QUIZ 7 LEASES (from Quiz Bowl)
Finance Lease - DEPRECIATION
A. Finance Lease w/ PURCHASE OPTIONS
(1) On January 1, 2023, ABC Company signed a
5-year non-cancellable lease from XYZ Inc. for a
building to be used as an office space with an
annual payment of Php 150,000 beginning
December 31, 2023. ABC Company paid a direct
cost of Php 30,000. The building has a useful life of
50 years, with a residual value amounting to Php
100,000 guaranteed by a 3rd party. The implicit rate
is 10%. ABC Company also received a lease
incentive of Php 100,000.
a. How much is the initial cost of the right of use
of an asset on December 31, 2023?
b. How much is the interest expense in 2023?
(2) On December 31, 2024, Whitebeard Company
entered into a 5-year noncancelable lease for a
machine to be used in their production. The lease
contract specifies a P150,000 annual payment
every December 31 beginning December 31, 2024.
The machine has a useful life of 10 years. The
interest rate implicit on the lease is 10%.
Whitebeard has a purchase option of P50,000, and
it is certain that the company will exercise this
option.
a. What is the initial cost of the right of use asset
on December 31, 2024?
b. How much is the interest expense in 2024?
B. Finance Lease w/ GRV & Initial DC
(1) At the beginning of current year, Ground Co.
signed a 3 year noncancelable lease for right of use
machInery with the following informations:
a. What is the initial cost of the right of use of an
asset?
b. How much interest expense is recognized at
the end of the current year?
(2) On January 1, 2021, ERC Co, leased machinery
to LUH Co, with a cost of ₱1,600,000, leased term
for 4 years, which is also the useful life of the asset
The residual value guarantee is ₱40,000. Rental is
payable every December 31. The implicit rate in the
lease is 12%, and 10% after considering the initial
direct cost. On January 1, 2021 ERC Co. paid an
initial direct cost of ₱20,000.
a. How much is the Annual rental?
b. How much is the unearned Interest income?
C.
(1) On December 31, 2023, ILLIT Co. signed a
5-year non-cancellable lease for the right of use of a
machine for PHP 565,730. The machine has a
useful life of 10 years. ILLIT Co. regularly uses
straight line depreciation on similar assets. Assume
that the cost of the right of use asset includes PHP
70,000 gross bargain purchase option.
CASE 1. At the end of the lease, ILLIT Co. expects
to exercise the bargain purchase option. ILLIT
Co. estimates that the equipment's fair value will be
PHP 50,000 at the end of its useful life. How much
is the depreciation expense on December 31,
2024?
CASE 2. Assume that the cost of the right of use
asset includes PHP 70,000 gross guaranteed
residual value. How much is the depreciation
expense on December 31, 2024?
(2) On December 31, 2023, Fairy Tail Company
signed a 5-year noncancelable lease for the right to
use assets of an equipment for Php 600,192. The
equipment has a useful life of 7 years. Accordingly,
Fairy Tail uses a straight line depreciation method
regularly on similar assets. Assume that the cost of
the right of use asset includes Php 56,000 gross
bargain purchase option. (Final answers should be
rounded off to the nearest whole number.)
a. At the end of the term, Fairy Tail expects to
exercise the bargain purchase option. The
company estimates that the equipment's fair value
will be Php 65,000 at the end of its useful life.
b. Assume instead that the cost of the right of use of
the asset includes Php 50,000 gross guaranteed
residual value.
D. Lease Modification - DECREASE in Scope of
Lease
(1) On January 1, 2021, Fairy Tail Company entered
into a five year lease for 5,000 square meters of
office space. Annual lease payment P200,000
payable on December 31 of each year. On January
1, 2023 Fairy Tail and the property owner agreed to
amend the original lease for the remaining three
years to decrease the leased office space to 3,750
square meters. As a result, the lease payment
decreases to P150,000 per year.
Fairy Tail's incremental borrowing rate is 10% in
2021, and 8% in 2023.
a. How much is the amount of lease liability to be
recognised on December 31, 2022 before the
modification?
b. How much should be recorded as an increase in
the lease liability as a result of modification on
January 1, 2023?
E. Operating Lease
(1) Azan Co. signed a five-year non-renewable
operating lease starting on January 1, 2024, for
business office space. The leased space, with a
useful life of 50 years, incurs a monthly rent of
P30,000 as per the agreement. Assume that in the
first two years, rent will be P30,000.00 per month
but in the last three years, it will be P35,000 per
month.
a. How much is the total rent income in 2024?
b. How much is the rent receivable at the end of
2025?
(2) On January 1, 2023, REI Company, lessor,
signed a 3-year nonrenewable operating lease for
specialized equipment. The lease commenced on
the same date. The equipment has a useful life of
10 years, and the lease agreement specifies a
monthly rent of P15,000.
CASE 1. Assume that REI Company grants free
rent of 3 months to the lessee, what is the total rent
income for the lessor from the operating lease?
CASE 2. Assume that the lessee paid P144,000 as
a lease bonus, how much is the total rent income
for 2023?
F. Direct Finance Lease - Lessor (NO INITIAL
DC)
(1) On January 1, 2023, Ceniza Machineries, Inc.
leased a construction equipment to Young
Company with the following information:
The lease agreement specifies equal annual
payment in advance every January 1 of each year
beginning January 1, 2023. The relevant present
value factors are the following:
a. How much is the annual collection of Ceniza
Machineries, Inc.?
b. How much is the total unearned interest
income?
G. Direct Finance Lease - Lessor (WITH INITIAL
DC)
(1) On December 31, 2022, Ehrndle Co. leased
equipment with a cost of P4,000,000 to Luffy Co. for
5 years which is also the useful life of the asset.
The lease agreement stipulates an annual payment
of P959,256, starting on December 31, 2022, with
each payment being of equal amount. On the same
date, Ehrndle Co. incurred an incremental cost of
P66,956 directly attributable to arranging the
lease.At the end of the lease term, the equipment
will revert to Ehrndle Co. The rate implicit on the
lease is 10% but after considering the initial direct
cost the implicit rate is adjusted at 9%.
a. Interest Income in 2024
b. How much is the leased-related asset to be
shown as current in the statement of financial
position on December 31, 2022?
(2) On December 31, 2022, Zafira Co. leased
equipment costing P400,000 to Sapphire Co. for 5
years. The equipment has a useful life of 5 years.
According to the lease agreement, an annual
payment of P99,680 must be made beginning on
December 31, 2022. On the same date, Zafira Co.
paid direct costs amounting to P15,650. At the end
of the lease term, the equipment will revert to Zafira
Co. The implicit rate was 12%, but after considering
the initial direct cost, it is adjusted to 10%.
a. The total interest income to be earned over the
lease term is
b. The amount to be presented as noncurrent in
the statement of financial position on December 31,
2023 is
H. Sales-type lease
(1) On January 1, 2024, Purple Co. leased
equipment with a cost of 200,000 to Yellow Co for 3
years and incurred indirect costs of 10,000. The
equipment has a useful life of 3 years. Yellow Co. is
to pay 100,000 annually every December 31. The
lease has an implicit rate of 12% and a residual
value of 10,000.
a. How much is the total interest income to be
earned for the entirety of the lease term?
b. How much is the profit on sale on December 31,
2021?
(2) A. Co. is a dealer in machinery and at the
beginning of this year, one of the machines was
leased out to another company specifying that the
ownership of such machine will be reverted back to
A. Co. at the end of its lease term. The following are
the provisions of the said lease:
a. What should be reported as total unearned
interest income?
b. How much is the profit of sale if the residual
value is guaranteed and unguaranteed?
I. Finance Lease - LESSOR
(1) On January 1, 2020, ABC Co leased equipment
to Kalinga XYZ Co, for 6 years, which is also the
useful life of the asset. The lease agreement
specifies equal annual payment of P150,000 every
December 31. At the end of the lease term, the
equipment will revert to ABC Co. A third party
related to the lessee guarantees the residual value
of the equipment amounting to P100,000. The rate
implicit in the lease is 10%.
a. How much is the net cost of investment?
b. How much is the unearned interest income?
(2) On January 1, 2018, Deborah entered into a
finance lease for a second hand stamping machine
as a lessor. The fair value of the machine was
₱500,000, and its carrying amount in Deborah's
financial statements was ₱440,000. Deborah paid
an additional cost of ₱3,000 to arrange the lease
contract. The stamping machine has a remaining
economic life of 6 years. The lease term is 5 years.
Annual lease payments are ₱110 000, payable on
December 31 of each year. Deborah anticipates
that at the end of the term of the lease, the machine
can be sold for ₱50,000, and the lessee promises to
protect Deborah against the first ₱20,000 loss from
a sale at a price less than the estimated residual
value (i.e. 50,000). Deborah classifies the lease as
finance.
a. How much is Deborah's net investment in the
lease on January 1, 2018?
b. How much is the gain or loss on sale of the
machine?
J. Sale and Leaseback
(1) On January 1, of the current year, Queens Co.
sells a building to Kangoh, Inc. At the same time,
Queens Co. entered into a contract with Kangoh,
Inc. for the right to use the building. Data relating to
the sale and leaseback are the following:
Assume the fair value of the building is 3,800,000.
a. How much is the gain (loss) on rights
transferred to be recognized by the lessee?
b. How much is the initial cost of the rights of use
asset to be recognized by the lessee?
K. SUBLEASES
(1) On January 1, 2024, Lessee Company entered
into a 10-year lease for 7, 000 square meters of
office space for annual lease payment of P200,000
every December 31. The rate implicit in the lease at
the commencement date is 11%. On January 1,
2029, when the present value of the lease liability
is 739,179, the cost of right of use asset is
1,177,846, and accumulated depreciation of
588,923, the Lessee (intermediate lessor)
subleases the 7,000 square meters of office space
for the remaining terms of 5 years to the sublessee
for P250,000 when the implicit rate of 10%.
a. How much unearned interest income should
the intermediate lessor record at the beginning of
2029 assuming that the sublease is treated as a
finance lease?
b. Assuming that the intermediate lessor treats the
sublease as a finance lease, what amount of
depreciation expense should the sublessee
recognize in 2029?
(2) On January 1, 2022, Eternal Sunshine Co.
entered into a 8-year lease of luxurious helicopters
for an annual lease payment of P200,000 every end
of the year, December 31. The implicit rate at the
commencement date is 15%. 3 years have passed,
January 1, 2025, the present value of the lease
liability is P670,431 and the cost of right of use
asset is P897,464 and an accumulated depreciation
of P336,549, the intermediate lessor subleases the
helicopter with the remaining terms of 5 years to
Cowboy Carter Co., the sublessee, for P150,000
with an implicit rate of 7%. Assume that the
intermediate lessor treats the sublease as a
finance lease.
a. How much is the interest income to be
recognized on December 31, 2025?
b. How much will be recorded as lease receivable
by the intermediate lessor on January 1, 2025?
L. Cost of Right-of-use asset
(1) In connection with your audit of Hiyyih
Enterprises, you noted that the company has a
long-standing policy of acquiring company
equipment by leasing. Early in 2020, 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, Hiyyih may purchase the
machine. The estimated economic life of the
equipment is 12 years. Hiyyih 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:
a. Amount to be capitalized as cost of the right of
use of asset.
b. Lease liability as of December 31, 2021.
(2) On January 1, 2024, Vintage Company entered
into a non-cancelable lease for an equipment with
the following information:
a. Compute for the initial cost of the right of use
asset.
b. Assume that the lease payment shall be made
every December 31 and that the first payment is to
be made every December 31, 2024. Compute for
the initial cost of the right of use asset.
M. First and Second Lease
(1) Red Apple Company entered as a lessee on the
following lease:
1st Lease
On July 1, 2024 Red Apple Company leased
computer equipment from Green Apple Corporation
under a 3-year operating lease. Total rent for the
term of the lease will be ₱390,000 payable as
follows:
12 months at ₱ 6,250 = ₱ 75,000
12 months at ₱ 10,000 = ₱ 120,000
12 months at ₱ 16,250 = ₱ 195,000
All payments were made when due. The lease is for
a low value asset.
2nd Lease
On June 30, 2025, Red Apple company leased a
new machine from Blue Apple Company under a
lease with the following information:
Annual rental payable at beginning of each
lease year - ₱ 500,000
Lease Term - 10 years
Useful life of machine - 10 years
Implicit interest rate - 12%
The fair value of the machine on June 30, 2025 is ₱
2,500,000. Red Apple Company has the option to
purchase the machine on June 30, 2029 by paying
₱ 600,000 which approximates the expected fair
value of the machine on the option exercise date.
a. On June 30, 2025, what amount of accrued rent
payable for the first lease should be reported in
Red Apple Company's statement of financial
position?
b. How much should be recorded as the cost of the
right of use asset in June 30,2025?
(2) Sinak tan mo Co. entered as a lessee on the
following lease contract:
First Lease
On January 31, 2024, Sinak tan mo Co. leased
equipment from Mahalin mo Co. under a 5-year
operating lease. Rent for the term of the lease will
be ₱ 624,000:
The lease is a low value asset and payments are
paid when due.
Second Lease
Sinak tan mo Co. leased a new machine from Ayo
Co. on January 1, 2025, under a lease with the
following information:
The fair value of the building on January 1, 2025 is
₱ 834,000.
a. In Sinak tan mo Co.'s January 1, 2025, the
accrued rent payable should for the first lease be:
b. How much should Sinak tan Co. record as cost
of right of use asset on January 1, 2025?
N. Decommissioning Liability, Investment
Property
(1) The following matters on the financial
statements of ABC Co. for the year ended October
31, 2023 are under consideration:
A. At the cost of Php 150 million, ABC's plant was
commissioned and became operational on May 1,
2018. Its useful life was estimated at 20 years and
its present value of decommissioning liability was
Php 20 million. Its discount rate is 10%.
B. On May 1, 2023, ABC shifted to a newly acquired
building in the city center. This was leased as
follows:
Date of commencement of lease: May 1, 2023
Lease Period: 3 years
Six semi-annual installments payable in advance
every May 1 and Nov 1 (to be increased by 5%
annually)
On May 1, 2023, the carrying value and fair value of
the vacated building was Php 55 million and Php 70
million respectively. The fair value of the vacated
building did not change as of October 31, 2023.
ABC uses cost model to account for investment
properties
a. The total finance cost relating to
decommissioning cost for the year ended October
31, 2023 is
b. Carrying amount of the plant for the year
ended October 31, 2023 is
(2) On December 31, 2024, the year-end financial
statements of Makapasar Company (Makapasar
Co.) are under finalization and the following matters
are under consideration:
A. Makapasar Co.'s gas detoxification facility was
purchased on January 1, 2020, for P150,000,000.
The cost of cleaning up the routine contamination
caused by the initial location of gas on the property
is estimated to be P30,000,000. The cost will be
incurred in 15 years when all of the existing
stockpiles of gas are detoxified and the facility is
decommissioned. The appropriate discount rate is
12%. However, as a result of technological
advances, the entity had estimated that the present
value of the decommissioning liability as of January How much should Di Mo Sure recognize as the
1, 2022 was P34,000,000. As of the reporting date, initial measurement for lease liability? (Carry
there has been no change in the above estimates. over all decimal places in the computation of
B. On January 1, 2024, Makapasar Co. shifted to a present value)
newly acquired facility in the city center. The
vacated facility was leased as follows:
Date of commencement of lease: Jan 1, 2024
Lease period: 3 years
Six semi-annual installments payable in advance
every January 1 and July 1 (to be increased by 6%
annually): P3,500,000
The entity does not transfer substantially all the
risks and rewards incidental to ownership of the
underlying asset. On January 1, 2024, the carrying
amount and fair value of the vacated facility was
P128,926,769 and P105,000,000. On December
31, 2024, the fair value of the vacated facility
increased by P5,000,000.

a. The total finance cost relating to

decommissioning cost for the year ended
December 31, 2024 is:

b. The carrying amount of the facility for the year

ended December 31, 2024 is (assuming Makapasar
Co. uses the (1) cost model or (2) fair value model
to account for investment properties):

O. Lease Liability
(1) On December 31, 2023, Stranger Things signed
a three-year noncancelable lease for the right of
use of a new machine, requiring ₱100,000 annual
payments beginning December 31, 2023. The
machine has a useful life of 5 years, with no
salvage value. The implicit rate on the lease is 10%.
Stranger Things has a bargain purchase option
amounting to ₱20,000 and it is reasonably certain
that the company will exercise this option.
a. What is the amount to be capitalized as a right
of use asset on December 31, 2023?

b. How much is the depreciation expense on the

lease in 2024?

(2) On January 1, 2022, Di Mo Sure Company

entered into a nine-year non-cancelable lease on a
warehouse commencing on the same date. The
warehouse has a useful life of 40 years and lease
payment specification of P49,000, including P1,000
for real estate taxes. Its interest rate implicit on the
lease is 9% while incremental borrowing rate of Di
Mo Sure is 10%.
a. What amount should Di Mo Sure Company report
as initial measurement of lease liability assuming
lease payment shall be made on January 1 and the
first lease payment was made on the
commencement date? (Carry over all decimal
places in the computation of present value)

b. Assume lease payment shall be made every

December 31 and in addition to the annual rent,
lessor and lessee agreed that additional rent is
computed at: