UNION CHRISTIAN COLLEGE

City of San Fernando, La Union

School of Business and Sciences

Accountancy Program

MOCK BOARD EXAMINATION

SY 2019-2020

Instructions: Kindly encircle the correct letter using black or blue ball pen. Double encircling,
erasures, usage of pencil and friction pen in encircling means wrong.

1. Iceberg Company is in the business of leasing new sophisticated equipment.

At the beginning of current year, the equipment was delivered to a lessee under a direct financing lease
with the following provisions:

Cost of equipment 3.390,000

Annual rental payable at the end of the year 600,000
Useful life and lease term 10 years
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for 10 years 5.650
Present value of an ordinary annuity of 1 at 11% for 10 years 5.889

The entity incurred and paid initial direct costs of P143,400 in negotiating and arranging the lease.

The equipment will revert to Iceberg Company at the end of the lease.

Required:
1. Compute the total financial revenue to be recognized over the lease term.
2. Determine the new implicit rate that will be used in computing interest income.
3. Prepare journal entries on the books of Iceberg Company for the current year.

2. Jolo Company is in the business of leasing new sophisticated equipment. As the lessor, Jolo Company
expects a 12% return on the net investment.

All leases are classified as direct financing.

At the end of the lease term, the equipment will revert to Jolo Company.

On January 1,2020, an equipment is leased to a lessee with the following information.

 Cost of equipment to Jolo
Residual value- unguaranteed 5,250,000
Annual rental payable in advance 600,000
Useful life and lease term 900,000
Implicit interest rate 12%
First lease payment January 1,2020

Required:

1. Compute the total financial revenue.

2. Prepare a table of amortization for the lease receivable and interest income.
3. Prepare journal entries for 2020 and 2021.
4. Prepare journal entries for 2027.
5. Prepare journal entry on January 1,2028 to record the return of the equipment from the lessee.
The fair value of the equipment on this date is P500,000.

3. Desiree Company is in the business of leasing new sophisticated equipment. The lessor expects a 12%
return on net investment.

All leases are classified as direct financing lease.

At the end of the lease term, the equipment will revert to the lessor.

At the beginning of current year, an equipment is leased to a lessee with the following information:

Cost of equipment to the lessor 5,000,000

Residual value- unguaranteed 600,000
Annual rental payable at the beginning of each year 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%

1. What is the gross investment in the lease?

a. 7,200,000
b. 7,800,000
c. 5,000,000
d. 5,250,000

2. What is the net investment in the lease?

a. 5,000,000
b. 5,250,000
c. 4,400,000
d. 4,650,000
3. What is the total interest income over the lease term?
a. 2,550,000
b. 1,950,000
c. 3,150,000
d. 1,500,000

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

a. 594,000
b. 522,000
c. 630,000
d. 450,000

4. At the beginning of current year, Lessor Company leased a machine to Lessee Company. The machine
had an original cost of P6,000,000. The lease term was five years and the implicit interest rate on the
lease was 15%.
The lease is properly classified as a direct financing lease.
The annual lease payments of P1,730,541 are made each December 31.
The machine reverts to lessor at the end of the lease term, at which time the residual value of the
machine will be P400,000. The residual value is unguaranteed.
The PV of 1 at 15% for 5 periods is .4972, and the PV of an ordinary annuity of 1 at 15% for 5 periods is
3.3522

1. At the commencement of the lease, what would be the net lease receivable on the part of the lessor?
a. 6,400,000
b. 5,801,120
c. 6,000,000
d. 5,600,000

2. What is the gross investment in the lease?

a. 8,652,705
b. 9,052,705
c. 6,000,000
d. 8,252,705

3. What is the total unearned interest income?

a. 3,052,705
b. 2,652,705
c. 2,252,705
d. 6,000,000

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

a. 1,297,905
b. 1,357,905
c. 900,000
d. 70,168
5. On January 1,2020, Lyle Company entered into a direct financing lease. A third party guaranteed the
residual value of the asset under the lease estimated to be P1,200,000 on January 1,2025, the end of the
lease term.
Annual lease payments are P1,000,000 due each December 31, beginning December 31,2020. The last
payment is due December 31,2024.
The remaining useful life of the asset was six years at the commencement of the lease.
The lessor used 10% as the implicit interest rate. The PV of 1 at 10% for 5 periods is .62, and the PV of an
ordinary annuity of 1 at 10% for 5 periods is 3.79.

1. What is the net lease receivable of the lessor at the commencement of the lease?
a. 4,534,000
b. 3,790,000
c. 4,990,000
d. 2,590,000

2. What is the gross investment in the lease?

a. 5,000,000
b. 6,200,000
c. 3,800,000
d. 5,744,000

3. What is the total unearned interest income?

a. 2,410,000
b. 1,666,000
c. 1,210,000
d. 466,000

4. What is the interest income for 2020?

a. 379,000
b. 620,000
c. 453,400
d. 500,000

6. On January 1,2020, Anne Company leased equipment to Meg Company for an eight year period
expiring January 1,2028. Equal payments under the lease are P600,000 and are due on January 1 of each
year. The first payment was made on January 1,2020. The rate of interest contemplated is 10%.
The cash selling price of the equipment is P3,520,000 and the cost of the equipment is P2,800,000.
Anne Company paid initial direct costs of p50,000 in negotiating and arranging the lease. The lease is
appropriately recorded as a sales type lease.

Required:
Prepare journal entries on the books of Anne Company for 2020 and 2021.

7. On January 1,2020, Fox Company, dealer in the equipment leased equipment to Tiger Company. The
lease is appropriately accounted for as a sale by Fox Company and as a purchase by Tiger Company.
The lease is for a 10year period which approximates the useful life of the asset. The first of 10 equal
annual payments of P500,000 was made on January `,2020.
Fox Company purchased the equipment for P2,675,000 and established a list selling price of P3,375,000
on the equipment. Fox Company used the perpetual inventory system.
The present value on January 1,2020of the rent payments over the lease term discounted at 12% was
P3,165,000.

Required:
Prepare journal entries for 2020 and 2021 on the books of Fox Company and Tiger Company.

8. Vanderbuilt Company is a dealer in machinery. The perpetual inventory system is used. At the
beginning of current year, a machinery was leased to Thunder Company with the following provisions:
Annual rental payable at the end of each year 3,000,000
Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value guarantee 1,000,000
Initial direct cost paid by Vanderbuilt 300,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

Required:
Prepare journal entries on the books of Vanderbuilt Company and Thunder Company for the current
year.

9. Angola Company used leases as the primary method of selling products. The entity’s main product is a
small helicopter that is very popular among government officials and corporate executives.
Angola Company constructed such a helicopter for a Cabinet Secretary at a cost of P8,000,000
The terms of the lease provided for annual rental f P3,328,710 to be paid over 5 years every December
31 of each year with the ownership of the helicopter transferring to the lessee at the end of the lease
term.
It is estimated that the helicopter will have a residual value of P500,000 after 5 years.

Angola Company incurred initial direct costs of P200,000 in finalizing the lease with the lessee.
Financing the construction was at a 12% rate. The present value of an ordinary annuity of 1 for 5 periods
at 12% is 3.605

Required:
1. Compute the total unearned financial revenue.
2. Compute the manufacturer profit to be recognized immediately.
3. Compute the interest income for the first year.
4. Prepare journal entries for the first year relating to the sales type lease on the books of the lessor.

10. On January 1,2020, Esmerelda Company leased equipment to another entity.

The terms of the lease called for annual payment of P500,000 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 interest rate in the lease is 12%. The PV of an ordinary annuity of 1 at 12% for 5 periods is
3.60.
On July 1,2022 Esmeralda Company “actually sold” the equipment to the lessee for P1,200,000.

Required:
1. Determine the unearned interest income on January 1,2020.
2. Determine the gross profit on sale.
3. Prepare journal entries for 2020, 2021 and 2022 to record the sales type lease and the actual sale of
the underlying asset. The periodic system is used.

11. On January 1,2020, gallant Company entered into a lease agreement with Blacksheep Company for a
machine which was carried on the accounting records of gallant Company at P2,000,000.
Total payment under the lease which expires on December 31,2029 aggregate P3,550,800 of which
P2,400,000 represents cost of the machine to Blacksheep Company. Payments of P355,080 are due each
January 1 of each year.
The interest rate of 10% which was stipulated in the lessee is considered fair and adequate
compensation to Gallant Company.
Blacksheep Company expects the machine to have a 10 year life, no residual value and be depreciated
on a straight line basis. The lease qualifies as a sales type lease.

1. What amount should be recognized by Gallant as profit from sale for the year ended December
31,2020?
a. 1,150,800
b. 1,550,800
c. 400,000
d. 355,080

2. What amount of interest income should be recognized by Gallant for the year ended December
31,2020?
a. 244,080
b. 200,000
c. 204,492
d. 240,000

3. What total income before tax should be recognized by gallant from the lease for the year ended
December 31,2020?
a. 204,492
b. 604,492
c. 355,080
d. 755,080

12. Reagan Company used leases as a method of selling products. In 2020, Reagan Company completed
construction of a passenger ferry.
On January 1,2020, the ferry was leased to the Super ferry Line on a contract specifying that ownership
of the ferry will transfer to the lessee at the end of the lease period.
 Original cost of the ferry 8,000,000
Fair value of ferry at lease date 13,000,000
Lease payments in advance 1,500,000
residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1,2020
Lease term 20 years
Present value of an annuity due of 1 at 10% for 20 periods 8.37
Present value of 1 at 12% for 20 periods 0.10

1. What is the gross investment in the lease?

a. 30,000,000
b. 32,000,000
c. 10,000,000
d. 38,000,000

2. What is the net investment in the lease?

a. 12,555,000
b. 13,000,000
c. 12,755,000
d. 8,000,0000

3. What is the gross profit on sale for 2020?

a. 6,555,000
b. 4,555,000
c. 5,000,000
d. 7,000,000

4. What is the interest income for 2020?

a. 1,506,600
b. 1,560,0000
c. 1,326,600
d. 1,380,000

13. Marianas Company adopted the policy of leasing as the primary method of selling products. The
entity’s 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 that date.
The lease payments began at the beginning of current year. 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 14% for 10
periods is 5.95.
1. What amount should be reported as gross profit on sale for the current year?
a. 5,875,000
b. 6,375,000
c. 4,275,000
d. 4,775,000

2. What is the unearned interest income at the beginning of current year?

a. 10,125,000
b. 11,725,000
c. 9,625,000
d. 8,525,000

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

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

14. At the beginning of current year, German Company sold an equipment to Sterling Company for
P1,200,000 which is the fair value of the equipment.
The equipment had a cost of P2,500,000 carrying amount of P1,000,0000 and remaining useful life of 5
years?
On the same day , German Company leased back the equipment for one year for an annual rental of
P300,000 payable at the beginning of the year.
German Company ahs no option to renew or repurchase the equipment.

Required:
Prepare journal entries for the current year to record the sale and lease back transaction on the books
of German Company and Sterling Company.

15. On January 1,2020, Canada Company sold a machine with a remaining useful life of 10 years to
Saigon Company and simultaneously leased it back for 3 years. The leaseback is appropriately classified
as low value lease.

Sale price 500,000

Machinery 600,000
Accumulated depreciation 120,000
Annual rental 100,000

Required:
Prepare journal entries to record the sale and leaseback transaction on the books of Canada Company
and Saigon Company.
16. At the beginning of the current year Pedro Company sold a machine and immediately leased it back.

There is no transfer of title to the lessee nor purchase option that is reasonably certain to be exercised.
The following data relate to the sale and leaseback transaction:
Sale price at above fair value 6,000,000
Fair value of machine 5,000,000
Carrying amount of machine 4,500,000
annual rental payable at the end of each year 800,000
Remaining life of machine 10 years
Lease term 4 years
Implicit interest rate 8%
Present value of an ordinary annuity of 1 at 8% for 4 periods 3.312

Required:
1. Compute the initial lease liability
2. Compute the cost of right of use asset
3. Determine the gain on right transferred to buyer-lessor
4. Prepare journal entries on the books of seller-lessee for the current year
5. Prepare journal entries on the books of buyer-lessor for the current year.

17. At the beginning of current year, Hazel Company sold a machine immediately leased it back.

The following data pertain to the sale and leaseback transaction:

Sale price at above fair value 4,000,000
Fair value of machine 5,000,000
Carrying amount of machine 3,500,000
annual rental payable at the end of each year 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 3
periods 2.67

The lease provides for neither transfer of title to the lessee upon lease expiration nor a purchase option
that is reasonably certain to be exercised.

Required:
1. Compute the initial lease liability.
2. Compute the cost of right of use asset
3. Determine the gain on right transferred to buyer-lessor
4. Prepare journal entries on the books of seller-lessee for the current year
5. Prepare journal entries on the books of buyer-lessor for the current year.
18. At the beginning of current year, World Company sold a machine and immediately leased it back.
The following data pertain to the sale and leaseback transaction:
Sale price at fair value 5,000,000
Carrying amount of machine 6,500,000
annual rental payable at the end of each year 300,000
Remaining life of machine 4 years
Lease term 20 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 4 periods 3.465

Required:
1. Compute the initial lease liability.
2. Compute the cost of right of use asset
3. Determine the loss on right transferred to buyer-lessor
4. Prepare journal entries on the books of seller-lessee for the current year
5. Prepare journal entries on the books of buyer-lessor for the current year.

19. At the beginning of current year, Arianne Company sold a machine and immediately leased it back.
Sale price at fair value 5,000,000
Carrying amount of machine 6,000,000
annual rental payable at the end of each year 500,000
Remaining life of machine 5 years
Lease term 20 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 5 periods 4.21

1. What is the cost of right of use asset?

a. 2,105,000
b. 2,526,000
c. 2,895,000
d. 1,500,000

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

a. 579,000
b. 505,200
c. 500,000
d. 0

3. What is the lease liability at year-end?

a. 2,177,560
b. 1,605,000
c. 1,731,300
d. 2,105,000
4. What s the net annual rental income of the buyer-lessor?
a. 373,700
b. 200,000
c. 500,000
d. 250,000

20. At the beginning of current year, Judy Company sold a building with remaining useful life of 30 years
and immediately leased it back for 5 years.
Sale price at below fair value 18,000,000
Carrying amount of machine 20,000,000
annual rental payable at the end of each year 24,000,000
Remaining life of machine 1,000,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12% for 5 periods 3.60

1. What is the initial lease liability?

a. 3,600,000
b. 4,000,000
c. 4,800,000
d. 0

2. What the cost of right of use asset?

a. 3,000,000
b. 4,320,000
c. 5,760,000
d. 6,720,000

3. What is the loss on right transferred?

a. 4,000,000
b. 2,880,000
c. 5,760,000
d. 6,720,000

4. what is the interest expense of the seller-lessee for the current year?
a. 120,000
b. 576,000
c. 672,000
d. 432,000

5. What is the net annual income of the buyer-lessor?

a. 400,000
b. 200,000
c. 300,000
d. 100,000