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Problem 13-1 Multiple Choice (PAS 17) 1. Under a sales type lease, what is the meaning of gross investment in the lease? a. Present value of minimum lease payments b. Absolute amount of minimum lease payments c. Present value of minimum lease payments plus present value of unguaranteed residual value d. Aggregate of minimum lease
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Problem 13-1 Multiple Choice (PAS 17)

1. Under a sales type lease, what is the meaning of gross investment in the lease?

a. Present value of minimum lease payments b. Absolute amount of minimum lease payments c. Present value of minimum lease payments plus present value of unguaranteed residual value d. Aggregate of minimum lease payments and

unguaranteed residual value

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2. Net investments in a sales type lease is equal to

a. Gross investment in the lease less unearned finance income b. Cost of the lease asset c. The minimum lease payments d. The minimum lease payments less unguaranteed residual value

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3. These are incremental costs that are directly attributable to negotiating and arranging lease.

a. Initial direct costs b. Transaction costs c. Costs of services d. Executory costs

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4. Initial direct costs incurred by the lessor under a sales type lease should be

a. Deferred and all allocated over the economic life of the leased property. b. Expensed un the period incurred. c.Deferred and allocated over the term of the lease in proportion to the recognition of rental income. d. Added to the gross investment in the lease and amortized over the term of the lease as a yield adjustment.

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5. Which of the following statements characterizes a sales type lease?

a. The lessor recognizes only interest revenue over the life of the asset.b. The lessor recognizes only interest revenue over the lease term.c. The lessor recognizes a dealer’s profit at lease inception and interest revenue over the lease term.d. The lessor recognizes a dealer’s profit at lease inception and interest revenue over the life of the asset

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6. The profit on a finance lease transaction for lessors who are manufacturers or dealers should

a. Not be recognized separately from finance income b. Be recognized in the normal way on the transaction c. only be recognized at the end of the lease term d. Be recognized on a straight line basis over the life of the lease

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7. The sales revenue recognized at the commencement of the lease by a manufacturer or dealer lessor is the

a. Fair value of the assetb. Present value of the minimum lease paymentsc. Fair value of the asset or present value of the minimum lease payments, whichever is lower.d. Fair value of the asset or present value of the minimum lease payments , whichever is higher.

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8. What is the treatment of an unguaranteed residual value in determining the cost of sales under sales type lease? a. The unguaranteed residual value is ignored.b. The unguaranteed residual value is added to the cost of the lease asset.c. The unguaranteed residual value is deducted from the cost of the leased asset at absolute amount.d. The unguaranteed residual value is deducted from the cost of the leased asset at present value.

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9. The excess of the fair value of leased property at the inception of the lease over the carrying amount shall be recognized by the dealer lessor as a. Unearned income from a sales type leaseb. Unearned income from a direct financing leasec. Manufacturer’s profit from a sales type leased. Manufacturer’s profit from a direct financing lease

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10. In a lease that is recorded as a sales type lease by the lessor, interest revenue

a. Does not ariseb. Shall be recognized over the period of the lease using the interest methodc. Shall be recognized over the period of the lease using the straight line methodd. Shall be recognized in full as revenue at the inception of the lease

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Problem 13-11 (IAA)

Esmeralda Company leased equipment to another entity on January 1, 2015. The terms of the lease called for annual payment of 500,000 to be made at the end of each year. The lease term is 5 years which is the useful life of the equipment. The lease is appropriately recorded as a sales type lease. The cost of the equipment is P1,000,000. The implicit rate in the lease is 12%. The PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On July 1, 2017, Esmeralda Company “actually sold” the equipment to the lease for P1,200,000.

Required:1. Determine the unearned interest income on January 1, 2015.2. Determine the gross profit on sale.3. Prepare journal entries for 2015, 2016 and 2017 to record the

sales type lease and the actual sale of the leased asset. The periodic system is used.

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Problem 13-12 (AICPA Adapted)Howe Company leased equipment to Kew Company on January 1, 2015 for an eight-year period expiring December 31, 2022. Equal payments under the lease are 500,000 and are due on January 1 of each year. The first payment was made on January 1, 2015. The selling price of the equipment is P2,900,000 and the carrying amount is P2,000,000. 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 profit on the sale should be reported for the year ended December 31, 2015?

a. 900,000b. 780, 000c. 240,000d. 333,600

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Problem 13-13 (AICPA Adapted)Meg Company leased equipment from Wee Company on July 1, 2015 for an 8-year period. Equal payments underthe lease are 600,000 and are due on July 1 of each year. The first payment was made on July 1, 2015.

The interest rate contemplated by Meg Company and Wee Company is 105. The cash selling price of the equipment is P3,520,000 and the cost of the equipment on Wee Company’s accounting records is P2,800,000. The lease is appropriately recorded as a sales type lease.

What amount of profit on sale and interest revenue should be recognized for the year ended December 31, 2015?

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Profit on sale Interest Revenuea. 720,000 176,000b. 720,000 146,000c. 45,000 176,000d. 45,000 146,000

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Problem 13-14 (AICPA Adapted)On January 1, 2015, Gallant Company entered into a lease agreement with Blacksheep Company for a machine which was carried on the accounting records of Gallant Company at P2,000,000. Total payments under the lease which expires on December 31, 2024 aggregate P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep Company. Payments of P355,080 are due each January 1 of each year. The interest rate of 10% which was stipulated in the lease is considered fair and adequate compensation to Gallant Company for the use of its funds. Blacksheep Company expects the machine to have a 10-year life, no residual value and be depreciated on a straight line basis. The lease qualifies as a sales type lease. What total income before tax should be recognized by Gallant Company from the lease for the year ended December 31,2015?

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a. 204, 492b. 604, 492c. 355,080d. 755,080

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Problem 13-15 (IAA)Reagan Company used leases as a method of selling products. In 2015, Reagan Company completed construction of a passenger ferry.

On January 1, 2015, 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. The annual lease payments do not include executory costs.

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Original cost of the ferry 8,000,000Fair Value of ferry at lease date 12,555,000Lease payments in advance 1,500,000Estimated residual value 2,000,000Implicit interest rate 12%Date of first lease payment January 1, 2015Lease term 20 yearsPV of an annuity due of 1 at 10% for 20 periods 8.37PV of 1 at 12% for 20 periods 0.10

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1. What is the total financial revenue over the lease term?a. 17,445,000b. 19,245,000c. 19,445,000d. 22,000,0002. What is the gross profit on sale for 2015?e. 6,555,000f. 4,555,000g. 4,755,000h. 4,355,000

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3. What is the interest income for 2015?a. 1,506,600b. 1,524,600c. 1,326,600d. 1,350,600

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Problem 13-18 (IAA)Marianas Company adopted the policy of leasing as the primary method of selling products. The entity’s main product is a small cargo vessel. Marianas company constructed such a cargo vessel for Jade Company at a cost of P8,500,000.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 Jade Company at the end of the lease period. It is estimated that the cargo vessel will have a residual value of P1,600,000 at the date.The lease payments began January 1, 2015. Marianas Company incurred initial direct cost of P500,000 in financing the lease agreement with Jade Company. The sale price of the cargo vessel is P14,875,000.Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 145 for 10 periods is 5.95

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1. What amount should be reported as gross profit on sale for 2015?

a. 5,875,000b. 6,375,000c. 4,275,000d. 4,775,0002. What is the unearned interest income on January 1, 2015?e. 10,125,000f. 11,725,000g. 9,625,000h. 8,525,000

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3. What is the interest income for 2015?a. 2,082,500b. 1,732,500c. 2,306, 500d. 1,956,500

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Problem 13-19 (IAA)Dexter Company leased equipment to another entity on January 1,2015. The lease is for an eight-year period expiring December 31, 2022. The first of eight equal annual payments of 900,000 was made on January 1,2015. Dexter Company had purchased the equipment on December 29, 2014 for P4,800,000. The lease is appropriately accounted for as a sales type lease by Dexter company. The present value on January 1, 2015 of all rent payments over the lease term discounted at a 105 interest rate was P5,280,000. What amount of interest revenue should be recorded in 2016?a. 490,000b. 480,000c. 438,000d. 391,000

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Problem 13-20 (AICPA Adapted)Accenture Company, a dealer in equipment, leased equipment to another entity on July 1,2015. the lease is appropriately accounted for as a sale by Accenture Company.The lease is for the entire ten-year useful life of the equipment expiring June 30, 2025. the first of ten equal annual payments of P500,000 was made on July 1, 2015.Accenture company had purchased the equipment for P2,675,000 on January 1, 2015, established a list selling price of P3,375,000 on the equipment.The present value on July 1, 2015 of the rent payments over the lease term discounted at 12% is P3,165,000.

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What amount of gross profit on sale and interest income should be recognized, respectively for 2015?

a. 490,000 and 189,900b. 490,000 and 159,900c. 700,000 and 159,900d. 700,000 and 189,900

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Problem 13-21 (IFRS)Liza Company is a car dealer. On January 1,2015, the entity entered in finance lease with a customer under which the customer would pay P200,000 on January 1 each year for 5 years, commencing in 2015. 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 gross profit on sale should be recognized for the year ended December 31, 2015?a. 150,000b. 130,000c. 20,000d. 0

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Problem 13-22 (IAA)Hazel company leased machinery to Anne company on July 1, 2015 for a ten-year period expiring June 30, 2025. 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, 2015. 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.

1. What is the gross profit on sale for 2015?a. 600,000b. 300,000c. 472,500d. 0

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2. What amount of interest revenue should be recorded for 2015?

a. 175,500b. 236,250c. 405,000d. 202,500

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Problem 13-23(IAA)On December 31,2015, Benz Company, a lessor, actually sold a machinery that it had been leasing under a sales type lease. On January 1, 2015 after receipt of the lease payment for the year, the following account balances were associated with the lease:

Gross lease receivable 5,850,000Unearned interest income 1,000,000

The interest rate implicit in the lease is 10%. On December 31,2015, Benz Company actually sold the leased machinery to the lessee for P3,250,00 cash.

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1. What is the interest income for 2015?a. 585,000b. 485,000c. 325,000d. 02. What is the carrying amount of the lease receivable on december 31,2015?e. 5,850,000f. 4,850,000g. 5,335,000h. 5,365,000

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3. What is the loss on sale of the machinery that should recognized on December 31,2015?

a. 2,085,000b. 1,600,000c. 2,600,000d. 2,015,000

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Problem 13-24 (IAA)On January 1,2015, Pamela Company leased equipment to another entity under a finance lease. The terms of the lease called for annual lease payments to be made in advance at the beginning of each year starting January 1, 2015. The implicit interest rate for the transaction is 12%. On July 1,2017 the lessor actually sold the equipment to the lessee and received P3,000,000 to complete the transaction. After the January 1,2017 payment was made, the balance of the “net lease receivable” was P3,500,000.

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1. What is the interest income to be recognized in 2017?

a. 210,000b. 420,000c. 360,000d. 180,0002. What is the carrying amount of the lease receivable on July 1,2017?e. 3,500,000f. 3,710,000g. 3,290,000h. 3,920,000

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3. What is the loss on sale of the leased asset to be recognized on July 1, 2017?a. 710,000b. 500,000c. 290,000d. 0