FINANCIAL ACCOUNTING & REPORTING
ðÖŃG QÜÏZ ŠËT – N
1) Abalos Company, a calendar-year corporation, leases some of its equipment under an operating lease, in one of its
lease contracts that took effect on May 1, 2016, Abalos Company is required to pay rentals in advance as follows:
May 1, 2016 P1,000,000 May 1, 2019 P1,700,000
May 1, 2017 P1,200,000 May 1, 2020 P1,900,000
May 1, 2018 P1,400,000
What are the amounts of accrual or deferral relating to the lease on December 31, 2016 and December 31, 2017,
respectively by the lessor?
A. P440,000 accrued rent receivable and P680,000 accrued rent receivable
B. P40,000 unearned rent and P200,000 accrued rent receivable
C. P40,000 accrued rent receivable and P200,000 unearned rent
D. P40,000 unearned rent and P240,000 accrued rent receivable
ANSWER: B
Total rent over the lease term 1,000,000 + 1,200,000 + 1,400,000 + 1,700,000 + 1,900,000 7,200,000
Lease term 5
Straight line rent revenue per year 1,440,000
Per months 12
Straight line rent per month 120,000
Cumulative rent revenue (120,000 x 8 months) 960,000
Cumulative cash received (1,000,000)
Unearned rent as of December 31, 2016 40,000
Cumulative rent revenue (120,000 x 20 months) May 1, 2016 – December 31, 2017 2,400,000
Cumulative cash received 1,000,000 + 1,200,000 2,200,000
Rent receivable 200,000
2) On January 1, 2016 Aguila Corporation signed a ten-year operating lease for an office space at P960,000 per year. The
lease included a provision for additional rental payment of 5% of annual company sales in excess of P5,000,000. Aguila
Corporation’s sales for the year ended December 31, 2016 were P6,000,000. Upon execution of the lease, Aguila
Corporation paid P240,000 as a bonus for the lease.
A. 1,284,000 B. 1,034,000 C. 984,000 D. 960,000
ANSWER: B
Rent revenue
1. Straight line rent revenue 960,000
2. Amortization of lease bonus 240,000/10 years 24,000
3. Contingent rent (6,000,000 – 5,000,000) x 5% 50,000
Total rent revenue 1,034,000
3) Flames Company leased machinery to Talon Company on July 1, 2022, for a ten-year period expiring June 30, 2032.
Equal annual payments under the lease are P75,000 and are due on July 1 of each year. The first payment was made
on July 1, 2022. The rate of interest used by Flames and Talon is 9%. The cash selling price of the machinery is
P525,000 and the cost of the machinery on Flames’ accounting records was P465,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by Flames, what amount of
interest revenue would Flames record for the year ended December 31, 2022? (Present value factor round 2 decimal)
A. 47,250 B. 40,500 C. 20,250 D. 23,625
ANSWER: C
Net investment PV of rental or cash selling price 525,000
First payment (75,000)
Carrying amount after first payment on July 1, 2022 450,000
, Use the following information for the next four (4) questions:
Chelu Company used leases as a method of selling products. During the current year, the entity completed construction of
a passenger ferry. At the beginning of current year, the ferry was leased on a contract specifying that ownership of the ferry
will transfer to the lessee at the end of the lease period.
Original cost of the ferry 8,000,000
Fair value of ferry at the inception of lease 13,000,000
Residual value 2,000,000
Annual rental payable in advance at the beginning of each year 1,500,000
Implicit interest rate 12%
Lease term 20 years
Present value of an annuity due of 1 at 12% for 20 periods 8.37
Present value of an ordinary annuity of 1 at 12% for 20 periods 7.47
Present value of 1 at 12% for 20 periods 0.10
4) What is the gross investment in the lease?
A. 30,000,000 B. 32,000,000 C. 38,000,000 D. 10,000,000
5) What is the net investment in the lease?
A. 12,555,000 B. 13,000,000 C. 12,755,000 D. 11,205,000
6) What is the gross profit on sale for the current year?
A. 6,555,000 B. 4,555,000 C. 5,000,000 D. 3,205,000
7) What is the unearned interest income in the lease?
A. 17,445,000 B. 19,245,000 C. 19,445,000 D. 22,000,000
8) What is the interest income for the current year?
A. 1,506,000 B. 1,560,000 C. 1,326,600 D. 1,380,000
ANSWER: A, A, B, A, C
Amount Lease term Total amount
Periodic rent 1,500,000 20 30,000,000
GRV or URV* 0
Gross investment 30,000,000
Amount Present value factor Present value
Periodic rent 1,500,000 8.37 12,555,000
GRV or URV 0
Net investment 12,555,000
Gross investment 30,000,000
Net investment 12,555,000
Unearned rent 17,445,000
Net investment / CA of lease receivable after first payment 12,555,000 – 1,500,000 11,055,000
Interest rate 12%
Interest income 1,326,600
Sales (PV of periodic rent + PV of GRV) 5,400,000 + 285,000 12,555,000
Cost of sale (Cost + Initial direct cost) 4,000,000 + 200,000 8,000,000
Gross profit 4,555,000
Residual value in this problem should be completely ignored since there is a TRANSFER OF OWNERSHIP.
Use the following information for the next two (2) questions:
Babe Time Company manufactures an X-ray machine and leases it to Take Time Hospital. The entity provided the following
information pertaining to the finance lease agreement:
Commencement of the lease January 1, 2018
Annual rental payable in advance every January 1 600,000
Lease term 10 years
Useful life of machine 12 years
ðÖŃG QÜÏZ ŠËT – N
1) Abalos Company, a calendar-year corporation, leases some of its equipment under an operating lease, in one of its
lease contracts that took effect on May 1, 2016, Abalos Company is required to pay rentals in advance as follows:
May 1, 2016 P1,000,000 May 1, 2019 P1,700,000
May 1, 2017 P1,200,000 May 1, 2020 P1,900,000
May 1, 2018 P1,400,000
What are the amounts of accrual or deferral relating to the lease on December 31, 2016 and December 31, 2017,
respectively by the lessor?
A. P440,000 accrued rent receivable and P680,000 accrued rent receivable
B. P40,000 unearned rent and P200,000 accrued rent receivable
C. P40,000 accrued rent receivable and P200,000 unearned rent
D. P40,000 unearned rent and P240,000 accrued rent receivable
ANSWER: B
Total rent over the lease term 1,000,000 + 1,200,000 + 1,400,000 + 1,700,000 + 1,900,000 7,200,000
Lease term 5
Straight line rent revenue per year 1,440,000
Per months 12
Straight line rent per month 120,000
Cumulative rent revenue (120,000 x 8 months) 960,000
Cumulative cash received (1,000,000)
Unearned rent as of December 31, 2016 40,000
Cumulative rent revenue (120,000 x 20 months) May 1, 2016 – December 31, 2017 2,400,000
Cumulative cash received 1,000,000 + 1,200,000 2,200,000
Rent receivable 200,000
2) On January 1, 2016 Aguila Corporation signed a ten-year operating lease for an office space at P960,000 per year. The
lease included a provision for additional rental payment of 5% of annual company sales in excess of P5,000,000. Aguila
Corporation’s sales for the year ended December 31, 2016 were P6,000,000. Upon execution of the lease, Aguila
Corporation paid P240,000 as a bonus for the lease.
A. 1,284,000 B. 1,034,000 C. 984,000 D. 960,000
ANSWER: B
Rent revenue
1. Straight line rent revenue 960,000
2. Amortization of lease bonus 240,000/10 years 24,000
3. Contingent rent (6,000,000 – 5,000,000) x 5% 50,000
Total rent revenue 1,034,000
3) Flames Company leased machinery to Talon Company on July 1, 2022, for a ten-year period expiring June 30, 2032.
Equal annual payments under the lease are P75,000 and are due on July 1 of each year. The first payment was made
on July 1, 2022. The rate of interest used by Flames and Talon is 9%. The cash selling price of the machinery is
P525,000 and the cost of the machinery on Flames’ accounting records was P465,000.
Assuming that the lease is appropriately recorded as a sale for accounting purposes by Flames, what amount of
interest revenue would Flames record for the year ended December 31, 2022? (Present value factor round 2 decimal)
A. 47,250 B. 40,500 C. 20,250 D. 23,625
ANSWER: C
Net investment PV of rental or cash selling price 525,000
First payment (75,000)
Carrying amount after first payment on July 1, 2022 450,000
, Use the following information for the next four (4) questions:
Chelu Company used leases as a method of selling products. During the current year, the entity completed construction of
a passenger ferry. At the beginning of current year, the ferry was leased on a contract specifying that ownership of the ferry
will transfer to the lessee at the end of the lease period.
Original cost of the ferry 8,000,000
Fair value of ferry at the inception of lease 13,000,000
Residual value 2,000,000
Annual rental payable in advance at the beginning of each year 1,500,000
Implicit interest rate 12%
Lease term 20 years
Present value of an annuity due of 1 at 12% for 20 periods 8.37
Present value of an ordinary annuity of 1 at 12% for 20 periods 7.47
Present value of 1 at 12% for 20 periods 0.10
4) What is the gross investment in the lease?
A. 30,000,000 B. 32,000,000 C. 38,000,000 D. 10,000,000
5) What is the net investment in the lease?
A. 12,555,000 B. 13,000,000 C. 12,755,000 D. 11,205,000
6) What is the gross profit on sale for the current year?
A. 6,555,000 B. 4,555,000 C. 5,000,000 D. 3,205,000
7) What is the unearned interest income in the lease?
A. 17,445,000 B. 19,245,000 C. 19,445,000 D. 22,000,000
8) What is the interest income for the current year?
A. 1,506,000 B. 1,560,000 C. 1,326,600 D. 1,380,000
ANSWER: A, A, B, A, C
Amount Lease term Total amount
Periodic rent 1,500,000 20 30,000,000
GRV or URV* 0
Gross investment 30,000,000
Amount Present value factor Present value
Periodic rent 1,500,000 8.37 12,555,000
GRV or URV 0
Net investment 12,555,000
Gross investment 30,000,000
Net investment 12,555,000
Unearned rent 17,445,000
Net investment / CA of lease receivable after first payment 12,555,000 – 1,500,000 11,055,000
Interest rate 12%
Interest income 1,326,600
Sales (PV of periodic rent + PV of GRV) 5,400,000 + 285,000 12,555,000
Cost of sale (Cost + Initial direct cost) 4,000,000 + 200,000 8,000,000
Gross profit 4,555,000
Residual value in this problem should be completely ignored since there is a TRANSFER OF OWNERSHIP.
Use the following information for the next two (2) questions:
Babe Time Company manufactures an X-ray machine and leases it to Take Time Hospital. The entity provided the following
information pertaining to the finance lease agreement:
Commencement of the lease January 1, 2018
Annual rental payable in advance every January 1 600,000
Lease term 10 years
Useful life of machine 12 years
