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Los Angeles Corporation has entered into an agreement to lease a bulldozer to Lakers Corporation. The lease agreement
details are as follow:
Length of the lease 5 years
Commencement date January 1, 2011
Annual lease payment payable December 31
each year commencing Dec 31, 2011 P 8,000
Fair value of the bulldozer at January 1, 2011 P 34,797
Estimated economic life of the bulldozer 8 years
Estimated residual value of the asset at the end of its
economic life P 2,000
Residual value at the end of the lease term, of which
50% is guaranteed by Lakers Corporation P 7,200

The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Lakers
Corporation does not intend to buy the bulldozer at the end of the lease term. Los Angeles Corporation incurred P 1,000 to
negotiate and execute the lease agreement. Los Angeles Corporation purchased the bulldozer for P 34,797 just before the
inception of the lease.

Based on the above and the result of your audit, answer the following: (Round off the present factors to four decimal
places)

Use 9% as the implicit interest rate.

1 . Ignoring income taxes, if Los Angeles Corporation erroneously accounted for the transaction as an operating lease, its
profit for 2011 will be overstated by
a. P 478 c. P 678
b. P 553 d. P 1,128
2. The amount to be reported by Lakers Corporation under current liabilities as liability under finance lease as of 31
December 2011 is
a. P 5,208 c. 5,709
b. P 5,438 d. 6,223
3. The depreciation amount to be recognized by Lakers Corporation for the year ended 31 December 2011 is
a. P 5,971 c. P 3,932
b. P 5,251 d. P 6,291
4. Ignoring income taxes, if Lakers Corporation erroneously accounted for the transactions as an operating lease, its profit
for 2011 will be overstated by
a. P 1,513 c. P 1,193
b. P 1,302 d. P 982

On July 1, 2011, Madeline Company leased a small building and its site to Paris Company on a five year Contract. The lease
provides for an advance rental payment of P10,000 which does not reduce any other payment, plus an annual rental
payment of P40,000 payable each July 1 starting in 2011. The lease Can be terminated at any year-end by the lessee with a
six month advance notice. There is no renewal agreement. On July 8, 2011, Paris spent P20,000 on internal Changes and
painting. Madeline account’s showed the ff data on January 1, 2011:
Initial Cost of the building P 250,000
Accumulated Depreciation P 60,000
Estimated remaining life 15 years
Estimated Residual value P 10,000

The accounting period for each Company ends December 31. The lease is an operating lease to both parties.
5. The net amount to be presented as part of 2011 profit or loss of Madeline relative to the lease agreement is
a. P 9,000 C. P 30,000
b. P 21,000 d. P 38,000

6. The net amount to be presented as part of 2012 profit or loss of Paris relative to the lease agreement is
a. P 21,000 C. P 38,000
b. P 19,000 d. P 42,000

Real Inc. leases equipment to its customers under noncancelable leases. On January 1, 2010, Real leased equipment Costing
P 4,000,000 to Quezon Co., for nine years. The rental Cost was P 440,000 payable in advance semiannually (January 1 and
July 1), plus P20,000 semiannually for executory Costs. The equipment had an estimated life of 15 years and sold for P
5,330,250 with an estimated unguaranteed residual value of P 800,000. The implicit interest rate is 12%. (Round off PV
factors to four decimal places.)

7. How much is the total interest Income from lease that will be earned by Real InC?
a. P 2,869,988 C. P 3,657,616
b. P 3,398,748 d. P 3,389,748

8. Real, InC. should report profit on the sale at


a. P 1,330,552 C. P 1,338,492
b. P 1,330,252 d. P 1,638,492

9. How much interest expense should be reported by Quezon Co in relation to the lease for the year ended December 31,
2010?
a. P 508,064 C. P 501,793
b. P 543,398 d, P 0

10. How much should be reported by Quezon Co. under Current liabilities as liability under finance lease as of December 31,
2010?
a. P 365,798 C. P 394,252
b. P 378,207 d. P 356,798
11. How much should be reported by Quezon Co. under non Current liabilities as liability under finance lease as of
December 31, 2010?
a. P 4,089,815 C. P 4,446,613
b. P 4,080,815 d. P 4,143,593
Niyabangan Co purchases land and ConstruCts a service station and Car wash for a total of P 6,750,000. At January 2, 2010,
when Construction is completed, the facility and land on which it was constructed are sold to a major oil Company for P
7,500,000 and immediately leased from the oil Company by Niyabangan. Fair value of the land at time of the sale was P
750,000. The lease is a 10-year, noncancelable lease. The agreement requires equal rental payments at the end of year
beginning Dec. 31, 2010. The implicit interest rate in the lease is 10%. Niyabangan uses straight line depreciation for its
other various business holdings. The economic useful life of the facility was 15 years with zero salvage value. Title to the
facility and land will pass to Niyabangan at termination of the lease.

12. The total lease-related income to be recognized by the lessor during 2010 is
a. P675,000 c. P 750,000
b. P 600,000 d. P0

13. The total lease-related income to be recognized by the lessee during 2010 is
a. P75,000 C. P 750,000
b. P50,000 d. P0

14. The total lease-related expenses to be Recognized by the lessee during 2010 is
a. P 1,000,000 C. P 1, 075,000
b. P 1,425,000 d. P 1,200,000

Vanderbilt Company is a dealer in machinery. On January 1, 2010 machinery was leased to another enterprise with
the following provisions:

Annual rental payable at the end of each year 3,000,000


Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57

At the end of the lease term on December 31, 2010, the machinery will revert to Vanderbilt. The perpetual
inventory system is used. Vanderbilt incurred initial direct cost of P300,000 in finalizing the lease agreement.

15. What is the total financial revenue from the lease?


a. 4,630,000
b. 4,200,000
c. 5,200,000
d. 3,630,000

16.Vanderbilt Company should report profit on the sale in 2010 at


a. 7,700,000
b. 3,070,000
c. 2,500,000
d. 3,370,000

12. What is the earned financial revenue or interest income for 2010?
a. 1,364,400
b. 1,296,000
c. 1,800,000
d. 926,000

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