Lease and Accounting for Income Tax Drills

Accounting for Income Tax and Accounting for Finance Lease Drill Problems Problem I Xavier Company provided the following information for the first year of operations ended December 31, 2013. Accounting income 4,000,000 Nondeductible expenses 200,000 Nontaxable revenue 300,000 Deferred income on installment sale included in financial income but taxable in 2014 450,000 Doubtful accounts recorded 100,000 Financial depreciation 300,000 Tax depreciation 350,000 Estimated warranty cost accrued in 2013 but not deductible for tax purposes until paid 100,000 Income tax rate 30% Required: 1. Prepare journal entry to record the current tax expense 2. Prepare journal entry to record the deferred tax liability. 3. Prepare journal entry to record the deferred tax asset. 4. Present the income tax expense in income statement. 5. Determine the net deferred tax expense or benefit. (from fin 2 2013 edition) Problem 2 1. On January 1, 2012, Babson Company leased two automobiles for executive use. The lease requires Babson Company to make five annual payments of P1,300,000 beginning January 1, 2012. At the end of the lease term, December 31, 2016, Babson Company guaranteed the residual value of the automobiles at a total of P1,000,000. The lease qualifies as a finance lease. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows: For an annuity due with 5 payments (in advance) 4.240 For an ordinary annuity with 5 payments 3.890 Present value of 1 for 5 periods 0.650 What amount should be reported as finance lease liability immediately after the first required payment? a. 4,862,000 b. 4,407,000 c. 3,562,000 d. 3,107,000

2. 3. 4. 5.

On December 31, 2009,Leman Co. signs a 10-year noncancelable lease agreement to lease a storage building from Storage Company. The following information pertains to this lease agreement: 1) The agreement requires equal rental payments of P720,000 beginning on December 31, 2009. 2) The fair value of the building on December 31, 2009, is P4,400,000. 3) The building has an estimated economic life of 12 years, with an unguaranteed residual value of P100,000. Leman depreciates similar buildings on the straight-line method. 4) The lease is non-renewable. At the termination of the lease, the building reverts to the lessor. 5) Leman’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Leman. 6) The yearly rental payment includes P24,705 of executory costs related to taxes on the property. The following present value factors are for 10 periods at 12% annual interest rate: Present value of an annuity due of 1 6.32825 Present value of an ordinary annuity of 1 5.65022 Present value of 1 0.32197 What amount should be capitalized as the cost of the leased storage building? a. P4,556,340 b. P4,400,000 c. P4,432,197 d. P0 What amount should be included in the current liabilities section of Leman’s statement of financial position at December 31, 2010? a. P720,000 b. P414,477 c. P695,295 d. P280,818 What amount should be included in the noncurrent liabilities section of Leman’s statement of financial position at December 31, 2010? a. P3,453,975 b. P3,173,157 c. P5,562,360 d. P0 What are the total lease-related expenses to be reported on Leman’s income statement for the year ended December 31, 2010? a. P909,270 b. P879,182 c. P1,160,000 d. P464,705 Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor of computers, Luna purchased a new system on December 31, 2009. The system was delivered the same day (by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed the following information relating to the lease transaction: Cost of system to Luna P550,000 Estimated useful life and lease term 8 years Expected residual value (unguaranteed) P40,000 Luna's implicit rate of interest 12% General's incremental borrowing rate 14% Date of first lease payment Dec. 31, 2009 Additional information is as follows: a) At the end of the lease, the system will revert to Luna. b) General is aware of Luna’s rate of implicit interest. c) The lease rental consists of equal annual payments.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places.) The annual lease payment under the lease is a. P110,717 b. P95,950 c. P102,665 d. P91,664 The total financial revenue to be earned by the lessor over the lease term is a. P257,600 b. P183,312 c. P271,320 d. P335,736 The interest income to be recognized by the lessor in 2010 is a. P53,680 b.P52,714 c. P54,486 d. P52,547 The total expenses related to the lease that will be recognized by the lessee in 2010 is a. P121,464 b. P130,792 c. P112,630 d. P119,278 The amount to be reported under current liabilities as liability under finance lease as of December 31, 2010 is a. P60,239 b. P48,611 c. P35,715 d. P64,963 Catanauan Incorporated uses leases as a method of selling its products. In early 2009, Catanauan completed construction of a passenger ferry for use between Quiapo and Guadalupe. On April 1, 2009, the ferry was leased to the Balik-Balik Ferry Line on a contract specifying that ownership of the ferry will transfer to the lessee at the end of the lease period. The ferry is expected to be economically useful for 25 years. Annual lease payments do not include executory costs. Other terms of the agreement are as follows: Original cost of the ferry P1,500,000 Lease payments P225,000 Estimated residual value P78,000 Implicit rate 10% Date of first lease payment Apr. 1, 2009 Lease period 20 years PV of an ordinary annuity of 1 for 20 periods at 10% 8.5136 PV of an annuity due of 1 for 20 periods at 10% 9.3649 PV of 1 for 20 periods at 10% 0.1486 Based on the above and the result of your audit, determine the following: Total finance income that will be earned by the lessor over the lease term a. P2,459,306 b. P2,650,849 c. P2,392,897 d. P2,584,440 The profit on sale to be recognized by the lessor a. P607,103 b. P427,151 c. P415,560 d. P618,694 Liability under finance lease to be reported by the lessee as of December 31, 2010 a. P1,634,616 b. P1,845,313 c. P1,858,063 d. P1,647,366 Amount to be reported under current liabilities as liability under finance lease by the lessee as of December 31, 2010 a. P61,538 b. P39,194 c. P40,469 d. P60,263 Depreciation expense to be reported by the lessee for the year 2009 a. P61,221 b. P55,127 c. P76,091 d. P60,873 (From long quiz in fin 2)

16. On January 1, 2012, Oasis Company 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 includes a P500,000 bargain purchase option. At the end of the lease, the entity expects to exercise the bargain purchase option. The expected fair value of the equipment is P400,000 at the end of its 10-year useful life. The straight line depreciation is used. What amount of depreciation should be recognized by the entity for 2012? a. 575,000 b. 460,000 c. 625,000 d. 450,000 17. On January 1, 2012, Oblation Company entered into an 8-year lease for an equipment. The entity accounted for the acquisition as a finance lease for P6,000,000 which includes a P600,000 guaranteed residual value. At the end of the lease, the asset will revert back to the lessor. It is estimated that the asset’s fair value at the end of its 10 –year useful life will be P400,000. The entity regularly uses the straight line depreciation on similar equipment. For the year ended December 31, 2012, what amount should be recognized as depreciation expense on the leased asset? a. 675,000 b. 700,000 c. 540,000 d. 560,000 18. Pallid Company acquired an asset costing P3,165,000. The asset is leased on January 1, 2012 to another entity. Five annual lease payments are due each December 31, beginning December 31, 2012. The unguaranteed residual value of the asset at the end of the lease term on December 31, 2016 is P500,000. The asset will revert to the lessor at the end of the lease term. The lessor’s implicit interest rate is 12%. The PV of 1 at 12% for 5 periods is 0.57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. What is the annual rental payment? a. 879,166 b. 740,278 c. 800,000 d. 500,000 19. Quagmire Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. On January 1, 2012, the entity leased the 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, 2012. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment payable in advance required to yield the desired return? a. 500,000 b. 477,826 c. 559,610 d. 460,000 (from midterm fin 2)

Answer key. Problem I. refer to fin 2 2013 answer key….13-10 Problem 2 1. A 2. B 3. D 4. B 5. A 6. B 7. A 8. C 9. D 10. B 11. C 12. A 13. B 14. C 15. D 16. B 17. A 18. C 19. A