MSU Iligan Institute of Technology

College of Business Administration and Accountancy

Department of Accountancy
Financial Accounting Part II 8th Quiz: Leases

Name: _________________________________

Schedule: _______________

Rate: ________

THEORY. Determine whether the following statements are true or false. Write T for correct statements and F for
incorrect ones. Write your answer before the number.
1. For lessee, at inception, the right of use asset has the same value with the lease liability.
2. When the lessee has implemented major leasehold improvement, the lessee is less likely to exercise the option
to terminate the lease contract.
3. Lessee enters into a five year contract with a freight carrier Lessor to transport a specified quantity of
goods. The Lessor uses rail cars of a particular specification, and has a large pool of similar cars that can
be used to fulfill the requirements of the contract. The rail cars and engines are stored at the Lessors
premises when not in used and the costs associated with substituting the rail cars are minimal for Lessor.
The contract is a lease contract.
4. Y enters into a lease contract with W. The noncancellable term is 10 years after which Y may extend the
contract for another four years at market rent. The lease term is 14 years.
5. Under IFRS 16, the lessee will recognize higher total lease expense in the earlier years but lower in the
subsequent years due to depreciation.
6. Cash payment by the lessee representing interest portion of the lease liability shall be presented under financing
activities in the statement of cash flows when the company has the policy of presenting finance cost as such.
7. Company Z enters into a lease contract with Company X to rent a store; the only feature of the contract is that Z
will pay rent equivalent to 1% of the stores revenue. The lease liability in the contract is zero.
8. At the point of view of the lessor, when the lessee implemented leasehold improvements on the leased assets
and the lease is identified as operating lease, the lessor will recognize the leasehold improvement and depreciate
it over the leasehold improvements useful life.
9. If it is ownership is transferred at the end of the lease term, the lessor will deduct the residual value in
computing for depreciation and depreciate it over the right of use assets useful life.
10. In sale and leaseback, whether consideration is at fair value or not, the total gain on the sale is the same.
PROBLEMS. Supply the requirements. Please show your ALL YOUR SUPPORTING SOLUTIONS in good from.
Points will be given for necessary solutions presented. Present value factors must be rounded off to four decimal places.
ONLY FINAL ANSWERS SHOULD BE ROUNDED OFF to two decimal places.
Problem 1:
On September 1, 2015, Stores Co. entered into a three year lease agreement with Shirts Inc. Shorts Inc. will lease
store number 5 of Building A in the city. The store has 10 years useful life and a carrying amount equivalent to its fair
value of P350, 000. There is no bargain purchase option and no transfer of ownership at the end of the lease term. The
annual payments to be made by the lessee are (a) P80,000 for year 1, (b) P120,000 for year 2, and (c) P125,000 for year
3. Lease payment is due every September 1 starting September 1, 2016. The incremental borrowing rate is 10% for
both lessee and lessor.
Requirements:
1. Prepare appropriate journal entries on the books of Stores Co. to account for the lease from year 1 to 3.
2. (BONUS) Stores Co will account for the lease as ____________________________.
Problem 2:
On January 1, 2015, Aurora Light Transpo Inc. entered to a lease contract with Philippine Toy Corp. The latter will
lease 20 specific vans from the former for a term of five years and noncancellable. Information regarding the lease:
a. Equal annual lease payments of P350, 000. Payments are due every December 31.
b. Philippine Toy Corp has the option to purchase all of the vans at the end of the lease term for P290, 000. The
estimated residual value is P300, 000 at the end of the lease term and P50, 000 at the end of 10 years, the
useful life of the van.
c. The fair value of the vans on January 1, 2015 is estimated to be P1, 450, 000. It was purchased at P1, 400, 000
by Aurora Light.
d. The implicit rate in the lease known to the lessee is 10%. Incremental borrowing rate of the lessee and lessor is
11%.
e. The lessor paid P55, 000 initial direct cost while the payee shouldered P35, 000 initial direct cost.

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Name: _________________________________

Schedule: _______________

Rate: ________

Requirements:
1. Prepare appropriate journal entries in the books of Aurora Light Transpo Inc. for years 2015 and 2016.
2. Prepare appropriate journal entries in the books of Philippine Toy Corp. for the years 2015 and 2016.
3. (BONUS) Prepare appropriate journal entries in the books of Aurora Light Transpo Inc. and Philippine Toy
Corp. assuming that Philippine Toy Corp actually exercised the option to purchase the vans.
Problem 3:
On January 1, 2015, Aurora Light Transpo Inc. (the company is a dealer of vans) entered to a lease contract with
Philippine Toy Corp. The latter will lease 20 specific vans from the former for a term of five years and noncancellable.
Information regarding the lease:
a. Equal annual lease payments of P350, 000. The first payment is due on January 1, 2015 and December 31
thereafter.
b. Philippine Toy Corp agreed to guarantee the residual value of P300, 000 at the end of the lease term.
c. The fair value of the vans on January 1, 2015 is estimated to be P1, 700, 000. It was purchased at P1, 600, 000
by Aurora Light.
d. The implicit rate in the lease known to the lessee is 10%. Incremental borrowing rate of the lessee and lessor is
11%.
e. The lessor paid P55, 000 initial direct cost while the payee shouldered P35, 000 initial direct cost.
Requirements:
1. Prepare appropriate journal entries in the books of Aurora Light Transpo Inc. for year 2015.
2. Prepare necessary entry (ies ) in Auroras books on January 1, 2020 when the lessee returns the asset when
a. the actual fair value is P350, 000.
b. the actual fair value is P200, 000
3. (Bonus) Prepare necessary entries for 2015 assuming the residual value was not guaranteed.
Problem 4:
At the beginning of the year Duff Inc. entered into a 10-year lease contract to rent the first two floors of a 10 floor
building; the building has remaining useful life of 20 years. Duff has to pay P1, 0000, 000 pesos to the lessor at the end
of the year and the implicit rate is 8%. The contract provides a purchase option of P350, 000 at the end of the lease term
when the fair value is expected to be P250, 000. Duff agreed to guarantee residual value of P200, 000 at the end of the
lease term. Duff also paid P10, 000 initial direct costs.
Requirement: Prepare the journal entries for each of the following independent assumptions (unless stated
otherwise):
1. The lease payments include janitorial monthly services by the lessor. The only known stand alone price is the
annual janitorial service of P96, 000. Prepare journal entries at the beginning of the contract.
2. Assume that for practical expediency the whole contract is accounted as lease contract; at the beginning of the
third year, it was reliably determined that the fair value of the underlying asset at the end of the lease term is
P230, 000, prepare necessary entry (ies) for the 3rd year.
3. Continuing requirement (2), at the end of the fifth year, it was reliably determined that the fair value of the
asset at the end of the lease term is P400, 000, prepare necessary entry (ies) on the sixth year. The revised rate
is 7%.
4. Continuing requirement (3), at the beginning of the seventh year, the lessee and lessor agreed to modify the
contract. The revised rate is 7%
a. Assume the modification was to discontinue the rental on the second floor and the lease payments is
reduced to P650, 000, prepare necessary journal entries on this year.
b. Assume instead that the modification was to include floor 3 in the lease agreement. The new lease
payment is P1, 800, 000 and the stand alone price of floor 3 is P750, 000.
c. Assume instead that the modification was to include floor 3 in the lease agreement. The new lease
payment is P1, 800, 000 and the stand alone price of floor 3 is P900, 000.

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