PRACTICAL ACCOUNTING 1

1. On January 1, 2014, Jane Company signed a 10-year operating lease

for office space at P960,000 per year. The lease included a provision
for additional rent of 5% of annual sales in excess of P5,000,000. The
entity's sales for the current year amounted to P6,000,000. Upon
execution of the lease, the entity paid P240,000 as a bonus for the
lease. What is the rent expense for the year ended December 31,
2014?
a. P1,010,000
b. P1,034,000
c. P1,250,000
d. P984,000
2. On December 1, 2014, Troy Company leased office space for five years
at P60,000 a month. On that date, the entity paid the lessor the
following amounts :
Rent security deposit
First month rent
Last month rent
Installation of new walls
and offices

80,000
60,000
60,000
360,000

What is the total expense relating to the utilization of office space for 2014?
a.
b.
c.
d.

120,000
140,000
60,000
66,000

3. On December 31, 2014, Jasper Company sold an equipment with an

estimated remaining useful life of 10 years. At the same time, the entity
leased back the equipment for 2 years. The leaseback is an operating
lease.
Sale price

7,500,000

Carrying amount

5,000,000

Fair value of equipment on date of sale

6,000,000

What amount of gain should be reported in the income statement for

2014?
a. 2,500,000
b. 1,500,000
c. 1,000,000
d. 1,750,000
4. On January 1, 2014, Kamahalan Company sold a machinery to another
entity. The entity leased back the machinery for 12 years for use in the
new farm that it is developing. The annual lease payment is P700,000
on January 1 of each year. The sale price of the machinery was
P5,000,000 while the carrying amount as of the date of sale was
Page 1 of 4

P3,500,000. The entity estimated that the remaining economic life of

the equipment is 15 years. The entity is a wholly owned subsidiary of a
US Company. It is required to follow US GAAP in the reporting package
for consolidation. What amount should be reported as deferred gain on
December 31, 2014 in the reporting package for consolidation?
a. 1,500,000
b. 1,375,000
c. 1,400,000
d. 0
5. On January 1, 2015, Baby Duck Company leased two automobiles for
executive use. The lease required the entity to make five annual
payments of P1,500,000 beginning January 1, 2014. At the end of the
lease term, December 31, 2018, the entity guaranteed the residual
value of the automobiles at P1,000,000. The lease qualified as a
finance lease. The interest rate implicit in the lease is 10% and present
value factors at 10% are as follows:
For an annuity due with 5 payments

4.17

For an ordinary annuity with 5 payments 3.79

Present value of 1 for 5 periods

.62

What is the finance lease liability immediately after the first required
payment?
a.
b.
c.
d.

4,412,500
5,375,000
6,062,500
4,805,000

6. On January 1, 2014, Bryan Company entered into a 6-year lease with a

lessor. Annual lease payments of P1,500,000 including annual
executory cost of P300,000 are payable at the end of each year. The
entity knows that the lessor expects a 10% return on the lease. The
entity has 1 12% incremental borrowing rate. The equipment is
expected to have an estimated useful life of 6 years. In addition, a third
party has guaranteed to pay the lessor a residual value of P500,000
ate the end of the lease. The present value of an ordinary annuity of 1
for 6 years at 10% is 4.35 and at 12% is 4.11. the present value of 1 at
10% for 6 periods is 0.56 and at 12% for 6 periods is 0.51. On
December 31, 2014, what is the principal amount of the lease
obligation?
a. 5,220,000
b. 4,542,000
c. 4,323,840
d. 4,850,000

7. On January 1, 2014, Kim Company entered into an 8-year lease for an

equipment. The entity accounted for the acquisition as a finance lease
for P6,000,000 which included a P600,000 guaranteed residual value.
At the end of the lease, the asset will revert back to the lessor. It is
estimated that the fair value of the asset at the end of the 10-year
Page 2 of 4

useful life would be P400,000. The entity used the straight line
depreciation. What amount should be recognized as depreciation
expense on the leased asset for 2014?
a. 675,000
b. 700,000
c. 540,000
d. 560,000
8. Kenneth Company acquired an asset costing P3,165,000. The asset is
leased on January 1, 2014 to another entity. Five annual lease
payments are due each December 31, beginning December 31, 2014.
The unguaranteed residual value of the asset at the end of the lease
term on December 31, 2018 is P500,000. The asset will revert back to
the lessor at the end of the lease term. The lessor's implicit interest
rate is 12%. The PV of 1 at 12% for 5 periods is .57 and the PV of an
ordinary annuity of 1 at 12% for 5 periods is 3.6. What is the annual
rental payment?
a. 879,166
b. 740,278
c. 800,000
d. 500,000
For items 9-13
BABYLABS Company is a dealer in equipment. On January 1, 2014, a
equipment was leased to another entity with the following provisions:
Annual rental payable at the end of
each year
Lease term and useful life of
machinery
Cost of equipment
Guaranteed residual value
Implicit interest rate
PV of an ordinary annuity of 1 for 5
periods at 12%
PV of 1 for 5 periods at 12%

1,500,000
5 years
4,000,000
500,000
12%
3.60
.57

At the end of the lease term on December 31, 2018, the equipment will
revert to the lessor. On such date, the fair value of the asset is P350,000. The
perpetual inventory system is used. The lessor incurred initial direct cost of
P200,000 in finalizing the lease agreement.
9. What
a.
b.
c.
d.

is the gross investment in the lease?

7,500,000
8,000,000
4,000,000
4,500,000

10.

What is the net investment in the lease?

5,400,000
5,685,000
4,000,000
3,500,000
What is the total finance lease revenue?

a.
b.
c.
d.
11.

Page 3 of 4

a.
b.
c.
d.
12.
a.
b.
c.
d.
13.
a.
b.
c.
d.

2,315,000
1,815,000
2,100,000
2,600,000
What is the interest income to be recognized for 2014?
682,200
648,000
900,000
960,000
What amount should be reported as profit on sale for 2014?
1,485,000
1,685,000
3,500,000
4,000,000

14.
Dan Company decided to enter the leasing business. The entity
acquired a specialized packaging machine for P2,300,000. On January
1, 2014, the entity leased the machine for a period of six years, after
which title to the machine is transferred to the lessee. The six annual
lease payments are due each January 1 and the first payment was
made on January 1, 2014. The residual value of the machine is
P200,000. The lease terms are arranged so that a return of 12% is
earned by the lessor. The present value of 1 at 12% for six periods is
0.51, the present value of an annuity in advance of 1 at 12% for six
periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six
periods is 4.11. what is the annual lease payment payable in advance
required to yield the desired return?
a. 500,000
b. 477,826
c. 559,610
d. 460,000
15.
As an inducement to enter a lease, a lessor grants Paul company,
a lessee, nine months of free rent under a five-year operating lease.
The lease is effective on July 1, 2014 and provides for monthly rental of
P100,000 to begin April 1, 2015. In the income statement for the year
ended June 30, 2015, what amount should be reported ass rent
expense?
a. 1,020,000
b. 900,000
c. 300,000
d. 255,000

Page 4 of 4