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CEBU CPAR
PRCTICAL ACCOUNTING 1
LEASE
PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. Jennifer Company leases and operates a retail store. The following information relates to the lease for
the year ended December 31, 2007:

• The store lease, an operating lease, calls for a base monthly rent of P15,000
on the first day of each month.
• Additional rent is computed at 6% of net sales over P3,000,000 up to
P6,000,000 and 5% of net sales over P6,000,000 per calendar year.
• Net sales for 2007 were P9,000,000.
• Jennifer paid executory costs to the lessor for property taxes of P120,000
and insurance of P50,000.

For 2007, Jennifer's expenses relating to the store lease are

a. 710,000
b. 680,000
c. 540,000
d. 350,000
2. As an inducement to enter a lease, Honey Company, a lessor, grants Grechen Corporation, a lease,
nine months of free rent under a five year operating lease. The lease is effective on July 1, 2006 and
provides for monthly rental of P10,000 to begin April 1, 2007.

In Grechen's income statement of the year ended June 30, 2007, rent expense should be reported as
a. 102,000
b. 90,000
c. 30,000
d. 25,000
3. On January 1, 2007, Kyla Company leased a building to Brill under an operating lease for ten years at
P500,000 per year, payable the first day of each lease year. When paid P150,000 to a real estate broker
as a finder's fee. The building is depreciated P120,000 per year. For 2007, Kyla incurred insurance and
property tax expense totaling P90,000. Kyla's net rental income for 2007 should be
a. 275,000
b. 290,000
c. 350,000
d. 365,000
4. Smart Company leased a new machine to Globe Company on January 1, 2007. The lease expires on
January 1, 2011. The annual rental is P90,000. Additionally, on January 1, 2007, Globe paid P50,000 to
Smart as a lease bonus and P25,000 as a security deposit to be refunded upon expiration of the lease.
In Smart's 2007 income statement, the amount of rental revenue should be
a. 140,000
b. 125,000
c. 100,000
d. 90,000
5. On January 31, 2007, Elmer Company leased a new machine from Amor Company. The following data
relate to the lease transaction at the inception of the lease:

Annual rental payable at beginning of each lease year 50,000

Lease term 10 years
Useful life of machine 15 years
Implicit interest rate 10%
Present value of an annuity of 1 in advance for 10
periods at 10% 6.75
Present value of annuity of 1 in arrears for 10 periods at 10% 6.15
Fair value of the machine 400,000
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The lease has no renewal option, and the possession of the machine reverts to Amor when the lease
terminates. At the inception of the lease, Elmer should record a lease liability of
a. 400,000
b. 338,000
c. 307,000
d. 0
6. On January 2, 2007, Irene Company entered into a ten-year non-cancelable lease requiring year-end
payments of P100,000. Irene's incremental borrowing rate is 12%, while the lessor's implicit interest
rate, known to Irene, is 10%. Present value factors for an ordinary annuity for ten periods are 6.145 at
10%, and 5.650 at 12%. Ownership of the property remains with the lessor at expiration of the lease.
There is no bargain purchase option. The leased property has an estimated economic life of 12 years.
What amount should Irene capitalize for this leased property on January 2, 2007?
a. 1,000,000
b. 614,500
c. 565,000
d. 0
7. Noli Company leased a new machine from Ryan Company on May 1, 2007, under a lease with the
following information:

Annual rental payable at beginning of each lease year 400,000

Lease term 10 years
Useful life of machines 12 years
Implicit interest rate 14%
Present value of an annuity of 1 in advance for 10 periods at 14% 5.95
Present value of 1 for 10 periods at 14% 0.27

Noli has the option to purchase the machine on May 1, 2017, by paying P500,000, which approximates
the expected fair value of the machine on the option exercise date. On May 1, 2007, Noli should record
a capitalized leased asset of
a. 2,515,000
b. 2,380,000
c. 2,245,000
d. 1,980,000
8. On January 2, 2007, Margie Company entered into a 5-year lease for drilling equipment. Margie
accounted for the acquisition as a capital lease for P2,400,000, which includes a P100,000 bargain
purchase option. At the end of the lease, Margie expects to exercise the bargain purchase option.
Margie estimates that the equipment's fair value will be P200,000 at the end of its 8-yearlife. Margie
regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2007,
what amount should Margie recognize as depreciation expense on the leased asset?
a. 480,000
b. 460,000
c. 300,000
d. 275,000
9. Ethel Company leased machinery from Jaymie Company on January 1, 2007, for 10-year period (useful
life of the asset is 20 years)

Equal annual payments under the lease are P200,000 and are due on January 1 of each year starting
January 1, 2007.

The present value at January 1, 2007 of the lease payments over the lease term discounted at 10% was
P1,352,000. Ethel's incremental borrowing rate was 12%. The lease is appropriately accounted for as a
capital lease by Ethel because there is a very nominal bargain purchase option.

What should be the liability under capital lease to be shown as noncurrent on the December 31, 2007?
a. 1,215,920
b. 1,090,240
c. 1,067,200
d. 973,920
10. What is the interest expense for the year 2007?
a. 200,000
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b. 115,200
c. 106,720
d. 0
11. What is the depreciation for the year 2007?
a. 135,000
b. 115,200
c. 67,600
d. 20,000
12. On January 1, 2007, Eulalia Company signed a long-term lease for an office building. The terms of the
lease required Eulalia to pay P100,000 annually, beginning December 30, 2007, and continuing each
year for 30 years. The lease qualifies as a capital lease. On January 1, 2007, the present value of the
lease payments is P1,125,000 at the 8% interest rate implicit in the lease. In Eulalia's December 31,
2007, balance sheet, the capital lease liability should be
a. 1,025,000
b. 1,115,000
c. 1,125,000
d. 2,900,000
13. On January 1, 2007, Cristina Company as lessee signed a the-year noncancelable lease for a machine
stipulating annual payments of P200,000. The first payment was made on January 1, 2007. Cristina
appropriately treated this transaction as a capital lease. The ten lease payments have a present value of
P1,350,000 at January 1, 2007, based on implicit interest of 10%. For the year ended December 31,
2007, Cristina should record interest expense of
a. 135,000
b. 115,000
c. 65,000
d. 0
14. Marilyn Company leased equipment from Trixia Corporation on July 1, 2007 for an 8-year period. Equal
payments under the lease are P600,000 and are due in July 1 of each year. The first payment was made
on July 1, 2007.

The interest rate comtemplated by Marilyn and Trixia is 10%. The cash selling price of the equipment is
P3,520,000,and the cost of the equipment on Trixia's accounting records is P2,800,000. The lease is
appropriately recorded as a sales type lease.

What is the gain on sale of the equipment that Trixia should recognize for 2007?
a. 720,000
b. 360,000
c. 90,000
d. 45,000
15. What is the interest revenue that Andrei should recognize for 2007?
a. 292,000
b. 146,000
c. 352,000
d. 176,000
16. On January 1, 2007, Alice Company entered into a lease agreement with Maricel Company for a
machine which was carried on the accounting records of Alice at P2,000,000. Total payments under the
lease which expires on December 31, 2012, aggregate P3,550,800 of which P2,400,000 represents
costs of the machine to Maricel. 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
Alice for the use of its funds. The interest method of amortization is being used. Maricel expects the
machine to have a 10-year life, no salvage and be depreciated on a straight line basis. The lease is to
be conceived as an installment purchase of property.

What should be the income before income tax derived by Alice from this lease for the year ended
December 31, 2007?
a. 204,492
b. 604,492
c. 355,080
d. 755,080
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17. Ronwaldo Company leases computer equipment to customers under direct financing leases. The
equipment has no residual value at the end of the lease and the leases do not contain bargain purchase
options. Ronwaldo wishes to earn 8 and interest on a 5-year lease of equipment with the fair value of
P323,400. The present value of annuity due of 1 at 8% for 5 years is 4.312. What is the total amount of
interest revenue that Ronwaldo will earn over the life of the lease.
a. 129,360
b. 139,450
c. 51,600
d. 75,000
18. On January 1, 2007, Sheena Compnay sold equipment with a carrying amount of P1,000,000, and a
remaining useful life of 10 years, to Maco Drilling for P1,500,000. Sheena immediately leased the
equipment back under a 10-year capital leased with a present value of P1,500,000 and will depreciate
the equipment using the straight-line method. Sheena made the first annual lease payment of P244,120
in December 2007. In the December 31, 2007 balance sheet, the unearned gain on equipment sale
should be
a. 500,000
b. 450,000
c. 255,880
d. 0
19. On December 31, 2007, Ivan Company sold equipment to Kristine and simultaneously leased it back for
12 years. Pertinent information on this date is as follows:

Sales price 480,000

Carrying amount 360,000
Estimated remaining economic life 15 years

At December 31, 2007 how much should Ivan report as deferred revenue from the sale of the
equipment?
a. 120,000
b. 112,000
c. 110,000
d. 0
20. On January 1, 2007, Grace Company sold anequipment with remaining life of 10 years to Marlou
Company for P2,600,000. On the same date, Grace Company leased back the equipment for 8 years.

Relevant data are:

Cost of equipment 3,000,000
Accumulated depreciation 700,000
Annual rental payable at year-end 487,350
Interest rental implicit in the lease 10%
Present value of annuity of 1 for 8 periods at 10% 5.335

What is the gain on the sale and leaseback to be recognized in 2007?

a. 300,000
b. 260,000
c. 37,500
d. 30,000
21. On January 1, 2007 Remy Company sold Alnea Company an equipment with a remaining useful life of
10 years. At the same time, Remy leased back the equipment for 4 years. The leaseback is an operating
lease data. Data related to the sale and leaseback are:

Sales price 1,200,000

Fair value of equipment on the date of sale 1,000,000
Carrying amount of equipment 700,000

In Remy's income statement, how much gain from the sale and leaseback should be reported?
a. 500,000
b. 350,000
c. 300,000
d. 200,000
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