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(Kulang 11-1 to 7)

Problem 11-8 (AICPA Adapted)


On January 1, 2015, Mixx Company entered into a lease for a new
warehouse.
Rental payments are P800, 000 a year for 5 years, payable in advance
starting January 1, 2015.
The warehouse has an estimated life of 10 years. The entity paid initial direct
cost of P100, 000 on January 1, 2015.
The realty taxes of P40, 000 a year are to be paid by the entity.
The entity has the option to purchase the property at the conclusion of the
lease for a nominal amount.
The interest rate implicit in the lease is 10%. The relevant present value
factors are:
PV of an ordinary annuity of 1 at 10% for 5 periods
3.79
PV of an annuity of 1 in advance at 10% for 5 periods
4.17
Required:
Prepare journal entries on the books of Mixx Company for 2015 and 2016.
Problem 11-9 (AICPA Adapted)
Overland Company closed a lease contract for newly constructed terminals
and freight storage facilities on January 1, 2015.
Although the terminals have a composite life of 10 years, the lease runs for
5 years with a transfer of title to the lessee upon expiration of the lease.
The annual rental is P1, 000, 000 payable at the end of each year starting
December 31, 2015.
The lessee must also make an annual payment of P75, 000 for taxes and
P125, 000 for insurance.
The contract was negotiated to assure the lessor a 10% rate of return.
The present value of an annuity of 1 at 10% for five periods is 3.79.
The present value of an annuity of 1 in advance at 10% for 5 periods is 4.17.
Required:
Prepare journal entries on the books of Overland Company for 2015 and 2016 in connection with
the finance lease.

Problem 11-10 (AICPA Adapted)


Letty Company leased a machine on January 1, 2015 with the following provisions.
Annual rental payable in advance at the beginning
of each year, starting January 1, 2015
Lease term
Useful life of machine
Implicit interest rate in the lease
PV of an ordinary annuity of 1 at 12% for 10 periods
PV of an annuity of 1 in advance at 12% for 10 periods
PV of 1 at 12% for 10 periods

1, 000, 000
10 years
15 years
12%
5.650
6.328
0.322

The entity has the option to purchase the machine on January 1, 2025 by pairing P200, 000
which is sufficiently lower than the expected fair value of the machine on January 1, 2025. At the
inception of the lease, it is reasonably certain that the option will be exercised.
Required:
Prepare journal entries on the books of Letty Company for 2015 and 2016.

Problem 11-11 (AICPA Adapted)


Veronica Company negotiated a long term lease for newly constructed
building. On January 1, 2015, the entity took possession of the building. The
building has useful life of 20 years. The lease runs for 15 years from January
1, 2015. The lease contains neither a transfer of title nor a bargain purchase
option. Annual payments of P1, 000, 000 are payable to the lessor on
December 31 of each of the 15 years of the lease term. The lease was
negotiated to assure the lessor a 10% rate of return. Present value factors
are:
PV of an ordinary annuity of 1 at 10% for 15 periods
PV of an annuity of 1 in advance at 10% for 15 periods

7.606
8.367

Required:
Prepare journal entries on the books of Veronica Company for 2015.

Problem 11-12 (IAA)


On January 1, 2015, Lesse Company entered into a lease with Lessor
Company for a new equipment that had a fair value of P3, 500, 000.
The lease stipulates that annual payments of P1, 000, 000 will be made for
five years starting December 31, 2015.
Lessee Company guaranteed a residual value of P474, 060 at the end of the
5-year period. The equipment will revert to the lessor at the lease expiration.
The implicit interest rate for the lease is 16% after considering the
guaranteed residual value.
The economic life of the equipment is 10 years. The present value factors at
16% for five periods are:
Present value of 1
0.4761
Present value of an ordinary annuity of 1
3.2743
Required:
1. Prepare a schedule of the annual payments showing reduction of
liability every year.
2. Prepare journal entries on the books of Lessee Company for 2015 and
2016.
3. Prepare journal entry on December 31, 2019, end of lease term, to
record the return of the equipment to the lessor. Assume the fair value
of the equipment is equal to the guaranteed residual value.

4. Prepare journal entry on December 31, 2019 to record the return of the
equipment to the lessor assuming the fair value of the equipment is
only P300, 000.
5. Prepare journal entry on December 31, 2019 to record the return of the
equipment to the lessor assuming the fair value of the equipment is
P500, 000.

Problem 11-13 (IAA)


Lawton Company leased a machinery with a fair value of P2, 800, 000 on
January 1, 2015. The machinery has an estimated useful life of 8 years.
The contract is a six-year noncancelable lease with a 10% implicit interest
rate.
The lease contains neither a transfer of title nor a bargain purchase option.
The lease requires annual payments of P500, 000 beginning January 1, 2015.
The entity guaranteed a residual value of P400, 000 when the machinery is
returned to the lessor upon the lease expiration.
The present value of an annuity due of 1 at 10% for six periods is 4.7908.
The present value of 1 at 10% for 6 periods is .5645.
Required:
1. Determine whether the lease is a finance lease.
2. Prepare a table of amortization of the lease liability and interest
expense.
3. Prepare journal entries for 2015 and 2016.

Problem 11-14 (IFRS)


On December 31, 2015, Eden Company leased an equipment to Eve
Company. On this date, Eden Company purchased the equipment at the fair
value of P1, 700, 000. The lease agreement contained the following clauses:
Annual rent payable in advance on
December 31 of each year
Estimated residual value at the end of lease term
000
Residual value guaranteed by lessee
000
Lease term

420, 000
300,
200,
4 years

Economic life of equipment


Implicit interest rate
PV of an annuity of 1 in advance at 7% for 4 periods
PV of 1 at 7% for 4 periods

6 years
7%
3.6243
.7629

The lease is cancelable but the cancelation will require a monetary penalty
equivalent to two years rental payments on the part of the lessee.
Included in the annual rental is an amount of P20, 000 to cover
reimbursement for insurance paid by the lessor.
The directors of Eve Company have indicated that they intend to return the
asset to Eden Company at the end of the lease term.
Required:
1. Determine whether the cancelable lease is a finance lease.
2. Prepare a table of amortization of the lease liability and interest
expense.
3. Prepare journal entries for 2015 and 2016 on the book of Eve Company.
4. Prepare journal entry to record the return of the equipment to the
lessor on December 31, 2019. Assume the fair value of the equipment
is P50, 000.

Problem 11-15 (IAA)


Dexter Company has maintained a policy of acquiring equipment by leasing.
On January 1, 2015, Dexter Company entered into a lease agreement with
Oceanic Company for an equipment with a fair value of P2, 200, 000.
The lease stipulates an annual rental payment of P600, 000 to be paid every
December 31 starting December 31, 2015.
The lease contains neither a transfer of title nor a bargain purchase option.
The equipment has a residual value of P300, 000 at the end of the 5-year
lease period but is unguaranteed by the lessee. The economic life of the
equipment is 8 years.
The implicit interest rate is 12% after considering the unguaranteed residual
value.
The present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60.
Required:
1. Determine whether the lease is an operating lease or a finance lease.
2. Prepare journal entries on the books of Dexter Company for 2015.
3. Prepare journal entry on December 31, 2019 to record the return of the
equipment to the lessor as required by the contract. The fair value of
the equipment is P200, 000.

Problem 11-16 (IAA)


Macedon Company leased many assets and capitalized most of the leased
assets.
On December 31, 2015, the entity had the following balances in relation to a
piece of specialized equipment:
Equipment under finance lease
Accumulated depreciation
Lease liability

4, 000, 000
2, 465, 000
1, 300, 000

Depreciation has been recorded up to the end of the year, and no accrued
interest is involved.
On December 31, 2015, the entity decided to purchase the equipment for P1,
600, 000 and paid cash to complete the purchase.
Required:
Prepare journal entry to record the actual purchase of the equipment on the
books Macedon Company.

Problem 11-17 (IFRS)


Troy Company prepared the following amortization schedule for the lease of
a machine from another entity. The machine has an economic life of six
years. The lease agreement requires four annual payments of P330, 000
including executor costs of P30, 000, and the machine will be returned to the
lessor at the end of the lease term.
Minimum lease Interest
payment
expense
1/1/2015
12/31/2015
12/31/2016
12/31/2017
12/31/2018

300,
300,
300,
300,

000
000
000
000

98,
78,
56,
31,

515
366
203
766

Reduction Balance of
liability
liability
985, 150
201, 485
783, 665
221, 634
562, 031
243, 797
318, 234
268, 234
50, 000

Required:
1. What amount would Troy Company disclose as future lease payments
in the notes to financial statements on December 31, 2015.
2. Prepare journal entry to record the finance lease on January 1, 2015.
3. Prepare journal entry on December 31, 2015 to record the minimum
lease payment and the executor cost.
4. Prepare journal entry to record the depreciation for 2015.

5. Prepare journal entry to record the minimum lease payment and the
executor cost on December 31, 2018.
6. Prepare journal entry to record the return of the machine to the lessor.
Assume the fair value is the same as the guaranteed residual value.

Problem 11-18 (IFRS)


Elysee Company leased a machine with a fair value of P1, 650, 000 for a
period of 5 years under a finance lease. The initial direct costs included in
negotiating the lease amounted to P12, 500. The present value of the
minimum lease payments discounted at the rate implicit in the lease is P1,
584, 000. At what amount should the machine be recognized initially by
Elysee Company?
a.
b.
c.
d.

1,
1,
1,
1,

650,
596,
662,
584,

000
500
500
000

Problem 11-19 (AICPA Adapted)


At the beginning of current year, Clay Company leased a new machine from
Saxe Company. The following data relate to the lease transaction at the
inception of the lease:
Lease term
Annual rental payable at beginning of each lease year
000
Useful life of machine
Implicit interest rate
Present value of an annuity of 1 in
advance for 10 periods at 10%
Present value of annuity of 1 in
arrears for 10 periods at 10%
Fair value of the machine

10 years
500,
15 years
10%
6.76
6.15
4, 000, 000

The lease has no renewal option, and the possession of the machine reverts
to Saxe Company when the lease terminates.
At the commencement of the lease, what amount should be recognized as
finance lease liability?
a. 4, 000, 000
b. 3, 380, 000
c. 3, 075, 000
d.
0

Problem 11-20 (AICPA Adapted)


At the beginning of current year, Ashe Company entered into a ten-year
noncancelable lease requiring year-end payments of P100, 000. Ashes
incremental borrowing rate is 12%, while the lessors implicit interest rate,
known to Ashe, is 10%. Present value factors for an ordinary annuity for ten
periods are 6.145 at 10%, and 5.650 at 12%. 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 be capitalized as cost of the leased property?
a. 1, 000, 000
b.
614, 500
c.
565, 000
d.
0

Problem 11-21 (IAA)


On December 31, 2015, Tiger Company leased equipment from another
entity. Pertinent lease transaction data are as follows:

The estimated seven-year useful equipment life coincides with the


lease term.
The first of the seven equal annual P800, 000 lease payments was paid
on December 31, 2015.
The implicit interest rate is 12%.
Tigers incremental borrowing rate is 14%.
Present values of an annuity of 1 in advance for seven periods are 5.11
at 12% and 4.89 at 14%.

What amount should be recorded as initial measurement of the equipment?


a. 5, 600, 000
b. 4, 088, 000
c. 3, 912, 000
d.
0

Problem 11-22 (AICPA Adapted)


East Company leased a new machine from North Company on January 1,
2015 under a lease with the following information:

Annual rental payable at beginning of each lease year


400, 000
Lease term
Useful life of machine
years
Implicit interest rate
Present value of an annuity of 1
in advance for 10 periods at 14%
Present value of 1 for 10 periods at 14%

10 years
12
14%
5.95
0.27

East Company has the option to purchase the machine on January 1, 2025,
by paying P500, 000 which approximates the expected fair value of the
machine on the option exercise date.
What is the initial cost of the leased asset to be recognized by East
Company?
a.
b.
c.
d.

2,
2,
2,
1,

515,
380,
245,
980,

000
000
000
000

Problem 11-23 (AICPA Adapted)


At the beginning of current year, Stoic Company became the lessee of new
equipment under a noncancelable six-year lease. The estimated economic
life of the equipment is ten years. The fair value of the equipment at the
inception of the lease was P4, 000, 000. The lease does not meet the criteria
for classification as a finance lease with respect to transfer of ownership of
the leased asset, or bargain purchase option, or lease term.
Nevertheless, Stoic Company must classify this lease as a finance lease if, at
inception of the lease, the present value of the minimum lease payments
excluding executor cost is equal to at least what amount?
a.
b.
c.
d.

2,
3,
3,
4,

700,
000,
600,
000,

000
000
000
000

Problem 11-24 (IFRS)


Mindoro Company leased a land and building for 20 years, the useful life of
the building with effect from January 1, 2015. At that date, the fair value of
the leasehold interest was P7, 500, 000 and of which P6, 000, 000 was

attributable in the building. Annual rentals of P800, 000 are payable in


advance on January 1. What amount should be recognized as an operating
lease expense for the year ended December 31, 2015?
a. 800, 000
b. 640, 000
c. 160, 000
d.
0

Problem 11-25 (IFRS)


Casanova Company leased a warehouse with adjoining land for a period of
15 years. The fair values of the leasehold interests in the land and the
warehouse are P5, 000, 000 and P2, 500, 000 respectively. The land has an
indefinite economic life whereas the warehouse has a useful life of 15 years.
Title to the land is not expected to pass at the end of the lease. At what
amount should the asset in relation to finance lease be recognized in the
financial statements?
a. 7, 500, 000
b. 5, 000, 000
c. 2, 500, 000
d.
0

Problem 11-26 (AICPA Adapted)


Robbin Company leased a machine from Ready Leasing Company. The lease
qualified as finance lease and required 10 annual payments of P100, 000
beginning immediately. The lease specified an interest rate of 12% and a
purchase option of P100, 000 at the end of the tenth year, even though the
machines estimated value on that date was P200, 000.
Present value of an annuity due (in advance)
of 1 at 12% for 10 periods
Present value of 1 at 12% for 10 periods

6.328
0.322

What amount should be recorded as lease liability at the beginning of the


lease term?
a.
b.
c.
d.

621,
648,
665,
697,

600
600
000
200

Problem 11-27 (AICPA Adapted)


At the beginning of current year, Nori Company entered into a 5-year lease
for drilling equipment. The entity accounted for the acquisition as a finance
lease for P2,400,000, which included a P100,000 bargain purchase option. At
the end of the lease, the entity is expected to exercise the bargain purchase
option. The entity estimated that the equipmentsfair value will be P200,000
at the end of the 8-year life and regularly used straight line depreciation on
similar equipment. What amount should be recognized as depreciation
expense on the leased asset for the current year?
a.
b.
c.
d.

480,000
460,000
300,000
275,000

Problem 11-28 (AICPA Adapted)


At the beginning of current year, Cole Company signed an eight-year
noncancelable lease for a new machine, requiring P150,000 annual
payments at the beginning of each year. The machine has a useful life of 12
years, with no residual value. Title passes to Company at the lease expiration
date. Cole Company used straight-line depreciation for all plant assets.
Aggregate lease payments have a present value of P1,080,000 based on an
appropriate rate of interest.
a.
b.
c.
d.

0
90,000
135,000
150,000

Problem 11-29 (AICPA Adapted)


At the beginning of current year. Kosovo Company entered into a 10-year
lease foranequipment. The entity accounted for the acquisition as a finance
lease for P4,900,00, Which includesa P200,000 guaranteed residual value. At
the end of the lease, the asset will revert back to the lessor. It is estimated
that the assets fair value at the end of its 12-year useful life will be
P100,000. The straight line depreciation is used. What amount should be
recognized as depreciation expense on the leased asset?
a.
b.
c.
d.

490,000
400,000
470,000
480,000

Problem 11-30 (IFRS)


Nova Company has leased an asset under a finance lease. The present value
of the minimum lease payments is P686,000 and the fair value of the asset is
P700,000. The asset has a useful life of 5 years and the lease is for a period
of 4 years, after which is substantially below the expected value of the asset
at that date. The asset is depreciated on a straight line basis. What is the
annual depreciation expense?
a.
b.
c.
d.

175,
140,
137,
171,

000
000
000
000

Problem 11-31 (IFRS)


As the beginning of current year, Diamond Company 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 for the current year?
a.
b.
c.
d.

600,000
450,000
592,000
444,000

Problem 11-32 (AICPA Adapted)


Neal Company entered into a nine-year finance lease on a warehouse on
December 31, 2015. Lease payment of P520, 000 which included real estate
taxes and other executor cost of P20, 000, are due annually, beginning on
December 31, 2016 and every December 31 thereafter. The interest rate
implicit in the lease is 9%. The rounded present value of an ordinary annuity
of 1 for nine years at 9% is 5.6. What amount should be reported as lease
liability on December 31, 2015?
a.
b.
c.
d.

2,
2,
4,
4,

800,
912,
500,
680,

000
000
000
000

Problem 11-33 (AICPA Adapted)


Nun Company leased a machinery from Chin Company on January 1, 2015
for a 10-year period. The useful life of the asset is 20 years. Equal annual
payments under the lease are P200, 000 and are due on January 1 of each
year starting January 1, 2015. The present value on January 1, 2015 of the
lease payments over the lease term discounted at 10% was P1, 352, 000.
The incremental borrowing rate was 12%. The lease is appropriately
accounted for as a finance lease because there is a very nominal bargain
purchase option.
1. What is the finance lease liability to be reported as noncurrent on
December 31, 2015?
a. 1, 215, 920
b. 1, 090, 240
c. 1, 067, 200
d.
973, 920
2. What is the interest expense for 2015?
a. 200, 000
b. 115, 200
c. 106, 720
d.
0
3. What is the depreciation for 2015?
a. 135, 200
b. 115, 200
c. 67, 600
d. 20, 000

Problem 11-34 (AICPA Adapted)


Oak Company leased equipment for the entire nine-year useful life, agreeing
to pay P500, 000 at the start of the lease term on December 31, 2015 and
P500, 000 annually on each December 31 for the next eight years. The
present value on December 31, 2015, of the nine lease payments over the
lease term, using the rate implicit in the lease which Oak Company knows to
be 10%, was P3, 165, 000. The December 31, 2015, present value of the
lease payments using the incremental borrowing rate of 12% was P2, 985,
000. What amount should be reported as lease liability on December 31,
2016?
a. 3, 500, 000
b. 2, 431, 500
c. 2, 283, 200

d. 2, 485, 000

Problem 11-35 (AICPA Adapted)


On January 1, 2015, Blaugh Company signed a long-term lease for an office
building. The terms of the lease required Blaugh Company to pay P100, 000
annually, beginning December 31, 2015, and continuing each year for 30
years. The lease qualifies as a finance lease. On January 1, 2015, the present
value of the lease payments is P1, 125, 000 at the 8% interest rate implicit in
the lease. What amount should be reported as lease liability on December
31, 2015?
a.
b.
c.
d.

1,
1,
1,
2,

025,
115,
125,
900,

000
000
000
000

Problem 11-36 (AICPA Adapted)


On December 31, 2015, Rafferty Company leased equipment under a finance
lease. Annual lease payments of P200, 000 are due December 31 for 10
years. The equipment useful life is 10 years, and the interest rate implicit in
the lease is 10%. The lease obligation was recorded on December 31, 2015
at P1, 350, 000 and the first lease payment was made on that date. What
amount should be included in current liabilities on December 31, 2015 in
relation to the finance lease?
a. 65, 000
b. 85, 000
c. 115, 000
d. 200, 000

Problem 11-37 (IFRS)


Miracle Company leased machinery for the entire useful life of 10 years with
effect from January 1, 2015. 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, 2015 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, 2015?

a. 4, 578, 000
b. 4, 641, 000
c.
700, 000
d.
0

Problem 11-38 (AICPA Adapted)


On December 31, 2015, Roe Company leased a machine from Colt Company
for a five-year period. Equal annual payments under the lease are P1, 050,
000 including P50, 000 annual executor cost and are due on December 31 of
each year. The first payment was made on December 31, 2015, and the
second payment was made on December 31, 2016. The five lease payments
are discounted at 10% over the lease term. The present value of minimum
lease payments at the inception of the lease and before the first annual
payment was P4, 170, 000. The lease is appropriately accounted for as a
finance lease.
On December 31, 2016, what amount should be reported as lease liability?
a.
b.
c.
d.

3,
3,
2,
2,

170,
150,
853,
487,

000
000
000
000

Problem 11-39 (AICPA Adapted)


On January 1, 2015, Babson Company leased two automobiles for executive
use. The lease required Babson Company to make five annual payments of
P1, 300, 000 beginning January 1, 2015. At the end of the lease term,
December 31, 2019. Babson Company guaranteed the residual value of the
automobiles at a total of P1, 000, 000. The lease qualified as a finance lease.
The interest rate implicit in the lease is 9%. Present value factors for the 9%
rate implicit in the lease are as follows:
For an annuity due with 5 payments (in advance)
4.240
For an ordinary annuity with 5 payments
Present value of 1 for 5 periods

3.890
0.650

What amount should be reported as finance lease liability immediately after


the first required payment?
a.
b.
c.
d.

4,
4,
3,
3,

862,
407,
562,
107,

000
000
000
000

Problem 11-40 (AICPA Adapted)


On January 1, 2015, Day Company entered into a 10-year lease agreement
with Ward Company for industrial equipment. Annual lease payments of P1,
000, 000 are payable at the end of each year. Day Company knows that the
lessor expects a 10% return on the lease. The equipment is expected to have
an estimated useful life of 10 years. In addition, a third party has guaranteed
to pay Ward Company a residual value of P500, 000 at the end of the lease.
The present value of an ordinary annuity of 1 at 10% for 10 years is 6.14.
The present value of 1 at 10% for 10 years is .39.
What is the principal amount of the lease obligation on December 31, 2015?
a.
b.
c.
d.

6,
6,
5,
5,

335,
140,
754,
968,

000
000
000
500

Problem 11-41
On January 1, 2015, Harrow Company signed a five year noncancelable
equipment lease with annual payments of P1,000,000 beginning December
31, 2105. The entity treated this transaction as a finance lease. The five
lease payments have a present value of P3,790,000 on January 1, 201 based
on a implicit interest rate of 10%. What amount should be reported as
interest expense for 2015?
a. 379,000
b. 279,000
c. 242,000
d.
0

(KULANG 11-42-45)
(CHAPTER 12- HANNAH)

Problem 13-1 Multiple Choice (PAS 17)

1. Under a sales type lease, what is the meaning of gross investment in the lease?
a. Present value of minimum lease payments
b. Absolute amount of minimum lease payments
c. Present value of minimum lease payments plus
unguaranteed residual value

present value of

d. Aggregate of minimum lease payments and


unguaranteed residual value
2. Net investments in a sales type lease is equal to
a. Gross investment in the lease less unearned
finance income
b. Cost of the lease asset
c. The minimum lease payments
d. The minimum lease payments less unguaranteed
residual value
3. These are incremental costs that are directly attributable to negotiating and
arranging lease.
a. Initial direct costs
b. Transaction costs
c. Costs of services
d. Executory costs
4. Initial direct costs incurred by the lessor under a sales type lease should be
a. Deferred and all allocated over the economic life of the leased property.
b. Expensed un the period incurred.
c. Deferred and allocated over the term of the lease in proportion to the
recognition of rental income.
d. Added to the gross investment in the lease and amortized over the term of the
lease as a yield adjustment.
5. Which of the following statements characterizes a sales type lease?
a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.

c. The lessor recognizes a dealers profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealers profit at lease inception and interest revenue
over the life of the asset
6. The profit on a finance lease transaction for lessors who are manufacturers or
dealers should
a. Not be recognized separately from finance

income

b. Be recognized in the normal way on the transaction


c. only be recognized at the end of the lease term
d. Be recognized on a straight line basis over the life of the lease
7. The sales revenue recognized at the commencement of the lease by a
manufacturer or dealer lessor is the
a. Fair value of the asset
b. Present value of the minimum lease payments
c. Fair value of the asset or present value of the minimum lease payments,
whichever is lower.
d. Fair value of the asset or present value of the minimum lease payments ,
whichever is higher.
8. What is the treatment of an unguaranteed residual value in determining the cost
of sales under sales type lease?

a. The unguaranteed residual value is ignored.


b. The unguaranteed residual value is added to the cost of the lease asset.
c. The unguaranteed residual value is deducted from the cost of the leased asset at
absolute amount.
d. The unguaranteed residual value is deducted from the cost of the leased asset at
present value.

9. The excess of the fair value of leased property at the inception of the lease over
the carrying amount shall be recognized by the dealer lessor as
Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturers profit from a sales type lease

d. Manufacturers profit from a direct financing lease

10. In a lease that is recorded as a sales type lease by the lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of the lease using the interest method
c. Shall be recognized over the period of the lease using the straight line method
d. Shall be recognized in full as revenue at the inception of the lease

(13-2 to 12- GUIA)


Problem 13-11 (IAA)
Esmeralda Company leased equipment to another entity on January 1, 2015.
The terms of the lease called for annual payment of 500,000 to be made at
the end of each year. The lease term is 5 years which is the useful life of the
equipment. The lease is appropriately recorded as a sales type lease. The
cost of the equipment is P1,000,000. The implicit rate in the lease is 12%.
The PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On July 1,
2017, Esmeralda Company actually sold the equipment to the lease for
P1,200,000.
Required:
1. Determine the unearned interest income on January 1, 2015.
2. Determine the gross profit on sale.
3. Prepare journal entries for 2015, 2016 and 2017 to record the sales
type lease and the actual sale of the leased asset. The periodic system
is used.

Problem 13-12 (AICPA Adapted)


Howe Company leased equipment to Kew Company on January 1, 2015 for
an eight-year period expiring December 31, 2022. Equal payments under the
lease are 500,000 and are due on January 1 of each year. The first payment
was made on January 1, 2015. 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 of 12% is P2,780,000. What
amount of profit on the sale should be reported for the year ended
December 31, 2015?

a. 900,000
b. 780, 000
c. 240,000
d. 333,600

Problem 13-13 (AICPA Adapted)


Meg Company leased equipment from Wee Company on July 1, 2015 for an
8-year period. Equal payments underthe lease are 600,000 and are due on
July 1 of each year. The first payment was made on July 1, 2015.
The interest rate contemplated by Meg Company and Wee Company is 105.
The cash selling price of the equipment is P3,520,000 and the cost of the
equipment on Wee Companys accounting records is P2,800,000. The lease is
appropriately recorded as a sales type lease.
What amount of profit on sale and interest revenue should be recognized for
the year ended December 31, 2015?
Profit on sale

Interest Revenue

a.

720,000

176,000

b.

720,000

146,000

c.

45,000

176,000

d.

45,000

146,000

Problem 13-14 (AICPA Adapted)


On January 1, 2015, 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, 2024 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 fair and adequate
compensation to Gallant Company for the use of its funds. 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 total income before tax should be recognized by Gallant


Company from the lease for the year ended December 31,2015?

a. 204, 492
b. 604, 492
c. 355,080
d. 755,080

Problem 13-15 (IAA)


Reagan Company used leases as a method of selling products. In 2015,
Reagan Company completed construction of a passenger ferry.
On January 1, 2015, 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. The annual lease payments do not include
executory costs.
Original
8,000,000

cost

of

the

ferry

Fair Value of ferry at lease date


Lease
1,500,000

12,555,000

payments

in

Estimated
2,000,000

residual

Implicit
12%

interest

advance
value
rate

Date of first lease payment


2015

January 1,

Lease term
years

20

PV of an annuity due of 1 at 10% for 20 periods


PV
0.10

of

at

12%

8.37
for

20

periods

1. What is the total financial revenue over the lease term?


a. 17,445,000
b. 19,245,000
c. 19,445,000
d. 22,000,000
2. What is the gross profit on sale for 2015?
a. 6,555,000
b. 4,555,000
c. 4,755,000
d. 4,355,000
3. What is the interest income for 2015?
a. 1,506,600
b. 1,524,600
c. 1,326,600
d. 1,350,600

(KULANG 13-16-17 pa type nalang :*)


Problem 13-18 (IAA)
Marianas Company adopted the policy of leasing as the primary method of
selling products. The entitys main product is a small cargo vessel. Marianas
company constructed such a cargo vessel for Jade Company at a cost of
P8,500,000.
The terms of the lease provided for annual advance payments of P2,500,000
to be paid over 10 years with the ownership transferring to Jade
Company at the end of the lease period. It is estimated that the cargo
vessel will have a residual value of P1,600,000 at the date.
The lease payments began January 1, 2015. Marianas Company incurred
initial direct cost of P500,000 in financing the lease agreement with Jade
Company. The sale price of the cargo vessel is P14,875,000.
Financing the construction was at a 14% rate. The present value of an
annuity due of 1 at 145 for 10 periods is 5.95

1. What amount should be reported as gross profit on sale for


2015?
a. 5,875,000
b. 6,375,000
c. 4,275,000
d. 4,775,000
2. What is the unearned interest income on January 1, 2015?
a. 10,125,000
b. 11,725,000
c.

9,625,000

d.

8,525,000

3. What is the interest income for 2015?


a. 2,082,500
b. 1,732,500
c. 2,306, 500
d. 1,956,500

Problem 13-19 (IAA)


Dexter Company leased equipment to another entity on January 1,2015. The
lease is for an eight-year period expiring December 31, 2022. The first of
eight equal annual payments of 900,000 was made on January 1,2015.
Dexter Company had purchased the equipment on December 29, 2014 for
P4,800,000. The lease is appropriately accounted for as a sales type lease by
Dexter company. The present value on January 1, 2015 of all rent payments
over the lease term discounted at a 105 interest rate was P5,280,000. What
amount of interest revenue should be recorded in 2016?
a. 490,000
b. 480,000
c. 438,000
d. 391,000

Problem 13-20 (AICPA Adapted)


Accenture Company, a dealer in equipment, leased equipment to another
entity on July 1,2015. the lease is appropriately accounted for as a sale by
Accenture Company.
The lease is for the entire ten-year useful life of the equipment expiring June
30, 2025. the first of ten equal annual payments of P500,000 was made on
July 1, 2015.
Accenture company had purchased the equipment for P2,675,000 on January
1, 2015, established a list selling price of P3,375,000 on the equipment.
The present value on July 1, 2015 of the rent payments over the lease terms
discounted at 12% is P3,165,000.
What amount of gross profit on sale and interest income should be
recognized, respectively for 2015?
a. 490,000 and 189,900
b. 490,000 and 159,900
c. 700,000 and 159,900
d. 700,000 and 189,900
Problem 13-21 (IFRS)
Liza Company is a car dealer. On January 1,2015, the entity entered in
finance lease with a customer under which the customer would pay
P200,000 on January 1 each year for 5 years, commencing in 2015. The cost
of the car is P600,000 and the cash selling price was P750,000. The entity
paid legal fees of P20,000 to a law firm in connection with the arrangement
of the lease. What amount of gross profit on sale should be recognized for
the year ended December 31, 2015?
a. 150,000
b. 130,000
c.

20,000

d.

Problem 13-22 (IAA)

Hazel company leased machinery to Anne company on July 1, 2015 for a tenyear period expiring June 30, 2025. Equal annual payments under the lease
are P750,000 and are due on July 1 of each year. The first payment was
made on July 1, 2015. The implicit rate of interest is 9%. The cash selling
price of the machinery is P5,250,000 and the carrying amount is P4,650,000.
The lease is appropriately recorded as a sales type lease.
1. What is the gross profit on sale for 2015?
a. 600,000
b. 300,000
c. 472,500
d.

2. What amount of interest revenue should be recorded for 2015?


a. 175,500
b. 236,250
c. 405,000
d. 202,500

Problem 13-23(IAA)
On December 31,2015, Benz Company, a lessor, actually sold a machinery
that it had been leasing under a sales type lease. On January 1, 2015 after
receipt of the lease payment for the year, the following account balances
were associated with the lease:
Gross lease receivable
Unearned interest income

5,850,000
1,000,000

The interest rate implicit in the lease is 10%. On December 31,2015, Benz
Company actually sold the leased machinery to the lessee for P3,250,00
cash.
1. What is the interest income for 2015?

a. 585,000
b. 485,000
c. 325,000
d.

2. What is the carrying amount of the lease receivable on december


31,2015?
a. 5,850,000
b. 4,850,000
c. 5,335,000
d. 5,365,000
3. What is the loss on sale of the machinery that should recognized on
December 31,2015?
a. 2,085,000
b. 1,600,000
c. 2,600,000
2,015,000
Problem 13-24 (IAA)
On January 1, 2015, Pamela Company leased equipment to another entity
under a finance lease. The terms of the lease called for annual lease
payments to be made in advance at the beginning of each year starting
January 1, 2015. The implicit interest rate for the transaction is 12%. On July
1, 2017 the lessor actually sold the equipment to the lessee and received
P3,000,000 to complete the transaction. After the January 1, 2017 payment
was made, the balance of the net lease receivable was P3,500,000.
1. What is the interest income to be recognized in 2017?
a. 210,000
b. 420,000
c. 360,000
d. 180,000
2. What is the carrying amount of the lease receivable on July 1, 2017?

a. 3,500,000
b. 3,710,000
c. 3,290,000
d. 3,920,000
3. What is the loss on sale of the leased asset to be recognized on July 1,
2017?
a. 710,000
b. 500,000
c. 290,000
d.

Problems 14-1 Multiple choice (PAS 17)

1. If the sale and leaseback transaction results in an operating lease and


the sale price is below fair value that is compensated by future rental
at below market value, any indicated loss on sale is

a. Recognized immediately in profit or loss.


b. Recognized in other comprehensive Income.
c. Deferred and amortized in proportion to the lease payments over the
period for which the asset is expected to be used.
d. Not recognized

2. If the sale and leaseback transaction results in an operating lease and


the sale price is above fair value, the excess of the sale price over fair
value is

a. Deferred and amortized over the period for which the asset is expected
to be used.
b. Recognized immediately in profit or loss.

c. Recognized in other comprehensive income.


d. Not recognized.

3. For sale and leaseback transaction resulting in an operating lease, if


the fair value of the asset at the time of sale and leaseback is below
the carrying amount of the asset, the difference is recognized

a.
b.
c.
d.

As
As
As
As

loss immediately
gain immediately
deferred loss to be amortized over the lease term
deferred gain to be amortized over the lease term

4. If the sale and leaseback transaction results in a finance lease, any


excess of sales proceeds over the carrying amount of the asset is

a.
b.
c.
d.

Deferred and amortized as income over the lease term


Deferred and amortized as income over the life of the asset.
Recognized in profit or loss immediately
Recognized in other comprehensive income

5. Which of the following statement is true regarding sale and leaseback


transaction?

a. Both profit and loss on sale followed by an operating lease are


recognized immediately if the transaction is established at fair value.
b. Profit from the sale should be amortized in proportion to the rental
payments if an operating lease results from the sale and leaseback
transaction.
c. Any profit on sale and leaseback transaction resulting in an operating
lease deferred and loss is recognized immediately.
d. Profit from the sale should be deferred and amortized in proportion to
the amortization of the leased asset if the sale and leaseback
transaction results in a finance lease.

.
Problems 14-2 (ACP)

On January 1, 2015, German Company sold an equipment to Sterling


Company for P 1,100,000 which is the fair value of the equipment.
The equipment had a cost P 2,500,000, carrying amount of P 1,000,000 and
remaining useful life of 10 years.
On the same day, German Company leased back equipment for 5 years for
an annual rental of P 40,000 payable at the beginning of each year.
German Company has no option to renew or repurchase the equipment.

Required:
Prepare Journal entries for 2015 to record the sale and leaseback transaction
in the books of German Company and Sterling Company.

Problem 14-3 (ACP)

On January 1, 2015, Canada Company sold a machine with a remaining


useful life of 10 years to Saigon Company and simultaneously leased it back
for 3 years. Pertinent data are as follows;

Sale price

500,000

Machinery

1,000,000

Accumulated Depreciation
Annual rental

450,000
90,000

Required:
Prepare journal entry to record the sale and leaseback transaction on the
books of Canada Company and Saigon Company.

Problem 14-4 (IFRS)

On January 1, 2015, Juan Company sold a machine and immediately leased it


back at an annual rental that was determine to be sufficiency lower than
market rent.

The details of the sale and leaseback are as follows:

Sale price
Fair value machine
Carrying amount of machine
Annual rental
Remaining life of machine
Lease term

5,000,000
6,500,000
7,000,000
80,000
15 years
5 years

Required:
Prepare journal entries for 2015 to record the sale and leaseback on the
books of Juan Company
Problem 14-5 (IFRS)
On January 1, 2015, Pedro Company sold a machine and immediately leased
it back at an annual rental that was determine to be sufficiency lower than
market rent.

The following date relate to the sale and leased back transaction;

Sale price
Fair value of machine
Carrying amount of machine
Annual rental
Remaining life of machine
Lease term

4,000,000
5,300,000
5,000,000
50,000
10 years
2 years

Required:
Prepare journal entries for 2015 to record the sale and leaseback transaction
on the books of Pedro Company.

Problem 14-6 (IFRS)


On January 1, 2015, Hazel Company sold a machine and immediately lease it
back. The following data pertain to the sale and leaseback transaction.

Sale price
Fair value of machine
Carrying amount of machine
Annual rental
Remaining life of machine
Lease term

4,600,000
4,300,000
3,500,000
90,000
12 years
3 years

Required:
Prepare journal entries for 2015 to record the sale and leaseback transaction
on the books of Hazel Company.

Problem 14-7 (IFRS)


On January 1, 2015, Racquel Company a machine and immediately lease it
back. The following data pertain to the sale and leaseback transaction.

Sale price

4,500,000

Fair value of machine


Carrying amount of machine
Annual rental
Remaining life of machine
Lease term

4,000,000
4,200,000
80,000
10 years
2 years

Required:
Prepare journal entries for 2015 to record the sale and leaseback transaction
on the books of seller-lease.

Problem 14-8 (AICPA Adapted)


On December 31, 2015, Bain Company sold a machine to a Ryan Company
and simultaneously leased it back for one year. The entity provided the
following information at this date:
Sale Price

360,000

Carrying Amount

330,000

Present Value of reasonable leased rental


(P30,000 for 12 months @ 12%)
Estimated remaining useful life

341,000
12 years

In the Income statement for 2015, what amount should be reported as gain
from the sale of the machine?
a.

32,100

b.

30,000

c.

4,100

d.

Problem 14-9 (IFRS)


On January 1, 2015, Tripoli Company sold a machine for P3, 000,000. The fair
value on the date of sale was P3, 500,000. The a=machine had carrying
amount of P3, 800,000 and remaining life of 10 years. The entity
immediately leased back the machine at an annual rental of P50, 000 for four
years. It was determined that the annual rental is sufficiently lower
compared to the market rent of a similar asset. What total amount should be
recognized in profit or loss for 2015?

a. 425, 000
b. 475, 000
c.200, 000
d.250, 000

Problem 14-10 (IFRS)


On December 31, 2015, Zeta Company sold an equipment with an estimated
remaining useful life of 10 years for P7, 500,000. At the same time, Zeta
Company leased back the equipment for 2 years. The lease back in an
operating lease. On the date of sale, the fair value of the equipment is P6,
000,000 and the carrying amount is P5, 000,000. What amount should be
reported as gain from sale and lease back for 2015?
a. 2, 500,000
b. 1, 500,000
c. 1, 000,000
d. 1, 750,000
Problem 14-11 (IFRS)
On December 31, 2015, Thunder Company sold a land with a cost of P1,
500,000 to Victoria Company for P2, 300,000 when the fair value of the land
was
P2, 150,000. The Thunder Company immediately entered
into a cancelable lease agreement to use the land for two years at an annual
rental of P200, 000. What amount of gain should be recorded on the sale of
land for 2015?
a. 150, 000
b. 800, 000
c. 650, 000
d. 725, 000
Problem 14-12 (IAA)
On June 30, 2015, Pam Company sold equipment for P3, 500,000. The
equipment had a carrying amount of P3, 150,000 and a remaining useful life
of 10 years. The same day, the entity leased back the entity at P35, 000 per
month for 5 years with no option to renew the lease or purchase the
equipment. what amount should be reported as rent expense for 2015?
a. 420, 000
b. 210, 000
c.175, 000

d. 140, 000
Problem 14-13 (AICPA Adapted)
On June 30, 2015, Lee Company sold equipment to an unaffiliated entity for
P5, 500,000. The equipment had a carrying amount of P5, 000,000 and a
remaining life for 10 years. That same day, Lee Company leased back at P15,
000per month for 2 years with no option renew the lease or to repurchase
the equipment. The present value of the lease payments using the
appropriate interest rate was P318, 650 on June 30, 2015.
What amount should be reported a rent expense for the year ended
December 31, 2014?
a. 110, 000
b. 90, 000
c. 50, 000
d. 40, 000
Problem 14-14 (AICPA Adapted)
On December 31, 2015, Lane Company sold equipment to Noll Company and
simultaneously leased it back for 12 years. Pertinent information on this
date is as follows:
Sale price

480, 000

Carrying amount

360, 000

Estimated remaining economic life

15 years

On December 31, 2015, what amount should be reported as gain from sale of
equipment?
a. 120,000
b. 112,000
c. 110,000
d.

Problem 14-17 (PHILCPA Adapted)


on December 31, 2015, Albocasser Company purchased a tractor from
Cheliff company. Simultaneous with the sale. Cheliff leased back the tractor
for 12 years for use in the farm that it is developing. The sale price of the
tractor was
P7, 800, 000, while the carrying amount in the books of
Cheliff on the date of the sale was P5, 850,000. Cheliffs engineer has
estimated that the remaining economic life of the tractor is 15 year. Cheliff is
a wholly-owned subsidiary of s USA Company.

What is the amount that Cheliff Company should report as deferred gain from
the sale of the tractor on December 31, 2015 in the reporting package for
use in consolidation with the head office account?
a. 1, 950,000
b. 1, 820,000
c. 1, 737, 500
d.

Problem 14-18(IFRS)
In an attempt to alleviate liquidity problems, Banco Company entered into an
agreement on January 1, 2015 to sell a processing plant to another entity for
P 3,500,000 which is the fair value of the plant. At the date of sale, the plant
had a carrying amount of P 2,750,000. Banco Company immediately leased
the processing plant back from the buyer. The terms of the lease agreement
were:
Annual payment in arrears, commencing
December 31, 2015
Reimbursement to the lessor for maintenance
Cost (included in the annual payment)
Lease term
Economic life of plant
Implicit interest rate

700,000
35,000
6 years
8 years
10%

What amount should be reported as deferred gain on sale and leasedback on


December 31, 2015?
a. 750,000
b. 625,000
c. 656,000
d. 0

Problem 14-19(IAA)

On January 1, 2015, Accord Company sold a building with a carrying amount


of P 4,200,000 to another entity for P4,050,000. Accord Company
immediately entered into a leasing agreement where in Accord Company
would lease the building back for annual payment of P 640,000. The term of
the lease is 10 years, the expected remaining useful life of the building. The
first annual lease payment is to be made immediately, and future payments
will be made on January 1 of each succeeding year. The lessors implicit
interest rate is 12%. What amount of loss on sale and leaseback should be
recognized by Accord Company for 2015?
a.
b.
c.
d.

150,00
135,00
15,000
0

Problem 14-20(IFRS)
Sensible Company sold a machinery on January 1, 2015 at the fair value of P
2,500,000 when the carrying amount was P 2,000,000. Sensible company
leased the asset back on that date for the remaining useful life of 5 years.
Lease payments are P 700,000 on January 1 each year.
What amount of gain on disposal should be recognized in the 2015 income
statement?
a.
b.
c.
d.

500,000
100,000
250,000
0

What is the total finance charge over the lease term?


a.
b.
c.
d.

1,500,000
1,000,000
500,000
0

Problem 14-21(IAA)
On January 1, 2015, Baker Company sold equipment it had recently
purchased to an unaffiliated entity for its fair value of P 5,700,000. The
equipment had a carrying amount of P 4,500,000 and a remaining life of five
years. On that same day, Baker Company leased back the equipment at P
1,350,000 per year payable in advance for a 5-year period. The lessors
implicit interest rate in the lease is 10%. Baker Company used the double
declining balance method of depreciation. What amount should be reported
as unearned income on the sale and leaseback on December 31, 2015?
a.
b.
c.
d.

1,200,000
960,000
720,000
0

Problem 14-22(IAA)
On January 1, 2015, Halo Company sold a computer system to Lark Company
for P 2,550,000 and immediately leased the computer system back. The
computer was carried on Halos books at a value of P 2,250,000. The term of
the noncancelable lease is 10 years and title will transfer to Halo at the end
of the lease term. The lease agreement required equal rental payments of P
415,000 at the end of each year. The incremental borrowing rate for halo is
12% but Halo is aware that Lark set the annual rental to ensure a rate of
return of 10%, the computer has a fair value of P 2,550,000 on January 1,
2015 and an estimated economic life of 12 years. Halo paid executor cost of
P 45,000 for the current year. Which of the following would be recorded by
Halo on December 31, 2015?
A.
B.
C.
D.

Debit leased computer P 2,550,000


Credit deferred gain P 300,000
Debit deferred gain P 25,000
Debit deferred gain P 30,000

Problem 15-1 Multiple Choice (PAS 12)


1. Which entities are required to apply deferred tax accounting?
I. Public entities
II. Nonpublic entities
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. These are differences that will result in future taxable amount of
determining taxable profit of future period when the carrying amount of
the asset or liability is recovered or settled.
a. Temporary differences
b. Taxable temporary differences
c. Deductible temporary differences
d. Permanent differences
3. These are differences that will result in future taxable amount of
determining taxable profit of future period when the carrying amount of the
asset or liability is recovered or settled
a. Taxable Temporary differences
b. Deductible temporary differences
c. Taxable temporary and permanent differences
d. Deductible temporary and permanent difference

4. It is the deferred tax consequence attributable to a taxable temporary


difference.
a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
5. It is the deferred consequence attributable to a deductible temporary
difference and operation loss carryforward.
a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
6. It is the profit for a period before deduction tax expense.
a. Accounting profit
b. Taxable profit
c. Gross profit
d. Net profit
7. It is the aggregate amount included in the determination of net profit
for the period in respect of current tax and deferred tax.
a. Tax expense
b. Current tax expense
c. Deferred tax expense
d. Deferred benefit
8. It is the profit is a period determined in accordance with the rules
established by taxation authorities upon which income taxes are payable.
a. Accounting profit
b. Taxable profit
c. Net profit
d. Accounting profit subject to tax
9. It is the amount of income tax payable in respect of taxable profit.
a. Current tax expense
b. Total income tax expense
c. Deferred tax expense
d. Deferred tax benefit
10. The deferred tax expense is equal to.
a. Increase in deferred tax asset less increase in deferred tax liability
b. Increase in deferred tax liability less increase in deferred tax asset
c. Increase in deferred tax asset
d. Increase in deferred tax liability

Problem 15-2 Multiple Choice (PAS 12)


1. It is the amount attributable to an asset or liability of tax purposes.
a. Carrying amount
b. Tax base
c. Measurement base
d. Taxable amount
2. A deferred tax liability shall be recognized for all
a. Permanent differences
b. Temporary differences
c. Taxable temporary differences
d. Deductible temporary differences
3. A differed tax asset shall be recognized for all deductible temporary
differences and operation loss carryforward when
a.
It is probable that taxable income will be available against which
the deferred tax asset can be used.
b.
It is probable that accounting income will be available against
which the deferred tax asset can be used.
c.
It is possible that taxable income will be available against which
the deferred tax asset can be used.
d. It is possible that accounting income will be available against which
the deferred tax asset can be used.
4. An entity shall offset a deferred tax asset and deferred tax liability
when
I. The deferred tax asset and deferred tax liability relate to income
taxes levied by the same taxing authority
II. The entity has a legal enforceable right to offset a current tax asset
against the current tax liability.
a.
b.
c.
d.

I only
II only
Both I and II
Neither I and II

5. Which of the following statements in incorrect concerning tax asset


and liabilities?
a. Deferred tax assets and liabilities shall be discounted.
b.
Tax assets and liabilities shall be presented separately from other
assets and liabilities
in the statement of financial position.
c.
Deferred tax assets and liabilities shall be distinguished from
current tax assets and
liabilities.

d.
When an entity makes a distinction between current and
noncurrent assets and
liabilities, it shall not classify
deferred tax assets and liabilities as current.
Problem 15-3 Multiple choice (IFRS)
1. Which of the following statements in relation to deferred tax assets or
liabilities is TRUE?
I. Deferred tax liabilities are the amounts of income taxes payable in
future periods in respect of taxable temporary differences.
II. Deferred tax assets are the amounts of income taxes recoverable in
future periods in respect of deductible permanent differences.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Deferred tax assets are the amount of income taxes recoverable in future
periods in respect of
a. Carryforward of unused tax losses only
b. Taxable temporary differences and carryforward of unused tax
losses
c. Deductible temporary differences and carryforward of unused tax
losses
d. Permanent differences
3. All of the following must be disclosed separately, except?
a. The tax bases of major items on which deferred tax has been
calculated.
b. The amount of deductible temporary differences for which no
deferred tax asset is
recognized.
c. The amount of taxable temporary differences associated with
investments in subsidiaries and associates for which no deferred tax
liability is recognized.
d. The amount of income tax relating to each component of other
comprehensive income.
4. Which of the following statements in relation to deductible temporary
differences is true?
I. Interest expenses accrued but included in taxable profit on a cash
basis shall be classified under deductible temporary differences.

II. Where accumulated depreciation on an asset is greater than


accumulated tax depreciation, the amount shall be classified under
deductible temporary differences.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
5. Which of the following statements is true in relation to deferred tax?
I. Development costs have been capitalized and amortized but were
deducted in determining taxable profit in the period in which they were
accrued. This will give rise to deferred tax asset.
II. The tax base for a machine for tax purposes is greater than the
carrying amount in the financial statements up to the end of the
reporting period. This will give rise to a deferred tax asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Problem 15-4 Multiple Choice (AICPA Adapted)
1. Justification for the method of determining periodic deferred tax expense
is based on the concept of
a. Matching of periodic expenses to periodic revenue.
b. Objectivity in the calculation of periodic expense.
c. Recognition of assets and liabilities.
d. Consistency of tax expense measurement with actual tax planning
strategies.
2. Which of the following differences would result in future taxable amount?
a. Expenses or losses that are deductible after they are recognized in
accounting income.
b. Revenues or gains that are taxable before they are recognized in
accounting income.
c. Expenses or losses that are deductible before they are recognized
in accounting income.
d. Revenues or gains that are recognized in accounting income but are
never included in taxable income.
3. A temporary difference which would result in a deferred tax liability is
a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess tax depreciation over accounting depreciation

d. Subscription received in advance


4. A temporary difference which would result in a deferred tax asset is
a. Tax, penalty or surcharge.
b. Dividend received on share investments.
c. Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable income at the time of
receipt but deferred
for accounting purposes.
5. An entity, cash basis taxpayer, prepares accrual basis financial
statements. In its year-end statement of financial position, the entitys
deferred tax liabilities increased compared to the prior year. Which of the
following changes would cause this increase in deferred tax liabilities?
I. An increase in prepaid expense
II. An increase in rent receivable
III. An increase in warranty expense
a. I only
b. I and II
c. II and III
d. III only
6. An entity reported deferred tax assets and deferred tax liabilities at the
end of the prior year and at the end of the current year. For the current year,
the entity should report deferred tax expense or benefit equal to the
a. Decrease in the deferred tax assets
b. Increase in the deferred tax liabilities
c. Amount of the current liability plus the sum of the net changes in
deferred tax assets and deferred tax liabilities
d. Sum of the net changes in deferred tax assets and deferred tax
liabilities
7. Because an entity uses different methods to depreciate equipment for
accounting and income tax purposes, the entity has temporary differences
that will reverse during the next year and add to taxable income. Deferred
income taxes that are based on these temporary differences shall be
classified in the entitys statement of financial position as
a. Contra account to current assets
b. Contra account to noncurrent assets
c. Current liability
d. Noncurrent liability
8. At the current year-end, an entity had a deferred tax liability arising from
accelerated depreciation that exceeded a deferred asset relating to rent
received in advance which is expected to reverse in the next year. Which of
the following shall be reported in the entitys current year-end statement of
financial position?

a. The excess of the deferred tax liability over the deferred tax assets
as a noncurrent liability.
b. The excess of the deferred tax liability over the deferred tax asset as
current liability.
c. The deferred tax liability as noncurrent liability.
d. The deferred tax liability as current liability.

9. The financial reporting basis of a plant asset exceeded the tax basis
because a different method of reporting depreciation is used for financial
accounting purposes and tax purposes. What is reported if there are no other
temporary differences?
a. Current tax asset
b. Deferred tax asset
c. Deferred tax liability
d. Current tax payable
10. A deferred tax liability is computed using
a. Current tax law regardless of expected or enacted future tax law
b. Expected future tax law regardless of whether enacted or not
c. Current tax law unless a future enacted law is different
d. Either current or expected future tax law regardless of whether the
expected future tax law is enacted or not
Problem 15-5 Multiple Choice (IAA)
1. The purpose of interperiod tax allocation is to
a. Allow reporting entities to fully utilize tax losses carried forward from
a previous year.
b. Allow reporting entities whose tax liabilities vary significantly from
year to year to smooth payments to taxing agencies.
c. Recognize an asset or liability for the tax consequences of temporary
differences that exist at the end of the reporting period.
d. Amortize the deferred tax liability shown on the statement of
financial position.
2. The result of interperiod tax allocation is that
a. Wide fluctuations in an entitys tax liability payments are eliminated.
b. The expense shown in the income statement is equal to the deferred
taxes shown in the
statement of financial position.
c. Tax liability shown in the statement of financial position is equal to
the deferred taxes
shown in the previous years statement of financial
position plus the income tax expense
shown in the income statement.

d. Tax expense shown in the income statement is equal to income


taxes payable for the current year plus or minus the change in the deferred
tax asset or liability balances for the
year.
3. Which of the following is an example of a temporary difference that would
result in a deferred tax liability?
a. Use of straight line depreciation for accounting purposes and an
accelerated rate for
income tax purposes.
b. Rent revenue collected in advance when included in taxable income
before it is included
in pretax accounting income.
c. Use of a shorter depreciation period for accounting purposes than is
used for income tax
purposes.
d. Investment losses recognized earlier for accounting purposes than
for tax purposes.
4. Which of the following is the most likely item to result in a deferred tax
asset?
a. Using accelerated depreciation for tax purposes but straight line
depreciation for accounting purposes.
b. Using the cost recovery method of recognizing construction revenue
for tax purposes but
using percentage of completion method for financial
reporting purposes.
c. Prepaid expense
d. Unearned revenue
5. An example of a deductible temporary difference occurs when
a. The installment sales method is used for tax purposes but the
accrual method of
recognizing sales revenue is used for financial
accounting purposes.
b. Accelerated depreciation is used for tax purposes but straight line
depreciation is used
for accounting purposes.
c. Warranty expense are recognized on the accrual basis for financial
accounting purposes
but recognized for tax purposes as the warranty
conditions are met.
d. The cost recovery method of recognizing construction revenue is
used for tax purposes but the percentage of completion method is
used for financial accounting purposes.
6. A deferred tax liability arising from the use of an accelerated method of
depreciation for tax purposes and the straight line method for financial
reporting purposes would be classified as
a. A current liability
b. A noncurrent liability
c. A current liability for the portion of the temporary difference
reversing within a year and a noncurrent liability for the remainder.
d. An offset to the accumulated depreciation.

7. An item that would create a permanent difference in pretax financial and


taxable income would be
a. Using accelerated depreciation for tax purposes and straight line
depreciation for book purposes.
b. Purchasing equipment previously leased with an operating lease in
prior years.
c. Using the percentage of completion method on long-term
construction contracts.
d. Paying fines for violation of laws.
8. Recognizing tax benefits in a loss year due to a loss carryforward requires
a. Only a footnote disclosure.
b. Creating a new caryrforward for the next year.
c. Creating a deferred tax asset.
d. Creating a deferred tax liability.
9. Intraperiod tax allocation
a. Involves the allocation of income taxes between current and future
periods.
b. Associates tax effect with different items in the income statement.
c. Arises because certain revenue and expenses appear in the financial
statements eitherbefore or after they are included in the income tax return.
d. Arises because different income statement items are taxed at
different rates.
10. In computing the change in deferred tax asset or liability, which of the
following tax rate is used?
a. Current tax rate
b. Estimated future tax rate
c. Enacted future tax rate
d. Past years tax rate
Problem 15-6 Multiple Choice (IAA)
1. All of the following would require intraperiod tax allocation, except
a. Discontinued operation
b. Prior period error
c. Operating income
d. Income from continuing operations
2. Income tax expense should be allocated to all of the following, except
a. Discontinued operation
b. Prior period error
c. Gross profit
d. Other comprehensive income

3. Taxable income
a. Differs from accounting income due to differences in interperiod tax
allocation
b. Differs from accounting income due to differences in interperiod tax
allocation and
permanent differences.
c. Is based on international financial reporting standards.
d. Is reported in the income statement.
4. Which of the following statements is true about interperiod tax allocation?
a. It arises because certain revenue and expense items appear in the
income statement
either before or after they are included in the tax
return.
b. It is required for the cumulative effect of accounting changes but not
for prior period errors.
c. The purpose is to allocate income tax expense evenly over a number
of accounting periods.
d. The purpose is to relate the income tax expense to the items which
affect the amount of tax.
5. Which of the following statements is correct about the presentation of
deferred tax assets and liabilities?
a. Current deferred tax assets are netted against current deferred tax
liabilities.
b. All noncurrent deferred tax assets are netted against noncurrent
deferred tax liabilities.
c. Deferred tax assets are never netted against deferred tax liabilities.
d. Deferred tax assets are netted against deferred tax liabilities if they
relate to the same tax liability.
Problem 15-7 (AICPA Adapted)
1. Which statement is true regarding reporting deferred income taxes in the
financial statements?
a. Deferred tax assets are always netted against deferred tax liabilities.
b. Deferred taxes of one jurisdiction are offset against another
jurisdiction in the netting process.
c. Deferred tax assets and liabilities may only be classified as
noncurrent.
d. Deferred tax assets and liabilities are classified as current and
noncurrent based on expiration date.
2. When accounting for income taxes, a temporary difference occurs in which
of the following scenarios?
a. An item is included in the calculation of net income in one year and
taxable income in a different year.

b. An item is included in the calculation of net income but is neither


taxable nor deductible.
c. The accrual method of accounting is used.
d. An item is no longer taxable due to a change in the tax law.
3. When temporary difference will result in taxable amounts in future years
a. A deferred tax liability is recognized in the current year.
b. A deferred tax asset is recognized in the current year.
c. A deferred tax asset may be recognized in the current year if certain
conditions are met.
d. A deferred tax liability may be recognized in the current year if
certain conditions
are met.
4. Royalties are recognized when received for income tax purposes and
recognized when earned for financial statement purposes. This is an example
of what?
a. Permanent difference that gives rise to deferred tax asset.
b. Temporary difference that gives rise to deferred tax liability.
c. Permanent difference that does not give rise deferred tax.
d. Temporary difference that gives rise to deferred tax asset.
5. Which of the following statements is correct regarding the provisions for
income taxes in the financial statements of a sole proprietorship?
a. The provision for income taxes should be based on business income
using individual taxes rates.
b. The provision for income taxes should be based on business income
using corporate tax rates.
c. The provision for income taxes should be based on the proprietors
total taxable income.
d. No provision for income taxes is required.

Problem 15-8 (ACP)


ABC Company reported pretax financial income of P2, 000,000 for the year
ended December 31, 2015. The taxable income was P1, 500,000. The
difference is due to accelerated depreciation for the income tax purposes.
The income tax rate is 30% and ABC company made estimated tax payment
of P200,000 during the current year.
Required:
a. Prepare journal entries for 2015.
b. Compute the total income tax expense for 2015.

Problem 15-9 (ACP)


Simplex Company reported the following information for the year ended
December 31, 2015:
Operating loss
Interest income on note receivable
Loss on inventory writedown

(1,000,000)
1,100,000
( 300,000)

Loss before income tax

( 200,000)

There are no temporary differences at the beginning of the year. The income
tax rate is 30 %.
Required:
1. Prepare journal entry to record the income tax expense and deferred tax
for 2015.
2. Present the income tax expense in the income statement.

Problem 15-10 (ACP)


Zeus Company reported pretax financial income of P3,000,000 for the year
ended December 31, 2015. The taxable income was P4,000,000.
The difference is due to rental received in advance. Rental income is taxable
when received.
The income tax rate is 30% and Zeus Company made estimated tax
payment of P500,000 during the current year.
Required:
a. Prepare journal entries relating to income tax for 2015.
b. Compute the total income tax expense for 2015.

Problem 15-11 (ACP)


In 2015, Argentina Company received an advance payment of P1,000,000,
which was subject to tax but not supported in accounting income until 2016.
The income tax rate is 30%.
The income tax statement and tax return showed the following:
2015
2016
Income before tax per income statement
9,000,000
Income before tax per return

6,000,000
7,000,000
8,000,000

Required:
1. Prepare journal entries to record the income tax and deferred tax for 2015
and 2016
2. Present the income tax expense in the income statement for 2015 and
2016.

Problem 15-12 (ACP)


Colombo Company included in 2015 a deferred income on installment sale of
P500,000 in accounting income. This deferred income is expected to reverse
for tax purposes in 2016. The income statement and tax return showed the
following:

Accounting income
Taxable income

2015
2016
5,500,000
7,000,000
5,000,000
7,500,000

Required:
1. Prepare journal entries to record the income tax and deferred tax for 2015
and 2016.
2. Present the income tax expense in the income statement for 2015 and
2016.

Problem 15-13 (ACP)


Xavier Company provided the following information for the first year of
operations:
Accounting income
Nondeductible expenses
Nontaxable revenue
Deferred income on installment sale included
in financial income but taxable next year
Doubtful accounts recorded
Financial depreciation
Tax depreciation
Estimated warranty cost accrued in the current year
but not deductible for tax purpose until paid
Income tax rate

4,000,000
200,000
300,000
450,000
100,000
300,000
350,000
100,000
30%

Required:
1.
2.
3.
4.
5.

Prepare journal entry to record the current tax expense.


Prepare journal entry to record the deferred tax liability.
Prepare journal entry to record the deferred tax asset.
Present income tax expense in income statement.
Determine the net deferred tax expense or benefit.

Problem 15-14 (IAA)


On January 1, 2015, Valley Company entered into a 3-year construction
contract that had an estimated gross revenue of P3,000,000.
The entity used the percentage of completion method in recognizing income
on its book and reported construction income as follows:
2015
2016
2017

600,000
1,500,000
900,000

The cost recovery method is used for income tax purposes and the entity
reported construction income on the tax return as follows:
2015
2016

2017

3,000,000

This is the only timing difference income before construction income and
tax as follows:
2015
2016
2017

2,400,000
3,600,000
3,200,000

Required:
Prepare journal entries to record income tax and deferred tax for 2015, 2016,
and 2017. The income tax rate is 30%.
Problem 15-15 (IAA)
On January 1, 2015, aye Company purchased an equipment for P1,000,000.
The equipment has an estimated useful life of 4 years and no residual value.
The entity used the straight line method of depreciation for accounting
purposes and the SYD method for tax purposes.
The comparative depreciation charges for each of the four years are:
2015
2016
2017
2018

Straight line
250,000
250,000
250,000
250,000

SYD
400,000
300,000
200,000
100,000

The depreciation charge is the only timing differences between accounting


income and taxable income.
Aye Company generated P4,000,000 income before depreciation and tax for
each of the four years and that the applicable tax rate is 30%.
Required:
1. Prepare journal entries to record income tax and deferred tax for each of
the four years.
2. Present the deferred tax liability on December 31, 2016.
Problem 15-16 (IAA)

Complex Company recorded the following information relating to income


before tax for accounting purposes:
2015
2,000,000
2016
3,000,000
2017
4,000,000
2018
5,000,000
In 2015, the entity recognized doubtful accounts of P100,000. Such accounts
were considered worthless or uncollectible in 2016.
Analysis of the tax and books records disclosed P120,000 in unearned rent
income on December 31,2015 that has been recognized as taxable income in
2015 when the cash was received.
Also on December 31, 2015, estimated warranty cost of P300,000 had been
recognized as expense on the books in 2015 when the product sales were
made but is not deductible for tax purpose until paid.
The unearned rent income on December 31, 2015 is realized and the actual
warranty payments were made as follows:
Rent income per book
warranty payments
2016
40,000
2017
40,000
2018
40,000

Actual
20,000
80,000
200,000

Required:
Prepare journal entries for 2015, 2016, 2017 and 2018 to record income tax
expense and deferred income tax arising from the temporary differences.
The income rate is 30%.
2. Present the deferred tax asset on December 31, 2016.

Problem 15-17 (ACP)


Shangri-La Company reported a pretax accounting income of P7,900,000
for the year ended December 31 2015. Temporary differences have been
identified as follows.
Tax depreciation in excess accounting depreciation
1,000,000
Litigation loss accrued for financial accounting
Purposes but will be deducted for tax purposes
In the distance future

400,000

Warranty cost expensed for financial accounting


Purposes exceeded the amount currently deducted
For tax purposes by

300,000

The warranty liability is classified as a current liability in the entitys


statement of financial position. The income tax rate is 30%.
There are no temporary differences at the beginning of the current year.
Required:
1. Prepare journal entries to record the income tax and deferred tax for 2015.
2. Prepare a partial income statement and partial statement of financial
position to show the income tax expensed and deferred tax amount.
The entity has no legal enforceable right to set off a current tax asset against
a current tax liability.
3. Determine the net deferred tax expense or benefit.

Problem 15-18 (IFRS)


On December 31, 2015, the statements of financial position accounts of
Simple Company have the same basis for accounting and tax purposes,
except the following:

Computer software cost


Equipment
Accrued liability-health care

Carrying amount Tax base


4,000,000
0
15,000,000
12,000,000
2,000,000

Difference
4,000,000
3,000,000
0
2,000,000

In January 2015, the entity incurred cost of P6,000,000 in relation to the


development of a computer software product. Considering the technical feasibility
of the product, this cost was capitalized and amortized over 3 years for accounting
purpose using straight line. However, the total amount was expensed in 2015 for
tax purposes.
The equipment was acquired on January 1, 2015 for P20,000,000. The useful life of
the equipment is 4 years with no residual value. The equipment is depreciated using
the straight line for accounting purposes and sum of 4 years digits method for tax
purposes.
In January 2015, the entity entered into an agreement with the employees to
provide health care benefits the cost of such plan for 2015 was P2,000,000. This
amount was accrued as an expense in 2015 for accounting purposes. However,
health care benefits are deductible for tax purposes only when actually paid.

The pretax accounting income for 2015 is P13,000,000. The tax rate is 30% and
assume there are no deferred taxes on January 1, 2015.
Required:
1. Prepare journal entries to record the deferred tax liability, deferred tax asset and
current tax expense.
2. Present the income tax expense in the income statement.

Problem 15-19 (IFRS)


On January 1, 2012, Easy Company acquired an equipment for P8,000,000. The
equipment is depreciated using straight line method based on useful life of 8 years
with no residual value.
On January 1, 2015, after 3 years, the equipment was revalued at a replacement
cost of P12,000,000 with no change in useful life.
The pretax accounting income before depreciation for 2015 is P10,000,000. The
income tax rate is 30% and there are no other temporary differences at the
beginning of the year.
Required:
1. Prepare journal entry to record the revaluation on January 1, 2015.
2. Prepare journal entry to record the deferred tax liability on January 1, 2015.
3. Prepare journal entry to record the current tax expense for 2015.
4. Prepare the adjustment of the deferred tax liability on December 31, 2015.
5. Prepare the adjustment if the revaluation surplus on December 31, 2015.
6. Prepare the income tax expense in the income statement for 2015.

Problem 15-20 (IFRS)


Aloha Company provided the following information on December 31, 2015:
Accounts receivable
Motor vehicle
Provision for warranty

Carrying Amount
1,500,000
1,650,000
120,000

Tax base
1,750,000
1,250,000
0

Deposits received in advance

150,000

The depreciation rates for accounting and taxation are 15% and 25% respectively.
The deposits are taxable when received and warranty costs are deductible when
paid,
An allowance for doubtful accounts of P250,000 has been raised against accounts
receivable for accounting purposes but such accounts are deductible only when
written off as uncollectible.
The entity showed net income of P8,000,000 in the income statement for 2015.
There are no temporary differences at the beginning of the current year. The tax
rate is 30%.
Required:
1. Determine the deferred tax liability on December 31, 2015.
2. Determine the deferred tax asset on December 31, 2015.
3. Determine the net deferred tax expense or benefit.
4. Determine the current tax expense for 2015.
5. Determine the total income tax expense for 2015.

Problem 15-21 (IFRS)


West Company disclosed the following assets and liabilities at carrying amount on
December 31, 2015:
Property
Plant and equipment
Inventory
Trade receivables
Trade payables
Cash

10,000,000
5,000,000
4,000,000
3,000,000
6,000,000
2,000,000

The value for tax purposes for property plant and equipment was P7, 000, 000 and
P4,000,000 respectively.
The entity has made a provision for inventory obsolescence of P2, 000, 000 which is
not allowable for tax purposes.
Further, an impairment charge against trade receivable of P1, 000, 000 has been
made. This charge will not be allowed in the current year for tax purposes.
West company reported net income of P9, 000,000 for 2015 there no temporary
differences at the beginning of the current year. The tax rate is 30%.
Required:

1. Prepare journal entry to record the current tax expenses.


2. Prepare journal entry to record the deferred tax liability.
3. Prepare journal entry to record the deferred tax assets.
4. Determine the net deferred tax expense or benefit.
5.Determine the total income tax expense.

(KULANG 15-22 to 66)