8. The entity retired its bond with a face value of P5,000,000 and an unamortized
premium of 150,000. The bonds is retired at 105 and paid the accrued interest of 200,000. What is the gain or loss in the retirement of bonds?
a 300,000 loss c 100,000 loss
b 300,000 gain d 100,000 gain
Answer is c
Solution: Retirement price 5,000,000 x 105
P5,250,000 Carrying amount of bonds 5,000,000+150,000
5,150,000 Loss on retirement of bonds
P 100,000 .
9. On December 31, 2015 the Nanloko Company retired its P8,000,000 face value,
10 bonds. The entity paid a total cash of P8,500,000 including the accrued interest of P400,000. The entity incurred a gain of 150,000 in the retirement of
the said bonds. What is the unamortized premium or discount of the retired bonds?
a 250,000 discount c 50,000 discount
b 250,000 premium d 50,000 premium
Answer is b
Solution: Total cash paid
P8,500,000 Accrued interest
400,000 Retirement price
P8,100,000 Gain on retirement
150,000 Carrying amount of bonds
P8,250,000 Carrying amount of bonds
P 8,250,000 Face value of bonds
P 8,000,000 Unamortized premium
P 250,000
10. The Makakamove-on Company retired its bond with a carrying amount of
P4,850,000 at a price that would gain P200,000. The entity also paid the accrued of P200,000. How much is the total cash paid by the entity?
a 4,850,000 c 5,050,000
b 5,250,000 d 4,650,000
Answer is a
Solution: Carrying amount of bonds
P4,850,000 Gain on retirement of bonds
200,000 Retirement price
P4,650,000 Accrued interest
200,000 Total cash paid
P4,850,000 COMPOUND FINANCIAL INSTRUMENT
1. ABC Company issued 6,000 of 12, 12-year, P1,000 face value bonds with detachable share warrants at 120. Each bond has a detachable warrant for ten
ordinary shares of ABC Company at a specified option price of P20 per share. The par value of the ordinary share is P15. Immediately after the issuance, the
market value of bonds ex warrants was P6,500,000 and the market value of the- warrants was P800,000.
Q1: What is the carrying amount of bonds payable at year end? a. 6,000,000
c. 6,900,000 b. 6,500,000
d. 7,200,000 Q2: The issuance of the bonds payable with share warrants will show
which of the following? a. A credit to Cash 7,200,000
b. A credit to Bonds Payable 6,500,000 c. A debit to Discount on bonds payable 500,000
d. A credit to Share warrants outstanding 700,000
Answer is b,d
Solution:
a. Issue price of bonds payable – equal to market value ex-warrants 6,500,000
b. Cash 7,200,000
Bonds Payable 6,000,000
Premiums on bonds payable 500,000
Share warrants outstanding 700,000
2. On December 31, 2015, Divergent Company had outstanding 10, P2,000,000 face amount convertible bonds payable maturing on December 31, 2020. Interst
is payable on June 30 an December 31. Each P1,000 bond is convertible into 50 shares of P15 par value. On December 31, 2015, the unamortized premium on
bonds payable was P70,000. On December 31, 2015, 400 bonds were converted when Divergent’s share had a market price of P25. The entity incurred P6,000 in
connection with the conversion. No equity component was recognized when the bonds were originally issued.
Q1: What is the share premium from the issuance of shares as a result of the bond conversion on December 21,2015?
a. 108,000 c. 120,000
b. 114,000 d. 130,000
Q2: The carrying amount of converted bonds payable is equal to ______. a. 300,000
c. 1,035,000 b. 414,000
d. 2,070,000
Answer is a,b
Solution: Bonds Payable
2,000,000 Premium on bonds payable
70,000 Carrying amount
2,070,000 Carrying amount converted 4002,000 x 2,070,000
414,000 Par value of shares issued 400 x 50 x P15
300,000 Share premium
114,000 Conversion Expenses
6,000 Net share premium
108,000 Carrying amount converted 4002,000 x 2,070,000
414,000
3. Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each P1,000 bond was issued with 25 detachable share
warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value of each
warrant is P7. The stated interest on the bonds is 9 payable annually every December 31. However, the prevailing market rate of interest for similar bonds
without warrant is 11.
Q1: On December 31, 2015, what amount should be recorded as discount or premium on bonds payable?
a. 359,000 c. 539,000
b. 395,000 d. 593,000
Q2: The amount allocated to equity is ____________. a. 1,239,000
c. 3,129,000 b. 1,329,000
d. 3,192,000
Answer is c,a
Solution: PV of principal 7,000,000 x 0.59
4,130,000 PV of interest payments 630,000 x 3.70
2,331,000 TOTAL PRESENT VALUE OF BONDS PAYABLE
6,461,000 Bonds payable
7,000,000 PV of bonds payable
6,461,000 Discount on bonds payable
539,000 Issue price of bonds with warrants 7,000,000 x 110
7,700,000 PV of bonds payable
6,461,000 Residual amount allocated to warrants
1,239,000 4. Anneth Company issued 8,000 convertible bonds at the beginning of the current
year. The bonds had a five-year term with a nominal rate of interest of 5, and were issued at par with a face value of P1,000 per bond. Interest is payable
annually on December 31. Each bond is convertible into 40 ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is
9. At the issuance date, the amount of P325,000 was credited to share
premium from conversion privilege. The bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.
Q1: What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity?
a. 8,000,000 loss c. 325,000 gain
b. 325,000 loss d. 0
Q2: Which of the following is false in recording the issuance of the convertible bonds?
a. A credit to Cash 8,000,000 b. A credit to Bonds Payable 7,675,000
c. A debit to Discount on bonds payable 325,000 d. A credit to Share warrants outstanding 325,000
Answer is d,c
Solution: There is no gain or loss since the bonds were not converted and instead, the
entity paid off the convertible bondholders as maturity.
Cash 8,000,000
Discount on bonds payable 325,000
Bonds payable 8,000,000
Share Premium - conversion privilege 325,000
9-10 Fajardo Company had outstanding share capital with par value of P100,000,000 and
a 9 convertible bond payable in the face amount of P20,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the
bond indenture entitled the bondholders to receive 20 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face
value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the share was P30. The total
unamortized bond discount at the date of conversion was P900,000. The share premium from conversion privilege has a balance of P3,000,000 on June 30, 2015.
Q1: What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital?
a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000
Q2: The total consideration is equal to ____________.
a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000
Answer is d,a
Solution: Bonds Payable
20,000,000 Discount on bonds payable
900,000 Carrying amount
11,100,000 Carrying amount converted 520 x 11,100,000
2,775,000 Applicable share premium from conversion privilege
520 x 3,000,000 750,000
Total consideration 3,525,000
Par value of shares issued 5,000 x 20 x 20 2,000,000
Carrying amount converted 520 x 11,100,000 2,775,000
Applicable share premium from conversion privilege 520 x 3,000,000
750,000 Total consideration
3,525,000
NOTE PAYABLE
1. U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the existing loan facility, the entity had the discretion to refinance or roll over the note
payable for at least twelve months after the end of reporting period.
On December 31,2015, what amount of the note payable should be reported as noncurrent liability?
a. 1,500,000 c. 2,250,000
b. 1,800,000 d. 0
Answer is a
Solution: The entire amount is classified as non-current liability.
PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an obligation for at least twelve months after the end of
reporting period, it shall classify the obligation as noncurrent, even if it would otherwise be due within a shorter period.
2. Fred Company reported the following liabilities on December 31,2015: Accounts Payable
600,000 Short-term borrowings
300,000 Mortgage payable, current portion P100,000
2,000,000 Note payable, due June 30, 2016
900,000 The P900,000 note payable was refinanced with a 5-year loan on January 15,
2016 with the first principal payment due January 15, 2017. The financial statements were issued February 28, 2016.
What amount should be reported as current liabilities on December 31, 2015? a 900,000
c. 1,000,000 b 1,900,000
d. 700,000
Answer is b
Solution: Accounts Payable
600,000 Short-term borrowings
300,000 Mortgage payable- current portion
100,000 Note payable
900,000 Total current liabilities
1,900,000 3. On January 1, 2015, Anne Company sold land to Guring Company. There was no
establish market price for the land. Guring gave Anne a P3,000,000 noninterest bearing note payable in three equal annual installments of P1,000,000 with the
first payment due December 31, 2015.
The note has no ready market. The prevailing rate of interest for a note of this type is 12. The present value of a P3,000,000 note payable in three equal
annual installments of P1,000,000 at 12 rate of interest is P2,401,830.
What is the carrying amount of the note payable on December 31, 2015? a 2,401,830
c. 1,690,050 b 1,401,830
d. 3,000,000
Answer is c
Solution: Note Payable
3,000,000 Present Value
2,401,830 Discount on note payable - January 1, 2015
598,170 Amortization or interest expense 12 × 2,401,830
288,220 Discount on note payable - December 31, 2015
309,950 Note payable - January 1, 2015
3,000,000 Annual payment on December 31, 2015
1,000,000 Note payable - December 31, 2015
2,000,000 Discount on note payable - December 31, 2015
309,950 Carrying amount - December 31, 2015
1,690,050 4. On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year
note bearing interest at 8 per annum compounded annually. Interest is payable in full at maturity on February 28, 2017.
What amount should be reported as accrued interest payable on December 31, 2016?
a 33,333 c. 76,000
b 40,000 d. 80,000
Answer is c
Solution: Accrued interest from March 1, 2015
to February 28, 2016 500,000 × 8 40,000
Accrued interest from March 1 to December 31, 2016 500,000 + 40,000 × 8 × 1012
36,000 Accrued interest payable - December 31, 2016
76,000 5. On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at
an annual rate of 10. The loan agreement requires Arman to maintain a P200,000 compensating balance in its checking account. Arman would otherwise
maintain a balance of only P100,000 in this account. The checking account earns interest at an annual rate of 5.
What is the effective interest rate on the borrowing? a 10
c. 11.33 b 10.67
d. 10.56
Answer is d
Solution: Interest expense 1,000,000 × 10 × 180360
50,000 Interest income on compensating balance
in excess of the normal checking account balance 100,000 × 5 × 180360
2,500 Net interest expense
47,500 Net proceeds of loan 1,000,000 - 100,000
900,000 Effective amount 900,000 × 180360
450,000 Effective interest rate 47,500450,000
10.56 6. On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note
at a discount rate of 11. The entity elected the fair value option for reporting the note payable.
On December 31, 2015, the credit rating and risk factors indicated that the rate of interest applicable to its borrowings was 10. The present value factors at 11
and 9 are as follows:
PV factor 11, 3 periods .731 PV factor 10, 3 periods .751
PV factor 11, 2 periods .812 PV factor 10, 2 periods .826
PV factor 11, 1 period .901
PV factor 10, 1 period .909
Q1: What is the initial carrying amount of the note payable on January 1, 2015? a 146,200
c. 162,400 b 150,200
d. 165,200 Q2: What is the carrying amount of the note payable on December 31, 2015?
a 165,200 c. 181,800
b 162,400 d. 150,200
Answer is a,a
Solution: a. Fair value of note - January 1, 2015 200,000 × .731
146,200 b. Fair value of note - December 31, 2015 200,000 × .826 165,200
7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11 five-year note payable. On December 31, 2015, the fair value of the note is determined to be
P1,950,000 based on market and interest factors. The entity has elected the fair value option for reporting the financial liability.
Q1: What amount should be reported as interest expense for 2015? a 220,000
c. 110,000 b 214,500
d. 107,250 Q2: What is the carrying amount of the note payable on December 31, 2015?
a 2,000,000 c. 1,000,000
b 1,950,000 d. 1,780,000
Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value option?
a 150,000 gain c. 75,000 gain
b 150,000 loss d. 0
Answer is c,b,a
Solution a. Interest expense for 2015 2,000,000 × 11 × 612
110,000
b. Carrying amount equal to fair value 1,950,000
c. Note Payable - July 1, 2015 2,000,000
Fair value - December 31, 2015 1,950,000
Decrease in fair value of note payable - gain 150,000
DEBT RESTRUCTURE
1. Balleta Company has the following three loans payable scheduled to be repaid in February next year. The Balleta’s accounting year ends on December 31. The
company intends to repay loan 1 for P100,000 when it comes due in February. In the following October, the company intends to get a new loan for P80,000 from
the same bank. The company intends to refinance loan 2 for P150,000 when it is due in February. The refinancing agreement, for P180,000 will be signed in April
after the financial statements for this year have been authorized issue. The company intends to refinance loan 3 for P200,000 before it comes due in
February. The actual refinancing, for 175,000 took place in January, before the financial statements for this year have been authorized for issue.
As of December 31 of the year, what are the total current and non-current liabilities to be reported?
a. P100,000;P25,000 c. P450,000;0
b. P250,000;P175,000 d. P125,000;P350,000
Answer is c
Solution: Loan 1
P100,000 Loan 2
150,000 Loan 3
200,000 Total current liabilities
P450,000 No non-current liabilities
Under PAS 1: Presentation of Financial Statements, an entity classifies its financial Liabilities as current when they are due to be settled within 12
months after the end of the reporting period, even if:
a. The original term was for a period longer than 12 months; and b. An agreement to refinance, or to reschedule payments, on a long-term
basis is completed after the end of the reporting period and before the financial statements are authorized for issued.
PAS 1 further provides that if the refinancing on a long-term basis occurs between the end of the reporting period and the date the financial
statements are authorized for issue, such events qualifies or disclosure as non-adjusting event in accordance with PAS 10.
2. Caramel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months. The new loan will have a term of 5 years. The
following items are based on the financial statements of Caramel:
Current Assets P750,000
Short-Term Loan Payable 600,000
Total Liabilities 3,000,000
Current Ratio 1.5
Debt-to-Equity Ratio 1.5
What are the total current, shareholders’ equity and non-current liabilities? a. P500,000; P2,000,000; P2,500,000
b. P2,500,000; P500,000; P2,000,000 c. P2,000,000; P2,500,000; P500,000
d. P500,000; P2,500,000; P2,000,000
Answer is b Solution:
a. Current Ratio =
Current Assets Current Liabilities
1.5 =
P 750,000 Current Liabilities
Current Liabilities =
P 750,000 1.5
= P500,000
b. Debt-to-equity ratio =
Total Liabilities Total Equity
1.5 =
P 3,000,000 Total Equity
Total Equity =
P 3,000,000 1.5
= P2,000,000
c. Total Liabilities P3,000,000
Less: Current Liabilities 500,000
Non-current Liabilities P2,500,000
3. Al Rey Co. owes P1,998,000 to Lomi Corp. The debt is a 10-year, 11 note. Because Al Rey Co. is in financial trouble, Lomi Corp. agrees to accept land and
cancel the entire debt. The land has a book value of P800,000 and fair market value of P1,200,000.
What entry should be made by Al Rey Co. for the restructure?
a. Gain on restructuring of debt 1,998,000
Land 800,000
Note Payable 1,198,000
b. Notes Payable 1,998,000
Land 800,000
Gain on restructuring of debt 1,198,000
c. Note Payable 800,000
Gain on restructuring of debt 1,198,000
Land 1,998,000
d. Notes Payable 1,198,000
Land 800,000
Gain on restructuring of debt 1,998,000 `
Answer is b
Solution: Notes Payable
1,998,000 Land
800,000 Gain on restructuring of debt
1,198,000 `
Total liability P1,998,000
Book value of land 800,000
Gain in debt restructuring P1,198,000
4. Canela Co. is having financial difficulty and therefore has asked Enriquez Bank to restructure its 3 million note outstanding. The present note has 3 years
remaining and pays a current rate of interest of 12. The note was issued at its face value. Enriquez Bank agrees to accept land in exchange for extinguishing its
claim on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000. Enriquez Bank agrees to reduce the principal balance due to
P2,000,000 and interest to 10.
12 10
Present value of 1 for 3 periods 0.71178
0.75132 Present value of an ordinary annuity
Of 1 for 3 periods 2.40183
2.48685 Q1: What is the gain on debt restructuring?
a. P1,096,074 c. P480,366
b. P1,903,926 d. P1,423,560
Q2: Discount on note payable c. P480,366
c. P96,074 d. P903,926
d. P48,532
Answer is a,c
Solution:
Present value principal P2,000,000 x 0.71178 P1,423,560
Present value of interest payments P2,000,000 x 10= P200,000 x 2.40183
480,366 Total
P1,903,926 a. Note payable – old
P3,000,000 Present value of restructured liability
1,903,926 Gain on debt restructuring
P1,096,074 b. Face value of note payable – new
P2,000,000 Present value of restructured liability
1,903,926 Discount on note payable
P 96,074
5. At year-end, Yohannah Company showed the following data with respect to its matured obligation:
Note Payable 6,000,000
Accrued interest payable 750,000
The entity is threatened with a court suit it could not pay maturing debt. Accordingly, the entity entered into an agreement with the creditor for the
issuance of share capital in full settlement of the note payable.
The agreement provided for the issue of 40,000 shares with par value of P100. The share is currently quoted at P120. The fair value of the note payable on the
date of restructuring is P4,700,000
Q1: Under the “equity swap”, what amount should be recognized as gain from extinguishment of debt?
a. 450,000 c. 950,000
b. 1,000,000 d. 800,000
Q2: What is the share Premium? a. 450,000
c. 950,000 b. 1,000,000
d. 800,000
Answer is a,d
Solution: Note Payable
6,000,000 Accrued Interest Payable
750,000 Total carrying amount of liability
5,250,000 Fair value of shares 40,000 x 120
4,800,000 Gain on extinguishment of debt
450,000 Fair value of shares
4,800,000 Par Value of shares 40,000 x 100
4,000,000 Share Premium
800,000 6. Due to extreme financial difficulties, Restine Co. had negotiated a restructuring of
a 10 P5,000,000 note payable due on December 31, 2015. The unpaid interest on the note on such date is P500,000. The creditor had agreed to reduce the
face value to P4,000,000 forgive the unpaid interest, reduce the interest rate to 8 and extend the due date three years from December 31, 2015.
The PV of 1 at 10 for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at 10 for 3 periods is 2.49
Q1: What is the gain on extinguishment of debt in 2015?
a. 1,703,000 c. 2,000,000
b. 1,203,000 d. 540,000
Q2: What is the interest expense for 2016? a. 320,000
c. 400,000 b. 379,680
d. 500,000
Answer is a,b
Solution: PV of principal 4,000,000 x .75
3,000,000 PV annual interest payments 320,000 x 2.49
796,800 Total present value of new liability
3,796,800 Note payable – old
5,000,000 Accrued interest payable
500,000 Total old liability
5,500,000 Present value of new liability
3,796,000 Gain on extinguishment
1,703,200 Interest expense for 2016 10 x 3,796,800
379,680 Interest paid 8 x 4,000,000
320,000 Amortization of discount
59,680
7. Kengel Co. had bonds payable with face value of P5,000,000 and a carrying amount of P4,800,000. In addition, unpaid interest on the bonds was accrued in
the amount of P250,000. The creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of P50 par value. The shares have no
reliable measure of fair value. However, the bonds are quoted at P3,500,000.
Q1: What is the gain on the extinguishment of the bonds payable? a. 1,500,000
c. 1,550,000 b. 1,300,000
d. 0 Q2: What is the share premium from the issuance of the shares?
a. 2,300,000 c. 1,000,000
b. 1,300,000 d. 0
Answer is c,c
Solution:
Carrying amount of bonds payable 4,800,000
Accrued interest on bonds payable 250,000
Total 5,050,000
Fair value of bonds payable 3,500,000
Gain on extinguishment of bonds payable 1,550,000
Fair value of bonds payable 3,500,000
Par Value of shares 50,000 x 50- 2,500,000
Share premium 1,000,000
OPERATING LEASE
1. On December 1, 2015, Rain Company leased office space for five years at a monthly rental of P300,000. On the same date, the entity paid the lessor the
following amounts:
Bonus to obtain Lease 150,000
First month’s rent 300,000
Last month’s rent 300,000
Security deposit refundable at lease expiration
700,000 Installation of new walls and offices
2,400,000 What total amount of the expenses relating to utilization of the office space
should be reported for 2015?
a. 342,500 c. 555,000
b. 810,500 d. 425,000
Answer is a
Solution: Amortization of Lease Bonus 150,000 5 x 112
2,500 Rent for December
300,000 Depreciation of leasehold improvement
2,400,000 5 x 112 40,000
Total December 2015 Expenses 342,500
2. As an inducement to enter a lease, McDough Company, a lessor, granted SpaFry Company, a lessee, nine months of free rent under a six year operating lease.
The lease was effective on July 1, 2015 and provided for monthly rental of P100,000 to begin April 1, 2016.
In the income statement for the year ended June 30, 2016, what amount should be reported as rent expense?
a. 1,050,000 c. 900,000
b. 300,000 d. 255,000
Answer is a
Solution: Total Rent Expense 100,000 x 63 remaining months
6,300,000 Average annual rent expense, July 1, 2015 to
June 30, 2016 6.300,000 6 1,050,000
3. On July 1, 2015, Walton Company leased office premises for a three-year period at an annual rental of P360,000 payable on July 1 each year. The first rent
payment was made July 1, 2015. Additionally on July 1, 2015, the entity paid P240,000 as a lease bonus to obtain a three-year lease instead of the lessor’s
usual term of six years.
On December 31, 2015, what amount should be reported as prepaid rent? a. 240,000
c. 220,000 b. 380,000
d. 180,000
Answer is d
Solution: Rent payment on July 1, 2015 360,000 x 612
180,000 Lease Bonus 240,000 x 3036
200,000 Prepaid Rent – December 31, 2015
380,000
4. On July 1, 2015, Gold Company leased a delivery truck from Marr Company under a 3-year operating lease. Total rent for the term of the lease will be
P360,000, payable as follows:
12 months at 6,000 = P 72, 000
12 months at 6,500 = 78,000
12 months at 17,500 = 210,000
All payments were made when due. On June 30, 2017, what amount should be reported as accrued rent receivable?
a. 90,000 c. 210,000
b. 120,000 d.
Answer is a
Solution: Average annual rent revenue 360,000 3
120,000 Rent revenue from July 1, 2015 to June 30, 2017
120,000 x 2 240,000
Less: Rentals received: First 12 months
72,000 Second 12 months
78,000 150,000
Rent Receivable – June 30, 2017 90,000
5. B.I. Company leased a new machine to H.I. Company on January 1, 2015. The lease expires on January 1, 2020. The Annual rental is P900,000. Additionally, on
January 1, 2015, H.I. Company paid P 500,000 to B.I. Company as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the
lease.
What amount of rental revenue should be reported for 2015? a. 900,000
c. 1,250,000 b. 1,000,000
d. 1,400,000
Answer is b
Solution: Annual Rental
900,000 Amortization of lease bonus 500,000 5
100,000 Total Rental Revenue
1,000,000
6. Babe Company owns and manages apartment complex. On signing a lease, each tenant must pay the first and last month’s rent and a P50,000 refundable
security deposit. The security deposits are rarely refunded in total, because cleaning costs of P15,000 per apartment are almost always deducted. About
30 of the time, the tenants are also charged for damages to the apartment which typically cost P10,000 to repair.
If one-year lease is signed on a P90,000 per month apartment, what amount should be reported as refundable security deposit?
a. 35,000 c. 32,000
b. 50,000 d. 140,000
Answer is b
Solution: Refundable Security Deposit
50,000
7. Dutch Company leased equipment to Ender Company on July 1, 2015 for a one- year period expiring June 30, 2016 for P45,000 a month. On July 1, 2016, Dutch
leased this piece of equipment to Foil Company for a three-year period expiring June 30, 2019 for P60,000 a month. The original cost of the equipment was
P4,200,000. The equipment which has been continually on lease since July 1, 2011 is being depreciated on a straight line basis over an eight-year period with
no residual value. Both the lease to Ender and the lease to Foil are appropriately recorded as operating lease.
What is the amount of net rental income that would be reported by Dutch Company for the year ended December 31, 2016?
a. 350,000 c. 110,000
b. 610,000 d. 105,000
Answer is d
Solution: Rent income – Ender 45,000 x 6
270,000 Rent income – Foil 60,000 x 6
360,000 Total rent income for 2016
630,000 Depreciation 4,200,000 8
525,000 Net rental income for 2016
105,000
8. Cain Company, lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on January 1 of
each year as shown in the following schedule:
January 1, 2015 1,200,000
January 1, 2016 1,150,000
January 1, 2017 1,500,000
January 1, 2018 1,650,000
January 1, 2019 1,900,000
On December 31, 2016, what amount should be recognized as rent receivable? a. 1,210,000
c. 410,000 b. 610,000
d. 0
Answer is b
Solution: Average annual rental 7,400,000 5
1,480,000 Rent Income for 2015 and 2016 1, 480,000 x 2
2,960,000 Rent Received for 2015 and 2016 1,200,000 + 1,150,000 2,350,000
Rent Receivable – December 31, 2016 610,000
9. Jaguar Company leased office premises to Fox Company for a five-year term beginning January 1, 2015. Under the terms of the operating lease, rent for the
first years is P900,000 and rent for years 2 through 5 is P1,300,000 per annum. However, as an inducement to enter the lease, Jaguar granted Fox the first six
months of the lease rent-free.
What amount should Jaguar report as rental income for 2015? a. 1,300,000
c. 900,000 b. 1,130,000
d. 450,000
Answer is b
Solution: First Year 900,000 x 612
450,000 Second Year
1,300,000 Third Year
1,300,000 Fourth Year
1,300,000
Fifth Year 1,300,000
Total rental revenue 5,650,000
Average annual rental revenue 5,650,000 5 1,130,000
10. As an incentive to enter a four-year operating lease for a warehouse, Silent Hill Company received an upfront cash of P90,000 upon signing an agreement at the
beginning of current year. The annual rental is P1,122,500.
What amount should be recognized as lease expense for the current year? a. 1,122,500
c. 1,032,500 b. 1,100,000
d. 0
Answer is b
Solution: Annual Rental
1,122,500 Amorization of upfront cash received 60,000 4
22,500 Lease expense for current year
1,100,000
FINANCE LEASE – LESSEE
1. Gandalf Company leased a machine from Harry Leasing Company. The lease qualifies as a finance lease and requires 10 annual payments of P200,000
beginning immediately. The lease specifies an interest rate of 11 and a purchase option of P200,000 at the end of the tenth year, even though the
machine’s estimated value on that date is 300,000.
Present Value of an annuity due in advance of 1 at 11 for 10 periods.
6.537 Present value of 1 at 11 for 10 periods.
0.352 What amount should be recorded as lease liability at the beginning of the lease
term?
a. 1,307,400 c. 1,321,500
b. 1,377,800 d. 1,397,200
Answer is b
Solution: Present value of rentals 200,000 x 6.537
1,307,400 Present value of bargain purchase option
200,000 x .352 70,400
Total lease liability – beginning of lease term 1,377,800
2. At the beginning of current year, Nick Company signed an eight-year noncancelable lease for a new machine, requiring P150,000 annual payments at
the beginning of each year. The machine has a useful life of 12 years with no residual value. Title passes to the lessee at the lease expiration date. Cole uses
straight line depreciation for all of the plant assets. Aggregate lease payments have a present value of P1,080,000 based on an appropriate rate of interest.
What amount should be recorded as depreciation expense of the leased machine for the current year?
a. 150,000 c. 90,000
b. 135,000 d. 0
Answer is c
Solution: Depreciation for current year 1,080,000 12
90,000
3. Ziggurat Company is a lessee under a finance lease. The asset is recorded at P5,300,000 and has an economic life of 8 years. The lease term is 5 years. The
asset is expected to have a fair value of P1,300,000 at the end of 5 years and a fair value of P300,000 at the end of 8 years. The lease agreement provides for
the transfer of title of the asset to the lesee at the end of the lease term.
What amount of depreciation expense should be recorded for the first year of the
lease? a. 925,000
c. 625,000 b. 800,000
d. 500,000
Answer is c
Solution: Cost
5,300,000
Residual Value after 8 years 300,000
Depreciable Amount 5,000,000
Annual Depreciation 5,000,000 8 625,000
4. On January 1, 2015, Plow Company entered into a ten-year noncancelable lease requiring year-end payments of P1,000,000. Plow’s incremental borrowing rate is
12, while the lessor’s implicit interest rate, known to Plow, is 10. Present value factors for an ordinary annuity for ten periods are 6.145 at 10, and 5.650
at 12. On same date, Plow Company paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement. 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 be capitalized initially as cost of the leased property?
a. 5,850,000 c. 6,145,000
b. 5,650,000 d. 6,345,000
Answer is d Solution:
Present value of rentals 1,000,000 x 6.145 6,145,000
Initial Direct Cost 200,000
Total Cost of Property 6,345,000
5. Loop Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and the warehouse are
P3,000,000 and P1,500,000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not
expected to pass at the end of the lease.
At what amount should the asset in relation to finance lease be recognized in the financial statements of the lessee?
a. 4,500,000 c. 1,500,000
b. 3,000,000 d. 0
Answer is c
Solution: The warehouse lease is a finance lease and therefore the leasehold
interest of P1,500,000 is recognized as an asset.
6. Asylum Company leased a machine with a fair value of P2,450,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating
the lease amounted to P22,500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P2,384,000.
At what amount should the machine be recognized initially in the financial statement?
a. 2,450,000 c.2,562,500
b. 2,406,500 d.2,384,000
Answer is b
Solution: Present value of minimum lease payments
2,384,000 Initial Direct Costs
22,500 Total Initial cost of machine
2,406,500
7. Je-Barbie Company entered into a nine-year finance lease on a warehouse on December 31, 2015. Lease payment of P620,000 which includes real estate
taxes and other executory cost of P20,000, are due annually, beginning on December 31, 2016 and every December 31 thereafter. The interest rate implicit
in the lease is 9. The rounded present value of an ordinary annuity of 1 for nine years at 9 is 5.6.
What amount should be reported as lease liability on December 31, 2015? a. 3,360,000
c. 3,472,000 b. 3,000,000
d. 3,584,000
Answer is a
Solution: Lease Liability 600,000 x 5.6
3,360,000 8. At the beginning of current year, Forever Company leased a van with a fair value
of P 2,400,000 under a finance lease. The lease term is 6 years and the present value of the minimum lease payments is P 2,340,000. The useful life of the van
was estimated at 8 years with no residual value. The entity used straight line depreciation.
What is the depreciation charge on the van for the current year? a. 400,000
c. 300,000 b. 390,000
d. 292,500
Answer is b
Solution: Annual Depreciation 2,340,000 6 years
390,000 9. Lava Company has leased an asset on a finance lease. The present value of the
minimum lease payments is P986,000 and the fair value of the asset is P1,000,000. The asset has a useful life of 5 years and the lease is for a period of
4 years, after which the asset can be acquired for a near zero cost, which is substantially below the expected value of the asset at that date. The asset is
depreciated on a straight line basis.
What is the amount of the annual depreciation expense? a. 197,200
c. 246,500 b. 200,000
d. 250,000
Answer is a
Solution: Annual depreciation 986,000 5 years
197,200 10.Tambak Company leased a land and building for 20 years, the useful life of the
building, with effect from January 1, 2015. At that date, the fair value of the leasehold interest was P10,000,000 and of which 8,000,000 are attributable to
the building. Annual rentals of P900,000 are payable in advance on January 1.
What amount should be recognized as an operating lease expense for 2015? a. 900,000
c. 180,000 b. 200,000
d. 0
Answer is c
Solution: Leasehold interest
10,000,000 Attributable to building
8,000,000 Attributable to land
2,000,000 Operating lease expense
2,000,00010,000,000 x 900,000 180,000
DIRECT FINANCING LEASE – LESSOR
1. On December 31, 2015, Bentong Company, a lessor, sold a machinery that it had
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