FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance

FINANCIAL ACCOUNTING PART 2
QUIZ 5 _LEASES

Student: ___________________________________________________________________________

THEORIES/PROBLEMS

1. What is a ‘lease’ in accordance with IFRS 16?

a. An agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time.
b. A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of
time in exchange for consideration.
c. A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of
another entity.
d. A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in accordance with the original or modified terms
of a debt instrument.

2. Under IFRS, a lessee is required to recognize

a. Right of use asset (ROUA) and a lease liability. c. Lease liability but not ROUA
b. Right of use asset but not a lease liability. d. Neither ROUA not lease liability.

3. The classification of a lease as either an operating or finance lease is based on

a. The transfer of the risks and rewards of ownership.
b. The length of the lease.
c. The minimum lease payments being at least 50% of the fair value.
d. The economic life of the asset.

4. Which statement is incorrect regarding IFRS 16 Leases?

a. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as required by IAS
17 and, instead, introduces a single lessee accounting model.
b. A lessee is required to recognize assets and liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of low value.
c. A lessee is required to recognize depreciation of lease assets separately from interest on lease liabilities in
the income statement.
d. A lessor shall classify its leases as operating leases.

5. Which of the following is not likely an effect of IFRS 16 on lessee’s financial statements?
a. Increase in assets and liabilities. c. Increase in operating expenses.
b. Increase in finance costs d. Increase in financing cash outflows.

6. The lessee may apply the operating lease model under what condition?
a. Short term lease c. Both a and b
b. Low value lease d. Under all circumstances.

7. A short-term lease is defined as

a. Twelve months or less c. Twelve month lease with a purchase option
b. Six months or less d. Two year lease with option to termintae

8. The cost of ROUA includes the following, except

a. The present value of lease payments
b. Lease payments made to lessor on or before commencement date
c. Initial direct cost incurred by lessee
d. Estimated cost of dismantling, removing or restoring the underlying asset for which the lessee
has no present obligation.

9. The ROUA is reported as

a. PPE c. Investment property
b. Intangible asset d. Noncurrent asset as a separate line item

10. A lease liability is measured at

a. The fair value of the underlying asset c. The present value of fixed lease payments
b. The absolute amount of lease payments d. The present value of lease payments.

11. Which is not included in lease payments?

a. Any payment required by a purchase option that is reasonably certain to be exercised
b. Required payments over the lease term
c. Amount guaranteed by a party related to the lease
d. Costs for services and taxes paid by lessee

12. What is the interest rate used to determine present value of lease payments when the implicit interest rate is not
determinable?
a. The prime rate c. The lessee’s average borrowing rate
b. The lessor’s published rate d. The lessee’s incremental borrowing rate
13. These are incremental costs that are directly attributable to negotiating and arranging a lease.
a. Initial direct costs c. Costs of services
b. Transaction costs d. Executory costs

14. The initial direct cost incurred by the lessee in a finance lease is
a. Added to the lease liability
b. Added to the carrying amount of the ROUA
c. Expensed outright
d. Added to the carrying amount of the ROUA and lease liability

15. In computing deprecation of a ROUA, the lessee should deduct

a. The residual value guarantee and depreciate over the lease term
b. An unguaranteed residual value and depreciate over the lease term
c. The residual value guarantee and depreciate over the useful life of the asset
d. An un unguaranteed residual value and depreciate over the useful life of the asset

16. The lessee’s lease liability for a finance lease would be periodically reduced by
a. Lease payment
b. Lease payment plus the depreciation of the asset
c. Lease payment less the depreciation of the asset
d. Lease payment less the portion allocated for interest

17. A lessee had a five-year finance lease requiring equal annual payments. The reduction of the lease liability in the
third year should equal
a. The current liability shown for the lease at the end of the second year
b. The current liability shown for the lease at the end of the third year
c. The reduction of the lease liability in the fourth year
d. One-fifth of the original lease liability

18. Situations that would normally lead to a lease being classified as a finance lease include:
I. The lease transfers ownership of the asset to the lessee by the end of the lease term.
II. The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair
value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain
that the option will be exercised.
III. The lease term is for the major part of the economic life of the asset, even if title is not transferred.
IV. At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
V. The lease assets are of a specialized nature such that only the lessee can use them without major
modifications being made.
a. I, II, III, IV and V c. I, II and IV only
b. I, II, III and IV only d. I, II, III and V only

19. Other situations that might also lead to classification as a finance lease are:
a. If the lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by
the lessee.
b. Gains or losses from fluctuations in the fair value of the residual fall to the lessee (for example, by means of
a rebate of lease payments).
c. The lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than
market rent.
d. All of the above.

20. The situations which would normally lead to a lease being classified as a finance lease include all the following,
except
a. The lease transfers ownership of the asset to the lessee by the end of the lease term.
b. The lessee has the option to purchase the asset at a price which is expected to be sufficiently
higher than the fair value at the date the option becomes exercisable.
c. The lease term is for the major part of the economic life of the asset even if title is not transferred.
d. The present value of the minimum lease payments amounts to at least substantially all of the fair value of
the leased asset at the inception of the lease.

21. The classification of a lease is normally carried out

a. At the inception of the lease. c. Earlier of a and b.
b. At the commencement of the lease. d. Later of a and b.

22. The inception of the lease is

a. The date of the lease agreement.
b. The date of commitment by the parties to the principal provisions of the lease.
c. The date from which the lessee is entitled to exercise its right to use the leased asset.
d. Earlier of a and b.

23. It is the date on which the lessee is entitled to exercise the right to use the underlying asset.
a. Inception of the lease d. Date of commitment to the provisions of the
b. Commencement of the lease lease
c. Date of lease agreement

24. The lease of land and building when split causes difficulty in the allocation of the minimum lease payments. In
this case, the minimum lease payments should be split
a. According to the relative fair value of two elements.
 b. By the entity based on the useful life of the two elements.
c. Using the sum of the digits method.
d. According to any fair method devised by the entity.

25. When there is a lease of land and building and the title to the land is not transferred, generally the lease is treated
as if
a. The land is a finance lease and the building is a finance lease
b. The land is a finance lease and the building is an operating lease
c. The land is an operating lease and the building is a finance lease
d. Both the building and the land are operating leases

26. The accounting concept that is principally used to classify leases into operating and finance is
a. Substance over form c. Neutrality
b. Prudence d. Completeness

27. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make.
Minimum lease payments exclude
a. Contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor.
b. The payment required to exercise the option to purchase the asset at a price that is expected to be sufficiently
lower than fair value at the date the option becomes exercisable.
c. For a lessee, any amounts guaranteed by the lessee or by a party related to the lessee.
d. For a lessor, any residual value guaranteed to the lessor by the lessee, a party related to the lessee, or a
third party unrelated to the lessor that is financially capable of discharging the obligations under the
guarantee.

28. Which statement is incorrect regarding accounting for finance leases by lessees?
a. At commencement of the lease term, finance leases should be recorded as an asset and a liability at the
lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the
interest rate implicit in the lease, if practicable, or else at the enterprise's incremental borrowing rate).
b. Finance lease payments should be apportioned between the finance charge and the reduction of the
outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest
on the remaining balance of the liability).
c. The depreciation policy for assets held under finance leases should be consistent with that for owned assets.
d. If there is reasonable certainty that the lessee will obtain ownership at the end of the lease - the asset
should be depreciated over the shorter of the lease term or the life of the asset

29. At commencement of the lease term, the lessor should record a finance lease in the statement of financial position
as a receivable, at an amount equal to
a. The gross investment in the lease.
b. The net investment in the lease.
c. The lower of the fair value of the asset and the present value of the minimum lease payments.
d. The higher of the fair value of the asset and the present value of the minimum lease payments

30. The net investment in the lease is

a. The minimum lease payments receivable by the lessor under a finance lease.
b. Any unguaranteed residual value accruing to the lessor.
c. The aggregate of a and b.
d. The gross investment in the lease discounted at the interest rate implicit in the lease.

31. Gross investment in the lease is equal to

a. Sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed
residual value accruing to the lessor.
b. The lease payments under a finance lease of the lessor.
c. Present value of lease payments under a finance lease of the lessor and any unguaranteed residual value.
d. Present value of the lease payments under a finance lease of the lessor.

32. The primary difference between a direct financing lease and a sales type lease is that in a sales type lease,
a. Manner in which rental collection are recorded as rental income
b. Depreciation recorded each year by the lessor
c. Recognition of the manufacturer’s or dealer’s profit at the inception of the lease
d. Allocation of initial direct costs incurred by the lessor over the lease term.

33. The following are included in lease receivable, except

a. Guaranteed residual value c. A purchase option that is reasonably certain
b. Unguaranteed residual value d. All are included.

34. Under a sales type lease, gross investment in the lease is equal to the
a. Present value of lease payments
b. Absolute amount of lease payments
c. Present value of lease payments plus present value of unguaranteed residual value
d. Sum of absolute amount of lease payments and unguaranteed residual value.

35. Net investment in a sales type lease is equal to

a. Gross investment (GI) in the lease less unearned interest income (UII)
b. Cost of the underlying asset
c. The lease payments
d. The lease payments less unguaranteed residual value.
36. The sales revenue recognized at the commencement of the lease by a manufacturer or a dealer lessor is the
a. Fair value (FV) of the asset
b. Present value (PV) of the lease payments
c. FV of the asset or PV of the lease payments, whichever is lower.
d. FV of the asset or PV of the lease payments, whichever is higher.

37. What is the treatment of of an unguaranteed residual value in determining the cost of goods sold under a sales
type lease?
a. The unguaranteed residual value is ignored
b. The unguaranteed residual value is added to the cost of the underlying asset
c. The unguaranteed residual value is deducted from the cost of the underlying asset at absolute amount
d. The unguaranteed residual value is deducted from the cost of the underlying asset at present value

38. The excess of the FV of the underlying asset at the inception of the lease over the carrying amount shall be
recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturer’s profit from a sales type lease
d. Manufacturer’s profit from a direct financing lease

39. In a lease that is recorded as a sales type lease by the lessor, intrest income
a. Shall be recognized over the lease term using the effective interest method.
b. Shall be recognized over the lease term using the straight line method.
c. Shall be recognized in full as income at the inception of the lease
d. Is not recognized.

40. If the sale and leaseback transaction results in a finance lease, any excess of sale proceeds over the carrying
amount of the asset is
a. Deferred and amortized as income over the lease term.
b. Deferred and amortized as income over the life of the asset.
c. Recognized in profit or loss immediately.
d. Recognized in other comprehensive income.

Use the following for the next three questions: V 12-14

On January 1, 2018, Alpha Inc. entered into a 10-year non-cancelable lease requiring lease payments of P1M
every end of the year. Alpha also paid initial direct cost P200,000 in negotiating the lease. Ownership is not
transerred to the lessee at the expiration of the lease. The property has an estimated useful life of 12 years. The
lessor’s implicit interst rate which is known to Alpha, is 10% while Alpha’s incremental borrowing rate is 12%.

41. What amount should be capitalized as cost of ROUA? _________ 6,345,000

42. What is the lease liability on December 31, 2018? ___________ 5,759,500

43. What is the depreciation for 2018? ___________ 634,500

44. At the beginning of the current year, Bravo Company entered into an 8-year finance lease for an equipment. The
entity accounted for the acquisition of the finance lease at P5M which included a P200,000 purchase option. At
the commencement date, the entity is not reasonably certain to exercise the purchase option. The expected fair
value of the equipment is P400,000 at the end of the 10-year useful life. The straight line depreciation is used.
What amount of depreciation should be recognized for the current year? ________ 600,000 V12-16

Use the following for the next 4 questions:

45. On January 1, 2018, Charlie Company leased an equipment for 8 years from a lessor with annual rental of
P500,000 payable at the end of each year. The useful life of the equipment is 10 years. The implicit interest rate
is 10%. Charlie has the option to purchase the equipment on January 1, 2016 by paying P500,000. There is
reasonable certainty that Charlie shall exercise the option. On January 1, 2018, Charlie incurred initial direct cost
of P200,000. V 12-19

46. What is the initial cost of the ROUA? ________ P3,100,000

47. What is the interest expense for 2018? ________ P290,000

48. What is the lease liability on December 31, 2018? _________ P2,690,000

49. What is the depreciation for 2018? _________ P310,000

50. Delta Company leased a machinery for the entire useful life of 10 years which takes effect from January 1, 2018.
At that date, the fair value of the machinery was P4,900,000. Annual rentals of P700,000 are payable in advance
on January 1 of each year, beginning January 1, 2018, and the interest rate implicit in the lease is 9%. What
total amount of lease liability including interest should be recognized in the statement of financial position on
December 31, 2018? ________ 4,578,000 V 12-24

51. Epsilon Company leases computer equipment to customers under direct financing leases. Annual lease payments
of P75,000 are made at the beginning of the each. The equipment has no residual value at the end of the lease
and the lease does not contain bargain purchase option. The entity wishes to earn 8% interest on a 5-year lease
 of equipment with a cost of P323,400. The present value of an annuity due of 1at 8% for 5 years is 4.312. What
total amount of interest revenue should be recognized over the lease term?
a. 129,360 b. 139,450 c. 51,600 d. 75,000

Answer: C
Lease receivable (75,000 x 5) 375,000
Present value of rentals (fair value) (323,400)
Total interest revenue 51,600

52. As an incentive to enter a noncancelable operating lease for office premises for 10 years, Kappa Company as
lessor has offered the lessee a rent free period of 2 years. Annual rental payment under the lease commencing
in the 3rd year is P500,000. What amount of rent revenue should be recognized in the 1 st year? V 13-13
a. P400,000 b. P500,000 c. P450,000 d. P 0

53. On January 1, 2018, Lambda Company leased a property to Sigma Company under a 4-year operating lease. The
monthly rental for 2018, 2019, 2020 and 2021 is P200,000, P300,000, P400,000 and P500,000, respectively.
Rentals are payable at the end of each month. All rental payments within the year were made when due. What
amount shoul be reported as rent receivable from Sigma on December 31, 2019? V 13-14 x 2
a. P2M b. P2.4M c. P1.2M d. P1.8M
e.

54. Rho Company leased a property to Tau Company on January 1, 2018 under an operating lease for 10 years at
P500,000 per year, payable the first day of each lease year. Rho Company paid P150,000 to a real estate broker
as initial direct cost. The building is depreciated P120,000 per year. Rho incurred insurance and property taxes
totaling P90,000 for 2018. What is the net rent income for 2018? _______ P275,000 V 13-16

Use the following for the next 2 questions: V 13-21

On January 1, 2018, Upsilon Company leased an equipment to another entity for a 4-year period. The annual
rentals will be paid by the lessee beginning December 31, 2018. The lease agreement called for a 10% increase
in annual rental per annum. The rental due on December 31, 2021 was P133,100.

55. What is the rental payment due on December 31, 2019? ________ P110,000

56. What is the rental income for the year ended December 31, 2018? _______ P116,025

57. Oceanic Company is engaged in leasing equipment. Such an equipment was delivered to a lessee on January 1,
2013 under a direct financing lease with the following provisions:
Cost of equipment 4,361,200
Unguaranteed residual value 200,000
Useful life and lease term 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 8 years at 10% 5.335
Present value of 1 for 8 years at 10% 0.466

The annual rental is payable at the end of each year. The equipment will revert to the lessor upon the lease
expiration. What is the annual rental over the lease term?
a. 800,000 b. 817,470 c. 779,980 d. 834,940

Answer: A
Cost of equipment 4,361,200
Present value of residual value (200,000 x .466) __(93,200)
Net investment to be recovered from rental 4,268,000
Annual rental (4,268,000 / 5.335) 800,000

Use the following for the next 4 questions: V 14-18

On January 1, 2018, Alpha Company leased an equipment to Omega Company. The equipment had an original
cost of P6,000,000. The lease term was 5 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 equipment reverts to Alpha at the end of the lease term, at which time the residual value will be P400,000.
The residual value is unguaranteed.

58. At the commencement of the lease, what would be the net lease receivable on the part of Alpha?
a. P6,400,000 b. P5,801,120 c. P6,000,000 d. P5,600,000

59. What is the gross investment in the lease?

a. P8,652, 705 b. P9,052,705 c. P6,000,000 d. P8,252,705

60. What is the total unearned interest income?

a. P3,052, 705 b. P2,652, 705 c. P2,252, 705 d. P6,000,000

61. What is the interest income for the current year?

a. P1,297,905 b. P1,357,905 c. P900,000 d. P870,168

62. Bowtock has leased an item of plant under the following terms:
 Commencement of the lease - January 1, 2015
 Term of the lease - 5 years
  Annual payments in advance - P12,000
 Cash price and fair value of the asset – P52,000
 Implicit interest rate – 8% per annum
 Depreciation policy – 20% per annum
The total lease related expenses for the fiscal year ended September 30, 2016 is
a. P13,072 c. P12,272
b. P12,896 d. P10,200
ACCA F7 07-08 #36C.21
SOLUTION GUIDE:

Interest
Date Payment (8%) Principal C.A.

1/1/15 52,000

1/1/15 12,000 - 12,000 40,000

1/1/16 12,000 3,200 8,800 31,200

1/1/17 12,000 2,496 9,504 21,696

63. Pi Company owns an asset costing P5,239,000. The asset is leased on January 1, 2018 to another entity. Five
annual lease payments are due each January, beginning January 1, 2018. The lessee guarantees the P2,000,000
residual value of the asset at the end of the lease term on December 31, 2022. The lessor’s implicit interest rate
is 8%. The PV of 1 at 8% for 5 periods is .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?
a. 1,215,545 b. 1,531,090 c. 900,000 d. 751,500
Answer: C
Cost of asset 5,239,000
PV of guaranteed residual value (2,000,000 x .68) (1,360,000)
Net investment to be recovered from rental 3,879,000
Divide by PV of an annuity of 1 in advance at 8% for 5 years __4.31
Annual lease payment 900,000
64. Irene Company acquired a specialized machine for P2,300,000. On January 1, 2013, Irene Company 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 each January 1 and the first payment was made on January 1, 2013. The residual value
of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Irene Company.
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?
a. 500,000 b. 477,826 c. 383,333 d. 460,000
Answer: A
Cost of asset 2,300,000
Divide by PV of an annuity in advance of 1 at 12% for six periods _____4.60
Annual lease payment 500,000
65. Ericson Company leased an asset to another entity. The cost of the asset was P7,994,000. Terms of the lease
specify four-year life for the lease, an annual interest rate of 15%, and four year-end rental payments. The
lease qualifies as a finance lease and is classified as a direct financing lease. The lease provides for a transfer of
title to the lessee at the end of the lease term. After the fourth year, the residual value is estimated to be
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% for 4
periods is 2.855. What is the annual rental payment?
a. 2,000,000 b. 3,000,350 c. 2,800,000 d. 2,599,650
Answer: C (7,994,000 / 2.855) 2,800,000
Use the following for the next 3 questions: V 14-16
On January 1, 2018, Upsilon Company signed a ten-year noncancelable lease agreement to lease a storage
building from Warehouse Company. The agreement required equal rental payments at the end of each year. The
fair value of the building on January 1, 2018 is P2,949,600. However, the carrying amount to Warehouse
Company is P2,458,000. The building has an estimated economic life of 10 years with no residual value. Upsilon
Company depreciates similar building on the straight line method. At the termination of the lease, the title to the
building will be transferred to Upsilon Company. The incremental borrowing rate of Upsilon Company is 12% per
year. Warehouse Company set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is
known by the lessee. The annual total lease payment included P20,000 of executory costs related to taxes on the
property. Round off present value factor to three decimal places.

66. What is the minimum annual lease payment?

a. 400,000 b. 435,044 c. 480,000 d. 522,053

67. What is the total annual lease payment?

a. 420,000 b. 455,044 c. 542,053 d. 500,000
68. What is the unearned interest income of the lessor at the beginning of 2018?
a. P1,850,400 b. 2,342,000 c. 1,542,000 d. 2,542,000

69. On January 1, 2018, Chi Company, as a lessor, leased an equipment for ten years at an annual rental of
P1,200,000, payable by Delta 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 2018?
a. 500,000 b. 648,000 c. 756,000 d. 360,000
Answer: B
Present value of rentals equal to the cost of asset 8,400,000
Advance payment on January 1, 2013 (1,200,000)
Balance – January 1, 2013 7,200,000
Interest income for 2013 (7,200,000 x 9%) 648,000
Use the following for the next two questions: V 15-13 changed 2.8M to 3M

Miro Company leased equipment from Lucas Company on July 1, 2018 for an 8-year period. Equal payments
under the lease are P600,000 and are due on July 1 of each year with the first payment to be made July 1,
2018.the cash selling price of the equipment is P3,520,000 and the cost of the equipment on Lucas’ books is
P3,000,000. The interest rate agreed by Miro nd Lucas is 10%. The lease is appropriately recorded as a sales
type lease.

70. What amount should be recognized as profit from sale for the year ended December 31, 2018? ________
3,520,000 – 3M = 520,000

71. What amount of interest revenue should be recorded for the year ended December 31, 2018? _________
3,520,000 -600,000 = 2,920,000 x 10% x 6/12 = 146,000
72. On January 1, 2018, Nicole Company, a car dealer, entered into a finance lease with Sydney Company wherein
the latter would pay P200,000 on January 1 each year for 5 years starting 2018. The cost of the car is P600,000
and the cash selling price was P750,000. Nicole paid legal fees of P20,000 in connection with the arrangement of
the lease. What amount of gross profit on sale should be recognized in 2018? _________
750,000 – 600,000 – 20,000 = 130,000

Use the following for the nesxt 4 questions:

On January 1, 2018, Rhoxy Company leased for 20 years an equipment under a sales type lease to Alphonse
Company which provides for transfer of ownership to Alphonse at the end of the lease period. The cost of the
equipment is P8M and the fair value is P13M. The equipment has a residual value of P2M. Annual lease payment
of P1.5M starts in January 1, 2018. The implicit interest rate is 12%.

73. What is the gross investment in the lease? _________ 1.5M x 20 years = P30M

74. What is the net investment in the lease? ________ 1.5M x 8.37 = 12,555,000 PV of rentals or FV
of asset, whichever is lower. Residual value is ignored because ownership is transferred to lessee

75. What is the gross profit on sale for 2018? ________ Sales price, FV or PV 12,555,000
Cost of asset 8,000,000
Profit 4,555,000
76. What is the interest income for 2018? ________ 12,555,000- 1500,000 = 11,055,000 x 12% =
1,326,600

Use the following for the next 4 questions:

On January 1, 2018, Granny Company sold equipment to Sony Company at the fair value of P5M. The equipment
had a carrying amount of P4.5M and a remaining life of 10 years. Granny immediately leased back the equipment
at P15,000 per month for 2 years with no option to renew the lease or repurchase the equipment. The PV of the
lease payments was P318,650 on January 1, 2018.

77. What is the initial lease liability

a. P318,650 b. P159,325 c. P360,000 d. P0

78. What is the cost of ROUA? 318,650/5M x 4.5M = 285,785

a. 360,000 b. 318,650 c. 286,785 d. 0

79. What is the annual depreciation of the ROUA? 286,785/2 years = 143,392
a. 159,325 b. 143,392 c. 180,000 d. 0

80. What is the gain transferred to the buyer lessor?

a. 500,000 b. 468,135 c. 250,000 d. 0
FV 5,000,000
CA 4,500,000
Total gain 500,000

Fv 5,000,000
RRbSL (318,650)
RTTBL 4,681,350

GAIN TO BE RECOGNIZED 4,681,350/5,000,000 x 500,000 = 468,135

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Don’t waste your life in doubts and fears; spend yourself on the work before you, well assured that the
right performance of this hour’s duties will be the best preparation for the hours or ages that follow it.
– Ralph Waldo Emerson-
 FINACT2 –QUIZ 5

Name: ___________________________ Section:___________ Date: __________ Score: ______

NOTE: ERASURES OR SUPERIMPOSITIONS WILL INVALIDATE YOUR ANSWERS.

1. __________ 21. ________ 41. ________ 61. ________________ 81. ________________

2. _________ 22. ________ 42. ________ 62. ________________ 82. ________________

3. __________ 23. ________ 43. ________ 63. ________________ 83. ________________

4. __________ 24. _______ 44. ________ 64. ________________ 84. ________________

5. __________ 25. ________ 45. ________ 65. ________________ 85. ________________

6. __________ 26. ________ 46. ________ 66. ________________ 86. ________________

7. __________ 27. _______ 47. ________ 67. ________________ 87. ________________

8. __________ 28. ________ 48. ________ 68. ________________ 88. ________________

9. __________ 29. ________ 49. ________ 69. ________________ 89. ________________

10. _________ 30. _______ 50. ________ 70. ________________ 90. ________________

11. _________ 31. ________ 51. ________ 71. ________________ 91. ________________

12. _________ 32. ________ 52. ________ 72. ________________ 92. ________________

13. _________ 33. ________ 53. ________ 73. ________________ 93. _______________

14. _________ 34. ________ 54. ________ 74. ________________ 94. ________________

15.__________ 35. ________ 55. ________ 75. ________________ 95. ________________

16. _________ 36. ________ 56. ________ 76. ________________ 96. ________________

17. _________ 37. ________ 57. ________ 77. ________________ 97. ________________

18. _________ 38. ________ 58. ________ 78. ________________ 98. ________________

19. _________ 39. ________ 59. ________ 79. ________________ 99. ________________

20. _________ 40. ________ 60. ________ 80. ________________ 100. _______________