Leases with answers - Freudenthal 100 PDF

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PRACTICAL ACCOUNTING 1 – REVIEWLEASES 2019PROF. U. VALLADOLIDMultiple Choice Identify the letter of the choice that best completes the statement or answers the question.1 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 ...

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1 PRACTICAL ACCOUNTING 1 – REVIEW LEASES 2019 PROF. U.C. VALLADOLID Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 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 90,000. Additionally, on January 1, year 1, Lake paid 50,000 to Rapp as a lease bonus and 25,000 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. 140,000 b. 125,000 c. 100,000 d. 90,000 2.Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, year 1. Under the terms of the operating lease, rent for the first year is 8,000 and rent for years two through five is 12,500 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. 12,000 b. 11,600 c. 10,800 d. 8,000 3.On January 1, year 1, Wren Co. leased a building to Brill under an operating lease for ten years at 50,000 per year, payable the first day of each lease year. Wren paid 15,000 to a real estate broker as a finder’s fee. The building is depreciated 12,000 per year. For year 1, Wren incurred insurance and property tax expense totaling 9,000. Wren’s net rental income for year 1 should be a. 27,500 b. 29,000 c. 35,000 d. 36,500 4.Ozz Company, a lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on January 1 of each year as shown in the following schedule: 4 January 1, 2017 1,000,000 January 1, 2018 1,000,000 January 1, 2019 1,400,000 January 1, 2020 1,700,000 January 1, 2021 1,900,000 Total rentals 7,000,000 1. What is the rent income for 2017? a. 1,000,000 b. 1,400,000 c. 2,000,000 d. 1,500,000 2. On December 31, 2018, what amount should be recognized as accrued rent receivable? a. 700,0000 b.800,000 c.400,000 d. 0

2 5.On January 1, 2019, an entity leased a building from a lessor with the following pertinent information. Annual rental payable at the end of each year 1,000,000 Initial direct cost paid 400,000 Lease incentive received 100,000 Leasehold improvement 200,000 Purchase option that is reasonably certain to be exercised 500,000 Lease term 5 years Useful life of building 8 years Implicit interest rate 10% PV of an ordinary annuity of 1 for 5 periods at 10% 3.79 Present value of 1 for 5 periods at 10% 0.62 1. What is the cost of the right of use asset? a. 4,500,000 b. 4,400,000 c. 4,700,000 d. 4,600,000 2. What is the lease liability on December 31, 2019? a. 3,510,000 b. 3,169,000 c. 3,950,000 d. 3,719,000 6.At the beginning of the current year, Joshtin Company leased a machinery with the following information: Annual rental payable at the end of each year Residual value guarantee Payment to lessor to obtain a long-term lease Cost of dismantling and restoring the asset as required by contract at present value Annual executory cost paid by lessee Lease term Useful life of machinery Implicit interest rate Present value of an ordinary annuity of 1 at 10% for 4 periods Present value of 1 at 10% for 4 periods 1. What is the initial lease liability? a. 3,510,000 b. 3,170,000 c. 4,010,000 d. 4,000,000 2. What is the cost of right use asset? a. 4,200,000 b. 4,250,000 c. 3,810,000 d. 3,900,000 3. What is the depreciation for current year? a. 462,500 b. 925,000 c. 850,000 d. 965,000

1,000,000 500,000 300,000 390,000 50,000 4 years 8 years 10% 3.17 0.68

3 4. What is the lease liability at year-end? a. 2,510,000 b. 3,159,000 c. 2,861,000 d. 3,620,000 7.Jerome Company entered into a ten-year non-cancelable lease requiring year-end payments of P 1,200,000 on January 01, 2018. The incremental borrowing rate is 15%, while the lessor’s implicit interest rate is 10%. Present value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.019 at 15%. An initial direct cost of P 150,000 in negotiating and securing the leasing arrangement was paid on the same day. Ownership of the property remains with the lessor at expiration of the lease. There is no purchase option. The leased property has an estimated economic life of 12 years. 1. What amount should be financed initially as cost of the right of use asset? a. 7,245,000 b. 7,524,000 c. 7,750,000 d. 6,850,000 2.

What amount should be recognized initially as lease liability? a. 7,245,000 b. 6,145,000 c. 7,345,000 d. 7,374,000

3.

What is annual depreciation of the right of use asset? a. 834,500 b. 614,100 c. 752,400 d. 734,500

8.An entity recorded the cost right of use asset at P4,500,000. The underlying asset had a useful life of 8 years and the lease term is 5 years. The asset is expected to have a fair value of P1,500,000 at the end of 5 years and a fair value of P500,000 at the end of 8 years. The lease agreement provided for the transfer of title of the underlying asset to the lessee at the end of the lease term. What amount of depreciation expense should be recorded for the first year of the lease? a. 900,000 b. 800,000 c. 600,000 d. 500,000 9.On January 1, 2022, Kaila Company and the lessor agreed to amend the original terms of the lease by reducing the lease payment to 50,000 and increasing the implicit rate to 9%. The lease liability has a carrying amount of 200,000 on January 1, 2022. The present value of an ordinary annuity of 1 at 9% for 3 periods is 2.5313. What is the decrease or increase in lease liability for 2022? a. 73,435 increase b. 73,435 decrease c. 50,000 increase d. 50,000 decrease

4 10.On January 1, year 1, Babson, Inc. leased two automobiles for executive use. The lease requires Babson to make five annual payments of 13,000 beginning January 1, year 1. At the end of the lease term, December 31, year 5, Babson guarantees the residual value of the automobiles will total 10,000. The lease qualifies as a finance lease. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows: For an annuity due with five payments For an ordinary annuity with five payments Present value of 1 for five periods

4.240 3.890 0.650

Babson’s recorded finance lease liability immediately after the first required payment should be a. 48,620 b. 44,070 c. 35,620 d. 31,070 11.On December 30, year 1, Rafferty Corp. leased equipment under a finance lease. Annual lease payments of 20,000 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 finance lease obligation was recorded on December 30, year 1, at 135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this finance lease in its December 31, year 1 balance sheet? a. 6,500 b. 8,500 c. 11,500 d. 20,000 12.On January 2, year 1, Nori Mining Co. (lessee) entered into a five-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for 240,000, which includes a 10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment’s fair value will be 20,000 at the end of its eight-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, year 1, what amount should Nori recognize as depreciation expense on the leased asset? a. 48,000 b. 46,000 c. 30,000 d. 27,500 13.On January 1, 2019, Mess Company entered to a ten-year non-cancelable lease agreement to lease a building from Keep Company. The agreement required equal annual payments at the end of each year. The fair value of the building at the beginning of the lease is P3,949,500, while the carrying amount to Keep Company is P3,458,000. The building has estimated useful life of 10 years. The title of the building will be transferred to Mess at the end of the lease. The incremental borrowing rate of Mess Company is 12%. Keep Company set the annual rental to insure 10% rate of return. The implicit rate of the lessor is known by the lessee. The annual lease payment includes P35,000 executory costs. 1. What is the minimum annual lease payment? a. 642,718 b. 500,000 c. 562,734 d. 480,000 2. What is the total annual lease payment? a. 515,000 b. 535,000 c. 597,734 d. 677,718

5 14.Angel Company entered into a finance lease on January 1, 2018. The lessee guaranteed the residual value of the asset under the lease estimated to be P1,200,000 on January 1, 2021, the end of the lease term. Annual lease payments are P1,000,000 due each December 31, beginning December 31, 2018.The last payment is due December 31, 2022. The remaining useful life of the asset was six years at the commencement of the lease. Both the lessor and the lessee used 10% as the interest rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is. 3.79. 1. What is the net lease receivable of the lessor at the commencement of the lease? a. 4,534,000 b. 3,790,000 c. 4,990,000 d. 2,590,000 2. What is the gross investment in the lease? a. 5,000,000 b. 6,200,000 c. 3,800,000 d. 5,744,000 3. What is the total unearned interest income? a. 2,410,000 b. 1,666,000 c. 1,210,000 d. 466,000 4. What is the interest income for 2018? a. 379,000 b. 620,000 c. 453,400 d. 500,000 15.An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor. On January 1, 2019, an equipment is leased to a lessee with the following information: Cost of equipment to the entity Fair value of equipment Residual value – unguaranteed Initial direct cost Annual rental payable in advance Useful life and lease term Implicit interest rate PV of 1 at 12% for 8 periods PV of an ordinary annuity of 1 at 12% for 8 periods PV of an annuity due of 1 at 12% for 8 periods First lease payment 1. What is the gross investment in the lease? a. 7,800,000 b. 7,200,000 c. 6,600,000 d. 6,900,000

3,500,000 5,500,000 600,000 200,000 900,000 8 years 12% 0.40 4.97 5.56 January 1, 2019

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

7

Sale and leaseback (IFRS 16) 1.At year-end, Bain Company sold a machine with 12-year useful life to another entity and simultaneously leased it back for one year. Sale price Carrying amount Present value of reasonable lease rentals (3,000 for 12 months @ 12%)

360,000 330,000 34,100

What amount of gain on right transferred should be reported in the current year? a. 34,100 b. 30,000 c. 4,100 d. 0 2.At the beginning of current year, East Company sold an equipment with remaining life of 10 years and immediately leased it back for 4 years at the prevailing market rental. Sale price at fair value Carrying amount of equipment Annual rental payable at the end of each year Implicit interest rate Present value of an ordinary annuity of 1 at 10% for Four periods 1. What is the initial lease liability? a. 2,536,000 b. 3,200,000 c. 3,000,000 d. 0 2. What is the cost of right of use asset? a. 1,902,000 b. 2,598,000 c. 2,536,000 d. 0 ROUA = C.A. of asset x lease liability (adj) F.V. of Asset

3. What is the gain on right transferred to the buyer-lessor? a. 866,000 b. 634,000 c. 750,000 d. 0 Recog. Gain = Total Gain x Rights transferred to buyer/lessor F.V. of Asset

4. What is the annual depreciation of the right of use asset? a. 475,500 b. 190,200 c. 634,000 d. 253,600 5. What is the net annual rental income of the buyer-lessor? a. 800,000 b. 200,000 c. 600,000 d. 400,000

6,000,000 4,500,000 800,000 10% 3.17...