99271) Php 292,502
First Payment Php 73,259
Interest Expense (292,502 x 8%) ( 23,400) (49,859)
Lease Liability—end. 2012 Php 242, 643

5. Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011
it leased equipment with a cost of Php200,000 to Silver Point Co. The 5-year lease calls
for a 10% down payment and equal annual payments at the end of each year. The
equipment has an expected useful life of 5 years. If the selling price of the equipment is
Php325,000, and the rate implicit in the lease is 8%, what are the equal annual
payments?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Php73,259
b. Php67,831
c. Php75,822
d. Php81,398

Selling Price (325,000 x 90%) Php 292,500

PV of Ordinary Annuity at 8% for 5 periods ÷ 3.99271
Lease Liability Php 73,259

ATOS

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 for the
purpose of leasing a machine to be used in its manufacturing operations. The following data
pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of
Php155,213 are due on December 31 of each year.
 (b) The fair value of the machine on January 1, 2011, is Php400,000. The machine has a
remaining economic life of 10 years, with no salvage value. The machine reverts to the
lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the
8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a
suit which is sufficiently material to make collectibility of future lease payments
doubtful.

1. If the present value of the future lease payments is Php400,000 at January 1, 2011, what
is the amount of the reduction in the lease liability for Alt Corp. in the second full year of
the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest
dollar.)
a. Php115,213
b. Php123,213
c. Php126,734
d. Php133,070
Lease Liability—beg. Php 155,213
Interest Expense (284,787 x 10%) ( 28,479)
Lease Liability—end. 2012 Php 126,734

PV of Future lease Payments Php400,000

Lease Liability—beg. Php 155, 213
Interest (400,000 x 10%) ( 40,000) (115, 213)
Total Php 284,787

2. If Yates records this lease as a direct-financing lease, what amount would be recorded as
Lease Receivable at the inception of the lease?
a. Php155,213
b. Php385,991
c. Php400,000
d. Php465,638
Fair Value Php 400 000

3. Hook Company leased equipment to Emley Company on July 1, 2010, for a one-year
period expiring June 30, 2011, for Php60,000 a month. On July 1, 2011, Hook leased this
piece of equipment to Terry Company for a three-year period expiring June 30, 2014, for
Php75,000 a month. The original cost of the equipment was Php4,800,000. The
equipment, which has been continually on lease since July 1, 2006, is being depreciated
on a straight-line basis over an eight-year period with no salvage value. Assuming that
both the lease to Emley and the lease to Terry are appropriately recorded as operating
leases for accounting purposes, what is the amount of income (expense) before income
taxes that each would record as a result of the above facts for the year ended December
31, 2011?
Hook Emley Terry
a. Php210,000 Php(360,000) Php(450,000)
b. Php210,000 Php(360,000) Php(750,000)
c. Php810,000 Php(60,000) Php(150,000)
d. Php810,000 Php(660,000) Php(450,000)

Hook:
Rent from July to December(Php60,000 × 6) Php360,000
Amortization of lease (Php75,000 x 6) 450,000
Php810,000
Depreciation (4,800,000 ÷ 8) (600,000)
Operating Profit Php210,000

Emley:

Operating Loss
(Php60,000) x 6 Php(360,000)

Terry:
Operating Loss:
(Php75,000) × 6 Php(450,000).
Hull Co. leased equipment to Riggs Company on May 1, 2011. At that time the collectibility of
the minimum lease payments was not reasonably predictable. The lease expires on May 1,
2012. Riggs could have bought the equipment from Hull for Php3,200,000 instead of leasing it.
Hull's accounting records showed a book value for the equipment on May 1, 2008, of
Php2,800,000. Hull's depreciation on the equipment in 2011 was Php360,000. During 2011,
Riggs paid Php720,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and
other related costs under the terms of the lease of Php64,000 in 2011. After the lease with
Riggs expires, Hull will lease the equipment to another company for two years.

4. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2011, should be
a. Php296,000.
b. Php360,000.
c. Php656,000.
d. Php720,000.

Rent Expense Php 720, 000

5. The income before income taxes derived by Hull from this lease for the year ended
December 31, 2011, should be
a. Php296,000.
b. Php360,000.
c. Php656,000.
d. Php720,000.

Rent incurred Php 720,000

Less: Maintenance Costs Php 64,000
Depreciation 360,000 424,000
Net Rent Revenue Php 296,000

BACOLOR
1. On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of Php40,000 each, payable beginning December 31, 2011. Brick
Co. agrees to guarantee the Php25,000 residual value of the asset at the end of the
lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s
 implicit interest rate is 8%. What journal entry would Gold Star make at January 2, 2011
assuming this is a direct–financing lease?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092

a. Lease Receivable 225,000

Equipment 225,000
b. Lease Receivable 159,708
Loss 65,292
Equipment 225,000
c. Lease Receivable 167,155
Equipment 167,155
d. Lease Receivable 176,835
Equipment 176,835

Present value of rentals (Php40,000 x 3.99271) Php159,708

Present value of guaranteed residual value (Php25,000 x .68508) 17,127
Net lease receivable Php176,835

2. Mays Company has a machine with a cost of Php400,000 which also is its fair market value on
the date the machine is leased to Park Company. The lease is for 6 years and the
machine is estimated to have an unguaranteed residual value of Php40,000. If the
lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease
payments would be
a. Php92,361.
b. Php82,465.
c. Php78,180.
d. Php66,667.
Cost of Asset Php400,000
Unguaranteed Residual Value (Php40,000 × .50663)] 20, 265
Php 379,375
PV of ordinary annuity of 1 at 12% for 6 periods ÷ 4.60478
PV of lease payments Php82,465.
3.On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal
annual payments of Php40,000 each, payable beginning December 31, 2011. Brick Co. agrees to
guarantee the Php25,000 residual value of the asset at the end of the lease term. Brick’s
incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is
8%. What journal entry would Brick Co. make at December 31, 2011 to record the first lease
payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092

a. Lease Liability 40,000

Cash 40,000
b. Lease Liability 25,853
Interest Expense 14,147
Cash 40,000
c. Lease Liability 23,285
Interest Expense 16,715
Cash 40,000
d. Lease Liability 8,285
Interest Expense 16,715
Cash 25,000

Present value of rentals (Php40,000 x 3.99271) Php159,708

Unguaranteed Residual Value (Php25,000 x .68508) 17,127
Net lease Income Php176,835.

Annual rent Php40,000

Interest (Php176,835 x 8%) 14,147
Lease Liability Php25,853.

4. On January 2, 2010, Gold Star Leasing Company leases equipment to Brick Co. with 5
equal annual payments of Php40,000 each, payable beginning December 31, 2010. Brick
Co. agrees to guarantee the Php25,000 residual value of the asset at the end of the
lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s
 implicit interest rate is 8%. What journal entry would Brick Co. make at December 31,
2011 to record the second lease payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092

a. Lease Liability 40,000

Cash 40,000
b. Lease Liability 25,613
Interest Expense 14,387
Cash 40,000
c. Lease Liability 27,921
Interest Expense 12,079
Cash 40,000
d. Lease Liability 23,760
Interest Expense 16,240
Cash 40,000

Solution:
($40,000 x 3.99271) + ($25,000 x .68508) = $176,835

$40,000 – ($176,835 x .08) = $25,853

($176,835–$25,853)x.08=$12,079Interestexp.
 5. Geary Co. leased a machine to Dains Co. Assume the lease payments were made on the
basis that the residual value was guaranteed and Geary gets to recognize all the profits,
and at the end of the lease term, before the lessee transfers the asset to the lessor, the
leased asset and obligation accounts have the following balances:
Leased equipment under capital lease Php400,000
Less accumulated depreciation--capital lease 384,000
Php 16,000
Interest payable Php 1,520
Obligations under capital leases 14,480
Php16,000
If, at the end of the lease, the fair market value of the residual value is Php8,800, what
gain or loss should Geary record?
a. Php6,480 gain
b. Php7,120 loss
c. Php7,200 loss
d. Php8,800 gain

Fair value of residual value Php 8,800

Carrying amount of asset (16,000)
Loss (Php7,200).

BALBUENA
1. Harter Company leased machinery to Stine Company on July 1, 2011, for a ten-year
period expiring June 30, 2021. Equal annual payments under the lease are Php75,000
and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate
of interest used by Harter and Stine is 9%. The cash selling price of the machinery is
Php525,000 and the cost of the machinery on Harter's accounting records was
Php465,000. Assuming that the lease is appropriately recorded as a sale for accounting
purposes by Harter, what amount of interest revenue would Harter record for the year
ended December 31, 2011?
a. Php47,250
b. Php40,500
c. Php20,250
d. Php0
Cash selling price Php525,000
 First payment ( 75,000)
Lease Receivable Php450,000

Interest Income
(450, 000 x 9% x 6/12) Php 20, 250

2. Pye Company leased equipment to the Polan Company on July 1, 2011, for a ten-year
period expiring June 30, 2021. Equal annual payments under the lease are Php80,000
and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate
of interest contemplated by Pye and Polan is 9%. The cash selling price of the
equipment is Php560,000 and the cost of the equipment on Pye's accounting records
was Php496,000. Assuming that the lease is appropriately recorded as a sale for
accounting purposes by Eby, what is the amount of profit on the sale and the interest
revenue that Pye would record for the year ended December 31, 2011?
a. Php64,000 and Php50,400
b. Php64,000 and Php43,200
c. Php64,000 and Php21,600
d. Php0 and Php0
Cash Selling Price Php560,000
Cost of Equipment (496,000)
Profit on Sale Php 64,000

Interest Income
(Php560,000 – Php80,000) × .09 × 6/12 Php21,600.

Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on
July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by
Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The
first of 10 equal annual payments of Php621,000 was made on July 1, 2011. Metro had
purchased the equipment for Php3,900,000 on January 1, 2011, and established a list selling
price of Php5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the
rent payments over the lease term discounted at 8% (the appropriate interest rate) was
Php4,500,000.
3 .Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion
and interest expense that Sands should record for the year ended December 31, 2011?
 a. Php225,000 and Php155,160
b. Php225,000 and Php180,000
c. Php270,000 and Php155,160
d. Php270,000 and Php180,000

Depreciation Expense Php 225,000

Interest Expense
(Php4,500,000 – Php621,000) × .04 Php155,160.

4. What is the amount of profit on the sale and the amount of interest income that Metro
should record for the year ended December 31, 2011?
a. Php0 and Php155,160
b. Php600,000 and Php155,160
c. Php600,000 and Php180,000
d. Php900,000 and Php360,000

Cash Selling Price Php4, 500,000

Cost of Equipment (3. 900,000)
Profit on Sale Php 600,000

Interest Income
(Php4,500,000 – Php621,000) × .04 Php 62,475.

5. Roman Company leased equipment from Koenig Company on July 1, 2011, for an eight-
year period expiring June 30, 2019. Equal annual payments under the lease are
Php300,000 and are due on July 1 of each year. The first payment was made on July 1,
2011. The rate of interest contemplated by Roman and Lennon is 8%. The cash selling
price of the equipment is Php1,861,875 and the cost of the equipment on Koenig's
accounting records was Php1,650,000. Assuming that the lease is appropriately
recorded as a sale for accounting purposes by Koenig, what is the amount of profit on
the sale and the interest income that Lennon would record for the year ended
December 31, 2011?
a. Php0 and Php0
b. Php0 and Php62,475
 c. Php211,875 and Php62,475
d. Php211,875 and Php74,475
Solution:
Php1,861,875 – Php1,650,000 = Php211,875.

(Php1,861,875 – Php300,000) × .04 = Php62,475.

BAMUYA
Use the following information for questions 1 through 4.
Gage Co. purchases land and constructs a service station and car wash for a total of
Php360,000. At January 2, 2010, when construction is completed, the facility and land on which
it was constructed are sold to a major oil company for Php400,000 and immediately leased
from the oil company by Gage. Fair value of the land at time of the sale was Php40,000. The
lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various
business holdings. The economic life of the facility is 15 years with zero salvage value. Title to
the facility and land will pass to Gage at termination of the lease. A partial amortization
schedule for this lease is as follows:
Payments Interest Amortization Balance
Jan. 2, 2010 Php400,000.00
Dec. 31, 2010 Php65,098.13 Php40,000.00 Php25,098.13 374,901.87
Dec. 31, 2011 65,098.13 37,490.19 27,607.94 347,293.93
Dec. 31, 2012 65,098.13 34,729.39 30,368.74 316,925.19

1.What is the discount rate implicit in the amortization schedule presented above?
a. 12%
b. 10%
c. 8%
d. 6%

Solution:
Php40,000 Php400,000

———— = 10% or ————— = 6.1446*

Php400,000 Php65,098.13
*6.1446 = PV factor of ordinary annuity of Php1 for 10 years at 10%.

2. The total lease-related expenses recognized by the lessee during 2011 is which of the
following? (Rounded to the nearest dollar.)
a. Php64,000
b. Php65,098
c. Php73,490
d. Php61,490

Solution:
[(Php400,000 – Php40,000) ÷ 15] + Php37,490 = Php61,490.

3. What is the amount of the lessee's liability to the lessor after the December 31, 2012
payment? (Rounded to the nearest peso.)
a. Php400,000
b. Php374,902
c. Php347,294
d. Php316,925

Solution:
Php316,925 (See amortization table.)

4. The total lease-related income recognized by the lessee during 2011 is which of the
following?
a. Php -0-
b. Php2,667
c. Php4,000
d. Php40,000

Solution:
 (Php400,000 – Php360,000) ÷ 15 = Php2,667.

5. On June 30, 2011, Falk Co. sold equipment to an unaffiliated company for Php700,000.
The equipment had a book value of Php630,000 and a remaining useful life of 10 years.
That same day, Falk leased back the equipment at Php7,000 per month for 5 years with
no option to renew the lease or repurchase the equipment. Falk's rent expense for this
equipment for the year ended December 31, 2011, should be
a. Php84,000.
b. Php42,000.
c. Php35,000.
d. Php28,000.

Solution:
Php7,000 × 6 = Php42,000.

BARLISO
1. On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year
period. Equal annual payments under the lease are Php630,000 (including Php30,000
annual executory costs) and are due on December 31 of each year. The first payment
was made on December 31, 2010, and the second payment was made on December 31,
2011. The five lease payments are discounted at 10% over the lease term. The present
value of minimum lease payments at the inception of the lease and before the first
annual payment was Php2,502,000. The lease is appropriately accounted for as a capital
lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease
liability of
a. Php1,902,000.
b. Php1,872,000.
c. Php1,711,800.
d. Php1,492,200.

Solution:
Php2,502,000 – Php630,000 + Php30,000 = Php1,902,000 (2010).
Php1,902,000 – [Php600,000 – (Php1,902,000 × .10)] = Php1,492,200 (2011).
Use the following information for questions 2 and 3.

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of Php150,000 starting at the end of the first year,
with title passing to Hernandez at the expiration of the lease. Hernandez treated this
transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no
salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate
lease payments were determined to have a present value of Php900,000, based on implicit
interest of 10%.

2. In its 2011 income statement, what amount of interest expense should Hernandez
report from this lease transaction?
a. Php0
b. Php56,250
c. Php75,000
d. Php90,000

Solution:
Php900,000 × .10 = Php90,000.

3. In its 2011 income statement, what amount of depreciation expense should Hernandez
report from this lease transaction?
a. Php150,000
b. Php100,000
c. Php90,000
d. Php60,000

Solution:
Php900,000 ÷ 15 = Php60,000

4.Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey
leased equipment to Dalton for a five-year period ending December 31, 2016, at which date
ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are
Php220,000 (including Php20,000 executory costs) and are due on December 31 of each year.
The first payment was made on December 31, 2011. Collectibility of the remaining lease
payments is reasonably assured, and Torrey has no material cost uncertainties. The normal
sales price of the equipment is Php770,000, and cost is Php600,000. For the year ended
December 31, 2011, what amount of income should Torrey realize from the lease transaction?
a. Php170,000
b. Php220,000
c. Php230,000
d. Php330,000

Solution:
Php770,000 – Php600,000 = Php170,000.

5. On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased
it back for one year. Pertinent information at this date follows:
Sales price Php900,000
Carrying amount 825,000
Present value of reasonable lease rentals
(Php7,500 for 12 months @ 12%) 85,000
Estimated remaining useful life 12 years
In Haden’s December 31, 2011 balance sheet, the deferred profit from the sale of this
machine should be
a. Php85,000.
b. Php75,000.
c. Php10,000.
d. Php0.

Solution:
= 9.44%, < 10% of FV of asset  it is a minor leaseback.
BENEDICTO

A . On June 30,2017, Carl company sold equipment with an estimated useful life of 10 years and
immediately leased it back for 5 years.The equipment's carrying amount is P 820,000, fair value is
750,000 and its selling price is 790,000. The lease agreement is an operating lease.

1.What amount of deferred loss should the company recognize on June 30,2017 assuming future rental
is above or equal to market rate rent?

a.none

b. 30,000

c. 40,000

d. 70,000

2.What amount of deferred loss should the company recognize on June 30, 2017 assuming future rental
is below market rate rent?
a. None

b. 30,000

c. 40,000

d. 70,000

Answer: 1. A 2. C

Question 1. Question 2

Fair value. P 790,000. P 790,000

Selling price. 750,000. 750,000

Outright loss. 40,000. None

Deferred loss. None. 40,000

B. On June 30,2017, Clyde company sold equipment with an estimated useful life of 10 years and
immediately leased it back for 5 years. The equipment's carrying amount was P 540,000 . selling price is
P 516,000 and fair value is P 558,000. The lease agreement is an operating lease.

3.What amount of deferred loss the company should recognize on June 30, 2017 assumming future
rental is equal or above market rate rent?

a. None

b. 18,000

c. 24,000

d. 42,000

4.What amount of deferred loss the company should recognize on June 30,2017 assuming the future
rental is below market rate rent?

a. None

b. 18,000

c. 24,000

d. 42,000
Answer: 3. A. 4.C.

2. There is no deferred loss if the market rat is above, it should recognize immediately

4. Selling price. P 516,000

Carrying amount. 540,000

Loss. 24,000

5. The following information pertains to an operational sale and leaseback of equipment of Popcorn
Company on December 31, 2017 :

Selling price. P 480,000

Carrying amount. 520,000

Monthly lease payment. 37,316

PV of lease payment/ Fair market value. 420,000

Estimated remaining life. 12 years

Lease term.

Implicit rate. 12%

.What amount of deferred gain should Popcorn company recognize on the sale on December 31?

a. None

b.P 40,000

c. P 60,000

d.P 100,000

Answer: C.

Selling price. P 480,000

Fair market value. 420,000

Deferred Gain. 60,000

BERNABE
1.The following information pertains to an operating sale and leaseback of equipment by Cloudy
Company on December 31,2017:

Sale price. P 320,000

Carrying amount. 420,000

Monthly lease payment. 37,316

Present value of lease payment/ Fair market value. 420,000

Estimated remaining life. 12 years

Lease term. 1 year

Implicit rate. 12%

What amount of deferred loss should recognize assuming amount of loss is not compensated by future
lease payments?

a. None

b. 37,334

c. 100,000

d. 120,000

Answer: C.

Sale price. P 320,000

Carrying value. 420,000

Loss on sale. (P 100,000)

2. The following information pertains to.an operating sale and leaseback of equipment by Marshmallow
Co. On December 31, 2017:

Sale price. P600,000

Carrying amount. 520,000

Monthly lease payment. 19,571

PV of lease payment. 420,000

Estimated remaining life. 12 years

Lease term. 1 year

Implicit rate. 12%

What amount of deferred gain should marshmallow report at December 31,2017?

a. None

b. 80,000

c. 100,000

d. 180,000

Answer: D.

Sale price. P 600,000

Fair market value. 420,000

Deferred Gain. P 180,000

3..The following information pertains to an operating sale and leaseback of equipment by Marble
Company on December 31,2017:

Sale price. P480,000

Carrying amount. 400,000

Monthly lease payment. 37,316

Present value of lease payment/ Fair market value. 420,000

Estimated remaining life. 12 years

Lease term. 1 year

Implicit rate. 12%

What amount of deferred gain should marble report at December 31,2017?

a. None

b. 20,000

c.60,000

d. 80,000

Answer: C.

Sale price. P480,000

Fair market value. 420,000

Deferred Gain. P60,000

4.On December 31,2017, Cebu Pacific sold an airplane to PAL with an estimated remaining life of 10
years and lease it back for 3 year. Additional information are as follows:

Selling price P 30,000,000

Carrying amount at date of sale. 10,000,000

Monthly rental under lease. 800,000

Implicit rate computed by PAL, known to Cebu Pacific. 12%

PV of monthly rental (P800,000 for 36 mos. at 12%). 24,085,600

The leaseback is considered as operating lease.

In Cebu Pacific's profit or loss, what amount should be included as realized gain on this transaction?

a. None

b. P 5,914,500

c. P 14,085,600

d. P 20,000,000

Answer: C.

Fair market value P 24,085,600

Less: Carrying value. 10,000,000

Realized Gain. P 14,085,600

5 .The following information pertains to an operating sale and leaseback of equipment by Barbie
Company on December 31,2017:

Sale price. P640,000

Carrying amount. 500,000

Monthly lease payment. 25,457

Fair market value. 540,800

Estimated remaining life. 25 years

Lease term. 12 years

Implicit rate. 12%

What amount of deferred gain should Barbie report at December 31,2017?

a. None

b. 40,800

c. 99,200

d. 140,000

Answer: C

Sale price. P640,000

Fair market value. 540,800

Deferred Gain. P 99,200

BISMONTE

1. On June 30, 2017, Amethyst Company sold an equipment with an estimated remaining life of 10 years
and immediately leased it back for 8 years. The equipment's carrying amount was P 450,000 and selling
price is P 430,000.

What amount should Amethyst report deferred loss on June 30, 2017 statement of financial position?

a. None

b. 20,000

c. 15,000

d. 35,000

Answer: A

The loss incurred in sale and lease back should be recognized immediately.

On December 31,2017 Coffee Company sold an equipment to Bean Corp. and simultaneously leased it
back for 10 years. Pertinent information on this date is as follows:
Sale price. P 360,000

Carrying amount. 390,000

Estimated remaining economic life 10 years

2.In Coffee's December 31, 2017 profit or loss what amount should be the loss from the sale of this
machine?

a. None

b. 4,100

c. 30,000

d. 34,100

3. If the economic substance is shown rather than the form as accounting policy chosen by the company,
at what amount should be the carrying amount of the machine in Coffee's statement of financial
position at December 31, 2018?

a. None

b. 330,000

c. 357,500

d. 360,000

Answers: 2. C. 3 B.

Selling price. P 360,000

Carrying amount. 390,000

Loss recognized. (P 30,000)

Impaired value. P360,000

Depreciation- 2018( 360,000 ÷ 12). (30,000)

Carrying value- December 31, 2018. P330,000

. On December 31,2017 Peter Company sold an equipment James Corp. and simultaneously leased it
back for 12 years. Pertinent information on this date is as follows:

Sale price. P 480,000

Carrying amount. 360,000

Estimated remaining economic life 12 years

4.In Peter's December 31, 2017 what amount should be the deferred revenue from the sale of this
machine?

a. None

b. 110,000

c. 112,000

d. 120,000

5. If the economic substance is shown rather than the form as accounting policy chosen by the company,
at what amount should be the carrying amount of the machine in Peter's statement of financial position
at December 31, 2018?

a. None

b. 330,000

c. 360,000

d. 440,000

Answers: 4. B. 5 B.

Selling price. P 480,000

Carrying amount. 360,000

Deferred gain- December 31,2017. P 120,000

Less: Realized gain ( 120,000 ÷ 12 ). 10,000

Deferred gain- December 31, 2018. P 110,000

Original carrying amount. P 360,000

Depreciation for 2018 (360,000÷ 12). ( 30,000)

Carrying amount of the equipment. P 330,000

BRIONES

. Tiger Corp. Leased equipment to Dog Co. On Jan 1, 2017 for an 8 yr perios expiring Dec. 31, 2025. Equal
payments under the lease are P 600,000 and are due on December 31 of each year. The first payment
was made on December 31, 2017. The rate of interest contemplated by Tiger and Dog is 11%. The
present value of equipment is P 3,087,674. Tiger Corp. Incurred a total transaction cost of P 44,544 to
negotiate the contract of lease. If the transaction cost is included, the effective yield is 10.6%.

1. If the lease is accounted for as sale type lease, what is the intial carrying amount of lease rental
receivable on January 1, 2017?

a. 2,773,339

b. 2,827,318

c. 3,022,705

d. 3,087,674

2. If the lease is accounted for as sale type lease, what is the carrying amount of lease rental receivable
on December 1, 2017?

a. 2,773,339

b. 2,827,318

c. 3,022,705

d. 3,087,674

3. If the lease is accounted for as sale type lease, what is the amount of finance income should the lessor
report in its 2017 profit or loss?

a. None

b. 303,609

c. 332,015
d. 339,644

4. If the lease is accounted as a direct financing lease, what amount of finance incone should the lessor
report in its 2017 profit or loss?

a. None

b. 303,609

c. 332,015

d. 339,644

Answers: 1. D 2. B. 3. D 4. C.

Table 1- amortization ( partial)

Date Annual rental Interest Income Amortization Carrying amount

11%

1/1/17 -------- ------------ ------------- 3,087,674(1)

12/31/17 600,000 339,633(3) 260,356 2,827,318(2)

12/31/18 600,000 311,005 288,995 2,638,623

Table 2 - amortization (partial)

Date Annual rental Interest Income Amortization Carrying amount

10.6%

1/1/17 --------- --------- -------- 3,132,218

12/31/17 600,000 332,015(4) 267,985 2,884,233

12/31/18 600,000 303,609 296,391 2,567,842

5.On December 1, 2016, Willie Company leased office space for 10 years from Parisian Company at a
monthly rental of P90,000. On that date, Willie paid the landlord the following amounts:

Rent deposit P90,000

First month’s rent 90,000
Last month’s rent 90,000
Installation of new walls and offices 495,000
 P765,000

The entire amount of P765,000 was charged to rent revenue in 2016. What amount should Parisian
Company report as rent revenue for the year ended December 31, 2016?
a.P90,000 b.P94,125 c.P184,125 d.P495,000

Answer: B
Solution:

Rent for December P90,000

Depreciation of leasehold improvement
(495,000 / 10 x 1/12) 4,125
Rent Revenue P94,125

BULANADI

M.. Ice Corp, which manifactures ,sells,and leasee heavy construction equipment, leased equipment to
Cream Co., a regular customer on January 1, 2017. Costs to manufacture the leased equipment is P
4,008,000. The lease payments are P 252,644 beginning January 1, 2017 anf cotinuing annually with the
last payment being made on January 1, 2021. If Cream were to purchase the equipment outright the fair
market value would be P 1,167,524. Because of the heavy wear expected on the equipment, the lease
contains a guaranteed residual value wherein the lessee guarantees a residual value on December 30,
2021 of P 260,000. Cream contracted with Cone finance to serve as a third party guarantor of the residu
value. Ice implicit rate known to Cream is 12% whuch is lower than Cream's borrowing rate of 14%.
Expected useful life of the equipment is 10 years.

1. What is the amount of gross profit on sale that Ice should report in year 2017?

a. None

b.115,200

c. 159,524

d. 355,696

2. How much is the adjusted cost of sales attributed to the lesse?

a. 147,420

b. 860,580

c. 1,008,000

d. 1,155,420
Answers: 1. C. 2. B.

Total selling price. P 1,167,524

PV of residual value(260,000 x .567). 147,420

Adjusted selling price. P 1,020,104

Less: Adjusted selling price:

Cost of sales. P 1,008,000

PV of residual value. 147,420. 860,58(2)

Gross Profit. P 159,624(1)

Use the following information for items 3-5

On December 31, 2016, Sunshine Co. leased a new machine from Sunset Corporation with the following
information
Lease Term 6 years
Economic Life 6 years
Annual rental payable every December 31 P500,000
Incremental borrowing rate 15%
Implicit Interest rate 12%
First annual payment Dec. 31, 2016
The machine reverts to Sunset at the termination of the lease. The cost of the machine on Sunset’s
accounting records is P3,755,000

3.What is the capitalized cost of the asset?

a.P3,755,000 b.P2,302,400 c.P2,175,000 d.P0

Answer: B
Solution:
Annual Rental P500,000
PV of annuity due factor 3.6048
Present value of annual rental 1,802,400
Annual Rental 500,000
Capitalized cost of asset P2,302,400

4.What is the lease liability balance at December 31,2017?

a.P1,805,000 b.P1,851,000 c.P1,831,600 d.P1,518,688

Answer: D
Solution:
Capitalized cost of asset P2,302,400
Annual Rental ( 500,000)
Carrying amount 1,802,400
 Annual Rental P500,000
Interest (1,802,400x12%) ( 216,288) ( 283,712)
Lease liability balance P1,518,688

5. Assume the use of straight line method of depreciation, how much is the depreciation expense for the
year ended, December 31, 2018
a.P383,733 b.P362,500 c.288,125 d.261,875

Answer: A
Solution:
Capitalized cost of asset P2,302,400
Lese Term 6 years
Depreciation expense P 383,733

CABAS

1. On December 31,2016, Lionel Ritche Inc. sold equipment to Noli, and simultaneously leased it back for
12 years. Pertinent information at this date is as follows:
Sales Price P480,000
Carrying Amount 360,000
Estimated remaining useful life 15 years

At December 31, 2016, how much should Lionel report as deferred gain from the sale of the equipment?
a.P0 b.P110,000 c.P112,000 d.120,000

Answer: D
Solution:
Sale Price P480,000
Carrying Amount 360,000
Deferred gain 120, 000

2. Vivo Co. leased machinery under direct-financing. The machinery has 30 years useful life, had no
residual value and no option to purchase the machinery at the end of ten year lease with a fair value of
P565,000. The incremental borrowing rate is 12% and the implicit rate is 10%.
The present value of an annuity due of P1:

at 10% for ten years is 6.7590

at 12% for ten years is 6.3282
What is the total amount of interest revenue that Vivo will earn over the life of the lease?

a.P 270,920
b.P 83,592
c.P 565,000
d.P 835,920

Solution: A

Rental x Annuity of 1 = FV/ MCP

Fair Value of Equipment P565,000
Annuity of 1 ÷ 6.759
Rental P 83,592

Gross Investment
(P 83,592 x 10) P835,920
Net Investment
(P 83,592 x 6.7590) ( 565,000)
Interest Revenue P 270,920

3. Ruru Co. leased equipment from Aljur Corp. on January 1, 2017. The lease term is 8 years and the
useful life of the equipment is 24 years. Annual payments are due every first day of the calendar year,
January 1 which amounts to P650,000. The first payment was made on the same date. The implicit rate
is 8% and the incremental rate is 10%. The cost of the equipment on Aljur's book records is P 3,930,000.
The lease is appropriately recorded as a sales type lease. What is the amount of selling price of the
equipment if it has a Gross profit on sale of P 820,00 and Interest revenue on December 31,2017?
Selling price; Interest Revenue
a.P 3,930,000 ; P 262,400
b. P4,750,000 ; P 328,000
c. P 3,110,000 ; P196,800
d. P 4,750,000 ; P 410,000

Solution: B.

Selling price (squeeze). P 4,750,000

Cost. ( 3,930,000 )
Gross profit on sale. 820,000

Selling price. P 4,750,000

Annual payment. ( 650,000)
Lease receivable. P 4,100,000
Implicit rate. x 8%
Interest revenue. P 328,000
4. On July 1, 2017, Cupcake Co. leased computer equipment to Monitor Corp. for an annual payment of
P 300,000 that are payable every on July 1 of each year.The lease term is 12 years, ending on June 30,
2029. The first payment was made on the same date. The incremental rate is 14% and the implicit rate is
11%. The carrying cost of the computer equipment on Monitor's books is P800,000 and its list selling
price is P1,890,000. The lease is appropriately accounted for as a sales-type lease. What amount of lease
receivable on December 31, should Monitor report ?
a. P 300,000
b.P 1,090,000
c.P 883,38.25
d.P 0

Solution: C.
PV of rental ( 300,000 x 7.2065 ). P 2,161,950
First payment. ( 300,000 )
Lease receivable- July 1, 2017. P 1,861,950
Second payment. P 300,000
Interest for 2017(11% x 1,861,950). ( 204,814.5). (95,185.5)
Lease receivable- July 1, 2018. P 1,766,764.5
Months from July 1 to December 31. x 6/12
Lease receivable- December 31. P 883,382.25

5. Shake Co. leased a new machine from Love Co. The lease is not renewable, and the machine reverts
to Love at the termination of the lease. The cost of the machine on Love’s accounting records is P
812,300. Annual rental payable at beginning of each year is P350,000. The useful life of machine 20
years,lease term is 15 years. Shake's incremental borrowing rate is 16% and the implicit interest rate is
12%.
Present value of annuity of 1 in advance for 15 periods at
12% 7.63
16% 6.47

At the beginning of the lease term, what amount should Shake record a lease liability of ?
a.P 0
b.P 2,670,500
c. P 4,200,000
d.P 2,264,500

Solution: B.
PV of annual payment (350,000 x 7.63). P2,670,500
CAUBE
1. Heart Corp. entered into a lease agreement with Pulse Inc. for machinery. Annual lease payments of P
45,000 are payable at the end of each year. Heart knows that the lessor expects a 8% return on the
lease.Heart has a 12% incremental borrowing rate. The equipment is expected to have an estimated
useful life of ten years. In addition, a third party has guaranteed to pay Pulse a residual value of P 15,000
at the end of the lease. The lease term is 6 years and the estimated useful life of the equipment is 10
years. The present value of an ordinary annuity of Php1 at 8% for six years is 4.6229, 9% for six years is
4.4859. The present value of Php1 at 8% for six years is .6302, 9% for six years is .5963. In heart's
December 3, 2017 balance sheet, the principal amount of the lease obligation was

a.P 26,833.5
b.P 201,865.5
c.P 28,359
d.P 208,030.5

Solution: D.
PV of annual payment ( P 45,000 x 4.6229). P 208,030.5

2. Clover, Inc. leased an industrial equipment from Industrial Borrowing Co. The lease qualifies as a
capital lease and requires 5 annual payments of P 35,000 beginning January 1 of each year. The lease
specifies an interest rate of 10% and a purchase option of P 50,000 at the end of the tenth year, even
though the machine’s estimated value on that date is P 10,000.Clover's incremental borrowing rate is
12%.The present value of an annuity due of one at
10% for 5 years is 4.1699 the present value of one at
10% for 5 years is .6209 and 12% for 5 years is 4.0373,12% for 5 years is .5674

What amount should Clover record as lease liability at the beginning of the lease term?
a.P 176,991.5
b.
c.
d
Solution: A
PV of annual payment ( P 35,000 x 4.1699). P 145,946.5
PV of BPO ( P 50,000 x .6209). 31,045
Total lease liability. P 176,991.5

3. On December 31, 2017, Twice Corp. entered into a ten-year capital lease on a warehouse having
annual lease payments of P 35,000, which excludes real estate taxes of P 5,000, are due annually,
beginning on December 31, 2018, and every December 31 of each year. Twice does not know the
interest rate implicit in the lease; Twice’s incremental borrowing rate is 14%. What amount should Neal
report as capitalized lease liability at December 31, year 1?
a. P 208,800
b.P 35,000
c. P182,700
d. P 40,000
Solution: C.
4. More Company leased a new machine from Less Company on May 1, 2017 having the option to
purchase the machine on May 1,2025 by paying P200,000, which approximates the expected fair value
of the machine on the option exercise date. Additional information were as follows:
Lease term 8 years
Annual rental payable at beginning of each lease year P 60,000
Useful life of machine. 14 years
Implicit interest rate 12%
Present value of an annuity of one in advance for eight periods at 12% 5.56
Present value of one for ten periods at 12% 0.40
East should record a capitalized lease asset on May 1, 2017 of
a. P 333,600
b.P 413,600
c. P 253,600
d.P 260,000
Answer: A
PV of annual lease payment( 60,000 x 5.56) P333,600

5. On December 1, 2008, Perez Corporation leased office space for 10 years at a monthly

rental of Php90,000. On that date Perez paid the landlord the following amounts:

Rent deposit Php 90,000

First month's rent 90,000

Last month's rent 90,000

Installation of new walls and offices 495,00

Php765,000

The entire amount of Php765,000 was charged to rent expense in 2008. What amount

should Perez have charged to expense for the year ended December 31, 2008?

a. Php90,000

b. Php94,125

c. Php184,125
d. Php495,000

Rent Expense

Php90,000 + (495,000/10 × 1/12) Php94,125.

DAGOHOY

McCabe Corporation issued Php550,000 of 7% 10-year bonds. The bonds are dated and sold
on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued
for Php512,408 to yield the market interest rate of 8%. Use the effective-interest method
for questions 12 15.

1. What is the amount of interest expense that McCabe Corporation will record on July 1, 2011,
the first semiannual interest payment date? (All amounts rounded to the nearest dollar.)
a. Php20,496
b. Php38,500
c. Php19,250
d. Php22,000

2. What is the amount of discount amortization that McCabe Corporation will record on
July 1, 2011, the first semiannual interest payment date?
a. Php0
b. Php2,562
c. Php1,246
d. Php1,504

3. What is the total cash payment for interest for each 12-month period? (All amounts
rounded to the nearest dollar.)
a. Php22,000
b. Php38,500
c. Php40,993
d. Php44,000

Solution:
1. a (Php512,408 * 0.08 * 6/12 = Php20,496)
2. c [Int. exp. = Php20,496 Int. payment = Php19,250 (Php550,000 * 0.07 * 6/12)
Php20,496 Php19,250 = Php1,246]
3. b (Php550,000 * 0.07 = Php38,500)
4. On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain

machinery. The terms of the lease called for Penn to make annual payments of $100,000

at the end of each year for ten years with title to pass to Penn at the end of this period.

The machinery has an estimated useful life of 15 years and no salvage value. Penn uses

the straight-line method of depreciation for all of its fixed assets. Penn accordingly

accounted for this lease transaction as a capital lease. The lease payments were

determined to have a present value of $671,008 at an effective interest rate of 8%. With

respect to this capitalized lease, Penn should record for 2008

a. lease expense of $100,000.

b. interest expense of $44,734 and depreciation expense of $38,068.

c. interest expense of $53,681 and depreciation expense of $44,734.

d. interest expense of $45,681 and depreciation expense of $67,101.

Use the following information for questions 49 through 54. (Annuity tables on page 21-20.)
Interest Expense
$671,008 × .08 $53,681
Depreciation Expense
$671,008 ÷ 15 $44,734.

5. Huffman Company leases a machine from Lincoln Corp. under an agreement which

meets the criteria to be a capital lease for Huffman. 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. Huffman should record the leased asset at

a. $509,256.

b. $488,661.

c. $434,366.

d. $416,799.

Lease receivable
($102,000 - $15,000) × 4.99271 $434,366

DELA CRUZ

Ayoko na Inc. leases equipment to its customers under noncancelable leases. On January 1,
2010, Ayoko na Inc. leased equipment costing Php4,000,000 to Ayo Co. for nine years. The
rental cost was Php 440,000 payable in advance semiannually plus Php20,000 semiannually for
executor costs. The equipment had an estimated life of 15 years and sold for Php5,330,250 with
an estimated unguaranteed residual value of Php800,000. The implicit rate is 12 %.

Compute for the following:

1. How much is the total interest income from lease that will be earned by Ayoko Na Inc.?
a. Php2,869,988
b. Php3,389,748
c. Php3,675,616
d. Php 0

Solution:
Gross investment in the lease:
Minimum lease payments Php7,920,000
(Php440,000 x 18)
Unguaranteed residual value 800,000 Php6,720,000

Net Investment in the lease:

 PV of minimum lease payments
(Php440 x 11.4773) Php 50,050,012
PV of unguaranteed residual value
(Php800,000 x 0.3503) 280,240 5,330,252
Total unearned interest income Php3,389,748

2. Ayoko Na Inc. should report profit on the sale at:

a) Php1,330,252
b) Php1,044,384
c) Php1,050,012
d) Php1,338,492

Solution:
Sales (PV of MLP) Php5,050,012
Less: Cost of Sales 3,719,760
Profit on Sale: Php1,330,252

3. How much should be reported by Au Co. under current liabilities as liability under finance
lease as of December 31,2010?
a) Php4,143,593
b) Php4,446,613
c) Php4,273,410
d) Php 0

Finance lease liability (Php440,000 x 11.4773) Php5,050,012

Less: Lease Payment, 1/1/10 440,000
Balance, 1/1/10 4,610,012
Less: Principal payment on 7/1/10:
Total Payment Php440,000
Applicable to interest
(Php4,610,012 x12% x 6/12) 276,601 163,399
Balance, 12/31/10 Php4,446,613

4. On December 31, 2007, Pool Corporation leased a ship from Renn Company for an eight-

year period expiring December 30, 2015. Equal annual payments of $200,000 are due on

December 31 of each year, beginning with December 31, 2007. The lease is properly

classified as a capital lease on Pool's books. The present value at December 31, 2007 of
the eight lease payments over the lease term discounted at 10% is $1,173,685. Assuming

all payments are made on time, the amount that should be reported by Pool Corporation

as the total obligation under capital leases on its December 31, 2008 balance sheet is

a. $1,091,054.

b. $1,000,159.

c. $871,054.

d. $1,200,000.

Lease Liability
$1,173,685 – $200,000 = $973,685 × .10 = $97,369
$973,685 – ($200,000 – $97,369) $871,054.

5. On December 31, 2008, Dodd Corporation leased a plane from Aero Company for an

eight-year period expiring December 30, 2016. Equal annual payments of $150,000 are

due on December 31 of each year, beginning with December 31, 2008. The lease is

properly classified as a capital lease on Dodd’s books. The present value at December

31, 2008 of the eight lease payments over the lease term discounted at 10% is $880,264.

Assuming the first payment is made on time, the amount that should be reported by Dodd

Corporation as the lease liability on its December 31, 2008 balance sheet is

a. $880,264.

b. $818,290.

c. $792,238.

d. $730,264.

Lease Liability
$880,264 – $150,000 $730,264.

ENTIENZA
On January 1, 2008, Dexter, Inc. signs a 10-year noncancelable lease agreement to lease a

storage building from Garr Warehouse Company. Collectibility of lease payments is reasonably

predictable and no important uncertainties surround the amount of costs yet to be incurred by
the

lessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the end of each year.

(b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value

to Garr is $2,500,000.

(c) The building has an estimated economic life of 10 years, with no residual value. Dexter

depreciates similar buildings on the straight-line method.

(d) At the termination of the lease, the title to the building will be transferred to the lessee.

(e) Dexter's incremental borrowing rate is 11% per year. Garr Warehouse Co. set the annual

rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter,

Inc.

(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the

property.

1. What is the amount of the minimum annual lease payment? (Rounded to the nearest

dollar.)

a. $188,237

b. $478,236

c. $488,236

d. $498,236
Minimum Annual Lease Payment
$3,000,000 ÷ 6.14457 $488,236
2. What is the amount of the total annual lease payment?

a. $188,237

b. $478,237

c. $488,237

d. $498,237

Total annual lease payment

$488,236 + $10,000 $498,237.

3. Dexter, Inc. would record depreciation expense on this storage building in 2008 of

(Rounded to the nearest dollar.)

a. $0.

b. $250,000.

c. $300,000.

d. $488,237.

Depreciation Expense
$3,000,000 ÷ 10 $300,000

On January 1, 2008, Dalton Corporation signed a five-year noncancelable lease for equipment.

The terms of the lease called for Dalton to make annual payments of $50,000 at the beginning
of

each year for five years with title to pass to Dalton at the end of this period. The equipment has

an estimated useful life of 7 years and no salvage value. Dalton uses the straight-line method of

depreciation for all of its fixed assets. Dalton accordingly accounts for this lease transaction as a
capital lease. The minimum lease payments were determined to have a present value of

$208,493 at an effective interest rate of 10%.

4. In 2008, Dalton should record interest expense of

a. $15,849.

b. $29,151.

c. $20,849.

d. $34,151.

Interest Expense
($208,493 – $50,000) × .10 $15,849.
5. In 2009, Dalton should record interest expense of

a. $10,849.

b. $12,434.

c. $15,849.

d. $17,434.

Interest Expense
[$158,493 – ($50,000 - $15,849)] × .10 $12,434.

GANAL

On January 1, 2008, Carley Corporation signed a five-year noncancelable lease for equipment.

The terms of the lease called for Carley to make annual payments of $60,000 at the end of each

year for five years with title to pass to Carley at the end of this period. The equipment has an

estimated useful life of 7 years and no salvage value. Carley uses the straight-line method of

depreciation for all of its fixed assets. Carley accordingly accounts for this lease transaction as a

capital 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 2008 Carley 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.

Interest Expense
$227,448 × .10 $22,745
Depreciation Expense
($227,448 – 0) ÷ 7 $32,493

2. With respect to this capitalized lease, for 2009 Carley 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.

Interest Expense
[$227,448 – ($60,000 – $22,745)] × .10 $19,019.
3. Barkley Corporation is a lessee with a capital lease. The asset is recorded at $450,000

and has an economic life of 8 years. The lease term is 5 years. The asset is expected to

have a market value of $150,000 at the end of 5 years, and a market value of $50,000 at

the end of 8 years. The lease agreement provides for the transfer of title of the asset to

the lessee at the end of the lease term. What amount of depreciation expense would the

lessee record for the first year of the lease?

a. $90,000

b. $80,000
c. $60,000

d. $50,000

Depreciation Expense
($450,000 – $50,000) ÷ 8 $50,000

Use the following information for questions 63 through 68. (Annuity tables on page 21-20.)

Hay Corporation enters into an agreement with Marly Rentals Co. on January 1, 2008 for the

purpose of leasing a machine to be used in its manufacturing operations. The following data

pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of

$155,213 are due on December 31 of each year.

(b) The fair value of the machine on January 1, 2008, is $400,000. The machine has a

remaining economic life of 10 years, with no salvage value. The machine reverts to the

lessor upon the termination of the lease.

(c) Hay depreciates all machinery it owns on a straight-line basis.

(d) Hay's incremental borrowing rate is 10% per year. Hay does not have knowledge of the

8% implicit rate used by Marly.

(e) Immediately after signing the lease, Marly finds out that Hay Corp. is the defendant in a

suit which is sufficiently material to make collectibility of future lease payments doubtful.

4. If the present value of the future lease payments is $400,000 at January 1, 2008, what is

the amount of the reduction in the lease liability for Hay Corp. in the second full year of the

lease if Hay Corp. accounts for the lease as a capital lease? (Rounded to the nearest

dollar.)

a. $115,213
b. $123,213

c. $126,734

d. $133,070

Interest Expense
$400,000 – [$155,213 – ($400,000 × .1)] = $284,787.
$155,213 – ($284,787 ×.1) $126,734.

5. If Marly records this lease as a direct-financing lease, what amount would be recorded as

Lease Receivable at the inception of the lease?

a. $155,213

b. $385,991

c. $400,000

d. $465,638

Fair value $400,000.

GREGORIO

1. Sele Company leased equipment to Snead Company on July 1, 2007, for a one-year

period expiring June 30, 2008, for $60,000 a month. On July 1, 2008, Sele leased this

piece of equipment to Quirk Company for a three-year period expiring June 30, 2011, for

$75,000 a month. The original cost of the equipment was $4,800,000. The equipment,

which has been continually on lease since July 1, 2003, is being depreciated on a straight-

line basis over an eight-year period with no salvage value. Assuming that both the lease

to Snead and the lease to Quirk are appropriately recorded as operating leases for

accounting purposes, what is the amount of income (expense) before income taxes that

each would record as a result of the above facts for the year ended December 31, 2008?
 Sele Snead Quirk

a. $210,000 $(360,000) $(450,000)

b. $210,000 $(360,000) $(750,000)

c. $810,000 $(60,000) $(150,000)

d. $810,000 $(660,000) $(450,000)

Sele: ($60,000 × 6) + ($75,000 × 6) – (4,800,000 ÷ 8) $210,000

Snead: ($60,000) × 6 $(360,000)
Quirk: ($75,000) × 6 $(450,000).

Eddy leased equipment to Hoyle Company on May 1, 2008. At that time the collectibility of the

minimum lease payments was not reasonably predictable. The lease expires on May 1, 2009.

Hoyle could have bought the equipment from Eddy for $3,200,000 instead of leasing it. Eddy's

accounting records showed a book value for the equipment on May 1, 2008, of $2,800,000.

Eddy's depreciation on the equipment in 2008 was $360,000. During 2008, Hoyle paid $720,000

in rentals to Eddy for the 8-month period. Eddy incurred maintenance and other related costs

under the terms of the lease of $64,000 in 2008. After the lease with Hoyle expires, Eddy will

lease the equipment to another company for two years.

2. Ignoring income taxes, the amount of expense incurred by Hoyle from this lease for the

year ended December 31, 2008, should be

a. $296,000.

b. $360,000.

c. $656,000.
d. $720,000.

Rent Expense $720,000

3. The income before income taxes derived by Eddy from this lease for the year ended

December 31, 2008, should be

a. $296,000.

b. $360,000.

c. $656,000.

d. $720,000.

Income before Tax

$720,000 – $64,000 – $360,000 $296,000.

4. Hite Company has a machine with a cost of $400,000 which also is its fair market value

on the date the machine is leased to Rich Company. The lease is for 6 years and the

machine is estimated to have an unguaranteed residual value of $40,000. If the lessor's

interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments is:
a. $92,361.

b. $82,465.

c. $78,180.

d. $66,667.

Lease Liability—beg.
[$400,000 – ($40,000 × .50663)] ÷ 4.60478 $82,465

5. Estes Co. leased a machine to Dains Co. Assume the lease payments were made on the

basis that the residual value was guaranteed and Estes gets to recognize all the profits,

and at the end of the lease term, before the lessee transfers the asset to the lessor, the
leased asset and obligation accounts have the following balances:

Leased equipment under capital lease $400,000

Less accumulated depreciation--capital lease 384,000

Interest payable $ 1,520

Obligations under capital leases $14,480

If, at the end of the lease, the fair market value of the residual value is $8,800, what gain

or loss should Estes record?

a. $6,480 gain

b. $7,120 loss

c. $7,200 loss

d. $8,800 gain

Loss on Lease
$8,800 – $16,000 ($7,200).

IGNALANGIN
1. Durham Company leased machinery to Santi Company on July 1, 2008, for a ten-year

period expiring June 30, 2018. Equal annual payments under the lease are $75,000 and

are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of

interest used by Durham and Santi is 9%. The cash selling price of the machinery is

$525,000 and the cost of the machinery on Durham's accounting records was $465,000.

Assuming that the lease is appropriately recorded as a sale for accounting purposes by

Durham, what amount of interest revenue would Durham record for the year ended

December 31, 2008?

a. $47,250
b. $40,500

c. $20,250

d. $0

Interest Revenue
($525,000 – $75,000) × .09 × 6/12 ` $20,250

2. Eby Company leased equipment to the Mills Company on July 1, 2008, for a ten-year

period expiring June 30, 2018. Equal annual payments under the lease are $80,000 and

are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of

interest contemplated by Eby and Mills is 9%. The cash selling price of the equipment is

$560,000 and the cost of the equipment on Eby's accounting records was $496,000.

Assuming that the lease is appropriately recorded as a sale for accounting purposes by

Eby, what is the amount of profit on the sale and the interest revenue that Eby would

record for the year ended December 31, 2008?

a. $64,000 and $50,400

b. $64,000 and $43,200

c. $64,000 and $21,600

d. $0 and $0
Profit on Sale
$560,000 – $496,000 $64,000
Interest Revenue
($560,000 – $80,000) × .09 × 6/12 $21,600.

Risen Company, a dealer in machinery and equipment, leased equipment to Foran, Inc., on July

1, 2008. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran.

The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2018. The first of

10 equal annual payments of $621,000 was made on July 1, 2008. Risen had purchased the
equipment for $3,900,000 on January 1, 2008, and established a list selling price of $5,400,000

on the equipment. Assume that the present value at July 1, 2008, of the rent payments over the

lease term discounted at 8% (the appropriate interest rate) was $4,500,000.

3. Assuming that Foran, Inc. uses straight-line depreciation, what is the amount of deprecia-

tion and interest expense that Foran should record for the year ended December 31,

2008?

a. $225,000 and $155,160

b. $225,000 and $180,000

c. $270,000 and $155,160

d. $270,000 and $180,000

Depreciation
$4,500,000 1 (4,500,000 ÷10) × (1/2) $225,000
Interest Expense
($4,500,000 – $621,000) × .04 $155,160.

4. What is the amount of profit on the sale and the amount of interest income that Risen

should record for the year ended December 31, 2008?

a. $0 and $155,160

b. $600,000 and $155,160

c. $600,000 and $180,000

d. $900,000 and $360,000

Profit on Sale
$4,500,000 – $3,900,000 $600,000
Interest Income
($4,500,000 – $621,000) × .04 $155,160

5. Mayer Company leased equipment from Lennon Company on July 1, 2008, for an eight-
year period expiring June 30, 2016. Equal annual payments under the lease are $300,000

and are due on July 1 of each year. The first payment was made on July 1, 2008. The rate

of interest contemplated by Mayer and Lennon is 8%. The cash selling price of the

equipment is $1,861,875 and the cost of the equipment on Lennon's accounting records

was $1,650,000. Assuming that the lease is appropriately recorded as a sale for

accounting purposes by Lennon, what is the amount of profit on the sale and the interest

income that Lennon would record for the year ended December 31, 2008?

a. $0 and $0

b. $0 and $62,475

c. $211,875 and $62,475

d. $211,875 and $74,475

Profit on Sale
$1,861,875 – $1,650,000 = $211,875.
Interest Income
($1,861,875 – $300,000) × .04 = $62,475.

ISIDRO

Bohl Co. purchases land and constructs a service station and car wash for a total of $360,000. At

January 2, 2007, when construction is completed, the facility and land on which it was

constructed are sold to a major oil company for $400,000 and immediately leased from the oil

company by Bohl. Fair value of the land at time of the sale was $40,000. The lease is a 10-year,

noncancelable lease. Bohl uses straight-line depreciation for its other various business holdings.

The economic life of the facility is 15 years with zero salvage value. Title to the facility and land
will pass to Bohl at termination of the lease. A partial amortization schedule for this lease is as

follows:

Payments Interest Amortization Balance

Jan. 2, 2007 $400,000.00

Dec. 31, 2007 $65,098.13 $40,000.00 $25,098.13 374,901.87

Dec. 31, 2008 65,098.13 37,490.19 27,607.94 347,293.93

Dec. 31, 2009 65,098.13 34,729.39 30,368.74 316,925.19

1. What is the discount rate implicit in the amortization schedule presented above?

a. 12%

b. 10%

c. 8%

d. 6%

Discount rate
$40,000 ÷ $400,000 10%
PV factor of ordinary annuity of $1 for 10 years at 10%.
$400,000 ÷$65,098.13 6.1446
*6.1446 PV factor of ordinary annuity of $1 for 10 years at 10%.

2. The total lease-related expenses recognized by the lessee during 2008 is which of the

following? (Rounded to the nearest dollar.)

a. $64,000

b. $65,098

c. $73,490

d. $61,490

Executory Expenses
[($400,000 – $40,000) ÷ 15] + $37,490 $61,490
3. What is the amount of the lessee's liability to the lessor after the December 31, 2009
payment? (Rounded to the nearest dollar.)

a. $400,000

b. $374,902

c. $347,294

d. $316,925

Lease Liability $316,925

4. The total lease-related income recognized by the lessee during 2008 is which of the

following?

a. $ -0-

b. $2,667

c. $4,000

d. $40,000

Lease Revenue
($400,000 – $360,000) ÷ 15 ` $2,667

5. On June 30, 2008, Colt sold equipment to an unaffiliated company for $700,000. The

equipment had a book value of $630,000 and a remaining useful life of 10 years. That

same day, Colt leased back the equipment at $7,000 per month for 5 years with no option

to renew the lease or repurchase the equipment. Colt's rent expense for this equipment

for the year ended December 31, 2008, should be

a. $84,000.

b. $42,000.

c. $35,000.

d. $28,000.

Rent Expense
($400,000 – $360,000) ÷ 15 $2,667
LOPEZ

1. On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from

Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual

payments of $160,000 beginning December 31, 2008. The lease is appropriately

accounted for by Mendez as a capital lease. Mendez's incremental borrowing rate is 11%.

Mendez knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2008 balance sheet, Mendez should report a lease liability of

a. $606,528.

b. $680,000.

c. $751,344.

d. $766,528.

Lease Liability
($160,000 × 4.7908) – $160,000 $606,528.

2. On December 31, 2007, Patten Co. leased a machine from Bass, Inc. for a five-year

period. Equal annual payments under the lease are $630,000 (including $30,000 annual

executory costs) and are due on December 31 of each year. The first payment was made

on December 31, 2007, and the second payment was made on December 31, 2008. The

five lease payments are discounted at 10% over the lease term. The present value of

minimum lease payments at the inception of the lease and before the first annual payment

was $2,502,000. The lease is appropriately accounted for as a capital lease by Patten. In
its December 31, 2008 balance sheet, Patten should report a lease liability of

a. $1,902,000.

b. $1,872,000.

c. $1,711,800.

d. $1,492,200.

Lase Liability
$1,902,000 – [$600,000 – ($1,902,000 × .10)] $1,492,200

On January 2, 2008, Martinez, Inc. signed a ten-year noncancelable lease for a heavy duty drill

press. The lease stipulated annual payments of $150,000 starting at the end of the first year,
with

title passing to Martinez at the expiration of the lease. Martinez treated this transaction as a

capital lease. The drill press has an estimated useful life of 15 years, with no salvage value.

Martinez uses straight-line depreciation for all of its plant assets. Aggregate lease payments
were

determined to have a present value of $900,000, based on implicit interest of 10%.

3. In its 2008 income statement, what amount of interest expense should Martinez report

from this lease transaction?

a. $0

b. $56,250

c. $75,000

d. $90,000

Interest Expense
$900,000 × .10 $90,000.
4. In its 2008 income statement, what amount of depreciation expense should Martinez

report from this lease transaction?

a. $150,000

b. $100,000

c. $90,000

d. $60,000
Depreciation Expense
$900,000 ÷ 15 $60,000.

5. Castro Co. manufactures equipment that is sold or leased. On December 31, 2008,

Castro leased equipment to Ermler for a five-year period ending December 31, 2013, at

which date ownership of the leased asset will be transferred to Ermler. Equal payments

under the lease are $220,000 (including $20,000 executory costs) and are due on

December 31 of each year. The first payment was made on December 31, 2008.

Collectibility of the remaining lease payments is reasonably assured, and Castro has no

material cost uncertainties. The normal sales price of the equipment is $770,000, and cost

is $600,000. For the year ended December 31, 2008, what amount of income should

Castro realize from the lease transaction?

a. $170,000

b. $220,000

c. $230,000

d. $330,000

Profit on Sale
$770,000 – $600,000 $170,000.

LUBARBIO

Problem: Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor
of computers, Luna purchased a new system on December 31,2016. The system was delivered the same
day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant
revealed the following relating to the lease transaction:

Cost of system to Luna P550,000

Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) P 40,000
Luna’s implicit interest rate 12%
Date of first lease payment December 31,2016

Additional information is as follows:

(a) At the end of the lease, the system will revert to Luna
(b) General is aware of Luna’s rate of implicit interest
(c) The lease rental consists of equal annual payments

1.The annual lease payment under the lease is

a. P110,717 b.P95,950 c.P102,665 d.P91,664

Answer: B
Solution:
Cost of system P550,000
Less present value of unguaranteed
residual value (40,000 x 0.4039) 16,156
Net investment to be recovered 533,844
Divide by the PV of annuity due factor 5.5638
Annual lease payment P95,950

2.The total financial revenue to be earned by the lessor over the lease term is
a.P257,600 b.P183,312 c.P271,320 d.P335,736

Answer: A
Solution:
Gross Investment in the lease:
Minimum lease payment (P95,950 x 8) P767,600
Unguaranteed residual value 40,000 P807,600
Net investment in the lease:
PV of minimum lease payments 533,844
PV of unguaranteed residual value 16,156 550,000
Total unearned interest income P257,600

3.The interest income to be recognized by the lessor in 2017 is

a.P53,680 b.52,714 c.P54,486 d.P52,547

Answer: C
Solution:
 Interest income [(P550,000-P95,950) x 12%] P54,486

4.The total expenses related to the lease that will be recognized by the lessee in 2017 is
a.121,464 b.130,792 c.P112,630 d.P119,278

Answer: D
Solution:
Interest expense [(P533,844-P95,950)] x 12%] P52,547
Depreciation expense (P533,844/8) 66,731
Total P119,278

5. The amount to be reported under current liabilities as liability under finance lease as of December
31,2017 is
a.P60,239 b.P48,611 c.P35,715 d.64,963

Answer: B
Solution:
Finance lease liability, 12/31/16 P533,844
Lease Payment,12/31/16 95,950
Balance, 12/31/16 P437,894
Less principal payment on 12/31/16:
Total payment in 2017 P95,950
Less applicable to interest
(437,894 x 12%) 52,547 43,403
Balance, 12/31/17 P394,491

Total payment in 2018 P95,950

Less applicable to interest (394,491 x 12%) 47,339
Current portion of finance lease liability 48,611

MACARANAS

Problem: In connection with your audit Nakar Enterprises, you noted that the company has a long-
standing policy of acquiring company equipment by leasing. Early in 2017, the company entered into a
lease for a new milling machine. The lease stipulates that annual payments will be made for 5 years. The
payments are to be made in advance on December 31, of each year. At the end of the 5-year period,
Nakar may purchase the machine. The estimated economic life of the equipment is 12 years. Nakar uses
the calendar year for reporting purposes and straight-line depreciation for other equipment. In addition,
the following information about the lease is also available:

Annual lease payments (including executory costs of P5,000) P60,000

Purchase option price P25,000
Estimated fair value of the machine after 5 years P75,000
Implicit rate 10%
Date of first payment January 1, 2017
1.Amount to be capitalized as an asset for the lease of the milling machine.
a.P229,345 b.P224,017 c.P244,868 d.275,913

Answer: C
Solution
PV of rental payments (P55,000 x 4.1699) P229,345
PV of purchase option (25,000 x 0.6209) 15,523
PV of MLP (Cost of asset) P244,868

2.Liability under the finance lease as of December 31,2017

a.P130,919 b.P153,855 c.P136,780 d.P189,868

Answer: B
Solution:
Finance lease liability, 1/1/17 P244,868
Less payment, 1/1/17 55,000
Balance, 1/1/17 P189,868
Less principal payment on 12/31/17:
Total payment in 2017 P55,000
Less applicable to interest
(P189,868 x 10%) 18,987 36,013
Balance, 12/31/17 P153,855

3. Amount to be reported under current liabilities as liability under finance lease as of

December 31,2017
a.P39,614 b.P41,322 c.P41,908 d.P36,013

Answer: A
Solution:
Rental payment in 2018 P55,000
Less applicable to interest (P153,855 x 10%) 15,386
Current portion of finance lease liability P39,614

4.Interest expense for the year 2017

a.P17,435 b.P18,987 c.P10,902 d.P0

Answer: B
Solution:
Interest expense in 2017 (P189,868 x 10%) P18,987

5.Depreciation expense for the year 2017

a.P20,406 b.P19,112 c.P18,668 d.P48,974

Answer: A
Solution:
Depreciation expense in 2017 (P244,868/12) P20,406
MAYUGA
1. On December 31, 2008, Devin Corp. sold a machine to Ryan and simultaneously leased it

back for one year. Pertinent information at this date follows:

Sales price $900,000

Carrying amount 825,000

Present value of reasonable lease rentals

($7,500 for 12 months @ 12%) 85,000

Estimated remaining useful life 12 years

In Devin’s December 31, 2008 balance sheet, the deferred profit from the sale of this

machine should be

a. $85,000.

b. $75,000.

c. $10,000.

d. $0.

$85,000 ÷ 900,000 = 9.44%, < 10% of FV of asset

It is a minor leaseback and is therefore 0.

2.On December 31, 2011, Burton, Inc. leased machinery with a fair value of Php840,000 from
Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual
payments of Php160,000 beginning December 31, 2011. The lease is appropriately
accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%.
Burton knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2011 balance sheet, Burton should report a lease liability of
a. Php606,528.
b. Php680,000.
 c. Php751,344.
d. Php766,528.

Solution:
(Php160,000 × 4.7908) – Php160,000 = Php606,528.
3. On 1 January 2013, a company which prepares financial statements to 31 December each year
acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is £50,000 and
the company is required to make three lease payments of £19,753 each. These payments fall due on 31
December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the
finance charge which should be shown in the company's financial statements for the year to 31
December 2013 if the total finance charge is allocated to accounting periods using the sum of digits
method.

a. 4,629
b. 9,259
c. 9,877
d. 4,938

Solution:

£4,629
The sum of the digits is 6 (3 + 2 + 1). Total lease payments are £59,259 so the total finance
charge is £9,259. Therefore the finance charge for 2013 is 3/6ths of £9,259 = £4,629 (to the nearest £).

4. On 1 January 2013, a company which prepares financial statements to 31 December each year
acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is £50,000 and
the company is required to make three lease payments of £19,753 each. These payments fall due on 31
December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the
finance charge which should be shown in the company's financial statements for the year to 31
December 2013 if the total finance charge is allocated to accounting periods using the actuarial method.

a. 5,000
b. 45,000
c. 4,500
d. 50,000

Solution:

£4,500
The liability throughout 2013 is £50,000. Therefore the finance charge for 2013 is £4,500 (9% of
£50,000).

5. On 1 January 2013, a company which prepares financial statements to 31 December each year
acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is P50,000 and
the company is required to make three lease payments of P19,753 each. These payments fall due on 31
December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the
finance charge which should be shown in the company's financial statements for the year to 31
December 2013 if the total finance charge is allocated to accounting periods using the level spread
method.

a. 59,259
b. 19,753
c. 3,086
d. 10,082

Solution:

P3,086
Total lease payments are P59,259 so the total finance charge is P9,259. Dividing this by 3 gives
an annual finance charge of P3,086 (to the nearest P).

MORENO

1.On March 01, 2015, ABC Co. leased several delivery trucks from XYZ Co. under a three year operating
lease.

P50,000 per month for 12 months P 600,000

P45,000 per month for the next 12 months 540,000
P25,000 per month for the last 12 months 300,000

What is the annual rent revenue for the first year?

a. 440,000
b. 520,000
c. 450,000
d. 480,000

Solution

600,000+540,000+300,000= 1,440,000
No. of years /3 years
Rent Revenue 480,000

Problem: Ice Corporation is in the business of leasing new trucks. As a lessor of trucks, Ice purchased a
new system on December 31,2016. The trucks were delivered the same day (by prior arrangement) to
General Investment Company, a lessee. The corporation accountant revealed the following relating to
the lease transaction:

Cost of system to Ice P600,000

Estimated useful life and lease term 8 years
 Expected residual value (unguaranteed) P 50,000
Ice’s implicit interest rate 12%
Date of first lease payment December 31,2016

Additional information is as follows:

(a) At the end of the lease, the system will revert to Ice
(b) General is aware of Ice’s rate of implicit interest
(c) The lease rental consists of equal annual payments

2.The annual lease payment under the lease is

a. P98,853 b.P75,000 c.P104,210 d.111,470

Answer: C
Solution:
Cost of system P600,000
Less present value of unguaranteed
residual value (50,000 x 0.4039) 20,195
Net investment to be recovered 579,805
Divide by the PV of annuity due factor 5.5638
Annual lease payment P104,210

3.The total financial revenue to be earned by the lessor over the lease term is
a.P253,875 b.P283,680 c.P303,875 d.P233,680

Answer: B
Solution:
Gross Investment in the lease:
Minimum lease payment (P104210 x 8) P833,680
Unguaranteed residual value 50,000 P883,680
Net investment in the lease:
PV of minimum lease payments 579,805
PV of unguaranteed residual value 20,195 600,000
Total unearned interest income P283,680

4.The interest income to be recognized by the lessor in 2017 is

a.P34,042 b.72,000 c.P59,495 d.P69,577

Answer: C
Solution:
Interest income [(P600,000-P104,210) x 12%] P59,495

5. On December 1, 2013, Goetz Corporation leased office space for 10 years at a monthly
rental of $90,000. On that date Perez paid the landlord the following amounts:

Rent deposit $ 90,000

First month's rent 90,000

Last month's rent 90,000

Installation of new walls and offices 660,000

$930,000

The entire amount of $930,000 was charged to rent expense in 2013. What amount

should Goetz have charged to expense for the year ended December 31, 2013?

a. $90,000

b. $95,500

c. $185,500

d. $660,000

Rent Expnse

$90,000 + [(660,000÷10) x 1/12)] $95,500

OCHADA
1. On January 1, 2013, Bean Corporation signed a ten-year noncancelable lease for certain

machinery. The terms of the lease called for Bean to make annual payments of $200,000

at the end of each year for ten years with title to pass to Bean at the end of this period.

The machinery has an estimated useful life of 15 years and no salvage value. Bean uses

the straight-line method of depreciation for all of its fixed assets. Bean accordingly

accounted for this lease transaction as a capital lease. The lease payments were

determined to have a present value of $1,342,016 at an effective interest rate of 8%. With

respect to this capitalized lease, Bean should record for 2013

a. lease expense of $200,000.

b. interest expense of $89,468 and depreciation expense of $76,136.

c. interest expense of $107,361 and depreciation expense of $89,468.

d. interest expense of $91,362 and depreciation expense of $134,202.

Interest Expense

$1,342,016 × .08 $107,361

Depreciation Expense

$1,342,016 ÷ 15 $89,468.

On January 1, 2013, Dancey, Inc. signs a 10-year noncancelable Lease Agreement to Lease A

storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably

predictable and no important uncertainties surround the amount of costs yet to be incurred by the

lessor. The following information pertains to this Lease Agreement.

(a) The agreement requires equal rental payments at the end of each year.

(b) The fair value of the building on January 1, 2013 is $4,000,000; however, the book value

to Holt is $3,300,000.

(c) The building has an estimated economic life of 10 years, with no residual value. Dancey

depreciates similar buildings on the straight-line method.

(d) At the termination of the lease, the title to the building will be transferred to the lessee.

(e) Dancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual

rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dancey,

Inc.

(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the

property.

2. What is the amount of the minimum annual lease payment? (Rounded to the nearest

dollar.)

a. $250,981
b. $640,981

c. $650,981

d. $660,981

Minimum Amount of Lease Payment

$4,000,000 ÷ 6.14457 $650,981

3. What is the amount of the total annual lease payment?

a. $250,981

b. $640,981

c. $650,981

d. $660,981

Total Annual Lease Payment

$650,981 + $10,000 $660,981

4. Dancey, Inc. would record depreciation expense on this storage building in 2013 of

(Rounded to the nearest dollar.)

a. $0.

b. $330,000.

c. $400,000.

d. $650,981.

Depreciation Expense

$4,000,000 ÷ 10 $400,000.

5. Meteor Company leases a machine from Vollmer Corp. under an agreement which meets

the criteria to be a capital lease for Meteor. The six-year lease requires payment of

$170,000 at the beginning of each year, including $25,000 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. Meteor should record the leased asset at

a. $848,760.

b. $814,435.

c. $723,943.

d. $694,665.

Leased Asset

($170,000 - $25,000) × 4.99271 = $723,943

OLORES

1. On December 31, 2013, Bang Corporation leased a ship from Fort Company for an eight year

period expiring December 30, 2021. Equal annual payments of $400,000 are due on

December 31 of each year, beginning with December 31, 2013. The lease is properly

classified as a capital lease on Bang 's books. The present value at December 31, 2013 of

the eight lease payments over the lease term discounted at 10% is $2,347,370. Assuming

all payments are made on time, the amount that should be reported by Bang Corporation

as the total obligation under capital leases on its December 31, 2014 balance sheet is

a. $2,182,108.

b. $2,000,318.

c. $1,742,107.

d. $2,400,000.

Lease Liability

$2,347,370 – $400,000 = $1,947,370 × .10 = $194,737

$1,947,370 – ($400,000 – $194,737) $1,742,107

On January 1, 2013, Saucer Corporation signed a five-year noncancelable lease for equipment.

The terms of the lease called for Saucer to make annual payments of $200,000 at the beginning

of each year for five years with title to pass to Saucer at the end of this period. The equipment

has an estimated useful life of 7 years and no salvage value. Saucer uses the straight-line

method of depreciation for all of its fixed assets. Saucer accordingly accounts for this lease

transaction as a capital lease. The minimum lease payments were determined to have a present

value of $833,972 at an effective interest rate of 10%.

2. In 2013, Saucer should record interest expense of

a. $63,397.

b. $116,604.

c. $83,396.

d. $136,604.

Interest Expense

($833,972 – $200,000) × .10 $63,397.

3. In 2014, Saucer should record interest expense of

a. $43,396.

b. $49,732.

c. $63,396.

d. $69,736.

Interest Expense

[$633,972 – ($200,000 - $63,397)] × .10 $49,732

4. On December 31, 2013, Kuto Corporation leased a plane from Lisa Company for an

eight-year period expiring December 30, 2021. Equal annual payments of $225,000 are
due on December 31 of each year, beginning with December 31, 2013. The lease is

properly classified as a capital lease on Kuto’s books. The present value at December 31,

2013 of the eight lease payments over the lease term discounted at 10% is $1,320,396.

Assuming the first payment is made on time, the amount that should be reported by Kuto

Corporation as the lease liability on its December 31, 2013 balance sheet is

a. $1,320,396.

b. $1,227,435.

c. $1,188,357.

d. $1,095,396.

Lease Liability

$1,320,396 – $225,000 $1,095,396

5. Empanada Corporation is a lessee with a capital lease. The asset is recorded at $630,000

and has an economic life of 8 years. The lease term is 5 years. The asset is expected to

have a fair value of $210,000 at the end of 5 years, and a fair value of $70,000 at the end

of 8 years. The Lease Agreement provides for the transfer of title of the asset to the lessee

at the end of the lease term. What amount of depreciation expense would the lessee

record for the first year of the lease?

a. $126,000

b. $112,000

c. $84,000

d. $70,000

Depreciation Expense

($630,000 – $70,000) ÷ 8 $70,000.

PAGTAKHAN
On January 1, 2013, Oggle Corporation signed a five-year noncancelable lease for equipment.

The terms of the lease called for Oggle to make annual payments of $120,000 at the end of

each year for five years with title to pass to Oggle at the end of this period. The equipment has

an estimated useful life of 7 years and no salvage value. Oggle uses the straight-line method of

depreciation for all of its fixed assets. Oggle accordingly accounts for this lease transaction as a

capital lease. The minimum lease payments were determined to have a present value of

$454,896 at an effective interest rate of 10%.

1. With respect to this capitalized lease, for 2013 Oggle should record

a. rent expense of $120,000.

b. interest expense of $45,490 and depreciation expense of $90,978.

c. interest expense of $45,490 and depreciation expense of $64,985.

d. interest expense of $60,000 and depreciation expense of $90,978.

Interest Expense

$454,896 × .10 = $45,490; ($454,896 – 0) ÷ 7 $64,985

2. With respect to this capitalized lease, for 2014 Oggle should record

a. interest expense of $45,490 and depreciation expense of $64,985.

b. interest expense of $40,938 and depreciation expense of $64,985.

c. interest expense of $38,039 and depreciation expense of $64,985.

d. interest expense of $28,938 and depreciation expense of $64,985.

[$454,896 – ($120,000 – $45,490)] × .10 $38,039

3. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal

annual payments of $129,057, with the first payment due at lease inception. The lease

does not transfer ownership, nor is there a bargain purchase option. The equipment has a

4-year useful life and no salvage value. If Pizza, Inc.’s incremental borrowing rate is 10%

and the rate implicit in the lease (which is known by Pizza, Inc.) is 8%, what is the amount
recorded for the leased asset at the lease inception?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.57710 3.31213

10%, 4 periods 3.48685 3.16986

a. $461,650

b. $409,092

c. $427,453

d. $450,000

Lease Asset

$129,057 × 3.57710 $461,650.

4. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal

annual payments of $129,057, with the first payment due at lease inception. The lease

does not transfer ownership, nor is there a bargain purchase option. The equipment has a

4-year useful life and no salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and

the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Assuming that this lease

is properly classified as a capital lease, what is the amount of interest expense recorded

by Pizza, Inc. in the first year of the asset’s life?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.57710 3.31213

10%, 4 periods 3.48685 3.16986

a. $0

b. $36,931

c. $26,607

d. $34,197

Interest Expense
$129,057 × 3.57710 = $461,650

($461,650 – $129,057) × .08 $26,607

5. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal

annual payments of $129,057, with the first payment due at lease inception. The lease

does not transfer ownership, nor is there a bargain purchase option. The equipment has a

4 year useful life and no salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and

the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Assuming that this lease

is properly classified as a capital lease, what is the amount of principal reduction recorded

when the second lease payment is made in Year 2?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.57710 3.31213

10%, 4 periods 3.48685 3.16986

a. $129,057

b. $92,125

c. $94,860

d. $102,450

First Payment

$129,057 × 3.57710 = $461,650

Second Payment

$129,057 – [($461,650 – $129,057) × .08] $102,450.

PENDILILANG

1. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal

annual payments of $129,057, with the first payment due at lease inception. The lease

does not transfer ownership, nor is there a bargain purchase option. The equipment has a
4-year useful life and no salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and

the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Pizza, Inc. uses the

straight-line method to depreciate similar assets. What is the amount of depreciation

expense recorded by Pizza, Inc. in the first year of the asset’s life?

PV Annuity Due PV Ordinary Annuity

8%, 4 periods 3.57710 3.31213

10%, 4 periods 3.48685 3.16986

a. $0 because the asset is depreciated by Torre Company.

b. $106,863

c. $115,413

d. $112,500

Depreciation Expense

$129,057 × 3.57710 = $461,650

($461,650 – 0) ÷ 4

2. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it

leased equipment with a cost of $400,000 to White Dwarf Co. The 5-year lease calls for a

10% down payment and equal annual payments at the end of each year. The equipment

has an expected useful life of 5 years. White Dwarf’s incremental borrowing rate is 10%,

and it depreciates similar equipment using the double-declining balance method. The

selling price of the equipment is $650,000, and the rate implicit in the lease is 8%, which is

known to White Dwarf Co. What is the amount of interest expense recorded by White Dwarf

Co. for the year ended December 31, 2013?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. $58,500

b. $46,800

c. $52,000

d. $65,000

Interest Expense

($650,000 × .90) ÷ 3.99271 = $146,517

$146,517 × 3.99271 = $585,000

$585,000 × .08 $46,800.

3. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it

leased equipment with a cost of $400,000 to White Dwarf Co. The 5-year lease calls for a

10% down payment and equal annual payments of $146,518 at the end of each year. The

equipment has an expected useful life of 5 years. White Dwarf’s incremental borrowing rate

is 10%, and it depreciates similar equipment using the double-declining balance method.

The selling price of the equipment is $650,000, and the rate implicit in the lease is 8%,

which is known to White Dwarf Co. What is the book value of the leased asset at

December 31, 2013?

a. $650,000

b. $520,000

c. $390,000

d. $416,000

Lease Asset

$650,000 – (650,000 × .40) $390,000

4. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it

leased equipment with a cost of $400,000 to White Dwarf Co. The 5-year lease calls for a

10% down payment and equal annual payments at the end of each year. The equipment
has an expected useful life of 5 years. If the selling price of the equipment is $650,000,

and the rate implicit in the lease is 8%, what are the equal annual payments?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. $146,517

b. $135,662

c. $151,644

d. $162,796

Annual equal payment

($650,000 × .90) ÷ 3.99271 $146,517.

5. Shookt Company leased equipment to Emergerd Company on July 1, 2012, for a one-year

period expiring June 30, 2013, for $60,000 a month. On July 1, 2013, Shookt leased this

piece of equipment to Terry Company for a three-year period expiring June 30, 2016, for

$75,000 a month. The original cost of the equipment was $4,800,000. The equipment,

which has been continually on lease since July 1, 2008, is being depreciated on a straightline

basis over an eight-year period with no salvage value. Assuming that both the lease

to Emergerd and the lease to Terry are appropriately recorded as operating leases for

accounting purposes, what is the amount of income (expense) before income taxes that

each would record as a result of the above facts for the year ended December 31, 2013?

Shookt Emergerd Terry

a. $210,000 $(360,000) $(450,000)

b. $210,000 $(360,000) $(750,000)

c. $810,000 $(60,000) $(150,000)

d. $810,000 $(660,000) $(450,000)

Shookt: ($60,000 × 6) + ($75,000 × 6) – (4,800,000 ÷ 8) $210,000

Emergerd: ($60,000) × 6 $(360,000)

Terry: ($75,000) × 6 $(450,000).

PUNZALAN

Esc Corporation enters into an agreement with Gates Rentals Co. on January 1, 2013 for the

purpose of leasing a machine to be used in its manufacturing operations. The following data

pertain to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of

$310,426 are due on December 31 of each year.

(b) The fair value of the machine on January 1, 2013, is $800,000. The machine has a

remaining economic life of 10 years, with no salvage value. The machine reverts to the

lessor upon the termination of the lease.

(c) Esc depreciates all machinery it owns on a straight-line basis.

(d) Esc's incremental borrowing rate is 10% per year. Esc does not have knowledge of the 8%

implicit rate used by Gates.

(e) Immediately after signing the lease, Gates finds out that Esc Corp. is the defendant in a

suit which is sufficiently material to make collectibility of future lease payments doubtful.

d. Depreciation Expense and Interest Expense

1. If the present value of the future lease payments is $800,000 at January 1, 2013, what is

the amount of the reduction in the lease liability for Esc Corp. in the second full year of the

lease if Esc Corp. accounts for the Lease As a capital lease? (Rounded to the nearest

dollar.)

a. $230,426

b. $246,426
c. $253,469

d. $266,140

Reduction to lease liability

$800,000 – [$310,426 – ($800,000 × .1)] = $569,574

$310,426 – ($569,574 × .1) $253,469.

2. If Gates records this Lease As a direct-financing lease, what amount would be recorded as

Lease Receivable at the inception of the lease?

a. $310,426

b. $771,982

c. $800,000

d. $931,276

Fair value $800,000

Bull Co. leased equipment to Shookening Company on May 1, 2013. At that time the collectibility of the

minimum lease payments was not reasonably predictable. The lease expires on May 1, 2014.

Shookening could have bought the equipment from Bull for $4,000,000 instead of leasing it. Bull's

accounting records showed a book value for the equipment on May 1, 2010, of $3,500,000. Bull's

depreciation on the equipment in 2013 was $450,000. During 2013, Shookening paid $900,000 in

rentals to Bull for the 8-month period. Bull incurred maintenance and other related costs under

the terms of the lease of $80,000 in 2013. After the lease with Shookening expires, Bull will lease the

equipment to another company for two years.

3. Ignoring income taxes, the amount of expense incurred by Shookening from this lease for the

year ended December 31, 2013, should be

a. $370,000.

b. $450,000.

c. $820,000.

d. $900,000.

Rent Expense $900,000.

4. The income before income taxes derived by Bull from this lease for the year ended

December 31, 2013, should be

a. $370,000.

b. $450,000.

c. $820,000.

d. $900,000.

Income before Taxes

$900,000 – $80,000 – $450,000 $370,000.

5. On January 2, 2013, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5

equal annual payments of $80,000 each, payable beginning December 31, 2013. Sharp

Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease

term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit

interest rate is 8%. What journal entry would Sailor Moon make at January 2, 2013 assuming

this is a direct–financing lease?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. Lease Receivable 450,000

Equipment 450,000

b. Lease Receivable 319,416

Loss 130,584

Equipment 450,000

c. Lease Receivable 334,310

Equipment 334,310

d. Lease Receivable 353,671

Equipment 353,671

Lease Receivable

($80,000 × 3.99271) + ($50,000 × .68508) $353,671

ROLDAN

1. Aprils Company has a machine with a cost of $600,000 which also is its fair value on the

date the machine is leased to Park Company. The lease is for 6 years and the machine is

estimated to have an unguaranteed residual value of $60,000. If the lessor's interest rate

implicit in the lease is 12%, the six beginning-of-the-year lease payments would be

a. $138,541.

b. $123,698.

c. $117,270.

d. $100,000.

First Payment

[$600,000 – ($60,000 × .50663)] ÷ 4.60478 $123,698

2. On January 2, 2013, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5

equal annual payments of $80,000 each, payable beginning December 31, 2013. Sharp

Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease

term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit

interest rate is 8%. What journal entry would Sharp Co. make at December 31, 2013 to
record the first lease payment?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. Lease Liability 80,000

Cash 80,000

b. Lease Liability 51,706

Interest Expense 28,294

Cash 80,000

c. Lease Liability 46,570

Interest Expense 33,430

Cash 80,000

d. Lease Liability 16,570

Interest Expense 33,430

Cash 50,000

Solution:

($80,000 × 3.99271) + ($50,000 × .68508) = $353,671

$80,000 – ($353,671 × .08) = $51,706.

3. On January 2, 2012, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5

equal annual payments of $80,000 each, payable beginning December 31, 2012. Sharp

Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease

term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit

interest rate is 8%. What journal entry would Sharp Co. make at December 31, 2013 to

record the second lease payment?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68508

10%, 5 periods 4.16986 3.79079 .62092

a. Lease Liability 80,000

Cash 80,000

b. Lease Liability 51,226

Interest Expense 28,774

Cash 80,000

c. Lease Liability 55,843

Interest Expense 24,157

Cash 80,000

d. Lease Liability 47,520

Interest Expense 32,480

Cash 80,000

Solution:

($80,000 × 3.99271) + ($50,000 × .68508) = $353,671

$80,000 – ($353,671 × .08) = $51,706

($353,671 – $51,706) × .08 = $24,157 Interest exp.

4. Deary Co. leased a machine to Vains Co. Assume the lease payments were made on the

basis that the residual value was guaranteed and Deary gets to recognize all the profits,

and at the end of the lease term, before the lessee transfers the asset to the lessor, the

leased asset and obligation accounts have the following balances:

Leased equipment $400,000

Less accumulated depreciation--capital lease 384,000

$ 16,000

Interest payable $ 1,520

Lease liability 14,480

$16,000

If, at the end of the lease, the fair value of the residual value is $7,800, what gain or loss

should Deary record?

a. $6,680 gain

b. $6,280 loss

c. $8,200 loss

d. $7,800 gain

Solution:

$7,800 – $16,000 = ($8,200).

5. Haroter Company leased machinery to Just Company on July 1, 2013, for a ten-year

period expiring June 30, 2023. Equal annual payments under the Lease Are $125,000 and

are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of

interest used by Haroter and Just is 9%. The cash selling price of the machinery is

$875,000 and the cost of the machinery on Haroter's accounting records was $775,000.

Assuming that the lease is appropriately recorded as a sale for accounting purposes by

Haroter, what amount of interest revenue would Haroter record for the year ended

December 31, 2013?

a. $78,750

b. $67,500

c. $33,750

d. $0

Solution:
($875,000 – $125,000) × .09 × 6/12 = $33,750.

SANDAGON

1. Nye Company leased equipment to the Poland Company on July 1, 2013, for a ten-year

period expiring June 30, 2023. Equal annual payments under the Lease Are $120,000 and

are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of

interest contemplated by Nye and Poland is 9%. The cash selling price of the equipment is

$840,000 and the cost of the equipment on Nye's accounting records was $744,000.

Assuming that the lease is appropriately recorded as a sale for accounting purposes by

Eby, what is the amount of profit on the sale and the interest revenue that Nye would

record for the year ended December 31, 2013?

a. $96,000 and $75,600

b. $96,000 and $64,800

c. $96,000 and $32,400

d. $0 and $0

Solution:

$840,000 – $744,000 = $96,000; ($840,000 – $120,000) × .09 × 6/12 = $32,400.

Use the following information for questions 91 and 92.

Jeprox Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on

July 1, 2013. The lease is appropriately accounted for as a sale by Jeprox and as a purchase by

Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2023. The

first of 10 equal annual payments of $828,000 was made on July 1, 2013. Jeprox had purchased

the equipment for $5,200,000 on January 1, 2013, and established a list selling price of

$7,200,000 on the equipment. Assume that the present value at July 1, 2013, of the rent
payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000.

2. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of depreciation

and interest expense that Sands should record for the year ended December 31,

2013?

a. $300,000 and $206,880

b. $300,000 and $240,000

c. $360,000 and $206,880

d. $360,000 and $240,000

Solution:

($6,000,000÷10 x 1/2) $300,000

3. What is the amount of profit on the sale and the amount of interest income that Jeprox

should record for the year ended December 31, 2013?

a. $0 and $206,880

b. $800,000 and $206,880

c. $800,000 and $240,000

d. $1,200,000 and $480,000

Profit on Sale

$6,000,000 – $5,200,000 $800,000.

Interest Income

($6,000,000 – $828,000) × .04 $206,880.

4. Rodman Company leased equipment from Kuliglig Company on July 1, 2013, for an eightyear

period expiring June 30, 2021. Equal annual payments under the Lease Are $500,000

and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate

of interest contemplated by Rodman and Kuliglig is 8%. The cash selling price of the
equipment is $3,103,125 and the cost of the equipment on Kuliglig's accounting records

was $2,750,000. Assuming that the lease is appropriately recorded as a sale for

accounting purposes by Kuliglig, what is the amount of profit on the sale and the interest

income that Kuliglig would record for the year ended December 31, 2013?

a. $0 and $0

b. $0 and $104,125

c. $353,125 and $104,125

d. $353,125 and $124,125

Profit on Sale

$3,103,125 – $2,750,000 = $353,125.

Interest Income

($3,103,125 – $500,000) × .04 = $104,125.

5. On June 30, 2013, Pak Co. sold equipment to an unaffiliated company for $1,400,000.

The equipment had a book value of $1,260,000 and a remaining useful life of 10 years.

That same day, Pak leased back the equipment at $14,000 per month for 5 years with no

option to renew the lease or repurchase the equipment. Pak's rent expense for this

equipment for the year ended December 31, 2013, should be

a. $168,000.

b. $84,000.

c. $70,000.

d. $56,000.

Rent Expense

$14,000 × 6 $84,000.
STA. ANA

Vage Co. purchases land and constructs a service station and car wash for a total of $360,000.

At January 2, 2012, when construction is completed, the facility and land on which it was

constructed are sold to a major oil company for $400,000 and immediately leased from the oil

company by Vage. Fair value of the land at time of the sale was $40,000. The lease is a 10-year,

noncancelable lease. Vage uses straight-line depreciation for its other various business holdings.

The economic life of the facility is 15 years with zero salvage value. Title to the facility and land

will pass to Vage at termination of the lease. A partial amortization schedule for this lease is as

follows:

Payments Interest Amortization Balance

Jan. 2, 2012 $400,000.00

Dec. 31, 2012 $65,098.13 $40,000.00 $25,098.13 374,901.87

Dec. 31, 2013 65,098.13 37,490.19 27,607.94 347,293.93

Dec. 31, 2014 65,098.13 34,729.39 30,368.74 316,925.19

1. What is the discount rate implicit in the amortization schedule presented above?

a. 12%

b. 10%

c. 8%

d. 6%

Discount rate

$40,000 ÷ $400,000 = 10%

2. The total lease-related expenses recognized by the lessee during 2013 is which of the

following? (Rounded to the nearest dollar.)

a. $64,000

b. $65,098

c. $73,490

d. $61,490

Executory Expenses

[($400,000 – $40,000) ÷ 15] + $37,490 $61,490

3. The total lease-related income recognized by the lessee during 2013 is which of the

following?

a. $ -0-

b. $2,667

c. $4,000

d. $40,000

Rent revenue

($400,000 – $360,000) ÷ 15 $2,667.

4. On December 31, 2013, Tim, Inc. leased machinery with a fair value of $1,050,000

from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual

payments of $200,000 beginning December 31, 2013. The lease is appropriately

accounted for by Tim as a capital lease. Tim's incremental borrowing rate is 11%.

Tim knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2013 balance sheet, Tim should report a lease liability of

a. $758,160.

b. $850,000.
c. $939,180.

d. $958,160.

Lease Liability

($200,000 × 4.7908) – $200,000 $758,160.

5. On December 31, 2012, Anuna Co. leased a machine from Catt, Inc. for a five-year period.

Equal annual payments under the Lease Are $840,000 (including $40,000 annual

executory costs) and are due on December 31 of each year. The first payment was made

on December 31, 2012, and the second payment was made on December 31, 2013. The

five lease payments are discounted at 10% over the lease term. The present value of

minimum lease payments at the inception of the Lease And before the first annual payment

was $3,336,000. The lease is appropriately accounted for as a capital lease by Anuna. In

its December 31, 2013 balance sheet, Anuna should report a lease liability of

a. $2,536,000.

b. $2,496,000.

c. $2,282,400.

d. $1,989,600.

Lease Liability

$3,336,000 – $840,000 + $40,000 $2,536,000

$2,536,000 – [$800,000 – ($2,536,000 × .10)] $1,989,600

TABARA

On January 2, 2013, YokoNa, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with

title passing to YokoNa at the expiration of the lease. YokoNa treated this transaction as a

capital lease. The drill press has an estimated useful life of 15 years, with no salvage value.

YokoNa uses straight-line depreciation for all of its plant assets. Aggregate lease payments

were determined to have a present value of $1,500,000, based on implicit interest of 10%.

1. In its 2013 income statement, what amount of interest expense should YokoNa report

from this lease transaction?

a. $0

b. $93,750

c. $125,000

d. $150,000

Interest Expense

$1,500,000 × .10 = $150,000.

2. In its 2013 income statement, what amount of depreciation expense should YokoNa

report from this lease transaction?

a. $250,000

b. $200,000

c. $150,000

d. $100,000

Depreciation Expense

$1,500,000 ÷ 15 $100,000

3. Taray Co. manufactures equipment that is sold or leased. On December 31, 2013, Taray

leased equipment to DEscon for a five-year period ending December 31, 2018, at which

date ownership of the leased asset will be transferred to DEscon. Equal payments under

the Lease Are $440,000 (including $40,000 executory costs) and are due on December 31
of each year. The first payment was made on December 31, 2013. Collectibility of the

remaining lease payments is reasonably assured, and Taray has no material cost

uncertainties. The normal sales price of the equipment is $1,540,000, and cost is

$1,200,000. For the year ended December 31, 2013, what amount of income should

Taray realize from the lease transaction?

a. $340,000

b. $440,000

c. $460,000

d. $660,000

Rent Revenue

$1,540,000 – $1,200,000 $340,000

4. On December 31, 2013, Hayden Corp. sold a machine to Maricar and simultaneously leased

it back for one year. Pertinent information at this date follows:

Sales price $900,000

Carrying amount 825,000

Present value of reasonable lease rentals

($7,500 for 12 months @ 12%) 85,000

Estimated remaining useful life 12 years

In Hayden’s December 31, 2013 balance sheet, the deferred profit from the sale of this

machine should be

a. $85,000.

b. $75,000.

c. $10,000.

d. $0.

$900,000 $85,000 = 9.44%, < 10% of FV of asset. It is a minor leaseback and therefore, the answer is 0.
5. On December 1, 2008, Chenes Corporation leased office space for 10 years at a monthly

rental of Php50,000. On that date Chenes paid the landlord the following amounts:

Rent deposit Php 50,000

First month's rent 50,000

Last month's rent 50,000

Installation of new walls and offices 395,00

Php 665,000

The entire amount of Php665,000 was charged to rent expense in 2008. What amount

should Chenes have charged to expense for the year ended December 31, 2008?

a. Php50,000

b. Php 53,292

c. Php184,125

d. Php395,000

Rent Expense

Php50,000 + (395,000/10 × 1/12) Php 53,292

TARREGA

On January 2, 2011, Fre, Inc. signed a ten-year noncancelable lease for a heavy duty drill press.
The lease stipulated annual payments of Php50,000 starting at the end of the first year, with
title passing to Hernandez at the expiration of the lease. Fre treated this transaction as a capital
lease. The drill press has an estimated useful life of 15 years, with no salvage value. Fre uses
straight-line depreciation for all of its plant assets. Aggregate lease payments were determined
to have a present value of Php800,000, based on implicit interest of 10%.

1. In its 2011 income statement, what amount of interest expense should Fre report from
this lease transaction?
a. Php0
 b. Php56,250
c. Php90,000
d. Php80,000

Solution:
Php800,000 × .10 = Php80,000.

2. In its 2011 income statement, what amount of depreciation expense should Fre report
from this lease transaction?
a. Php83,333
b. Php100,000
c. Php53,333
d. Php60,000

Solution:
Php800,000 ÷ 15 = Php 53,333
LightSaber Corporation issued Php450,000 of 7% 10-year bonds. The bonds are dated and sold
on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued
for Php412,408 to yield the market interest rate of 8%. Use the effective-interest method
for questions 12 15.

3. What is the amount of interest expense that LightSaber Corporation will record on July 1, 2011,
the first semiannual interest payment date? (All amounts rounded to the nearest dollar.)
a. Php16,496
b. Php38,500
c. Php19,250
d. Php22,000

4. What is the amount of discount amortization that LightSaber Corporation will record on
July 1, 2011, the first semiannual interest payment date?
a. Php0
b. Php 746
c. Php1,246
d. Php 552

5. What is the total cash payment for interest for each 12-month period? (All amounts
rounded to the nearest dollar.)
a. Php22,000
b. Php31,500
c. Php40,993
d. Php43,000

Solution:

3. a (Php412,408 * 0.08 * 6/12 = Php16,496)

4. b [Int. exp. = Php16,496 Int. payment = Php15,750 (Php450,000 * 0.07 * 6/12)

Php16,496 Php15,750 = Php 746]

5. b (Php450,000 * 0.07 = Php 31,500)

TERREN
Problem: Twice Corporation is in the business of leasing new trucks. As a lessor of trucks, Twice
purchased a new system on December 31,2016. The trucks were delivered the same day (by prior
arrangement) to General Investment Company, a lessee. The corporation accountant revealed the
following relating to the lease transaction:

Cost of system to Twice P700,000

Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) P 70,000
Twice’s implicit interest rate 12%
Date of first lease payment December 31,2016

Additional information is as follows:

(a) At the end of the lease, the system will revert to Twice
(b) General is aware of Twice’s rate of implicit interest
(c) The lease rental consists of equal annual payments

2.The annual lease payment under the lease is

a. P28,273 b.P70,000 c.P120,732 d.111,470

Answer: C
Solution:
Cost of system P700,000
Less present value of unguaranteed
residual value (70,000 x 0.4039) 28,273
Net investment to be recovered 671,727
Divide by the PV of annuity due factor 5.5638
Annual lease payment P120,732

3.The total financial revenue to be earned by the lessor over the lease term is
a.P1,035,856 b.P335,856 c.P350,000 d.P671,727

Answer: B
Solution:
Gross Investment in the lease:
Minimum lease payment (P120,732 x 8) P965,856
Unguaranteed residual value 70,000 P1,035,856
Net investment in the lease:
PV of minimum lease payments 671,727
PV of unguaranteed residual value 28,273 700,000
Total unearned interest income P 335,856

4.The interest income to be recognized by the lessor in 2017 is

a.P120,732 b.100,000 c.P98,488 d.P87,500

Answer: C
Solution:
Interest income [(P700,000-P120,732) x 12%] P98,488

5. On December 1, 2013, Bugritz Corporation leased office space for 10 years at a monthly

rental of $100,000. On that date Tubolz paid the landlord the following amounts:

Rent deposit $ 100,000

First month's rent 100,000

Last month's rent 100,000

Installation of new walls and offices 550,000

$850,000

The entire amount of $850,000 was charged to rent expense in 2013. What amount

should Bugritz have charged to expense for the year ended December 31, 2013?

a. $90,000

b. $100,000

c. $104,583

d. $550,000
Rent Expense

$100,000 + [(550,000÷10) x 1/12)] $104,583

TRINILLA
1. The following information pertains to an operational sale and leaseback of equipment of Elephant
Company on December 31, 2017 :

Selling price. P 580,000

Carrying amount. 620,000

Monthly lease payment. 47,316

PV of lease payment/ Fair market value. 520,000

Estimated remaining life. 12 years

Lease term.

Implicit rate. 12%

.What amount of deferred gain should Popcorn company recognize on the sale on December 31?

a. P 580,000

b.P 60,000

c. P 210,000

d.P 40,000

Answer: B

Selling price. P 580,000

Fair market value. (520,000)

Deferred Gain. P 60,000

2. Fart Corp. entered into a lease agreement with Choge Inc. for machinery. Annual lease payments of P
55,000 are payable at the end of each year. Fart knows that the lessor expects a 8% return on the lease.
Fart has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life
of ten years. In addition, a third party has guaranteed to pay Choge a residual value of P 15,000 at the
end of the lease. The lease term is 6 years and the estimated useful life of the equipment is 10 years.
The present value of an ordinary annuity of Php1 at 8% for six years is 4.6229, 9% for six years is 4.4859.
The present value of Php1 at 8% for six years is .6302, 9% for six years is .5963. In heart's December 3,
2017 balance sheet, the principal amount of the lease obligation was

a.P 254,260
b.P 249,523.5
c.P 28,359
d.P 254,259.5

Solution: D.
PV of annual payment ( P 55,000 x 4.6229). P 254,259.5

On January 2, 2008, AsaPa Co. signed a ten-year noncancelable lease for a heavy duty drill

press. The lease stipulated annual payments of $250,000 starting at the end of the first year,
with

title passing to AsaPa Co. at the expiration of the lease. AsaPa Co. treated this transaction as a

capital lease. The drill press has an estimated useful life of 15 years, with no salvage value.

AsaPa Co. uses straight-line depreciation for all of its plant assets. Aggregate lease payments
were

determined to have a present value of $1,000,000, based on implicit interest of 10%.

3. In its 2008 income statement, what amount of interest expense should AsaPa Co.report

from this lease transaction?

a. $125,000

b. $59,250

c. $90,000

d. $100,000

Interest Expense
$1,000,000 × .10 $100,000.
4. In its 2008 income statement, what amount of depreciation expense should Martinez

report from this lease transaction?

a. $100,000
b. $133,333

c. $90,000

d. $66,667

Depreciation Expense
$1,000,000 ÷ 15 $66,667.

5. Minion Company leases a machine from Voldemort Corp. under an agreement which meets

the criteria to be a capital lease for Minion. The six-year lease requires payment of

$270,000 at the beginning of each year, including $35,000 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. Minion should record the leased asset at

a. $1.173,287

b. $814,435.

c. $1,225,458

d. $694,665.

Leased Asset

($270,000 - $35,000) × 4.99271 = $1.173,287

VERGARA
1. Lore Company leased a new machine from Mess Company on May 1, 2017 having the option to
purchase the machine on May 1,2025 by paying P200,000, which approximates the expected fair value
of the machine on the option exercise date. Additional information were as follows:
Lease term 8 years
Annual rental payable at beginning of each lease year P 50,000
Useful life of machine. 14 years
Implicit interest rate 12%
Present value of an annuity of one in advance for eight periods at 12% 5.56
Present value of one for ten periods at 12% 0.40
East should record a capitalized lease asset on May 1, 2017 of
a. P 333,600
b.P 413,600
c. P 278,000
d.P 260,000
Answer: C
PV of annual lease payment( 50,000 x 5.56) P278,000

Monsters, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it
leased equipment with a cost of Php300,000 to Takot A Co. The 5-year lease calls for a 10%
down payment and equal annual payments at the end of each year. The equipment has an
expected useful life of 5 years. If the selling price of the equipment is Php425,000, and the rate
implicit in the lease is 8%, what are the equal annual payments?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Php46,702
b. Php67,831
c. Php95,800
d. Php81,398

Selling Price (425,000 x 90%) Php 382,500

PV of Ordinary Annuity at 8% for 5 periods ÷ 3.99271
Lease Liability Php 95,800

3. On December 31,2016, Elton John Inc. sold equipment to Benny, and simultaneously leased it back for
12 years. Pertinent information at this date is as follows:
Sales Price P620,000
Carrying Amount 240,000
Estimated remaining useful life 15 years

At December 31, 2016, how much should Elton John report as deferred gain from the sale of the
equipment?
a.P0 b.P400,000 c.P620,000 d.380,000

Answer: D
Solution:
Sale Price P620,000
Carrying Amount 240,000
Deferred gain 380, 000
On December 31,2017 Tea Company sold an equipment to Leaf Corp. and simultaneously leased it back
for 10 years. Pertinent information on this date is as follows:

Sale price. P 560,000

Carrying amount. 580,000

Estimated remaining economic life 10 years

4.In Tea's December 31, 2017 profit or loss what amount should be the loss from the sale of this
machine?

a. None

b. 4,100

c. 30,000

d. 20,000

5. If the economic substance is shown rather than the form as accounting policy chosen by the company,
at what amount should be the carrying amount of the machine in Coffee's statement of financial
position at December 31, 2018?

a. None

b. 513,333

c. 46,667

d. 560,000

Answers: 4. D. 5 B.

Selling price. P 560,000

Carrying amount. 580,000

Loss recognized. (P 20,000)

Impaired value. P560,000

Depreciation- 2018( 560,000 ÷ 12). (46,667)

Carrying value- December 31, 2018. P513,333

VILLAVIZA

1. Bebe Co. leased machinery under direct-financing. The machinery has 30 years useful life, had no
residual value and no option to purchase the machinery at the end of ten year lease with a fair value of
P425,000. The incremental borrowing rate is 12% and the implicit rate is 10%.
The present value of an annuity due of P1:

at 10% for ten years is 6.7590

at 12% for ten years is 6.3282
What is the total amount of interest revenue that Vivo will earn over the life of the lease?

a.P 425,000
b.P 83,592
c.P 203,791
d.P 628,790

Solution: C

Rental x Annuity of 1 = FV/ MCP

Fair Value of Equipment P425,000
Annuity of 1 ÷ 6.759
Rental P62879

Gross Investment
(P 62,879 x 10) P628,790
Net Investment
(P 62,879 x 6.7590) ( 424,999)
Interest Revenue P 203,791

2.Ahh Co. leased a new machine from Jake Co. The lease is not renewable, and the machine reverts to
Jake at the termination of the lease. The cost of the machine on Jake’s accounting records is P
1,390,300. Annual rental payable at beginning of each year is P690,000. The useful life of machine 20
years,lease term is 15 years. Ahh's incremental borrowing rate is 16% and the implicit interest rate is
12%.
Present value of annuity of 1 in advance for 15 periods at
12% 7.63
16% 6.47

At the beginning of the lease term, what amount should Shake record a lease liability of ?
a.P 6,900,000
b.P 5,690,500
c. P 4,200,000
d.P 5,264,700

Solution: B.
PV of annual payment (350,000 x 7.63). P5,264,700

3..The following information pertains to an operating sale and leaseback of equipment by Jolen
Company on December 31,2017:

Sale price. P320,000

Carrying amount. 240,000

Monthly lease payment. 37,316

Present value of lease payment/ Fair market value. 230,000

Estimated remaining life. 12 years

Lease term. 1 year

Implicit rate. 12%

What amount of deferred gain should Jolen report at December 31,2017?

a. 32,000

b. 90,000

c.60,000

d. 80,000

Answer: B

Sale price. P320,000

Fair market value. 230,000

Deferred Gain. P90,000

4. On December 31,2017, Brownies sold an oven to G with an estimated remaining life of 10 years and
lease it back for 3 year. Additional information are as follows:

Selling price P 38,000

Carrying amount at date of sale. 25,000

Monthly rental under lease. 8,000

Implicit rate computed by PAL, known to Cebu Pacific. 12%

PV of monthly rental (P8,000 for 36 mos. at 12%). 34,560

The leaseback is considered as operating lease.

In Cebu Pacific's profit or loss, what amount should be included as realized gain on this transaction?

a. P9,085

b. P 9,560

c. P 13,000

d. P 20,000

Answer: B.

Fair market value P 34,560

Less: Carrying value. 25,000

Realized Gain. P 9,560

5.On March 01, 2015, Pagoda Co. leased several delivery trucks from Energy Co. under a three year
operating lease.

P60,000 per month for 12 months P 720,000

P55,000 per month for the next 12 months 660,000
P45,000 per month for the last 12 months 540,000

What is the annual rent revenue for the first year?

a. 640,000
b. 520,000
c. 450,000
d. 670,000

Solution

720,000+660,000+540,000= 1,920,000
No. of years /3 years
Rent Revenue 640,000