INTERMEDIATE ACCOUNTING PART 3 DEPARTMENTAL EXAMINATIONName:

_____________________________ May 20, 2023 / 10:00–12:00PM

Direction: Read each question carefully. Choose the best answer among the choices
presented. Final answersaretobeplaced in the answer sheet through shading. Strictly
no erasures on the final answers. You may use this questionnaireasyour working
paper.
For Numbers 1 to 4:
On December 31, 2021, Tito Co. signed a 4-year noncancelable lease for a new
machine requiringP120,000annual payments beginning December 31, 2021. The machine
has a useful life of 8 years, with nosalvagevalue.The rate implicit on the lease is
12%. Tito has a purchase option amounting to P20,000. It is certainthatthecompany
will exercise this option. The fair value of the machine at the inception of the
leaseamountedtoP447,794.
1. How much is the initial cost of the right-of-use asset on December 31, 2021? a.
P420,926 c. P480,000
b. P474,660 d. P500,000
2. How much is the interest expense in 2022?
a. Nil c. P57,600
b. P36,111 d. P60,000
3. How much is the lease-related liability to be shown as current in the statement
of financial positiononDecember 31, 2021?
a. P300,926 c. P83,889
b. P217,037 d. P36,111
4. How much is the lease-related liability to be shown as non-current in the
statement of financial positionon December 31, 2021?
a. P300,926 c. P83,889
b. P217,037 d. P36,211
For Numbers 5 to 8:
On December 31, 2021, Tracy Co. signed a 4-year, noncancelable lease for a right of
use of machinerequiringP150,000 annual payments beginning December 31, 2021. The
annual payments include payment for insuranceand property taxes amounting to
P20,000. On the same data, Tracy Co. paid P40,000 incremental coststhataredirectly
attributable to negotiating and arranging a lease. The machine has a useful life of
8 years, withnosalvage value. The rate implicit on the lease is 10%. Tracy Co.
Guarantee a residual value of P50,000at theendof the lease term. The fair value of
the machine at the incpetion of the lease amounted to P518,561.
5. How much is the initial cost of the right of use asset on December 31, 2021? a.
P487,447 c. P527,447
b. P495,975 d. P577,447
6. How much is the interest expense in 2022?
a. Nil c. P52,745
b. P35,745 d. P57,745
7. How much is the lease-related liability to be shown as current in the statement
of financial positiononDecember 31, 2021?
a. P357,447 c. P94,255
b. P263,192 d. P35,745
8. How much is the lease-related liability to be shown as non-current in the
statement of financial positionon December 31, 2021?
a. P357,447 c. P94,255
b. P263,192 d. P35,745
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On Januayr 1, 2021, Catherine Co. Leased an asset with a fair value of P800,000
fromJoyce Co. for aleasetermof 6 years. The lease specifies equal annual payments
beginning on January 1, 2021. The lesseeguaranteesaP100,000 residual value of the
asset at the end of the lease term. The rate implicit on the lease is 9%.
9. How much is the lease-related liability to be shown as non-current in the
statement of financial positionon December 31, 2021?
a. P165,044 c. P150,317
b. P151,414 d. P163,848
On January 1, 2019, Mayumi Corporation, lessor, entered into a four-year operating
lease. The paymentswereas follows: P20,000 for 2019, P18,000 for 2020, P16,000 for
2021, and P14,000 for 2022. 10. What is the correct amount of rent income for 2021?
a. P20,500 c. P17,000
b. P19,000 d. P18,000
For Numbers 11 to 15:
On January 1, 2017, Bishop enters into an 8-year lease contract for 7,500 square
meters of officespace. Annuallease payment is P300,000 payable on December 31 each
year. On January 1, 2021, Bishop andthepropertyowner agree to amend the original
lease for the remaining 4 years to decrease the leased officespacetoonly4,500
square meters. As a result, the lease payment decreases to P195,000 per year.
Bishop’s incrementalborrowing rate is 5% in 2017 and 6% in 2021.
11. How should Bishop account for the lease modification?
a. The lease modification is accounted as a separate lease.
b. The lease modification is not accounted as a separate lease.
c. The amendment in the original lease is not a lease modification.
d. None of the choices.
12. How much is the amount of lease liability to be recognized on January 1, 2017?
a. P2,400,000 c. P1,938,964
b. P1,753,912 d. P1,653,250
13. How much should be recognzied as interest expense for the year ended 2020
relating totheleaseof7,500 square meters of office space?
a. P96,948 c. P86,796
b. P76,135 d. P64,942
14. How much should be recognized as gain or loss on lease modification for the
year ended2021?a. P37,721 gain c. P37,721 loss
b. P37,425 gain d. None of the Choices
15. How much should be recognized as total of depreciation expense and interest
expesnefor theyearended 2021?
a. P195,320 c. P154,778
b. P117,057 d. None of the Choices
For Numbers 16 to 19:
On January 1, 2021, Jude Co., lessor, entered into a 3 year nonrenewable operating
lease, commencingonthatdate, for office space. The office space has a useful life
of 50 years. The lease specifies a monthly rent of P25,000.16. Assume that Jude Co.
grants free rent of 6 months to the lease, how much is the total rent incomein2021?
a. P320,000 c. P360,000
b. P300,000 d. P250,000
17. Based on the preceding question, how much is the rent receivable (or unearned
rent income)onDecember 31, 2021?
a. Nil c. (P40,000)
b. (P50,000) d. P100,000
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18. Assume instead the rent payment will be as follows: Rent per month for the 1
st two years - P25,000;
Rent per month for the last year - P30,000, how much is the total rent income in
2021? a. P320,000 c. P360,000
b. P300,000 d. P250,000
19. Based on the preceding question, how much is the rent receivable (or unearned
rent income)onDecember 31, 2021?
a. Nil c. (P40,000)
b. (P50,000) d. (P20,000)
For Numbers 20 and 21:
On December 31, 2021, Take it Easy Co. Leased an equipment with a cost of
P1,000,000 to DesperadoCo. for4years which is also the useful life of the asset.
The lease agreement specificies equal annual paymentofP261,694 beginning on
December 31, 2021. At the end of the lease term, the equipment will revert
toTakeitEasy Co. A third party related to the lessee guarantees residual value of
the equipment amountingtoP150,000.The rate implicit on the lease is 11%.
20. How much is the total interest income to be earned over the lease term? a.
P46,775 c. P196,775
b. P103,225 d. P1,172,927
21. How much is the interst income in 2022?
a. P24,597 c. P81,214
b. P61,361 d. P110,000
For Numbers 22 to 24:
On December 31, 2021, Dire Straits Co. leased an equipment with a cost of P900,000
to Sultants of SwingCo. for4 years which is also the useful life of the asset. The
lease agreement specifices equal annual paymentofP251,600 beginning on December 31,
2021. On the same date, Dire Straits Co. Paid P24,128 incremental coststhat are
directly attributable to negotiating and arranging a lease. At the end of the lease
term, theequipmentwill revert to Dire Straits Co. The rate implicit on the lease is
8% but after considering the initial direct costtheimplicit rate is adjusted at 6%.
22. How much is the total interest income to be earned over the lease term? a.
P82,273 c. P162,795
b. P106,402 d. P186,924
23. How much is the total interest income in 2022?
a. P51,872 c. P35,894
b. P72,000 d. P40,352
24. How much is the leased-related asset to be shown as current in the statement of
financial positiononDecember 31, 2021?
a. P648,400 c. P448,671
b. P199,728 d. P211,248
For Numbers 25 to 28:
On January 1, 2021, Money Co. a dealer of machines, leased a machine to For Nothing
Co. Data relatingtothelease is as follows:
Cost of the Machinery P900,000
Useful life of equipment 5
Lease term 4
Annual rent payable at the end of the year 300,000
Interest rate implicit in the lease 8%
Residual value 50,000
Initial direct cost 10,000
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The leased asset reverts to Money Co. At the end of the lease term. The lease is
appropriately recordedassalestype lease.
25. How much is the total interest income to be earned over the lease term? a. P
219,620 c. P993,630
b. P1,250,000 d. P 36,750
26. How much is the total interest income in 2021?
a. P65,025 c. P 46,227
b. P82,430 d. P100,000
27. How much is the profit on sale on December 31, 2021?
a. Nil c. P167,310
b. P120,380 d. P 83,630
28. Assuming the residual value decrease by P6,000, how much is the loss to be
recognizedinprofitorlossat the end of the lease?
a. Nil c. P300,032
b. P6,000 d. P 50,000
For Numbers 29 to 32:
At the beginning of current year, Lessor Company leased a machine to Lessee
Company. The machinehadanoriginal cost of P6,000,000. The lease term was five years
and the implicit interest rate on the leasewas15%.The lease is properly classified
as a direct financing lease. The annual lease payments of P1,750,000aremadeeach
December 31. The machine reverts to Lessor at the end of the lease term, at which
time theresidual valueof the machine will be P275,000. The residual value is
unguaranteed.
29. At the commencement of the lease, what would be the net lease receivable on the
part of thelessor?a. P6,275,000 c. P6,000,000
b. P8,750,000 d. P5,725,000
30. What amount should be reported as gross investment in the lease?
a. P8,750,000 c. P6,000,000
b. P9,025,000 d. P8,475,000
31. What amount should be reported as total unearned interest income?
a. P3,025,000 c. P2,475,000
b. P2,750,000 d. P6,000,000
32. What amount should be reported as interest income for the current year? a.
P1,312,500 c. P900,000
b. P1,353,750 d. P450,000
For Numbers 33 to 36:
France Company is a dealer in equipment. At the beginning of current year, an
equipment was leasedtoanotherentity with the following provisions:
Annual rental payable at the end of each year P1,500,000
Lease term and useful life of equipment 5 years
Cost of equipment 4,000,000
Residual value - unguaranteed 500,000
Interest rate implicit in the lease 12%
At the end of the lease term, the equipment shall revert to the lessor. The entity
incurred initial direct costofP200,000 in finalizing the lease agreement. Use two
decimal places when necessary.
33. What amount should be reported as gross investment in the lease?
a. P7,500,000 c. P4,000,000
b. P8,000,000 d. P4,500,000
34. What amount should be reported as net investment in the lease?
a. P5,400,000 c. P4,000,000
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b. P5,685,000 d. P3,500,000
35. What amount should be reported as interest income for current year?
a. P682,200 c. P900,000
b. P648,000 d. P960,000
36. What amount should be reported as gross income on sale?
a. P1,485,000 c. P3,500,000
b. P1,685,000 d. P4,000,000
37. What is the treatment of initial direct cost incurred by the lesse in a finance
lease? a. Added to the lease liability.
b. Added to the carrying amount of the right of use asset.
c. Expensed immediately.
d. Added to the carrying amount of the right of use asset and lease liability.
38. In computing depreciation of a right of use asset under a finance lease, the
lessee shoulddeduct a. The residual value guarantee and depreciate over the lease
term.
b. An unguaranteed residual value and depreciate over the lease term.
c. The residual value guarantee and depreciate over the useful life of the asset.
d. An unguarnteed residual value and derepciation over the useful life of the
asset. 39. Net Investment in a direct financing lease is equal to
a. Cost of the asset.
b. Cost of the asset plus initial direct cost paid by lessor.
c. Cost of the asset minus guaranteed residual value.
d. Cost of the asset plus unguaranteed residual value.
40. Net investment in a sales type lease is equal to
a. Gross investment in the lease unearned finance income.
b. Cost of the underlying asset.
c. The lease payments
d. The lease payments less unguaranteed residual value.
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