Reference no: EM132575718

Question 1. Listed below are four lease situations:

                                                                  I         II               III                   IV

Asset's fair value

(in million pesos)                               P12      P12           P10              P8

Asset's useful life (years)                    10           10           10              10

Bargain purchase option                         None      None         None       None

Lease term (in years)                                6            5               6        4

Present value of minimum lease payments     P11         P8M          ?      P5M

Which of the foregoing leases shall be classified as operating lease?

Question 2. James Company leased a new machine to Lake Co. on January 1, 2015. The lease expires on January 1, 2020. The annual rental is P900, 000. Additionally, on January 1, 2015, Lake paid P500,000 to James as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease. In James 2015 statement of comprehensive income, the amount of rental revenue should be_____________.

Question 3. Peter Company leased office premises to Fox, Inc. for a five-year term beginning January 2, 2015. Under the terms of the operating lease, rent for the first year is P80,000 and rent for years 2 through 5 is P125,000 per annum. However, as an inducement to enter the lease, Peter granted Fox the first six months of the lease rent-free. In its 2015 statement of comprehensive income, what amount should Peter report as rental revenue?_______________

Question 4. On July 1, 2015, Extreme Company signed a five-year lease for equipment having a 12-year economic life. The lease agreement provides for neither a transfer of title to Extreme nor a bargain purchase option. The agreement calls for annual payments of P240, 000 starting July 1, 2016. Incremental borrowing rate is 14% which approximates the rate implicit in the lease. Fair market value of the equipment at the inception of the lease is P1,480,000. Present value factors are as follows:

PV of an ordinary annuity of 14% for five periods - 3.433

PV of an annuity due at 14% for five periods - 3.914

How much is the interest expense for the year ended December 31, 2015?______________

Question 5. Use the same information given in no.4. What is the amount of liability relating to the lease agreement that Extreme would report in its December 31, 2015 statement of financial position?______________

Question 6. On July 1, 2015, Pat Co. leased a piece of land from Luke Corporation under a 3-year operating lease.

Total rent for the term of the lease will be P3,600,000, payable as follows:

12 months at P 50,000 = P 600,000

12 months at P 75,000 = P 900,000

12 months at P175,000 = P 2,100,000

All payments were made when due.

How much is Luke's rent revenue for the fiscal year ended June 30,2016?___________________

Question 7. Use the same information given in no.6. What is the amount reported in Luke's statement of financial position at June 30, 2015?

Question 8. On December 31,2015, Simon Company leased a new machine from Junction Company with the following pertinent information:

Lease term - 6 years; Useful life of machine - 6 years

Annual rental payable every December 31 P500,000

Simon's incremental borrowing rate 15%

Implicit interest rate in lease (known by Simon) 12%

Present value of annuity of 1 in advance for 6 periods

at 12% - 4.61 ; at 15% - 4.35

The machine reverts to Junction at the termination of the lease. The cost of the machine on Junction's accounting records is P3,755,000.

At what amount should Simon record the asset at December 31, 2015?______________

Question 9. Use the same information given in 8. What is the lease liability balance at December 31, 2016?____________

Question 10. Use the same information given in 8. Assuming that Simon uses straight -line method of depreciation, how much is the depreciation expense for the year ended December 31, 2017?________________

Question 11. On December 31,2015, Lazarus Corporation leased equipment under a finance lease. Annual lease payments of P200,000 are due December 31 for 10 years. The useful life of the equipment is 10 years, and the interest rate implicit in the lease is 10%. The finance lease obligation was initially recorded on December 31, 2015 at P1,350,000, and the first lease payment was made on that date.

What amount should Lazarus include in current liabilities for this finance lease in its December 31, 2015, statement of financial position?________________

Question 12. Dominic Company leased a new machine from Isidore Company on May 1,2015, under a lease with the following information:

Lease term-10 years; Useful life of machine - 12 years

Annual rental payable at beginning of each year P400, 000

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

Dominic has the option to purchase the machine on May1, 2025 by paying P500,000, which approximates the expected fair value of the machine on the option exercise date. On May 1, 2015, Dominic should record a capitalized leased asset of ________________

Question 13. On January 2, 2015, Raphael Mining Company (lessee) entered into a 5-year lease for drilling equipment. Raphael accounted for the acquisitions as a finance lease for P2, 400,000, which includes a P100, 000 bargain purchase option. At the end of the lease, Raphael expects to exercise the bargain purchase option. Raphael estimates that the equipment's fair value will be P200, 000 at the end of its 8- year life. Raphael regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2015, what amount should Raphael recognize as depreciation expense on the leased asset?_______________

Question 14. On January 1, 2015, Bello Enterprises acquired a machine by signing a four - year lease. Annual rental of P1,742,174 are payable at the beginning of each year starting January 1,2015. Bello guarantees the residual value of P1,200,000 at the end of the lease term. The asset's useful life is 5 years, at the end of which, the asset's scrap value is expected to be P80,000. Bello uses straight line method to depreciate this asset. The lessor's implicit interest rate is 10%, which is known to Bello.

Present value of 1 discounted at 10% for 4 periods is 0.68301.

Present value of 1 discounted at 10% for 5 periods is 0.62092

Present value of annuity due of 1 for 4 periods discounted at 10% is 3.48685.

Present value of ordinary annuity at 10% for 4 periods is 3.16987.

At what amount should this machine be recorded by Bello on January 1, 2015?______________

Question 15. Use the same information given in 14. How much depreciation should Bello Enterprises record on this machine for the year 2015?