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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCYCPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Week No. 9AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla####### Page 1 of 4 0915 -2303213 Ÿ resacpareviewAP-301: LEASES; INCOME TAXES; POST-RETIREMENT BENEFITSPROBLEM 1 :CASE 1: On September 1, 2...

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41 ! May 2021 CPA Licensure Examination ! Week No. 9

AUDITING (Auditing Problems)

S. Ireneo ! C. Espenilla

AP-301: LEASES; INCOME TAXES; POST-RETIREMENT BENEFITS PROBLEM 1: CASE 1: On September 1, 2018, Mansion Company entered into one-year nonrenewable lease, commencing on that date, for an office space and made the following payments to ABC Properties: Bonus to obtain lease 120,000 First month’s rent 40,000 Last month’s rent 40,000 If the lease is considered “Short-term lease” in its income statement for the year ended Dec. 31, 2018, what amount should Mansion report as rent expense? CASE 2: On January 1, 2018, Travel Corporation signed an 3-year operating lease for various office furniture and equipment at P300,000 per year. The lease included a provision for additional rent of 5% of annual company sales in excess of P2,000,000. Travel’s sales for the year ended Dec. 31, 2018 were P2,500,000. Upon execution of the lease, Travel Corporation paid P100,000 as a bonus for the lease. If the lease is considered “Low value lease”, Travel’s rent expense for the year ended Dec. 31, 2018 is CASE 3: As an inducement to enter a lease, Premier Arts Company, a lessor, grants Marvel Management Corporation, a leaseholder, nine months of free rent under a two-year operating lease for its office furniture and equipment. The lease is effective on Feb. 1, 2018 and provides for monthly rental of P30,000 to begin November 1, 2018. If the lease is considered “Low value lease”: 1. What is the rent expense for 2018? 2. What amount of accrued rent should Marvel report in its Dec. 31, balance sheet? PROBLEM 2: On January 1, 2017, DEF Corp. leased an equipment for 3 years at an annual rental of P500,000 payable every January 1 starting at inception. The equipment had an estimated useful life of 5 years with the asset ownership to be transferred to the lessee at lease expiration. The lessee paid lease bonus amounting to P300,000 and direct lease expense which included installation and commissioning costs amounting to P200,000. The lessor will however reimburse DEF Corp. 40% of the direct lease expense as a lease incentive. DEF Corp. further estimated that it will incur P600,000 in the future as cost to dismantle and decommission the said equipment upon retirement. The implicit lease rate on the lease known to both parties at the lease inception which is also deemed relevant in the determination of the present value of any future retirement obligations is at 8%. The asset had an estimated salvage value of P400,000 after 3 years and P200,000 after 5 years. Requirements: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Interest expense on the provision for asset retirement in 2017 4. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method) PROBLEM 3: On January 1, 2017, GHI Corp. leased an equipment for 3 years at semi-annual rental of P500,000 payable every June 30 and December 31. The equipment had an estimated useful life of 5 years. GHI Corp. has an option to purchase the equipment from the lessor by paying the lessor P400,000 at the lease expiration date. The lessee paid lease bonus amounting to P400,000 and direct lease expense which included installation and commissioning costs amounting to P300,000. The lessor will however reimburse GHI Corp. 20% of the direct lease expense as a lease incentive. The annual implicit lease rate on the lease known to both parties at the lease inception was at 10% while the incremental borrowing rate of the GHI Corp. was at 12%. The asset had an estimated salvage value of P300,000 after 3 years and P100,000 after 5 years. Requirements: If at lease inception, GHI Corp. is reasonably certain to exercise the purchase option: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method) 4. Entry to record the exercise of the purchase option at the lease expiration 5. Entry to record the non-exercise of the purchase option at the lease expiration

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0915-2303213 ! www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Week No. 9: LEASE, INCOME TAXES, POST-EMPLOYMENT BENEFITS

AP-301

PROBLEM 4: Using the same information in the previous problem however, assuming that at lease inception, GHI Corp. is not reasonably certain to exercise the purchase option: Requirements: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method)

PROBLEM 5: On January 1, 2017, JKL Corp. leased a building for 4 years at semi-annual rental of P800,000 payable every January 1 and July 1 starting at the lease inception. The equipment had an estimated useful life of 6 years. The annual implicit lease rate on the lease known to both parties at the lease inception was at 12%. The asset had an estimated salvage value of P300,000 after 4 years and P100,000 after 6 years. JKL Corp. guaranteed the residual value of the asset. Requirements: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method), assuming that the asset’s estimated residual value remains P300,000 at the end of 2017. 4. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method), assuming that the asset’s estimated residual value was revised to P400,000 by the end of 2017. 5. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method), assuming that the asset’s estimated residual value was revised to P100,000 by the end of 2017. 6. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method), assuming that the asset’s estimated residual value was revised to zero by the end of 2017.

PROBLEM 6: Using the information in the previous problem except that assuming that JKL did not guarantee the asset’s residual value. Requirements: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method), assuming that the asset’s estimated residual value remains P300,000 at the end of 2017.

PROBLEM 7: On January 1, 2017, MNO Corp. leased a building for 5 years at an annual rental of P600,000 payable every December 31. The building had an estimated useful life of 15 years. The annual implicit lease rate on the lease known to both parties at the lease inception was at 12%. The lease agreement contained an option for MNO Corp. to extend the lease for another 10 years but at a reduced annual rental of P500,000. At lease inception, it was reasonably certain that MNO Corp. will be exercising the option. Requirements: 1. Initial cost of the Right of Use Asset 2. Interest expense on the lease liability for 2017 3. Depreciation expense on the Right of Use Asset in 2017 (Straight Line Method).

PROBLEM 8: Using the same information in the previous problem, assuming however that at lease inception it was not reasonably certain that MNO Corp. will be exercising the option. Requirements: 1. Initial cost of the Right of Use Asset

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