An entity is in the business of leasing equipment under a direct financing lease.

The lessor expects a 12%

return on net investment after considering the initial direct cost. At the end of the lease term, the
equipment shall revert to the lessor. At the beginning of current year, an equipment is leased to a lessee
with the following information:
Cost of equipment to the lessor 5,000,000
Residual value unguaranteed 600,000
Annual rental payable in advance at the beginning of each year 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate after initial direct cost 12%

1. What is the gross investment in the lease?

a. 7,200,000 b. 7,800,000 c. 5,000,000 d. 5,250,000

2. What is the net investment in the lease?
a. 5,000,000 B. 5,250,000 C. 4,400,000 D. 4,650,000

3. What amount of interest income should be recognized for the current year?
a. 594,000 B. 522,000 C. 630,000 D. 450,000

4. Cascade Company is determining the amount of pretax accounting income for the current year
by making adjustment to taxable income from income tax return. The tax return showed
taxable income of P4,000,000 on which a tax liability of PI,200,000 has been recognized.
Following is the list of items that may be required to determine pretax accounting income from
the amount of taxable income:
• Accelerated depreciation for income tax purposes was P500,000. Straight line financial
depreciation on the assets is P400,000.
• Goodwill impairment loss of P300,000 was not included as a deduction in the tax return but
may be deducted in the income statement.
• Interest income on treasury bills was not included in the tax return. During the year, P600,000
was received on these investments.
What is the pretax accounting income?
______________________ 4,400,000

5. Jasco Company is in the first year of operations. The entity reported pretax income of P4,000,000
and recorded the following items:
Premium on life insurance of key officer 100,000
Depreciation on tax return in excess of book depreciation 120,000
Interest on exempt government bonds 53,000
Warranty expense 40,000
Actual warranty repairs 32,000
Bad debt expense 14,000
Beginning balance in allowance for uncollectible accounts 0
Ending balance in allowance for uncollectible accounts 8,000
 Rent received in advance that will be recognized
evenly over the next three years 240,000
What is the taxable income for the current year?
______________________ 4,183,000

6. On December 31, 2023, an entity reported a deferred tax liability of P1,500,000 and a deferred
tax asset of P600,000. On December 31, 2024, the deferred tax liability is P2,500,000 and the
deferred tax asset is P750,000. What amount should be reported as deferred tax expense for
2024?

a. 1,150,000
b. 1,550,000
c. 850,000
d. 150,000

On December 30, 20x5, 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 the end of each lease year ₱100,000
Useful life of machine 12 years
Implicit interest rate 10%

7. 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, Haber should record a lease liability of
a. 0
b. 615,000
c. 630,000
d. 676,000

8. Neal Corp. entered into a nine-year lease on a warehouse on December 31, 20x1. Lease payments of
₱52,000, which includes payment for non-lease component of ₱2,000 (at stand-alone selling price), are due
annually, beginning on December 31, 20x1, 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, 20x1?
a. 280,000
b. 291,200
c. 450,000
d. 468,000

9. On January 2, 20x6, Ashe Company entered into a ten-year noncancellable lease requiring year-end
payments of ₱100,000. 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, 20x6?
a. 1,000,000
b. 614,500
c. 565,000
d. 0
10. Robbins, Inc., leased a machine from Ready Leasing Co. The lease requires 10 annual payments of
₱10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option of ₱10,000
at the end of the tenth year, even though the machine's estimated value on that date is ₱20,000. 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

11. On January 1, 20x7, Babson, Inc., leased two automobiles for executive use. The lease requires Babson to
make five annual payments of ₱13,000 beginning January 1, 20x7. At the end of the lease term, Babson
guarantees the residual value of the automobiles will total ₱10,000. 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

12. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The rent in 20x1 is ₱10,000
and shall increase by 10% annually starting on January 1, 20x2. Rentals are payable at the end of each year.
ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC Co. opts to use the practical
expedient allowed under PFRS 16 for leases of low value assets. How much is the lease expense in 20x1?
a. 10,000
b. 11,000
c. 11,603
d. 12,853

On January 1, 20x1, Entity Y leases out an equipment to Entity X. Information on the lease is as follows:
Lease term 3 years
Annual rent payable at the end of each year 100,000
Interest rate implicit in the lease 10%

The lease provides for the transfer of ownership of the equipment to the lessee at the end of the lease term.
The relevant present value factor is as follows:

13. How much is the gross investment on January 1, 20x1?

a. 500,000
b. 400,000
c. 300,000
d. 200,000

14. If the current tax expense is less than the income tax expense during the period, there must be a
a. deferred tax benefit
b. income tax payable
c. deferred tax expense
d. prepaid income tax

15. Trade receivables have a carrying amount of P4,000. The related revenue has already been included in
taxable profit (tax loss). How much is the tax base of the asset?
a. 4,000
b. 2,400
c. 1,600
d. 0

“ Do not ever give up. “ /map 😊