FAR LEASES

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RELATED STANDARD: PFRS 16 - LEASES
TOPIC OUTLINE

LECTURE NOTES
BASIC CONCEPTS
Under PFRS 16, LEASE is a CONTRACT or part of a contract that conveys the right to use an underlying
asset for a period of time in exchange for consideration.
In a lease contract, the parties are:
 LESSEE – The entity that obtains the right to use an underlying asset for a period of time in exchange
for consideration.
 LESSOR – The provides the right to use an underlying asset for a period of time in exchange for
consideration.
RIGHT TO CONTROL THE USE OF THE ASSET
An entity has the right to control the use of an identified asset if it has both of the following throughout the
period of use:
 The right to obtain substantially all of the economic benefits from the use of the identified
asset.
The customer can obtain substantially all of the economic benefits from the use of the asset by having
EXCLUSIVE USE of the asset throughout the period.
 The right to direct the use of the identified asset.
A customer has the right to direct use of the asset when the customer has the right to DIRECT HOW
and FOR WHAT PURPOSE the asset is used throughout the period of use.
IDENTIFIED ASSET
An identified asset is requirement for a contract of lease to exist. An asset can be identified by being
EXPLICITLY specified in a contract or IMPLICITLY specified when made available to the customer.
NOTES:
 PORTIONS OF ASSETS: A portion of an asset is an identified asset if it is physically distinct. If not
physically distinct, the portion is not an identified asset, unless it represents substantially all of the
capacity of the asset thereby providing the customer the right to obtain substantially all of the
economic benefits from the asset.
 SUBSTANTIVE SUBSTITUTION RIGHTS: An asset is not an identified asset if the supplier has the
substantive right to substitute it throughout the period of use.
LEASE TERM
PFRS 16 defines lease term as the NON-CANCELLABLE period of for which the lessee has the right to use
the underlying asset together with both:
 Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that
option.
 Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise
that option.
ACCOUNTING FOR LEASES – LESSEE
Under PFRS 16, a lessee shall account the lease by recognizing a LEASE LIABILITY and RIGHT-OF-USE
ASSET at the commencement date.
Simply stated, the general accounting of leases on the lessee’s perspective is FINANCE LEASE.
On the other hand, a lessee may elect not to apply the FINANCE LEASE MODEL and make an accounting
policy election to apply the operating lease model in two OPTIONAL EXEMPTIONS.
1) SHORT-TERM LEASE
This is a lease that has a term of 12 MONTHS OR LESS at the commencement of the lease.
NOTE: A lease that contains a purchase option is NOT a short-term lease. The election of short-term
lease is made based on the class of underlying asset to which the right of use relates.
2) LOW VALUE LEASE
The assessment of value is based on the value of the asset when it is new, regardless of the age of
the asset being leased.
Typically, low value underlying assets include personal computers, office furniture and telephones.
NOTE: Low value asset is a matter of PROFESSIONAL JUDGMENT
MEASUREMENT OF LEASE LIABILITY
INITIAL MEASUREMENT
The lease liability is initially measured at the PRESENT VALUE of the LEASE PAYMENTS that are not yet paid
as at the commencement date.
Lease payments include:
 Fixed payments less any lease incentives receivable
 Variable lease payments
 Amounts expected to be payable by the lessee under residual value guarantees
 Exercise price of a purchase option if the lessee is reasonably certain to exercise that option
 Termination penalties if the lease term reflects the exercise of a termination option
NOTE: Executory costs are EXPENSED IMMEDIATELY when incurred.
The lease payments above shall be discounted using the IMPLICIT INTEREST RATE in the lease. If that rate
is not readily determinable, the lessee’s INCREMENTAL BORROWING RATE is used.
IMPLICIT INTEREST RATE: The rate that causes the present value of the lease payments and
the unguaranteed residual value to equal the fair value of the
underlying asset and initial direct costs of the lessor.
INCREMENTAL BORROWING RATE: The rate of interest that the lessee would have to pay to borrow
funds necessary to obtain a similar asset over a similar term and
similar security.
SUBSEQUENT MEASUREMENT
The lease liability is subsequently measured similar to an AMORTIZED COST financial liability.
MEASUREMENT OF RIGHT-TO-USE ASSET
INITIAL MEASUREMENT
The right-of-use asset is initially measured at COST. The cost comprises the following:
 The amount of the initial measurement of the lease liability
 Any lease payments made at or before commencement date, less any lease incentives received
 Any initial direct costs incurred by the leases
 The present value of any decommissioning and restoration costs for which the entity has incurred an
obligation
SUBSEQUENT MEASUREMENT
The right-of-use asset is subsequently measured under COST MODEL, which is COST LESS ANY
ACCUMULATED DEPRECIATION AND IMPAIRMENT LOSS.
EXEMPTIONS FOR SUBSEQUENT MEASUREMENT
 If the asset relates to a class of PPE that is measured under the REVALUATION MODEL, the asset may
be measured under REVALUATION MODEL.
 If the asset meets the definition of an investment property and the entity uses the FAIR VALUE
MODEL, the asset is measured under FAIR VALUE MODEL.
DEPRECIATION
PFRS 16 provides that the lessee shall depreciate the right-of-use asset over the USEFUL LIFE OF THE
UNDERLYING ASSET under the following conditions:
 The lease contract TRANSFERS OWNERSHIP to the lessee by the end of the lease term.
 There is a reasonable certainty that the lessee will exercise a PURCHASE OPTION.
An any other case, the lessee depreciates the underlying asset over the shorter of the asset’s useful life
and the lease term.
Depreciation starts from the commencement date of the lease.

OTHER ACCOUNTING ISSUES

1) SEPARATING THE COMPONENTS OF A CONTRACT
An entity accounts for each lease component of a contract separately from the non-lease components
of that contract.
A lessee allocates the consideration in the contract to each lease component based on the RELATIVE
STAND-ALONE PRICE of the lease component and the aggregate stand-alone price of the non-lease
components.
2) VARIABLE LEASE PAYMENTS
The accounting for variable lease payments depends on the nature of variability.
Type of Variable Payment Initial Accounting Subsequent Accounting
Include in lease liability and Adjust lease liability and
right-of use asset based on right-of-use asset when the
Based on index or rate
the level or rate at the revised index or rate changes
commencement date the lease payments
Recognized as expense when
Others (based on sales or usage) Exclude from lease liability event or condition that
and right-of-use asset triggers payment occurs
Treat as fixed lease
In-substance fixed payments Treat as fixed lease payments
payments
3) GUARANTEED RESIDUAL VALUE
 Residual value guarantee is a guarantee made to a lessor by a party unrelated to the lessor that the
value of an underlying asset at the end of a lease will be at least a specified amount.
As to the lessee, a residual value is guaranteed if it is:
 Guaranteed by the lessee or
 Guaranteed by a party related to the lessee.
When a lessee accounts for a residual value, this presupposes that the asset will REVERT BACK to the
lessor at the end of the lease term. If the asset does not revert back to the lessor, the residual value
is not guaranteed because it inures to the benefit of the lessee rather than the lessor.
4) LEASE MODIFICATIONS
PFRS 16 provides that the lessee shall account for the lease modification as a separate lease under
the following conditions:
 The modification increases the scope of the lease by adding the right to use an additional
underlying asset.
 The rental for the lease modification increases by an amount commensurate with the increase in
scope of equivalent to the current market rental.
5) PRESENTATION
RIGHT-OF-USE ASSET (NON-CURRENT ASSET)
This asset is presented either:
 Separately from other assets or
 Together with other assets as if they were owned, with disclosure of the line items that include
the right-of-use assets.
LEASE LIABILITY (CURRENT LIABILITY AND NON-CURRENT LIABILITY)
This liability are presented either
 Separately from other liabilities
 Together with other liabilities, with disclosure of the line items that include the lease liabilities
ACCOUNTING FOR LEASES – LESSOR
Lessor accounting under PFRS 16 is substantially the same as the old lease standard, PAS 17. PFRS 16
provides that the lessor shall classify leases as either an operating lease or a finance lease.
Under PFRS 16, among others, any of the following situations would normally lead to a lease being
classified as a finance lease:
a. The lease transfers ownership of the leased asset to the lessee at the end of the lease term.
b. The lessee has an option to purchase the asset at a price which is expected to be sufficiently lower
than the fair value at the date the option becomes exercisable.
c. The lease term is for the major part of the economic life of the asset even if title is not transferred.
Under US GAAP, "major part" means at least 75% of the economic life of an asset.
d. The present value of the minimum lease payment amounts to substantially all of the fair value of the
leased asset at the inception of the lease.
Under US GAAP, "substantially all" means at least 90% of the fair value of the leased asset.

PFRS 16 also provide that, individually or in combination, the following situations could also lead to a lease
being classified as finance lease:
a. The leased asset is of a specialized nature such that only the lessee can use it without major
modification.
b. If the lessee cancels the lease, the lessor's losses associated with the cancelation are borne by the
lessee.
c. Gains or losses from fluctuation in the fair value of the residual fall to the lessee.
d. The lessee has the ability to continue the least for a secondary period at a rent which is substantially
lower than market rent.
INCEPTION AND COMMENCEMENT DATE
Inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the
parties to the principal provisions of the lease.
Accordingly, this is the date:
 When a lease is classified as either an operating lease or a finance lease.
 When the amounts to be recognized at the commencement of the lease are determined for a finance
lease.
Commencement of the lease is the date from which the lessee is entitled to exercise its right to use the
leased asset. In other words, the commencement of the lease is the date of initial recognition of the assets,
liabilities, income or expenses resulting from the lease.
On the part of the lessor, a finance lease is either:
 Direct financing lease
 Sales type lease
The main difference between the two is the presence or absence of a manufacturer or dealer profit or loss.
DIRECT FINANCING LEASE
The lessor in a direct finance lease is actually engaged in the financing business. Thus, this type of lease is
an arrangement between a financing entity and a lessee.
The income of the lessor is INTEREST INCOME only.
The following terms are used in a direct finance lease:
 Gross investment in the lease - the gross investment in the lease is equal to the gross rentals for the
entire lease term plus the absolute amount of the residual value, whether guaranteed or
unguaranteed. Actually, this is the amount debited to lease receivable.
 Net investment in the lease - the net investment in the lease is equal to the cost of the asset plus any
initial direct cost incurred by the lessor.
 Unearned interest income - the unearned interest income is the total financial revenue of the lessor
which is the difference between the gross investment and net investment in the lease.
 Initial direct cost - in a direct financing lease, the initial direct cost incurred by the lessor is added to
the cost of the asset to get the net investment in the lease. This would effectively spread the initial
direct cost over the lease term and reduce the amount of interest income. Accordingly, the interest
rate implicit in the lease is recomputed so as to include the initial direct cost in the measurement of
the lease receivable.
RESIDUAL VALUE
Unlike for lessees who account for guaranteed residual value only, lessors account for BOT GUARANTEED
AND UNGUARANTEED RESIDUAL VALUES, provided the asset REVERTS back to the lessor at the end of the
lease term.
As to the lessee, a residual value is guaranteed if it is:
 Guaranteed by the lessee or
 Guaranteed by a party related to the lessee.
 Guaranteed by a third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee.
SALES TYPE LEASE
The lessor in a sales type lease is actually a manufacturer or dealer that uses the leases as a means of
facilitating the sale of product.
The income of the lessor includes INTEREST INCOME and DEALER PROFIT OR LOSS.
The following terms are used in a direct finance lease:
 Gross investment - This is equal to the gross rentals for the entire lease term plus the absolute
amount of the residual value, whether guaranteed or unguaranteed.
 Recall that this is the same definition of gross investment in a direct financing lease.
 Net investment in the lease - This is equal to the present value of the gross rentals plus the present
value of the residual value, whether guaranteed or unguaranteed.
 Unearned interest income - This is the total financial revenue of the lessor which is the difference
between the gross investment and net investment in the lease.
 Sales — The amount is equal to the net investment in the lease or fair value of the asset, whichever is
lower.
 Cost of sales - This is equal to the cost of the asset sold plus the initial direct cost incurred by the
lessor.
 Gross profit - This is the usual formula of sales minus cost of sales.
 Initial direct cost - This amount is expensed immediately in a sales type lease as component of cost of
sales.
CLASSIFICATION OF LAND AND BUILDING LEASE
When classifying a lease on land and building, an entity normally considers the land and building elements
separately.
A land lease with a lease term of several decades or longer may be classified as finance lease even if title
will not pass to the lessee at the end of the lease term.
The minimum lease payments are allocated between the land and building elements in proportion to the
relative fair value of the leasehold interests in the land and building elements at the inception of the lease.
If the lease payments cannot be allocated reliably between the two elements, the entire lease is classified
as a finance lease, unless it is clear that both elements are operating leases.
OPERATING LEASE
An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to
ownership of an underlying asset.
The accounting for operating leases is STRAIGHT-FORWARD. The lessor recognizes the lease payments as
income on a straight-line basis over the lease term, unless other systematic basis is more representative of
the patter in which benefit from the use of the underlying asset is diminished.
This accounting treatment of the lessor is the same for the accounting treatment of lessees for operating
leases.
The following items are under consideration for operating leases:
1) INITIAL DIRECT COSTS
Initial direct costs are often incurred by the lessor and include amounts such as commissions, legal
fees and internal costs that are incremental and directly attributable to negotiating and arranging a
lease.
Initial direct costs incurred by lessor in an operating lease shall be added to the carrying amount of
the leased asset and recognized as an expense over the lease term on the same basis as the lease
income.
2) DEPRECIATION
The leased asset remains the asset of the lessor under an operating lease. Therefore, the lessor
continues to depreciate it.
3) LEASE BONUS
Any lease bonus received by the lessor from the lessee is recognized as unearned rent income to be
amortized over the lease term.
A lease bonus paid by the lessee to the lessor in addition to the periodic rental is treated as prepaid
rent expense by the lessee to be amortized over the lease term.
4) SECURITY DEPOSITS
Any security deposit refundable upon the lease expiration shall be accounted for as liability by the
lessor.
Any security deposit refundable upon the lease expiration is accounted for as an asset by the lessee.
SALE AND LEASEBACK TRANSACTIONS
A sale and leaseback transaction is an arrangement whereby one party sells a property to another party
and then immediately leases the property back from its new owner.
This transaction results to a scenario wherein the seller becomes a seller-lessee and the purchaser, a
purchaser-lessor.
To account for these transactions, both the seller-lessee and buyer-lessor determine whether the transfer
qualifies as a sale based on the requirements for satisfying a performance obligation in PFRS 15.
TRANSFER QUALIFIES AS A SALE
If the transfer qualifies as a sale under PFRS 15:
 The seller-lessee shall:
o 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 and
o Recognize only the amount of any gain or loss that relates to the rights transferred to the
buyer-lessor
 The buyer-lessor shall account for the purchase of the asset applying applicable standards and for the
lease applying the lessor accounting under PFRS 16.
The following adjustments shall be made to measure the sale proceeds at fair value if the sales price is not
equal to the fair value of the asset or if the lease payments are not at market rates:
 Any below-market terms shall be accounted for as a prepayment of lease payments.
 Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor
to the seller-lessee.

The adjustment is measured based on the more readily determinable of:

 The difference between the fair value of the consideration for the sale and the fair value of the asset.
 The difference between the present value of the contractual payments for the lease and the present
value of payments for the lease at market rates.

TRANSFER OF THE ASSET IS NOT A SALE

If the transfer does not qualify as a sale, the parties shall account for it as a financing transaction.
Accordingly,
 The seller-lessee continues to recognize the asset and accounts for the amounts received as a
financial liability under PFRS 9.
 The buyer-lessor does not recognize the transferred asset and accounts for the amounts paid as a
financial asset under PFRS 9.
 DISCUSSION EXERCISES
STRAIGHT PROBLEMS
FINANCE LEASE – LESSEE
1. On January 1, 2020, TBH CORP. entered into a 4-year lease agreement with another entity for
machine. Lease payment is P200,000 payable annually starting on January 1, 2020. TBH knows that
the lessor expects a 10% return on the lease. TBH has a 12% incremental borrowing rate. The
machine is expected to have an estimated useful life of 5 years and a residual value of P50,000. The
lease agreement contained a purchase option at P100,000 exercisable at the end of the lease term. It
is reasonably certain as of inception of the lease that TBH will exercise the option in the future. TBH
uses the straight-line method of depreciation.
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1,
2020?

(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31,
2020?

(3) Provide the journal entry after the lease-term when the purchase option is exercised.

(4) Provide the journal entry after the lease-term when the purchase option is not exercised.

2. OTW CORP. leased factory equipment on January 1, 2020 with the following information:
Fixed annual payment at the end of each year P500,000
Lease term 4 years
Useful life of equipment 5 years
Implicit rate 10%.
OTW guaranteed a 100,000 residual value on December 31, 2023 to the lessor.
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1,
2020?

(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31,
2020?

(3) Determine the current and non-current portion of the carrying amount of the lease liability on
December 31, 2020.

(4) Assuming the fair value of the underlying asset on December 31, 2023 is P80,000, what is the
gain or loss on finance on 2023?
 (5) Assuming the residual value is unguaranteed; repeat the requirements in (1) and (2).

(6) Assuming that the residual value is unguaranteed and OTW actually purchased the equipment
on December 31, 2021 for P1,200,000, what would be the journal entry?

3. On January 1, 2020, BRB INC. leased an industrial machine with the following information:
Annual fixed payment at the end of each year P1,000,000
Initial direct costs 250,000
Lease incentive received 150,000
Residual value guaranteed 300,000
Lease term 5 years
Useful life of the machine 6 years
Implicit interest rate 8%
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1,
2020?

(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31,
2020?

4. On January 1, 2020, ILY CORP. enters into a 4-year lease of property with annual lease payments of
P100,000, payable at the end of each year. The contract states that lease payments will increase after
two years based on the increase in the Consumer Price Index (CPI) in the preceding 2 years. The rate
implicit in the lease is not readily determinable. ILY CORP.’s incremental borrowing rate is 12%. ILY
uses straight-line depreciation.
The CPIs are as follows:
January 1, 2020 125
January 1, 2022 150
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1,
2020?
 (2) What are the carrying amounts of right-of use asset and finance lease liability on December 31,
2020?

(4) What are the carrying amounts of right-of use asset and finance lease liability on December 31,
2022?

5. TOTGA CORP. entered into a lease of building on January 1, 2020 with the following information:
Annual rental payable at the end of each year P300,000
Lease term 5 years
Useful life of the building 20 years
Implicit rate of interest 9%
The lease contained an option for the lessee to extent the lease for a further 5 years.
At the commencement date, the exercise of the extension option is NOT reasonably certain because
the entity believes there is no economic incentive to do so.
After 3 years, on January 1, 2023, the lessee decided to extent the lease for a further 5 years.
New annual rental payable at the end of each year P400,000
New implicit rate 12%
REQUIREMENTS:
(1) Prepare an amortization table for 2020, 2021 and 2022.

(2) Remeasure the lease liability on January 1, 2023.

(3) Prepare a new amortization table for 2023 to 2029.

6. On January 1, 2020, an entity entered into a lease agreement with the following information:
Floor space 3,000 square meters
Annual rental payable at the end of each year 100,000
Implicit rate in the lease 10%
Lease term 8 years
On January 1, 2022 the entity and the lessor agreed to amend the original terms of the lease with the
following information:
Additional floor space 4,500 square meters
Increase in rental payable at the end of each year 200,000
Implicit rate in the lease 8%
The increase in the rental for the additional 4,500 square meters is equivalent to the current market
rent.
REQUIREMENT: Prepare the journal entries for 2020 and in 2022 pertaining to the lease modification.

FINANCE LEASE – LESSOR

7. TYL CORP. is in the business of leasing new hi-tech equipment. As lessor, TYL expects a 12% return
on the net investment. All leases are classified as direct financing lease. At the end of the lease term,
the equipment will revert to TYL CORP. On January 1, 2020, an equipment is leased to another
entity with the following information.
Cost of equipment to TYL CORP. 5,000,000
Residual value - unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
REQUIREMENTS:
(1) What is the gross investment in the lease?

(2) What is the net investment in the lease?

(3) What is the total interest income over the lease term?

(4) What is the interest income for the current year?

8. GG CORP. is a dealer in machinery. On January 1, 2020, a machinery is leased to another entity with
the following provisions:
Annual rental payable at the end of each year P800,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery 2,000,000
Initial direct cost 100,000
Estimated residual value 200,000
Implicit interest rate 10%
At the end of the lease term on December 31, 2024, the machinery will revert to GG CORP.
REQUIREMENTS:
(1) What is the gross investment in the lease?

(2) What is the net investment in the lease?

(3) What is the gross profit on sale?

(4) What is the interest income for the current year?

OPERATING LEASES
9. GGWP CORP. is engaged in leasing heavy equipment. On December 1, 2020, the entity bought a
second hand heavy equipment for P750,000. In December 31, 2020, the entity incurred P150,000 for
a major overhaul to put the equipment in good running condition. The equipment has an estimated
useful life of 5 years and the entity is using the straight-line method of depreciation.
On April 1, 2021, GGWP leased the equipment to TYL CORP. for 3 years up to March 31, 2024. GGWP
incurred insurance and property tax expense totaling P120,000 for 2021. Additionally, TYL paid
P300,000 to GGWP as a lease bonus to obtain the three-year lease. GGWP paid P90,000 commission
associated with negotiating the lease
The annual lease payments are shown in the following schedule:
March 31, 2022 P600,000
March 31, 2023 900,000
March 31, 2024 1,200,000
REQUIREMENTS:
(1) Prepare the journal entries on the books of the lessor and lessee for the year 2020, 2021 and
2022.

(2) What is to be reported as net rental income by GGWP for the year 2021?
SALE AND LEASEBACK
10. On January 1, 2020, SUS CORP. sells a building to PICION CORP. and simultaneously leases it back.
Additional information follows:
Fair value of the building 500,000
 Carrying amount of building 400,000
Remaining useful life of building 10 years
Lease term 5 years
Annual rent payable at the end of each year 50,000
Implicit interest rate equal to market rate 12%
The transfer qualifies as a sale
REQUIREMENT: Prepare the journal entries to account the sale and leaseback transaction on both
books of the seller-lessee and buyer-lessor under the following assumptions:
(a) The sale price is P500,000

(b) The sale price is P550,000

(c) The sale price is P450,000

(d) Assuming the transfer does not qualify as sale

11. On January 1, 2020, CB sold a building with remaining life of 25 years and immediately leased it back
for 3 years.
Sales price at fair value P5,000,000
Carrying amount 6,000,000
Annual rental payable at the end of each year 250,000
Implicit interest rate 8%
REQUIREMENT: Prepare the journal entries to account the sale and leaseback transaction on both
books of the seller-lessee and buyer-lessor
MULTIPLE CHOICE (THEORIES)
1. Which of the following is not one of the criteria when determining whether a contract is or contains a
lease?
A. Identified asset
B. Identified liability
C. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use.
D. Right to direct the use of the identified asset throughout the period of use.
2. In relation to PFRS 16, which of the following statements is false?
A. A portion of an asset being leased is an identified asset if it is physically distinct.
B. An underlying asset is not considered an identified asset for the purpose of applying the
accounting requirements of PFRS 16 if the supplier’s substitution rights is not substantive.
C. The current view on accounting for leases by lessees is that all leases are “on-balance sheet”
items, with very minimal exceptions.
D. Lease term includes periods covered by an option to extend the lease if the lessee is reasonably
certain to exercise that option.
3. According to PFRS 16, lease payments exclude which of the following?
(1) Purchase option that is unreasonably certain to exercise.
(2) Fixed amount of rentals
(3) Amounts expected to be payable by the lessee under residual value guarantees
(4) Cost for services and taxes paid by the lessee
A. 1 and 3 C. 2 and 4
B. 2 and 3 D. 1 and 4
4. In relation to PFRS 16, determine the correct statement.
A. Short-term lease is defined as twelve-month or less lease with a purchase option.
B. In relation to low-value lease, the value of an underlying asset is based on the value of the
asset when new regardless of the age of the asset.
C. A right of use asset is measured initially and subsequently at cost.
D. The discount rate used by the lessee in accounting for leases is interest rate implicit in the lease
or lessee’s incremental borrowing rate whichever is higher.

5. S1: Initial direct costs incurred by a lessee are expensed immediately.

S2: Initial direct costs are included to both the carrying amount of liability and asset.
S3: The right of use asset is generally reported within the non-current asset section as a separate
line item.
A. True, false, false C. False, false, true
B. False, true, true D. True, false, true
6. The lessee’s liability for a finance lease would be periodically reduced by
A. Lease payment plus the depreciation of the asset.
B. Lease payment less the depreciation of the asset.
C. Lease payment less the portion allocable to interest.
D. Lease payment
7. The lessor should report the leased asset under an operating lease and income therefrom as which of
the following?
A. The asset should be kept off the statement of financial position and the lease income should go
to reserves.
B. The asset should be kept off the statement of financial position and the lease income should go
to the income statement.
C. The asset should be reported in the statement of financial position according to its nature and
the lease income should go to reserves.
D. The asset should be reported in the statement of financial position according to its nature and
the lease income should go to the income statement.
8. Lease bonus under the operating lease
A. is amortized to income using the effective interest method.
B. is initially treated as unearned rent by a lessor.
C. is treated as an outright gain by a lessor.
D. is recognized in profit or loss over the remaining lease term using a very complex formula.
9. Which condition would require lease capitalization?
A. The lease does not transfer title to the lessee.
B. There is an uncertain purchase option.
C. The present value of the lease payments is significantly more than the fair value of the asset.
D. The lease term is below the useful life of asset.
10. Net investment in the lease is equal to the
A. Gross investment in the lease plus unearned finance income
 B. The present value of lease payments less the present value of any unguaranteed residual value
C. The present value of the lease payments.
D. The present value of lease payments plus the present value of any unguaranteed residual value.
11. Where there is a lease of land and building and the title to the land is not transferred, generally the
lease is treated as if
A. The land is finance lease and the building is a finance lease.
B. The land is an operating lease and the building is a finance lease.
C. The land is a finance lease and the budding is an operating lease.
D. The land is an operating lease and the building is an operating lease.
12. Initial direct cost incurred by a lessor in a sales type lease shall be
A. Charged to cost of sales in the first period of the lease term.
B. Deferred and allocated over the lease term on a straight line basis.
C. Charged to unearned interest income in the first period of the lease term.
D. Deferred and allocated over the lease term in proportion to the recognition of rent revenue.
13. Which of the following statements characterizes a 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.
C. The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease
term.
D. The lessor recognizes a dealer's profit at lease inception and interest revenue over the life of the
asset.
14. In a sale and leaseback transaction, which of the following statements is incorrect?
S1: If the transfer qualifies as a sale under PFRS 15, 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 and recognize only the amount of
any gain or loss that relates to the rights transferred to the buyer-lessor
S2: If the transfer does not qualify as a sale, the parties shall account for it as a financing
transaction.
A. S1 only C. Both statements
B. S2 only D. None from the statements
 QUIZZER (DO-IT-YOURSELF DRILL)
THEORIES
1. Lease payments under an operating lease shall be recognized as an income by the lessor on
A. Straight line basis over the lease term
B. Diminishing balance basis
C. Sum of units basis
D. Cash basis

2. Which statement characterizes an operating lease?

A. The lessee records depreciation and interest.
B. The lessee records a lease obligation.
C. The lessor transfers title of the underlying asset to the lessee for the duration of the lease term.
D. The lessor records depreciation and lease revenue.

3. All of the following situations would prima facie lead to a lease being classified as a finance lease,
except
A. Transfer of ownership to the lessee.
B. Option to purchase at a value below the fair value of the underlying asset.
C. The lease term is for a major part of the asset's life.
D. The present value of the lease payments is 50% of the fair value of the asset.

4. Entity A (customer) enters into a contract with Entity B (supplier) for the use of a data processing
equipment. According to the contract, Entity A shall operate the equipment only in accordance with
the standard operating procedures stated in the accompanying user’s manual. In assessing the
existence of a lease, does Entity A have the right to direct the use of the asset?
A. No, because the asset’s use is restricted.
B. Yes, because Entity A has the right to direct how and for what purpose the asset is used.
C. Yes, because the asset’s use is predetermined and Entity B is precluded from changing that
predetermined use.
D. Maybe yes, maybe no, but exactly I don’t know.

5. Which of the following is not one of the criteria when determining whether a contract is or contains a
lease?
A. Identified asset
B. Identified liability
C. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
D. Right to direct the use of the identified asset throughout the period of use

6. Which of the following statements is correct regarding the accounting for leases?
A. The lessor depreciates the leased asset under a finance lease.
B. The lessee depreciates the leased asset under a “short-term” or a “low-valued asset” lease.
C. When discounting lease payments the lessor and the lessee use the interest rate implicit in the
lease.
D. An entity can never be both a lessor and a lessee of a same leased asset.

7. According to PFRS 16, lease liabilities are presented in the lessee’s statement of financial position
(1) separately from the other liabilities of the lessee.
(2) together with other liabilities, with disclosure of the line items that include the lease liabilities.
A. 1 only C. Either 1 or 2
B. 2 only D. Neither 1 nor 2

8. According to PFRS 16, right-of-use assets are presented in the lessee’s statement of financial position
(1) separately from the other assets of the lessee.
(2) together with other assets as if they were owned, with disclosure of the line items that include
the right-of-use assets.
A. 1 only C. Either 1 or 2
B. 2 only D. Neither 1 nor 2

9. Which is correct regarding lease capitalization criteria?

A. The lease transfers ownership to the lessor.
B. The lease contains a purchase option.
C. The lease term is equal to at least 75% of the economic life of the underlying asset.
D. The lease payments are 90% of fair value of asset.

10. The accounting concept that is principally used to classify leases into operating and finance on the
part of lessor is
 A. Substance over form C. Neutrality
B. Prudence D. Completeness

11. Net investment in a direct financing lease is equal to

A. Cost of the asset
B. Cost of the asset plus initial direct cost paid by the lessor
C. Cost of the asset minus guaranteed residual value
D. Cost of the asset plus unguaranteed residual value

12. Which is the correct accounting treatment for a finance lease in the accounts of a lessor?
A. Treat as a noncurrent asset equal to net investment in lease and recognize all finance payments
in income statement.
B. Treat as a receivable equal to gross amount receivable on lease and recognize finance payments
in cash by reducing debt.
C. Treat as a receivable equal to net investment in the lease and recognize finance payments by
reducing debt and taking interest to income statement.
D. Treat as a receivable equal to net investment in the lease and recognize finance payments in
cash by reduction of debt.

13. As to the lessee, a residual value is guaranteed if it is:

(1) Guaranteed by the lessee
(2) Guaranteed by a related party to the lessee
(3) Guaranteed by a party unrelated to the lessee and lessor
A. 1 only C. 1, 2 and 3
B. 1 and 2 E. 1 and 3
C. 2 only

14. As to the lessee, a residual value is guaranteed if it is:

(1) Guaranteed by the lessee
(2) Guaranteed by a related party to the lessee
(3) Guaranteed by a party unrelated to the lessee and lessor
A. 1 only C. 1, 2 and 3
B. 1 and 2 E. 1 and 3
C. 2 only

15. S1: An asset is depreciated over its own useful life if the lease contract does not provide a transfer
of ownership or a reasonably certain purchase option.
S2: Advance rent is excluded from the initial balance of lease liability but included in the initial
measurement of right of use asset.
A. True, false C. False, false
B. False, true D. True, true

16. Which of the following is incorrect regarding the treatment of initial direct costs?
A. Initial direct costs incurred by a lessee under finance lease are included in the measurement of
lease liability and right of use asset.
B. Initial directs costs incurred by a lessor in an operating lease shall be added to the carrying
amount of the leased asset and recognized as an expense over the lease term on the same
basis as the lease income.
C. Initial directs costs incurred by a lessor in direct finance lease shall be added amount of lease
receivable to be presented in the statement of financial position.
D. Initial directs costs incurred by a lessor in a sales type lease is not presented in the statement of
financial position but only in the income statement.

17. Which of the following statements characterizes a 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.
C. The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease
term.
D. The lessor recognizes a dealer's profit at lease inception and interest revenue over the life of the
asset.

18. Which of the following statements is incorrect regarding the accounting of lessor on finance lease?
S1: The gross profit recognized in a sales type lease is the same whether the residual value is
guaranteed or residual value.
S2: Whether sales type lease or direct finance lease, the lessor derecognizes leased asset and
recognized net investment in the lease which is subsequently measured at amortized cost.
 S3: Whether sales type lease or direct finance lease, the computation of gross and net investment is
the same.
A. S1 only D. S2 and S3
B. S1 and S3 E. S2 only
C. S3 only

19. Initial direct costs incurred by the lessor under an operating lease
A. Are expensed outright.
B. Reduces income over the lease term.
C. Are capitalized and derecognized when the lease term is over.
D. Cause an adjustment to the implicit interest rate in the lease.

20. If a lease provides for the transfer of ownership over the leased asset or a purchase option that is
reasonably certain as to exercise
A. The lessor shall depreciate the leased asset over its useful life.
B. The lessee shall depreciate the leased asset over the shorter of the asset’s useful life and the
remaining lease term.
C. The lessee shall depreciate the leased asset over its useful life.
D. Both the lessee and the lessor shall depreciate the leased asset.

21. On a sale and leaseback transaction, which of the following statements is incorrect?
S1: In a sale and leaseback transaction, both the seller-lessee and buyer-lessor shall determine
whether the transaction qualifies as a sale under PFRS 15.
S2: The amount to be recognized by the seller-lessee as cost of right of use asset is the same
whether the selling price is at, below or above fair value.
A. S1 only C. Both statements
B. S2 only D. None from the statements

22. The primary difference between a direct financing lease and a sales type lease is the
A. Manner in which rental collections are recorded as rental income.
B. Depreciation recorded each year by the lessor.
C. Recognition of the manufacturer or dealer profit at the inception of the lease.
D. Allocation of initial direct costs incurred by the lessor over the lease term.

23. Under a direct financing lease, the excess of aggregate rentals over the cost of the underlying asset
should be recognized as income of the lessor
A. In increasing amounts during the term of the lease
B. In constant amounts during the term of the lease
C. In decreasing amounts during the term of the lease
D. After the cost of the underlying asset has been fully recovered through rentals

24. The excess of the fair value of underlying asset at the inception of the lease over the carrying amount
shall be recognized by the dealer lessor as
A. Unearned income from a sales type lease
B. Unearned income from a direct financing lease
C. Manufacturer profit from a sales type lease
D. Manufacturer profit from a direct financing lease

25. Which statement is true about low value lease?

S1: An underlying asset does not qualify as low value lease if the nature of the asset is such that the
asset is typically not of low value when new.
S2: The value of an underlying asset is based on the value of the asset on lease inception.
A. S1 only C. Both statements
B. S2 only D. None from the statements

26. The cost of right of use asset comprises all, except

A. The present value of lease payments
B. Lease payments made to lessor on or before commencement date
C. Initial direct cost incurred by lessee
D. Estimated cost of dismantling, removing or restoring the underlying asset for which the lessee
has no present obligation

27. The lease payments include all of the following, except

A. Periodic rentals
B. Termination penalty if the lease term reflects the termination option
C. Exercise price of a purchase option that is not reasonably certain to be exercised
D. Residual value guarantee of the lessee
28. Regarding the accounting for the residual value of a leased asset, which of the following statements is
incorrect?
A. A lessee accounts for a residual value only if it is guaranteed.
B. A lessor accounts for a residual value only if it is guaranteed.
C. A lessor accounts for a residual value whether guaranteed or not.
D. Both lessee and lessor will account for a residual value only if the leased asset reverts back to
the lessor.

29. Which of the following is correct regarding the accounting for operating leases?
A. A lessor under an operating lease may classify the lease as either direct operating lease or sales
type operating lease.
B. A lessor includes a rent collected in advance as part of the cost of the leased asset.
C. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as rent income is recognized.
D. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as depreciation expense is
recognized.

30. Security deposits that are refundable

A. are treated as unearned income by lessors under an operating lease.
B. are not discounted because they are normally of a short-term nature
C. are treated as receivable by lessees and as payable by lessors.
D. are discounted only by lessees but not by lessors
PROBLEMS
1. On January 2, 20x9, GGSS CORP. (lessee) entered into a 5-year lease for drilling equipment. GSS
recognized a lease liability of ₱240,000 at the commencement date. This amount includes the
₱10,000 exercise price of a purchase option. At the end of the lease, GGSS expects to exercise the
purchase option. GGSS estimates that the equipment's fair value will be ₱20,000 at the end of its 8-
year life. GGSS regularly uses straight-line depreciation on similar equipment. For the year ended
December 31, 20x9, what amount should GGSS recognize as depreciation expense on the leased
asset?
A. 48,000 C. 30,000
B. 46,000 D. 27,500

2. In the long-term liabilities section of its balance sheet at December 31, 20x9, ILY CORP. reported a
lease liability of ₱75,000, net of current portion of ₱1,364. Payments of ₱9,000 were made on both
January 2, 2x10, and January 2, 2x11. ILY's incremental borrowing rate on the date of the lease was
11% and the lessor's implicit rate, which was known to ILY, was 10%. In its December 31, 2x10,
balance sheet, what amount should ILY report as lease liability, net of current portion?
A. 66,000 C. 73,636
B. 73,500 D. 74,250

Use the following in answering the next item(s):

At the beginning of current year, ILYSM leased a machinery with the following information:
Annual rental payable at the end of each year 1,000,000
Residual value guarantee 500,000
Payment to lessor to obtain a long-term lease 300,000
Cost of dismantling and restoring the asset as required
by contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life of machinery 8 years
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

3. What is the initial lease liability?

A. 3,510,000 C. 4,010,000
B. 3,170,000 D. 4,000,000

4. What is the cost of right use asset?

A. 4,200,000 C. 3,810,000
B. 4,250,000 D. 3,900,000

5. What is the depreciation for current year?

A. 462,500 C. 850,000
B. 925,000 D. 965,000
6. What is the lease liability at year-end?
A. 2,510,000 C. 2,861,000
B. 3,159,000 D. 3,620,000

Use the following in answering the next item(s):

On December 31, 2019, GGWP leased equipment for 10 years. The entity contracted to pay P400,000
annual rent on December 31, 2019, and on December 31 of each of the next nine years.

The lease liability was recorded at P2,700,000 on December 31, 2019, before the first payment.

The equipment's useful life is 12 years, and the interest rate implicit in the lease is 10%. The entity
used the straight line method to depreciate all equipment.

7. In recording the December 31, 2020 payment, by what amount should the lease liability be reduced?
A. 270,000 C. 225,000
B. 230,000 D. 170,000

8. What amount should be reported as interest expense for 2020?

A. 270,000 C. 200,000
B. 230,000 D. 0

Use the following in answering the next item(s):

On January 1, 20x1, GG CORP. leased equipment to WP CORP. Information on the lease is shown
below:
Cost of equipment ₱ 1,200,000
Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of each year 400,000
Interest rate implicit in the lease 10%
Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting.

9. How much is the gross investment in the lease on January 1, 20x1?

A. 2,000,000 C. 1,200,000
B. 1,600,000 D. 1,800,000

10. How much is the net investment in the lease on January 1, 20x1?
A. 1,200,000 C. 1,394,740
B. 1,280,000 D. 1,474,741

11. How much is the total interest income (finance income) to be recognized by GG CORP. over the lease
term?
A. 205,260 C. 125,259
B. 235,260 D. 525,259

12. How much is the gross profit from the sale?

A. 114,740 C. 125,259
B. 194,740 D. 45,259

13. How much is the net profit from the sale?

A. 125,259 C. 194,740
B. 45,259 D. 114,740

14. As an inducement to enter a lease, SUS CORP. a lessor, grants PICION COR.., a lessee, nine months
of free rent under a five-year operating lease. The lease is effective on July 1, 20x5, and provides for
monthly rental of ₱1,000 to begin April 1, 20x6. In SUS’ income statement for the year ended June
30, 20x6, rent income should be reported as
A. 10,200 C. 3,000
B. 9,000 D. 2,550

Use the following in answering the next item(s):

On January 1, 2019, Jones Company entered into a lease for floor space with the following
information:
Floor space 5,000 square meters
Annual rental payable at the end of each year 200,000
Lease term 5 years
Implicit rate in the lease 10%
Present value of an ordinary annuity of 1 at
10% for 5 periods 3.7908
 On January 1, 2021, the lessee and the lessor agreed to amend the original terms of the lease with
the following information:
Floor space 3,750 square meters
Annual rental payable at the end of each year 150,000
Implicit rate in the lease 8%
Present value of an ordinary annuity of 1 at
8% for 3 periods 2.5771

15. What amount should be reported as lease liability on December 31, 2020 before the modification?
A. 758,160 C. 497,374
B. 633,976 D. 386,565

16. What amount should be recorded as termination gain or loss on January 1, 2021?
A. 42,478 gain C. 10,620 gain
B. 42,478 loss D. 10,620 loss

17. What amount should be recorded as increase in the lease liability due to the modification on January
1, 2021?
A. 386,565 C. 13,535
B. 373,030 D. 0

18. GGSS CORP. purchased a tractor on January 1, 2019 at a cost of P1,600,000 for the purpose of
leasing it.

The tractor is estimated to have a useful life of 5 years with residual value of P100,000. Depreciation
is on a straight line basis.

On April 1, 2019, Myriad entered into a lease contract for the lease of the tractor for a term of two
years up to March 31, 2021.

The lease fee is P50,000 monthly and the lessee paid P600,000, the lease fee for one year.

GGSS paid P120,000 commission associated with negotiating the lease, P15,000 minor repairs and
P10,000 transportation of the tractor to the lessee during the current year.

What amount of net rent revenue should be reported for the current year?
A. 160,000 C. 80,000
B. 235,000 D. 85,000

Use the following in answering the next item(s):

At the beginning of current year, OTW CORP. leased computer equipment to TBH CORP. under a direct
financing lease.

The equipment has no residual value at the end of the lease and the lease does not contain bargain
purchase option.

The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000. The
present value of an annuity due of 1 at 8% for 5 years is 4.312.
19. What is the total interest revenue that OTW will earn over the lease term?
A. 1,293,600 C. 516,000
B. 1,394,500 D. 750,000

20. What amount should be reported as interest revenue for the current year?
A. 258,720 C. 103,200
B. 198,720 D. 646,800

Use the following in answering the next item(s):

At the beginning of current year, LMAO CORP. sold a building with remaining life of 20 years and
immediately leased it back for 5 years.
Sale price at above fair value 20,000,000
Fair value of building 18,000,000
Carrying amount of building 10,800,000
Annual rental payable at the end of each year 1,500,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12%
for five periods 3.60
21. What amount should be reported as initial lease liability?
A. 5,400,000 C. 7,500,000
B. 3,400,000 D. 7,400,000
22. What is the cost of right of use asset?
A. 2,040,000 C. 2,000,000
B. 4,000,000 D. 3,000,000
23. What amount should be reported as gain on right transferred to the buyer-lessor?
A. 7,200,000 C. 5,600,000
B. 1,500,000 D. 5,840,000
24. What is the gross rental income of the buyer-lessor?
A. 1,500,000 C. 944,444
B. 2,000,000 D. 555,556
25. What is the depreciation of the building of the buyer-lessor?
A. 1,000,000 C. 900,000
B. 1,500,000 D. 500,000
26. FTW CORP., lessor, leased an equipment under an operating lease. The lease term is 5 years and the
lease payments are made in advance on January 1 of each year as shown in the following schedule:
January 1, 2014 1,000,000
January 1, 2015 1,000,000
January 1, 2016 1,400,000
January 1, 2017 1,700,000
January 1, 2018 1,900,000
On December 31, 2015, what amount should be reported as rent receivable?
A. 0 C. 800,000
B. 400,000 D. 1,400,000

Use the following in answering the next item(s):

TBH CORP. enters into a leasing agreement on January 1, 2013 for an item of equipment costing
P947,220. The lease agreement requires payment of five annual rents of P 250,000 each, payable in
arrears at the end of the respective years. After the end of the primary lease period, the lessee has
the right to purchase the asset at a bargain price of P 200,000. At the date of the lease agreement,
TBH is reasonably certain that it will exercise the right to purchase the equipment at the end of the
lease term. TBH believes that the equipment will last for 8 years and will have no residual value at
the end of that period. It depreciates assets of this type on the straight line method. TBH engages the
lessor to service the equipment, paying a servicing fee of P 50,000 per year. The lease agreement
provides for a clause on contingent rent in that if market interest rates go up by 1% per month, the
annual rent will be increased by P 10,000 per month. The effective rate that equates the present
value with the cost of the equipment is 14.6%. TBH incremental borrowing rate is 10%.

27. What amount of annual depreciation should TBH recognize related to the leased-asset?
A. P 118,402 C. P 189,440
B. P 149,440 D. P 214,390
28. What amount of interest expense should TBH Company recognize on December 31, 2017?
A. P 40,910 C. P 103,290
B. P 57,330 D. P 121,980

29. GGWP CORP., a dealer in machinery and equipment, leased equipment to LMAO CORP. on July 1, 2013.
The lease is appropriately accounted for as a sale by GGWP and as a purchase by LMAO. The lease is
for a ten-year period equal to the useful life of the asset expiring June 30, 2023. The first often equal
annual payments of P250,000 was made on July 1, 2013. GGWP had purchased the equipment for
P1,337,500 on January 1, 2013, and established a list selling price of P1,687,500 on the equipment.
The present value on July 1, 2013 of the rent payments over the lease term discounted at 12% was
P1,582,500. What amount of profit on sale and interest income should be recorded for the year ended
December 31, 2013, respectively?
A. 245,000 and 79,950 C. 350,000 and 79,950
B. 245,000 and 94,950 D. 350,000 and 94,950

Use the following in answering the next item(s):

On January 1, 2020, FTW CORP. enters into a 4-year lease of property with annual lease payments of
P50,000, payable at the end of each year. The contract states that lease payments will increase after
two years based on the increase in the Consumer Price Index (CPI) in the preceding 2 years. The rate
implicit in the lease is not readily determinable. The implicit rate of the lease is 12% but FTW CORP.’s
incremental borrowing rate is 10%. FTW uses straight-line depreciation with an estimated useful life
of 5 years.

In addition, the contract requires FTW to make an additional payment of 5% of excess sales over
P2,000,000. FTW expects its annual sales in the next 4 years to exceed P2,000,000 by P100,000.
The CPIs are as follows:
 January 1, 2020 250
January 1, 2022 300
30. What is the initial measurement of right-of use asset and finance lease liability on January 1, 2020?
A. P158,435 C. P151,865
B. P475,305 D. P455,595
31. What is the carrying amount of right-of use asset on December 31, 2020?
A. P113,899 C. P118,826
B. P121,492 D. P126,748
32. What is the carrying amount of lease liability on December 31, 2020?
A. P124,279 C. P120,088
B. P372,836 D. P360,266
33. What is the total amount of expense in relation to the finance lease transaction shall be presented in
2020 statement of profit or loss, assuming that the expected sales for the year were met?
A. P45,780 C. P56,190
B. P61,190 D. P72,190

34. What are the carrying amounts of finance lease liability on December 31, 2022?
A. P142,848 C. P53,568
B. P145,448 D. P54,543
35. What are the carrying amounts of right of use asset on December 31, 2022?
A. P72,013 C. P46,417
B. P75,333 D. P46,714

Use the following in answering the next item(s):

At the beginning of current year, SKL CORP. sold a building with remaining useful life of 30 years and
immediately leased it back for 5 years.
Sale price at below fair value P18,000,000
Fair value of building 20,000,000
Carrying amount of building 24,000,000
Annual rental payable at the end of each year 1,000,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12%
for 5 periods 3.60

36. What amount should be reported as initial lease liability?

A. 3,600,000 C. 4,800,000
B. 4,000,000 D. 0

37. What the cost of right of use asset?

A. 3,000,000 C. 5,760,000
B. 2,880,000 D. 6,720,000
38. What amount should be reported as loss on right transferred?
A. 4,000,000 C. 4,320,000
B. 2,880,000 D. 6,000,000

39. What is the net annual rent income of the buyer-lessor?

A. 400,000 C. 300,000
B. 200,000 D. 100,000

40. At the end of the current year, HBD INC. purchased a machinery that it had been leasing under a
finance arrangement. The leased asset and lease liability were originally recorded at P2,000,000. At
the time of the purchase, the accumulated depreciation on the leased asset was P800,000 and the
remaining balance of the lease liability was PI,300,000. The leased asset was purchased for
P1,440,000 cash. What amount is debited as cost of the machinery on the date of purchase?
A. 1,200,000 C. 1,440,000
B. 1,340,000 D. 2,000,000
- END OF HANDOUTS -