CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

FINANCE LEASE - LESSEE

1. At the beginning of current year, an entity leased a building from a lessor with the following pertinent
information:
Annual rental payable at the end of each year 1,500,000
Initial direct cost paid 405,000
Lease bonus paid to lessor before commencement of the lease 300,000
Lease incentive received 50,000
Cost of restoring building as required by contract 1,500,000
Present value of restoration cost discounted at 8% for six periods 945,000
Leasehold improvement – useful life 8 years 1,200,000
Purchase option that is reasonably certain to be exercised 1,000,000
Lease term 6 years
Useful life of building 10 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 6 periods at 10% 4.36
Present value of 1 for 6 periods at 10% 0.56
Present value of 1 for 6 periods at 8% 0.63

1. What is the initial lease liability?

a. 7,100,000
b. 6,540,000
c. 9,210,000
d. 9,600,000

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

a. 8,750,000
b. 8,700,000
c. 9,900,000
d. 7,755,000

3. What total amount of interest expense should be reported for the current year?
a. 710,000
b. 785,600
c. 804,500
d. 830,000

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

a. 6,310,000
b. 5,694,000
c. 9,060,000
d. 5,600,000

5. What is the depreciation of the right of use asset for current year?
a. 1,450,000
b. 1,550,000
c. 870,000
d. 875,000

6. What is the depreciation of the leasehold improvement for current year?

a. 200,000
b. 150,000
c. 120,000
d. 0
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2. On January 1, 2021, an entity leased two automobiles for executive use. The lease required the entity
to make five annual payments of P2,000,000 beginning December 31, 2021. 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% and present value factors at 10% for 5
periods are 4.17 for an annuity due, 3.79 for an ordinary annuity and 0.62 for present value of 1.

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

a. 7,020,000
b. 5,722,000
c. 7,580,000
d. 6,338,000

2. What is the current portion of the lease liability on December 31, 2021?
a. 2,000,000
b. 1,298,000
c. 820,000
d. 500,000

3. What is the interest expense for 2021?

a. 758,000
b. 820,000
c. 834,000
d. 896,000

3. On January 1, 2021, an entity entered into a 5-year lease with a lessor. Annual lease payments of
P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. The
entity knows that the lessor expects an 8% implicit rate on the lease. The entity has a 10%
incremental borrowing rate. The equipment is expected to have a useful life of 10 years. In addition,
a third party has guaranteed to pay the lessor a residual value of P500,000 at the end of the lease.
The present value of an ordinary annuity of 1 for 5 years is 3.99 at 8% and 3.79 at 10%. The present
value of 1 at 8% for 5 periods is 0.68 and at 10% for 5 periods is 0.62. On December 31, 2021, what
is the principal amount of the lease obligation?
a. 3,990,000
b. 3,309,200
c. 3,676,400
d. 3,971,040

4. At the beginning of current year, an entity entered into an 8-year finance lease for an equipment. The
entity accounted for the acquisition of the finance lease at P5,000,000 which included a P500,000
bargain purchase option that is reasonably certain to be exercised. The expected fair value of the
equipment is P400,000 at the end of the 10-year useful life. What amount of straight line depreciation
should be recognized for the current year?
a. 575,000
b. 460,000
c. 625,000
d. 450,000

5. At the beginning of current year, an entity entered into an 8-year lease for an equipment. The entity
accounted for the acquisition as a finance lease for P6,000,000 which included a P600,000 residual
value guarantee. At the end of the lease, the asset will revert back to the lessor. It is estimated
that the fair value of the asset at the end of the 10-year useful life would be P400,000. What amount
should be recognized as straight line depreciation on the leased asset for the current year?
a. 675,000
b. 700,000
c. 540,000
d. 560,000
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