Leases

An entity is a manufacturer of machinery. It uses lease agreements to sell its product. On Jan.
1,
2019, the entity leased a machine to another entity under the following terms:
 The lease term is 5 years.
 The annual rental is P500,000 payable every January 1, starting January 1, 2019.
 The machine has a cost to the entity of P1,600,000
 Implicit interest rate in the lease, known to the lessee, is 8%.
The machine reverts back to the entity at the end of 5 years with unguaranteed residual value of
P400,000. The present value factors of 1 and annuity due at 8% for 5 periods are 0.68 and 4.31
respectively.
1. What amount of sales revenue should be recognized by the entity?
a. 2,155,000
b. 2,427,000
c. 2,555,000
d. 1,883,000
2. What amount of gross income should be recognized by the entity for 2019?
a. 555,000
b. 827,000
c. 955,000
d. 700,000
3. What amount should be recognized as interest income for 2019?
a. 194,160
b. 154,160
c. 172,400
d. 128,000
Sharpie Co. manufactures an X-ray machine and leases it to Stabilo Hospital. The entity
provided the ff. information pertaining to the finance lease agreement:
Commencement of the lease January 1, 2018
Annual rental payable in advance every Jan. 1 600,000
Lease term 10 years
Useful life of the machine 12 years
Cost of the machine 3,000,000
Fair value of the machine on Jan. 1, 2018 4,950,000
Legal fees in directly signing the lease 140,000
Guaranteed residual value 150,000
Implicit rate in the lease 10%
The machine will revert back to Sharpie on Jan. 1, 2028. The present value of an ordinary
annuity and annuity due for 10 periods at 10% are 6.14 and 6.76. The present value of 1 for 10
periods at 10% is 0.39.
4. What amount of sales revenue should be recognized by Sharpie?
a. 4,956,780 c. 3,742,500
b. 4,056,000 d. 4,114,500
5. What amount of interest income should be recognized for 2018?
a. 405,600 c. 411,450
b. 345,600 d. 351,450
On Jan. 1, 2019, an entity purchased equipment at a cost of P5,000,000 with a useful life of 10
years. On the same date, the entity leased the equipment to another entity under an operating
lease. The lease term is for 5 years with the following rental payments in advance:
January 1, 2019 1,000,000
January 1, 2020 1,000,000
January 1, 2021 1,400,000
January 1, 2022 1,700,000
January 1, 2023 1,900,000
The entity also incurred maintenance cost of P150,000 for the year 2019.
6. What is the net rental income for the year ended Dec. 31, 2019?
a. 1,400,000 c. 350,000
b. 1,150,000 d. 750,000
7. What amount of rent receivable is recognized on Dec. 31, 2021?
a. 4,200,000 c. 800,000
b. 2,800,000 d. 0
On January 1, 2019, an entity leased an automobile from another entity for executive use. The
lease required the entity to make five annual payments of P500,000 every January 1 beginning
January 1, 2019. At the end of the lease term on Dec. 31, 2023, a party related to the lessor
guaranteed the residual value of the automobile at P400,000. The lease qualified as a finance
lease. The interest rate implicit in the lease is 12%. The present value of 1 for 5 periods is 0.567,
ordinary annuity of 1 for 5 periods is 3.605 and annuity due for 5 periods is 4.037.
8. What amount should be reported as lease liability on Dec. 31, 2019?
a. 1,200,720 c. 1,518,500
b. 2,018,500 d. 1,745,300
9. What is the interest expense for the year ended Dec. 31, 2019?
a. 182,256 c. 212,738
b. 182,220 d. 0
Next Level Company is a dealer in equipment. Next Level leased equipment to Savage Company
on January 1, 2020, for an eight-year period expiring January 1, 2028. Equal annual payments
under the lease are due at the end of each year beginning December 31, 2020. The lease
agreement includes a guaranteed residual value of P200,000, an interest rate of 10% and that the
asset will revert back to Next Level on January 1, 2028. It was determined that the fair value of
the asset is P3,000,000, its carrying amount is P2,500,000 and that the present value of the lease
payment at the 10% interest rate is P2,759,000. The present value of ordinary annuity of 1 at
10% for 8 periods is at 5.33.
10. What is the periodic rental that Next Level should charge Savage?
a. 517,636
b. 562,852
c. 500,000
d. 545,216
11. What amount of gross profit should Next Level recognize?
a. 500,000
b. 259,000
c. 406,000
d. 165,000
An entity is a dealer in machinery. On Jan. 1 2018, a machinery was leased to another entity with
the following provisions:
Annual rental payable at the end of each year 2,000,000
Lease term and useful life of machinery 5 years
Cost of machinery 6,000,000
Residual value- unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
There is no transfer of title nor bargain purchase option.
12. What amount should be reported as sales revenue?
a. 7,200,000 c. 7,000,000
b. 7,770,000 d. 8,000,000
13. What is the interest income for 2018?
a. 720,000 c. 864,000
b. 795,600 d. 932,400
14. What amount of cost of goods should be reported?
a. 6,630,000 c. 6,000,000
b. 6,570,000 d. 5,430,000
15. At the beginning of the current year, Dauntless Co. leased a van with a fair value of
P3,600,000 under a finance lease. The lease term is 6 years and the present value of the
minimum lease payments is P3,552,000. The useful life of the van was estimated at 8 years with
no residual value. The entity used straight line depreciation.
What is the depreciation charge on the van for the current year?
a. 600,000 c. 592,000
b. 450,000 d. 444,000

Leases

Uploaded by

Copyright:

Available Formats

Leases

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Leases

Uploaded by

Copyright:

Available Formats

An entity is a manufacturer of machinery. It uses lease agreements to sell its product. On Jan.

You might also like