Problem 13-1 Multiple Choice (PAS 17)

1. Under a sales type lease, what is the

meaning of gross investment in the
lease?
a. Present value of minimum lease
payments
b. Absolute amount of minimum lease
payments
c. Present value of minimum lease
payments plus
present value of
unguaranteed residual value
d. Aggregate of minimum lease

2. Net investments in a sales type

lease is equal to
a. Gross investment in the lease less
unearned
finance income
b. Cost of the lease asset
c. The minimum lease payments
d. The minimum lease payments less
unguaranteed
residual value

3. These are incremental costs

that are directly attributable to
negotiating and arranging lease.
a. Initial direct costs
b. Transaction costs
c. Costs of services
d. Executory costs

4. Initial direct costs incurred by the

lessor under a sales type lease should be
a. Deferred and all allocated over the
economic life of the leased property.
b. Expensed un the period incurred.
c.Deferred and allocated over the term
of the lease in proportion to the
recognition of rental income.
d. Added to the gross investment in the
lease and amortized over the term of the
lease as a yield adjustment.

5. 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 dealers profit at lease
inception and interest revenue over the lease term.
d. The lessor recognizes a dealers profit at lease
inception and interest revenue over the life of the
asset

6. The profit on a finance lease transaction for

lessors who are manufacturers or dealers
should
a. Not be recognized separately from finance
income
b. Be recognized in the normal way on the
transaction
c. only be recognized at the end of the lease
term
d. Be recognized on a straight line basis over
the life of the lease

7. The sales revenue recognized at the

commencement of the lease by a manufacturer
or dealer lessor is the
a. Fair value of the asset
b. Present value of the minimum lease
payments
c. Fair value of the asset or present value of the
minimum lease payments, whichever is lower.
d. Fair value of the asset or present value of the
minimum lease payments , whichever is higher.

8. What is the treatment of an unguaranteed

residual value in determining the cost of sales
under sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to
the cost of the lease asset.
c. The unguaranteed residual value is deducted
from the cost of the leased asset at absolute
amount.
d. The unguaranteed residual value is deducted
from the cost of the leased asset at present value.

9. The excess of the fair value of leased

property 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. Manufacturers profit from a sales type
lease
d. Manufacturers profit from a direct
financing lease

10. In a lease that is recorded as a sales

type lease by the lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of
the lease using the interest method
c. Shall be recognized over the period of
the lease using the straight line method
d. Shall be recognized in full as revenue
at the inception of the lease

Problem 13-11 (IAA)

Esmeralda Company leased equipment to another entity on
January 1, 2015. The terms of the lease called for annual
payment of 500,000 to be made at the end of each year. The
lease term is 5 years which is the useful life of the equipment.
The lease is appropriately recorded as a sales type lease. The
cost of the equipment is P1,000,000. The implicit rate in the
lease is 12%. The PV of an ordinary annuity of 1 at 12% for 5
periods is 3.60. On July 1, 2017, Esmeralda Company actually
sold the equipment to the lease for P1,200,000.
Required:
1. Determine the unearned interest income on January 1,
2015.
2. Determine the gross profit on sale.
3. Prepare journal entries for 2015, 2016 and 2017 to record
the sales type lease and the actual sale of the leased asset.
The periodic system is used.

Problem 13-12 (AICPA Adapted)

Howe Company leased equipment to Kew Company on
January 1, 2015 for an eight-year period expiring
December 31, 2022. Equal payments under the lease
are 500,000 and are due on January 1 of each year. The
first payment was made on January 1, 2015. The selling
price of the equipment is P2,900,000 and the carrying
amount is P2,000,000. The lease is appropriately
accounted for as a sales type lease. The present value
of the lease payments at an implicit interest rate of 12%
is P2,780,000. What amount of profit on the sale should
be reported for the year ended December 31, 2015?
a.
b.
c.
d.

900,000
780, 000
240,000
333,600

Problem 13-13 (AICPA Adapted)

Meg Company leased equipment from Wee Company
on July 1, 2015 for an 8-year period. Equal payments
underthe lease are 600,000 and are due on July 1 of
each year. The first payment was made on July 1,
2015.
The interest rate contemplated by Meg Company
and Wee Company is 105. The cash selling price of
the equipment is P3,520,000 and the cost of the
equipment on Wee Companys accounting records is
P2,800,000. The lease is appropriately recorded as a
sales type lease.
What amount of profit on sale and interest revenue
should be recognized for the year ended December
31, 2015?

Profit on sale
Revenue
a. 720,000
b. 720,000
c.
45,000
d.
45,000

Interest
176,000
146,000
176,000
146,000

Problem 13-14 (AICPA Adapted)

On January 1, 2015, Gallant Company entered into a
lease agreement with Blacksheep Company for a
machine which was carried on the accounting records of
Gallant Company at P2,000,000. Total payments under
the lease which expires on December 31, 2024
aggregate P3,550,800 of which P2,400,000 represents
cost of the machine to Blacksheep Company. Payments
of P355,080 are due each January 1 of each year. The
interest rate of 10% which was stipulated in the lease is
considered fair and adequate compensation to Gallant
Company for the use of its funds. Blacksheep Company
expects the machine to have a 10-year life, no residual
value and be depreciated on a straight line basis. The
lease qualifies as a sales type lease. What total income
before tax should be recognized by Gallant Company
from the lease for the year ended December 31,2015?

a. 204, 492
b. 604, 492
c. 355,080
d. 755,080

Problem 13-15 (IAA)

Reagan Company used leases as a method
of selling products. In 2015, Reagan
Company completed construction of a
passenger ferry.
On January 1, 2015, the ferry was leased to
the Super Ferry line on a contract specifying
that ownership of the ferry will transfer
to the lessee at the end of the lease
period. The annual lease payments do not
include executory costs.

Original cost of the ferry

8,000,000
Fair Value of ferry at lease date
12,555,000
Lease payments in advance
1,500,000
Estimated residual value
2,000,000
Implicit interest rate
12%
Date of first lease payment
January 1, 2015
Lease term
20
years
PV of an annuity due of 1 at 10% for 20 periods
8.37
PV of 1 at 12% for 20 periods
0.10

1. What is the total financial revenue over the

lease term?
a. 17,445,000
b. 19,245,000
c. 19,445,000
d. 22,000,000
2. What is the gross profit on sale for 2015?
e. 6,555,000
f. 4,555,000
g. 4,755,000
h. 4,355,000

3. What is the interest income for

2015?
a. 1,506,600
b. 1,524,600
c. 1,326,600
d. 1,350,600

Problem 13-18 (IAA)

Marianas Company adopted the policy of leasing as the
primary method of selling products. The entitys main
product is a small cargo vessel. Marianas company
constructed such a cargo vessel for Jade Company at a cost
of P8,500,000.
The terms of the lease provided for annual advance
payments of P2,500,000 to be paid over 10 years with the
ownership transferring to Jade Company at the end of
the lease period. It is estimated that the cargo vessel will
have a residual value of P1,600,000 at the date.
The lease payments began January 1, 2015. Marianas
Company incurred initial direct cost of P500,000 in financing
the lease agreement with Jade Company. The sale price of
the cargo vessel is P14,875,000.
Financing the construction was at a 14% rate. The present
value of an annuity due of 1 at 145 for 10 periods is 5.95

1. What amount should be reported as gross

profit on sale for 2015?
a. 5,875,000
b. 6,375,000
c. 4,275,000
d. 4,775,000
2. What is the unearned interest income on
January 1, 2015?
e. 10,125,000
f. 11,725,000
g. 9,625,000
h. 8,525,000

3. What is the interest income for

2015?
a. 2,082,500
b. 1,732,500
c. 2,306, 500
d. 1,956,500

Problem 13-19 (IAA)

Dexter Company leased equipment to another entity
on January 1,2015. The lease is for an eight-year
period expiring December 31, 2022. The first of eight
equal annual payments of 900,000 was made on
January 1,2015. Dexter Company had purchased the
equipment on December 29, 2014 for P4,800,000. The
lease is appropriately accounted for as a sales type
lease by Dexter company. The present value on
January 1, 2015 of all rent payments over the lease
term discounted at a 105 interest rate was P5,280,000.
What amount of interest revenue should be recorded in
2016?
a. 490,000
b. 480,000
c. 438,000
d. 391,000

Problem 13-20 (AICPA Adapted)

Accenture Company, a dealer in equipment,
leased equipment to another entity on July 1,2015.
the lease is appropriately accounted for as a sale
by Accenture Company.
The lease is for the entire ten-year useful life of
the equipment expiring June 30, 2025. the first of
ten equal annual payments of P500,000 was made
on July 1, 2015.
Accenture company had purchased the equipment
for P2,675,000 on January 1, 2015, established a
list selling price of P3,375,000 on the equipment.
The present value on July 1, 2015 of the rent
payments over the lease term discounted at 12%
is P3,165,000.

What amount of gross profit on sale

and interest income should be
recognized, respectively for 2015?
a.
b.
c.
d.

490,000
490,000
700,000
700,000

and
and
and
and

189,900
159,900
159,900
189,900

Problem 13-21 (IFRS)

Liza Company is a car dealer. On January 1,2015,
the entity entered in finance lease with a customer
under which the customer would pay P200,000 on
January 1 each year for 5 years, commencing in
2015. The cost of the car is P600,000 and the cash
selling price was P750,000. The entity paid legal
fees of P20,000 to a law firm in connection with the
arrangement of the lease. What amount of gross
profit on sale should be recognized for the year
ended December 31, 2015?
a. 150,000
b. 130,000
c. 20,000
d.
0

Problem 13-22 (IAA)

Hazel company leased machinery to Anne company on
July 1, 2015 for a ten-year period expiring June 30,
2025. Equal annual payments under the lease are
P750,000 and are due on July 1 of each year. The first
payment was made on July 1, 2015. The implicit rate of
interest is 9%. The cash selling price of the machinery
is P5,250,000 and the carrying amount is P4,650,000.
The lease is appropriately recorded as a sales type
lease.
1.
a.
b.
c.
d.

What is the gross profit on sale for 2015?

600,000
300,000
472,500
0

2. What amount of interest

revenue should be recorded for
2015?
a. 175,500
b. 236,250
c. 405,000
d. 202,500

Problem 13-23(IAA)
On December 31,2015, Benz Company, a lessor,
actually sold a machinery that it had been leasing
under a sales type lease. On January 1, 2015 after
receipt of the lease payment for the year, the following
account balances were associated with the lease:
Gross lease receivable
5,850,000
Unearned interest income
1,000,000
The interest rate implicit in the lease is 10%. On
December 31,2015, Benz Company actually sold the
leased machinery to the lessee for P3,250,00 cash.

1. What is the interest income for 2015?

a. 585,000
b. 485,000
c. 325,000
d.
0
2. What is the carrying amount of the lease
receivable on december 31,2015?
e. 5,850,000
f. 4,850,000
g. 5,335,000
h. 5,365,000

3. What is the loss on sale of the

machinery that should recognized
on December 31,2015?
a. 2,085,000
b. 1,600,000
c. 2,600,000
d. 2,015,000

Problem 13-24 (IAA)

On January 1,2015, Pamela Company leased
equipment to another entity under a finance
lease. The terms of the lease called for
annual lease payments to be made in
advance at the beginning of each year
starting January 1, 2015. The implicit interest
rate for the transaction is 12%. On July
1,2017 the lessor actually sold the equipment
to the lessee and received P3,000,000 to
complete the transaction. After the January
1,2017 payment was made, the balance of
the net lease receivable was P3,500,000.

1. What is the interest income to be

recognized in 2017?
a. 210,000
b. 420,000
c. 360,000
d. 180,000
2. What is the carrying amount of the lease
receivable on July 1,2017?
e. 3,500,000
f. 3,710,000
g. 3,290,000
h. 3,920,000

3. What is the loss on sale of the

leased asset to be recognized on

July 1, 2017?
a. 710,000
b. 500,000
c. 290,000
d.
0