UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA PHILIPPINES
Synthesis in Financial Accounting & Reporting
Edmund E. Hilario, CPA, MBA
Chapter 6.1 Financial Liabilities
2nd Semester 2017 -2018
==============================================================
================
MULTIPLE CHOICE PROBLEMS:
Leases
1. On January 1, 2011, Nickel Co. signed a 10-year
operating lease for o,ce space at P576,000 per year.
The lease included a provision for additional rent of 5%
annual company sales in excess of P3,000,000. Nickel’s
sales for the year ended December 31, 2011 were
P3,600,000. Upon execution of the lease Nickel paid
P144,000 as a for the lease.
How should be Nickel’s rent expense for the ended
December 31, 2011?
a. P590,400 c. P606,000
b. P620,400 d. P750,000
Answer: B
Annual rental P576,000
Add: Additional rental
(P3,600,000-P3,000,000 x 5%) 30,000
Amortization of bonus (P144,000/10) 14,400
Total rent expense P620,400
2. As an inducement to enter a lease, Athena, a
lesser, grants Zeus Corp., a lessee, months of the rent
under a 5-year operating lease. The lease is eBective
July 1, 2011 and provides for a monthly rental of
P20,000 to begin April 1, 2012. In Zeus’ income
statement for the year ended June 30, 2012, How
much should be reported as rent expense?
a. P 51,000 c. P 60,000
b. P180,000 d. P204,000
Answer: D
Lease terms (5 years) 60 months
Less: Rent free months 9 months
No of lease payments 51 months
x monthly rental P 20,000
Total rental P1,020,000
÷ Lease terms 5 years
Annual rent expenses P 204,000
3. Wall Co. leased o,ce premises to Fox, Inc. for a 5-
year term beginning January 2, 2011. Under the terms
of the operating lease, rent for the Frst year is P80,000
and rent for year 2 through 5 is P125,000 per annum.
However, as an inducement to enter the lease, Wall
granted Fox the Frst 6 months of the lease rent-free. In
its December 31, 2011 proFt or loss, what should for
report as rental expense?
a. P80,000 c. P108,000
b. P116,000 d. P120,000
Answer: C
First yr P 40,000
Second to Ffth yr (125,000 x 4 yrs) P500,000
Total cash rental P540,000
÷ Lease terms 5 years
Annual rental expenses P108,000
4. Christian Company a lessor of o,ce machines
purchased a new machine for P600,000 on January 1,
2011 which was leased the same day to Dior. The
machine will be depreciated at P55,000 per year. The
lease is a four-year period expiring January 1, 2015 and
provides for annual rental payments of P100,000
beginning January 1, 2011. In addition, Dior paid
P64,000 to Christian as a lease bonus. In its 2011 proFt
or loss, what amount of revenue and expense should
Christian report on this lease asset?
Revenue Expense
a. P100,000 P 0
b. P116,000 P 0
c. P116,000 P55,000
d. P164,000 P55,000
Answer: C
Rental income for 2011 P100,000
Add: Amortization of the lease bonus
(P64,000 ÷ 4 yrs) 16,000
Amt of revenue to be reported P116,000
5. Dream Company, a leassor of o,ce machines,
purchased a new machine for P500,000 on January 1,
2011, which leased the same day to Girl Company. The
machine is expected to have a ten-year life and will be
depreciated P50,000 per year. The lease is for a three–
yearn period expiring January 1, 2014 and provides for
annual rental payments of P100,000 beginning January
1, 2011. In addition, Girl paid P60,000 as lease bonus to
obtain a three-year lease. In its 2011 proFt or loss,
what amount dream report as operating proFt on this
leased asset?
a. P 50,000 c. P 70,000
b. P100,000 d. P110,000
Answer: C
Gross rental income -2011 P100,000
Add: Amortization of lease bonus (P60,000/3) 20,000
Total rental income P120,000
Less: Annual depreciation of lease asset 50,000
Operating profit P70,000
6. On January 1, 2011, Bauman Company leased a
warehouse to Cuban under an operating lease for ten
years at P100,000 per year, payable the Frst day of
each lease year. Bauman paid P45,000 to real estate
broken as a Fnder’s fee. The warehouse is depreciated
P25,000 per year. During 2011, Bauman incurred
insurance and property tax expense of P18,750. How
much should be Bauman’s net Rental income for 2011?
a. P51,750 c. P55,000
b. P56,250 d. P75,000
Answer: A
Gross rental income -2011 P100,000
Less: Amortization of Fnder’s fee
(P45,000 ÷ 10 yrs) P 4,500
Annual depreciation 25,000
Insurance & property tax 18,750 P 48,250
Net rental income P 51,750
7. Brim Company leased o,ce premises to Whim Inc.
for a 5-year term beginning January 2, 2011. Under the
terms of the lease, rent for the Frst year is P150,000
and rent for years 2 through 5 is P187,500 per annum.
However, as an inducement to enter the lease, Brim
granted Whim the Frst 6 months for the lease rent-fee
and provided an allowance of P8,000 as an additional
incentive. In its December 31, 2011 proFt or loss, what
amount should report as rental income?
a. P150,000 c. P163,400
b. P165,000 d. P166,600
Answer: B
Cash rent for 2011(P150,000 x ½) P 75,000
Cash rent for 2012 (P187,500 x 4) P750,000
Total cash rent P825,000
Less: Cash incentive provided 8,000
Adjusted cash rent for 5 yrs P817,000
÷ Lease term 5 years
Annual rent income P163,400
8. Good Company leased a new machine from Bye
Corporation on May 1, 2011 under a lease with the
following information:
UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA PHILIPPINES
Synthesis in Financial Accounting & Reporting
Edmund E. Hilario, CPA, MBA
Chapter 6.1 Financial Liabilities
2nd Semester 2017 -2018
==============================================================
================
Annual rental payable beginning of
each lease year P400,000
Lease term 10years
Economic life of machine 12years
Implicit interest rate 14%
Present value of an annuity of 1 in advance for
10 period at 14% 5.95
Present value of 1 for 10 periods at 14% 0.27
Good has the option to purchase the machine on May 1,
2021, by paying P500,000 which approximates the
expected fair value of the machine on the option
exercise date. On May 1, 2011, how much should Good
report the leased asset?
a. P1,980,000 c. P2,245,000
b. P2,380,000 d. P2,515,000
Answer: B
Annual rental P 400,000
x PV of annuity in advance 5.95
Cost of the lease asset P2,380,000
9. On January 2, 2011, Hello Inc. interest into a ten-
year non-cancelable lease requiring year-end payments
of P1,000,000. Hello’s incremental borrowing rate is
12%. Whiles the lessor’s implicit interest rate, know to
Hello, is 10%. Present value factor for an ordinary
annuity for ten periods is 6.145 at expiration of the
lease. There is no bargain purchase option. The leased
property has an estimated useful life of 12 years. What
amount should Hello capitalize for this leased property
on January 22, 2011?
a. None c. P5,650,000
b. P6,145,000 d. P10,000,000
Answer: B
Annual rental P1,000,000
x PV of annuity in advance 6.145
Cost of the lease asset P6,145,000
10. On January 2, 2011, Dioxide Mining Co. (lessee)
interest into a 5-year lease for drilling equipment.
Dioxide accounted for the acquisition as a Fnance lease
for P2,400,000, which includes a P100,000 bargain
purchase option. Dioxide estimates that the
equipment’s fair value will be P200,000 at the end of its
8-year economic life. Dioxide regularly uses straight-
line depreciation on similar equipment. For the year
ended December 31, 2011, what amount should
Dioxide recognize as depreciation expense on the lease
asset?
a. P275,000 c. P300,000
b. P460,000 d. P480,000
Answer: A
Cost of leased assets P2,400,000
Less: Estimated fair value (salvage value) 200,000
Depreciable cost P2,200,000
÷ Useful life 8 years
Depreciation expense P 275,000
11. On December 30, 2010, chlorine Company leased a
new machine from Oxide Corporation. The following
data relate to the lease transaction at the inception of
the lease:
Lease term 10 years
Annual rental payable at the
end of each Lease term P 240,000
Estimated life of machine 12 years
Implicit interest rate 10%
Present value of an annuity of P1 in
Advance for 10 period at 10% 6.76
Present value of an annuity of P1 in
Arrears for 10 period at 10% 6.15
Fair value of the machine P 1,680,000
The lease has no renewal option, and the possession of
the machine reverts to Chlorine when the lease
terminates. At the inception of the lease, what is the
carrying value of the machine on December 31, 2011?
a. P1,328,400 c. P1,338,480
b. P1,353,000 d. P1,460,160
Answer: A
Annual rental P 240,000
x PV of P1 in arrears for 10 periods 6.15
Cost of machine P1,476,000
Less: Depreciation for 2011(P1,476,000/10) 147,600
Carrying value P1,328,400
12. On January 2, 2011, James Company enters into a
5-year non-cancelable lease, with four renewal option
of one year each, for equipment having an estimated
useful life of 10year and a fair value to the lessor,
Worthy Corp., at the inception of the lease of
P3,000,000. James’ incremental borrowing rate is 8%
and uses the straight-line method of depreciation. The
lease contain the following provisions: (1) rental
payments of P200,000, payable at the beginning of
each six-month period. (2) a termination penalty
assuring renewal of the lease for a period of four years
after expiration of the initial lease term. (3) an option
allowing the lessor to extend the lease one year beyond
the last renewal exercised by the lessee and (4) a
guarantee by James that Worthy will realize P100,000
from selling the asset at the expiration of the lease. On
January 1, 2010 new information reveals that the
expected salvage value is P60,000. Present value factor
of annuity due of 20 semi-annual payments at 8% is
14.134 and present value factor for amount due in 20
interest periods at 8% annual rate is .456. What is the
amount of periodic depreciation James should recognize
from 2011 to 2014?
a. P281,240 c. P282,680
b. P276,680 d. P287,240
Answer: D
PV of periodic rental(P200,000 x 14.134) P2,826,800
PV of guaranteed residual value 45,600
Total cost of leased asset P2,872,400
÷ Lease term 10 years
Annual depreciation P 287.240
Lease contract terms 5 years
Renewal option 4 years
Extension 1 year
Length of lease 10 years
13. On January 1, 2011, Calcium, Inc. signed a long-
term for an o,ce building. The term of the lease
required Calcium to pay P100,000 annually beginning
December 31, 2011 and continuing each for 30 years.
The lease qualiFes as Fnance lease. On January 1,
2011, the present value of the lease payments is
P1,125,000 at 8% interest rate implicit in the lease. In
Calcium’s December 31, 2011 statement of Fnancial
position, how much should be the Fnance lease
liability?
a. P1,025,000 c. P1,115,000
b. P1,125,000 d. P2,900,000
Answer: C
Total lease liability – 1.1.11 P1,125,000
Less: Principal payment – 2011
Annual rental P100,000
Less: Interest (P1,125,000 x 8%) P 90,000 P 10,000
Lease liability – 12.31.11 P1,115,000
UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA PHILIPPINES
Synthesis in Financial Accounting & Reporting
Edmund E. Hilario, CPA, MBA
Chapter 6.1 Financial Liabilities
2nd Semester 2017 -2018
==============================================================
================
14. On December 30, 2011 Slim Company lease
equipment under a Fnance lease. Annual lease
payments of P200,000 are due December 31 for 10
years. The equipment’s economic life is 10 years and
the interest rate implicit in the lease is 10%. The
Fnance lease obligation was recorded on December 30,
2011 at P1,350,000, and the Frst lease payment was
made on that date. What amount should Slim include
in current liabilities for this Fnance lease in its
December 31, 2011 statement of Fnancial position?
a. P65,000 c. P 85,000
b. P15,000 d. P200,000
Answer: C
Annual rental P200,000
Less: Interest expense -2012
Total liabilities P1,350,000
Less: Downpayment P 200,000
Total liabilities – 12.31.11 P1,150,000
x eBective interest rate 10% P115,000
Current portion of lease liabilities P85,000
15. On August 1, 2011 Argon Company a machine to
Barium Company for a 6-year period requiring payment
of P100,000 at the beginning of each year. The Machine
cost P480,000, with an economic life of eight years and
no residual value. Argon’s interest rate is 10% and
present value factors are as follows:
Present value of an annuity P1 at 10%
For 6 periods 4.791
Present value of an annuity due of P1
at 10% For 8 periods 5.868
Argon appropriately recorded the lease as a direct
Fnancing lease. At the inception of the lease, how much
should be the gross lease receivables account balance?
a. P479,100 c. P480,000
b. P586,800 d. P600,000
Answer: D
Periodic rental P100,000
x lease terms 6 years
Gross rentals P600,000
16. Neon Inc, leases computer equipment to customer
under direct Fnancing leases. The equipment has no
residual value at the end of the lease and the leases do
not contain bargain purchase options. Neon wishes to
earn 8% interest on a 5-year lease of equipment with a
fair value of P323,400. The present value of an annuity
due of 1 at 8% 5year is 4.312. What is the total
amount of the interest revenue that Neon will earn over
the term of the lease?
a. P51,600 c. P75,000
b. P129,360 d. P139,450
Answer: A
Gross rental (P75,000 x 5) P375,000
Less: PV of rentals (P75,000 x 4.312) P323,400
Total revenue to be earned P 51,600
PV of rental P323,400
÷ PV of annuity of 8% for 5 periods 4.312
Periodic rental P 75,000
17. Zinc Co. Lease equipment from Peseta Corp. on
July 1, 2011 for an 8-years period expiring June 30,
2019. Equal payments under the lease are P600,000
and are due on July 1 of each year. The Frst payment
was made on July 1, 2011. The rate of interest
contemplated by Zinc and Peseta is 10%. The cash
selling price of the equipment is P3,520,000, and the
cost of the equipment on Peseta’s accounting records is
P2,800,000. The lease is appropriately recorded as a
sales-type lease. What is the amount of proFt on the
sale and interest revenue that Peseta should record for
the year ended December 31, 2011?
ProFt on Sale Interest Revenue
a. P45,000 P146,000
b. P45,000 P176,000
c. P720,000 P146,000
d. P720,000 P176,000
Answer: C
Selling price P3,520,000
Less: cost of sales P2,800,000
profit on sales P 720,000
PV of receivable – 7.1.11 P3,520,000
Less: collection made 600,000
Balance 7.1.11 P2,920,000
x implicit rate 10%
Interest revenue – 12 mos. P 292,000
x ration of mos. 6/12
Interest revenue P 146,000
18. On January 1, 2011 Peter Pan Company sold
equipment with the carrying amount of P1,000,000 and
a remaining economic life of 10 years to De Koko
Drilling for P1,5000,000. Peter Pan immediately leased
the equipment back under a 10-year Fnance lease
payment of P244,120 in December 2011. In the
December 31, 2011 statement of Fnancial position,
how much should be the adjusted unearned gain on
equipment sale?
a. None c. P255,880
b. P450,000 d. P500,000
Answer: B
Selling price P1,500,000
Less: Carrying value P1,000,000
Deferred gain P 500,000
Less: realized gain (P500,000 ÷ 10) P 50,000
Deferred gain 12.31.11 P 450,000
19. On December 31, 2010, Silhouette Corp. Sold
equipment to Dark Co. and simultaneously leased it
back for 12 years. Pertinent information on this date is
as follows:
Sales Price P480,000
Carrying amount P360,000
Estimated remaining economic life 12 years
Question 1: At December 31, 2011, how much should
Silhouette report as deferred revenue from the sale
equipment?
a. None c. P110,000
b. P112,000 d. P120,000
Answer: C
Selling price P480,000
Less: Carrying value P360,000
Deferred gain
P120,000
Less: realized gain (P120,000 ÷ 12) P 10,000
Deferred gain 12.31.10 P110,000
Question 2: If the economics substance of the
transaction would be shown how much should
Silhouette report as carrying value of the equipment on
its December 31, 2011 statement of Fnancial position?
a. None c. P330,000
b. P360,000 d. P440,000
Answer: C
Original carrying amount P360,000
Less: Depreciation (P360,000/12yrs) P 30,000
Carrying value of equipment P330,000
UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA PHILIPPINES
Synthesis in Financial Accounting & Reporting
Edmund E. Hilario, CPA, MBA
Chapter 6.1 Financial Liabilities
2nd Semester 2017 -2018
==============================================================
================
20. On December 31, 2011, Bean Company sold a
machine to David and simultaneously leased it back for
10 year. Pertinent information at this date follows:
Sales Price P360,000
Carrying amount 390,000
Estimated remaining economic life 10 years
Question 1: In Bean Company’s December 31, 2011
proFt or loss, how much should be the loss from the
sale of this machine?
a. None c. P 4,100
b. P30,000 d. P34,100
Answer: B
Selling price P360,000
Less: Carrying value P390,000
Loss recognized outright P (30,000)
Question 2: If the economic substance is shown
rather than form, what is the carrying value of
the machine in Bean Company’s statement of
financial position as of December 31, 2012?
a. None c. P330,000
b. P357,500 d. P360,000
Answer: B
Impaired value P360,000
Less: Depreciation – 2012 (P360,000/10) P 36,000
Carrying value – 12.31.12 P324,000
21. On June 30, 2011, Potassium Company sold
equipment with an estimated economic life of ten
years and immediately leased it back for 8 years.
23. On December 31, 2011, Pal sold to Air Philippines
an airplane with an estimated remaining life of 10
years. At the same time, Pal lease back the airplane for
three years. Additional information is as follows:
Selling price P 30,000,000
Carrying value at date of sale 10,000,000
Monthly rental under lease 800,000
Implicit rate in the lease computed by
Air Phils known to PAL 12%
Present value of operating lease
(P800,000 for 36 months at 12%) P 24,085,600
The leaseback is considered as an operating lease. In
PAL’s December 31, 2011 proFt or loss, what
amount should be included as realized gain on this
transaction?
a. None c. P5,914,400
b. P14,085,600 d. P20,000,000
Answer: B
Sales price P30,000,000
Less: FV P24,085,600
Deferred gain P 5,914,400
FV P24,085,600
Less: Carrying value P10,000,000
Realized gain P14,085,600
24. The following information pertains to sale and
operating leaseback of equipment by Mega Co. on
December 31, 2011:
Sales price P 480,000
Carrying amount 400,000
