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JPIA - QEReview - IntAcc2 - HO1 - Finance Lease-Lessee

The document is a review guide for Intermediate Accounting 2, focusing on finance leases from a lessee's perspective. It includes various scenarios with financial data, calculations, and multiple-choice questions regarding lease liabilities, right of use assets, interest expenses, and depreciation. The content is structured to aid students in preparing for examinations in accounting principles related to leasing.

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Rianne Navidad
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52 views3 pages

JPIA - QEReview - IntAcc2 - HO1 - Finance Lease-Lessee

The document is a review guide for Intermediate Accounting 2, focusing on finance leases from a lessee's perspective. It includes various scenarios with financial data, calculations, and multiple-choice questions regarding lease liabilities, right of use assets, interest expenses, and depreciation. The content is structured to aid students in preparing for examinations in accounting principles related to leasing.

Uploaded by

Rianne Navidad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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NEU-JPIA QE REVIEW | INTERMEDIATE ACCOUNTING 2 | MAY-JUNE 2023

FINANCE LEASE - LESSEE


ADOPTED FROM: FAR-6833 | CPA REVIEW SCHOOL OF THE PHILIPPINES

1. At the beginning of current year, an entity leased a building from a lessor with the following pertinent
information:

Annual rental payable at the end of each year 1,500,000


Initial direct cost paid 405,000
Lease bonus paid to lessor before commencement of the lease 300,000
Lease incentive received 50,000
Cost of restoring building as required by contract 1,500,000
Present value of restoration cost discounted at 8% for six periods 945,000
Leasehold improvement – useful life 8 years 1,200,000
Purchase option that is reasonably certain to be exercised 1,000,000
Lease term 6 years
Useful life of building 10 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 6 periods at 10% 4.36
Present value of 1 for 6 periods at 10% 0.56
Present value of 1 for 6 periods at 8% 0.63

1. What is the initial lease liability?

a. 7,100,000
b. 6,540,000
c. 9,210,000
d. 9,600,000

2. What is the cost of the right of use asset?

a. 8,750,000
b. 8,700,000
c. 9,900,000
d. 7,755,000

3. What total amount of interest expense should be reported for the current year?

a. 710,000
b. 785,600
c. 804,500
d. 830,000

4. What is the lease liability at year-end?

a. 6,310,000
b. 5,694,000
c. 9,060,000
Lecturer: Caitlin R. Farin | Academic Affairs Committee Head, NEU-JPIA | 4th year, BS Accountancy
NEU-JPIA QE REVIEW | INTERMEDIATE ACCOUNTING 2 | MAY-JUNE 2023

d. 5,600,000

5. What is the depreciation of the right of use asset for current year?

a. 1,450,000
b. 1,550,000
c. 870,000
d. 875,000

6. What is the depreciation of the leasehold improvement for current year?

a. 200,000
b. 150,000
c. 120,000
d. 0

2. On January 1, 2021, an entity leased two automobiles for executive use. The lease required the entity to
make five annual payments of P2,000,000 beginning December 31, 2021. At the end of the lease term,
December 31, 2025, the entity had a residual value guarantee of the automobiles at P1,000,000. The
interest rate implicit in the lease is 10% and present value factors at 10% for 5 periods are 4.17 for an
annuity due, 3.79 for an ordinary annuity and 0.62 for present value of 1.

1. What is the lease liability on December 31, 2021?

a. 7,020,000
b. 5,722,000
c. 7,580,000
d. 6,338,000

2. What is the current portion of the lease liability on December 31, 2021?

a. 2,000,000
b. 1,298,000
c. 820,000
d. 500,000

3. What is the interest expense for 2021?

a. 758,000
b. 820,000
c. 834,000
d. 896,000

2. On January 1, 2021, an entity entered into a 5-year lease with a lessor. Annual lease payments of
P1,200,000 including annual executory cost of P200,000 are payable at the end of each year. The entity
knows that the lessor expects an 8% implicit rate on the lease. The entity has a 10% incremental borrowing
rate. The equipment is expected to have a useful life of 10 years. In addition, a third party has guaranteed
to pay the lessor a residual value of P500,000 at the end of the lease. The present value of an ordinary
Lecturer: Caitlin R. Farin | Academic Affairs Committee Head, NEU-JPIA | 4th year, BS Accountancy
NEU-JPIA QE REVIEW | INTERMEDIATE ACCOUNTING 2 | MAY-JUNE 2023

annuity of 1 for 5 years is 3.99 at 8% and 3.79 at 10%. The present value of 1 at 8% for 5 periods is 0.68
and at 10% for 5 periods is 0.62. On December 31, 2021, what is the principal amount of the lease
obligation?

a. 3,990,000
b. 3,309,200
c. 3,676,400
d. 3,971,040

4. At the beginning of current year, an entity entered into an 8-year finance lease for an equipment. The entity
accounted for the acquisition of the finance lease at P5,000,000 which included a P500,000 bargain
purchase option that is reasonably certain to be exercised. The expected fair value of the equipment is
P400,000 at the end of the 10-year useful life. What amount of straight line depreciation should be
recognized for the current year?

a. 575,000
b. 460,000
c. 625,000
d. 450,000

5. At the beginning of current year, an entity entered into an 8-year lease for an equipment. The entity
accounted for the acquisition as a finance lease for P6,000,000 which included a P600,000 residual value
guarantee. At the end of the lease, the asset will revert back to the lessor. It is estimated that the fair
value of the asset at the end of the 10-year useful life would be P400,000. What amount should be
recognized as straight line depreciation on the leased asset for the current year?

a. 675,000
b. 700,000
c. 540,000
d. 560,000

Lecturer: Caitlin R. Farin | Academic Affairs Committee Head, NEU-JPIA | 4th year, BS Accountancy

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