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AGUILAN 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 Php90,000. Additionally, on January 1, year 1, Lake paid Php50,000 to Rapp as a lease bonus and Php25,000 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. Php140,000 b. Php125,000 c. Php100,000 d. Php90,000 Solution: Annual Rental

90,000

Lease Bonus (50,000/5)

10,000

Rental Revenue, year1

100,000

2. Wall Co. leased office premises to Fox, Inc. for a fiveyear term beginning January 2, year 1. Under the terms of the operating lease, rent for the first year is Php8,000 and rent for years two through five is Php12,500 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. Php12,000 b. Php11,600 c. Php10,800 d. Php8,000 Solution: Rental for year1(8,000/2)

4,000

Rental for year2-5(12,500x4) 50,000 54,000 No. of years Rental Income, year1

/5years 10,800

3. On January 1, year 1, Wren Co. leased a building to Brill under an operating lease for ten years at Php50,000 per year, payable the first day of each lease year. Wren paid Php15,000 to a real estate broker as a finder’s fee. The building is depreciated Php12,000 per year. For year 1, Wren incurred insurance and property tax expense totaling Php9,000. Wren’s net rental income for year 1 should be a. Php27,500 b. Php29,000 c. Php35,000 d. Php36,500 Solution: Rental revenue Depreciation expense

50,000 (12,000)

Executory costs

(9,000)

Finder’s fee (15,000 ÷ 10)

(1,500)

Net rental income

27,500

4. On July 1, year 1, Gee, Inc. leased a delivery truck from Marr Corp. under a three-year operating lease. Total rent for the term of the lease will be Php36,000, payable as follows: 12 months at Php500 = Php6,000 12 months at Php750 = 9,000 12 months at Php1,750 = 21,000 All payments were made when due. In Marr’s June 30, year 3 balance sheet, the accrued rent receivable should be reported as a. Php0 b. Php9,000 c. Php12,000 d. Php21,000 Solution: Accruals (36,000x1/36x24) 24,000 Collections (6,000+9,000) (15,000) Accrued Rent Receivable

9,000

5. As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine months of free rent under a five-year operating lease. The lease is effective on July 1, year 1 and provides for monthly rental of Php1,000 to begin April 1, year 2. In Hompson’s income statement for the year ended June 30, year 2, rent expense should be reported as a. Php10,200 b. Php9,000 c. Php3,000 d. Php2,550 Solution: Rent Receivable (1,000x51) 51,000 No. of Years

/5years

Rent Expense

10,200

ALEGARBES 1. On January 1, year 1, Park Co. signed a ten-year operating lease for office space at Php96,000 per year. The lease included a provision for additional rent of 5% of annual company 514 Module 13: Present Value sales in excess of Php500,000. Park’s sales for the year ended December 31, year 1, were Php600,000. Upon execution of the lease, Park paid Php24,000 as a bonus for the lease. Park’s rent expense for the year ended December 31, year 1, is a. Php98,400 b. Php101,000 c. Php103,400 d. Php125,000 Solution: Base rental Lease bonus (24,000 ÷ 10)

96,000 2,400

Cont. rental [5% × (600,000 – 500,000)] 5,000 103,400

2. On December 1, year 1, Clark Co. leased office space for five years at a monthly rental of Php60,000. On the same date, Clark paid the lessor the following amounts: First month’s rent Php60,000 Last month’s rent 60,000 Security deposit (refundable at lease expiration) 80,000 Installation of new walls and offices 360,000 What should be Clark’s year 1 expense relating to utilization of the office space? a. Php60,000 b. Php66,000 c. Php120,000 d. Php140,000 Solution: Rent Expense

60,000

Amortization Expense(360,000x1/6) 6,000 Total Expenses

66,000

3. Star Co. leases a building for its product showroom. The ten-year nonrenewable lease will expire on December 31, year 11. In January year 6, Star redecorated its showroom and made leasehold improvements of Php48,000. The estimated useful life of the improvements is eight years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, year 6 balance sheet? a. Php45,600 b. Php45,000 c. Php44,000 d. Php43,200 Solution: Cost

48,000

Amortization (48,000x1/6x1/2) (4,000) 44,000 4. On January 2, year 1, Ral Co. leased land and building from an unrelated lessor for a ten-year term. The lease has a renewal option for an additional ten years, but Ral has not reached a

decision with regard to the renewal option. In early January of year 1, Ral completed the following improvements to the property: Description Estimated life Cost Sales office 10 years Php47,000 Warehouse 25 years 75,000 Parking lot 15 years 18,000 Amortization of leasehold improvements for year 1 should be a. Php7,000 b. Php8,900 c. Php12,200 d. Php14,000 Solution: Cost (47,000 + 75,000 + 18,000) 140,000 No. of years

/10 years 14,000

5. On January 1, year 1, Nobb Corp. signed a twelve-year lease for warehouse space. Nobb has an option to renew the lease for an additional eight-year period on or before January 1, year 5. During January year 3, Nobb made substantial improvements to the warehouse. The cost of these improvements was Php540,000, with an estimated useful life of fifteen years. At December 31, year 3, Nobb intended to exercise the renewal option. Nobb has taken a full year’s amortization on this leasehold. In Nobb’s December 31, year 3 balance sheet, the carrying amount of this leasehold improvement should be a. Php486,000 b. Php504,000 c. Php510,000 d. Php513,000 Solution: Cost

540,000

Amortization(540,000/15) (36,000) 504,000

AMBALADA 1.On December 1, 2011, Burol Corporation leased office space for 10 years at a monthly rental of Php90,000. On that date Perez paid the landlord the following amounts: Rent deposit

Php 90,000

First month's rent

90,000

Last month's rent

90,000

Installation of new walls and offices

495,000 Php765,000

The entire amount of Php765,000 was charged to rent expense in 2011. What amount should Burol have charged to expense for the year ended December 31, 2011? a. Php90,000 b. Php94,125 c. Php184,125 d. Php495,000 Solution: First month’s rent

Php90,000

Installation of new walls and offices (495,00 ÷ 12 /10) Rent Expense

2.

4,125 Php 94,125

On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of Php100,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of Php671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2011 a. lease expense of Php100,000. b. interest expense of Php44,734 and depreciation expense of Php38,068. c. interest expense of Php53,681 and depreciation expense of Php44,734.

d. interest expense of Php45,681 and depreciation expense of Php67,101. Solution: PV of Machinery

Php 673,008

Interest Rate

8%

Interest Expense

Php 53,681

On January 1, 2011, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2011 is Php3,000,000; however, the book value to Holt is Php2,500,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. (f) The yearly rental payment includes Php10,000 of executory costs related to taxes on the property. 3.

What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) a. Php188,237 b. Php478,236 c. Php488,236 d. Php498,236

Solution: Fair Value of Asset

Php 3,000,000

÷PV of Ordinary Annuity

÷ 6.014457

Rent Expense

Php

488,236

4.

What is the amount of the total annual lease payment? a. Php188,237 b. Php478,237 c. Php488,237 d. Php498,237

Rent Expense

Php 488,236

Executory Costs

10,000

Lease Payment

Php 498,236

5.

Yancey, Inc. would record depreciation expense on this storage building in 2011 of (Rounded to the nearest dollar.) a. Php0. b. Php250,000. c. Php300,000. d. Php488,237.

Fair Value of Equipment

Php 3,000, 000

Lease term

÷

Depreciation

Php

10 300,000

AQUINO 1.

Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of Php102,000 at the beginning of each year, including Php15,000 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. Metcalf should record the leased asset at a. Php509,256. b. Php488,661.

c. Php434,366. d. Php416,799. First month’s rent

Php102,000

Executory costs

( 15,000)

Rent Expense

Php 87,000

PV of annuity due in 6 years at 8%

÷ 4.99271

2.

On December 31, 2011, Lang Corporation leased a ship from Fort Company for an eightyear period expiring December 30, 2019. Equal annual payments of Php200,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10% is Php1,173,685. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2012 balance sheet is a. Php1,091,054. b. Php1,000,159. c. Php871,054. d. Php1,200,000.

Lease Liability—beg. (1,173,685 – 200,00) First Payments

Php 973 685 Php200,000

Interest Expense (973,685 x 10%) Lease Liability—end

97, 369

(102,632) Php 871,054

Use the following information for questions 18 and 19. On January 1, 2011, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of Php50,000 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 salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for

this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of Php208,493 at an effective interest rate of 10%. 3.

In 2011, Sauder should record interest expense of a. Php15,849. b. Php29,151. c. Php20,849. d. Php34,151.

Solution: Lease Liability—beg. 2011

Php208,493

First Payment

( 50,000)

Lease Liability—end. 2011

Php158,493

Interest rate Interest Expense 4.

10% Php 15, 849

In 2012, Sauder should record interest expense of a. Php10,849. b. Php12,434. c. Php15,849. d. Php17,434.

Solution: Lease Liability—beg. 2012

Php 158,493

First Payment

Php 50,000

Interest Expense

(15,849)

Lease Liability—end. 2012 Interest rate Interest Expense 5.

34,151 Php 124,342 10% Php 12,434

On December 31, 2011, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2019. Equal annual payments of Php150,000 are due on December 31 of each year, beginning with December 31, 2011. The lease is

properly classified as a capital lease on Kuhn’s books. The present value at December 31, 2011 of the eight lease payments over the lease term discounted at 10% is Php880,264. 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, 2011 balance sheet is a. Php880,264. b. Php818,290. c. Php792,238. d. Php730,264. Lease Liability—beg.

Php880,264

First Payment

(150,000)

Lease Liability—end.

Php 730,264

ARCAY Use the following information for questions 21 and 22. On January 1, 2011, Ogleby Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Ogleby to make annual payments of Php60,000 at the end of each year for five years with title to pass to Ogleby at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of Php227,448 at an effective interest rate of 10%. 1.

With respect to this capitalized lease, for 2011 Ogleby should record a. rent expense of Php60,000. b. interest expense of Php22,745 and depreciation expense of Php45,489. c. interest expense of Php22,745 and depreciation expense of Php32,493. d. interest expense of Php30,000 and depreciation expense of Php45,489.

Lease Liability Interest rate

Php 227,448 10%

2.

Interest Expense

Php 22,745

Lease Liability

Php 227,448

Useful life

÷

Depreciation Expense

Php 32,493

7

With respect to this capitalized lease, for 2012 Ogleby should record a. interest expense of Php22,745 and depreciation expense of Php32,493. b. interest expense of Php20,469 and depreciation expense of Php32,493. c. interest expense of Php19,019 and depreciation expense of Php32,493. d. interest expense of Php14,469 and depreciation expense of Php32,493.

Solution: Lease Liability—beg

Php227,448

First Payment Interest Expense

Php60,000 (Php22,745)

Lease Liability—end Interest rate Interest Expense—end

3.

(37,255) Php190,193 10% Php 19,019

Emporia Corporation is a lessee with a capital lease. The asset is recorded at Php450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of Php150,000 at the end of 5 years, and a market value of Php50,000 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. Php90,000 b. Php80,000 c. Php60,000 d. Php50,000

Cost

Php450,000

Residual Value Depreciable Amount

(50,000) Php400,000

Annual Depreciation (400,000÷ 8)

4.

Php50,000

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of Php86,038, 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 salvage 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. Php307,767 b. Php272,728 c. Php284,969 d. Php300,000 Lease Liability (86,038 x 3.57710)

5.

Php 307,767

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of Php86,038, 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 salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest 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. Php0 b. Php24,621 c. Php17,738 d. Php22,798 Lease Liability (86,038 x 3.57710) First Payments Lease Liability—end Interest rate Interest Expense

Php307,767 (86,038) Php221,638 x 8% Php17,738.

ASAYTUNO 1.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of Php86,038, 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 salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2? PV Annuity Due

PV Ordinary Annuity

8%, 4 periods

3.57710

3.31213

10%, 4 periods

3.48685

3.16986

a. Php86,038 b. Php61,417 c. Php63,240 d. Php68,300

Lease Liability—beg (86,038 x 3.57710)

Php307,767

First Payment

Php86,038

Interest Expense

( 17,738)

Lease Liability –end.

Php 68, 300

2.

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of Php86,038, 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 salvage 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. Php0 because the asset is depreciated by Tower Company. b. Php71,242 c. Php76,942 d. Php75,000 Lease Liability—beg (86,038 x 3.57710)

Php307,767

Annual Depreciation (307,767÷ 4)

3.

Php76,942

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of Php200,000 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 Php325,000, 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, 2011? 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. Php29,250 b. Php23,400 c. Php26,000 d. Php32,500 Lease Liability (325,000 x 10% x 3.99271) PV of Ordinary Annuity at 8% at 5 periods Lease Liability—end Interest rate

Php 73,259 x 3.99271 Php 292,502 x 8%

Interest Expense

4.

Php23,400.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of Php200,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of Php73,259 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 Php325,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2011, and what is the balance in the Lease Liability account? Book Value of Leased Asset

Balance in Lease Liability

a.

Php325,000

Php219,243

b.

Php260,000

Php248,491

c.

Php195,000

Php242,643

d.

Php208,000

Php248,491

Lease Liability—beg. (73,259 x 3.99271)

Php 292,502

First Payment

Php 73,259

Interest Expense (292,502 x 8%)

( 23,400)

(49,859)

Lease Liability—end. 2012

5.

Php 242, 643

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of Php200,000 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. If the selling price of the equipment is Php325,000, and the rate implicit in the lease is 8%, what are the equal annual payments? PV Annuity Due 8%, 5 periods 10%, 5 periods

4.31213 4.16986

PV Ordinary Annuity

PV Single Sum

3.99271

.68508

3.79079

.62092

a. Php73,259 b. Php67,831 c. Php75,822 d. Php81,398 Selling Price

(325,000 x 90%)

PV of Ordinary Annuity at 8% for 5 periods Lease Liability

Php 292,500 ÷ 3.99271 Php 73,259

ATOS

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2011 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of Php155,213 are due on December 31 of each year.

(b) The fair value of the machine on January 1, 2011, is Php400,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.

1.

If the present value of the future lease payments is Php400,000 at January 1, 2011, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.) a. Php115,213 b. Php123,213 c. Php126,734 d. Php133,070

Lease Liability—beg.

Php 155,213

Interest Expense (284,787 x 10%)

( 28,479)

Lease Liability—end. 2012

Php 126,734

PV of Future lease Payments

Php400,000

Lease Liability—beg. Interest (400,000 x 10%) Total

Php 155, 213 ( 40,000)

(115, 213) Php 284,787

2. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? a. Php155,213 b. Php385,991 c. Php400,000 d. Php465,638

Fair Value 3.

Php 400 000

Hook Company leased equipment to Emley Company on July 1, 2010, for a one-year period expiring June 30, 2011, for Php60,000 a month. On July 1, 2011, Hook leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2014, for Php75,000 a month. The original cost of the equipment was Php4,800,000. The equipment, which has been continually on lease since July 1, 2006, is being depreciated on a straight-line basis over an eight-year period with no salvage value. Assuming that both the lease to Emley and the lease to Terry 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, 2011? Hook

Emley

Terry

a. Php210,000

Php(360,000)

Php(450,000)

b. Php210,000

Php(360,000)

Php(750,000)

c. Php810,000

Php(60,000)

Php(150,000)

d. Php810,000

Php(660,000)

Php(450,000)

Hook: Rent from July to December(Php60,000 × 6) Amortization of lease (Php75,000 x 6) Depreciation Operating Profit

(4,800,000 ÷ 8)

Php360,000 450,000 Php810,000 (600,000) Php210,000

Emley: Operating Loss (Php60,000) x 6

Php(360,000)

Terry: Operating Loss: (Php75,000) × 6

Php(450,000).

Hull Co. leased equipment to Riggs Company on May 1, 2011. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2012. Riggs could have bought the equipment from Hull for Php3,200,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2008, of Php2,800,000. Hull's depreciation on the equipment in 2011 was Php360,000. During 2011, Riggs paid Php720,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of Php64,000 in 2011. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. 4.

Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year ended December 31, 2011, should be a. Php296,000. b. Php360,000. c. Php656,000. d. Php720,000. Rent Expense

5.

Php 720, 000

The income before income taxes derived by Hull from this lease for the year ended December 31, 2011, should be a. Php296,000. b. Php360,000. c. Php656,000. d. Php720,000. Rent incurred

Php 720,000

Less: Maintenance Costs

Php 64,000

Depreciation

360,000

Net Rent Revenue

424,000 Php 296,000

BACOLOR 1.

On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of Php40,000 each, payable beginning December 31, 2011. Brick Co. agrees to guarantee the Php25,000 residual value of the asset at the end of the lease term. Brick’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, 2011 assuming this is a direct–financing lease? 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. Lease Receivable

225,000

Equipment b. Lease Receivable Loss

225,000 159,708 65,292

Equipment c. Lease Receivable

225,000 167,155

Equipment d. Lease Receivable

167,155 176,835

Equipment Present value of rentals

176,835

(Php40,000 x 3.99271)

Present value of guaranteed residual value (Php25,000 x .68508) Net lease receivable

Php159,708 17,127 Php176,835

2. Mays Company has a machine with a cost of Php400,000 which also is its fair market value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of Php40,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be a. Php92,361. b. Php82,465. c. Php78,180. d. Php66,667.

Cost of Asset Unguaranteed Residual Value (Php40,000 × .50663)]

Php400,000 20, 265 Php 379,375

PV of ordinary annuity of 1 at 12% for 6 periods PV of lease payments

÷ 4.60478 Php82,465.

3.On January 2, 2011, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of Php40,000 each, payable beginning December 31, 2011. Brick Co. agrees to guarantee the Php25,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at December 31, 2011 to record the first lease payment? PV Annuity Due 8%, 5 periods 10%, 5 periods a. Lease Liability

4.31213 4.16986

Interest Expense

Interest Expense

Interest Expense

.68508

3.79079

.62092

25,853 14,147 40,000 23,285 16,715

Cash d. Lease Liability

3.99271

40,000

Cash c. Lease Liability

40,000 8,285 16,715

Cash

25,000

Present value of rentals (Php40,000 x 3.99271) Unguaranteed Residual Value (Php25,000 x .68508) Net lease Income

Php159,708 17,127 Php176,835.

Annual rent

Php40,000

Interest (Php176,835 x 8%) Lease Liability

4.

PV Single Sum

40,000

Cash b. Lease Liability

PV Ordinary Annuity

14,147 Php25,853.

On January 2, 2010, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of Php40,000 each, payable beginning December 31, 2010. Brick Co. agrees to guarantee the Php25,000 residual value of the asset at the end of the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s

implicit interest rate is 8%. What journal entry would Brick Co. make at December 31, 2011 to record the second lease payment? 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. Lease Liability

40,000

Cash b. Lease Liability

40,000 25,613

Interest Expense 14,387 Cash c. Lease Liability

40,000 27,921

Interest Expense 12,079 Cash d. Lease Liability

40,000 23,760

Interest Expense 16,240 Cash

40,000

Solution: ($40,000 x 3.99271) + ($25,000 x .68508) = $176,835 $40,000 – ($176,835 x .08) = $25,853 ($176,835–$25,853)x.08=$12,079Interestexp.

5.

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

Php400,000 384,000 Php 16,000

Interest payable

Php 1,520

Obligations under capital leases

14,480 Php16,000

If, at the end of the lease, the fair market value of the residual value is Php8,800, what gain or loss should Geary record? a. Php6,480 gain b. Php7,120 loss c. Php7,200 loss d. Php8,800 gain Fair value of residual value Carrying amount of asset

Php 8,800 (16,000)

Loss

(Php7,200).

BALBUENA

1.

Harter Company leased machinery to Stine Company on July 1, 2011, for a ten-year period expiring June 30, 2021. Equal annual payments under the lease are Php75,000 and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest used by Harter and Stine is 9%. The cash selling price of the machinery is Php525,000 and the cost of the machinery on Harter's accounting records was Php465,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Harter, what amount of interest revenue would Harter record for the year ended December 31, 2011? a. Php47,250 b. Php40,500 c. Php20,250 d. Php0 Cash selling price

Php525,000

First payment

( 75,000)

Lease Receivable

Php450,000

Interest Income (450, 000 x 9% x 6/12)

2.

Php 20, 250

Pye Company leased equipment to the Polan Company on July 1, 2011, for a ten-year period expiring June 30, 2021. Equal annual payments under the lease are Php80,000 and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is Php560,000 and the cost of the equipment on Pye's accounting records was Php496,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Eby, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2011? a. Php64,000 and Php50,400 b. Php64,000 and Php43,200 c. Php64,000 and Php21,600 d. Php0 and Php0

Cash Selling Price

Php560,000

Cost of Equipment

(496,000)

Profit on Sale

Php 64,000

Interest Income (Php560,000 – Php80,000) × .09 × 6/12

Php21,600.

Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2021. The first of 10 equal annual payments of Php621,000 was made on July 1, 2011. Metro had purchased the equipment for Php3,900,000 on January 1, 2011, and established a list selling price of Php5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was Php4,500,000. 3 .Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of deprecia-tion and interest expense that Sands should record for the year ended December 31, 2011?

a. Php225,000 and Php155,160 b. Php225,000 and Php180,000 c. Php270,000 and Php155,160 d. Php270,000 and Php180,000 Depreciation Expense

Php 225,000

Interest Expense (Php4,500,000 – Php621,000) × .04

Php155,160.

4. What is the amount of profit on the sale and the amount of interest income that Metro should record for the year ended December 31, 2011? a. Php0 and Php155,160 b. Php600,000 and Php155,160 c. Php600,000 and Php180,000 d. Php900,000 and Php360,000 Cash Selling Price

Php4, 500,000

Cost of Equipment

(3. 900,000)

Profit on Sale

Php

600,000

Interest Income (Php4,500,000 – Php621,000) × .04

5.

Php

62,475.

Roman Company leased equipment from Koenig Company on July 1, 2011, for an eightyear period expiring June 30, 2019. Equal annual payments under the lease are Php300,000 and are due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest contemplated by Roman and Lennon is 8%. The cash selling price of the equipment is Php1,861,875 and the cost of the equipment on Koenig's accounting records was Php1,650,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Koenig, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2011? a. Php0 and Php0 b. Php0 and Php62,475

c. Php211,875 and Php62,475 d. Php211,875 and Php74,475 Solution: Php1,861,875 – Php1,650,000 = Php211,875. (Php1,861,875 – Php300,000) × .04 = Php62,475.

BAMUYA Use the following information for questions 1 through 4. Gage Co. purchases land and constructs a service station and car wash for a total of Php360,000. At January 2, 2010, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for Php400,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was Php40,000. The lease is a 10-year, noncancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments

Interest

Amortization

Jan. 2, 2010

Balance Php400,000.00

Dec. 31, 2010 Php65,098.13

Php40,000.00

Php25,098.13

374,901.87

Dec. 31, 2011

65,098.13

37,490.19

27,607.94

347,293.93

Dec. 31, 2012

65,098.13

34,729.39

30,368.74

316,925.19

1.What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6% Solution: Php40,000 ———— = 10% or Php400,000

Php400,000 ————— = 6.1446* Php65,098.13

*6.1446 = PV factor of ordinary annuity of Php1 for 10 years at 10%.

2.

The total lease-related expenses recognized by the lessee during 2011 is which of the following? (Rounded to the nearest dollar.) a. Php64,000 b. Php65,098 c. Php73,490 d. Php61,490 Solution:

[(Php400,000 – Php40,000) ÷ 15] + Php37,490 = Php61,490.

3.

What is the amount of the lessee's liability to the lessor after the December 31, 2012 payment? (Rounded to the nearest peso.) a. Php400,000 b. Php374,902 c. Php347,294 d. Php316,925 Solution: Php316,925 (See amortization table.)

4.

The total lease-related income recognized by the lessee during 2011 is which of the following? a. Php -0b. Php2,667 c. Php4,000 d. Php40,000 Solution:

(Php400,000 – Php360,000) ÷ 15 = Php2,667.

5.

On June 30, 2011, Falk Co. sold equipment to an unaffiliated company for Php700,000. The equipment had a book value of Php630,000 and a remaining useful life of 10 years. That same day, Falk leased back the equipment at Php7,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Falk's rent expense for this equipment for the year ended December 31, 2011, should be a. Php84,000. b. Php42,000. c. Php35,000. d. Php28,000. Solution: Php7,000 × 6 = Php42,000.

BARLISO 1.

On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are Php630,000 (including Php30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was Php2,502,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease liability of a. Php1,902,000. b. Php1,872,000. c. Php1,711,800. d. Php1,492,200. Solution: Php2,502,000 – Php630,000 + Php30,000 = Php1,902,000 (2010). Php1,902,000 – [Php600,000 – (Php1,902,000 × .10)] = Php1,492,200 (2011).

Use the following information for questions 2 and 3. On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of Php150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of Php900,000, based on implicit interest of 10%. 2.

In its 2011 income statement, what amount of interest expense should Hernandez report from this lease transaction? a. Php0 b. Php56,250 c. Php75,000 d. Php90,000 Solution: Php900,000 × .10 = Php90,000.

3.

In its 2011 income statement, what amount of depreciation expense should Hernandez report from this lease transaction? a. Php150,000 b. Php100,000 c. Php90,000 d. Php60,000 Solution: Php900,000 ÷ 15 = Php60,000

4.Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey leased equipment to Dalton for a five-year period ending December 31, 2016, at which date

ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are Php220,000 (including Php20,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is Php770,000, and cost is Php600,000. For the year ended December 31, 2011, what amount of income should Torrey realize from the lease transaction? a. Php170,000 b. Php220,000 c. Php230,000 d. Php330,000 Solution: Php770,000 – Php600,000 = Php170,000.

5.

On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price Carrying amount

Php900,000 825,000

Present value of reasonable lease rentals (Php7,500 for 12 months @ 12%) Estimated remaining useful life

85,000 12 years

In Haden’s December 31, 2011 balance sheet, the deferred profit from the sale of this machine should be a. Php85,000. b. Php75,000. c. Php10,000. d. Php0. Solution: = 9.44%, < 10% of FV of asset  it is a minor leaseback.

BENEDICTO A . On June 30,2017, Carl company sold equipment with an estimated useful life of 10 years and immediately leased it back for 5 years.The equipment's carrying amount is P 820,000, fair value is 750,000 and its selling price is 790,000. The lease agreement is an operating lease. 1.What amount of deferred loss should the company recognize on June 30,2017 assuming future rental is above or equal to market rate rent? a.none b. 30,000 c. 40,000 d. 70,000 2.What amount of deferred loss should the company recognize on June 30, 2017 assuming future rental is below market rate rent?

a. None b. 30,000 c. 40,000 d. 70,000 Answer: 1. A 2. C Question 1. Fair value.

Question 2

P 790,000.

P 790,000

Selling price.

750,000.

750,000

Outright loss.

40,000.

None

Deferred loss.

None.

40,000

B. On June 30,2017, Clyde company sold equipment with an estimated useful life of 10 years and immediately leased it back for 5 years. The equipment's carrying amount was P 540,000 . selling price is P 516,000 and fair value is P 558,000. The lease agreement is an operating lease. 3.What amount of deferred loss the company should recognize on June 30, 2017 assumming future rental is equal or above market rate rent? a. None b. 18,000 c. 24,000 d. 42,000 4.What amount of deferred loss the company should recognize on June 30,2017 assuming the future rental is below market rate rent? a. None b. 18,000 c. 24,000 d. 42,000

Answer: 3. A. 4.C. 2. There is no deferred loss if the market rat is above, it should recognize immediately 4. Selling price.

P 516,000

Carrying amount.

540,000

Loss.

24,000

5. The following information pertains to an operational sale and leaseback of equipment of Popcorn Company on December 31, 2017 : Selling price.

P 480,000

Carrying amount.

520,000

Monthly lease payment.

37,316

PV of lease payment/ Fair market value.

420,000

Estimated remaining life.

12 years

Lease term. Implicit rate.

12%

.What amount of deferred gain should Popcorn company recognize on the sale on December 31? a. None b.P 40,000 c. P 60,000 d.P 100,000 Answer: C. Selling price.

P 480,000

Fair market value.

420,000

Deferred Gain.

60,000

BERNABE

1.The following information pertains to an operating sale and leaseback of equipment by Cloudy Company on December 31,2017: Sale price.

P 320,000

Carrying amount.

420,000

Monthly lease payment.

37,316

Present value of lease payment/ Fair market value.

420,000

Estimated remaining life.

12 years

Lease term.

1 year

Implicit rate.

12%

What amount of deferred loss should recognize assuming amount of loss is not compensated by future lease payments? a. None b. 37,334 c. 100,000 d. 120,000 Answer: C. Sale price.

P 320,000

Carrying value.

420,000

Loss on sale.

(P 100,000)

2. The following information pertains to.an operating sale and leaseback of equipment by Marshmallow Co. On December 31, 2017: Sale price. Carrying amount.

P600,000 520,000

Monthly lease payment.

19,571

PV of lease payment.

420,000

Estimated remaining life. Lease term.

12 years 1 year

Implicit rate.

12%

What amount of deferred gain should marshmallow report at December 31,2017? a. None b. 80,000 c. 100,000 d. 180,000 Answer: D. Sale price.

P 600,000

Fair market value.

420,000

Deferred Gain.

P 180,000

3..The following information pertains to an operating sale and leaseback of equipment by Marble Company on December 31,2017: Sale price.

P480,000

Carrying amount.

400,000

Monthly lease payment.

37,316

Present value of lease payment/ Fair market value.

420,000

Estimated remaining life.

12 years

Lease term.

1 year

Implicit rate.

12%

What amount of deferred gain should marble report at December 31,2017? a. None b. 20,000 c.60,000 d. 80,000 Answer: C. Sale price.

P480,000

Fair market value.

420,000

Deferred Gain.

P60,000

4.On December 31,2017, Cebu Pacific sold an airplane to PAL with an estimated remaining life of 10 years and lease it back for 3 year. Additional information are as follows: Selling price

P 30,000,000

Carrying amount at date of sale.

10,000,000

Monthly rental under lease.

800,000

Implicit rate computed by PAL, known to Cebu Pacific.

12%

PV of monthly rental (P800,000 for 36 mos. at 12%).

24,085,600

The leaseback is considered as operating lease. In Cebu Pacific's profit or loss, what amount should be included as realized gain on this transaction? a. None b. P 5,914,500 c. P 14,085,600 d. P 20,000,000 Answer: C. Fair market value

P 24,085,600

Less: Carrying value.

10,000,000

Realized Gain.

P 14,085,600

5 .The following information pertains to an operating sale and leaseback of equipment by Barbie Company on December 31,2017: Sale price. Carrying amount.

P640,000 500,000

Monthly lease payment.

25,457

Fair market value.

540,800

Estimated remaining life.

25 years

Lease term.

12 years

Implicit rate.

12%

What amount of deferred gain should Barbie report at December 31,2017? a. None b. 40,800 c. 99,200 d. 140,000 Answer: C Sale price. Fair market value. Deferred Gain.

P640,000 540,800 P 99,200

BISMONTE 1. On June 30, 2017, Amethyst Company sold an equipment with an estimated remaining life of 10 years and immediately leased it back for 8 years. The equipment's carrying amount was P 450,000 and selling price is P 430,000. What amount should Amethyst report deferred loss on June 30, 2017 statement of financial position? a. None b. 20,000 c. 15,000 d. 35,000 Answer: A The loss incurred in sale and lease back should be recognized immediately. On December 31,2017 Coffee Company sold an equipment to Bean Corp. and simultaneously leased it back for 10 years. Pertinent information on this date is as follows:

Sale price.

P 360,000

Carrying amount.

390,000

Estimated remaining economic life

10 years

2.In Coffee's December 31, 2017 profit or loss what amount should be the loss from the sale of this machine? a. None b. 4,100 c. 30,000 d. 34,100 3. If the economic substance is shown rather than the form as accounting policy chosen by the company, at what amount should be the carrying amount of the machine in Coffee's statement of financial position at December 31, 2018? a. None b. 330,000 c. 357,500 d. 360,000 Answers: 2. C. 3 B. Selling price. Carrying amount. Loss recognized.

P 360,000 390,000 (P 30,000)

Impaired value. Depreciation- 2018( 360,000 ÷ 12). Carrying value- December 31, 2018.

P360,000 (30,000) P330,000

. On December 31,2017 Peter Company sold an equipment James Corp. and simultaneously leased it back for 12 years. Pertinent information on this date is as follows: Sale price. Carrying amount. Estimated remaining economic life

P 480,000 360,000 12 years

4.In Peter's December 31, 2017 what amount should be the deferred revenue from the sale of this machine? a. None b. 110,000 c. 112,000 d. 120,000 5. If the economic substance is shown rather than the form as accounting policy chosen by the company, at what amount should be the carrying amount of the machine in Peter's statement of financial position at December 31, 2018? a. None b. 330,000 c. 360,000 d. 440,000 Answers: 4. B. 5 B.

Selling price. Carrying amount.

P 480,000 360,000

Deferred gain- December 31,2017.

P 120,000

Less: Realized gain ( 120,000 ÷ 12 ).

10,000

Deferred gain- December 31, 2018.

P 110,000

Original carrying amount.

P 360,000

Depreciation for 2018 (360,000÷ 12).

( 30,000)

Carrying amount of the equipment.

P 330,000

BRIONES . Tiger Corp. Leased equipment to Dog Co. On Jan 1, 2017 for an 8 yr perios expiring Dec. 31, 2025. Equal payments under the lease are P 600,000 and are due on December 31 of each year. The first payment was made on December 31, 2017. The rate of interest contemplated by Tiger and Dog is 11%. The present value of equipment is P 3,087,674. Tiger Corp. Incurred a total transaction cost of P 44,544 to negotiate the contract of lease. If the transaction cost is included, the effective yield is 10.6%. 1. If the lease is accounted for as sale type lease, what is the intial carrying amount of lease rental receivable on January 1, 2017? a. 2,773,339 b. 2,827,318 c. 3,022,705 d. 3,087,674 2. If the lease is accounted for as sale type lease, what is the carrying amount of lease rental receivable on December 1, 2017? a. 2,773,339 b. 2,827,318 c. 3,022,705 d. 3,087,674 3. If the lease is accounted for as sale type lease, what is the amount of finance income should the lessor report in its 2017 profit or loss? a. None b. 303,609 c. 332,015

d. 339,644 4. If the lease is accounted as a direct financing lease, what amount of finance incone should the lessor report in its 2017 profit or loss? a. None b. 303,609 c. 332,015 d. 339,644 Answers: 1. D 2. B. 3. D 4. C. Table 1- amortization ( partial) Date

Annual rental

Interest Income 11%

Amortization

-------------

Carrying amount

1/1/17

--------

------------

3,087,674(1)

12/31/17

600,000

339,633(3)

260,356

2,827,318(2)

12/31/18

600,000

311,005

288,995

2,638,623

Table 2 - amortization (partial) Date

Annual rental

Interest Income 10.6%

Amortization

Carrying amount

1/1/17

---------

---------

--------

3,132,218

12/31/17

600,000

332,015(4)

267,985

2,884,233

12/31/18

600,000

303,609

296,391

2,567,842

5.On December 1, 2016, Willie Company leased office space for 10 years from Parisian Company at a monthly rental of P90,000. On that date, Willie paid the landlord the following amounts: Rent deposit First month’s rent Last month’s rent Installation of new walls and offices

P90,000 90,000 90,000 495,000

P765,000 The entire amount of P765,000 was charged to rent revenue in 2016. What amount should Parisian Company report as rent revenue for the year ended December 31, 2016? a.P90,000 b.P94,125 c.P184,125 d.P495,000 Answer: B Solution: Rent for December Depreciation of leasehold improvement (495,000 / 10 x 1/12) Rent Revenue

P90,000 4,125 P94,125

BULANADI M.. Ice Corp, which manifactures ,sells,and leasee heavy construction equipment, leased equipment to Cream Co., a regular customer on January 1, 2017. Costs to manufacture the leased equipment is P 4,008,000. The lease payments are P 252,644 beginning January 1, 2017 anf cotinuing annually with the last payment being made on January 1, 2021. If Cream were to purchase the equipment outright the fair market value would be P 1,167,524. Because of the heavy wear expected on the equipment, the lease contains a guaranteed residual value wherein the lessee guarantees a residual value on December 30, 2021 of P 260,000. Cream contracted with Cone finance to serve as a third party guarantor of the residu value. Ice implicit rate known to Cream is 12% whuch is lower than Cream's borrowing rate of 14%. Expected useful life of the equipment is 10 years. 1. What is the amount of gross profit on sale that Ice should report in year 2017? a. None b.115,200 c. 159,524 d. 355,696 2. How much is the adjusted cost of sales attributed to the lesse? a. 147,420 b. 860,580 c. 1,008,000 d. 1,155,420

Answers: 1. C. 2. B. Total selling price.

P 1,167,524

PV of residual value(260,000 x .567).

147,420

Adjusted selling price.

P 1,020,104

Less: Adjusted selling price: Cost of sales.

P 1,008,000

PV of residual value.

147,420.

860,58(2)

Gross Profit.

P 159,624(1)

Use the following information for items 3-5 On December 31, 2016, Sunshine Co. leased a new machine from Sunset Corporation with the following information Lease Term 6 years Economic Life 6 years Annual rental payable every December 31 P500,000 Incremental borrowing rate 15% Implicit Interest rate 12% First annual payment Dec. 31, 2016 The machine reverts to Sunset at the termination of the lease. The cost of the machine on Sunset’s accounting records is P3,755,000 3.What is the capitalized cost of the asset? a.P3,755,000 b.P2,302,400 Answer: B Solution: Annual Rental PV of annuity due factor Present value of annual rental Annual Rental Capitalized cost of asset

c.P2,175,000

P500,000 3.6048 1,802,400 500,000 P2,302,400

4.What is the lease liability balance at December 31,2017? a.P1,805,000 b.P1,851,000 c.P1,831,600 Answer: D Solution: Capitalized cost of asset Annual Rental Carrying amount

d.P0

P2,302,400 ( 500,000) 1,802,400

d.P1,518,688

Annual Rental Interest (1,802,400x12%) Lease liability balance

P500,000 ( 216,288)

( 283,712) P1,518,688

5. Assume the use of straight line method of depreciation, how much is the depreciation expense for the year ended, December 31, 2018 a.P383,733 b.P362,500 c.288,125 d.261,875 Answer: A Solution: Capitalized cost of asset Lese Term Depreciation expense

P2,302,400 6 years P 383,733

CABAS 1. On December 31,2016, Lionel Ritche Inc. sold equipment to Noli, and simultaneously leased it back for 12 years. Pertinent information at this date is as follows: Sales Price P480,000 Carrying Amount 360,000 Estimated remaining useful life 15 years At December 31, 2016, how much should Lionel report as deferred gain from the sale of the equipment? a.P0 b.P110,000 c.P112,000 d.120,000 Answer: D Solution: Sale Price Carrying Amount Deferred gain

P480,000 360,000 120, 000

2. Vivo Co. leased machinery under direct-financing. The machinery has 30 years useful life, had no residual value and no option to purchase the machinery at the end of ten year lease with a fair value of P565,000. The incremental borrowing rate is 12% and the implicit rate is 10%. The present value of an annuity due of P1: at 10% for ten years is 6.7590 at 12% for ten years is 6.3282 What is the total amount of interest revenue that Vivo will earn over the life of the lease? a.P 270,920

b.P 83,592 c.P 565,000 d.P 835,920 Solution: A Rental x Annuity of 1 = FV/ MCP Fair Value of Equipment P565,000 Annuity of 1 ÷ 6.759 Rental P 83,592 Gross Investment (P 83,592 x 10) Net Investment (P 83,592 x 6.7590) Interest Revenue

P835,920 ( 565,000) P 270,920

3. Ruru Co. leased equipment from Aljur Corp. on January 1, 2017. The lease term is 8 years and the useful life of the equipment is 24 years. Annual payments are due every first day of the calendar year, January 1 which amounts to P650,000. The first payment was made on the same date. The implicit rate is 8% and the incremental rate is 10%. The cost of the equipment on Aljur's book records is P 3,930,000. The lease is appropriately recorded as a sales type lease. What is the amount of selling price of the equipment if it has a Gross profit on sale of P 820,00 and Interest revenue on December 31,2017? Selling price; Interest Revenue a.P 3,930,000 ; P 262,400 b. P4,750,000 ; P 328,000 c. P 3,110,000 ; P196,800 d. P 4,750,000 ; P 410,000 Solution: B. Selling price (squeeze). Cost. Gross profit on sale.

Selling price. Annual payment. Lease receivable. Implicit rate. Interest revenue.

P 4,750,000 ( 3,930,000 ) 820,000

P 4,750,000 ( 650,000) P 4,100,000 x 8% P 328,000

4. On July 1, 2017, Cupcake Co. leased computer equipment to Monitor Corp. for an annual payment of P 300,000 that are payable every on July 1 of each year.The lease term is 12 years, ending on June 30, 2029. The first payment was made on the same date. The incremental rate is 14% and the implicit rate is 11%. The carrying cost of the computer equipment on Monitor's books is P800,000 and its list selling price is P1,890,000. The lease is appropriately accounted for as a sales-type lease. What amount of lease receivable on December 31, should Monitor report ? a. P 300,000 b.P 1,090,000 c.P 883,38.25 d.P 0 Solution: C. PV of rental ( 300,000 x 7.2065 ). First payment. Lease receivable- July 1, 2017. Second payment. P 300,000 Interest for 2017(11% x 1,861,950). ( 204,814.5). Lease receivable- July 1, 2018. Months from July 1 to December 31. Lease receivable- December 31.

P 2,161,950 ( 300,000 ) P 1,861,950 (95,185.5) P 1,766,764.5 x 6/12 P 883,382.25

5. Shake Co. leased a new machine from Love Co. The lease is not renewable, and the machine reverts to Love at the termination of the lease. The cost of the machine on Love’s accounting records is P 812,300. Annual rental payable at beginning of each year is P350,000. The useful life of machine 20 years,lease term is 15 years. Shake's incremental borrowing rate is 16% and the implicit interest rate is 12%. Present value of annuity of 1 in advance for 15 periods at 12% 7.63 16% 6.47 At the beginning of the lease term, what amount should Shake record a lease liability of ? a.P 0 b.P 2,670,500 c. P 4,200,000 d.P 2,264,500 Solution: B. PV of annual payment (350,000 x 7.63).

P2,670,500

CAUBE 1. Heart Corp. entered into a lease agreement with Pulse Inc. for machinery. Annual lease payments of P 45,000 are payable at the end of each year. Heart knows that the lessor expects a 8% return on the lease.Heart has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Pulse a residual value of P 15,000 at the end of the lease. The lease term is 6 years and the estimated useful life of the equipment is 10 years. The present value of an ordinary annuity of Php1 at 8% for six years is 4.6229, 9% for six years is 4.4859. The present value of Php1 at 8% for six years is .6302, 9% for six years is .5963. In heart's December 3, 2017 balance sheet, the principal amount of the lease obligation was a.P 26,833.5 b.P 201,865.5 c.P 28,359 d.P 208,030.5 Solution: D. PV of annual payment ( P 45,000 x 4.6229).

P 208,030.5

2. Clover, Inc. leased an industrial equipment from Industrial Borrowing Co. The lease qualifies as a capital lease and requires 5 annual payments of P 35,000 beginning January 1 of each year. The lease specifies an interest rate of 10% and a purchase option of P 50,000 at the end of the tenth year, even though the machine’s estimated value on that date is P 10,000.Clover's incremental borrowing rate is 12%.The present value of an annuity due of one at 10% for 5 years is 4.1699 the present value of one at 10% for 5 years is .6209 and 12% for 5 years is 4.0373,12% for 5 years is .5674

What amount should Clover record as lease liability at the beginning of the lease term? a.P 176,991.5 b. c. d Solution: A PV of annual payment ( P 35,000 x 4.1699). P 145,946.5 PV of BPO ( P 50,000 x .6209). 31,045 Total lease liability. P 176,991.5 3. On December 31, 2017, Twice Corp. entered into a ten-year capital lease on a warehouse having annual lease payments of P 35,000, which excludes real estate taxes of P 5,000, are due annually, beginning on December 31, 2018, and every December 31 of each year. Twice does not know the interest rate implicit in the lease; Twice’s incremental borrowing rate is 14%. What amount should Neal report as capitalized lease liability at December 31, year 1? a. P 208,800 b.P 35,000 c. P182,700 d. P 40,000 Solution: C.

4. More Company leased a new machine from Less Company on May 1, 2017 having the option to purchase the machine on May 1,2025 by paying P200,000, which approximates the expected fair value of the machine on the option exercise date. Additional information were as follows: Lease term 8 years Annual rental payable at beginning of each lease year P 60,000 Useful life of machine. 14 years Implicit interest rate 12% Present value of an annuity of one in advance for eight periods at 12% 5.56 Present value of one for ten periods at 12% 0.40 East should record a capitalized lease asset on May 1, 2017 of a. P 333,600 b.P 413,600 c. P 253,600 d.P 260,000 Answer: A PV of annual lease payment( 60,000 x 5.56)

P333,600

5. On December 1, 2008, Perez Corporation leased office space for 10 years at a monthly rental of Php90,000. On that date Perez paid the landlord the following amounts: Rent deposit Php 90,000 First month's rent 90,000 Last month's rent 90,000 Installation of new walls and offices 495,00 Php765,000 The entire amount of Php765,000 was charged to rent expense in 2008. What amount should Perez have charged to expense for the year ended December 31, 2008? a. Php90,000 b. Php94,125 c. Php184,125

d. Php495,000 Rent Expense Php90,000 + (495,000/10 × 1/12)

Php94,125.

DAGOHOY

McCabe Corporation issued Php550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for Php512,408 to yield the market interest rate of 8%. Use the effective-interest method for questions 12 15. 1. What is the amount of interest expense that McCabe Corporation will record on July 1, 2011, the first semiannual interest payment date? (All amounts rounded to the nearest dollar.) a. Php20,496 b. Php38,500 c. Php19,250 d. Php22,000 2. What is the amount of discount amortization that McCabe Corporation will record on July 1, 2011, the first semiannual interest payment date? a. Php0 b. Php2,562 c. Php1,246 d. Php1,504 3. What is the total cash payment for interest for each 12-month period? (All amounts rounded to the nearest dollar.) a. Php22,000 b. Php38,500 c. Php40,993 d. Php44,000

Solution: 1. a (Php512,408 * 0.08 * 6/12 = Php20,496) 2. c [Int. exp. = Php20,496 Int. payment = Php19,250 (Php550,000 * 0.07 * 6/12) Php20,496 Php19,250 = Php1,246] 3. b (Php550,000 * 0.07 = Php38,500)

4. On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Penn to make annual payments of $100,000 at the end of each year for ten years with title to pass to Penn at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Penn uses the straight-line method of depreciation for all of its fixed assets. Penn accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Penn should record for 2008 a. lease expense of $100,000. b. interest expense of $44,734 and depreciation expense of $38,068. c. interest expense of $53,681 and depreciation expense of $44,734. d. interest expense of $45,681 and depreciation expense of $67,101. Use the following information for questions 49 through 54. (Annuity tables on page 21-20.) Interest Expense $671,008 × .08 $53,681 Depreciation Expense $671,008 ÷ 15 $44,734.

5. Huffman Company leases a machine from Lincoln Corp. under an agreement which meets the criteria to be a capital lease for Huffman. The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 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. Huffman should record the leased asset at

a. $509,256. b. $488,661. c. $434,366. d. $416,799. Lease receivable ($102,000 - $15,000) × 4.99271

$434,366

DELA CRUZ

Ayoko na Inc. leases equipment to its customers under noncancelable leases. On January 1, 2010, Ayoko na Inc. leased equipment costing Php4,000,000 to Ayo Co. for nine years. The rental cost was Php 440,000 payable in advance semiannually plus Php20,000 semiannually for executor costs. The equipment had an estimated life of 15 years and sold for Php5,330,250 with an estimated unguaranteed residual value of Php800,000. The implicit rate is 12 %. Compute for the following: 1. How much is the total interest income from lease that will be earned by Ayoko Na Inc.? a. Php2,869,988 b. Php3,389,748 c. Php3,675,616 d. Php 0 Solution: Gross investment in the lease: Minimum lease payments (Php440,000 x 18) Unguaranteed residual value Net Investment in the lease:

Php7,920,000 800,000

Php6,720,000

PV of minimum lease payments (Php440 x 11.4773) Php 50,050,012 PV of unguaranteed residual value (Php800,000 x 0.3503) 280,240 Total unearned interest income

5,330,252 Php3,389,748

2. Ayoko Na Inc. should report profit on the sale at: a) Php1,330,252 b) Php1,044,384 c) Php1,050,012 d) Php1,338,492

Solution: Sales (PV of MLP) Less: Cost of Sales Profit on Sale:

Php5,050,012 3,719,760 Php1,330,252

3. How much should be reported by Au Co. under current liabilities as liability under finance lease as of December 31,2010? a) Php4,143,593 b) Php4,446,613 c) Php4,273,410 d) Php 0 Finance lease liability (Php440,000 x 11.4773) Php5,050,012 Less: Lease Payment, 1/1/10 440,000 Balance, 1/1/10 4,610,012 Less: Principal payment on 7/1/10: Total Payment Php440,000 Applicable to interest (Php4,610,012 x12% x 6/12) 276,601 163,399 Balance, 12/31/10 Php4,446,613

4. On December 31, 2007, Pool Corporation leased a ship from Renn Company for an eightyear period expiring December 30, 2015. Equal annual payments of $200,000 are due on December 31 of each year, beginning with December 31, 2007. The lease is properly classified as a capital lease on Pool's books. The present value at December 31, 2007 of

the eight lease payments over the lease term discounted at 10% is $1,173,685. Assuming all payments are made on time, the amount that should be reported by Pool Corporation as the total obligation under capital leases on its December 31, 2008 balance sheet is a. $1,091,054. b. $1,000,159. c. $871,054. d. $1,200,000. Lease Liability $1,173,685 – $200,000 = $973,685 × .10 = $97,369 $973,685 – ($200,000 – $97,369)

$871,054.

5. On December 31, 2008, Dodd Corporation leased a plane from Aero Company for an eight-year period expiring December 30, 2016. Equal annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2008. The lease is properly classified as a capital lease on Dodd’s books. The present value at December 31, 2008 of the eight lease payments over the lease term discounted at 10% is $880,264. Assuming the first payment is made on time, the amount that should be reported by Dodd Corporation as the lease liability on its December 31, 2008 balance sheet is a. $880,264. b. $818,290. c. $792,238. d. $730,264. Lease Liability $880,264 – $150,000

ENTIENZA

$730,264.

On January 1, 2008, Dexter, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Garr Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value to Garr is $2,500,000. (c) The building has an estimated economic life of 10 years, with no residual value. Dexter depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Dexter's incremental borrowing rate is 11% per year. Garr Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. 1. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) a. $188,237 b. $478,236 c. $488,236 d. $498,236 Minimum Annual Lease Payment $3,000,000 ÷ 6.14457

$488,236

2. What is the amount of the total annual lease payment? a. $188,237 b. $478,237 c. $488,237 d. $498,237 Total annual lease payment $488,236 + $10,000

$498,237.

3. Dexter, Inc. would record depreciation expense on this storage building in 2008 of (Rounded to the nearest dollar.) a. $0. b. $250,000. c. $300,000. d. $488,237. Depreciation Expense $3,000,000 ÷ 10

$300,000

On January 1, 2008, Dalton Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Dalton to make annual payments of $50,000 at the beginning of each year for five years with title to pass to Dalton at the end of this period. The equipment has

an estimated useful life of 7 years and no salvage value. Dalton uses the straight-line method of

depreciation for all of its fixed assets. Dalton accordingly accounts for this lease transaction as a

capital lease. The minimum lease payments were determined to have a present value of $208,493 at an effective interest rate of 10%. 4. In 2008, Dalton should record interest expense of a. $15,849. b. $29,151. c. $20,849. d. $34,151. Interest Expense ($208,493 – $50,000) × .10

$15,849.

5. In 2009, Dalton should record interest expense of a. $10,849. b. $12,434. c. $15,849. d. $17,434. Interest Expense [$158,493 – ($50,000 - $15,849)] × .10

$12,434.

GANAL On January 1, 2008, Carley Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Carley to make annual payments of $60,000 at the end of each

year for five years with title to pass to Carley at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Carley uses the straight-line method of depreciation for all of its fixed assets. Carley accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of

$227,448 at an effective interest rate of 10%. 1. With respect to this capitalized lease, for 2008 Carley should record a. rent expense of $60,000. b. interest expense of $22,745 and depreciation expense of $45,489. c. interest expense of $22,745 and depreciation expense of $32,493. d. interest expense of $30,000 and depreciation expense of $45,489. Interest Expense $227,448 × .10 Depreciation Expense ($227,448 – 0) ÷ 7

$22,745 $32,493

2. With respect to this capitalized lease, for 2009 Carley should record a. interest expense of $22,745 and depreciation expense of $32,493. b. interest expense of $20,469 and depreciation expense of $32,493. c. interest expense of $19,019 and depreciation expense of $32,493. d. interest expense of $14,469 and depreciation expense of $32,493. Interest Expense [$227,448 – ($60,000 – $22,745)] × .10

$19,019.

3. Barkley Corporation is a lessee with a capital lease. The asset is recorded at $450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a market value of $150,000 at the end of 5 years, and a market value of $50,000 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. $90,000 b. $80,000

c. $60,000 d. $50,000 Depreciation Expense ($450,000 – $50,000) ÷ 8

$50,000

Use the following information for questions 63 through 68. (Annuity tables on page 21-20.) Hay Corporation enters into an agreement with Marly Rentals Co. on January 1, 2008 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $155,213 are due on December 31 of each year. (b) The fair value of the machine on January 1, 2008, is $400,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Hay depreciates all machinery it owns on a straight-line basis. (d) Hay's incremental borrowing rate is 10% per year. Hay does not have knowledge of the 8% implicit rate used by Marly. (e) Immediately after signing the lease, Marly finds out that Hay Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. 4. If the present value of the future lease payments is $400,000 at January 1, 2008, what is the amount of the reduction in the lease liability for Hay Corp. in the second full year of the lease if Hay Corp. accounts for the lease as a capital lease? (Rounded to the nearest dollar.) a. $115,213

b. $123,213 c. $126,734 d. $133,070 Interest Expense $400,000 – [$155,213 – ($400,000 × .1)] = $284,787. $155,213 – ($284,787 ×.1)

$126,734.

5. If Marly records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? a. $155,213 b. $385,991 c. $400,000 d. $465,638 Fair value

$400,000.

GREGORIO 1. Sele Company leased equipment to Snead Company on July 1, 2007, for a one-year period expiring June 30, 2008, for $60,000 a month. On July 1, 2008, Sele leased this piece of equipment to Quirk Company for a three-year period expiring June 30, 2011, for $75,000 a month. The original cost of the equipment was $4,800,000. The equipment, which has been continually on lease since July 1, 2003, is being depreciated on a straightline basis over an eight-year period with no salvage value. Assuming that both the lease to Snead and the lease to Quirk 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, 2008?

Sele

Snead

Quirk

a. $210,000

$(360,000)

$(450,000)

b. $210,000

$(360,000)

$(750,000)

c. $810,000

$(60,000)

$(150,000)

d. $810,000

$(660,000)

$(450,000)

Sele: ($60,000 × 6) + ($75,000 × 6) – (4,800,000 ÷ 8) Snead: ($60,000) × 6 Quirk: ($75,000) × 6

$210,000 $(360,000) $(450,000).

Eddy leased equipment to Hoyle Company on May 1, 2008. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2009. Hoyle could have bought the equipment from Eddy for $3,200,000 instead of leasing it. Eddy's accounting records showed a book value for the equipment on May 1, 2008, of $2,800,000. Eddy's depreciation on the equipment in 2008 was $360,000. During 2008, Hoyle paid $720,000

in rentals to Eddy for the 8-month period. Eddy incurred maintenance and other related costs under the terms of the lease of $64,000 in 2008. After the lease with Hoyle expires, Eddy will lease the equipment to another company for two years.

2. Ignoring income taxes, the amount of expense incurred by Hoyle from this lease for the year ended December 31, 2008, should be a. $296,000. b. $360,000. c. $656,000.

d. $720,000. Rent Expense

$720,000

3. The income before income taxes derived by Eddy from this lease for the year ended December 31, 2008, should be a. $296,000. b. $360,000. c. $656,000. d. $720,000. Income before Tax $720,000 – $64,000 – $360,000

$296,000.

4. Hite Company has a machine with a cost of $400,000 which also is its fair market value on the date the machine is leased to Rich Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $40,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments is: a. $92,361. b. $82,465. c. $78,180. d. $66,667. Lease Liability—beg. [$400,000 – ($40,000 × .50663)] ÷ 4.60478

$82,465

5. Estes Co. leased a machine to Dains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Estes 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 under capital lease

$400,000

Less accumulated depreciation--capital lease

384,000

Interest payable

$ 1,520

Obligations under capital leases

$14,480

If, at the end of the lease, the fair market value of the residual value is $8,800, what gain or loss should Estes record? a. $6,480 gain b. $7,120 loss c. $7,200 loss d. $8,800 gain Loss on Lease $8,800 – $16,000

($7,200).

IGNALANGIN 1. Durham Company leased machinery to Santi Company on July 1, 2008, for a ten-year period expiring June 30, 2018. Equal annual payments under the lease are $75,000 and are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of interest used by Durham and Santi is 9%. The cash selling price of the machinery is $525,000 and the cost of the machinery on Durham's accounting records was $465,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Durham, what amount of interest revenue would Durham record for the year ended December 31, 2008? a. $47,250

b. $40,500 c. $20,250 d. $0

Interest Revenue ($525,000 – $75,000) × .09 × 6/12

`

$20,250

2. Eby Company leased equipment to the Mills Company on July 1, 2008, for a ten-year period expiring June 30, 2018. Equal annual payments under the lease are $80,000 and are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of interest contemplated by Eby and Mills is 9%. The cash selling price of the equipment is $560,000 and the cost of the equipment on Eby's accounting records was $496,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Eby, what is the amount of profit on the sale and the interest revenue that Eby would record for the year ended December 31, 2008? a. $64,000 and $50,400 b. $64,000 and $43,200 c. $64,000 and $21,600 d. $0 and $0 Profit on Sale $560,000 – $496,000 Interest Revenue ($560,000 – $80,000) × .09 × 6/12

$64,000 $21,600.

Risen Company, a dealer in machinery and equipment, leased equipment to Foran, Inc., on July 1, 2008. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2018. The first of 10 equal annual payments of $621,000 was made on July 1, 2008. Risen had purchased the

equipment for $3,900,000 on January 1, 2008, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2008, of the rent payments over the

lease term discounted at 8% (the appropriate interest rate) was $4,500,000. 3. Assuming that Foran, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that Foran should record for the year ended December 31, 2008? a. $225,000 and $155,160 b. $225,000 and $180,000 c. $270,000 and $155,160 d. $270,000 and $180,000 Depreciation $4,500,000 1 (4,500,000 ÷10) × (1/2) Interest Expense ($4,500,000 – $621,000) × .04

$225,000 $155,160.

4. What is the amount of profit on the sale and the amount of interest income that Risen should record for the year ended December 31, 2008? a. $0 and $155,160 b. $600,000 and $155,160 c. $600,000 and $180,000 d. $900,000 and $360,000 Profit on Sale $4,500,000 – $3,900,000 Interest Income ($4,500,000 – $621,000) × .04

$600,000 $155,160

5. Mayer Company leased equipment from Lennon Company on July 1, 2008, for an eight-

year period expiring June 30, 2016. Equal annual payments under the lease are $300,000 and are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of interest contemplated by Mayer and Lennon is 8%. The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Lennon's accounting records was $1,650,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Lennon, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2008? a. $0 and $0 b. $0 and $62,475 c. $211,875 and $62,475 d. $211,875 and $74,475 Profit on Sale $1,861,875 – $1,650,000 = $211,875. Interest Income ($1,861,875 – $300,000) × .04 = $62,475.

ISIDRO Bohl Co. purchases land and constructs a service station and car wash for a total of $360,000. At

January 2, 2007, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Bohl. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Bohl uses straight-line depreciation for its other various business holdings.

The economic life of the facility is 15 years with zero salvage value. Title to the facility and land

will pass to Bohl at termination of the lease. A partial amortization schedule for this lease is as follows: Payments

Interest

Amortization

Balance

Jan. 2, 2007

$400,000.00

Dec. 31, 2007

$65,098.13

$40,000.00

$25,098.13

374,901.87

Dec. 31, 2008

65,098.13

37,490.19

27,607.94

347,293.93

Dec. 31, 2009

65,098.13

34,729.39

30,368.74

316,925.19

1. What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6% Discount rate $40,000 ÷ $400,000 PV factor of ordinary annuity of $1 for 10 years at 10%. $400,000 ÷$65,098.13 *6.1446 PV factor of ordinary annuity of $1 for 10 years at 10%.

10% 6.1446

2. The total lease-related expenses recognized by the lessee during 2008 is which of the following? (Rounded to the nearest dollar.) a. $64,000 b. $65,098 c. $73,490 d. $61,490 Executory Expenses [($400,000 – $40,000) ÷ 15] + $37,490

$61,490

3. What is the amount of the lessee's liability to the lessor after the December 31, 2009

payment? (Rounded to the nearest dollar.) a. $400,000 b. $374,902 c. $347,294 d. $316,925 Lease Liability

$316,925

4. The total lease-related income recognized by the lessee during 2008 is which of the following? a. $ -0b. $2,667 c. $4,000 d. $40,000 Lease Revenue ($400,000 – $360,000) ÷ 15

`

$2,667

5. On June 30, 2008, Colt sold equipment to an unaffiliated company for $700,000. The equipment had a book value of $630,000 and a remaining useful life of 10 years. That same day, Colt leased back the equipment at $7,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Colt's rent expense for this equipment for the year ended December 31, 2008, should be a. $84,000. b. $42,000. c. $35,000. d. $28,000. Rent Expense ($400,000 – $360,000) ÷ 15

$2,667

LOPEZ 1. On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2008. The lease is appropriately accounted for by Mendez as a capital lease. Mendez's incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.6959. In its December 31, 2008 balance sheet, Mendez should report a lease liability of a. $606,528. b. $680,000. c. $751,344. d. $766,528. Lease Liability ($160,000 × 4.7908) – $160,000

$606,528.

2. On December 31, 2007, Patten Co. leased a machine from Bass, Inc. for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2007, and the second payment was made on December 31, 2008. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease is appropriately accounted for as a capital lease by Patten. In

its December 31, 2008 balance sheet, Patten should report a lease liability of a. $1,902,000. b. $1,872,000. c. $1,711,800. d. $1,492,200. Lase Liability $1,902,000 – [$600,000 – ($1,902,000 × .10)]

$1,492,200

On January 2, 2008, Martinez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with title passing to Martinez at the expiration of the lease. Martinez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Martinez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%. 3. In its 2008 income statement, what amount of interest expense should Martinez report from this lease transaction? a. $0 b. $56,250 c. $75,000 d. $90,000 Interest Expense $900,000 × .10

$90,000.

4. In its 2008 income statement, what amount of depreciation expense should Martinez report from this lease transaction?

a. $150,000 b. $100,000 c. $90,000 d. $60,000 Depreciation Expense $900,000 ÷ 15

$60,000.

5. Castro Co. manufactures equipment that is sold or leased. On December 31, 2008, Castro leased equipment to Ermler for a five-year period ending December 31, 2013, at which date ownership of the leased asset will be transferred to Ermler. Equal payments under the lease are $220,000 (including $20,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2008. Collectibility of the remaining lease payments is reasonably assured, and Castro has no material cost uncertainties. The normal sales price of the equipment is $770,000, and cost is $600,000. For the year ended December 31, 2008, what amount of income should Castro realize from the lease transaction? a. $170,000 b. $220,000 c. $230,000 d. $330,000 Profit on Sale $770,000 – $600,000

$170,000.

LUBARBIO Problem: Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor of computers, Luna purchased a new system on December 31,2016. The system was delivered the same

day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed the following relating to the lease transaction: Cost of system to Luna P550,000 Estimated useful life and lease term 8 years Expected residual value (unguaranteed) P 40,000 Luna’s implicit interest rate 12% Date of first lease payment December 31,2016 Additional information is as follows: (a) At the end of the lease, the system will revert to Luna (b) General is aware of Luna’s rate of implicit interest (c) The lease rental consists of equal annual payments 1.The annual lease payment under the lease is a. P110,717 b.P95,950 Answer: B Solution: Cost of system Less present value of unguaranteed residual value (40,000 x 0.4039) Net investment to be recovered Divide by the PV of annuity due factor Annual lease payment

c.P102,665

P550,000 16,156 533,844 5.5638 P95,950

2.The total financial revenue to be earned by the lessor over the lease term is a.P257,600 b.P183,312 c.P271,320 Answer: A Solution: Gross Investment in the lease: Minimum lease payment (P95,950 x 8) Unguaranteed residual value Net investment in the lease: PV of minimum lease payments PV of unguaranteed residual value Total unearned interest income

P767,600 40,000 533,844 16,156

d.P335,736

P807,600

550,000 P257,600

3.The interest income to be recognized by the lessor in 2017 is a.P53,680 b.52,714 c.P54,486 Answer: C Solution:

d.P91,664

d.P52,547

Interest income [(P550,000-P95,950) x 12%]

P54,486

4.The total expenses related to the lease that will be recognized by the lessee in 2017 is a.121,464 b.130,792 c.P112,630 d.P119,278 Answer: D Solution: Interest expense [(P533,844-P95,950)] x 12%] Depreciation expense (P533,844/8) Total

P52,547 66,731 P119,278

5. The amount to be reported under current liabilities as liability under finance lease as of December 31,2017 is a.P60,239 b.P48,611 c.P35,715 d.64,963 Answer: B Solution: Finance lease liability, 12/31/16 Lease Payment,12/31/16 Balance, 12/31/16 Less principal payment on 12/31/16: Total payment in 2017 Less applicable to interest (437,894 x 12%) Balance, 12/31/17

P533,844 95,950 P437,894 P95,950 52,547

Total payment in 2018 Less applicable to interest (394,491 x 12%) Current portion of finance lease liability

43,403 P394,491 P95,950 47,339 48,611

MACARANAS Problem: In connection with your audit Nakar Enterprises, you noted that the company has a longstanding policy of acquiring company equipment by leasing. Early in 2017, the company entered into a lease for a new milling machine. The lease stipulates that annual payments will be made for 5 years. The payments are to be made in advance on December 31, of each year. At the end of the 5-year period, Nakar may purchase the machine. The estimated economic life of the equipment is 12 years. Nakar uses the calendar year for reporting purposes and straight-line depreciation for other equipment. In addition, the following information about the lease is also available: Annual lease payments (including executory costs of P5,000) Purchase option price Estimated fair value of the machine after 5 years Implicit rate Date of first payment

P60,000 P25,000 P75,000 10% January 1, 2017

1.Amount to be capitalized as an asset for the lease of the milling machine. a.P229,345 b.P224,017 c.P244,868 Answer: C Solution PV of rental payments (P55,000 x 4.1699) PV of purchase option (25,000 x 0.6209) PV of MLP (Cost of asset)

P229,345 15,523 P244,868

2.Liability under the finance lease as of December 31,2017 a.P130,919 b.P153,855 c.P136,780 Answer: B Solution: Finance lease liability, 1/1/17 Less payment, 1/1/17 Balance, 1/1/17 Less principal payment on 12/31/17: Total payment in 2017 Less applicable to interest (P189,868 x 10%) Balance, 12/31/17

d.275,913

d.P189,868

P244,868 55,000 P189,868 P55,000 18,987

36,013 P153,855

3. Amount to be reported under current liabilities as liability under finance lease as of December 31,2017 a.P39,614 b.P41,322 c.P41,908 Answer: A Solution: Rental payment in 2018 Less applicable to interest (P153,855 x 10%) Current portion of finance lease liability

4.Interest expense for the year 2017 a.P17,435 b.P18,987

P55,000 15,386 P39,614

c.P10,902

Answer: B Solution: Interest expense in 2017 (P189,868 x 10%) 5.Depreciation expense for the year 2017 a.P20,406 b.P19,112 Answer: A Solution: Depreciation expense in 2017 (P244,868/12)

d.P36,013

d.P0

P18,987

c.P18,668

d.P48,974

P20,406

MAYUGA 1. On December 31, 2008, Devin Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price

$900,000

Carrying amount

825,000

Present value of reasonable lease rentals ($7,500 for 12 months @ 12%)

85,000

Estimated remaining useful life

12 years

In Devin’s December 31, 2008 balance sheet, the deferred profit from the sale of this machine should be a. $85,000. b. $75,000. c. $10,000. d. $0. $85,000 ÷ 900,000 = 9.44%, < 10% of FV of asset It is a minor leaseback and is therefore 0.

2.On December 31, 2011, Burton, Inc. leased machinery with a fair value of Php840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of Php160,000 beginning December 31, 2011. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.6959. In its December 31, 2011 balance sheet, Burton should report a lease liability of a. Php606,528. b. Php680,000.

c. Php751,344. d. Php766,528. Solution: (Php160,000 × 4.7908) – Php160,000 = Php606,528. 3. On 1 January 2013, a company which prepares financial statements to 31 December each year acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is £50,000 and the company is required to make three lease payments of £19,753 each. These payments fall due on 31 December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the finance charge which should be shown in the company's financial statements for the year to 31 December 2013 if the total finance charge is allocated to accounting periods using the sum of digits method. a. b. c. d.

4,629 9,259 9,877 4,938

Solution: £4,629 The sum of the digits is 6 (3 + 2 + 1). Total lease payments are £59,259 so the total finance charge is £9,259. Therefore the finance charge for 2013 is 3/6ths of £9,259 = £4,629 (to the nearest £). 4. On 1 January 2013, a company which prepares financial statements to 31 December each year acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is £50,000 and the company is required to make three lease payments of £19,753 each. These payments fall due on 31 December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the finance charge which should be shown in the company's financial statements for the year to 31 December 2013 if the total finance charge is allocated to accounting periods using the actuarial method. a. b. c. d.

5,000 45,000 4,500 50,000

Solution: £4,500 The liability throughout 2013 is £50,000. Therefore the finance charge for 2013 is £4,500 (9% of £50,000).

5. On 1 January 2013, a company which prepares financial statements to 31 December each year acquires a machine on a finance lease. The fair value of the machine on 1 January 2013 is P50,000 and the company is required to make three lease payments of P19,753 each. These payments fall due on 31

December 2013, 2014 and 2015. The rate of interest implicit in the lease is 9% per annum. Calculate the finance charge which should be shown in the company's financial statements for the year to 31 December 2013 if the total finance charge is allocated to accounting periods using the level spread method. a. b. c. d.

59,259 19,753 3,086 10,082

Solution: P3,086 Total lease payments are P59,259 so the total finance charge is P9,259. Dividing this by 3 gives an annual finance charge of P3,086 (to the nearest P).

MORENO 1.On March 01, 2015, ABC Co. leased several delivery trucks from XYZ Co. under a three year operating lease. P50,000 per month for 12 months P 600,000 P45,000 per month for the next 12 months 540,000 P25,000 per month for the last 12 months 300,000 What is the annual rent revenue for the first year? a. b. c. d.

440,000 520,000 450,000 480,000

Solution 600,000+540,000+300,000= 1,440,000 No. of years /3 years Rent Revenue 480,000

Problem: Ice Corporation is in the business of leasing new trucks. As a lessor of trucks, Ice purchased a new system on December 31,2016. The trucks were delivered the same day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed the following relating to the lease transaction: Cost of system to Ice Estimated useful life and lease term

P600,000 8 years

Expected residual value (unguaranteed) P 50,000 Ice’s implicit interest rate 12% Date of first lease payment December 31,2016 Additional information is as follows: (a) At the end of the lease, the system will revert to Ice (b) General is aware of Ice’s rate of implicit interest (c) The lease rental consists of equal annual payments 2.The annual lease payment under the lease is a. P98,853 b.P75,000 Answer: C Solution: Cost of system Less present value of unguaranteed residual value (50,000 x 0.4039) Net investment to be recovered Divide by the PV of annuity due factor Annual lease payment

c.P104,210

P600,000 20,195 579,805 5.5638 P104,210

3.The total financial revenue to be earned by the lessor over the lease term is a.P253,875 b.P283,680 c.P303,875 Answer: B Solution: Gross Investment in the lease: Minimum lease payment (P104210 x 8) Unguaranteed residual value Net investment in the lease: PV of minimum lease payments PV of unguaranteed residual value Total unearned interest income

P833,680 50,000 579,805 20,195

d.P233,680

P883,680

600,000 P283,680

4.The interest income to be recognized by the lessor in 2017 is a.P34,042 b.72,000 c.P59,495 Answer: C Solution: Interest income [(P600,000-P104,210) x 12%]

d.111,470

d.P69,577

P59,495

5. On December 1, 2013, Goetz Corporation leased office space for 10 years at a monthly

rental of $90,000. On that date Perez paid the landlord the following amounts: Rent deposit $ 90,000 First month's rent 90,000 Last month's rent 90,000 Installation of new walls and offices 660,000 $930,000 The entire amount of $930,000 was charged to rent expense in 2013. What amount should Goetz have charged to expense for the year ended December 31, 2013? a. $90,000 b. $95,500 c. $185,500 d. $660,000 Rent Expnse $90,000 + [(660,000÷10) x 1/12)]

$95,500

OCHADA 1. On January 1, 2013, Bean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Bean to make annual payments of $200,000 at the end of each year for ten years with title to pass to Bean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Bean uses the straight-line method of depreciation for all of its fixed assets. Bean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this capitalized lease, Bean should record for 2013 a. lease expense of $200,000. b. interest expense of $89,468 and depreciation expense of $76,136.

c. interest expense of $107,361 and depreciation expense of $89,468. d. interest expense of $91,362 and depreciation expense of $134,202. Interest Expense $1,342,016 × .08

$107,361

Depreciation Expense $1,342,016 ÷ 15

$89,468.

On January 1, 2013, Dancey, Inc. signs a 10-year noncancelable Lease Agreement to Lease A storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this Lease Agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000. (c) The building has an estimated economic life of 10 years, with no residual value. Dancey depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Dancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dancey, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. 2. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.) a. $250,981

b. $640,981 c. $650,981 d. $660,981 Minimum Amount of Lease Payment $4,000,000 ÷ 6.14457

$650,981

3. What is the amount of the total annual lease payment? a. $250,981 b. $640,981 c. $650,981 d. $660,981 Total Annual Lease Payment $650,981 + $10,000

$660,981

4. Dancey, Inc. would record depreciation expense on this storage building in 2013 of (Rounded to the nearest dollar.) a. $0. b. $330,000. c. $400,000. d. $650,981. Depreciation Expense $4,000,000 ÷ 10

$400,000.

5. Meteor Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Meteor. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 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. Meteor should record the leased asset at a. $848,760. b. $814,435. c. $723,943. d. $694,665. Leased Asset ($170,000 - $25,000) × 4.99271 =

$723,943

OLORES 1. On December 31, 2013, Bang Corporation leased a ship from Fort Company for an eight year period expiring December 30, 2021. Equal annual payments of $400,000 are due on December 31 of each year, beginning with December 31, 2013. The lease is properly classified as a capital lease on Bang 's books. The present value at December 31, 2013 of the eight lease payments over the lease term discounted at 10% is $2,347,370. Assuming all payments are made on time, the amount that should be reported by Bang Corporation as the total obligation under capital leases on its December 31, 2014 balance sheet is a. $2,182,108. b. $2,000,318. c. $1,742,107. d. $2,400,000. Lease Liability $2,347,370 – $400,000 = $1,947,370 × .10 = $194,737 $1,947,370 – ($400,000 – $194,737)

$1,742,107

On January 1, 2013, Saucer Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Saucer to make annual payments of $200,000 at the beginning of each year for five years with title to pass to Saucer at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Saucer uses the straight-line method of depreciation for all of its fixed assets. Saucer accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. 2. In 2013, Saucer should record interest expense of a. $63,397. b. $116,604. c. $83,396. d. $136,604. Interest Expense ($833,972 – $200,000) × .10

$63,397.

3. In 2014, Saucer should record interest expense of a. $43,396. b. $49,732. c. $63,396. d. $69,736. Interest Expense [$633,972 – ($200,000 - $63,397)] × .10

$49,732

4. On December 31, 2013, Kuto Corporation leased a plane from Lisa Company for an eight-year period expiring December 30, 2021. Equal annual payments of $225,000 are

due on December 31 of each year, beginning with December 31, 2013. The lease is properly classified as a capital lease on Kuto’s books. The present value at December 31, 2013 of the eight lease payments over the lease term discounted at 10% is $1,320,396. Assuming the first payment is made on time, the amount that should be reported by Kuto Corporation as the lease liability on its December 31, 2013 balance sheet is a. $1,320,396. b. $1,227,435. c. $1,188,357. d. $1,095,396. Lease Liability $1,320,396 – $225,000

$1,095,396

5. Empanada Corporation is a lessee with a capital lease. The asset is recorded at $630,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of $210,000 at the end of 5 years, and a fair value of $70,000 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. $126,000 b. $112,000 c. $84,000 d. $70,000 Depreciation Expense ($630,000 – $70,000) ÷ 8 PAGTAKHAN

$70,000.

On January 1, 2013, Oggle Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Oggle to make annual payments of $120,000 at the end of each year for five years with title to pass to Oggle at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Oggle uses the straight-line method of depreciation for all of its fixed assets. Oggle accordingly accounts for this lease transaction as a capital lease. The minimum lease payments were determined to have a present value of $454,896 at an effective interest rate of 10%. 1. With respect to this capitalized lease, for 2013 Oggle should record a. rent expense of $120,000. b. interest expense of $45,490 and depreciation expense of $90,978. c. interest expense of $45,490 and depreciation expense of $64,985. d. interest expense of $60,000 and depreciation expense of $90,978. Interest Expense $454,896 × .10 = $45,490; ($454,896 – 0) ÷ 7

$64,985

2. With respect to this capitalized lease, for 2014 Oggle should record a. interest expense of $45,490 and depreciation expense of $64,985. b. interest expense of $40,938 and depreciation expense of $64,985. c. interest expense of $38,039 and depreciation expense of $64,985. d. interest expense of $28,938 and depreciation expense of $64,985. [$454,896 – ($120,000 – $45,490)] × .10

$38,039

3. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal annual payments of $129,057, 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 salvage value. If Pizza, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pizza, 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. $461,650 b. $409,092 c. $427,453 d. $450,000 Lease Asset $129,057 × 3.57710

$461,650.

4. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal annual payments of $129,057, 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 salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pizza, 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. $0 b. $36,931 c. $26,607 d. $34,197 Interest Expense

$129,057 × 3.57710 = $461,650 ($461,650 – $129,057) × .08

$26,607

5. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal annual payments of $129,057, 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 salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2? PV Annuity Due PV Ordinary Annuity 8%, 4 periods 3.57710 3.31213 10%, 4 periods 3.48685 3.16986 a. $129,057 b. $92,125 c. $94,860 d. $102,450 First Payment $129,057 × 3.57710 = $461,650 Second Payment $129,057 – [($461,650 – $129,057) × .08]

$102,450.

PENDILILANG 1. Pizza, Inc. leased equipment from Torre Company under a four-year lease requiring equal annual payments of $129,057, 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 salvage value. Pizza, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pizza, Inc.) is 8%. Pizza, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by Pizza, 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. $0 because the asset is depreciated by Torre Company. b. $106,863 c. $115,413 d. $112,500 Depreciation Expense $129,057 × 3.57710 = $461,650 ($461,650 – 0) ÷ 4 2. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it leased equipment with a cost of $400,000 to White Dwarf 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. White Dwarf’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $650,000, and the rate implicit in the lease is 8%, which is known to White Dwarf Co. What is the amount of interest expense recorded by White Dwarf Co. for the year ended December 31, 2013? 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. $58,500 b. $46,800 c. $52,000 d. $65,000 Interest Expense ($650,000 × .90) ÷ 3.99271 = $146,517 $146,517 × 3.99271 = $585,000 $585,000 × .08

$46,800.

3. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it leased equipment with a cost of $400,000 to White Dwarf Co. The 5-year lease calls for a 10% down payment and equal annual payments of $146,518 at the end of each year. The equipment has an expected useful life of 5 years. White Dwarf’s incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $650,000, and the rate implicit in the lease is 8%, which is known to White Dwarf Co. What is the book value of the leased asset at December 31, 2013? a. $650,000 b. $520,000 c. $390,000 d. $416,000 Lease Asset $650,000 – (650,000 × .40)

$390,000

4. Red Giant Inc. manufactures machinery used in the mining industry. On January 2, 2013 it leased equipment with a cost of $400,000 to White Dwarf 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 $650,000, 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. $146,517 b. $135,662 c. $151,644 d. $162,796 Annual equal payment ($650,000 × .90) ÷ 3.99271

$146,517.

5. Shookt Company leased equipment to Emergerd Company on July 1, 2012, for a one-year period expiring June 30, 2013, for $60,000 a month. On July 1, 2013, Shookt leased this piece of equipment to Terry Company for a three-year period expiring June 30, 2016, for $75,000 a month. The original cost of the equipment was $4,800,000. The equipment, which has been continually on lease since July 1, 2008, is being depreciated on a straightline basis over an eight-year period with no salvage value. Assuming that both the lease to Emergerd and the lease to Terry 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, 2013? Shookt Emergerd Terry a. $210,000 $(360,000) $(450,000) b. $210,000 $(360,000) $(750,000) c. $810,000 $(60,000) $(150,000) d. $810,000 $(660,000) $(450,000)

Shookt: ($60,000 × 6) + ($75,000 × 6) – (4,800,000 ÷ 8)

$210,000

Emergerd: ($60,000) × 6 Terry: ($75,000) × 6

$(360,000) $(450,000).

PUNZALAN

Esc Corporation enters into an agreement with Gates Rentals Co. on January 1, 2013 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $310,426 are due on December 31 of each year. (b) The fair value of the machine on January 1, 2013, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Esc depreciates all machinery it owns on a straight-line basis. (d) Esc's incremental borrowing rate is 10% per year. Esc does not have knowledge of the 8% implicit rate used by Gates. (e) Immediately after signing the lease, Gates finds out that Esc Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. d. Depreciation Expense and Interest Expense 1. If the present value of the future lease payments is $800,000 at January 1, 2013, what is the amount of the reduction in the lease liability for Esc Corp. in the second full year of the lease if Esc Corp. accounts for the Lease As a capital lease? (Rounded to the nearest dollar.) a. $230,426 b. $246,426

c. $253,469 d. $266,140 Reduction to lease liability $800,000 – [$310,426 – ($800,000 × .1)] = $569,574 $310,426 – ($569,574 × .1)

$253,469.

2. If Gates records this Lease As a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease? a. $310,426 b. $771,982 c. $800,000 d. $931,276 Fair value

$800,000

Bull Co. leased equipment to Shookening Company on May 1, 2013. At that time the collectibility of the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2014. Shookening could have bought the equipment from Bull for $4,000,000 instead of leasing it. Bull's accounting records showed a book value for the equipment on May 1, 2010, of $3,500,000. Bull's depreciation on the equipment in 2013 was $450,000. During 2013, Shookening paid $900,000 in rentals to Bull for the 8-month period. Bull incurred maintenance and other related costs under the terms of the lease of $80,000 in 2013. After the lease with Shookening expires, Bull will lease the equipment to another company for two years. 3. Ignoring income taxes, the amount of expense incurred by Shookening from this lease for the year ended December 31, 2013, should be

a. $370,000. b. $450,000. c. $820,000. d. $900,000. Rent Expense

$900,000.

4. The income before income taxes derived by Bull from this lease for the year ended December 31, 2013, should be a. $370,000. b. $450,000. c. $820,000. d. $900,000. Income before Taxes $900,000 – $80,000 – $450,000

$370,000.

5. On January 2, 2013, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5 equal annual payments of $80,000 each, payable beginning December 31, 2013. Sharp Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit interest rate is 8%. What journal entry would Sailor Moon make at January 2, 2013 assuming this is a direct–financing lease? 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. Lease Receivable 450,000 Equipment 450,000 b. Lease Receivable 319,416

Loss 130,584 Equipment 450,000 c. Lease Receivable 334,310 Equipment 334,310 d. Lease Receivable 353,671 Equipment 353,671 Lease Receivable ($80,000 × 3.99271) + ($50,000 × .68508)

$353,671

ROLDAN 1. Aprils Company has a machine with a cost of $600,000 which also is its fair value on the date the machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an unguaranteed residual value of $60,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-the-year lease payments would be a. $138,541. b. $123,698. c. $117,270. d. $100,000. First Payment [$600,000 – ($60,000 × .50663)] ÷ 4.60478

$123,698

2. On January 2, 2013, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5 equal annual payments of $80,000 each, payable beginning December 31, 2013. Sharp Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit interest rate is 8%. What journal entry would Sharp Co. make at December 31, 2013 to

record the first lease payment? 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. Lease Liability 80,000 Cash 80,000 b. Lease Liability 51,706 Interest Expense 28,294 Cash 80,000 c. Lease Liability 46,570 Interest Expense 33,430 Cash 80,000 d. Lease Liability 16,570 Interest Expense 33,430 Cash 50,000 Solution: ($80,000 × 3.99271) + ($50,000 × .68508) = $353,671 $80,000 – ($353,671 × .08) = $51,706. 3. On January 2, 2012, Sailor Moon Leasing Company leases equipment to Sharp Co. with 5 equal annual payments of $80,000 each, payable beginning December 31, 2012. Sharp Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Sharp’s incremental borrowing rate is 10%, however it knows that Sailor Moon’s implicit interest rate is 8%. What journal entry would Sharp Co. make at December 31, 2013 to record the second lease payment? 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. Lease Liability 80,000 Cash 80,000 b. Lease Liability 51,226 Interest Expense 28,774 Cash 80,000 c. Lease Liability 55,843 Interest Expense 24,157 Cash 80,000 d. Lease Liability 47,520 Interest Expense 32,480 Cash 80,000 Solution: ($80,000 × 3.99271) + ($50,000 × .68508) = $353,671 $80,000 – ($353,671 × .08) = $51,706 ($353,671 – $51,706) × .08 = $24,157 Interest exp. 4. Deary Co. leased a machine to Vains Co. Assume the lease payments were made on the basis that the residual value was guaranteed and Deary 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 $400,000 Less accumulated depreciation--capital lease 384,000 $ 16,000 Interest payable $ 1,520

Lease liability 14,480 $16,000 If, at the end of the lease, the fair value of the residual value is $7,800, what gain or loss should Deary record? a. $6,680 gain b. $6,280 loss c. $8,200 loss d. $7,800 gain Solution: $7,800 – $16,000 = ($8,200).

5. Haroter Company leased machinery to Just Company on July 1, 2013, for a ten-year period expiring June 30, 2023. Equal annual payments under the Lease Are $125,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest used by Haroter and Just is 9%. The cash selling price of the machinery is $875,000 and the cost of the machinery on Haroter's accounting records was $775,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Haroter, what amount of interest revenue would Haroter record for the year ended December 31, 2013? a. $78,750 b. $67,500 c. $33,750 d. $0

Solution:

($875,000 – $125,000) × .09 × 6/12 = $33,750. SANDAGON 1. Nye Company leased equipment to the Poland Company on July 1, 2013, for a ten-year period expiring June 30, 2023. Equal annual payments under the Lease Are $120,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest contemplated by Nye and Poland is 9%. The cash selling price of the equipment is $840,000 and the cost of the equipment on Nye's accounting records was $744,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Eby, what is the amount of profit on the sale and the interest revenue that Nye would record for the year ended December 31, 2013? a. $96,000 and $75,600 b. $96,000 and $64,800 c. $96,000 and $32,400 d. $0 and $0

Solution: $840,000 – $744,000 = $96,000; ($840,000 – $120,000) × .09 × 6/12 = $32,400.

Use the following information for questions 91 and 92. Jeprox Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July 1, 2013. The lease is appropriately accounted for as a sale by Jeprox and as a purchase by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2023. The first of 10 equal annual payments of $828,000 was made on July 1, 2013. Jeprox had purchased the equipment for $5,200,000 on January 1, 2013, and established a list selling price of $7,200,000 on the equipment. Assume that the present value at July 1, 2013, of the rent

payments over the lease term discounted at 8% (the appropriate interest rate) was $6,000,000. 2. Assuming that Sands, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that Sands should record for the year ended December 31, 2013? a. $300,000 and $206,880 b. $300,000 and $240,000 c. $360,000 and $206,880 d. $360,000 and $240,000 Solution: ($6,000,000÷10 x 1/2)

$300,000

3. What is the amount of profit on the sale and the amount of interest income that Jeprox should record for the year ended December 31, 2013? a. $0 and $206,880 b. $800,000 and $206,880 c. $800,000 and $240,000 d. $1,200,000 and $480,000 Profit on Sale $6,000,000 – $5,200,000

$800,000.

Interest Income ($6,000,000 – $828,000) × .04

$206,880.

4. Rodman Company leased equipment from Kuliglig Company on July 1, 2013, for an eightyear period expiring June 30, 2021. Equal annual payments under the Lease Are $500,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest contemplated by Rodman and Kuliglig is 8%. The cash selling price of the

equipment is $3,103,125 and the cost of the equipment on Kuliglig's accounting records was $2,750,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Kuliglig, what is the amount of profit on the sale and the interest income that Kuliglig would record for the year ended December 31, 2013? a. $0 and $0 b. $0 and $104,125 c. $353,125 and $104,125 d. $353,125 and $124,125 Profit on Sale $3,103,125 – $2,750,000 = $353,125. Interest Income ($3,103,125 – $500,000) × .04 = $104,125. 5. On June 30, 2013, Pak Co. sold equipment to an unaffiliated company for $1,400,000. The equipment had a book value of $1,260,000 and a remaining useful life of 10 years. That same day, Pak leased back the equipment at $14,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Pak's rent expense for this equipment for the year ended December 31, 2013, should be a. $168,000. b. $84,000. c. $70,000. d. $56,000.

Rent Expense $14,000 × 6

$84,000.

STA. ANA

Vage Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2012, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Vage. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Vage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Vage at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2012 $400,000.00 Dec. 31, 2012 $65,098.13 $40,000.00 $25,098.13 374,901.87 Dec. 31, 2013 65,098.13 37,490.19 27,607.94 347,293.93 Dec. 31, 2014 65,098.13 34,729.39 30,368.74 316,925.19

1. What is the discount rate implicit in the amortization schedule presented above? a. 12% b. 10% c. 8% d. 6% Discount rate $40,000 ÷ $400,000 =

10%

2. The total lease-related expenses recognized by the lessee during 2013 is which of the following? (Rounded to the nearest dollar.)

a. $64,000 b. $65,098 c. $73,490 d. $61,490 Executory Expenses [($400,000 – $40,000) ÷ 15] + $37,490

$61,490

3. The total lease-related income recognized by the lessee during 2013 is which of the following? a. $ -0b. $2,667 c. $4,000 d. $40,000 Rent revenue ($400,000 – $360,000) ÷ 15

$2,667.

4. On December 31, 2013, Tim, Inc. leased machinery with a fair value of $1,050,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $200,000 beginning December 31, 2013. The lease is appropriately accounted for by Tim as a capital lease. Tim's incremental borrowing rate is 11%. Tim knows the interest rate implicit in the lease payments is 10%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908. The present value of an annuity due of 1 for 6 years at 11% is 4.6959. In its December 31, 2013 balance sheet, Tim should report a lease liability of a. $758,160. b. $850,000.

c. $939,180. d. $958,160. Lease Liability ($200,000 × 4.7908) – $200,000

$758,160.

5. On December 31, 2012, Anuna Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the Lease Are $840,000 (including $40,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2012, and the second payment was made on December 31, 2013. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the Lease And before the first annual payment was $3,336,000. The lease is appropriately accounted for as a capital lease by Anuna. In its December 31, 2013 balance sheet, Anuna should report a lease liability of a. $2,536,000. b. $2,496,000. c. $2,282,400. d. $1,989,600. Lease Liability $3,336,000 – $840,000 + $40,000

$2,536,000

$2,536,000 – [$800,000 – ($2,536,000 × .10)]

$1,989,600

TABARA

On January 2, 2013, YokoNa, Inc. signed a ten-year noncancelable lease for a heavy duty drill

press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with title passing to YokoNa at the expiration of the lease. YokoNa treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. YokoNa uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,500,000, based on implicit interest of 10%. 1. In its 2013 income statement, what amount of interest expense should YokoNa report from this lease transaction? a. $0 b. $93,750 c. $125,000 d. $150,000 Interest Expense $1,500,000 × .10 =

$150,000.

2. In its 2013 income statement, what amount of depreciation expense should YokoNa report from this lease transaction? a. $250,000 b. $200,000 c. $150,000 d. $100,000 Depreciation Expense $1,500,000 ÷ 15

$100,000

3. Taray Co. manufactures equipment that is sold or leased. On December 31, 2013, Taray leased equipment to DEscon for a five-year period ending December 31, 2018, at which date ownership of the leased asset will be transferred to DEscon. Equal payments under the Lease Are $440,000 (including $40,000 executory costs) and are due on December 31

of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payments is reasonably assured, and Taray has no material cost uncertainties. The normal sales price of the equipment is $1,540,000, and cost is $1,200,000. For the year ended December 31, 2013, what amount of income should Taray realize from the lease transaction? a. $340,000 b. $440,000 c. $460,000 d. $660,000 Rent Revenue $1,540,000 – $1,200,000

$340,000

4. On December 31, 2013, Hayden Corp. sold a machine to Maricar and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price $900,000 Carrying amount 825,000 Present value of reasonable lease rentals ($7,500 for 12 months @ 12%) 85,000 Estimated remaining useful life 12 years In Hayden’s December 31, 2013 balance sheet, the deferred profit from the sale of this machine should be a. $85,000. b. $75,000. c. $10,000. d. $0. $900,000 $85,000 = 9.44%, < 10% of FV of asset. It is a minor leaseback and therefore, the answer is 0.

5. On December 1, 2008, Chenes Corporation leased office space for 10 years at a monthly rental of Php50,000. On that date Chenes paid the landlord the following amounts: Rent deposit Php 50,000 First month's rent 50,000 Last month's rent 50,000 Installation of new walls and offices 395,00 Php 665,000 The entire amount of Php665,000 was charged to rent expense in 2008. What amount should Chenes have charged to expense for the year ended December 31, 2008? a. Php50,000 b. Php 53,292 c. Php184,125 d. Php395,000 Rent Expense Php50,000 + (395,000/10 × 1/12)

Php 53,292

TARREGA On January 2, 2011, Fre, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of Php50,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Fre treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Fre uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of Php800,000, based on implicit interest of 10%. 1.

In its 2011 income statement, what amount of interest expense should Fre report from this lease transaction? a. Php0

b. Php56,250 c. Php90,000 d. Php80,000 Solution: Php800,000 × .10 = Php80,000.

2.

In its 2011 income statement, what amount of depreciation expense should Fre report from this lease transaction? a. Php83,333 b. Php100,000 c. Php53,333 d. Php60,000 Solution: Php800,000 ÷ 15 = Php 53,333

LightSaber Corporation issued Php450,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for Php412,408 to yield the market interest rate of 8%. Use the effective-interest method for questions 12 15. 3. What is the amount of interest expense that LightSaber Corporation will record on July 1, 2011, the first semiannual interest payment date? (All amounts rounded to the nearest dollar.) a. Php16,496 b. Php38,500 c. Php19,250 d. Php22,000 4. What is the amount of discount amortization that LightSaber Corporation will record on July 1, 2011, the first semiannual interest payment date? a. Php0 b. Php 746 c. Php1,246 d. Php 552 5. What is the total cash payment for interest for each 12-month period? (All amounts rounded to the nearest dollar.) a. Php22,000 b. Php31,500 c. Php40,993

d. Php43,000

Solution: 3. a (Php412,408 * 0.08 * 6/12 = Php16,496) 4. b [Int. exp. = Php16,496 Int. payment = Php15,750 (Php450,000 * 0.07 * 6/12) Php16,496 Php15,750 = Php 746] 5. b (Php450,000 * 0.07 = Php 31,500)

TERREN Problem: Twice Corporation is in the business of leasing new trucks. As a lessor of trucks, Twice purchased a new system on December 31,2016. The trucks were delivered the same day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed the following relating to the lease transaction: Cost of system to Twice P700,000 Estimated useful life and lease term 8 years Expected residual value (unguaranteed) P 70,000 Twice’s implicit interest rate 12% Date of first lease payment December 31,2016 Additional information is as follows: (a) At the end of the lease, the system will revert to Twice (b) General is aware of Twice’s rate of implicit interest (c) The lease rental consists of equal annual payments 2.The annual lease payment under the lease is a. P28,273 b.P70,000 Answer: C Solution: Cost of system Less present value of unguaranteed residual value (70,000 x 0.4039) Net investment to be recovered Divide by the PV of annuity due factor Annual lease payment

c.P120,732

P700,000 28,273 671,727 5.5638 P120,732

3.The total financial revenue to be earned by the lessor over the lease term is

d.111,470

a.P1,035,856

b.P335,856

Answer: B Solution: Gross Investment in the lease: Minimum lease payment (P120,732 x 8) Unguaranteed residual value Net investment in the lease: PV of minimum lease payments PV of unguaranteed residual value Total unearned interest income

c.P350,000

P965,856 70,000 671,727 28,273

P1,035,856

700,000 P 335,856

4.The interest income to be recognized by the lessor in 2017 is a.P120,732 b.100,000 c.P98,488 Answer: C Solution: Interest income [(P700,000-P120,732) x 12%]

d.P671,727

d.P87,500

P98,488

5. On December 1, 2013, Bugritz Corporation leased office space for 10 years at a monthly rental of $100,000. On that date Tubolz paid the landlord the following amounts: Rent deposit

$ 100,000

First month's rent

100,000

Last month's rent

100,000

Installation of new walls and offices

550,000 $850,000

The entire amount of $850,000 was charged to rent expense in 2013. What amount should Bugritz have charged to expense for the year ended December 31, 2013? a. $90,000 b. $100,000 c. $104,583 d. $550,000

Rent Expense $100,000 + [(550,000÷10) x 1/12)]

$104,583

TRINILLA 1. The following information pertains to an operational sale and leaseback of equipment of Elephant Company on December 31, 2017 : Selling price.

P 580,000

Carrying amount.

620,000

Monthly lease payment.

47,316

PV of lease payment/ Fair market value.

520,000

Estimated remaining life.

12 years

Lease term. Implicit rate.

12%

.What amount of deferred gain should Popcorn company recognize on the sale on December 31? a. P 580,000 b.P 60,000 c. P 210,000 d.P 40,000 Answer: B Selling price.

P 580,000

Fair market value.

(520,000)

Deferred Gain.

P 60,000

2. Fart Corp. entered into a lease agreement with Choge Inc. for machinery. Annual lease payments of P 55,000 are payable at the end of each year. Fart knows that the lessor expects a 8% return on the lease. Fart has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Choge a residual value of P 15,000 at the end of the lease. The lease term is 6 years and the estimated useful life of the equipment is 10 years. The present value of an ordinary annuity of Php1 at 8% for six years is 4.6229, 9% for six years is 4.4859.

The present value of Php1 at 8% for six years is .6302, 9% for six years is .5963. In heart's December 3, 2017 balance sheet, the principal amount of the lease obligation was a.P 254,260 b.P 249,523.5 c.P 28,359 d.P 254,259.5 Solution: D. PV of annual payment ( P 55,000 x 4.6229).

P 254,259.5

On January 2, 2008, AsaPa Co. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $250,000 starting at the end of the first year, with title passing to AsaPa Co. at the expiration of the lease. AsaPa Co. treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. AsaPa Co. uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $1,000,000, based on implicit interest of 10%. 3. In its 2008 income statement, what amount of interest expense should AsaPa Co.report from this lease transaction? a. $125,000 b. $59,250 c. $90,000 d. $100,000 Interest Expense $1,000,000 × .10

$100,000.

4. In its 2008 income statement, what amount of depreciation expense should Martinez report from this lease transaction? a. $100,000

b. $133,333 c. $90,000 d. $66,667 Depreciation Expense $1,000,000 ÷ 15

$66,667.

5. Minion Company leases a machine from Voldemort Corp. under an agreement which meets the criteria to be a capital lease for Minion. The six-year lease requires payment of $270,000 at the beginning of each year, including $35,000 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. Minion should record the leased asset at a. $1.173,287 b. $814,435. c. $1,225,458 d. $694,665. Leased Asset ($270,000 - $35,000) × 4.99271 =

$1.173,287

VERGARA 1. Lore Company leased a new machine from Mess Company on May 1, 2017 having the option to purchase the machine on May 1,2025 by paying P200,000, which approximates the expected fair value of the machine on the option exercise date. Additional information were as follows: Lease term 8 years Annual rental payable at beginning of each lease year P 50,000 Useful life of machine. 14 years Implicit interest rate 12% Present value of an annuity of one in advance for eight periods at 12% 5.56 Present value of one for ten periods at 12% 0.40 East should record a capitalized lease asset on May 1, 2017 of

a. P 333,600 b.P 413,600 c. P 278,000 d.P 260,000 Answer: C PV of annual lease payment( 50,000 x 5.56)

P278,000

Monsters, Inc. manufactures machinery used in the mining industry. On January 2, 2011 it leased equipment with a cost of Php300,000 to Takot A 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 Php425,000, and the rate implicit in the lease is 8%, what are the equal annual payments? PV Annuity Due 8%, 5 periods 10%, 5 periods

PV Ordinary Annuity

4.31213 4.16986

PV Single Sum

3.99271

.68508

3.79079

.62092

a. Php46,702 b. Php67,831 c. Php95,800 d. Php81,398 Selling Price

(425,000 x 90%)

Php 382,500

PV of Ordinary Annuity at 8% for 5 periods

÷

Lease Liability

3.99271 Php

95,800

3. On December 31,2016, Elton John Inc. sold equipment to Benny, and simultaneously leased it back for 12 years. Pertinent information at this date is as follows: Sales Price P620,000 Carrying Amount 240,000 Estimated remaining useful life 15 years At December 31, 2016, how much should Elton John report as deferred gain from the sale of the equipment? a.P0 b.P400,000 c.P620,000 d.380,000 Answer: D Solution: Sale Price Carrying Amount Deferred gain

P620,000 240,000 380, 000

On December 31,2017 Tea Company sold an equipment to Leaf Corp. and simultaneously leased it back for 10 years. Pertinent information on this date is as follows: Sale price.

P 560,000

Carrying amount.

580,000

Estimated remaining economic life

10 years

4.In Tea's December 31, 2017 profit or loss what amount should be the loss from the sale of this machine? a. None b. 4,100 c. 30,000 d. 20,000 5. If the economic substance is shown rather than the form as accounting policy chosen by the company, at what amount should be the carrying amount of the machine in Coffee's statement of financial position at December 31, 2018? a. None b. 513,333 c. 46,667 d. 560,000 Answers: 4. D. 5 B. Selling price.

P 560,000

Carrying amount.

580,000

Loss recognized.

(P 20,000)

Impaired value.

P560,000

Depreciation- 2018( 560,000 ÷ 12). Carrying value- December 31, 2018.

(46,667) P513,333

VILLAVIZA 1. Bebe Co. leased machinery under direct-financing. The machinery has 30 years useful life, had no residual value and no option to purchase the machinery at the end of ten year lease with a fair value of P425,000. The incremental borrowing rate is 12% and the implicit rate is 10%. The present value of an annuity due of P1: at 10% for ten years is 6.7590 at 12% for ten years is 6.3282 What is the total amount of interest revenue that Vivo will earn over the life of the lease? a.P 425,000 b.P 83,592 c.P 203,791 d.P 628,790 Solution: C Rental x Annuity of 1 = FV/ MCP Fair Value of Equipment P425,000 Annuity of 1 ÷ 6.759 Rental P62879 Gross Investment (P 62,879 x 10) Net Investment (P 62,879 x 6.7590) Interest Revenue

P628,790 ( 424,999) P 203,791

2.Ahh Co. leased a new machine from Jake Co. The lease is not renewable, and the machine reverts to Jake at the termination of the lease. The cost of the machine on Jake’s accounting records is P 1,390,300. Annual rental payable at beginning of each year is P690,000. The useful life of machine 20 years,lease term is 15 years. Ahh's incremental borrowing rate is 16% and the implicit interest rate is 12%. Present value of annuity of 1 in advance for 15 periods at 12% 7.63 16% 6.47 At the beginning of the lease term, what amount should Shake record a lease liability of ? a.P 6,900,000 b.P 5,690,500

c. P 4,200,000 d.P 5,264,700 Solution: B. PV of annual payment (350,000 x 7.63).

P5,264,700

3..The following information pertains to an operating sale and leaseback of equipment by Jolen Company on December 31,2017: Sale price.

P320,000

Carrying amount.

240,000

Monthly lease payment.

37,316

Present value of lease payment/ Fair market value.

230,000

Estimated remaining life.

12 years

Lease term.

1 year

Implicit rate.

12%

What amount of deferred gain should Jolen report at December 31,2017? a. 32,000 b. 90,000 c.60,000 d. 80,000 Answer: B Sale price.

P320,000

Fair market value.

230,000

Deferred Gain.

P90,000

4. On December 31,2017, Brownies sold an oven to G with an estimated remaining life of 10 years and lease it back for 3 year. Additional information are as follows: Selling price

P 38,000

Carrying amount at date of sale.

25,000

Monthly rental under lease.

8,000

Implicit rate computed by PAL, known to Cebu Pacific. PV of monthly rental (P8,000 for 36 mos. at 12%).

12% 34,560

The leaseback is considered as operating lease. In Cebu Pacific's profit or loss, what amount should be included as realized gain on this transaction? a. P9,085 b. P 9,560 c. P 13,000 d. P 20,000 Answer: B. Fair market value Less: Carrying value. Realized Gain.

P 34,560 25,000 P 9,560

5.On March 01, 2015, Pagoda Co. leased several delivery trucks from Energy Co. under a three year operating lease. P60,000 per month for 12 months P 720,000 P55,000 per month for the next 12 months 660,000 P45,000 per month for the last 12 months 540,000 What is the annual rent revenue for the first year? a. b. c. d.

640,000 520,000 450,000 670,000

Solution 720,000+660,000+540,000= 1,920,000

No. of years Rent Revenue

/3 years 640,000