THEORIES

1. Statement 1: The default treatment for lessee accounting under PFRS 16 is the recognition of rent
expense in straight-line method.
Statement 2: Lessor accounting under PFRS 16 requires the classification of the lease as either operating
or finance on commencement date.
a. True, True
b. True, False
c. False, True
d. False, False

2. Statement 1: A period of time described in a lease contract is limited to number of months, quarters or
years.
Statement 2: For a contract to contain a lease, the right to control the use of an identified asset shall be
with consideration.
a. True, True
b. True, False
c. False, True
d. False, False

3. Statement 1: In a lease contract, the owner of the underlying asset is called the lessor.
Statement 2: In a lease contract, the entity that uses the underlying asset is called the lessee.
a. True, True
b. True, False
c. False, True
d. False, False

4. The lease term is equal to the noncancellable period, together with

I. Period covered by extension option, if the lessee is reasonably certain to exercise that
option.
II. Period covered by extension option, if the lessee is not reasonably certain to exercise that
option.
III. Period covered by termination option, if the lessee is reasonably certain to exercise that
option.
IV. Period covered by termination option, if the lessee is not reasonably certain to exercise that
option.

a. I and III
b. II and IV
c. II and III
d. I and IV

5. When should the lease term start?

a. Inception of the lease
b. Commencement date
 c. Inception of the lease or commencement date, whichever is earlier
d. Inception of the lease or commencement date, whichever is later

6. Statement 1: If only a lessor 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.
Statement 2: If only a lessee has the right to terminate a lease, the non-cancellable period of the lease
includes the period covered by the option to terminate the lease.
a. True, True
b. True, False
c. False, True
d. False, False

7. All of the following are considered in determining the length of lease term, except
a. significant leasehold improvements undertaken
b. negotiation costs and costs of integrating a new asset into the lessee’s operations
c. importance of the underlying asset to the lessee’s operations
d. market value of rentals for the previous periods relative to the expected market rentals in future
periods.

8. Statement 1: Lease modification involves changes in the assumptions and estimates used in computing
for lease liability.
Statement 2: Reassessment of lease liability involves changes in the terms and conditions of lease
agreement.
a. True, True
b. True, False
c. False, True
d. False, False

9. Right-of-use asset can be subsequently measured under which of the following models?
a. Cost model
b. Revaluation model
c. Fair value model
d. All of the other choices are subsequent measurement for right-of-use asset

10. The following are correct in determining the useful life in subsequently depreciating ROU asset, except
a. If there is a transfer of ownership at the end of the lease term, the ROU asset shall be
depreciated during the shorter of lease term and useful life of the underlying asset.
b. If there is a purchase option that the lessee is reasonably certain to exercise, the ROU asset shall
be depreciated over the useful life of the underlying asset.
c. If there is a purchase option that the lessee is not reasonably certain to exercise, the ROU asset
shall be depreciated over the shorted of lease term and useful life of the underlying asset.
d. If there is a guaranteed residual value, the ROU asset shall be depreciated over the shorted of
lease term and useful life of the underlying asset.
11. Statement 1: At the end of the current year, the entity (as the lessee) entered into negotiations with the
lessor to change the guaranteed residual value. In this scenario, the lease liability shall be remeasured
using a revised discount rate.
Statement 2: At the end of the current year, the entity (as the lessee), changed its estimate of expected
shortfall from its residual value guarantee. In this scenario, the lease liability shall be remeasured using
the revised discount rate.
a. True, True
b. True, False
c. False, True
d. False, False

12. The following are correct in using discount rate in determining the revised lease liability arising from
reassessment and lease modifications, except
a. If there is an increase in the shortfall from guaranteed residual value due to decrease in
expected value of underlying asset at the end of the lease term, the original discount rate shall
be used.
b. If there is a decrease in the shortfall from guaranteed residual value due to increase in expected
value of underlying asset at the end of the lease term, the original discount rate shall be used.
c. If the lease agreement was amended to increase the lease payments, a revised discount rate
shall be used.
d. If the lease payments were increased due to increase in the index on which it is based, a revised
discount rate shall be used.

13. Statement 1: Interest expense increases the carrying amount of the lease liability.
Statement 2: Increase in the expected lease term increases the carrying amount of the lease liability.
a. True, True
b. True, False
c. False, True
d. False, False

14. Regarding the remeasurement of lease liability, which of the following is/are correct?
I. Increase in the expected value of the underlying asset covered by a residual value guarantee will
increase the revised lease liability
II. Increase in the lease term as extended by a change in the lease agreement will increase the revised
lease liability.
a. Only I is true
b. Only II is true
c. Both I and II are true
d. Neither I nor II is true

15. Regarding the remeasurement of lease liability, which of the following is/are correct?
I. If the lessee becomes reasonably certain that it will now exercise the purchase option, it will
increase the revised lease liability
 II. If the lessee becomes reasonably certain that it will not exercise the termination option, it will
increase the revised lease liability.
a. Only I is true
b. Only II is true
c. Both I and II are true
d. Neither I nor II is true

16. Regarding the remeasurement of lease liability, which of the following is/are correct?
I. If the lessee becomes reasonably certain that it will now exercise the termination option, it will
decrease the revised lease liability
II. If the lessee becomes reasonably certain that it will exercise the extension option, it will decrease
the revised lease liability.
a. Only I is true
b. Only II is true
c. Both I and II are true
d. Neither I nor II is true

17. Which of the following shall be recognized in profit or loss of the lessee?
I. Interest expense
II. Variable lease payments based on index
III. Variable lease payments based on sales
a. I only
b. I and II only
c. I and III only
d. I, II, III

18. Statement 1: On initial recognition, the ROU asset and lease liability are equal in the absence of advance
lease payments, initial direct costs and asset retirement obligation.
Statement 2: The amounts of ROU asset and lease liability are not necessarily equal on each reporting
date.
a. True, True
b. True, False
c. False, True
d. False, False

19. Statement 1: Lessors shall classify each lease agreement as either operating or finance lease.
Statement 2: The basis for classification as operating or finance lease is the legal form, rather than the
transfer of risks and rewards.
a. True, True
b. True, False
c. False, True
d. False, False

20. Statement 1: All of the indicators shall be met for a lease to be classified as a finance lease.
 Statement 2: Lease classification shall be made on commencement date of the lease.
a. True, True
b. True, False
c. False, True
d. False, False

21. The following are the secondary indicators of situations that may lead to the classification of the lease as
a finance lease, except
a. if the lessor can cancel the lease, the lessor’s losses associated with the cancellation are borne
by the lessee
b. gains or losses from the fluctuation in the fair value of the residual accrue to the lessee
c. the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
d. all of the other choices are the secondary indicators mentioned by PFRS 16.

22. Initially, a lessor classified one of its leases involving its building as a finance lease. Later, the estimated
useful life of the building was extended, which will make the lease an operating lease had this estimated
useful life has been used during the initial classification. How should the lessor account for this change?
a. Classify the lease as an operating lease immediately on the date the estimate was changed
b. Classify the lease as an operating lease on the immediately succeeding reporting date after the
estimate was changed.
c. Recognize the building and depreciate it over is estimated remaining useful life.
d. Do not change the classification of the lease.

23. Statement 1: Direct financing leases are usually provided by banks.

Statement 2: Sales-type financing leases are usually provided by manufacturers or dealers.
a. True, True
b. True, False
c. False, True
d. False, False

24. Statement 1: The total interest income that the lessor can earn from a finance lease is equal to the
difference between the gross investment in the lease and the net investment in the lease.
Statement 2: Under sales type lease, the implicit interest rate is the rate that discounts the lease
payments and unguaranteed residual value to equal the sum of the fair value of the underlying asset
and initial direct costs.
a. True, True
b. True, False
c. False, True
d. False, False

25. The following are the lease payments that shall be included in the gross investment in the lease, except
a. Amount of unguaranteed residual value.
b. Amount that lessee is expected to pay as shortfall under residual value guarantee.
 c. Purchase option, if the lessee is reasonably certain to exercise.
d. All of the other choices shall be included in the lease payments.
26. Statement 1: Under operating lease, both the lessor and lessee will recognize depreciation expense.
Statement 2: Under finance lease, interest income recognized by the lessor is equal to the interest
expense recognized by the lessee.
a. True, True
b. True, False
c. False, True
d. False, False

27. Statement 1: Under operating lease, a manufacturer or dealer shall not recognize gross profit.
Statement 2: Under operating lease, initial direct costs incurred by the manufacturer or dealer shall be
recognized as an outright expense.
a. True, True
b. True, False
c. False, True
d. False, False

28. Generally, initial direct costs are capitalized under operating lease. Which of the following is the correct
accounting treatment for these?
a. Expensed the whole amount of initial direct costs at the end of the lease term.
b. Amortized over the estimated remaining useful life of the underlying asset.
c. Amortized over the lease term.
d. Any of the other choices, depending on the lessor’s accounting policy.

29. Under operating lease

a. The remaining carrying amount of initial direct costs shall be included in prepayments.
b. Security deposit is included in the lease payments.
c. There is an accrued rent receivable if the rental income to date is higher than rentals received.
d. The lessee shall not recognize ROU asset and lease liability.

30. Unguaranteed residual value is considered in the

a. perspective of the lessor only
b. perspective of the lessee only
c. perspective both of the lessor and lessee
d. neither of the lessor and the lessee

PROBLEMS
1. On January 1, 2023, ABC Company, as the lessee, signed a six-year lease agreement with XYZ Company
as the lessor for the use of an equipment. The lease contract requires an annual lease payment of
P2,000,000 to be made every January 1 of each year, starting in 2023. Implicit interest rate, which is not
known by ABC Company is 11%. ABC Company’s incremental borrowing rate is 9%. The equipment has
a remaining useful life of eight years.
 Lease liability balance as December 31, 2025 should be
a. P5,518,222
b. P5,062,589
c. P6,479,439
d. P7,062,589

Carrying amount of the right-of-use asset as of December 31, 2026 should be

a. P4,889,651
b. P3,259,767
c. P6,519,535
d. P1,629,884

Interest income of XYZ Company for the year 2026 should be

a. P198,199
b. P682,538
c. P376,755
d. P537,617

Carrying amount of the net investment in lease for XYZ Company as of December 31, 2024 should be
a. P6,887,429
b. P5,425,046
c. P6,204,891
d. P4,887,429

Guaranteed Residual Value

2. At the beginning of 2023, DEF Company leased out its vehicle, for eight years, to ALPHA Company.
Annual lease payments of P1,600,000 are due every December 31 of each year, starting in 2023. In
addition, ALPHA Company guaranteed that the vehicle will have an P800,000 value at the end of the
lease term, even though it estimates that the vehicle will only have P200,000 value as of the same date.
Implicit interest rate on the lease is 9%, while the lessee’s incremental borrowing rate is 12%. The
lessee does not know the implicit interest rate. Lastly, the vehicle has a remaining useful life of ten years.
(Use the contemporary approach)

Total expense to be recognized by ALPHA Company for the year 2025 should be
a. P1,756,791
b. P1,932,629
c. P1,849,687
d. P1,536,219

Carrying amount of right-of-use asset as of December 31, 2028 should be

a. P2,145,087
b. P2,056,727
c. P2,047,638
d. P3,071,458

Interest income of DEF Company for the year 2026 should be

a. P595,206
 b. P606,905
c. P688,903
d. P678,171

Carrying amount of net investment in the lease as of December 31, 2027 should be
a. P4,667,817
b. P4,513,382
c. P5,608,607
d. P5,750,291

Unguaranteed Residual Value

3. On January 1, 2023, DEGAMO leased a building from SALGADO Company for a 15-year lease contract,
which is also equal to the building’s remaining useful life. Annual lease payments of P900,000 are due
every January 1, starting in 2023. In addition, the building has an estimated residual value of P500,000
at the end of the lease term, which DEGAMO is not guaranteeing. Implicit interest and lessee’s
incremental borrowing rates were 7% and 8%, respectively. DEGAMO knows the implicit interest rate.
(Use contemporary approach)

Total expense to be recognized by DEGAMO Company for the year 2026 should be
a. P1,057,144
b. P1,085,117
c. P1,027,214
d. P1,064,095

Carrying amount of lease liability as of December 31, 2028 should be

a. P5,863,708
b. P6,274,168
c. P5,374,168
d. P5,750,360

Noncurrent portion of the lease liability as of December 31, 2025 should be

a. P6,748,806
b. P6,321,222
c. P7,221,222
d. P6,763,708

Interest income of SALGADO Company for the year 2028 should be

a. P410,460
b. P428,252
c. P459,114
d. P442,486

Carrying amount of net investment in the lease as of December 31, 2027 should be
a. P 6,558,770
b. P 6,117,884
c. P 7,017,884
d. P 6,546,136
 Noncurrent portion of the net investment in the lease as of December 31, 2026 should be
a. P 6,558,770
b. P 7,017,884
c. P 7,458,770
d. P 6,970,813

Purchase Option
4. On January 1, 2023, VILLACORTA leased an equipment from GUEVARRA Company for a 7-year lease
contract, even though the equipment’s remaining useful life is 12 years. Annual lease payments of
P1,800,000 are due every December 31, starting in 2023. In addition, there is a P700,000 purchase
option that VILLACORTA can exercise at the end of the lease term. The equipment has an estimated
residual value of P400,000 at the end of the lease term and P200,000 at end of its useful life. Implicit
interest and lessee’s incremental borrowing rates were 6% and 9%, respectively. VILLACORTA does not
know the implicit interest rate. Lastly, it is reasonably certain that VILLACORTA will exercise the
purchase option. (Use contemporary approach)

Total expense to be recognized by VILLACORTA Company for the year 2027 should be
a. P1,638,997
b. P1,228,904
c. P1,750,465
d. P1,339,652

Carrying amount of lease liability as of December 31, 2027 should be

a. P3,755,576
b. P3,563,743
c. P3,452,032
d. P3,823,547

Noncurrent portion of the lease liability as of December 31, 2026 should be

a. P3,755,576
b. P3,563,743
c. P3,452,032
d. P3,823,547

Carrying amount of the right-of-use asset as of December 31, 2028 should be

a. P4,821,120
b. P4,050,933
c. P4,723,180
d. P4,090,432

Interest income of GUEVARRA Company for the year 2028 should be

a. P 235,386
b. P 345,293
c. P 254,837
d. P 263,534

Carrying amount of net investment in the lease as of December 31, 2027 should be
 a. P3,923,103
b. P3,876,439
c. P3,732,394
d. P3,673,954

Purchase Option – Not Reasonably Expected to be Exercised

5. On January 1, 2023, USOP leased an equipment from DOLOR Company for a 9-year lease contract, even
though the equipment’s remaining useful life is 12 years. Annual lease payments of P2,700,000 are due
every January 1, starting in 2023. This amount is inclusive of P300,000 payments for security and
maintenance fees.

In addition, there is a P1,000,000 purchase option that USOP can exercise at the end of the lease term.
The equipment has an estimated residual value of P800,000 at the end of the lease term and P600,000 at
end of its useful life. Implicit interest and lessee’s incremental borrowing rates were 5% and 7%,
respectively. USOP does not know the implicit interest rate. Lastly, it is not reasonably certain that USOP
will exercise the purchase option. (Use contemporary approach)

Total expense to be recognized by USOP Company for the year 2026 should be
a. P 2,547,846
b. P 2,847,846
c. P 2,659,792
d. P 2,959,792

Carrying amount of lease liability as of December 31, 2028 should be

a. P 7,581,651
b. P 7,085,655
c. P 6,739,246
d. P 6,298,361

Carrying amount of the right-of-use asset as of December 31, 2027 should be

a. P 7,436,052
b. P 9,295,065
c. P 8,365,559
d. P 10,456,949

Interest income of DOLOR Company for the year 2028 should be

a. P 425,514
b. P 326,790
c. P 478,703
d. P 367,638

Carrying amount of net investment in the lease of DOLOR Company as of December 31, 2027 should be
a. P 10,052,769
b. P 9,574,066
c. P 8,935,796
d. P 8,510,282
 Transfer of Ownership
6. On January 1, 2023 MERCADER Company entered into an 8-year lease agreement involving the
lease of a building with remaining useful life of 20 years belonging to CAMPOSANO Company.
After the lease term, the ownership over the building will be transferred to MERCADER. In
connection with the lease, MERCADER Company incurred initial direct costs of P600,000.
Annual lease payments of P1,750,000 at the beginning of each year, starting in 2023. Implicit
interest rate, which is not known by MERCADER Company, is 12%, while its incremental
borrowing rate is 14%.

The building has residual value of P700,000 at the end of the lease term and P300,000 at the end
of its 20-year remaining useful life.

Annual depreciation expense should be. P477,727

Carrying amount of ROU asset as of December 31, 2025 should be. P8,421,354

Lease liability as of December 31, 2026 should be P5,812,858

Amount of income that CAMPOSANO should recognize for the year 2024 should be. P 863,396

Balance in the net investment in the lease of CAMPOSANO Company as of December 31, 2026, if
there is any (input “0” if your answer is none), should be P 5,953,207

Extension Option.
7. On January 1, 2023, GARCIA Company, as the lessee, signed a three-year lease agreement with RAMOS
Company as the lessor for the use of an equipment. The lease contract requires an annual lease payment
of P1,600,000 to be made every January 1 of each year, starting in 2023. In addition, GARCIA Company
may choose to extend the lease term by additional five years, which is reasonably certain to be exercised
as GARCIA indicated its intention to extend to RAMOS. Implicit interest rate, which is not known by ABC
Company is 12%. GARCIA Company’s incremental borrowing rate is 10%. The equipment has a
remaining useful life of ten years.

Carrying amount of lease liability as of December 31, 2023 should be P 8,568,417

Carrying amount of ROU asset as of December 31, 2024 should be P 7,042,103

Interest income for the year 2024 should be P 789,390

Carrying amount of the net investment in the lease as of December 31, 2025, if there is any, should be
(input “0” if your answer is none) P6,459,759

8. On January 1, 2023, ROXAS Company leased a building from SANTOS Company for a five-year lease
contract. Annual lease payments of P2,000,000 are due every December 31, starting in 2023. The annual
lease payments will increase by 10% compounded, starting in 2024. In addition, ROXAS Company and
SANTOS Company incurred initial direct costs amounting to P400,000 and P500,000, respectively.
Lastly, the building has a carrying amount of P12,000,000 and remaining useful life of ten years. Implicit
interest and lessee’s incremental borrowing rates were 5% and 6%, respectively. ROXAS does not know
the implicit interest rate.
Initial measurement of ROU asset on January 1, 2023 should be P10,573,337

Interest expense for the year 2024 should be P527,024

Carrying amount of the lease liability as of December 31, 2025 should be P5,117,407

Carrying amount of SANTOS Company’s building as of December 31, 2024. P9,900,000

Accrued rent receivable of SANTOS Company as of December 31, 2025, if there is any, should be (input
“0” if your answer is none) P706,120

Net income of SANTOS Company from this lease for the year 2025 should be P1,142,040

Increasing Amount of Rent – Finance Lease

Semi-Annual Lease Payment

With Percentage Rentals

Sales-Type Lease