INTACC 2 PROBLEM SOLVING (NO ANSWERS)

BS Accountancy

INTERMEDIATE ACCOUNTING 2 FINALS SOLVINGS

CH 11-7
On January 1, 2020, Northstar Company entered into an 8-year lease of a floor of building with useful
life of 15 years with the following terms:

Annual rental for the first three years payable at the end of each year 300,000
Annual rental for the next five years payable at the end of each year 400,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for three periods 2.49
PV of an ordinary annuity of 1 at 10% for five periods 3.79

The lease provides for neither a transfer of title to the lessee nor a purchase option.

What is the lease liability on January 1, 2020?

1, 516, 000
2, 263, 000
1,884,000
1, 697, 250

What is the interest expense for 2020?

188, 400
226, 300
151, 600
169,725

What is the interest expense for 2023?

151, 460
126, 606
164, 964
200, 000

What is the lease liability on December 31, 2023?

1, 614, 604
1, 266, 064
1,366, 064
1, 214, 604

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CH 12- 10
Conn Company owns an office building and normally charges tenants P3,000 per square meter per year
for office space.

Because the occupancy rate is low, Conn Company agreed to lease 1,000 square meters to Hanson
Company at P1,200 per square meter for the first year of a three-year operating lease. Rent for
remaining years will be at the P3,000 rate.

Hanson Company moved into the building on January 1, 2020, and paid the first year’s rent in advance.

What amount of rental revenue should be reported in the income statement for the year ended
September 30, 2020?
2, 400,000
1,200,000
1,800,000
900,000

CH 12- 11
Wall Company leased an office to Fox Company for a five-year term beginning January 1, 2020.

Under the terms of the operating lease, rent for the first year is P800,000 and the rent for years 2
through 5 is P1,250,000 per annum.

However, as an inducement to enter the lease, Wall Company granted Fox Company the first six months
of the lease rent-free.

What amount should be reported as rental income for 2020?

1,200,000
1,160,000
1,080,000
800,000

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CH 12- 12
On January 1, 2020, Abba Company leased a building to Bee Company under a four-year operating lease.

The monthly rental for 2020, 2021, 2022 and 2023 is P100,000, P150,000, P200,000 and P250,000,
respectively.

Rentals are payable at the end of each month. All rental payments within the year were made when
due.

What amount should be reported as rent receivable from Bee Company on December 31, 2021?
1,000,000
1,200,000
600,000
900,000

CH 12-13
Abe Company, lessor, leased an equipment under an operating lease.
The lease term is 5 years payments are made in advance on January 1 of each year as shown in the
following schedule:
January 1, 2020 1,000,000
January 1, 2021 1,000,000
January 1, 2022 1,400,000
January 1, 2023 1,700,000
January 1, 2024 1,900,000
On December 31, 2021, what amount should be reported as rent receivable?
1, 400,000
800,000
400,000
0

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CH 12-14
At the beginning of current year, Wren Company leased a building to Brill Company under an operating
lease for ten years at P500,000 per year, payable the first day of each lease year. Wren Company paid
P150,000 to a real estate broker as initial direct cost.

The building is depreciated P120,000 per year. Wren Company incurred insurance and property tax
expense totaling P90,000 for the current year.
What is the net rent income for the current year?
275,000
290,000
350,000
365,000

CH 12-15
At the beginning of current year, Rapp Company leased a new machine to Lake Company for 5 years.
The annual rent is P900,000.
Additionally, Lake Company paid P500,000 to Rapp Company as a lease bonus and P250,000 as a
security deposit to be refunded upon expiration of the lease.

What amount should be reported as rent revenue for the current year?
1, 400,000
1, 250,000
1,000,000
900,000

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CH 13-7
At the beginning of current year, 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 interest rate on the
lease was 15%.

The lease is properly classified as a direct financing lease. The annual lease 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 date of the lease, what would be the net lease receivable on the part of the
lessor?
6,400,000
5,801,120
6,000,000
5,600,000

What is the gross investment in the lease?

8,652,705
9,052,705
6,000,000
8,252,705

What is the total unearned interest income?

3,052,705
2,652,705
2,252,705
6,000,000

What is the interest income for the current year?

1,297,905
1,357,905
900,000
870,168

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CH 13-8
On January 1, 2020, Lyle Company entered into a direct financing lease. A third party guaranteed the
residual value of the asset under the lease estimated to be P1,200,000 on January 1, 2025, the end of
the lease term.

Annual lease payments are P1,000,000 due each December 31, beginning December 1, 2020. The last
payment is due December 31, 2024.

The remaining useful life of the asset was six years at the commencement of the lease.

The lessor used 10% as the implicit rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an
ordinary annuity of 1 at 10% for 5 periods is 3.79.
What is the net lease receivable of the lessor at the commencement of the lease?
4,534,000
3,790,000
4,990,000
2,590,000

What is the gross investment in the lease?

5,000,000
6,200,000
3,800,000
5,744,000

What is the total unearned interest income?

2,410,000
1,666,000
1,210,000
466,000

What is the interest income for 2020?

379,000
620,000
453,400
500,000

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CH 13-9
Glade Company leases computer equipment under a direct financing lease. The equipment has no
residual value at the end of the lease and the lease does not contain purchase option.
The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000.
The present value of an annuity due to 1 at 8% for 5 years is 4.312.

What total amount of interest revenue should be recognized over the lease term?
1,293,000
1,394,500
516,000
750,000

CH 13-10
At the beginning of current year, Nueva Company, as lessor, leased an equipment for ten years at an
annual rental of P1,200,000, payable by Caster Company, the lessee, at the beginning of each year. The
lease is appropriately accounted for as finance lease.

The equipment had a cost of P8,400,000 with an estimated life of 12 years and no residual value. The
straight line depreciation is used. The implicit rate is 9%.

What amount of interest income should be reported in the income statement for the current year?
500,000
648,000
756,000
360,000

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CH 13-11
Cassandra Company is in the leasing business. The entity acquired a specialized packaging machine for
P3,000,000 cash and leased it for a period of six years, after which the machine is to be returned to
Cassandra Company for disposition. The guaranteed residual value of the machine is P200,000.

The lease term was arranged so that a return of 12% is earned by Cassandra Company. The PV of 1 at
12% for six periods is 0.51 and the present value of an annuity of 1 in advance at 12% for six periods is
4.60.

What is the annual lease payment payable in advance required to yield the desired return?
630,000
652,174
608,695
732,000

CH 13-12
Magnum Company had an asset costing P5,239,000. The asset was leased at the beginning of the
current year to another entity. Five annual lease payments are due in advance at the beginning of each
lease year.

The lessee guaranteed the P2,000,000 residual value of the asset at the end of the 5-year lease term.

The lessor’s implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is 0.68, and the PV of an annuity
of 1 in advance at 8% for 5 periods is 4.31.

What is the annual lease payment?

1,215,545
1,531,090
900,000
751,500

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CH 13-13
Ericson Company leased an asset to another entity. The cost of the asset was P7,994,000. Terms of the
lease specify four-year for the lease, an annual interest rate of 15%, and four year-end rental payments.
The lease qualified as a direct financing lease.

The lease provided for a transfer of title to the lessee at the end of the lease term.

After the fourth year, the residual value was estimated at P1,000,000.

The PV of 1 at 15% for 4 periods is .572 and the PV of an ordinary annuity of 1 at 15% for4 periods is
2.855.

What is the annual rental payment?

2,000,000
3,000,350
2,800,000
2,599,650

CH 13-14
Irene Company acquired a specialized machine for P2,300,000. At the beginning of current year, the
entity leased the machine for a period of six years, after which title to the machine is transferred to the
lessee.

The six annual lease payments are due in advance at the beginning of each lease year. The residual value
of the machine is P200,000.

The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at
12% for six periods is 0.51 and the present value of an annuity in advance of 1 at 12% for six periods is
4.60.

What is the annual lease rental payable in advance?

500,000
477,826
383,333
460,000

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CH 14-10
At the beginning of current year, Howe Company leased equipment to Kew Company for an eight-year
period.

Equal payments under the lease are P500,000 and are due at the beginning of the year.

The selling price of the equipment is P2,900,000 and the carrying amount is P2,000,000. The lease is
appropriately accounted for as a sales type lease.

The present value of the lease payments at an implicit interest rate is 12% is P2,780,000.

What amount of profit on the sale should be reported for the current year?
900,000
780,000
240,000
333,600

CH 14-11
Gold Company leased equipment to Fair Company and properly recorded the sales type lease. The eight
annual payments of P300,000 are due at the beginning of each year.

The lessor had purchased the equipment for P1,100,000 and had a list price of P1,800,000.

The present value of the lease payments is P1,700,000. The imputed interest rate on the lease was 11%
and the lessee had an incremental borrowing rate of 10%.

What profit on sale should be reported in the current year?

380,000
600,000
220,000
0

What amount of interest income should be reported the current year?

165,000
140,000
187,000
154,000

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CH 14-12
On July 1, 2020, Meg Company leased equipment to Wee Company for an 8-year period.

Equal payments under the lease are P600,000 and are due on July 1 of each year. The first payment was
made on July 1, 2020.

The interest rate contemplated by Meg company and Wee Company is 10%.

The cash selling price of the equipment is P3,520,000 and the cost of the equipment on Meg Company’s
accounting records is P2,800,000.

The lease is appropriately recorded as a sales type lease.

What amount of profit on sale should be recognized for the year ended December 31, 2020?
600,000
720,000
360,000
300,000

What amount of interest revenue should be recorded for the year ended December 31, 2020?
292,000
146,000
352,000
176,000

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CH 14-13
On January 1, 2020, Gallant Company entered into a lease agreement with Blacksheep Company for a
machine which was carried on the accounting records of Gallant Company at P2,000,000.

Total payments under the lease which expires on December 31, 2029 aggregate P3,550,800 of which
P2,400,000 represents cost of the machine to Blacksheep Company. Payments of P355,080 are due each
January 1 of each year.

The interest rate of 10% which was stipulated in the lease is considered and adequate compensation to
Gallant Company.

Blacksheep Company expects the machine to have a 10-year life, no residual value and be depreciated
on a straight line basis. The lease qualifies as a sales type lease.
What amount should be recognized by Gallant as profit from sales for the year ended December 31,
2020?
1,150,800
1,550,800
400,000
355,080
What amount of interest income should be recognized by Gallant for the year ended December 31,
2020?
244,080
200,000
204,492
240,000
What total income before tax should be recognized by Gallant from the lease for the year ended
December 31, 2020?
204,492
604,492
355,080
755,080

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CH 14-14
Reagan Company used leases as a method of selling products. In 2020, Reagan Company completed
construction of a passenger ferry.

On January 1, 2020, the ferry was leased to the Super Ferry Line on a contract specifying that ownership
of the ferry will transfer to the lessee at the end of the lease period.

Original cost of the ferry 8,000,000

Fair value of ferry at lease date 13,000,000
Lease payments in advance 1,500,000
Residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2020
Lease term 20 years
PV of an annuity due of 1 at 10% for 20 periods 8.37
PV of 1 at 12% for 20 periods 0.10

What is the gross investment in the lease?

30,000,000
32,000,000
10,000,000
38,000,000

What is the net investment in the lease?

12,555,000
13,000,000
12.755,000
8,000,000

What is the gross profit on sale for 2020?

6,555,000
4,555,000
5,000,000
7,000,000
What is the interest income for 2020?
1,506,600
1,560,000
1,326,600
1,380,000

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CH 15-9
On December 31, 2020, Bain Company sold a machine to Ryan Company and simultaneously leased it
back for one year. The entity provided the following information at this date:

Sales price 360,000

Carrying amount 330,000
Present value of reasonable lease rentals
(P30,000 for 12 months @ 12%) 341,000
Estimated remaining useful life 12 years

In the income statement for 20202, what amount should be reported as gain from the sale of the
machine?
34,100
30,000
4,100
0

CH 15-10
On December 31, 2020, Lane Company sold equipment to Noll Company and simultaneously leased it
back for 3 years.

The leaseback is appropriately considered a low value lease.

Sale price 480,000

Carrying amount 360,000
Estimated remaining economic life 5 years

What amount should be reported as a gain from sale of equipment for 2020?
120,000
60,000
40,000
0

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CH 15-11
At the beginning of current year, Racquel Company sold a building and immediately leased it back. The
following data pertain to the sale and leaseback transaction:

Sales price at above fair value 9,000,000

Fair value of the building 8,000,000
Carrying amount of the building 7,200,000
Annual rental payable at the end of each year 600,000
Remaining life of the building 20 years
Lease term 4 years
Implicit interest rate 12%
PV of ordinary annuity of 1 at 12 % for 4 periods 3.037

What is the initial lease liability?

1,822,200
2,400,000
1,200,000
1,000,000

What is the cost of right of use asset?

1,639,980
739,980
822,200
411,100

What is the gain on right transferred to buyer-lessor?

800,000
720,000
717,780
400,000

What is the annual rental income of the buyer-lessor?

600,000
329,272
270, 728
300,000

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CH 15-12
At beginning of the current year, Arianne Company sold a machine and immediately leased it back.

Sales price at fair value 5,000,000

Carrying amount of the machine 6,000,000
Annual rental payable at the end of each year 500,000
Remaining life of the machine 20 years
Lease term 5 years
Implicit interest rate 6%
PV of ordinary annuity of 1 at 6% for 5 periods 4.21

What is the cost of right of use of asset?

2,105,000
2,526,000
2,895,000
1,500,000

What is the loss on right transferred to the buyer-lessor?

579,000
505,200
500,000
0

What is the lease liability at year-end?

2,177,560
1,605,000
1,731,300
2,105,000

What is the net annual rental income of the buyer-lessor?

373,700
200,000
500,000
250,000

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CH 17-10
Jessabel Company has established a defined benefit pension plan for an employee. Annual payments
under the pension plan are equal to the employee’s highest lifetime salary multiplied by 3% multiplied
by numbers of years with the entity.

On December 31, 2020, the employee had worked for Jessabel Company for 15 years. The current salary
is P500,000.

The employee is expected to retire in 5 years and the salary increases are expected to average 4% per
year during that period.

The employee is expected to live for 6 years after retiring and will receive the first annual pension
payment one year after retirement. The discount rate is 12%.

Future value of 1 at 4% for 5 periods 1.217

PV of an ordinary annuity of 1 at 12% for 6 periods 4.111
PV of 1 at 12% for 5 periods 0.567

What is the projected benefit obligation on December 31,2020?

638,269
225,000
524,460
608,500

CH 17-11
A director of Ester Company shall receive a retirement benefit of 20% of final salary per annum for a
contractual period of three years.

The anticipated salary is P1,000,000 for 20202, P1,200,000 for 2021 and P1,500,000 for 2022.
The discount rate is 10%. The PV of 1at 10% is .909 for one period and .826 for two periods.

Under the projected unit credit method, what is the estimated pension liability on December 31, 2021?
900,000
520,500
600,000
545,280

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CH 18-9
Seda Company provided the following information pertaining to a pension plan for the current year:

Actuarial value of projected benefit obligation

at the beginning of year 7,200,000
Assumed discount rate 10%
Service cost 1,800,000
Pension benefit paid 1,500,000

No change in actuarial estimated occurred during the current year

What is the projected benefit obligation at year-end?

6,420,000
7,500,000
7,920,000
8,220,000

CH 18-10
Greenbelt Company provided the following information with respect to the defined benefit plan for the
current year:

Projected benefit obligation:

January 1 3,000,000
December 31 3,500,000
Contribution to the plan 600,000
Benefits paid to retirees 500,000
Settlement discount rate 10%

What is the current service cost for the current year?

700,000
600,000
500,000
300,000

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CH 18-11
Bronson Company received the following report from the independent actuary in relation to a defined
benefit pension plan at year-end:

Pension benefits paid 135,000

PBO at year-end 2,160,000
Interest expense on PBO 120,000
Discount rate 8%

What is the current service cost for the current year?

675,000
810,000
540,000
255,000

CH 18-12
Winter Company provided the following defined benefit plan information for the current year:

January 1 Projected benefit obligation 3,500,000

Accumulated benefit obligation 2,600,000
During the year Pension benefits paid 250,000
Actuarial loss 200,000
Past service cost 500,000
December 31 Projected benefit obligation 4,700,000
Accumulated benefit obligation 3,600,000
Discount rate 10%

There is no change in actuarial assumptions during the current year.

What is the current service cost for the current year?

400,000
800,000
200,000
750,000

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CH 18-13
Gail Company provided followinginformation pertaining to defined benefit plan for the current year:

Fair value of plan assets, beginning of year 3,500,000

Fair value of plan assets, end of year 5,250,000
Employer contributions 1,100,000
Benefits paid 850,000

What was the actual return on plan assets?

1,500,000
2,600,000
1,750,000
650,000

CH 18-14
Manaoag Company maintains a fund to cover a pension plan with the following data for the current
year:

January 1 Fair value of plan assets 8,750,000

Market-related value of pension fund
(5-year weighted average) 7,150,000
During the year Pension benefits paid 600,000
Contribution to the fund 700,000
Actual return on plan assets 950,000

What is the fair value of plan assets on December 31?

8,200,000
9,800,000
7,250,000
8,850,000

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CH 14-14
Reagan Company used leases as a method of selling products. In 2020, Reagan Company completed
construction of a passenger ferry.

On January 1, 2020, the ferry was leased to the Super Ferry Line on a contract specifying that ownership
of the ferry will transfer to the lessee at the end of the lease period.

Original cost of the ferry 8,000,000

Fair value of ferry at lease date 13,000,000
Lease payments in advance 1,500,000
Residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2020
Lease term 20 years
PV of an annuity due of 1 at 10% for 20 periods 8.37
PV of 1 at 12% for 20 periods 0.10

What is the gross investment in the lease?

30,000,000
32,000,000
10,000,000
38,000,000

0 1
What is the net investment in the lease?
12,555,000
13,000,000
12.755,000
8,000,000

What is the gross profit on sale for 2020?

6,555,000
4,555,000
5,000,000
7,000,000
What is the interest income for 2020?
1,506,600
1,560,000
1,326,600
1,380,000

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CH 15-9
On December 31, 2020, Bain Company sold a machine to Ryan Company and simultaneously leased it
back for one year. The entity provided the following information at this date:

Sales price 360,000

Carrying amount 330,000
Present value of reasonable lease rentals
(P30,000 for 12 months @ 12%) 341,000
Estimated remaining useful life 12 years

In the income statement for 20202, what amount should be reported as gain from the sale of the
machine?
34,100
30,000
4,100
0

CH 15-10
On December 31, 2020, Lane Company sold equipment to Noll Company and simultaneously leased it
back for 3 years.

The leaseback is appropriately considered a low value lease.

Sale price 480,000

Carrying amount 360,000
Estimated remaining economic life 5 years

What amount should be reported as a gain from sale of equipment for 2020?
120,000
60,000
40,000
0

0 1
CH 15-11 0 1
At the beginning of current year, Racquel Company sold a building and immediately leased it back. The
following data pertain to the sale and leaseback transaction: