1. On January 1, 2013, Lessor Company leased a machine to Lessee Company.

The
machine had an original cost of P6,000,000. The lease term was five years and the
implicit internst rate on the leases 15%. The lease is properly classified as a direct
financing lease. The annual payments of P1,730,541 are made each December 31.
The machine reverts to Lessor at the end of the lease term, at which time the residual
value of the machine will be P400,000. The residual value is unguaranteed.

The PV of 1 at 15% for 5 periods is .4972, and the PV of an ordinary annuity of 1 at

15% for 5 periods is 3.3522. At the commencement the lease, what would be the
lease receivable on the part of the lessor and lease liability on the part of the lessee?
Lease receivable Lease liability Lease receivable Lease liability
a. 6,000,000 6,000,000 c. 6,000,000 5,801,120
b. 5,801,120 5,801,120 d. 5,801,000 6,000,000
2. Wall Company leased office premises to Fox Company for five-year term beginning
January 1, 2013. Under the terms of the operating lease, rent for the first year is
P800,000 and rent for years 2 through 5 is P1,250,000 per annum. However, as an
inducement to enter the lease, Wall granted Fox the first six months of the lease rent-
free. What amount should Wall report as rental income for 2013?
a. 1,200,000 b. 1,160,000 c. 1,080,000 d. 800,000