SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department
Review in FINANCIAL ACCOUNTING AND REPORTING, Part 2
Take-Home Assessment No. 3

Instruction: The following items are mix of “True or False” questions, multiple choice questions,
identification, and straight problems. For “True or False” questions, write the word TRUE if the statement is
correct, otherwise write FALSE. For MCQs, choose the letter of your choice that best corresponds to the best
answer. GODBLESS! #CPADream # KeepTheFaith
You can place your answers on a:
a. Clean sheet of paper and take a picture of it
after;
b. Microsoft Word File; or
c. Microsoft Excel File.
Please e-mail your answers at
gab.berbano@gmail.com
Name your file as shown “Code_Last Name, Given
Name_employee benefits.”
Submission is until Thursday, April 24, 2020,
6:00AM, Philippine Standard Time.
1. According to PFRS 16 Leases, a lessee shall
classify each of its leases into a finance lease or
an operating lease.
2. A contract is a lease contract if it conveys the
right to control the use an identified asset for a
period of time in exchange for consideration.
3. An underlying asset is not considered an
identified for the purpose of applying the
accounting requirements of PFRS 16 if the
supplier’s substitution right is not substantive.
4. The current view on accounting for leases by
lessees is that all leases are ‘on balance sheet’
items, with very minimal exceptions.
5. In most leases, a lessee recognizes an asset
and a liability at the commencement date.
6. According to PFRS 16, lease payments
include any amount to be paid for purchase
options that are reasonably certain to be exercised
and amounts that are expected to be paid under
residual value agreements.
7. The lessee always uses its incremental
borrowing rate in determining the present value
of the minimum lease payments.
8. If a lease transfers ownership of the
underlying asset to the lessee by the end of the
lease term, the underlying asset is depreciated
over its useful life or the lease term, whichever is
shorter.
9. Both finance and operating leases are subject
to capitalization.
10. Under an operating lease, the lease bonus
paid by the lessee to the lessor is deferred by the
lessor and amortized over the lease term as a
reduction to lease income.
11. When rental payments vary over the term of
an operating lease, the lessor should recognize
lease income on a straight-line basis, unless there
is another method that is more appropriate.
12. Initial direct costs are immediately
recognized as an expense by the lessor when the
costs are incurred in conjunction with an
operating lease.
13. The inception of a lease is defined as the date
of the lease agreement, or the date of an earlier
written commitment.
14. The commencement of the lease term is
defined as the date on which the leased property
is actually transferred to the lessee.
15. The lessor uses the implicit interest rate in
determining the present value of the lease
payments.
16. Any lease that contains a purchase option
must be treated as a finance lease by the lessor.
17. Termination penalties are included in the
lease payments if the lease term reflects the lessee
exercising an option to terminate the lease.
18. In a sale and leaseback transaction that
qualifies as a sale under PFRS 16, the seller-
lessee recognizes only the amount of any gain or
loss that relates to the rights transferred to the
buyer-lessor.
19. Entity A (customer) enters into a contract
with Entity B (supplier) for the use of a data
processing equipment. According to the contract,
Entity A shall operate the equipment only in
accordance with the standard operating
procedures stated in the accompanying user’s
manual. In assessing the existence of a lease, does
Entity A have the right to direct the use of the
asset?
A. No, because the asset’s use is restricted.
B. Yes, because Entity A has the right to direct
how and for what purpose the asset is used.
C. Yes, because the asset’s use is predetermined
and Entity B is precluded from changing that
predetermined use.
D. Maybe yes, maybe no, but exactly I don’t
know.
20. Which of the following is not one of the
criteria when determining whether a contract is or
contains a lease?
A. Identified asset
B. Identified liability
C. Right to obtain substantially all of the
economic benefits from use of an identified
asset throughout the period of use
D. Right to direct the use of the identified asset
throughout the period of use
21. Which of the following statements is
correct regarding the accounting for leases?
A. The lessor depreciates the leased asset under
a finance lease.
B. The lessee depreciates the leased asset under
a “short-term” or a “low-valued asset” lease.
C. When discounting lease payments the lessor
and the lessee use the interest rate implicit in
the lease.
D. An entity can never be both a lessor and a
lessee of a same leased asset.
22. According to PFRS 16, lease liabilities
are presented in the lessee’s statement of
financial position
A. separately from the other liabilities of the
lessee.
B. together with other liabilities, with disclosure
of the line items that include the lease
liabilities.
C. a or b
D. not presented in the lessee’s financial
statements but only in the lessor’s financial
statements
23. According to PFRS 16, right-of-use
assets are presented in the lessee’s statement of
financial position
A. separately from the other assets of the lessee.
B. together with other assets as if they were
owned, with disclosure of the line items that
include the right-of-use assets.
C. a or b
D. not presented in the lessee’s financial
statements but only in the lessor’s financial
statements
24. On January 2, 20x9, Nori Mining Co.
(lessee) entered into a 5-year lease for drilling
equipment. Nori recognized a lease liability of
₱240,000 at the commencement date. This
amount includes the ₱10,000 exercise price of a
purchase option. At the end of the lease, Nori
expects to exercise the purchase option. Nori
estimates that the equipment's fair value will be
₱20,000 at the end of its 8-year life. Nori
regularly uses straight-line depreciation on
similar equipment. For the year ended December
31, 20x9, what amount should Nori recognize as
depreciation expense on the leased asset?
A. 48,000
B. 27,500
C. 46,000
D. 30,000
25. In the long-term liabilities section of its
balance sheet at December 31, 20x9, Mene Co.
reported a lease liability of ₱75,000, net of
current portion of ₱1,364. Payments of ₱9,000
were made on both January 2, 2x10, and January
2, 2x11. Mene's incremental borrowing rate on
the date of the lease was 11% and the lessor's
implicit rate, which was known to Mene, was
10%. In its December 31, 2x10, balance sheet,
what amount should Mene report as lease
liability, net of current portion?
A. 66,000
B. 73,500
C. 73,636
D. 74,250
26. Oak Co. leased equipment for its entire
nine-year useful life, agreeing to pay ₱50,000 at
the start of the lease term on December 31, 20x8,
and ₱50,000 annually on each December 31 for
the next eight years. The present value on
December 31, 20x8, of the nine lease payments
over the lease term, using the rate implicit in the
lease which Oak knows to be 10%, was ₱316,500.
The December 31, 20x8, present value of the
lease payments using Oak's incremental
borrowing rate of 12% was ₱298,500. Oak made
a timely second lease payment. What amount
should Oak report as lease liability in its
December 31, 20x9, balance sheet?
A. 350,000
B. 243,150
C. 228,320
D. 0 statements.
27. On January 2, 20x5, Marx Co. as lessee
signed a five-year noncancelable equipment lease
with annual payments of ₱200,000 beginning
December 31, 20x5. The five lease payments
have a present value of ₱758,000 at January 2,
20x5, based on interest of 10%. What amount
should Marx report as interest expense for the
year ended December 31, 20x5?
A. 0
B. 48,000
C. 55,800
D. 75,800
28. On January 1, 20x1, ABC Co. enters into
a 4-year lease of office equipment. The rent in
20x1 is ₱10,000 and shall increase by 10%
annually starting on January 1, 20x2. Rentals are
payable at the end of each year. ABC Co. pays the
lessor a lease bonus of ₱5,000 on January 1, 20x1.
ABC Co. opts to use the practical expedient
allowed under PFRS 16 for leases of low value
assets. How much is the lease expense in 20x1?
A. 10,000
B. 11,000
C. 11,603
D. 12,853
29. A lessor’s gross investment in a finance lease
is computed as
A. lease payments plus unguaranteed residual
value
B. present value of (a)
C. difference between (a) and (b)
D. sum of (a) and (b)
30. Lessor Co. entered into two contract leases.
Lease #1 transfers substantially all the risks and
rewards incidental to ownership of the leased
asset. Lease #2 does not transfer substantially all
the risks and rewards incidental to ownership of
the leased asset. How should Lessor Co. classify
the leases? (Lease #1); (Lease #2)
A. Finance, Operating
B. Finance, Finance
C. Operating, Finance
D. Operating, Operating
31. A lessor’s unearned interest income in a
finance lease is computed as
A. lease payments plus unguaranteed residual
value
B. present value of (a)
C. difference between (a) and (b)
D. sum of (a) and (b)
32. Which of the following does not
correctly relate to the accounting for leases?
A. The underlying asset in a lease contract is
recognized by the lessee in its financial
B. The lessor recognizes a finance lease
receivable equal to the net investment in a
finance lease.
C. A manufacturer or dealer lessor recognizes
gross profit or loss on commencement of a
finance lease in accordance with its policy for
outright sales.
D. The lessor recognizes lease payments
receivable from an operating lease as income
in the period earned.
E. The lessor continues to recognize an asset
subject to a finance lease in its financial
statements.
33. Regarding the accounting for the residual
value of a leased asset, which of the following
statements is incorrect?
A. A lessee accounts for a residual value only if
it is guaranteed.
B. A lessor accounts for a residual value only if
it is guaranteed.
C. A lessor accounts for a residual value
whether guaranteed or not.
D. Both lessee and lessor will account for a
residual value only if the leased asset reverts
back to the lessor.
34. Under operating leases, lessors
A. recognize rent income using a straight line
basis, unless another method is more
appropriate.
B. recognize interest income using the effective
interest method.
C. recognize different amounts of rent income
each year depending on the contractual
payments
D. any of these
35. Security deposits that are refundable
A. are treated as unearned income by lessors
under an operating lease.
B. are not discounted because they are normally
of a short-term nature
C. are treated as receivable by lessees and as
payable by lessors.
D. are discounted only by lessees but not by
lessors
36. If the lessor recognizes rent income
(lease income), then the lease must have been
classified as
A. finance lease
B. operating lease
C. a or b
D. none of these B. 1,600,000
37. Which of the following statements is C. 1,200,000
false regarding the accounting for leases? D. 1,800,000
A. The lessor may not use the straight line basis 41. How much is the net investment in the
for recognizing lease income under an lease on January 1, 20x1?
operating lease if another systematic basis is A. 1,200,000
more representative of the pattern in which B. 1,280,000
benefit from the use of the underlying asset is C. 1,394,740
diminished. D. 1,474,741
B. The amount of lease income recognized each 42. How much is the total interest income
year under an operating lease is typically (finance income) to be recognized by
constant even though the contractual IMBROGLIO over the lease term?
payments increase every year by a certain A. 205,260
amount specified in the contract. B. 235,260
C. It is possible that the lessor does not C. 125,259
depreciate the leased asset even if the lease is D. 525,259
classified as an operating lease. 43. How much is the gross profit from the
D. Under an operating lease, the lessor sale?
capitalizes initial direct costs. These costs A. 114,740
will increase the lease income each year. B. 194,740
38. Which of the following is correct C. 125,259
regarding the accounting for operating leases? D. 45,259
A. A lessor under an operating lease may 44. How much is the net profit from the sale?
classify the lease as either direct operating A. 125,259
lease or sales type operating lease. B. 45,259
B. A lessor includes a rent collected in advance C. 194,740
as part of the cost of the leased asset. D. 114,740
C. A lessor includes initial direct costs incurred Use the following information for the next three
on the operating lease as part of the cost of questions:
the leased asset to be recognized in profit or On January 1, 20x1, YATAGHAN Financing
loss on the same basis as rent income is Co. leased equipment to LONG KNIFE, Inc.
recognized. Information on the lease is shown below:
D. A lessor includes initial direct costs incurred
on the operating lease as part of the cost of Cost of equipment ₱
the leased asset to be recognized in profit or 1,322,588
loss on the same basis as depreciation Useful life of equipment 5 years
expense is recognized. Lease term 4 years
39. On January 1, 20x1, IMBROGLIO Co. Annual rent payable at the 400,000
leased equipment to COMPLICATION, Inc. end of each year
Information on the lease is shown below: Interest rate implicit in the 10%
lease
Cost of equipment ₱ Residual value 80,000
1,200,000
Useful life of equipment 5 years The equipment will revert back to YATAGHAN
Lease term 4 years at the end of the lease term. The lease is
Annual rent payable at the 400,000 classified as direct financing lease.
start of each year
Interest rate implicit in the 10% 45. Assuming the residual value is guaranteed,
lease how much is the gross investment in the
lease on January 1, 20x1?
Initial direct costs amounted to ₱80,000. The A. 1,600,000
lease qualifies for sales type lease accounting. B. 1,680,000
C. 1,520,000
40. How much is the gross investment in the D. 2,080,000
lease on January 1, 20x1?
A. 2,000,000
 46. Assuming the residual value is
unguaranteed, how much is the net
investment in the lease?
A. 1,322,588
B. 1,267,948
C. 1,213,308
D. 1,345,981
47. How much is the total interest income to be
recognized by YATAGHAN over the lease
term if the residual value is unguaranteed
and guaranteed, respectively?
Unguaranteed
Guaranteed
a. 357,412 341,270
b. 341,270 357,412
c. 341,753 341,985
d. 357,412 357,412
48. Wall Co. leased office premises to Fox, Inc.
for a five-year term beginning January 2,
20x9. Under the terms of the operating
lease, rent for the first year is ₱8,000 and
rent for years 2 through 5 is ₱12,500 per
annum. However, as an inducement to
enter the lease, Wall granted Fox the first
six months of the lease rent-free. In its
December 31, 20x9, income statement,
what amount should Wall report as rental
income?
A. 12,000
B. 11,600
C. 10,800
D. 8,000
49. As an inducement to enter a lease, Arts,
Inc., a lessor, grants Hompson Corp., a
lessee, nine months of free rent under a
five-year operating lease. The lease is
effective on July 1, 20x5, and provides for
monthly rental of ₱1,000 to begin April 1,
20x6. In Art's income statement for the year
ended June 30, 20x6, rent income should be
reported as
A. 10,200
B. 9,000
C. 3,000
D. 2,550