FAR-Leases
1. What is a ‘lease’ in accordance with PFRS 16?
a. A contract, or part of a contract, that conveys the
right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
b. An agreement between two or more parties that
creates enforceable rights and obligations.
c. A contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument
of another entity.
d. An agreement whereby the lessor conveys to the
lessee in return for a payment or series of
payments the right to use an asset for an agreed
period of time.
2. Which statement is incorrect regarding a contract that
contains a lease and non-lease components?
a. A lessor shall allocate the consideration in the
contract applying PFRS 15.
b. A lessee shall allocate the consideration in the
contract to each lease component on the basis of
the relative stand-alone price of the lease
component and the aggregate stand-alone price of
the non-lease components.
c. As a practical expedient, a lessee may elect, by
class of underlying asset, not to separate non-
lease components from lease components, and
instead account for each lease component and any
associated non-lease components as a single lease
component.
d. A lessee may apply the practical expedient to
embedded derivatives that meet the criteria in
paragraph 4.3.3 of PFRS 9.
3. Which statement is incorrect regarding identification of
lease?
a. At inception of a contract, an entity shall assess
whether the contract is, or contains, a lease.
b. A contract is, or contains, a lease if the contract
conveys the right to control the use of an identified
asset for a period of time in exchange for
consideration.
c. The underlying asset can be identified explicitly or
implicitly.
d. An entity shall reassess whether a contract is, or
contains, a lease at the end of each reporting
period.
4. A customer does not have the right to use an identified
asset in which of the following?
a. If the supplier has the substantive right to
substitute the asset throughout the period of use.
b. If the supplier has a right or an obligation to
substitute the asset only on or after either a
particular date or the occurrence of a specified
event.
c. If the supplier has a right or obligation to
substitute the asset for repairs and maintenance, if
the asset is not operating properly or if a technical
upgrade becomes available.
d. In all of these.
5. A supplier’s right to substitute an asset is substantive
only if which of the following conditions exist:
a. The supplier has the practical ability to substitute
alternative assets throughout the period of use.
b. the supplier would benefit economically from the
exercise of its right to substitute the asset.
c. Both a and b.
d. Neither a nor b.
6. Lease term is the non-cancellable period for which a
lessee has the right to use an underlying asset,
together with:
a. Periods covered by an option to extend the lease if
the lessee is reasonably certain to exercise that
option.
b. Periods covered by an option to terminate the
lease if the lessee is reasonably certain not to
exercise that option.
c. Both a and b.
d. Neither a nor b.
7. Which statement is incorrect regarding the
determination of the lease term and the assessment of
the non-cancellable period of a lease?
a. An entity shall apply the definition of a contract
and determine the period for which the contract is
enforceable.
b. A lease is no longer enforceable when the lessee
and the lessor each has the right to terminate the
lease without permission from the other party with
no more than an insignificant penalty.
c. If only a lessee has the right to terminate a lease,
that right is considered to be an option to
terminate the lease available to the lessee that an
entity considers when determining the lease term.
d. If only a lessor has the right to terminate a lease,
the non-cancellable period of the lease excludes
the period covered by the option to terminate the
lease.
8. Which of the following will likely require reassessment
of the lease term after the commencement date?
I. Significant leasehold improvements not anticipated
at the commencement date that are expected to
have significant economic benefit for the lessee
when the option to extend or terminate the lease, ,
becomes exercisable.
II. A significant modification to, or customization of,
the underlying asset that was not anticipated at
the commencement date.
III. The inception of a sublease of the underlying asset
for a period beyond the end of the previously
determined lease term.
IV. A business decision of the lessee that is directly
relevant to exercising, or not exercising, an option
(for example, a decision to extend the lease of a
complementary asset, to dispose of an alternative
asset or to dispose of a business unit within which
the right-of-use asset is employed).
a. I, II, III and IV c. I and II only
b. I, II and III only d. I and III only
9. The lease term begins
a. At the inception date.
b. At the commencement date.
c. Earlier of a and b.
d. Later of a and b.
10. The commencement date is
a. The date of the lease agreement.
b. The date of commitment by the parties to the
principal terms and conditions of the lease.
c. The date on which a lessor makes an underlying
asset available for use by a lessee.
d. Earlier of a and b.
11. At commencement date, a lessee shall recognize a
right-of-use asset and a lease liability. Why?
a. Because at the start of a lease a lessee obtains the
right to use an asset for a period of time and, if
payments are made over time, incurs a liability to
make lease payments.
b. Because the absence of information about leases
on the balance sheet meant that investors and
analysts were not able to properly compare
companies that borrow to buy assets with those
that lease assets, without making adjustments.
c. Both a and b.
d. Neither a nor b.
12. At the commencement date, a lessee shall measure
the right-of-use asset at
a. Cost
b. Fair value
c. The lower cost and fair value
d. The lower of the fair value of the asset and the
present value of the minimum lease payments
13. The cost of the right-of-use asset shall comprise:
I. The amount of the initial measurement of the lease
liability.
II. Any lease payments made at or before the
commencement date, less any lease incentives
received
III. Any initial direct costs incurred by the lessee
IV. An estimate of costs to be incurred by the lessee in
dismantling and removing the underlying asset,
restoring the site on which it is located or restoring
the underlying asset to the condition required by
the terms and conditions of the lease, unless those
costs are incurred to produce inventories
a. I, II, III and IV c. I and II only
b. I, II and III only d. I and III only
14. Which statement is incorrect regarding measurement
of right-of-use assets after the commencement date?
a. A lessee shall measure the right-of-use asset
applying a cost model, unless it is required or
chooses to apply other measurement models.
b. If a lessee applies the fair value model in PAS 40
to its investment property, the lessee shall also
apply that fair value model to right-of-use assets
that meet the definition of investment property in
PAS 40.
c. If right-of-use assets relate to a class of property,
plant and equipment to which the lessee applies
the revaluation model in PAS 16, the lessee shall
also apply that revaluation model to all of the
right-of-use assets that relate to that class of
property, plant and equipment.
d. None of these.
15. Which statement is incorrect regarding depreciation of
right-of-use asset?
a. The depreciation policy for right-of-use asset held
should be consistent with that for owned assets.
b. If the lease transfers ownership of the underlying
asset to the lessee by the end of the lease term or
if the cost of the right-of-use asset reflects that the
lessee will exercise a purchase option, the lessee
shall depreciate the right-of-use asset from the
commencement date to the end of the useful life of
the underlying asset.
c. Otherwise, the lessee shall depreciate the right-of-
use asset from the commencement date to the
later of the end of the useful life of the right-of-use
asset or the end of the lease term.
d. None of these.
16. The Layla Company leased a canning machine with a fair
value of P165,000. The present value of the lease
payments discounted at the rate implicit in the lease is
P158,400. The initial direct costs incurred in negotiating
the lease were P1,250. The asset has a useful life of 5
years and the lease is for a period of 4 years, after
which the asset can be acquired for a near zero cost,
which is substantially below the expected value of the
asset at that date. If the asset is depreciated on a
straight-line basis, what amount should be the annual
depreciation expense?
a. P39,912 c. P31,930
b. P39,600 d. P31,680
17. Which statement is incorrect regarding presentation of
right-of-use assets?
a. A lessee shall either present in the statement of
financial position, or disclose in the notes right-of-
use assets separately from other assets.
b. If a lessee does not present right-of-use assets
separately in the statement of financial position,
the lessee shall disclose which line items in the
statement of financial position include those right-
of-use assets.
c. Right-of-use assets that meet the definition of
investment property shall be presented in the
statement of financial position as investment
property.
d. None of these.
18. At the commencement date, the lease payments
included in the measurement of the lease liability
comprise the following payments for the right to use
the underlying asset during the lease term that are not
paid at the commencement date:
I. Fixed payments (including in-substance fixed
payments), less any lease incentives receivable
II. Variable lease payments that depend on an index
or a rate, initially measured as at the
commencement date
III. Amounts expected to be payable by the lessee
under residual value guarantees
IV. The exercise price of a purchase option if the
lessee is reasonably certain to exercise that option
V. Payments of penalties for terminating the lease, if
the lease term reflects the lessee exercising an
option to terminate the lease
a. I, II, III, IV and V
b. I, II, III and IV only
c. I, III and IV only
d. I and III only
19. The lease payments shall be discounted using
a. The interest rate implicit in the lease, if that rate
can be readily determined.
b. The lessee’s incremental borrowing rate, if interest
rate implicit in the lease cannot be readily
determined.
c. Either a or b.
d. Neither a nor b.
20. What is the lessee’s incremental borrowing rate?
a. The rate that exactly discounts estimated cash
receipts through the expected life of the financial
asset to the gross carrying amount of a financial
asset.
b. The rate that exactly discounts the estimated
future cash payments or receipts through the
expected life of the financial asset to the amortized
cost of a financial asset that is a purchased or
originated credit-impaired financial asset.
c. The rate of interest that causes the present value
of the lease payments and the unguaranteed
residual value to equal the sum of the fair value of
the underlying asset and any initial direct costs of
the lessor.
d. The rate of interest that a lessee would have to
pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an
asset of a similar value to the right-of-use asset in
a similar economic environment.
21. On December 31, 2019, Gord Co. leased a machine
from Valir, Inc. for its entire economic life of five years.
Equal annual payments under the lease are P525,000
(including P25,000 annual executory costs) and are
due on December 31 of each year. The first payment
was made on December 31, 2019, and the second
payment was made on December 31, 2020. The
interest rate implicit in the lease is 10%. Gord learned
that a third party guaranteed to pay Valir, Inc. a
residual value of P200,000 at the end of the lease term.
In its December 31, 2020 statement of financial
position, Gord should report in the non-current liability
section a lease liability of
a. P1,243,445 c. P867,790
b. P1,018,047 d. P788,900
22. Miya Corp. has leased an item of plant under the
following terms:
 Commencement of the lease - January 1, 2019
 Term of the lease - 5 years
 Annual payments in advance - P12,000
 Cash price and fair value of the asset – P52,000
 Implicit interest rate – 8% per annum
 Depreciation policy – 20% per annum
The total lease related expenses for the fiscal year
ended September 30, 2020 is
a. P13,072 c. P12,272
b. P12,896 d. P10,200
SOLUTION GUIDE:
Interest
Date Payment (8%) Principal C.A.
1/1/19 52,000
1/1/19 12,000 - 12,000 40,000
1/1/20 12,000 3,200 8,800 31,200
1/1/21 12,000 2,496 9,504 21,696
23. Which statement is incorrect regarding reassessment
of the lease liability?
a. After the commencement date, a lessee shall
remeasure the lease liability to reflect changes to
the lease payments.
b. A lessee shall recognize the amount of the
remeasurement of the lease liability as an
adjustment to the right-of-use asset.
c. If the carrying amount of the right-of-use asset is
reduced to zero and there is a further reduction in
the measurement of the lease liability, a lessee
shall recognize any remaining amount of the
remeasurement in retained earnings.
d. None of these.
24. Which of the following will require remeasurement of
the lease liability?
I. Change in the lease term
II. Change in the assessment of an option to purchase
the underlying asset
III. Change in the amounts expected to be payable
under a residual value guarantee
IV. Change in future lease payments resulting from a
change in an index or a rate used to determine
those payments
a. I, II, III and IV c. I and II only
b. I, II and III only d. I and III only
Use the following information for the next three questions.
A lessee entered into a lease contract for the lease of land
for 10 years. The contract provides for annual lease
payments of P10,000 payable at the end of each year with
fixed annual escalation of 2% up to Year 5. At the
beginning of Year 6, a rent review will be done and lease
payments will be reset to reflect market including the
subsequent escalation rates, if any. The lessee’s
incremental borrowing rate is 8%.
Assume that after the rent review, the agreed rate for Year
6 is P12,000 with annual increase of 1% thereafter.
25. At commencement date, the lessee should recognize a
lease liability of
a. P41,429 c. P70,842
b. P68,603 d. P72,558
26. After the rent review, the lessee should recognize an
adjustment to lease liability of
a. Nil c. P5,589
b. P3,065 d. P8,879
27. In Year 6, the lessee should recognize amortization
expense of
a. Nil c. P8,202
b. P7,869 d. P8,636
28. Lease modification is a change in the scope of a lease,
or the consideration for a lease, that was not part of
the original terms and conditions of the lease.
Examples include
a. Adding or terminating the right to use one or more
underlying assets
b. Extending or shortening the contractual lease term
c. Both a and b
d. Neither a nor b
29. A lessee shall account for a modification to a finance
lease as a separate lease if:
a. The modification increases the scope of the lease
by adding the right to use one or more underlying
assets.
b. The consideration for the lease increases by an
amount commensurate with the stand-alone price
for the increase in scope and any appropriate
adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
c. Both a and b.
d. Neither a nor b.
30. For a modification that is not accounted for as a
separate lease, how should a lessor account for the
modification?
a. If the lease would have been classified as an
operating lease had the modification been in effect
at the inception date, the lessor shall (i) account
for the lease modification as a new lease from the
effective date of the modification and (ii) measure
the carrying amount of the underlying asset as the
net investment in the lease immediately before the
effective date of the lease modification.
b. The lessor shall apply the requirements of PFRS 9.
c. Either a or b.
d. Neither a nor b.
31. For a lease modification that is not accounted for as a
separate lease, at the effective date of the lease
modification a lessee shall:
a. Allocate the consideration in the modified contract.
b. Determine the lease term of the modified lease.
c. Remeasure the lease liability by discounting the
revised lease payments using a revised discount
rate.
d. Do all of these.
32. For a lease modification that is not accounted for as a
separate lease, the lessee shall account for the
remeasurement of the lease liability by:
a. Decreasing the carrying amount of the right-of-use
asset to reflect the partial or full termination of the
lease for lease modifications that decrease the
scope of the lease.
b. Recognizing in profit or loss any gain or loss
relating to the partial or full termination of the
lease.
c. Making a corresponding adjustment to the right-of-
use asset for all other lease modifications.
d. Doing all of these.
33. The IASB amended IFRS 16 in response to COVID 19
pandemic. It added a practical expedient to provide
relief for lessees from lease modification accounting for
rent concessions related to COVID-19. What is that
practical expedient?
a. The practical expedient allows lessees to account
for all leases as operating leases as a result of
COVID-19-related rent concession received.
b. The practical expedient allows lessees to account
for COVID-19-related rent concession received as
income over the remaining lease term.
c. The practical expedient requires lessees to carry
out an assessment to decide whether a COVID-19-
related rent concession received is a lease
modification or not.
d. The practical expedient avoids the need for lessees
to carry out an assessment to decide whether a
COVID-19-related rent concession received is a
lease modification or not.
34. Which statement is incorrect regarding presentation of
lease liabilities?
a. A lessee shall either present in the statement of
financial position, or disclose in the notes lease
liabilities separately from other liabilities.
b. If the lessee does not present lease liabilities
separately in the statement of financial position,
the lessee shall disclose which line items in the
statement of financial position include those
liabilities.
c. Both a and b.
d. Neither a nor b.
35. PFRS 16 does not require a lessee to recognize right of
use assets and lease liabilities for the following leases,
except
a. Leases of low-value assets
b. Leases that, at the commencement date, has a
lease term of 12 months or less
c. Leases that, at the commencement date, has a
lease term of 12 months or less but contains a
purchase option
d. Both a and b
36. Which of the following would not be considered as ‘low
value’ lease of asset?
a. Personal computers
b. Office furniture and equipment
c. Delivery vehicle
d. None of these
37. Which statement is incorrect regarding accounting for
a lease in which the lessee is allowed not to recognize
right of use asset and lease liability?
a. The lessee shall recognize the lease payments as
an expense on either a straight-line basis over the
lease term or another systematic basis.
b. The lessee shall apply another systematic basis if
that basis is more representative of the pattern of
the lessee’s benefit.
c. The lessee shall consider the lease to be a new
lease if there is a lease modification or there is any
change in the lease term.
d. The recognition exemptions shall be made by class
of underlying asset to which the right of use
relates regardless of the nature of exemption.
38. A lessee shall disclose additional qualitative and
quantitative information about its leasing activities
necessary to meet the disclosure objective in PFRS 16.
This additional information may include information
that helps users of financial statements to assess:
I. The nature of the lessee’s leasing activities
II. Future cash outflows to which the lessee is
potentially exposed that are not reflected in the
measurement of lease liabilities
III. Restrictions or covenants imposed by leases
IV. Sale and leaseback transactions
a. I, II, III and IV c. I and II only
b. I, II and III only d. I and III only
39. Future cash outflows to which the lessee is potentially
exposed that are not reflected in the measurement of
lease liabilities includes exposure arising from:
I. Variable lease payments
II. Extension options and termination options
III. Residual value guarantees
IV. Leases not yet commenced to which the lessee is
committed
a. I, II, III and IV c. I and II only
b. I, II and III only d. I and III only
40. Which statement is incorrect regarding lease
classification by lessors?
a. A lessor shall classify each of its leases as either an
operating lease or a finance lease.
b. A lease is classified as a finance lease if it transfers
substantially all the risks and rewards incidental to
ownership of an underlying asset.
c. Whether a lease is a finance lease or an operating
lease depends on the substance of the transaction
rather than the form of the contract.
d. Changes in estimates or changes in circumstances
give rise to a new classification of a lease for
accounting purposes.
41. Risks include the possibilities of
a. Losses from idle capacity
b. Technological obsolescence
c. Variations in return because of changing economic
conditions
d. All of these
42. Rewards may be represented by
a. The expectation of profitable operation over the
underlying asset’s economic life
b. Gain from appreciation in value or realization of a
residual value
c. Both a and b
d. Neither a nor b
43. Situations that would normally lead to a lease being
classified as a finance lease include:
I. The lease transfers ownership of the asset to the
lessee by the end of the lease term.
II. The lessee has the option to purchase the asset at
a price that is expected to be sufficiently lower
than fair value at the date the option becomes
exercisable for it to be reasonably certain, at the
inception date, that the option will be exercised.
III. The lease term is for the major part of the
economic life of the underlying asset even if title is
not transferred.
IV. At the inception date, the present value of the
lease payments amounts to at least substantially
all of the fair value of the underlying asset.
V. The underlying asset is of such a specialized nature
that only the lessee can use it without major
modifications.
a. I, II, III, IV and V c. I, II and IV only
b. I, II, III and IV only d. I, II, III and V only
44. Other situations that could also lead to classification as
a finance lease are:
a. If the lessee can cancel the lease, the lessor's
losses associated with the cancellation are borne
by the lessee.
b. Gains or losses from fluctuations in the fair value
of the residual fall to the lessee (for example, in
the form of rent rebate equaling most of the sales
proceeds at the end of the lease).
c. The lessee has the ability to continue to lease for a
secondary period at a rent that is substantially
lower than market rent.
d. All of the above.
45. The lease classification is made at
a. The date of the lease agreement.
b. The date of commitment by the parties to the
principal terms and conditions of the lease.
c. The date on which a lessor makes an underlying
asset available for use by a lessee.
d. The earlier of a and b.
46. Which statement is incorrect regarding accounting for
operating leases by lessors?
a. Underlying assets are presented in their
statements of financial position according to the
nature of the underlying asset.
b. Lease payments are recognized as income on a
straight-line basis, unless another systematic basis
is more representative of the pattern in which
benefit from use of the underlying asset is
diminished.
c. Costs, including depreciation, incurred in earning
the lease income are recognized as an expense.
d. Underlying assets are not subject to impairment in
accordance with PAS 36.
47. Initial direct costs are incremental costs of obtaining a
lease that would not have been incurred if the lease
had not been obtained, except for such costs incurred
by a manufacturer or dealer lessor in connection with a
finance lease. Which statement is incorrect regarding
initial direct costs incurred by lessors?
a. A lessor shall add initial direct costs incurred in
obtaining an operating lease to the carrying
amount of the underlying asset and recognize
those costs as an expense over the lease term on
the same basis as the lease income.
b. For finance leases other than those involving
manufacturer or dealer lessors, initial direct costs
are included in the initial measurement of the net
investment in the lease and reduce the amount of
income recognized over the lease term.
c. Both a and b.
d. Neither a nor b.
Use the following information for the next three questions.
Mindoro Company purchased a new machine on January 1,
2020 at a cost of P2,000,000 for the purpose of leasing it.
The machine is estimated to have a useful life of ten years
with a residual value of P200,000. Depreciation is
computed by Mindoro on a straight-line basis. On January
2, 2020, Mindoro entered into a lease contract with
Oriental Company for a term of four years. The lease fee
is P1,000,000 per year and was paid in advance by
Oriental. Mindoro paid P120,000 commissions associated
with negotiating the lease and receive an additional
P400,000 as lease bonus.
48. Mindoro Company should present the machine in its
statement of financial position as
a. Inventory.
b. Investment property.
c. Other noncurrent investment.
d. Property, plant and equipment.
49. The net effect of this lease on Mindoro’s 2020 profit or
loss is
a. P908,000 c. P820,000
b. P890,000 d. P800,000
50. In Mindoro’s December 31, 2020 statement of financial
position, the machine should be reported at
a. P1,928,000 c. P1,820,000
b. P1,910,000 d. P1,710,000
51. On July 1, 2018, Lessee, Inc. leased a delivery truck
from Lessor Corp. under a three-year operating lease.
Total rent for the term of the lease will be P360,000,
payable as follows:
12 months at P5,000 = P 60,000
12 months at P7,500 = 90,000
12 months at P17,500 = 210,000
 All payments were made when due. In Lessor's June
30, 2020 statement of financial position, the accrued
rent receivable should be reported at
a. P0 c. P120,000
b. P90,000 d. P210,000
52. A lessor leased a freehold building for 20 years with
effect from 1 January 2020. The useful life of the
building is 40 years. As part of the negotiations for the
lease the lessor granted the lessee a rent-free period.
Annual rentals of P1.6 million are payable in advance on
1 January, commencing in 2022. How much income
should lessor recognize in profit or loss in the year
ended 31 December 2020?
a. Nil c. P1.52 million
b. P1.44 million d. P1.6 million
53. On January 1, 2020, a lessor signed a 5-year operating
lease for office space at P3,600,000 per year. The
lease included a provision for additional rent of 10% of
annual lessee’s sales in excess of P6,000,000.
Lessee’s sales for the year ended December 31, 2020
were P10,000,000. Upon execution of the lease,
lessee paid P500,000 as a bonus for the lease.
The lessor’s rent income for the year ended December
31, 2020 is
a. P3,600,000 c. P4,000,000
b. P3,700,000 d. P4,100,000
54. At the commencement date, the lessor shall recognize
assets held under a finance lease in its statement of
financial position and present them as a receivable at
an amount equal to
a. The gross investment in the lease.
b. The net investment in the lease.
c. The lower of the fair value of the asset and the
present value of the lease payments.
d. The higher of the fair value of the asset and the
present value of the lease payments
55. The net investment in the lease is
a. The lease payments receivable by the lessor under
a finance lease.
b. Any unguaranteed residual value accruing to the
lessor.
c. The aggregate of a and b.
d. The gross investment in the lease discounted at
the interest rate implicit in the lease.
56. At the commencement date, the lease payments
included in the measurement of the net investment in
the lease comprise the following payments for the right
to use the underlying asset during the lease term that
are not received at the commencement date:
I. Fixed payments (including in-substance fixed
payments), less any lease incentives payable
II. Variable lease payments that depend on an index
or a rate, initially measured as at the
commencement date
III. Any residual value guarantees provided to the
lessor by the lessee, a party related to the lessee
or a third party unrelated to the lessor that is
financially capable of discharging the obligations
under the guarantee
IV. The exercise price of a purchase option if the
lessee is reasonably certain to exercise that option
V. Payments of penalties for terminating the lease, if
the lease term reflects the lessee exercising an
option to terminate the lease
a. I, II, III, IV and V c. IV and V only
b. I, II, III and IV only d. I, III, IV and V only
57. At the commencement date, a manufacturer or dealer
lessor shall recognize the following for each of its
finance leases:
a. Revenue being the fair value of the underlying
asset, or, if lower, the present value of the lease
payments accruing to the lessor, discounted using
a market rate of interest.
b. The cost of sale being the cost, or carrying amount
if different, of the underlying asset less the present
value of the unguaranteed residual value
c. Selling profit or loss (being the difference between
revenue and the cost of sale) in accordance with
its policy for outright sales to which PFRS 15
applies.
d. All of these.
Use the following information for the next three questions.
Lessor is a dealer in machinery. A machine was leased to
another entity with the following provisions:
Annual rental payable at the end of each
year P2,000,000
Lease term and useful life of machinery 5 years
Cost of machinery P5,000,000
Residual value-unguaranteed P1,000,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 5 periods
at 10% 3.79
PV of 1 for 5 periods at 10% 0.62
At the end of the lease term, the machinery will revert to
the lessor. The perpetual inventory system is used.
Lessor incurred initial direct costs of P200,000 in obtaining
the lease.
58. The total interest income to be recognized over the
lease term is
a. P2,800,000 c. P2,420,000
b. P2,600,000 d. P1,800,000
59. The selling profit is
a. P3,000,000 c. P5,800,000
b. P3,200,000 d. P6,000,000
60. Which statement is incorrect regarding the residual
value?
a. The total finance income to be earned over the
lease term and the selling profit are the same if
the lessee guarantees the residual value.
b. If the fair value of the underlying asset is less than
residual value at the end of the lease term, the
lessor will recognize a loss for the difference.
c. If the fair value of the underlying asset is less than
residual value at the end of the lease term, the
lessor will receive cash for the difference if the
lessee guarantees the residual value.
d. None of these.
61. Which statement is incorrect regarding subsequent
measurement of finance lease by lessors?
a. A lessor shall recognize finance income over the
lease term, based on a pattern reflecting a
constant periodic rate of return on the lessor’s net
investment in the lease.
b. A lessor shall apply the lease payments relating to
the period against the gross investment in the
lease to reduce both the principal and the
unearned finance income.
 c. If there has been a reduction in the estimated
unguaranteed residual value, the lessor shall revise
the income allocation over the lease term and
recognize immediately any reduction in respect of
amounts accrued.
d. A lessor shall apply the derecognition and
impairment requirements in PAS 36 to the net
investment in the lease.
62. Sor Company entered into a lease of equipment to See
Company. The lease term was six years. The
equipment cost P40,000 and Sor plans to earn a
P4,000 dealer profit. Sor’s implicit rate on the lease is
12 percent. As a result of this agreement, Sor will
receive year-end lease payments of
a. P7,333 c. P10,702
b. P8,213 d. P12,090
63. An asset with a market value of P100,000 is leased on
January 1, 2020. Five annual lease payments are due
each January 1 beginning January 1, 2020. The lessee
guarantees the P40,000 residual value of the asset at
of the end of the lease term. The lessor’s implicit
interest rate is 8%. What is the annual lease payment?
a. P16,877 c. P23,191
b. P18,227 d. P25,046
64. The interest rate implicit in the lease is the rate of
interest that causes the present value of the lease
payments and the unguaranteed residual value to be
equal to
a. The fair value of the underlying asset.
b. Any initial direct costs of the lessor.
c. The sum of a and b.
d. The difference between a and b.
65. Alu Corp. leases a machine with a fair value of
P109,444 to Card Inc. for five years at an annual
rental (in advance) of P25,000, and Card Inc. does not
guarantee the estimated residual value of P15,000 on
return of the asset. What would be the interest rate
implicit in the lease?
a. 14% c. 10%
b. 12% d. 9%
Use the following information for the next two questions.
Lessor Company leases computer equipment to customers
under direct financing leases. An item of equipment was
leased to a lessee with the following provisions:
Annual rental payable in advance P500,000
Lease term and useful life of equipment 5 years
Cost of equipment P1,955,000
Initial direct cost P65,000
66. The total interest income to be recognized over the
lease term is
a. P480,000 c. P545,000
b. P500,000 d. P273,700
67. The interest income to be recognized in the first year
of the lease is
a. P242,400 c. P273,700
b. P182,400 d. P203,700
68. A lessor shall account for a modification to a finance
lease as a separate lease if:
a. The modification increases the scope of the lease
by adding the right to use one or more underlying
assets.
b. The consideration for the lease increases by an
amount commensurate with the stand-alone price
for the increase in scope and any appropriate
adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
c. Both a and b.
d. Neither a nor b.
69. For a modification to a finance lease that is not
accounted for as a separate lease, how should a lessor
account for the modification?
a. If the lease would have been classified as an
operating lease had the modification been in effect
at the inception date, the lessor shall (i) account
for the lease modification as a new lease from the
effective date of the modification and (ii) measure
the carrying amount of the underlying asset as the
net investment in the lease immediately before the
effective date of the lease modification.
b. The lessor shall apply the requirements of PFRS 9.
c. Either a or b.
d. Neither a nor b.
70. Which statement is incorrect regarding lease of land
and building?
a. In classifying a lease of land and buildings, land
and buildings elements would normally be
considered separately.
b. The lease payments are allocated between the land
and buildings elements in proportion to their
relative fair values.
c. In determining whether the land element is an
operating lease or a finance lease, an important
consideration is that land normally has an
indefinite economic life.
d. The building element is normally classified as
finance lease.
71. The Minor Company leased a freehold building for 20
years, the useful life of the building, with effect from 1
January 2020. At that date the fair value of the
leasehold interest was P7.5 million of which P6.0 million
was attributable to the building. Annual rentals of
P800,000 are receivable in advance on 1 January.
How much should Minor recognize as an operating lease
income in the year ended 31 December 2020?
a. Nil c. P160,000
b. P640,000 d. P800,000
ICAEW
72. For finance leases, a lessor shall disclose the following
amounts for the reporting period:
a. Selling profit or loss
b. Finance income on the net investment in the lease
c. Income relating to variable lease payments not
included in the measurement of the net investment
in the lease.
d. All of these.
73. For finance leases, a lessor shall:
a. Provide a qualitative and quantitative explanation
of the significant changes in the carrying amount
of the net investment.
b. Disclose a maturity analysis of the lease payments
receivable, showing the undiscounted lease
payments to be received on an annual basis for a
minimum of each of the first five years and a total
of the amounts for the remaining years.
c. Reconcile the undiscounted lease payments to the
net investment in the lease.
d. Do all of these.
74. For operating leases, a lessor shall disclose: 77. Ronnel should measure the right-of-use assets at
a. Lease income, separately disclosing income a. P650,000 c. P300,000
relating to variable lease payments that do not b. P350,000 d. P 80,000
depend on an index or a rate.
b. A maturity analysis of lease payments, showing 78. Ronnel should recognize gain on sale and leaseback of
the undiscounted lease payments to be received on a. P950,000 c. P370,000
an annual basis for a minimum of each of the first b. P580,000 d. Nil
five years and a total of the amounts for the
remaining years. 79. Alex will recognize annual depreciation of
c. Both a and b. a. P160,000 c. P65,000
d. Neither a nor b. b. P100,000 d. Nil

75. PFRS 16 requires a lessor to disclose information about

a. Assets subject to operating leases separately from
owned assets held and used for other purposes by
the lessor.
b. How it manages its exposure to residual value risk.
c. Both a and b.
d. Neither a nor b.
76. If the transfer of an asset by the seller-lessee satisfies
the requirements of PFRS 15 to be accounted for as a
sale of the asset:
a. The seller-lessee shall measure the right-of-use
asset arising from the leaseback at the proportion
of the previous carrying amount of the asset that
relates to the right of use retained by the seller-
lessee.
b. The seller-lessee shall recognize only the amount
of any gain or loss that relates to the rights
transferred to the buyer-lessor.
c. The buyer-lessor shall account for the purchase of
the asset applying applicable Standards, and for
the lease applying the lessor accounting
requirements in PFRS 16.
d. All of these.
Use the following information for the next three questions.
Ronnel Corp. sold to Alex Co. two depreciable assets and
simultaneously leased them back. The transfers satisfy
the requirements of PFRS 15 to be accounted for as a sale
of the assets.
80. In a sale and leaseback treated as a sale of the asset,
if the fair value of the consideration for the sale of an
asset does not equal the fair value of the asset, or if
the payments for the lease are not at market rates, an
entity shall make the following adjustments to
measure the sale proceeds at fair value:
a. Any below-market terms shall be accounted for as
a prepayment of lease payments.
b. Any above-market terms shall be accounted for as
additional financing provided by the buyer-lessor
to the seller-lessee.
c. Both a and b.
d. Neither a nor b.
81. If the transfer of an asset by the seller-lessee does not
satisfy the requirements of PFRS 15 to be accounted
for as a sale of the asset:
a. The seller-lessee shall continue to recognize the
transferred asset and shall recognize a financial
liability equal to the transfer proceeds.
b. The buyer-lessor shall not recognize the
transferred asset and shall recognize a financial
asset equal to the transfer proceeds.
c. The seller-lessee and the buyer-lessor shall
account for the financial liability and the financial
asset, respectively, applying PFRS 9.
d. All of these.
- done -

Additional information:
Asset #1 Asset #2
Sales price P600,000 P1,000,000
Carrying amount P100,000 P550,000
Economic life 10 years 10 years
Lease term 8 years 4 years
PV of lease payments as
a % of sales price 80% 40%
 STRAIGHT PROBLEMS
PROBLEM NO. 1 – Lessee, with BPO
Nuggets Enterprises has a long-standing policy of acquiring
company equipment by leasing. Early in 2020, the
company entered into a lease for a new equipment. The
lease stipulates that annual payments will be made for 5
years. The payments are to be made in advance on
December 31 of each year. At the end of the 5-year
period, Nuggets may purchase the equipment. The
estimated economic life of the equipment is 12 years.
Nuggets uses the calendar year for reporting purposes and
straight-line depreciation for other equipment. In addition,
the following information about the lease is also available:
Annual lease payments (including
executory costs of P5,000) P60,000
Purchase option price P25,000
Estimated fair value of equipment
after 5 years P75,000 Date Payment Interest Principal amount
Implicit rate 10%
Date of first lease payment Jan. 1, 2020 1/1/20 244,868
1/1/20 55,000 - 55,000 189,868
REQUIRED: 12/31/20 55,000 18,987 36,013 153,855

1. Prepare the 2020 journal entries relating to the lease 12/31/21 55,000 15,386 39,614 114,241
on the books of Nuggets (Round off present value 12/31/22 55,000 11,424 43,576 70,665
factors to four decimal places.)
12/31/23 55,000 7,067 47,933 22,732

2. Prepare the journal entry to record the exercise of the 12/31/24 25,000 2,268 22,732 -
purchase option.

3. Prepare the journal entry at the end of the lease term
if the purchase option is not exercised.
PROBLEM NO. 2 – Lessee, with GRV
On January 1, 2020, Nets Company entered into a lease
contract with Denver Company for a new equipment that
had a selling price of P2,120,000. The lease contract
provides that annual payments of P420,000 will be made
for 6 years. Nets made the first payment on January 1,
2020, subsequent payments are made on January 1 of
each year. Nets guarantees a residual value of P367,122
at the end of the lease term. After considering the
guaranteed residual value, the rate implicit in the lease is
determined to be 12%. Nets has an incremental
borrowing rate of 15%. The economic life of the
equipment is 9 years. Nets depreciates its equipment
using straight line method.

REQUIRED:

1. Prepare the 2020 and 2021 journal entries relating to

the lease on the books of Nets (Round off present
value factors to four decimal places.)

2. Prepare the journal entry at the end of the lease term

if the fair value of the leased asset is P400,000.

3. Prepare the journal entry at the end of the lease term

if the fair value of the leased asset is P300,000.
PROBLEM NO. 3– Lessor and Lessee
, (Lessor, Direct Financing Lease)
Assimilator Controls Corporation is in the business of leasing equipment. Assimilator Controls purchased new equipment
on December 31, 2020. The equipment was delivered the same day (by prior arrangement) to Tantalum Investment
Company, a lessee. The corporation accountant revealed the: following information relating to the lease transaction:
Cost of equipment to Assimilator
Controls P550,000
Estimated useful life and lease
term 8 years
Expected residual value
(unguaranteed) P40,000
Assimilator Controls' implicit rate
of interest 12%
Tantalum’s incremental
borrowing rate 14%
Date of first lease payment Dec. 31, 2020
Annual lease payments P95,950

Additional information is as follows:

(a) At the end of the lease, the equipment will revert to Assimilator Controls.
(b) Tantalum is aware of Assimilator Controls' rate of implicit interest.
(c) The lease rental consists of equal annual payments.

REQUIRED:
Prepare the 2020 and 2021 journal entries relating to the lease on the books of Assimilator Controls and Tantalum
Investment Company

PROBLEM NO. 4 – Lessor and Lessee

(Lessor, Sales-type Lease)
Excel Inc. leases equipment to its customers under noncancelable leases. On January 1, 2020, Excel leased equipment
costing P4,000,000 to PRTC Co., for nine years. The rental cost was P440,000 payable in advance semiannually (January 1
and July 1). The equipment had an estimated life of 15 years and sold for P5,330,252 with an estimated unguaranteed
residual value of P800,000. The implicit interest rate is 12 percent.

REQUIRED:
Prepare the 2020 journal entries relating to the lease on the books of Excel and PRTC (Round off present value factors to four
decimal places.)