Chapter 7
Leases Part 1
1. Which of the following is not included in the flowchart of identifying a lease?
a. Identification of an asset explicitly stated in the contract or by being implicitly
specified at the time the asset is made available for use by the customer.
b. Identification of an asset wherein the supplier has the substantive right to
substitute the asset throughout the period of use.
c. An inquiry of the customer’s right to obtain substantially all of the economic
benefits from the use of the identified asset throughout the period of use.
d. An inquiry if the customer has the right to direct the use of the identified asset
throughout the period of use.
2. On January 1,2023, AIS Co. enters into a 4-year lease of property with annual lease of
payments of P 300,000.00, payable at the beginning of each year. The contract states
that the lease payments will increase after two years based on the increase in the
Consumer Price Index (CPI). AIS’s incremental borrowing rate is 12%. The property has
an estimated useful life of 10 years. AIS uses the straight-line method of depreciation.
The CPIs are as follows:
Jan. 1 2022 125
Jan. 1 2023 130
Jan. 1 2025 150
What is the initial measurement of lease liability and right of use asset?
a. 1,020,549.00
b. 1,200,000.00
c. 911,204.00
d. 1,200,549.00
Solution:
Annual payments every beginning of the year P 300,000.00
PV of an annuity due 1 @ 12%, n=4 3.40183 ((1-1/(1+r)n/r)(1+r)
Total 1,020,549.00
3. Based on the problem # 2, how much is the depreciation expense on Dec. 31,2023?
a. 120,000.00
b. 300,000.00
c. 255,137.00
d. 102,054.90
Solution:
Present Value of Lease P 1,020,549
Divide by: Lease Term 4
Annual Depreciation P 255,137.00
4. How much is the revised lease payment on 2025?
a. 345,000.00
b. 360,000.00
c. 350,000.00
d. 325,000.00
Solution:
Original Payments P 300,000.00
Multiply by: Change in CPI 150/130 (2 decimal point)
Total 345,000.00
5. On January 1 2021, AIS Co. enters into a 3-year lease of equipment for an annual rent pf
P 200,000.00 payable at the end of each year. The interest rate implicit in the lease is
10%, while the lessee’s incremental borrowing rate is 12%. AIS Co uses the straight-line
method.
How much is the interest expense on Dec 31 2021?
a. 34,711.00
b. 18,1818.80
c. 102,630.0
d. 49,737.00
Solution
Fixed payments P 200,000.00
PV of ordinary annuity 2.48685
Total 497,370.00
Date Payments Interest Amortization Present Value
1/1/21 497,370.00
12/31/21 200,000.00 49,737 150,263 347,107.00
12/31/22 200,000.00 34,711 165,289 181,818.00
12/31/23 200,000.00 18,181.8 181.818
Chapter 8 Leases Part 2
1. Among the choices, which is an indicator of a finance lease?
a. The lease transfers of ownership of the asset to the lessor by the end of the
lease term.
b. The lessee do not has the option to purchase the underlying asset at a price that
is expected to be sufficiently lower than the fair value at the date the option
becomes exercisable for it to be reasonably certain, at the inception date, that
the option will be exercised.
c. The leased asset is of such a specialized nature that only the lessee can use it
without major modifications.
d. The lease term is for the minor part of the economic life of the asset even if title
is not transferred.
2. On January 1 2021, AIS Co leased a piece of equipment to CBS Inc. Information on
the lease is as follows:
Cost of equipment 500,000
Useful life 10 yrs
Lease term 5 yrs
Annual Rent payable at the end of each year 150,000.00
Interest Rate implicit in the contract 12%
How much is the unearned interest income?
a. 209,284
b. 600,000.00
c. 540,712.50
d. 310,288.00
Solution:
Initial measurement
Fixed lease payment 150,000.00
Multiply by: Lease term 5 yrs
Gross investment in the lease 750,000
Fixed lease payments 150,000.00
Multiply by: PV of ordinary annuity of P 1@ 12%, n=5= 3.604776
Net investment in the lease 540,712.50
Gross investment P 750,000.00
Less: Net investment 540,712.50
Unearned interest income P 209,287.50
3-5. On January 1 2021, AIS Co leased a piece of equipment to CBS Inc. Information on the lease
is as follows
Cost of equipment 400,000.00
Useful life of the equipment 10 yrs
Lease term 5 yrs
Annual rent payable at the beginning of each year P 100,000
Market rate of interest 10%
Initial Direct Costs incurred by the lessor 5,000.00
3. How much is the Net investment in the lease
a. 416,986.54
b. 516,986.54
c. 316,986.54
d. 379,078.67
4. Gross Profit (Loss) from sale
a. 16,986.54
b. 11,986.54
c. (83,013.46)
d. (88, 013.46)
5. The journal entries for January 01 2021 for unearned interest income
Jan. 1 Finance Lease Receivable 400,000
Cash 100,000
Sales 416,986.54
Unearned Interest Income 83,013.46
a. True
b. False
Solution:
Annual Rent P 100,000.00
Multiply by PV of annuity due of P 1 @ 10%, n=5 4.16986537
Total 416,986,54
Less: Lease payment received on commencement date 100,000
Net investment in the lease 316,986.54
Gross investment in the lease 400,000.00
Less: Net investment in the lease 316,986.54
Unearned interest income 88,013.46
Gross profit from sale
Sales 416,986.54
Less: Cost of sales 400,000.00
Gross Profit 16,986.54
Less: Direct Cost 5000.00
Net Profit from sale 11,986.54
