Info 1

SALE AND LEASEBACK 1. On January 1, 2013, Hooks Oil Company sold equipment with a carrying amount of P1,000,000 and a remaining useful life of 10 years to Maco Drilling for P1,500,000. Hooks immediately leased the equipment back under a 10-year finance lease with a present value of P1,500,000 and will depreciate the equipment using the straight line method. Hooks made the first annual lease payment of P244,120 on December 31, 2013. The implicit interest rate in the lease is 10%. In Hook’s December 31, 2013 statement of financial position, what amount should be reported as unearned gain on equipment sale? a. 500,000 b. 450,000 c. 255,880 d. 0 2. On December 31, 2013, Albocasser Company purchased a tractor from Cheliff Company. Simultaneous with the sale, Cheliff leased back the tractor for 12 years for use in the new farm that it is developing. The sale price of the tractor was P7,800,000, while the carrying amount in the books of Cheliff on the date of the sale was P5,850,000. Cheliff’s engineers have estimated that the remaining economic life of the tractor is 15 years. Cheliff is a wholly-owned subsidiary of a US entity. It is required to follow US generally accepted accounting principles in the reporting package for consolidation. What is the amount that Cheliff should report as deferred gain from the sale of the tractor on December 31, 2013? a. 1,950,000 b. 1,820,000 c. 1,787,500 d. 0 3. On January 1, 2013, Baker Company sold equipment to an affiliated entity for P5,700,000. The equipment had a carrying amount of P4,500,000 and a remaining life of five years. On the same date, the entity leased back the equipment at P1,350,000 per year payable in advance for a five-year period. The lessor’s implicit interest rate in the lease is 10%. The entity used the double declining balance method of depreciation. What is the unearned income on the sale and leaseback on December 31, 2013? a. 1,200,000 b. 960,000 c. 720,000

d. 0

4. On January 1, 2013, Accord Company sold a building with a carrying amount of P4,200,000 to another entity for P4,050,000. The entity immediately entered into a leasing agreement wherein it would lease the building back for an annual

payment of P640,000. The term of the lease is 10 years, the expected remaining useful life of the building. The first annual lease payment is to be made immediately, and future payments will be made on January 1 of each succeeding year. The lessor’s implicit interest rate is 12%. What amount of loss on sale and leaseback should be recognized for 2013? a. 150,000 b. 135,000 c. 15,000 (For questions 5 & 6)

d. 0

Sensible Company sold an item of plant and

machinery on January 1, 2013 for P2,500,000 which is equal to fair value. The carrying amount of the asset was P2,000,000. The entity leased the item back on that date for remaining useful life of 5 years. Lease payments are P700,000 on January 1 each year. 5. What is the gain on disposal to be recognized for 2013? a. 500,000 b. 100,000 c. 250,000

d. 0

6. What is the total finance charge over the lease term? a. 1,500,000 b. 1,000,000 c. 500,000

d. 0

(For questions 7 & 8)

In an attempt to alleviate liquidity problems, Banco

Company entered into an agreement on January 1, 2013 to sell the processing plant to another entity for P3,500,000 which is the fair value of the plant. At the date of sale, the plant had a carrying amount of P2,750,000. The entity immediately leased the processing plant back from the buyer. The terms were: Annual payment in arrears, commencing December 31, 2013 700,000 Reimbursement to the lessor for maintenance cost Included in the annual payment 35,000 Lease term 6 years Economic life of plant 8 years 7. What is the deferred gain on the sale and leaseback on December 31, 2013? a. 750,000 b. 625,000 c. 656,250 d. 0 8. What is the total finance charge over the lease term? a. 1,240,000 b. 1,820,000 c. 700,000

d. 490,000

9. On January 1, 2013, Halo Company sold a computer system to Lark Company for P2,550,000 and immediately leased the computer system back. The

computer was carried on Halo’s books at an amount of P2,250,000. The term of the noncancelable lease is 10 years and title will transfer to Halo at the end of the lease term. The lease agreement required equal rental payments of P415,000 at the end of each year. The incremental borrowing rate for Halo is 12% but Halo is aware that Lark set the annual rental to ensure a rate of return of 10%. The computer has a fair value of P2,550,000 on January 1, 2013 and an estimated economic life of 12 years. Halo paid executor cost of P45,000 for the current year. Which of the following would be recorded by Halo on December 31, 2013? a. Debit leased computer P2,550,000 b. Credit deferred gain P300,000 c. Debit deferred gain P25,000 d. Debit deferred gain P30,000 10. On December 31, 2013, Bain Company sold a machine with 12-year useful life to another entity and simultaneously leased it back for one year. Sale price Carrying amount Present value of reasonable lease rentals (P3,000 for 12 months @ 12%) What revenue from the sale should be reported in 2013? a. 34,100 b. 30,000 c. 4,100

360,000 330,000 34,100 d. 0

11. On December 31, 2013, Mae Company sold an equipment with useful life of 10 years and simultaneously leased back the equipment for 2 years. Sale price Carrying amount Fair value of the equipment on the date of sale What amount of gain should be reported in 2013? a. 2,500,000 b. 1,500,000 c. 1,000,000

7,500,000 5,000,000 6,000,000 d. 1,750,000

12. On December 31, 2013, Thunder Company sold land with a cost of P1,500,000 to Victoria Company for P2,300,000 when the land’s fair value was P2,150,000. Thunder Company immediately entered into a cancellable lease agreement to use the land for two years at an annual rental of P20,000. What amount of profit should Thunder record on the sale of land for 2013? a. 150,000 b. 800,000 c. 650,000

d. 725,000

13. On June 30,2013, Lee Company sold an equipment for P5,500,000. The equipment had a carrying amount of P5,000,000 and a remaining life of 10 years. That same day, the entity leased back the equipment at P15,000 per month for 2 years with no option to renew the lease or repurchase the equipment. The present value of the lease payments using the appropriate interest rate was P318,650 on June 30, 2013. What is the rent expense for the year ended December 31, 2013? a. 110,000 b. 90,000

c. 50,000

d. 40,000

14. On June 30, 2013, Pam Company sold equipment for P3,500,000. The equipment had a carrying amount of P3,150,000 and a remaining useful life of 10 years. That same day, the entity leased back the equipment at P35,000 per month for 5 years with no option to renew the lease or repurchase the equipment. What amount should be reported as rent expense for 2013? a. 420,000 b. 210,000 c. 175,000 d. 140,000 15. On January 1, 2013, Tripoli Company sold a machine for P3,000,000. The fair value on the date of sale was P3,500,000. The machine had a carrying amount of P4,000,000 and remaining life of 10 years. The entity immediately leased back the machine at an annual rental of P60,000 for four years. It was determined that the annual rental is sufficiently lowercompared to the market rent of a similar asset. What total amount should be recognized in profit or loss for 2013? a. 1,060,000 b. 310,000 c. 185,000 d. 60,000 DIRECT FINANCING LEASE – LESSOR (For questions 16 & 17)

Camia Company is in the business of leasing new

sophisticated equipment. As a lessor, the entity expects 12% return. At the end of the lease term, the equipment will revert to Camia Company. On January 1, 2013, an equipment is leased to another entity under a direct financing lease. Cost of equipment to Camia Residual value – unguaranteed Annual rental payable in advance Useful life and lease term Implicit interest rate First lease payment

5,500,000 400,000 959,500 8 years 12% January 1, 2013

16. What is the unearned interest income on January 1, 2013? a. 2,576,000 b. 2,176,000 c. 1,776,000

d. 1,616,500

17. What is the interest income for 2013? a. 322,000 b. 544,860

d. 496,860

c. 660,000

18. On January 1, 2013, Nueva Company, acting as a lessor, leased an equipment for ten years at an annual rental of P1,200,000 payable by Caster Company, the lessee, at the beginning of each year under a direct financing lease. The equipment had a cost of P8,400,000 with an estimated life of 12 years and no residual value. The implicit rate is 9%. What amount of interest income should be reported in 2013? a. 500,000

b. 648,000

(For questions 19 & 20)

c. 756,000

d. 360,000

On January 1, 2013, Glade Company leased a

computer equipment to Blass Company under a direct financing lease. The equipment has no residual value at the end of the lease and the lease does not contain bargain price option. The entity wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000. The present value of an annuity due of 1 at 8% for 5 years is 4.312. 19. What is the total interest revenue that Glade will earn over the lease term? a. 1,293,600 b. 1,394,500 c. 516,000 d. 750,000 20. What is the interest revenue to be reported by Glade for 2013? a. 258,720 b. 198,720 c. 103,200 d. 646,800 21. Cassandra Company acquired a specialized packaging machine for P3,000,000 cash and leased it for a period of six years, after which the machine is to be returned to Cassandra Company. The unguaranteed residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% earned by Cassandra. The PV of 1 at 12% for six periods is .51, and the PV of an annuity in advance of 1 at 12% for six periods is 4.60. What is the annual lease payment payable in advance required to yield the desired return? a. 630,000 b. 652,174 c. 608, 695 d. 732,000

22. Magnum Company had an asset costing P5,239,000. The asset is leased on January 1, 2013 to another entity. Five annual lease payments are due each January 1 beginning January 1, 2013. The lessee guaranteed the P2,000,000 residual value of the asset as of the end of the lease term on December 31, 2017. The implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of an annuity of 1 in advance at 8% for 5 periods is 4.31. What is the annual lease payment? a. 1,215,545 b. 1,531,090

c. 900,000

d. 751,500

23. Irene Company decided to enter the leasing business. The entity acquired a specialized packaging machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual lease payments are due each January 1 and the first payment was made on January 1, 2013. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Irene Company. The present value of 1 at 12% for six periods is 0.51, and the present value of an annuity in advance of 1 at 12% for six periods is 4.60. What is the annual lease rental payable in advance required to yield the desired return? a. 500,000 b. 477,826

c. 383,333

d. 460,000

24. Lyle Company entered into a finance lease on January 1, 2013. A third party guaranteed the residual value of the asset under the lease estimated to be P120,000 on January 1, 2018, the end of the lease term. Annual lease payments are P100,000 due each December 31, beginning December 31, 2013. The last payment is due December 31, 2017. Both the lessor and lessee used 10% as the interest rate. The remaining useful life of the asset was six years at the commencement of the lease. The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79. What is the lease receivable of the lessor and lease liability of the lessee at the commencement of the lease? Lease receivable Lease liability a. 453,400 453,400 b. 379,000 379,000 c. 453,400 379,000

d.

379,000

453,400

25. On December 31, 2013, Benz Company, a lessor, sold machinery that it had been leasing under a direct financing lease. On January 1, 2013 after receipt of the lease payment for the year, the following account balances were associated with the lease: Gross lease receivable Unearned interest income Present value of lease receivable

5,850,000 1,000,000 4,850,000

The interest rate implicit in the lease is 10%. On December 31, 2013, Benz Company sold the leased machinery to the lessee for P3,250,000 cash. What is the loss on sale of machinery that should be recognized on December 31, 2013? a. 2,085,000 b. 1,600,000 c. 2,600,000 d. 2,015,000 SALES TYPE LEASE – LESSOR 26. Howe Company leased equipment to Kew Company on January 1, 2013, for an eight-year period expiring December 31, 2020. Equal payments under the lease are P500,000 and are due on January 1 of each year. The first payment was made on January 1, 2013. The selling price of the equipment is P2,900,000. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments at an implicit interest rate of 12% is P2,780,000. What amount of gross profit on sales should be reported for 2013? a. 900,000 b. 780,000 c. 240,000 d. 333,600 27. Liza Company is a car dealer. On January 1, 2013, the entity entered into a finance lease with a customer under which the customer would pay P200,000 on January 1 each year for 5 years, commencing in 2013. The cost of the car is P600,000 and the cash selling price was P750,000. The entity paid legal fees of P20,000 to a law firm in connection with the arrangement of the lease. What amount of the gross profit on sale should be recognized for 2013? a. 150,000 b. 130,000 c. 20,000 d. 0

(For questions 28-30)

Vanderbilt Company is a dealer in machinery. On

January 1, 2013, machinery was leased to another entity with the following provisions: Annual rental payable at the end of each year Lease term and useful life of machinery Cost of machinery Residual value – unguaranteed Implicit interest rate PV of an ordinary annuity of 1 for 5 periods at 12% PV of 1 for 5 periods at 12%

3,000,000 5 years 8,000,000 1,000,000 12% 3.60 0.57

At the end of the lease term on December 31, 2017, the machinery will revert to Vanderbilt. Vanderbilt incurred initial direct cost of P300,000 in finalizing the lease agreement. 28. What is the unearned interest income on January 1, 2013? a. 4,630,000 b. 4,200,000 c. 5,200,000

d. 3,630,000

29. What amount should be reported as gross profit on sale in 2013? a. 7,700,000 b. 3,070,000 c. 2,500,000 d. 3,370,000 30. What is the interest income for 2013? a. 1,364,400 b. 1,296,000 (For questions 31-33)

c. 1,800,000

d. 926,000

Reagan Company used leases as a method of selling

products. In 2013, the entity completed construction of a passenger ferry. On January 1, 2013, the ferry was leased to the Super Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. Annual lease payments do not include executor costs. Other terms of the agreement are as follows: Original cost of the ferry Fair value of ferry at lease date Lease payments payable in advance Estimated residual value Implicit interest rate Date of first lease payment Lease term Present value of an annuity due of 1 at 10% for 20 periods Present value of 1 at 12% for 20 periods

8,000,000 12,555,000 1,500,000 2,000,000 12% January 1, 2013 20 years 8.37 0.10

31. What is the unearned interest income on January 1, 2013? a. 17,445,000 c. 19,445,000 b. 19,245,000 d. 22,000,000 32. What is the gross profit on sale for 2013? a. 6,555,000 b. 4,555,000 c. 4,755,000

d. 4,355,000

33. What is the interest income for 2013? a. 1,506,600 b. 1,524,600

d. 1,350,600

(For questions 34-36)

c. 1,326,600

Marianas Company adopted the policy of leasing as

the primary method of selling ots products. The entity’s main product is a small helicopter that is very popular among politicians and entity managers. Marianas Company constructed such a helicopter fo Jade Company at a cost of P8,500,000. Financing the construction was at a 14% rate. The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership transferring to the lessee at the end of the lease period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date. The lease payments began January 1, 2013. Marianas Company incurred initial direct cost of P500,000 in financing the lease agreement with Jade. The sale price of the helicopter is P14,875,000. The present value of an annuity due of 1 at 14% for 10 periods is 5.95. 34. What is the gross profit on sale that should be recognized by Marianas Company? a. 5,875,000

b. 6,375,000

c. 4,275,000

35. What is the unearned interest income on January 1, 2013? a. 10,125,000 b. 11,725,000 c. 9,625,000 (For questions 36 & 37)

d. 4,775,000 d. 8,525,000

Easter Company leased equipment to Faye Company

on January 1, 2013. The lease is for an eight-year period expiring December 31, 2020. The first eight annual payments of P900,000 was made on January 1, 2013. The entity had purchased the equipment on December 29, 2012 for

P4,800,000. The lease is appropriately accounted for as a sales type lease. The present value on January 1, 2013 of all rent payments over the lease term discounted at a 10% interest rate was P5,280,000. 36. What is the gross profit on sale for 2013? a. 1,920,000 b. 2,400,000 c. 480,000 d. 240,000 37. What amount of interest revenue should be recorded in 2014? a. 490,000 b. 480,000 c. 438,000 d. 240,000 (For questions 38 & 39)

Hazel Company leased machinery to Anne Company

on July 1, 2013 for a ten-year period expiring June 30, 2023. Equal annual payments under the lease are P750,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The implicit rate of interest is 9%. The cash selling price of the machinery is P5,250,000 and the carrying amount is P4,650,000. The lease is appropriately recorded as a sales type lease. 38. What is the gross profit on sale for 2013? a. 600,000 b. 300,000 c. 472,500

d. 0

39. What amount of interest revenue should be recorded for 2013? a. 175,500 b. 236,250 c. 405,000 d. 202,500 FINANCE LEASE – LESSEE 40. Elysee Company leased a machine with a fair value of P1,650,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease amounted to P12,500. The present value of the minimum lease payments discounted at the rate implicit in the lease is P1,584,000. At what amount should the machine be recognized initially in Elysee’s financial statement? a. 1,650,000 b. 1, 596,500 c. 1,662,500 d. 1,584,000 41. Mindoro Company leased a land and building for 20 years, the useful life of the building, with effect from January 1, 2013. At that date, the fair value of the leasehold interest was P7,500,000 and of which P6,000,000 was attributable to the building. Annual rentals of P800,000 are payable in advance on January 1. What amount should be recognized as an operating lease expense for 2013? a. 800,000 b. 640,000 c. 160,000 d. 0

42. Casanova 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 P5,000,000 and P2,500,000 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. 7,500,000

b. 5,000,000

c. 2,500,000

d. 0

43. Neal Company entered into a nine-year finance lease on a warehouse on December 31, 2013. Lease payment of P520,000 which includes real estate taxes and other executory cost of P20,000, are due annually, beginning on December 31, 2014 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, 2013? a. 2,800,000 b. 2,912,000

c. 4,500,000

d. 4,680,000

44. Robbin Company leased a machine from Ready Leasing Company. The lease qualifies as a finance lease and requires 10 annual payments of P100,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option of P100,000 at the end of the tenth year, even though the machine’s estimated value on that date is P200,000. Present value of an annuity due (in advance) of 1 at 12% for 10 periods Present value of 1 at 12% for 10 periods

6.328 0.322

What amount should be recorded as lease liability at the beginning of the lease term? a. 621,600 b. 648,600 c. 665,000 d. 697,200 45. Helen Company is a lessee under a finance lease. The asset is recorded at P4,500,000 and has an economic life of 8 years. The lease term is 5 years. The asset is expected to have a fair value of P500,000 at the end of 8 years. The lease agreement provides for the transfer of tile of the asset to the lessee at the

end of the lease term. What amount of depreciation expense should be recorded for the first year of the lessee? a. 900,000 b. 800,000

c. 600,000

d. 500,000

46. Miracle Company leased machinery with useful life of 10 years for 10 years on January 1, 2013. At that date, the fair value of the machinery was P4,900,000. Annual rentals of P700,000 are payable in advance on January 1 and the interest rate implicit in the lease is 9%. What is the total lease liability (principal and interest) which should be recognized on December 31, 2013? a. 4,578,000 b. 4,641,000 700,000 d. 0 47. On January 1, 2013, Harrow Company as lessee signed a five-year noncancelable equipment lease with annual payments of P1,000,000 beginning December 31, 2013. The entity treated this transaction as a finance lease. The five lease payments have a present value of P3,790,000 at January 1, 2013 based on interest of 10%. What amount should be reported as interest expense for the year ended December 31, 2013? a. 379,000 b. 279,000 c. 242,000

d. 0

48. Yemen Company leased an equipment for 6 years from another entity on January 1, 2013. The entity recorded the asset at P4,800,000 which included bargain purchase option of P100,000. The equipment had an eight-year useful life. On January 1, 2019, the entity did not exercise the bargain purchase option. What is the loss on finance lease to be recognized in 2019? a. 1,325,000 b. 1,425,000 c. 200,000 d. 0

OPERATING LEASE 49. On December 1, 2013, Tell Company leased office space for five years at a monthly rental of P600,000. On the same date, the entity paid the lessor the following amounts: Bonus to obtain lease First month’s rent Last month’s rent Security deposit refundable at lease expiration Installation of new walls and offices

300,000 600,000 600,000 800,000 3,600,000

What total amount of the expenses relating to utilization of the office space should be reported for 2013? a. 1,400,000 b. 1,200,000

c. 665,000

d. 600,000

50. On July 1, 2013, Kemp Company leased office space for five years at P150,000 a month. On that date, the entity paid the lessor the following amounts: Rent security deposit First month’s rent Last month’s rent Non-refundable reimbursement to lessor for Modifications to the leased premises

350,000 150,000 150,000

900,000 1,550,000 The entity made timely rental payments from August 1 through December 1, 2013. What portion of payments to the lessor should be deferred on December 31, 2013? a. 1,400,000

b. 1,310,000

c. 1,250,000

d. 500,000

51. On January 1, 2013, Park Company signed a 10-year operating lease for office space at P960,000 per year. The lease included a provision for additional rent of 5% of annual company sales in excess of P5,000,000. The sales for the year ended December 31, 2013 totalled P6,000,000. Upon execution of the lease, the entity paid P240,000 as a bonus for the lease. What is the rent expense for the year ended December 31, 2013? a. 984,000 b. 1,010,000

c. 1,034,000

d. 1,250,000

52. As an inducement to enter a lease, Aris Company, a lessor, granted Hompson Company, a lessee, nine months of free rent under a five year operating lease. The lease was effective on July 1, 2013and provided for monthly rental of P1000,000 to begin April 1, 2014. In the income statement for the year ended June 30,2014, what amount should be reported as rent expense? a. 1,020,000 b. 900,000 c. 300,000 d. 255,000 53. Jana Company leased a building for 20 years with effect from January 1, 2013. The useful life of the building is 40 years. As part of the negotiations for the lease, the lessor granted Jana a rent-free period. Annual rentals of P1,600,000

are payable in advance on January 1, commencing in 2015. What amount of rent expense should be recognized for the year ended December 31, 2013? a. 1,600,000 b. 1,520,000 c. 1,440,000 d. 0 54. On October 1, 2013, Dean Company leased office space at a monthly rental of P300,000 for 10 years expiring September 30,2023. As an inducement for Dean to enter into the lease, the ;essor permitted Dean to occupy the premises rentfree from October 1 to December 31, 2013. For the year ended December 31, 2013, what amount should be reported as rent expense? a. 900,000 b. 292,500 c. 877,500

d. 0

55. On July 1, 2013, 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, 2013. Additional on July 1, 2013, the entire 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, 2013, what amount should be reported as prepaid rent? a. 180,000

b. 220,000

c. 240,000

d. 380,000

56. As an incentive to enter a four-year operating lease for a warehouse, Dunhill Company received an upfront cash of P60,000 upon signing an agreement on January 1,2013. The annual rental is P1,115,000. What amount should be recognized as lease expense for 2013? a. 1,115,000 b. 1,100,000 c. 1,055,000

d. 0

57. As an incentive to enter a noncancelable operating lease for office premises for 10 years, Valley Company as lessor has offered the lessee a rent-free period of 2 years. Annual rental payment under the lease commencing in the third year is P500,000. What amount of lease income should be recognized by Valley Company in the first year? a. 400,000 b. 500,000

c. 450,000

d. 0

58. Wall Company leased office premises to Fox Company for a five-year term beginning January 1, 2013. Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is P1,250,000 per annum.

However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease-free rent. What amount should Wall report as a rental income for 2013? a. 1,200,000

b. 1,160,000

c. 1,080,000

d. 800,000

59. Conn Company owns an office building and normally charges tenants P3,000 per square meter per year for office space. Because the occupancy rate is low, Conn agreed to lease 100 square meters to Hanson Company

at P1,200 per square

meter for the first year of a three-year operating lease. Rent for remaining years will be at the P3,000 rate. Hanson moved into the building on January 1, 2013, and paid the first year’s rent in advance. What amount of rental revenue should Conn report from Hanson in the income statement for the year ended September 30, 2013? a. 90,000

b. 120,000

c. 180,000

d. 240,000

60. On July 1, 2013, Gee 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 P5,000 12 months at P7,500 12 months at P17,500

= = =

P

60,000 90,000 210,000

All payments were made when due. On June 30,2015, what amount should be reported as accrued rent receivable? a. 210,000 b. 120,000

c. 90,000

d. 0

61. Abe 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, 2013 1,000,000 January 1, 2014 1,000,000 January 1, 2015 1,400,000 January 1, 2016 1,700,000 January 1, 2017 1,900,000 On December 31, 2014, what amount should be recognized as rent receivable? a. 1,400,000

b. 800,000

c. 400,000

d. 0

62. On January 1, 2013, Abba Company leased a building to Bee Company under a four-year operating lease. The monthly rental for 2013, 2014, 2015, and 2016 is P100,000, P150,000, P200,000 and P250,000, respectively. Rentals are payable at the end of each month. All rental payments within the year were made when due. On December 31, 2014, what amount should be reported as rent receivable? a. 1,000,000

b. 1,200,000

c. 600,00

d. 900,000

63. On January 1, 2013, Wren Company leased a building to Brill under an operating lease for ten years at P500,000 per year, payable the first day of each lease year. Wren paid P150,000 to a real estate broker as a finder fee. The building is depreciated P120,000 per year. For 2013, Wren incurred insurance and property tax expense totalling P90,000. What is the total rent income for 2013? a. 275,000 b. 290,000 c. 350,000 d. 365,000 64. Rapp Company leased a new machine to Lake Company on January 1, 2013. The lease expires on January 1,2018. The annual rental is P900,000. Additionally, on January 1, 2013, Lake paid P500,000 to Rapp 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 2013? a. 1,400,000 b. 1,2500,000 c. 1,000,000 d. 900,000 65. Jade Company purchased a new machine for P4,800,000 on January 1, 2013 and leased it to East the same day. The machine has an estimated 12-year life and will be depreciated P400,000 per year. The lease is for a three-year period expiring January 1, 2016, at an annual rental of P850,000. Additionally, East paid P300,000 to jade as a lease bonus to obtain a three-year lease. Jade incurred insurance expense of P80,000 for the leased machine during 2013. What is the operating profit on the leased asset for 2013? a. 670,000 b. 550,000 c. 470,000 66.

d. 370,000

Myriad Company purchased a tractor on January 1, 2013 at a cost of P1,600,000 for the purpose of leasing it. The tractor is estimated to have a useful life of 5 years with residual value of P100,000. Depreciation is on a straight line basis. On April 1, 2013, Myriad entered into a lease contract for the lease of the

tractor for a term of 2 years up to March 31, 2015. The lease fee is P50,000 monthly and the lessee paid P600,000, the lease fee for one year. Myriad paid P120,000 commission associated with negotiating the lease, P15,000 minor repairs, and P10,000 transportation of the tractor to the lessee during 2013. What amount of net rent revenue should be reported for 2013? a. 160,000 b. 235,000 c. 80,000

d. 85,000

67. On January 1, 2013, Glen Company Leased a building to Dix Company for a tenyear term at an annual rental of P500,000. At inception of the lease, Glen received P2,000,000 covering the first two years’ rent of P1,000,000 and a security deposit of P1,000,000. This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the P2,000,000 should be reported as current and noncurrent liability in Glen’s December 31, 2013 statement of financial position? Current liability Noncurrent liability a. 0 2,000,000 b. 500,000 1,000,000 c. 1,000,000 1,000,000 d. 1,000,000 500,000 (For questions 68 & 69)

On January 1, 2013, Simplex Company leased a

machine to another entity for a four-year period. The annual rentals will be paid by the lessee beginning December 31, 2013. The lease agreement called for a 10% increase in annual rental per annum. The rental due on December 31, 2016 was P133,100. 68. What is the rental payment due on December 31, 2014? a. 100,000 b. 121,000 c. 110,000

d. 90,909

69. What is the rental income for the year ended December 31, 2013? a. 100,000 b. 116,025 c. 105,477 d. 110,000 70. Hutch Company leased equipment to Elder Company on July 1, 2013 for a oneyear period expiring June 30, 2014 for P60,000 a month. On July 1, 2014, Hutch leased this piece of equipment to Toil Company for a three-year period expiring June 30, 2017 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, 2009 is being depreciated on a straight line basis over an eight year period with

no residual value. Both the lease to Elder and the lease to Toil are appropriately recorded as operating lease. What is the amount of net rental income that would be reported by Hutch Company for the year ended December 31, 2014? a. 210,000 b. 450,000 c. 810,000 d. 360,000 71. Barnel Company owns and manages apartment complex. On signing a lease, each tenant must pay the first and last months’ 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 the damages to the apartment which typically cost P10,000 to repair. If a one-year lease is signed on a P90,000 per month apartment, what amount should be reported as refundable security deposit? a. 140,000

b. 50,000

c. 35,000

d. 32,000

COMPOUND FINANCIAL INSTRUMENT 72. On December 31, 2013, Fort Company issued 5,000 of 8%, 10-year, P1,000 face value bonds with detachable share warrants at 110. Each bond carried a detachable warrant for 10 ordinary shares of Fort Company at a specified option price of P25 per share. The par value of the ordinary share is P20. Immediately after issuance, the market value of the bonds without the warrants was P5,400,000 and the market value of the warrants was P600,000. On December 31, 2013, what is the carrying amount of the bonds payable? a. 5,000,000 b. 4,950,000 c. 4,900,000 d. 5,400,000 73. On December 31, 2013, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each P1,000 bond was issued with 50 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P25. Immediately after issuance, the market value of each warrant is P5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On

December 31, 2013, what amount should be recorded as discount or premium on bonds payable? a. 170,000 discount b. 450,000 premium

c. 450,000 discount d. 800,000 discount

74. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2013, maturing on January 1, 2018 and paying interest semiannually on January 1 and July 1. It is estimated that the bonds would sell only at 103 without the conversion feature. Each P1,000 bond is convertible into 10 ordinary shares with P100 par value. What is the increase in shareholders’ equity arising from the issuance of the convertible bonds on January 1, 2013? a. 350,000 b. 500,000 c. 150,000 d. 0 75. Susan Company issued 5,000 convertible bonds on January 1, 2013. The bonds have a three-year term and are issued at 110 with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100 ordinary shares with par value of P5. When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53. What is the equity component of the issuance of the convertible bonds on January 1, 2013? a. 1,150,000 b. 1,650,000

c. 891,000

d. 391,000

76. Spare Company had outstanding share capital with a par value of P50,000 and a 12% convertible bond payable in the face amount of P10,000,000. Interest payment dates of the bond issues are June 30 and December 31. The conversion clause in the bond indenture, entitled the bondholders to receive 40 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2013, 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 the conversion was P500,000. The share premium from conversion privilege has

a balance of P2,000,000 on June 30, 2013. What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital? a. 2,000,000

b. 2,750,000

c. 3,000,000

d. 1,750,000

77. On December 31, 2013, Green Company issued 2,000 convertible bonds with a nominal interest rate of 7% at P2,000 each. Each bond can be converted into 5 new equity shares or redeemed for cash, at the option of the holder, in 5 years’ time. The fair value at that date of similar bonds without the convertibility option was estimated P1,500 each. What is the amount recognized in equity in respect of the issuance of convertible bonds on December 31, 2013? a. 4,000,000 b. 3,000,000 c. 1,000,000 d. 0 78. Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2013. Each P1,000 bond was convertible into 10 ordinary shares of P50 par value. On July 1, 2013, the interest was paid to bondholders, and the bonds were converted into ordinary shares, which had a fair value of P75 per share. The unamortized premium on these bonds was P12,000 at the date of conversion. No equity component was recognized when the bonds were originally issued. What is the increase in the share capital and share premium, respectively, as a result of the bond conversion? a. 300,000 and 312,000 b. 306,000 and 306,000 c. 450,000 and 162,000 d. 600,000 and 12,000 79. On December 31, 2013, Cey Company had outstanding 10%, P1,000,000 face amount convertible bonds payable maturing on December 31, 2016. Interest is payable on June 30 and December 31. Each P1,000 bond is convertible into 50 shares of P10 par value. On December 31, 2013, the unamortized premium on bonds payable was P60,000. On December 31, 2013, 400 bonds were converted when Cey’s share had a market price of P24. The entity incurred P4,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. What is the share premium from the issuance of shares as a result of the bond conversion on December 31, 2013?

a. 176,000

b. 220,000

c. 276,000

d. 280,000

80. Young Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a four-year term with a stated rate of interest of 6%, 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 50 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 P485,000 was credited to share premium from conversion privilege.

The bonds were not converted and

instead, the entity paid off the convertible bondholders as maturity. What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity? a. 2,500,000 gain

b. 485,000 loss

c. 485,000 gain

d. 0

81. On January 1, 2013, Arlene Company issued convertible bonds with a face value of P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par value. The bonds have a 5-year life with 10% stated interest rate payable annually every December 31. The fair value of the convertible bonds without conversion option is computed at P5,399,300 on January 1, 2013. On December 31, 2015, the convertible bonds were not converted but fully paid for P5,550,000. On such date, the fair value of the bonds without conversion privilege is P5,400,000 and the carrying amount is P5,178,000. What is the loss on the extinguishment of the convertible bonds on December 31, 2015? a. 221,700 b. 371,700 c. 150,000 d. 0 BONDS PAYABLE 82. Glen Company had the following long-term debt: Sinking fund bonds, maturing in instalments Industrial revenue bonds Subordinated bonds, maturing on a single date What is the total amount of the serial bonds? a. 3,000,000 b. 4,000,000 c. 4,800,000

2,200,000 1,800,000 3,000,000 d. 7,000,000

83. Blue Company reported the following long-term debt on December 31, 2013: 9% registered debentures, callable in 2014, due in 2015 11% callable trust bonds, convertible into ordinary shares beginning 2014, due in 2015 10% subordinated debentures (P500,000 maturing annually beginning in 2014)

3,500,000 3,000,000 1,500,000

What is the total amount of term bonds? a. 3,000,000 b. 3,500,000 c. 5,000,000 d. 6,500,000 84. On April 1, 2013, Greg Company issued at 99 plus accrued interest, 2,000 of 8% 1,000 face value bonds. The bonds are dated January 1, 2013, mature on January 1, 2023, and pay interest on January 1 and July 1. The entity paid bond issue cost of P70,000. From the bond issuance, what is the net cash received? a. 2,020,000 b. 1,980,000 c. 1,950,000 d. 1,910,000 85. On March 1, 2013, Cain Company issued at 103 plus accrued interest 4,000 of 9%, P1,000 face value bonds. The bonds are dated January 1, 2013 and mature on January 1, 2023. Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. What is the net cash received from the bond issuance? a. 4,320,000 b. 4,180,000

c. 4,120,000

d. 3,980,000

86. During the current year, Eddy Company incurred the following costs in connection with the issuance of the bonds: Promotion cost Printing and engraving Legal fees Fees paid to independent accountants for registration Commissions paid to underwriter

200,000 150,000 800,000 100,000 1,500,000

What amount should be reported as bond issue costs to be amortized over the term of the bonds? a. 2,550,000 b. 2,750,000

c. 1,500,000

d. 1,050,000

87. On November 1, 2013, Mason Company issued P8,000,000 of 10-year, 8% term bonds dated October 1., 2013. The bonds were sold to yield 10% with total proceeds of P7,000,000 plus accrued interest. Interest is paid every April 1 and

October 1. What amount should be reported for accrued interest payable on December 31, 2013? a. 175,000 b. 160,000

c. 116,667

d. 106,667

88. On January 1, 2013, Beau Company issued P3,000,000 maturity value, 12% bonds for P3,000,000 cash. The bonds are dated December 31, 2012 and mature on December 31, 2022. Interest is payable semiannually on June 30 and December 31. What amount of accrued interest payable should be reported on September 30, 2013? a. 270,000 b. 240,000

c. 180,000

d. 90,000

89. On June 30, 2013, Huff Company issued at 99, 5,000 of 8%, P1,000 face value bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P425,000. On June 30,2013, what amount should be reported as bond liability? a. 4,525,000

b. 4,950,000

c. 4,000,000

d. 4,575,000

90. On July 1, 2013, Carr Company issued at 104, 5,000 of 10% P1,000 face value bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,000. On July 1, 2013, what amount should be reported as bond liability? a. 4,875,000

b. 5,075,000

c. 5,200,000

d. 5,325,000

91. On January 1, 2013, Borg Company issued 4,000 of 8% P2,000 face value bonds at 97 plus accrued interest. The bonds are dated October 1, 2012 and mature on October 1, 2022. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, 2012 to January 1, 2013 amounted to P160,000. On January 1, 2013, what is the carrying amount of the bonds payable? a. 7,840,000

b. 7,766,000

c. 7,606,000

d. 7,760,000

92. Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2013 with interest payments on June 30 and December 31. When the bonds are issued on November 1, 2013, the entity received cash of P5,150,000 including accrued interest. What is the discount or premium from the issuance of the bond payable?

a. 150,000 bond premium b. 50,000 bond premium

c. 150,000 bond discount d. No bond premium and discount

93. On July 1, 2013, Tara Company issued 4,000 of 8%, 1,000 face value bonds payable for P3,504,000. The bonds were issued to yield 10%. The bonds are dated July 1, 2013 and mature on July 1, 2023. Interest is payable semiannually on January 1 and July 1. Using the effective interest method, what amount of the bond discount should be amortized for six months ended December 31, 2013? a. 30,400

b. 24,800

c. 19,840

d. 15,200

94. On January 1, 2013, Marsh Company issued 10% bonds payable in the face amount of P6,000,000. The bonds mature on January 1, 2023. The bonds were issued for P5,316,000 to yield 12%, resulting in the bond discount of P684,000. The entity used the effective interest method of amortizing bond discount. Interest is payable January 1 and July 1. For the six months ended June 30,2012, what amount should be reported as bond interest expense? a. 300,000 b. 318,960 c. 334,200 d. 341,040 95. On January 1, 2013, West Company issued 9% bonds in the face amount of P5,000,000, which mature on January 1, 2023. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. The entity used the interest method of amortizing bond discount. On December 31,2013, what is the carrying amount of the bonds payable? a. 4,695,000 b. 4.714,500 c. 4,704,750 d. 5,000,000 96. On December 31,2013, Marie Company reported bonds payable of P7,360,000 and accrued interest payable of P200,000. The bonds are retired on January 1, 2014 for P8,160,000 excluding accrued interest. What amount should be reported as gain or loss on extinguishment of bonds payable? a. 800,000 gain c. 600,000 gain b. 800,000 loss d. 600,000 loss 97. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and had a stated rate of 10%. If the market rate of interest is 8%, what is the issue price of the bonds? a. 2,262,000 b. 2,113,000 c. 2,159,000 d. 2,279,000

(For questions 98-101)

On January 1, 2013, Ezekiel Company received

P1,077,200 for P1,000 face amount 12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity has elected the fair value option for valuing financial liabilities. On December 31, 2013, the fair value of the bonds is determined to be P1,064,600. 98. What is the carrying amount of the bonds payable on January 1, 2013? a. 1,000,000 b. 1,077,200 c. 500,000 d. 538,600 99. What is the interest expense for 2013? a. 120,000 b. 100,000 c. 107,720 100.

What is the gain or loss from change in the fair value of the bonds for

2013? a. 64,600 gain b. 64,600 loss 101.

d. 129,264

c. 12,600 gain

d. 12,600 loss

What is the carrying amount of the bonds payable on December 31,

2013? a. 1,064,600

b. 1,077,200

c. 1,000,000

d. 1,064,920

NOTE PAYABLE 102.

On December1, 2013, Pine Company issued a note payable to National

Bank in the amount of P1,800,000, bearing an interest at 12%, and payable in three equal annual principal payments of P600,000. On this date, the bank’s prime rate was 11%. The first interest and principal payment was made on September 1, 2014. On December 31, 2014, what amount should be reported as accrued interest payable? a. 44, 000 b.48, 000 103.

c.66, 000

d.72, 000

Mann Company reported on June 30, 2013 a 10% note payable in the

amount of P3,600,000. The note is dated October 1, 2012 and is payable in three equal annual payments of P1,200,000 plus interest. The first interest and principal payment was made on October 1, 2013. On June 30, 2014, what amount should be reported as accrued interest payable? a. 270,000 b. 180,000 c. 90,000 d. 60,000

104.

On December 31, 2013, Roth Company issued a P1,000,000 face value

note payable to Wake Company in exchange for services rendered to Roth. The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of 1 due in 9 months at 8% is .944. at what amount should the note payable be reported on December 31, 2013? a. 1,030,000b. 1,000,000 c. 965,20 0 d. 944,000 105.

Loob Company had the following loans at 12% interest payable at

maturity. Loob repaid each loan on schedule maturity date. Date 11/1/2012 2/1/2013 5/1/2013

Amount 500,000 1,500,000 800,000

Maturity date 10/31/2013 7/31/2013 1/31/2014

Term 1 year 6 months 9 months

The entity recorded interest expense when the loan is repaid. As a result, interest expense of P150,000 was recorded in 2013. If no correction is made, by what amount would 2013 interest expense be understated? a. 54,000

106.

b. 62,000

c. 64,000

d. 72,000

Joshua Company bought a new machine on January 1, 2013 and agreed

to pay in equal annual instalment of P600,000 at the end of each of the next five years. The prevailing interest rate is 12%. The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The present value of 1 at 12%for five periods is 0.567. What is the interest expense on the note payable for 2013? a. 259,200 b. 187,200 c. 360,000 d. 457,200

107.

On December 31, 2013, Boston Company purchased a machine from

Helix Company in exchange for a noninterest bearing note requiring eight payments of P200,000. The first payment was made on December 31, 2013 and the others are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note was 11%. The PV of an ordinary annuity of 1

at 11% for 8 periods is 5.146, and the PV of an annuity of 1 in advance at 11% for 8 periods is 5.712. On December 31, 2013, what is the carrying amount of the note payable? a. 1,142,400b. 1,029,200 c.1,046,000 942,400

108.

On January 1, 2013, Pares Company borrowed P3,600,000 from a major

customer evidenced by a noninterest bearing note due in 3 years. The entity agreed to supply the customer’s inventory needs for the loan period at lower than market price. At the 12% imputed interest rate for this type of loan, the present value of the note is P2,550,000 on January 1, 2013. What amount of interest expense should be reported in 2013? a. 432,000 b. 350,000 c. 306,000

109.

d. 0

On January 1, 2013, Wisconsin Company loaned P1,780,000 cash to

Stone Company. The promissory note made by Stone for P2,000,000 did not bear explicit interest and was due on December 31,2014. No other rights or privileges were exchanged. The prevailing interest rate for a loan of this type was 6%. The present value of 1 for 2 periods at 6% is .89. What amount should be recognized as interest expense for 2013? a. 106,800 b. 110,000 c. 120,000 d. 0 110.

On March 1, 2013, Fine Company borrowed P1,000,000 and signed a 2-

year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2015. What amount should be reported as accrued interest payable on December 31, 2014? a. 100,000 b. 120,000 c. 232,000 d. 240,000

111.

On July 1, 2013, Cody Company obtained a P2,000,000, 180-day bank

loan at an annual rate of 12%. The loan agreement requires Cody to maintain a P400,000 compensating balance in its checking account. Cody would otherwise maintain a balance of only P200,000 in this account. The checking account earns

interest at an annual rate of 6%. What is the effective interest rate on the borrowing? a. 12.00%

112.

b. 12.67%

c. 13.33%

d. 13.50%

On January 1, 2013, Monk Company purchased equipment. There was no

established market price for the equipment which has a 8-year life and no residual value. The entity gave a P5,250,000 noninterest bearing note in 3 equal annual installments of P1,750,000 with the first payment due December 31, 2013. The prevailing rate for a note of this type is 8%. The present value of the note at 8% was P4,509,950. What amount should be reported for interest expense in 2013? a. 360, 796 b. 420,000

c. 220,796

d. 0