PINNACLe THEORY LEASES 41. The lessee may apply the operating lease model under what condition? 2. Short-term lease ‘Both short-term lease and low value lease b. Low value lease 4. Under al circumstances 2. Ashort-term lease is defined as a, Twelve months or less &. Twelve-month lease with a purchase option b. Siemonths or less 4. Two-year lease wth option to terminate 3. Which statement i true about low value ease? nn) helen nde eet based on he valu ofthe ase when new reads of the age of the asset The term of alow value lease may be more than twelve months An underlying asset doesnot qualify as low value lease ifthe nature of the asset is such that the aset is typically not of low value when new a, Allof these statements are true about lw value lease 4. Under IFRS 16a lessee is require to account for allleases as finance lease and recognize a, Right of use asset and lease iabilty —_—_c.-Lease lability but rot right of use asset Right of use asset but not lease labity Neither right of use asset nor lease ability 5. The costaf ght of us asset comprises al, except 2. The present value of lease payments, Lease payment made to lessor on or before commencement date €._ nila rec cost incurred byosece 4. Estimated cost of dismantling and restoring the underyng aset for which the lease has no present obligation 6. What is the cost basis of an asset acquired by a lease which is in substance an installment purchase? 2. the net realizable value of the asset determined atthe date of the lease agreement plus the sum ofthe future minimum lease payments under the lease . the sum ofthe futute minimum lease payments under the lease & the present value ofthe amount of the future minimum lease payments under the lease discounted at an appropriate rate 4. the present value ofthe market price ofthe asset discounted at an appropriate rate as an amount tobe received atthe end of the lease 7. Under PFRS 16, minimum lease payments may include a. Bargain purchase option ¢. Periodic rental payments . Guaranteed residual value 4) Any ofthese 8. The interest rate implicit inthe lease isthe discount rate that causes the aggregate of the present Value of the minimum lease payments and the unguaranteed residual value to be equal tothe Fair value ofthe ease asset Fair value ofthe lease asset and intial direct costs of the lessor Fair value of the ease asset and intial direct costs of the lessee Gross investment in the lease 9. In computing depreciation ofa right of use asset, the lessee should subtract, ‘A guaranteed residual value and depreciate over the life of the asset ‘Aguaranteed residual and depreciate over the term of the lease ‘An unguaranteed residual value and depreciate over the lfe of the asset ‘An unguaranteed residual value and depreciate over the term of the lease 10. The concept that is principally used to classify leases into operating and finance from the point of View ofthe lessoris, 3. Completeness «. Prudence Neutrality 4d Substance over form 11. The classification ofa lease from the point of view of the lessor is normally carried out Page | 109PINNACLe a, Atthe end ofthe lease term c. When the entity deems it necessary by Atthe inception ofthe lease 4. Altera “cooling of” period of one year 12, The basic accountng issue fora lessor is Revenue recognition during the lease term b. Expense recognition during the lease term Computing depreciation over the lease term 4. Determination of te cost of the leased asset 13. Under PFRS 16 lesors are required to account for lease receipts fom operation leases as '. Revenve, atthe end ofthe lease term . Income, on inception date ofthe lease & Income, ona straight-line basis over the ease term 4. Revenue, ona reducing balance bass over the lease term 14, when shoulda lessor recognize in income a nonrefundable lease bonus pad by 2 lessee in an operating lease? 2. When received . Atthe lease expiration b. tthe inception ofthe lease 4, Over the lease term 15. As an inducement to enter 2 lease, a lessor granted 2 lessee 12 months of free rental under a 5- year operating lease. The lease was effective on January 1, 2020 and provides for monthiy rental payments to begin January 1, 2022. The lessee made the frst rental payments on December 31, 2020. nits 2020 income statement, the lessor should report rental revenue in an amount equal Zero Cash received during 2020 COne-fifth ofthe total cash to be received over the life ofthe lease (One -fourth of the total cash to be received over the life ofthe lease 16. Which ofthe folowing i a correct statement of ene ofthe lease capitalization criteria from the pont of view ofthe esor? 2. The ease contains a purchase option reasonable certain . The ease transfers ownership ofthe property othe lessor losseo The ease terms equal to or more than 75% ofthe economic feof the property 4. The minimum lease payments equal or exceed 90% ofthe far-value ofthe property v 17, Which isthe correct accounting treatment 2. Treat as 3 noncurrent asset equal £0 net investment in lease. Recognize all france payments in income statement b. Treat as a receivable equal to gross amount receivable on lease. Recognize finance payments in cash by reducing debt €) Treat a a receivable equal to net investment inthe lease, Recognize finance payment by reducing debt and taking interest to income statement 4. Treat asa receivable equal to net investment inthe lease, Recognize finance payments in cash by eeduction debt a finance lease inthe accounts of a lessor? 418, Which ofthe following statements in relation to intial direct costs is correct? a. Ina cirect financing lease, inital cect cost are added tothe net investment inthe lease b. Inasalestype lease, inal direct costs are expensed inthe year of ineurtence € For operatinglease ntl direct costs are deferred and allocated over the lease term 8: Allofthe statements are correct 19. Which ofthe following statements characterizes sales type lease? a. The lessor recognizes only interest revenue over the life of the asset b. The lessor recognizes only interest revenue over the lease term &_ The lessor recognizes a dealers proft at lease inception and interest revenue over the lease term 4. The lessor recognizes a dealer’s profit at lease inception and interest revenue ove the asset fe 20. Under salesype lease 3. The ae price includes the present value ofthe unguarantced residual value BL The gross profits the same whether the residual value is guaranteed or unguaranteed Page | 110PINNACLe c._ The present value of guaranteed residual is deducted to determine the cost af goods sold d. None of these 21, Gross investment in the lease is the Aggregate of the minimum lease payments under a finance lease of the lessor and any lunguaranteed residual value accruing to the lessor The minimum lease payments under a finance lease ofthe lessor Present value of minimum lease payments under a finance lease of the lessor and any Unguaranteed residual value 4. Present value of the minimum lease payments under a finance lease ofthe lessor 22. Which of te following would not be included in the lease receivable account? 2. Abargain purchase option . Unguaranteed residual value b. Guaranteed cesidual value 4, Allwould be included 23. Which of te following statements characterizes lessor accounting for residual values? 3. Guaranteed residual values are included in the gross investment amount, but unguaranteed residual values ate excluded from the gross ievestment b. Unguaranteed residual values are included in the gross investment amount, but fuaranteed residval values are excluded from the gross investment Guaranteed residual values and unguaranteed residual values are excluded from the gross investment & Guaranteed residual values and unguaranteed residual values are included inthe gross investment 24, Under a finance lease that includes a bargain purchase option, how is depreciation on the asset Under lease recognized by Lessor Lessee Not recognized Depreciate over lease term Not recognized Depreciate over remaining life Depreciate over remaining life Depreciate over remaining life Depreciate over remaining life Not recognized 25. Ima sale and leaseback arrangement, the lessee is also 2. The new owner of he property Ell The seller b. The buyer &. Athi party guarantor 26. The lessor must classify a sale-and-leaseback arrangement as a(n) 2. Operating ease or 2 finance lease BBoirect financing lease or an operating ease . Operatinglense ora sales-tye lease Direct financing lease ora sales-type lease 27, Alease transaction that involves the sale ofan asset that is then leased back tothe seller forall or par of its remaining economic fe is known as Asie and leaseback & Anovated ease b. An operating lease 4. leveraged lease PROBLEMS, 41. Jackeline Corporation isin the business of leasing new sophisticated computer systems. As alessor fof computers, it purchased a new system on December 31, 2021. The system was delivered the same day (by prior arrangement) to X Company, 2 lessee. The following information are related to the lease transaction: Cost of system to the company 550,000 Estimated useful ite and lease term B years Expected residual value (unguaranteed) 40,000 ‘The company’s implicit rate of interest DK X's incremental borrowing rate 10% Date of frst lease payment Dec. 31, 2021 ‘Additional information is as follows: ‘+ -Atthe end ofthe lease, the system will revert to the company ‘+ Xis aware of the company’s rate of implicit interest ‘©The lease rental consists of equal annual payments Page | 111PINNACLe Question 1: The annual lease payment under the lease i a. Pi10,717 c. P102,665, by 95,350, 6. 91,664 {Question 2: The total financial ever tobe earned by the lessor over the lease termis a. 7257,600 . P271320, b pie3a12 4. 335,736 Question 3 The interest income tobe recognized by the lessor in 2022s, a. 53,680, , 54,486, b. 52,714 &. 52547 Question 4: The total expenses related tothe lease that will be recognized by the lessee in 2022 is 2. P124,468 c. P112,630 b. 130,792 4) P113278 Question 5: The amount to be reported unde current liabilities as Hablity under finance lease as of December 31, 2022's 2. 760239 «. P3571 bi, pager 4. 764.963 Shela Enterprises has a long-standing policy of acquiring company equipment by leasing, Early in 2021, the company entered into a lease fora new miling machine. The lease stipulates that annual payments will be made for 5 yeas. The payments are to be made in advance on DRESAEBESH of | January 1 tach yer, Atte end of the S:year period, it may purchase the machine. The estimated economic (not life of the equipment is 12 years. The company uses the calendar year for reporting purposes and 4231) straight-line deprecation for other equipment. In adltion, the folowing information about the lease is also avaiable Annual lease payments {incucing executory costs of P5,000) 60,000 5,000 Purchase option price 725,000 Estimated far value of machine after 5 years P7500 RVG = excluded because theres Implicit rate 0% option Date of frst ease payment Jan. 4, 2021 Question 1: Amount tobe capitalized as an asS88 1 the lease ofthe millng machine a. 729,305, &P204.808 b. p224,017 4. °275,913 Question 2: ibilty under finance lease a5 of December 31,2021 3. P130519 c. P136,780 b. Piszass 4. P188868 Note: Answer should be letter B: P153,855. {Question 3: Amount to be reported undercurrent lables a nity under finance lease as of Decemoer 31,2021 a P39616 «. Pa1.908 &. parzz 4. P3603 ‘Question 4: Interest expense for the year 2021 a. 17435 &. 16.902 bi, Pi8.987 4. Po ‘Question 5: Depreciation expense forthe year 2021 Page | 112PINNACLe ay 20,406 . Pie6se b. pis.i17 @. ag.74 “Mikelle Company, a lessor of office machines, purchased a new machine for P6,000,000 on January 41, 2021, which was leased the same day to X. The machine will be depreciated PS0,000 per year. ‘The lease is for a four-year period expiring January 1, 2025, and provides for annual rental payments of P1,000,000 beginning January 1, 2021. Additionally, x paid P640,000 to the company as alease bonus. In its 2021 income statement, what amount of revenue and expense should the company report on this leased asset? Remmi Exvense fren Expenea a P0000 FO P1,160,000 350,000 » PL16000 Po 4. P1,640,000 550,000 Jane Company purchased a tractor on January 1, 2021 at 2 cost of P1,600,000 for the purpose of leasing i, The tractor i estimated to have 2 useful life of 5 years with scrap of P100,000, Depreciation ison a straight line basis. On April, 2021, it entered into 2 lease contrac forthe lease ofthe tractor for aterm of two years upto March 31,2023, The lease fees P50,000 monthly and the lessee paid P500,000, the lease for one year. The company paid P120,000 commission associates with negotiating the lease, P15,000 minor repairs, and P20,000 transportation ofthe tractor tothe lessee during 2021. The company should report net cent revenue fr the year 202% at a. P160,000 & 80,000 . 235,000 4. 85,000 An entity isa dealer in equipment and uses leases to facilitate the sale ofits product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor. On January 1, 2021, an equipment is leased to a lessee with the following information: Cost of equipment to the entity 3,500,000 Fair value of equipment 5,500,000 Residual value ~ unguarantees 600,000 Initial direct cost 200,000 Annual rental payable in advance 300,000 Useful life and lease term B years Innplit interest rate 12% PV of 1 at 12% for 8 periods 40 PV ofan ordinary annuity of at 12% for 8 periods 497 PVot an annuity due of 1 at 12% or 8 periods 5.56 Firstlease payment January 1,202 Question 1: What isthe gross investment inthe lease? @. P7,800,000 «. 6,600,000 b. P7,200,000 4. 6,900,000 Question 2: What s the net investment inthe lease? 5,008,000 5,500,000 Bi 5,248,000 3. 5,740,000 Question 3: What s the total financial revenue? a. 2,196,000 . 2,796,000 4. 1,956,000 {Question 4: What amount shouldbe recognized as interest income for 2021? 3. ?600,480 c. 7536,760 b. P492,480 521,260 Question 5: What amount of cost of goods sold should be recognized in recording the lease? a. 3,260,000 . P3,740,000 3,500,000 8h? 3,460,000 Page | 113