Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

THIRD COMPREHENSIVE TEST

Accounting 122
GENERAL INSTRUCTIONS. This test is composed of three parts each with their own sets of
instruction. Read them carefully before answering the questions. Erasures are strictly not allowed.
This test is good for three hours. God bless!
MULTIPLE CHOICE. Choose the best statement among the choices. Write your final answer on the
answer sheet provided with this questionnaire. Each item is worth 1 point.
1. Which of the following is (are) not correct regarding disclosure requirements lessees?
A. For finance leases, future minimum lease payments in the aggregate and for
each of the succeeding five years must be disclosed.
B. For operating leases with initial or remaining lease terms in excess of one year,
future minimum rental payments in the aggregate and for each of the five
succeeding fiscal years must be disclosed.
C. For finance leases, future minimum lease payments for each of the
succeeding five years must be disclosed.
D. For operating leases with initial or remaining lease terms in excess of one year,
future minimum lease payments for each of the five succeeding fiscal years
must be disclosed.
a. A and C only. c. A and B only.
b. B and D only. d. C and D only.
2. Which of the following statements characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor transfers title of the leased property to the lessee for the duration of the
lease term.
d. The lessor records depreciation and lease revenue.
3. For a finance lease, the amount recorded initially by the lessee as a liability should:
a. Exceed the present value at the beginning of the lease term of minimum lease
payments during the lease term.
b. Exceed the total of the minimum lease payments during the lease term.
c. Not exceed the fair value of the leased property at the inception of the lease.
d. Equal the total of the minimum lease payments during the lease term.
4. A lease agreement does not provide for transfer of title or a bargain purchase option. The
additional two criteria for lessors relating to the collectibility of lease payments and
unreimbursable costs to be incurred by the lessor have been met. The fair market value of
the land is less than 25 percent of the total fair market of the leased property. In this
situation, the lessor would:
a. Treat the lease of the land and building as an operating lease if neither the
economic life test (using the life of the building) nor the present value of the
minimum lease payments test is met.
b. Treat the lease as a sales-type finance lease for the building and an operating
lease for the land if either the economic life test or the present value of the
minimum lease payments test is met.
c. Treat the lease as a direct-financing-type lease for the building and an operating
lease for the land if either the economic life test or present value of the minimum
lease payments test is met.
d. Would not apply the economic life or present value of the minimum lease
payments test to a lease agreement involving real estate.
5. Which of the following statements concerning guaranteed residual values is appropriate
for the lessee?
a. The asset and related liability should be increased by the amount of the residual
value.
b. The asset and related liability should be decreased by the amount of the residual
value.
c. The asset and related liability should be decreased by the present value of the
residual value.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 1
 d. The asset and related liability should be increased by the present value of the
residual value.
6. What are the three types of period costs that a lessee experiences with finance leases?
a. Interest expense, amortization expense, executory costs.
b. Amortization expense, executory costs, lease expense.
c. Executory costs, interest expense, lease expense.
d. Lease expense, executory costs, initial costs.
7. An eight-year finance lease specifies equal minimum annual lease payments. Part of this
payment represents interest and part represents a reduction in the net lease liability. The
portion of the minimum lease payment in the fourth year applicable to the reduction of
the net lease liability should be:
a. The same as in the third year.
b. Less than in the third year.
c. Less than in the fifth year.
d. More than in the fifth year.
8. Johntech, Inc. leased a new machine having an expected useful life of 30 years from
Carbide Company Terms of the non-cancelable 25-year lease were that Johntech would
gain title to the property upon payment of a sum equal to the fair market value of the
machine at the termination of the lease. Johntech accounted for the lease as a finance
lease and recorded an asset and a liability in the financial records. The asset recorded
under this lease should properly be amortized over:
a. 5 years (the period of actual ownership).
b. 22.5 years (75 percent of the 30-year asset life).
c. 25 years (the term of the lease).
d. 30 years (the total asset life).
9. Which one of the following items is not part of the minimum lease payments from the
standpoint of the lessee?
a. The minimum rental payments called for by the lease .
b. Any guarantee the lessee is required to make at the end of the lease term
regarding any deficiency from a specified minimum.
c. Any estimated residual value at the end of the lease term.
d. Any payment the lessee must make at the end of the lease term to purchase the
leased property under a bargain purchase option.
10. Initial direct costs incurred by a lessor in consummating a sales-type lease are:
a. Charged to unearned income in the first period of the lease term.
b. Charged to cost of sales in the first period of the lease term.
c. Deferred and allocated over the lease term in proportion to the recognition of rent
revenue.
d. Deferred and allocated over the lease term on a straight-line basis.
11. Lease Y does not contain a bargain purchase option, but the lease term is equal to 90
percent of the estimated economic life of the leased property. Lease Z does not transfer
ownership of the property to the lessee by the end of the lease term, but the lease term is
equal to 75 percent of the estimated economic life of the leased property. How should
the lessee classify these leases?
a. Lease Y – finance lease; Lease Z – operating lease.
b. Lease Y – finance lease; Lease Z – finance lease.
c. Lease Y – operating lease; Lease Z – finance lease.
d. Lease Y – operating lease; Lease Z – operating lease.
12. M and J Construction built an office building at a cost of P500,000. M and J sold this
building to Matson at a material gain and then leased it back from Matson for a
stipulated annual rental. This gain should be:
a. Recognized in full as an ordinary item in the year of the transaction.
b. Recognized in full as an extraordinary item in the year of the transaction.
c. Deferred and amortized proportionately over the life of the lease.
d. Treated as a reduction in the obligation under the finance lease.
13. If a lease involves both land and buildings and a bargain purchase option is reasonably
assured, then:
a. Both will be financeized and amortized.
b. Buildings are financeized and amortized; land is an operating lease.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 2
 c. Buildings are financeized and amortized; land is financeized and left at cost.
d. Both are operating leases since criteria 3 and 4 are not met.
14. Which of the following statements characterizes lessor accounting for residual values?
a. Guaranteed residual values are included in the gross investment amount, but
unguaranteed residual values are excluded from the gross investment.
b. Unguaranteed residual values are included in the gross investment amount, but
guaranteed residual values are excluded from the gross investment.
c. Guaranteed residual values and unguaranteed residual values are excluded from
the gross investment.
d. Guaranteed residual values and unguaranteed residual values are included in the
gross investment.
15. If the residual value of a leased asset is greater than the amount guaranteed by the
lessee
a. The lessee pays the lessor for the difference.
b. The lessee recognizes a gain at the end of the lease term.
c. The lessee has no obligation related to the residual value.
d. The lessee pays the lessor for the difference.
16. Which of the following is true regarding the lease term?
a. The lease term does not include all periods covered by bargain renewal options.
b. The lease term includes all periods for which failure to renew imposes a penalty
sufficiently high that the lessee probably will renew.
c. The lease term may extend beyond the date a bargain purchase option becomes
exercisable.
d. The lease term does not include all periods representing renewals or extensions of
the lease at the lessor's option.
17. Which of the following is not a required disclosure for lessors?
a. Total of minimum sublease rentals to be received in the future under non-
cancelable subleases.
b. Unearned interest revenue.
c. Unguaranteed residual values accruing to the benefit of the lessor.
d. A general description of the lessor's material leasing arrangements.
18. Draper Corporation leased a new building and land from Baylor Leasing Inc. for 25 years.
At the inception of the lease the building and land have fair market values of P200,000
and P25,000, respectively. The building has an expected economic life of 30 years. Which
of the following statements is correct regarding Draper's treatment of the lease?
a. Draper should treat the lease as a finance lease even though there is no bargain
purchase option and no automatic transfer of ownership at the termination of the
lease.
b. Draper should treat the lease as a finance lease only if there is either a bargain
purchase option or an automatic transfer of ownership at the termination of the
lease.
c. Draper should treat the lease as a finance lease provided that the land and
building are recorded in separate asset accounts and accounted for separately.
d. Draper should treat the lease as a finance lease only if Baylor treats the transaction
as a leveraged lease.
19. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental
payments should be:
a. Allocated between interest expense and depreciation expense.
b. Allocated between a reduction in the liability for leased assets and interest
expense.
c. Recorded as a reduction in the liability for leased assets.
d. Recorded as rental expense.
20. If the sale and leaseback transaction results in an operating lease and the sales price is
above fair value, the excess of the fair value over the carrying amount is:
a. Deferred and amortized over the period for which the asset is expected to be used.
b. Recognized immediately in profit or loss.
c. Recognized in other comprehensive income.
d. Not recognized.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 3
SHORT PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be
written on the answer sheet provided with this questionnaire. Solutions are to be written in a
separate sheet of paper to be submitted along with the answer sheet. Round off present value
factors to four decimal places. Each item is worth 2 points.
PROBLEM 1: On December 1, 2011, Goetz Corporation leased office space for 10 years at a
monthly rental of P90,000. On that date Perez paid the landlord the following amounts:
Rent deposit P 90,000
First month’s rent 90,000
Last month’s rent 90,000
Installation of new walls and offices 495,000
*The entire amount of P765,000 was charged to rent expense in 2011.
1. What amount should Goetz have charged to expense for the year ended December 31,
2011? 94,125
PROBLEM 2: On January 1, 2011, Dean Corporation signed a ten-year non-cancelable lease for
certain machinery. The terms of the lease called for Dean to make annual payments of P100,000
at the end of each year for ten years with title to pass to Dean at the end of this period. The
machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-
line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease
transaction as a finance lease. The lease payments were determined to have a present value of
P671,008 at an effective interest rate of 8%.
2. With respect to this capitalized lease, Dean should record total expenses for 2011: 98,415
PROBLEM 3: On January 1, 2011, Yancey, Inc. signs a 10-year non-cancelable lease agreement
to lease a storage building from Holt Warehouse Company. The following information pertains to
this lease agreement.
A. The agreement requires equal rental payments at the end of each year.
B. The fair value of the building on January 1, 2011 is P3,000,000; however, the book value to
Holt is P2,500,000.
C. The building has an estimated economic life of 10 years, with no residual value. Yancey
depreciates similar buildings on the straight-line method.
D. At the termination of the lease, the title to the building will be transferred to the lessee.
E. Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Company set the
annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by
Yancey, Inc.
F. The yearly rental payment includes P10,000 of executory costs related to taxes on the
property.
3. What is the amount of the minimum annual lease payment? (Rounded to the nearest
peso). 488,236
4. What is the amount of the total annual lease payment? 498,237
5. Yancey, Inc. would record depreciation expense on this storage building in 2011 of
(Rounded to the nearest peso). 300,000
PROBLEM 4: Metcalf Company leases a machine from Vollmer Corporation under an agreement
which meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment
of P102,000 at the beginning of each year, including P15,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit
rate is 8% and is known by the lessee.
6. Metcalf should record the leased asset at: 434,366
PROBLEM 5: On December 31, 2011, Lang Corporation leased a ship from Fort Company for an
eight-year period expiring December 30, 2019. Equal annual payments of P200,000 are due on
December 31 of each year, beginning with December 31, 2011. The lease is properly classified
as a finance lease on Lang 's books. The present value at December 31, 2011 of the eight lease
payments over the lease term discounted at 10% is P1,173,685.
7. Assuming all payments are made on time, the amount that should be reported by Lang
Corporation as the total obligation under capital leases on its December 31, 2012
statement of financial position is: 871,054
PROBLEM 6: On January 1, 2011, Sauder Corporation signed a five-year non-cancelable lease for
equipment. The terms of the lease called for Sauder to make annual payments of P50,000 at the
beginning of each year for five years with title to pass to Sauder at the end of this period. The
equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the
straight-line method of depreciation for all of its fixed assets. Sauder accordingly accounts for

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 4
this lease transaction as a capital lease. The minimum lease payments were determined to have
a present value of P208,493 at an effective interest rate of 10%.
8. In 2012, Sauder should record interest expense of 12,434
PROBLEM 7: On January 1, 2011, Ogleby Corporation signed a five-year non-cancelable lease
for equipment. The terms of the lease called for Ogleby to make annual payments of P60,000 at
the end of each year for five years with title to pass to Ogleby at the end of this period. The
equipment has an estimated useful life of 7 years and no salvage value. Ogleby uses the
straight-line method of depreciation for all of its fixed assets. Ogleby accordingly accounts for
this lease transaction as a finance lease. The minimum lease payments were determined to
have a present value of P227,448 at an effective interest rate of 10%.
9. With respect to this capitalized lease, for 2011 Ogleby should record total expenses of:
55,238
10. With respect to this capitalized lease, for 2012 Ogleby should record total expense of:
51,512
PROBLEM 8: Emporia Corporation is a lessee with a finance lease. The asset is recorded at
P450,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to
have a market value of P150,000 at the end of 5 years, and a market value of P50,000 at the
end of 8 years. The lease agreement provides for the transfer of title of the asset to the lessee at
the end of the lease term.
11. What amount of depreciation expense would the lessee record for the first year of the
lease? 50,000
PROBLEM 9: Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of P86,038, with the first payment due at lease inception. The lease does
not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year
useful life and no salvage value. Pisa, Inc.’s incremental borrowing rate is 10% and the rate
implicit in the lease (which is known by Pisa, Inc.) is 8%.
12. What is the amount recorded for the leased asset at the lease inception? 307,767
13. What is the amount of interest expense recorded by Pisa, Inc. in the first year of the asset’s
life? 17,738
14. What is the amount of principal reduction recorded when the second lease payment is
made in Year 2? 68,300
15. What is the amount of depreciation expense recorded by Pisa, Inc. in the first year of the
asset’s life? 76,942
PROBLEM 10: Haystack, Inc. manufactures machinery used in the mining industry. On January 2,
2011 it leased equipment with a cost of P200,000 to Silver Point Company. The 5-year lease calls
for a 10% down payment and equal annual payments at the end of each year. The equipment
has an expected useful life of 5 years. Silver Point’s incremental borrowing rate is 10%, and it
depreciates similar equipment using the sum of the year’s digit method. The selling price of the
equipment is P325,000, and the rate implicit in the lease is 8%, which is known to Silver Point
Company.
16. What are the equal annual payments? 73,259
17. What is the amount of interest expense recorded by Silver Point Company for the year
ended December 31, 2011? 23,400
18. What is the book value of the leased asset at December 31, 2011? 195,000
19. What is the balance in the lease liability account? 242,643
PROBLEM 11: Hook Company leased equipment to Emley Company on July 1, 2010, for a one-
year period expiring June 30, 2011, for P60,000 a month. On July 1, 2011, Hook leased this piece
of equipment to Terry Company for a three-year period expiring June 30, 2014, for P75,000 a
month. The original cost of the equipment was P4,800,000. The equipment, which has been
continually on lease since July 1, 2006, is being depreciated on a straight-line basis over an
eight-year period with no salvage value. Both the lease to Emley and the lease to Terry are
appropriately recorded as operating leases for accounting purposes
20. What is the amount of income (expense) before income taxes that Hook would record as
a result of the above facts for the year ended December 31, 2011? 210,000
21. What is the amount of income (expense) before income taxes that Emley would record as
a result of the above facts for the year ended December 31, 2011? 360,000
22. What is the amount of income (expense) before income taxes that Terry would record as a
result of the above facts for the year ended December 31, 2011? 450,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 5
PROBLEM 12: Hull Company leased equipment to Riggs Company on May 1, 2011. The lease
expires on May 1, 2012. Riggs could have bought the equipment from Hull for P3,200,000 instead
of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2008,
of P2,800,000. Hull's depreciation on the equipment in 2011 was P360,000. During 2011, Riggs paid
P720,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related
costs under the terms of the lease of P64,000 in 2011. After the lease with Riggs expires, Hull will
lease the equipment to another company for two years.
23. Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the
year ended December 31, 2011, should be: 720,000
24. The income before income taxes derived by Hull from this lease for the year ended
December 31, 2011, should be: 296,000
PROBLEM 13: On January 2, 2011, Gold Star Leasing Company leases equipment to Brick
Company with 5 equal annual payments of P40,000 each, payable beginning December 31,
2011. Brick Company agrees to guarantee the P25,000 residual value of the asset at the end of
the lease term. Brick’s incremental borrowing rate is 10%, however it knows that Gold Star’s
implicit interest rate is 8%.
25. What journal entry would Gold Star make at January 2, 2011 assuming this is a direct–
financing lease?
176,835
176,835
PROBLEM 14: Mays Company has a machine with a cost of P400,000 which also is its fair market
value on the date the machine is leased to Park Company. The lease is for 6 years and the
machine is estimated to have an unguaranteed residual value of P40,000. The lessor's interest
rate implicit in the lease is 12%.
26. The six beginning-of-the-year lease payments would be: 82,465
PROBLEM 15: Geary Company leased a machine to Dains Company Assume the lease
payments were made on the basis that the residual value was guaranteed and Geary gets to
recognize all the profits, and at the end of the lease term, before the lessee transfers the asset to
the lessor, the leased asset and obligation accounts have the following balances:
Leased equipment under finance lease P 400,000
Accumulated depreciation – finance lease 384,000
Interest payable 1,520
Obligation under finance leases 14,480
27. If, at the end of the lease, the fair market value of the residual value is P8,800, what gain or
loss should Geary record? 7,200
PROBLEM 16: Harter Company leased machinery to Stine Company on July 1, 2011, for a ten-
year period expiring June 30, 2021. Equal annual payments under the lease are P75,000 and are
due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest used
by Harter and Stine is 9%. The cash selling price of the machinery is P525,000 and the cost of the
machinery on Harter's accounting records was P465,000.
28. Assuming that the lease is appropriately recorded as a sale for accounting purposes by
Harter, what amount of interest revenue would Harter record for the year ended
December 31, 2011? 20,250
PROBLEM 17: Pye Company leased equipment to the Polan Company on July 1, 2011, for a ten-
year period expiring June 30, 2021. Equal annual payments under the lease are P80,000 and are
due on July 1 of each year. The first payment was made on July 1, 2011. The rate of interest
contemplated by Pye and Polan is 9%. The cash selling price of the equipment is P560,000 and
the cost of the equipment on Pye's accounting records was P496,000.
29. Assuming that the lease is appropriately recorded as a sale for accounting purposes by
Eby, what is the amount of profit on the sale and the interest revenue that Pye would
record for the year ended December 31, 2011? 64,000;21,600=85,600
PROBLEM 18: Metro Company, a dealer in machinery and equipment, leased equipment to
Sands, Inc., on July 1, 2011. The lease is appropriately accounted for as a sale by Metro and as a
purchase by Sands. The lease is for a 10-year period (the useful life of the asset) expiring June 30,
2021. The first of 10 equal annual payments of P621,000 was made on July 1, 2011. Metro had
purchased the equipment for P3,900,000 on January 1, 2011, and established a list selling price of
P5,400,000 on the equipment. Assume that the present value at July 1, 2011, of the rent
payments over the lease term discounted at 8% (the appropriate interest rate) was P4,500,000.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 6
 30. Assuming that Sands, Inc. uses straight-line depreciation, what is the total amount of
depreciation and interest expense that Sands should record for the year ended December
31, 2011? 380,160
31. What is the total amount of income that Metro should record for the year ended
December 31, 2011? 755,160
PROBLEM 19: Gage Company purchases land and constructs a service station and car wash for
a total of P360,000. At January 2, 2010, when construction is completed, the facility and land on
which it was constructed are sold to a major oil company for P400,000 and immediately leased
from the oil company by Gage. Fair value of the land at time of the sale was P40,000. The lease
is a 10-year, non-cancelable lease. Gage uses straight-line depreciation for its other various
business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the
facility and land will pass to Gage at termination of the lease. A partial amortization schedule for
this lease is as follows:
Date Payments Interest Amortization Balance
1/2/2010 P 400,000.00
12/31/2010 P 65,098.13 P 40,000.00 P 25,098.13 374,901.87
12/31/2011 65,098.13 37,490.19 27,607.94 347,293.93
12/31/2012 65,098.13 34,729.39 30,368.74 316,925.19
32. What is the discount rate implicit in the amortization schedule presented above? 10%
33. The total lease-related expenses recognized by the lessee during 2011 is: 61,490
34. What is the amount of the lessee's liability to the lessor after the December 31, 2012
payment? 316,925
35. The total lease-related income recognized by the lessee during 2011 is: 2,667
PROBLEM 20: On June 30, 2011, Falk Company sold equipment to an unaffiliated company for
P700,000. The equipment had a book value of P630,000 and a remaining useful life of 10 years.
That same day, Falk leased back the equipment at P7,000 per month for 5 years with no option
to renew the lease or repurchase the equipment.
36. Falk's rent expense for this equipment for the year ended December 31, 2011, should be
42,000
PROBLEM 21: On December 31, 2011, Bain Company sold a machine with 12 year useful life to
Ryan and simultaneously leased it back for one year.
Sales price P 360,000
Carrying amount 330,000
Present value of reasonable lease rentals (P3,000 for 12
months at 12%) 34,100
37. What gain from the sale should be reported in 2011? 30,000
PROBLEM 22: On December 31, 2011, Norhan Corporation sold Noel Company three airplanes
and simultaneously leased them back. Additional information pertaining to the sale-leaseback
follows:
Plane 1 Plane 2 Plane 3
Sales price P 600,000 P 1,000,000 P 300,000
Carrying amount, 12/31/2011 100,000 550,000 350,000
Remaining useful life, 12/31/2011 10 years 35 years 5 years
Lease term 8 years 3 years 4 years
Annual lease payments P 100,000 P 200,000 P 75,000
38. What net amount should Norhan report as gain (loss) on sale and leaseback from the sale
of the three airplanes? 400,000 gain
39. What amount should Norhan report as deferred gain on these transactions? 500,000
40. What amount should Norhan report as deferred loss on these transactions? 0

LONG PROBLEMS. Compute for the amount/s asked by each problem. Final answers should be
written on the answer sheet provided within this questionnaire. Solutions are to be written in a
separate sheet of paper to be submitted along with the answer sheet. Round off present value
factors to four decimal places. Each item is worth 2 points.
PROBLEM 1: Nuggets Enterprises has a long standing policy of acquiring company equipment by
leasing. Early in 2011, the company entered into a lease for a new equipment. The lease
stipulates that annual lease payments will be made for 5 years. The payments are to be made in
advance on December 31 of each year. At the end of the 5 year period, Nuggets may
purchase the equipment. The estimated economic life of the equipment is 12 years. Nuggets

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 7
uses the calendar year for reporting purposes and straight line depreciation for other
equipment. In addition, the following information about the lease is also available:
Annual lease payments (including executory costs of
P5,000) P 60,000
Purchase option price 25,000
Estimated fair value of equipment after 5 years 75,000
Implicit rate 10%
Date of first lease payment Jan. 1, 2011
At the end of the lease term, the purchase option was not exercised by Nuggets.
1. The interest expense of Nuggets in relation to the lease in 2012 is 15,385
2. The current portion of the finance lease liability as of December 31, 2013 is: 43,575
3. The annual depreciation expense is: 117,840
4. Nuggets would recognize a loss on finance lease at the end of the lease term of: 222,222
PROBLEM 2: On January 1, 2011, Bee Company purchased a building for P6,000,000 cash for the
purpose of leasing it. The building is expected to have a 10-year life and no residual value. On
April 1, 2011, Bee Company leased the building to Aye Company for three years beginning
immediately. Under the terms of the operating lease, Aye will pay a monthly rental of P90,000
payable in advance. However, as an inducement to enter the lease, Bee granted Aye the first 6
months of the lease rent-free. On the same date, April 1, 2011, Bee received a security deposit
from Aye of P600,000 to be refunded upon the lease expiration. In addition to the rental, Bee
Company received from Aye a lease bonus of P120,000 on April 1, 2011. In negotiating and
arranging the operating lease, Bee paid initial direct costs of P300,000. On January 1, 2012, Aye
Company finished constructing an improvement in the rented building at a total cost of
P500,000. Such leasehold improvement is expected to be useful for 5 years with a residual value
of P50,000 at the end of its life. During each year over the lease term, Bee Company paid repairs
and maintenance expenses of P15,000. Based on the foregoing information, answer the
following questions:
5. The annual depreciation on the leasehold improvement made by Aye would be: 4,925,000
6. The building of Bee would be carried in the financial statements on December 31, 2012 at:
225,000
7. Bee would recognize a rent receivable on December 31, 2012 of: 225,000
8. Aye would recognize on December 31, 2012 total liabilities relating to the lease of:
5,150,000
9. Bee would recognize on December 31, 2012 total assets relating to the lease of: 225,000
10. Bee’s annual net rent income is:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 8