Page |1

Chapter 7
Leases Part 1
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
 Page |2

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

"I have set the Lord continually before me. Because He is at my right hand, I will not be shaken." – (Psalm 16:8)
 Page |3

SOLUTIONS:

1. C
2. B
3. C - choice (d) is incorrect. Under a sublease, the lessee is also the lessor of the same leased asset.
4. C
5. C

6. D
Solution:
Cost 240,000
Residual value (fair value) (20,000)
Depreciable amount 220,000
Useful life 8
Depreciation expense 27,500

7. B
Solution:
First step: Place the given information on the amortization table.
Date Payments Int. expense Amortization Present value
12/31/x9
1/1/x10 9,000 75,000

Second step: “Squeeze” for the requirement.

Date Payments This is the Int. lease
expense
obligation as Amortization
of Dec. Present value
12/31/x9 31, 20x9, net of current portion.
1/1/x10 9,000 75,000
1/1/x11 9,000 7,500 a 1,500 73,500
a
(75,000 x 10%)

8. B
Solution:
Date Payments Int. expense Amortization Present value
12/31/x8 316,500
12/31/x8 50,000 - 50,000 266,500
12/31/x9 50,000 26,650 23,350 243,150

9. D (758,000 x 10%) = 75,800

10. D Solution:

20x1 10,000
20x2 (10K x 110%) 11,000
20x3 (11K x 110%) 12,100
20x4 (12.1K x 110%) 13,310
 Page |4

Lease bonus 5,000

Total 51,410
Divide by: 4
Annual lease expense 12,853