ACCOUNTING 4 LEASES

PROBLEM 1: TRUE OR FALSE

1. According to PFRS 16 Leases, a lessee shall classify each of its leases into a finance lease or an
operating lease.
2. A contract is (or contains) a lease if it conveys the right to control the use an identified asset for
a period of time in exchange for consideration.
3. An underlying asset is not considered an identified asset for the purpose of applying the
accounting requirements of PFRS 16 if the supplier’s substitution right is not substantive.
4. The current view on accounting for leases by lessees is that all leases are ‘on-balance sheet’
items, with very minimal exceptions.
5. In most leases, a lessee recognizes an asset and a liability at the commencement date.
6. According to PFRS 16, lease payments include any amount to be paid for purchase options that
are reasonably certain to be exercised and amounts that are expected to be paid under residual
value guarantees.
7. The lessee always uses its incremental borrowing rate in determining the present value of the
minimum lease payments.
8. If a lease transfers ownership of the underlying asset to the lessee by the end of the lease term,
the underlying asset is depreciated over its useful life or the lease term, whichever is shorter.

Fact pattern
On January 1, 2019, Lessee enters into a 4-year lease of an asset for an annual rent of P10,000
payable at the beginning of each year. The interest rate implicit in the lease is 10% while the
lessee’s incremental borrowing rate is 12%.

9. The initial measurement of the right-of-use asset is determined as follows: P10,000 x PV of an

ordinary annuity of P1 @10%, n=4.
10. The initial measurement of the lease liability is determined as follows: P10,000 x PV of an
annuity due of P1 @10%, n=4.

MULTIPLE CHOICE – THEORY

11. Which of the following is not one of the criteria when determining whether a contract is or
contains lease?
a. Identified Asset
b. Identified Liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use
12. If the supplier has substitution to right,
a. A customer shall not account for the contract as a lease.
b. A customer shall account for the contract as a lease.
c. A customer shall not account for the contract as a lease if it has the right to direct the use of
the asset.
d. A customer shall account for the contract as a lease if the supplier’s substitution right is not
substantive.
13 According to PFRS 16 lease payments exclude which of the following?
a. Rentals
b. Purchase option that is reasonably certain as to exercise
c. Payments for non-lease elements, except when the lessee opts to use the allowed practical
expedient
d. Amount expected to be paid under a residual value guarantee
14. The discount rate used by the lessee in accounting for leases is the
a. interest rate implicit in the lease
b. lessee’s incremental borrowing rate if interest
c. lease contract stated interest rate
d. Choice (a) if this is determinable, if not determinable, then Choice (b).
15. Initial direct costs incurred by a lessee are
a. expensed immediately
b. capitalized as cost of right-of-use asset
c. included in the initial measurement of lease liability
d. b and c
16. When a lease transfers ownership to the lessee by the end of the lease term, the underlying asset
is depreciated
a. over its useful life c. over the shorter of a and b
b. over the lease term d. not depreciated
17. A six-year lease expiring on December 31 specifies equal annual lease payments. Part of this
payment represents interest in part represents a reduction in the net lease liability. The portion of
the lease payment in the fifth year applicable to the reduction of the net lease liability should be
a. Less than in the fourth year c. The same as in sixth year
b. Less than in the sixth year d. Less than in the fourth year
18. Which of the following is incorrect regarding the accounting for leases by a lessee?
a. A lessee recognizes the same total amount of expense on a lease whether it uses the
general recognition or the recognition exemption under PFRS 16.
b. The interest expense on a lease liability decreases each period.
c. According to PFRS 16, executory cost, such as insurance and real property taxes, are always
excluded from lease payments regardless of whether these costs transfer goods or services
to the lessee.
d. A lessee shall allocate the total consideration in a contract to the lease components and
non-lease components of the contract.
19. Which of the following is not included in the lease payments for the purposes of computing for the
lease liability?
a. Fixed payments less any lease incentives receivable.
b. Variable lease payments that depend on an index or a rate, initially measured using the
index or rate as at the commencement date,
c. Guaranteed residual value
d. Contingent rent based on level of sales
20. A right of use asset is initially measured at cost and subsequently measured using the
a. cost model c. revaluation model
b. fair value model` d. any of these
21. Which of the following dates is issued to identify the commencement of a lease?
a. The date of the lease agreement
b. The date of the commitment by the parties to the principal provisions of the lease
c. The earlier of the date of the lease agreement and the date of the commitment by the
parties to the principal provisions of the lease
d. The date on which the lessee is entitled to exercise its right to use the leased asset.
22. Which is correct statement of one of the lease capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the economic life of the leased property.
d. The minimum lease payments excluding executor costs equal or exceed 90% of the fair
value of the leased property.
23. The amount to be recorded as the cost of an asset under a finance lease is equal to the
a. Present value of the minimum lease payments.
b. Present value of the minimum lease payments or the fair value of the asset, whichever is
lower.
c. Present value of the minimum lease payments pus the present value of any unguaranteed
residual value.
d. Carrying amount of the asset on the date of lease.
24. Which of the following is not included in the definition of minimum lease payments?
a. Any payment required by a bargain purchase option that is reasonably certain
b. Costs for services and taxes to be paid by and reimbursed to the lessor
c. Required payments over the lease term
d. Any amounts guaranteed by a party related to the lessee
25. Unguaranteed residual value is
a. A component of minimum lease payments
b. Completely ignored in accounting for a finance lease
c. The portion of residual value of the leased asset, the realization of which by the lessor is not
assured or is guaranteed solely by a party related to the lessor
d. The portion of residual value of the leased asset which is guaranteed by the lessee or by a
party related to the lessee
26. A lessee with a finance lease containing a bargain purchase option should depreciate the leased
asset over the
a. Asset’s remaining economic life.
b. Term of the lease
c. Life of the asset or then term of the lease, whichever is shorter.
d. Life of the asset or then term of the lease, whichever is longer.
27. In computing depreciation of a leased asset, the lessee should subtract
a. A guaranteed residual value and depreciate over the term of the lease.
b. An unguaranteed residual value and depreciate over the term of the lease.
c. A guaranteed residual value and depreciate over the life of the asset.
d. An unguaranteed residual value and depreciate over the life of the asset.
28. Lessors shall recognize asset held under a finance lease as receivable at an amount equal to
a. Gross investment in the lease
b. Net investment in the lease
c. Gross rentals
d. Residual value, whether guaranteed or unguaranteed
29. Which of the following would not be included in the lease receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
30. The interest rate implicit in the lease is the discount rate that causes the aggregate of the present
value of the minimum lease payments and the unguaranteed residual value to equal the
a. Fair value of the leased asset
b. Fair value of the leased asset and initial direct costs of the lessor.
c. Fair value of the leased asset and initial direct costs of the lessee.
d. Gross investment in the lease.
31. A lessor with a sales type lease involving an unguaranteed residual value available to the lessor at
the end of the lease term would report sales revenue at what amount?
a. The minimum lease payments plus the unguaranteed residual value
b. The present value of the minimum lease payments
c. The cost of the asset to the lessor less the present value of any unguaranteed residual value
 d. The present value of the minimum lease payments plus the present value of the
unguaranteed residual value
32. Which statement is incorrect about initial direct costs?
a. Initial direct costs incurred by the lessee in finance lase are added to the amount recognized
as an asset and to the finance lease liability.
b. In a direct financing lease, initial direct costs are added to the net investment in the lease.
c. In a sales type lease, initial direct costs are expensed as component of cost of goods sold.
d. For operating leases, initial direct costs are deferred and allocated over the lease term.
33. Lease payments under an operating lease shall be recognized as rent income using the
a. Cash method
b. Sum of years’ digits method
c. Declining balance method
d. Straight line method, unless another systematic basis is representative of the time pattern
of the user’s benefit.
34. When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee in an
operating lease?
a. When received
b. At the inception of the lease
c. At the lease expiration
d. Over the lease term
35. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest
b. The lessee records the lease obligation related to the underlying asset.
c. The lessor transfers title of the underlying asse5t to the lessee.
d. The lessee records depreciation and lease revenue.
36. The basic accounting issue for a lessor is
a. Expense recognition during the lease term
b. Revenue recognition during the lease term
c. Computing depreciation over the lease term
d. Determination of the cost of the leased asset
37. If the lessor and lessee use different interest rates to account for a finance lease, then
a. The lessor will use different account titles to record the leasing transactions
b. Total expenses and revenues will be equal
c. Total expenses and revenues will be different
d. The lessee and the lessor cannot use different interest rates
38. In the case of a lease of land and building where title to the land is not transferred, the lease is
generally treated as if:
a. Both land and building are finance leases
b. Both land and building are operating leases
c. Land is operating lease; building is finance lease
d. Land is finance lease; building is operating lease
39. The lessor must classify a sale-and-leaseback arrangement as a(n)
a. Operating lease or a finance lease
b. Operating lease or a sales-type lease
c. Direct financing lease or a sales-type lease
d. Direct financing lease or an operating lease
40. One incentive for entering into a sale-and-leaseback arrangement on substantially all of the
market value of an asset is
a. Tax implications are favorable for the lessor, compared with other lending arrangements
b. Improvement in cash flow for the lessor
c. Improvement in cash flow for the lessee
d. Entire gain appears on lessee income statement in sale year
41. Which of the following is incorrect about bonds sold at a discount?
a. The carrying amount of the bond increases each year
b. The discount on bonds payable account decreases each year
c. At maturity, the face value and carrying amount of the bonds will be equal
d. The balance of the bonds payable account increases each year
42. How would the carrying value of a bond payable be affected by amortization of each of the
following?
DISCOUNT PREMIUM
a. No effect No effect
b. Increases No effect
c. Increases Decreases
d. Decreases Increases
43. Under the effective interest method of bond discount or premium amortization, the periodic
interest expense is equal to
a. The stated rate of interest multiplied by the face value of bonds
b. The effective rate of interest multiplied by the face value of bonds
c. The stated rate multiplied by the beginning of the period carrying amount of the bonds
d. The effective rate multiplied by the beginning of the period carrying amount of the bonds
44. Bonds with a par value of P5.0 million carrying a stated interest rate of 12% payable semiannually
on March 1 and September 1 were issued on July 1. The total proceeds from the issue amounted
to P5,200,000. The best explanation for the excess amount received over the par is
a. The bonds were sold at a premium
b. The bonds were sold at a higher effective interest
c. The bonds were issued at par value plus accrued interest
d. No explanation is possible without knowing the maturity date of the bond issue
45. Under IFRS 16, a lease is accounted for as a finance lease if
a. The lease transfers ownership of the property from the lessee to the lessor at the end of
the lease term
b. The lease provides for a purchase option that allows the lessee to purchase the leased
property which is equal to the fair value of the leased asset
c. The lease term is more than 75% of the useful life of the leased property
d. The present value of minimum lease payments is at least 90% of fair value of the leased
asset at the inception of the lease
46. Which of the following situations may lead to a lease being classified as finance lease?
a. If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are
borne by the lessee.
b. The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower the market rent
c. The leased assets are of a specialized nature such that only the lessee can use them without
major modifications being made
d. All of these
 47. For a sales-type lease,
a. The sales price includes the present value of the unguaranteed residual value
b. The present value of the guaranteed residual value is deducted to determine the cost of
goods sold.
c. The gross profit will be the same whether the residual value is guaranteed or unguaranteed.
d. None of these
48. Upon retirement of the bonds, any resulting gain on retirement of thye bonds should be reported
in income statement when
a. Retirement price is less than the carrying value of the bonds
b. Retirement price is greater than the carrying value of the bonds
c. Retirement price is equal the carrying amount of the bonds
d. None of the above
49. What is basic purpose of the Conceptual Framework of Financial Reporting?
a. To develop a single set of high quality International Financial Reporting Standards (IFRS)
b. To promulgate rules and regulations affecting the practice of the Philippine Accountancy
profession
c. To address accounting issues with divergent and unacceptable treatments by issuing
implementation guidance on existing Philippine Financial Reporting Standards (PFRS)
d. To assist preparers of financial statements in applying accounting standards and in dealing
with issues that have yet to form the subject of accounting standards
50. In the Conceptual Framework of Financial Reporting, what provides “the why” (i.e., the purpose)
of accounting?
a. Objective of financial reporting
b. Elements of financial statements
c. Qualitative characteristics of accounting information
d. Recognition, measurement, and disclosure concepts such as assumptions, principles, and
constraints

MULTIPLE CHOICE – COMPUTATIONAL

51. On December 30, 2019, Haber Co. leased a new machine from Gregg Corp. The following data
relate to the lease transaction at the inception of the lease:
Lease term 10 years
Annual rental payable at end of each lease year P100,000
Useful life of machine 12 years
Implicit interest rate 10 %
The lease has no renewal option, and the possession of the machine reverts to Gregg when the
lease terminates. At the inception of the lease, Heber should record a lease liability of
a. 0 b. 615,000 c. 630,000 d. 676,000

52. On January 2, 2019, Ashe Company entered into a ten-year non-cancellable lease requiring year-
end payments of P100,000. Ashe’s incremental borrowing rate is 12% while the lessor’s implicit
interest rate, known to Ashe, is 10%. Ownership of the property remains with the lessor at
expiration of the lease. There is no bargain purchase option. The leased property has an estimated
economic life of 12 years. What amount should Ashe capitalize for this leased property on
January 2, 2019?
a. 1,000,000 b. 614,500 c. 565,000 d. 0
53. Neal Corp. entered into a nine-year lease on a warehouse on December 31, 2019. Lease payments
of P52,000, which includes payments for non-lease component of P2,000 (at stand-alone selling
price), are due annually, beginning on December 31, 2019, and every December 31 thereafter.
Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%.
What amount should Neal report as lease liability at December 31, 2019?
a. 280,000 b. 291,200 c. 450,000 d. 468,000

54. Robbins, Inc., leased a machine from Ready Leasing Co. The lase requires 10 annual payments of
P10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option
of P10,000 at the end of the tenth year, even though the machine’s estimated value on that date
is P20,000. It is reasonably certain that Robbins will exercise the purchase option. Robbins’
incremental borrowing rate is 14%. What amount should Robbins record the right-of-use asset at
the beginning of the lease term?
a. 62,160 b. 64,860 c. 66,500 d. 69,720

55. On January 1, 2019, Babson, Inc., leased two automobiles for executive use. The lease requires
Babson to make five annual payments of P13,000 beginning January 1, 2019. At the end of the
lease term, Babson guarantees the residual value of the automobiles will total P10,000. The
interest rate implicit in the lease is 9%. Babson’s recorded lease liability on initial recognition is
a. 48, 620 b. 44,070 ` c. 35,620 d. 31,070

56. On January 1, 2019, Harrow Co. as lessee signed a five year non-cancellable equipment lease with
annual payments of P100,000 beginning December 31, 2018. The implicit interest rate is 10%.
How much is the interest expense for the year ended December 31, 2018?
a. 37,900 b. 27,900 c. 24,200 d. 0

57. On January 1, 2019, Blaugh Co. signed a long-term lease for an office building, the trems of the
lease required Blaugh to pay P10,000 Annually, beginning December 30, 2019, and continuing
each year for 30 years. On January 1, 2019, the present value of the lease payments is P112,500
at the 8% interest rate implicit in the lease. In Blaugh’s December 31, 2019, balance sheet, the
lease liability should be
a. 102,500 b. 111,500 c. 112,500 d. 290,000

58. On January 1, 2019, Day Corp. entered into a 10-year lease agreement with Ward, Inc. for
industrial equipment. Annual lease payments of P10,000 are payable at the end of each year. Day
knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing
rate. The equipment is expected to have an estimated useful life of 10 years. In addition, a third
party, unrelated to Day, has guaranteed to pay Ward a residual value of P5,000 at the end of the
lease. In Day’s January 1, 2019 balance sheet, the principal amount of the lease obligations was
a. 63,374 b. 61,446 c. 58,112 d. 56,502

59. On December 30, 2019, Rafferty Corp. leased equipment. Annual lease payments of P20,000 are
due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate
implicit in the lease is 10%. The present value of the lease payments on December 30, 2019 before
the first lease payment is P135,000. The first lease payment was made on that date. What amount
should Rafferty include in current liabilities for this lease in its December 31, 2019, balance sheet?
a. 6,500 b. 8,500 c. 11,500 d. 20,000
60. On January 2, 2019, Cole Co. signed an eight-year non-cancellable lease for a new machine,
requiring P15,000 annual payments at the beginning of each year. The machine has a useful life of
12 years, with no salvage value. Title passes to Cole at the lease expiration date. Cole uses
straight-line depreciation for all of its plant assets. Aggregate lease payments have present value
on January 2, 2019, of P108,000, based on appropriate rate of interest. For 2019, Cole should
record depreciation (amortization) expense for the leased machine at
a. 0 b. 9,000 c. 13,500 d. 15,000

61. At the beginning of current year. An entity leased office space for five years at an annual rental of
P700,000 under an operating lease. On the same date, the entity incurred the following amounts:
Bonus to obtain lease 300,000
First year’s rent 700,000
Last year’s rent 700,000
Security deposit refundable at lease expiration 800,000
Installation of new walls and offices 750,000
Insurance 50,000
Property taxes 40,000
Initial direct cost 100,000

What total amount of the expenses relating to the rent of office space should be reported for
the current year?
a. 1,100,000
b. 1,000,000
c. 1,800,000
d. 1,340,000

62. On January 1, 2019, an entity purchased a new machine for P6,000,000 for the purpose of leasing
it. The machine had an estimated 10-year life. On April 1,2019, the entity leased the machine to a
lessee for three years at a monthly rental of P400,000. The lessee paid the rental for one year of
P4,800,000 on April 1, 2019 and additionally paid P900,000 to the lessor as a lease bonus to obtain
the three-year lease. On April 1, 2019, the entity paid P300,000 to a broker as a finder fee. What is
the net rental income for 2019?
a. 3,150,000
b. 4,350,000
c. 3,200,000
d. 4,400,000

63. On July 1, 2019, an entity leased an equipment to a lessee under a 3-year operating lease. Total
rent for the lease term is P3,600,000, payable P50,000 monthly for the first lease year, P75,000
monthly for the second lease year and P175,000 monthly for the third lease year. All payments
were made when due. On June 30, 2021, what amount should be reported as accrued rent
receivable?
a. 2,100,000
b. 1,200,000
c. 900,000
d. 0
64. On December 31,2019, an entity sold a machine with useful life of 10 years to another entity and
simultaneously leased it back for two years at annual rental of P360,000.
Sale price at fair value 3,600,000
Carrying amount 3,300,000

What amount of revenue from sale of the machine should be reported in 2019?
a. 150,000
b. 300,000
c. 360,000
d. 180,000

65. On December 31, 2019, an entity sold an equipment with an estimated remaining useful life of 10
years. At the same time, the entity leased back the equipment for 2 years.

Sale price at above fair value 7,500,000

Fair value of equipment on date of sale 6,000,000
Carrying amount of equipment 5,000,000

What amount of gain should be reported in the income statement for 2019?
a. 2,500,000
b. 1,500,000
c. 1,000,000
d. 1,750,000