MC QUESTIONS: LEASE

1. BTS Company leases a machine from V Corp. under an agreement which meets the criteria to
be a finance lease for BTS. The six-year lease requires payment of P102,000 at the beginning of
each year, including P15,000 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. BTS should record the leased asset at
a P509,256. b P488,661. c P434,366. d P416,799.
. . . .
2. On December 31, 2015, Lang Corporation leased a ship from Fort Company for an eight-year
period expiring December 30, 2023. Equal annual payments of P200,000 are due on December
31 of each year, beginning with December 31, 2015. The lease is properly classified as a finance
lease on Lang 's books. The present value at December 31, 2015 of the eight lease payments
over the lease term discounted at 10% is P1,173,685. Assuming all payments are made on time,
the amount that should be reported by Lang Corporation as the total lease liability on its
December 31, 2016 statement of financial position.
a P1,091,054. b P1,000,159 c P871,054. d P871,054.
. . . . .

Use the following information for the next two questions.

On January 1, 2015, Sauder Corporation signed a five-year non-cancelable lease for equipment. The
terms of the lease called for Sauder to make annual payments of P50,000 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 residual value. Sauder uses the straight-line method of
depreciation for all of its fixed assets. Sauder accordingly accounts for this lease transaction as a
finance lease. The minimum lease payments were determined to have a present value of P208,493
at an effective interest rate of 10%.

3. In 2015, Sauder should record interest expense of

a P15,849. b P29,151 c P20,849. d P34,151.
. . . .
4. In 2016, Sauder should record interest expense of
a P10,849. b P12,434. c P15,849. d P17,434.
. . . .
5. On December 31, 2016, Kuhn Corporation leased a plane from Bell Company for an eight-year
period expiring December 30, 2024. Equal annual payments of P150,000 are due on December
31 of each year, beginning with December 31, 2016. The lease is properly classified as a finance
lease on Kuhn’s books. The present value at December 31, 2016 of the eight lease payments
over the lease term discounted at 10% is P880,264. 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, 2016 statement of financial position is
a P880,264. b P818,290. c P792,238. d P730,264.
. . . .
6.Emporia Corporation is a lessee with a finance lease. The asset is recorded at P450,000 and has an
economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of
P150,000 at the end of 5 years, and a fair value of P50,000 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 P90,000 b P80,000 c P60,000 d. P50,000
. . .
Use the following information for the next two questions.

7. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual
payments of P86,038, 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 residual 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. P307,767
b. P272,728
c. P284,969
d. P300,000

8. what is the amount of principal reduction recorded when the second lease payment is made in
Year 2?
a. P86,038
b. P61,417
c. P63,240
d. P68,300

9. Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual
payments of P86,038, 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 residual 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. P0 because the asset is depreciated by Tower Company.
b. P71,242
 c. P76,942
d. P75,000

Use the following information for the next two questions.

10. Suga, Inc. manufactures machinery used in the mining industry. On January 2, 2016 it leased
equipment with a cost of P200,000 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
P325,000, 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, 2016?
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. P29,250
b. P23,400
c. P26,000
d. P32,500

11. What is the book value of the leased asset at December 31, 2016, and what is the balance in the
Lease Liability account?

Book Value of Balance in Lease

Leased Asset         Liability       
a. P325,000 P219,243
b. P260,000 P248,491
c. P195,000 P242,643
d. P208,000 P248,491

12. RM Company manufactures machinery used in the mining industry. On January 2, 2016 it leased
equipment with a cost of P200,000 to JiMin Company 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 P325,000, 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. P73,259
b. P67,831
c. P75,822
d. P81,398
13. JHOPE Company leased equipment to Jungkook Company on July 1, 2015, for a one-year period
expiring June 30, 2016, for P60,000 a month. On July 1, 2016, JHOPE leased this piece of
equipment to Jin Company for a three-year period expiring June 30, 2019, for P75,000 a month.
The original cost of the equipment was P4,800,000. The equipment, which has been continually
on lease since July 1, 2016, is being depreciated on a straight-line basis over an eight-year period
with no residual value. Assuming that both the lease to Jungkook and the lease to Jin 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, 2016?
JHOPE Jungkook Jin
a. P210,000 P(360,000) P(450,000)
b. P210,000 P(360,000) P(750,000)
c. P810,000 P(60,000) P(150,000)
d. P810,000 P(660,000) P(450,000)

Use the following information for the next two questions.

Sun Co. leased equipment to Moon Company on May 1, 2016. The lease expires on May 1, 2017.
Moon could have bought the equipment from Sun for P3,200,000 instead of leasing it. Sun's
accounting records showed a book value for the equipment on May 1, 2016, of P2,800,000. Sun's
depreciation on the equipment in 2016 was P360,000. During 2016, Moon paid P720,000 in rentals
to Sun for the 8-month period. Sun incurred maintenance and other related costs under the terms
of the lease of P64,000 in 2016. After the lease with Moon expires, Sun will lease the equipment to
another company for two years.

14. Ignoring income taxes, the amount of expense incurred by Moon from this lease for the year
ended December 31, 2016, should be
a. P296,000.
b. P360,000.
c. P656,000.
d. P720,000.

15. The income before income taxes derived by Sun from this lease for the year ended December
31, 2016, should be
a. P296,000.
b. P360,000.
c. P656,000.
d. P720,000.
16. On January 2, 2016, Gold Star Leasing Company leases equipment to Silver Co. with 5 equal
annual payments of P80,000 each, payable beginning January 2, 2016. Silver Co. agrees to
guarantee the P50,000 residual value of the asset at the end of the lease term. Silver’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, 2016 assuming this is a direct–financing
lease?

PV Annuity Due PV Ordinary Annuity PV Single Sum

8%, 5 periods 4.31213 3.99271 .68058
10%, 5 periods 4.16986 3.79079 .62092

a. Cash 80,000
Lease Receivable 370,000
Equipment 450,000
b. Cash 80,000
Lease Receivable 264,970
Loss 105,030
Equipment 450,000
c. Cash 80,000
Lease Receivable 284,635
Equipment 364,635
d. Cash 80,000
Lease Receivable 298,999
Equipment 378,999

17. Orange Co. leases equipment to Ponkan Company that was carried at a cost of P200,000 and
also has a fair value at the inception of the lease of P200,000.All executory costs are paid by
Ponkan directly to third parties. The equipment has a useful life of 6 years with no residual
value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer
of title. The term of the lease is 6 years beginning January 1, 2016. Based on this information,
what are the equal rental payments due at the beginning of each year (to the nearest pound)?
a. P99,854
b. P40,058
c. P33,333
d. P16,000

18. April Company has a machine with a cost of P400,000 which also is its fair value on the date the
machine is leased to May Company. The lease is for 6 years and the machine is estimated to
have an unguaranteed residual value of P40,000. If the lessor's interest rate implicit in the lease
is 12%, the six beginning-of-the-year lease payments would be
a. P92,361.
b. P82,465.
c. P78,180.
d. P66,667.
19. On January 2, 2015, Gold Star Leasing Company leases equipment to Silver Co. with 5 equal
annual payments of P80,000 each, payable beginning January 2, 2015. Silver Co. agrees to
guarantee the P50,000 residual value of the asset at the end of the lease term. Silver’s
incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%.
What journal entry would Silver Co. make at January 2, 2015 to record the lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68058
10%, 5 periods 4.16986 3.79079 .62092

a. Leased Equipment 299,224

Lease Liability 299,224
b. Leased Equipment 378,999
Lease Liability 298,999
Cash 80,000
c. Leased Equipment 344,970
Lease Liability 264,970
Cash 80,000
d. Leased Equipment 353,671
Lease Liability 273,671
Cash 80,000

20. Red Company leased equipment to the Green Company on July 1, 2016, for a ten-year period
expiring June 30, 2026. Equal annual payments under the lease are P80,000 and are due on July
1 of each year. The first payment was made on July 1, 2016. The rate of interest contemplated
by Red and Green is 9%. The cash selling price of the equipment is P560,000 and the cost of the
equipment on Red's accounting records was P496,000. Assuming that the lease is appropriately
recorded as a sale for accounting purposes by Red, what is the amount of profit on the sale and
the interest revenue that Red would record for the year ended December 31, 2016?
a. P64,000 and P50,400
b. P64,000 and P43,200
c. P64,000 and P21,600
d. P0 and P0

21. Sweet Co. manufactures equipment that is sold or leased. On December 31, 2016, Sweet leased
equipment to Sugar Co. for a five-year period ending December 31, 2021, at which date
ownership of the leased asset will be transferred to Sugar Co.. Equal payments under the lease
are P220,000 (including P20,000 executory costs) and are due on December 31 of each year. The
first payment was made on December 31, 2016. The normal sales price of the equipment is
P770,000, and cost is P600,000. For the year ended December 31, 2016, what amount of income
should Sweet realize from the lease transaction?
a. P170,000
b. P220,000
c. P230,000
d. P330,000