Leases-Quizzer FOR STUDENTS PDF

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OCTOBER 2021 - BReview for CPA Licensure ExaminationsPage 1 of 7Practice Questions -LeasesFor Problem 1 - Basic Initial (and Subsequent) Lease Liability1 On December 31, 2020 , Rolovenae Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2028. Equal annual pay...

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OCTOBER 2021 - B2 Review for CPA Licensure Examinations

Practice Questions - Leases For Problem 1 - Basic 1

Initial (and Subsequent) Lease Liability

On December 31, 2020, Rolovenae Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2028. Equal annual payments of P400,000 are due on December 31 of each year, beginning with December 31, 2020. The present value at December 31, 2020 of the eight lease payments over the lease term discounted at 10% is P2,347,370. Assuming all payments are made on time, the amount that should be reported by Rolovenae Corporation as the total obligation under the lease on its December 31, 2021 statement of financial position is A.

P2,182,108

B.

P2,000,318

C.

P1,742,107

D.

P2,400,000

For the Next 2 Questions. On January 1, 2020, Novie Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Novie to make annual payments of P200,000 at the beginning of each year for five years with title to pass to Novie at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Novie uses the straight-line method of depreciation for all of its fixed assets. Novie accordingly records a right of use asset in its books. The lease payments were determined to have a present value of P833,972 at an effective interest rate of 10%. 2

In 2020, Novie should record interest expense of A.

3

P63,397

B.

P116,604

C.

P83,396

D.

P136,604

C.

P63,396

D.

P69,736

In 2021, Novie should record interest expense of A.

P43,396

B.

P49,732

For Next 2 Questions. On January 1, 2021, an entity leased two automobiles for executive use. The lease required the entity to make five annual payments of P2,000,000 beginning December 31, 2021. At the end of the lease term, December 31, 2025, the entity had a residual value guarantee of the automobiles at P1,000,000. The interest rate implicit in the lease is 10% and present value factors at 10% for 5 periods are 4.17 for an annuity due, 3.79 for an ordinary annuity and 0.62 for present value of 1. 4

What is the lease liability on December 31, 2021? A.

5

B.

P5,722,000

C.

P7,580,000

D.

P6,338,000

D.

P500,000

What is the current portion of the lease liability on December 31, 2021? A.

6

P7,020,000

P2,000,000

B.

P1,298,000

C.

P820,000

On December 30, 2021, Calvin Corp. leased equipment and recorded a right of use asset. Annual lease payments of P20,000 are due December 31 for ten years. The equipment’s useful life is ten years, and the interest rate implicit in the lease is 10%. The lease liability was computed on December 30, 2021, at P135,000, and the first lease payment was made on that date. What amount should Calvin include in current liabilities as of December 31, 2021? A. P 6,500 B. P 8,500 C. P 11,500

D.

P 20,000

Page 1 of 7

OCTOBER 2021 - B2

Quizzer - Leases

For Problem 4 - Basic

Right Of Use Asset & Depreciation Expense

For Next 2 Questions. Seham, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of P129,057, with the first payment on January 1, 2021, the 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. Seham, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Seham, Inc.) is 8%.

8%, 4 periods 10%, 4 periods 7

P461,650

B.

P409,092

C.

P427,453

D.

P332,593

C.

P427,453

D.

P332,593

What is presented as lease liability on January 1, 2021? A.

9

PV of ordinary annuity 3.31213 3.16986

What is the amount recorded for the leased asset at the lease inception? A.

8

PV of annuity due 3.57710 3.48685

P461,650

B.

P409,092

On January 1, 2021, Amer Hassan Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Amer Hassan to make annual payments of P200,000 at the end of each year for ten years with title to pass to Amer Hassan at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Amer Hassan uses the straight-line method of depreciation for all of its fixed assets. The lease payments were determined to have a present value of P1,342,016 at an effective interest rate of 8%. With respect to this lease, Amer Hassan should record for 2021 A. B. C. D.

10

Lease expense of P200,000 Interest expense of P89,468 and depreciation expense of P76,136 Interest expense of P107,361 and depreciation expense of P89,468 Interest expense of P91,362 and depreciation expense of P134,202

Aripah Corporation is a lessee in a lease transaction. The right of use asset is recorded at P630,000 for the underlying asset that has an economic life of 8 years. The lease term is 5 years. The underlying asset is expected to have a fair value of P210,000 at the end of 5 years, and a fair value of P70,000 at the end of 8 years. The lease agreement provides for the transfer of title of the asset to Aripah at the end of the lease term. What amount of depreciation expense would the lessee record for the first year of the lease? A.

11

P126,000

B.

P112,000

C.

P84,000

D.

P70,000

At the beginning of current year, an entity entered into an 8-year lease for an equipment. The entity recorded right of use asset of P5,000,000 which included a P500,000 bargain purchase option that is reasonably certain to be exercised. The expected fair value of the equipment is P400,000 at the end of the 10-year useful life. What amount of straight line depreciation should be recognized for the current year? A.

12

P575,000

B.

P460,000

C.

P625,000

D.

P450,000

At the beginning of current year, an entity entered into an 8-year lease for an equipment. The entity recorded right of use asset of P6,000,000 which included the P600,000 guarantee of residual value by a third party. At the end of the lease, the asset will revert back to the lessor. It is estimated that the fair value of the asset at the end of the 10-year useful life would be P400,000. What amount should be recognized as straight line depreciation on the leased asset for the current year? A.

P675,000

B.

P700,000

FINANCIAL ACCOUNTING AND REPORTING

C.

P540,000

D.

P560,000

Page 2 of 7

OCTOBER 2021 - B2 13

Quizzer - Leases

On January 1, 2021, Vincent Inc. leased building from Sunny Corp. for 8 years. Useful life of the building is estimated to be 10 years. Annual lease payment to start on January 1, 2021 is P250,000 and the lease contains an option to purchase the asset at P10,000 at end of lease term, a price significantly higher than the estimate of P50,000. However, the lease option is reasonably certain to be exercised by the lessee. At the end of its life, the building is estimated to have a salvage value of P30,000. Assuming an implicit interest rate of 8%, PV factor of P1 at 8% for 8 periods is 0.54, PV of ordinary annuity for 8 periods is 5.75, and PV of advance annuity for 8 periods is 6.21. What amount should Vincent record as depreciation expense for 2021? A.

P150,790

B.

P188,488

Problem 5 LESSEE - Advanced

C.

P190,988

D.

P152,790

Right Of Use Asset

For Next 2 Questions. At the beginning of the current year, an entity leased building from a lessor with the following pertinent information: Annual rental payable at the end of each year Initial direct cost paid Lease bonus paid to lessor on commencement date Lease incentive received Required cost to restore the leased building Present value of the cost to restore Purchase option that is reasonably certain to be exercised Lease term Useful life of the leased building Implicit interest rate Present value of an ordinary annuity of 1 for 6 periods at 10% Present value of 1 for 6 periods at 10% 14

What is the initial lease liability? A.

15

P300,000 81,000 60,000 10,000 300,000 189,000 200,000 6 years 10 years 10% 4.36 0.56

P1,308,000

B.

P1,842,000

C.

P1,420,000

D.

P1,920,000

C.

P1,740,000

D.

P1,551,000

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

P1,750,000

B.

P1,980,000

Problem 8 LESSOR - Advanced

Finance Lease - Direct Financing

For Next 2 Questions. On January 1, 2021, Ebnie Leasing Company leases equipment to Brick Co. with 5 equal annual payments of P80,000 each, payable beginning December 31, 2021. Brick Co. agrees to guarantee the P50,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Ebnie’s implicit interest rate is 8%. PV of annuity due 4.31213 4.16986

8%, 5 periods 10%, 5 periods 16

PV of single sum 0.68508 0.62092

What amount of lease receivable shall Ebnie present on January 1, 2021 assuming the finance lease is direct-financing? A.

17

PV of ordinary annuity 3.99271 3.79079

P450,000

B.

P319,416

C.

P334,310

D.

P353,671

What amount of lease receivable shall Ebnie present on January 1, 2021 assuming the finance lease is direct-financing and the annual payment was each January starting January 1, 2021? A.

P379,224

B.

P264,970

FINANCIAL ACCOUNTING AND REPORTING

C.

P299,224

D.

P353,671

Page 3 of 7

OCTOBER 2021 - B2

Quizzer - Leases

For Next 2 Questions. An entity decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. At the beginning of current year, the entity leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due in advance at the beginning of each year. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. 18

What is the annual lease payment payable in advance required to yield the desired return? A.

19

P500,000

B.

P477,826

C.

P559,610

D.

P460,000

P1,257,660

C.

P700,000

D.

P900,000

What is the total finance income? A.

P1,057,660

B.

For Next 2 Questions. Novefe Company has a machine with a cost of P600,000 which also is its fair value on the date the machine is leased to Park Company, under a direct financing lease. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of P60,000. 20

If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be A.

21

B.

P123,698

C.

P117,270

D.

P100,000

D.

P742,188

What is Novefe’s gross investment in the lease at inception date? A.

22

P138,541

P802,188

B.

P618,490

C.

P678,490

In a direct financing lease, Hafsah Co. leased machinery with cost of P379,000. The lease term is 5 years, at which time the machinery will transfer to the lessee. Estimated residual value at the end of 5 years is P40,000, and the implicit interest rate is 10%. PVOA at 10% for 5 years is 3.79. PVF at 10% for 5 years is 0.62. What is the gross investment in the lease at inception date? A.

23

P447,230

B.

P467,282

C.

P379,000

D.

P500,000

Juhanisa Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Juhanisa wishes to earn 8% interest on a five-year lease of equipment with a fair value of P323,400. The present value of an annuity due of P1 at 8% for five years is 4.312. What is the total amount of interest revenue that Juhanisa will earn over the life of the lease? A.

P51,600

B.

P75,000

Problem 9 LESSOR - Extra 24

C.

P129,360

D.

P139,450

Finance Lease - Direct Financing

Najmah Co. leased a machine to PSJ Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Najmah 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 Less accumulated depreciation--capital lease

P400,000 384,000 P 16,000

Interest payable Lease liability

P 1,520 14,480 P16,000

If, at the end of the lease, the fair value of the residual value is P7,800, what gain or loss should Najmah record? A.

P6,680 gain

B.

P6,280 loss

FINANCIAL ACCOUNTING AND REPORTING

C.

P8,200 loss

D.

P7,800 gain

Page 4 of 7

OCTOBER 2021 - B2

Quizzer - Leases

Problem 10 LESSOR - Basic 25

Finance Lease - Sales Type

Nurol Company leased machinery to Stine Company on July 1, 2021, for a ten-year period expiring June 30, 2031. Equal annual payments under the lease are P125,000 and are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of interest used by Nurol and Stine is 9%. The cash selling price (fair value) of the machinery is P875,000 and the cost of the machinery on Nurol's accounting records was P775,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Nurol, what amount of interest revenue would Nurol record for the year ended December 31, 2021 (For this problem, round PV to the nearest whole number)? A.

26

P78,750

B.

P67,500

C.

P33,750

D.

P0

Rodel Company leased equipment to the Paula Company on July 1, 2021, for a ten-year period expiring June 30, 2031. Equal annual payments under the lease are P120,000 and are due on July 1 of each year. The first payment was made on July 1, 2021. The rate of interest contemplated by Rodel and Paula is 9%. The cash selling price of the equipment is P840,000 and the cost of the equipment on Rodel's accounting records was P744,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Rodel, what is the amount of profit on the sale and the interest revenue that Rodel would record for the year ended December 31, 2021? A. B.

27

P96,000 and P75,600 P96,000 and P64,800

C. D.

P96,000 and P32,400 P0 and P0

Shareena Company is a car dealer. On January 1, 2016, it entered into a finance lease with a customer under which the customer would pay P1,000,000 on January 1 each year for 5 years, commencing 2016. The cost of the car is P3,000,000 and the cash selling price was P3,750,000. Shareena paid legal fees of P100,000 to a law firm in connection with the arrangement of the lease. What amount of gross profit on sale should Shareena recognize for the year ended December 31, 2016? A. P 750,000 B. P 650,000 C. P 100,000 D. P 0

For Problem 11 - Advanced

Lease and Non-lease Components

For Next 4 Questions. Kim Company leases a machine from Jardin Corp. The six-year lease requires payment of P170,000 at the beginning of each year, including P25,000 per year for 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. 28

Kim should record the leased asset at A.

29

P848,761

B.

P814,435

C.

P723,943

D.

P694,665

Assume that the P25,000 payment is for maintenance services, and that the stand-alone prices of the rental component is P200,000 and the maintenance component is P50,000. Kim should record the leased asset at A.

30

P848,761

B.

P814,435

C.

P651,547

D.

P679,009

Assume that the P25,000 payment is for maintenance services, but the problem does not state the stand-alone prices of the components. (This is for exam purposes only). Kim should record the leased asset at A.

P848,761

B.

P814,435

FINANCIAL ACCOUNTING AND REPORTING

C.

P723,943

D.

P694,665

Page 5 of 7

OCTOBER 2021 - B2 31

Quizzer - Leases

Assume that the P25,000 payment is for maintenance services but the lessee applies the practical expedient rule on the non-lease component. Kim should record the leased asset at A.

32

P848,761

B.

P814,435

C.

P651,547

D.

P679,009

Klein Corporation entered into a nine-year capital lease on a warehouse on December 31, 2021. Lease payments of P52,000, which includes real estate taxes of P2,000, are due annually, beginning on December 31, 2022, and every December 31 thereafter. Klein does not know the interest rate implicit in the lease; Klein’s incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 5.60. What amount should Klein report as capitalized lease liability at December 31, 2021? A.

P280,000

B.

(2A) Problem 1 LESSOR - Basic 33

P291,200

C.

P239,200

D.

P468,000

Operating Lease

Crystal Company leased equipment to Gold Company on July 1, 2020, for ...