TRUE OR FALSE

1. Mark Corp. entered into a nine-year capital lease on a warehouse on December 31, 2021.
Lease payments of P 26,000, which includes real estate taxes of P 1,000, are due annually,
beginning on December 31, 2022, and every December 31 thereafter. Mark does not know the
interest rate implicit in the lease; Mark’s incremental borrowing rate is 9%. The rounded present
value of an ordinary annuity for nine years at 9% is 6.0. The amount that Mark should report as
capitalized lease liability on December 31, 2021 is P234,000.

Problem 2 Item 2 to 5

On December 31, 2021. Tito Co. signed a 4 year noncancelable lease for a new machine
requiring P 120, 000 annual payments beginning December 31,2021. The machine has a useful
life of 8 years, with no salvage value. The rate implicit on the lease is 12%.

Tito has a bargain purchase option amounting to P20, 000. It is certain that the company will
exercise this option. The fair value of the machine at the inception of the lease amounted
P447,794.

Based on the above data, answer the following:

2. The amount to be capitalized as machinery (leases asset) on December 31, 2021 is

P420,926.

3. Based on Problem 2, the interest expense in 2022 is P57,600.

4. Based on Problem 2 - the lease-related liability to be shown as current in the statement of

financial position on December 31,2021 is P300,926

5. Based on Problem2, the lease-related liability to be shown as non-current in the statement of

financial position on December 31,2021 is P217,037.

Problem 3

On December 31, 2021, Tracy Co. signed a 4-year noncancelable lease for a right of use of
machine requiring P 150,000 annual payments beginning December 31, 2021. The annual
payments include payment for insurance and property taxes amounting to P 20,000. On the
same date, Tracy Co. paid P 40,000 incremental costs that are directly attributable to
negotiating and arranging a lease. The machine has a useful life of 8 years, with no salvage
value. The rate implicit on the lease is 10%.

Tracy Co. guarantees a residual value of P 50,000 at the end of the lease term. The fair value of
the machine at the inception of the lease amounted to P 518,561.

6. Based on the above data, the initial cost of the right of use asset on December 31, 2021 is
P527,447.

7. Based on Problem 3 The interest expense in 2022 P52,745.

8. Based on Problem 3, the lease-related liability to be shown as current in the statement of

financial position on December 31, 2021 is P35,745.

9. Based on Problem 3, the lease-related liability to be shown as noncurrent in the statement of

financial position on December 31, 2021 is P263,192.

Problem 4

On December 31,2020, Invest in Yourself Co. signed a 4-year noncancelable lease for the right
of use of a machine for P 487,447. The machine has a useful life for 8 years. Invest in Yourself
regularly uses straight line depreciation on similar asset.
Assume that the cost of the right of use asset includes P 50,000 gross bargain purchase option.

Based on the above data, answer the following:

10. Case no. 1: At the end of the lease, Invest in Yourself expects to exercise the bargain
purchase option. Invest in Yourself estimates that the equipment’s fair value will be P 60,000 at
the end of its useful life. The depreciation expense on December 31, 2021 is P56,682.

11. Based on Problem 4: Assume instead that the cost of the right of use asset includes P
50,000 gross guaranteed residual value, the depreciation expense on December 31, 2021 is
P56,662.

12. On January 1, 2021, Catherine Co. leased an asset with a fair value of P 800,000 from
Joyce Co. for a lease term of 6 years. The lease specifies equal annual payments beginning on
January 1, 2021. The lessee guarantees a P 100,000 residual value of the asset the end of the
lease term. The rate implicit on the lease is 9%. The annual lease payment computed by
Catherine Company pertinent to this leas transaction is P165,044.