PFRS 16 LEASES

QUIZ

1. 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.

2. 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

3. 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.

4. 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

5. 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

6. 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. 46,000 c. 30,000 d. 27,500

7. 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

8. 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

9. 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

10. 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

11. 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 c. Finance, Finance
b. Operating, Finance d. Operating, Operating

12. 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)

13. 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)

14. 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 statements.
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.
15. 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.

16. 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

17. 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

18. If the lessor recognizes rent income (lease income), then the lease must have been classified as
a. finance lease c. a or b
b. operating lease d. none of these

19. Which of the following statements is false regarding the accounting for leases?
a. The lessor may not use the straight line basis for recognizing lease income under an operating lease if
another systematic basis is more representative of the pattern in which benefit from the use of the
underlying asset is diminished.
b. The amount of lease income recognized each year under an operating lease is typically constant even
though the contractual payments increase every year by a certain amount specified in the contract.
c. It is possible that the lessor does not depreciate the leased asset even if the lease is classified as an operating
lease.
d. Under an operating lease, the lessor capitalizes initial direct costs. These costs will increase the lease
income each year.

20. Which of the following is correct regarding the accounting for operating leases?
a. A lessor under an operating lease may classify the lease as either direct operating lease or sales type
operating lease.
b. A lessor includes a rent collected in advance as part of the cost of the leased asset.
c. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the leased asset
to be recognized in profit or loss on the same basis as rent income is recognized.
d. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the leased asset to
be recognized in profit or loss on the same basis as depreciation expense is recognized.

Use the following information for the next five questions:

On January 1, 20x1, IMBROGLIO Co. leased equipment to COMPLICATION, Inc. Information on the lease is shown
below:

Cost of equipment ₱ 1,200,000

Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of each 400,000
 year
Interest rate implicit in the lease 10%

Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting.

21. How much is the gross investment in the lease on January 1, 20x1?
a. 2,000,000 b. 1,600,000 d. 1,200,000 d. 1,800,000

22. How much is the net investment in the lease on January 1, 20x1?
a. 1,200,000 b. 1,280,000 c. 1,394,740 d. 1,474,741

23. How much is the total interest income (finance income) to be recognized by IMBROGLIO over the lease term?
a. 205,260 b. 235,260 c. 125,259 d. 525,259

24. How much is the gross profit from the sale?

a. 114,740 b. 194,740 c. 125,259 d. 45,259

25. How much is the net profit from the sale?

a. 125,259 b. 45,259 c. 194,740 d. 114,740

Use the following information for the next three questions:

On January 1, 20x1, YATAGHAN Financing Co. leased equipment to LONG KNIFE, Inc. Information on the lease is
shown below:

Cost of equipment ₱ 1,322,588

Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the end of each year 400,000
Interest rate implicit in the lease 10%
Residual value 80,000

The equipment will revert back to YATAGHAN at the end of the lease term. The lease is classified as direct
financing lease.

26. Assuming the residual value is guaranteed, how much is the gross investment in the lease on January 1, 20x1?
a. 1,600,000 b. 1,680,000 c. 1,520,000 d. 2,080,000

27. 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

28. 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
29. 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

30. 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