Problem 1

At the beginning of the current year, an entity leased an equipment from a lessor with the following pertinent
information:
Annual rental payable at the end of each year 1,000,000
Initial direct cost paid 400,000
Lease bonus paid to lessor before commencement of the lease 300,000
Lease incentive received 100,000
Discounted amount of restoring building as required by contract 700,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
Incremental borrowing rate 12%

1. What is the initial lease liability?

a. 4,100,000
b. 3,790,000
c. 4,500,000
d. 4,290,000
e. Answer is not given among the choices.

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

a. 5,500,000
b. 5,400,000
c. 5,100,000
d. 5,600,000
e. Answer is not given among the choices.

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

a. 410,000
b. 379,000
c. 450,000
d. 429,000
e. Answer is not given among the choices

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

a. 3,510,000
b. 3,169,000
c. 3,950,000
d. 3,719,000
e. Answer is not given among the choices.

5. What is the depreciation of the right of use asset for current year?
a. 1,080,000
b. 1,000,000
c. 675,000
d. 550,000
e. Answer is not given among the choices.
Problem 2
On December 31, 2020, an entity leased two automobiles for executive use. The lease required the entity
to make five annual payments of P1,500,000 beginning December 31, 2020. At the end of the lease term,
December 31, 2025, the entity had a residual value guarantee of the automobiles at P1,000,000. The
interest rate implicit in the lease is 10% while the incremental borrowing rate in 9%.

1. What is the lease liability on December 31, 2021?

a. 4,412,500
b. 5,375,000
c. 6,062,500
d. 4,805,500
e. Answer is not given among the choices.

2. What is the current portion of the lease liability on December 31, 2021?
a. 1,500,000
b. 1,058,750
c. 962,500
d. 750,000
e. Answer is not given among the choices.

3. What is the interest expense for 2021?

a. 480,500
b. 537,500
c. 441,250
d. 606,250
e. Answer is not given among the choices.

Problem 3
An entity is a dealer in equipment. At the beginning of the current year, an equipment was leased to another
entity with the following provisions:
Annual rental payable at the end of each year 1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Fair value of equipment on date of lease 6,000,000
Guaranteed residual value 500,000
Implicit interest rate 12%

The equipment will revert to the lessor at the end of the lease term. The fair value of the asset is P350,000
at the end of lease term. The perpetual inventory system is used. The lessor incurred initial direct cost of
P200,000 in finalizing the lease agreement.

1. What is the gross investment in the lease?

a. 7,500,000
b. 8,000,000
c. 4,000,000
d. 6,000,000
e. Answer is not given among the choices.
 2. What is the net investment in the lease?
a. 5,400,000
b. 5,685,000
c. 4,000,000
d. 3,500,000
e. Answer is not given among the choices.

3. What is the total financial revenue?

a. 2,315,000
b. 2,285,000
c. 2,000,000
d. 2,600,000
e. Answer is not given among the choices.

4. What amount of interest income should be recognized for the current year?
a. 682,200
b. 648,000
c. 720,000
d. 480,000
e. Answer is not given among the choices.

5. What amount should be reported as profit on sale for the current year?
a. 1,485,000
b. 1,685,500
c. 1,800,000
d. 2,000,000
e. Answer is not given among the choices.

Problem 4
An entity 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 the current year, an equipment is leased to a lessee
with the following information:

Cost of the equipment to the lessor 5,000,000

Residual value – unguaranteed 600,000
Annual rental payable in advance at the beginning of each year 900,000
Initial direct cost incurred by 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
e. Answer is not given among the choices.
 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
e. Answer is not given among the choices.

3. What is the total unearned interest income?

a. 2,550,000
b. 1,950,000
c. 3,150,000
d. 1,500,000
e. Answer is not given among the choices.

4. What amount of interest income should be recognized for the current year?
a. 594,000
b. 522,000
c. 630,000
d. 450,000
e. Answer is not given among the choices.

Problem 5
On January 1, 2020, an entity purchased a new machine for P6,000,000 for the purpose of leasing it. The
machine had an estimated 10-year life. On April 1, 2020, the entity leased machine to a lessee for three
years at a monthly rental of P400,000. The lessee paid the rental for one year of P4,800,000 on April 1,
2020 and additionally paid P900,000 to the lessor as a lease bonus to obtain the three-year lease. On April
1, 2020, the entity paid P300,000 to a broker as a finder fee. What is the net rental income for 2020?

a. 3,150,000
b. 4,350,000
c. 3,200,000
d. 4,400,000
e. Answer is not given among the choices.

Problem 6
At the beginning of the current year, an entity sold 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

Fair value of building 20,000,000
Carrying amount of building 24,000,000
Annual rental payable at the end of each year 1,000,000
Implicit interest rate 12%

1. What is the initial lease liability?

a. 3,600,000
b. 4,000,000
c. 4,800,000
d. 0
e. Answer is not given among the choices.
 2. What is the cost of right of use asset?
a. 3,000,000
b. 4,320,000
c. 5,760,000
d. 6,720,000
e. Answer is not given among the choices.

3. What is the loss on right transferred?

a. 4,000,000
b. 2,880,000
c. 5,760,000
d. 6,720,000
e. Answer is not given among the choices.

Problem 7
At the beginning of the current year, an entity sold an equipment with remaining life of 10 years and
immediately leased it back for 4 years.

Sale price at fair value 6,000,000

Carrying amount of building 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%

1. What is the initial lease liability?

a. 2,536,000
b. 3,200,000
c. 3,000,000
d. 0
e. Answer is not given among the choices.

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

a. 1,902,000
b. 2,598,000
c. 2,536,000
d. 0
e. Answer is not given among the choices.

3. What is the gain on right transferred?

a. 866,000
b. 634,000
c. 750,000
d. 0
e. Answer is not given among the choices.

4. What is the annual depreciation of the right of use asset?

a. 475,500
b. 190,200
c. 634,000
d. 253,600
e. Answer is not given among the choices.