Leases/ Income taxes

Accounting 3B

NAME: BANANIA, RHODELYN M. Date: MARCH 21,

2020
Professor: Section: Score:

QUIZ:
C 1. Entity A (customer) enters into a contract with Entity B (supplier) for the use of a data
processing equipment. According to the contract, Entity A shall operate the equipment only
in accordance with the standard operating procedures stated in the accompanying user’s
manual. In assessing the existence of a lease, does Entity A have the right to direct the use
of the asset?
a. No, because the asset’s use is restricted.
b. Yes, because Entity A has the right to direct how and for what purpose the asset is used.
c. Yes, because the asset’s use is predetermined and Entity B is precluded from changing
that predetermined use.
d. Maybe yes, maybe no, but exactly I don’t know.
B 2. Which of the following is not one of the criteria when determining whether a contract is or
contains a lease?
a. Identified asset
b. Identified liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use
3. Which of the following statements is correct regarding the accounting for leases?
C
a. The lessor depreciates the leased asset under a finance lease.
b. The lessee depreciates the leased asset under a “short-term” or a “low-valued asset”
lease.
c. When discounting lease payments, the lessor and the lessee use the interest rate implicit
in the lease.
d. An entity can never be both a lessor and a lessee of a same leased asset.
C 4. According to PFRS 16, lease liabilities are presented in the lessee’s statement of financial
position
a. separately from the other liabilities of the lessee.
b. together with other liabilities, with disclosure of the line items that include the lease
liabilities.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial
C statements
5. According to PFRS 16, right-of-use assets are presented in the lessee’s statement of financial
position
a. separately from the other assets of the lessee.
b. together with other assets as if they were owned, with disclosure of the line items that
include the right-of-use assets.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial
statements
A
6. Lessor Co. entered into two contract leases. Lease #1 transfers substantially all the risks
and rewards incidental to ownership of the leased asset. Lease #2 does not transfer
substantially all the risks and rewards incidental to ownership of the leased asset. How
should Lessor Co. classify the leases? (Lease #1); (Lease #2)
a. Finance, Operating c. Finance, Finance
b. Operating, Finance d. Operating, Operating
A 7. A lessor’s gross investment in a finance lease is computed as
a. lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)
C 8. A lessor’s unearned interest income in a finance lease is computed as
a. lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)
E 9. Which of the following does not correctly relate to the accounting for leases?
a. The underlying asset in a lease contract is recognized by the lessee in its financial
statements.
 b. The lessor recognizes a finance lease receivable equal to the net investment in a finance
lease.
c. A manufacturer or dealer lessor recognizes gross profit or loss on commencement of a
finance lease in accordance with its policy for outright sales.
d. The lessor recognizes lease payments receivable from an operating lease as income in
the period earned.
e. The lessor continues to recognize an asset subject to a finance lease in its financial
B statements.
10.Regarding the accounting for the residual value of a leased asset, which of the following
statements is incorrect?
a. A lessee accounts for a residual value only if it is guaranteed.
b. A lessor accounts for a residual value only if it is guaranteed.
c. A lessor accounts for a residual value whether guaranteed or not.
d. Both lessee and lessor will account for a residual value only if the leased asset reverts
A back to the lessor.
11.Under operating leases, lessors
a. recognize rent income using a straight line basis, unless another method is more
appropriate.
b. recognize interest income using the effective interest method.
c. recognize different amounts of rent income each year depending on the contractual
payments
d. any of these

C 12.Security deposits that are refundable

a. are treated as unearned income by lessors under an operating lease.
b. are not discounted because they are normally of a short-term nature
c. are treated as receivable by lessees and as payable by lessors.
d. are discounted only by lessees but not by lessors
B 13.If the lessor recognizes rent income (lease income), then the lease must have been classified
as
a. finance lease c. a or b
b. operating lease d. none of these
D 14.Which of the following statements is false regarding the accounting for leases?
a. The lessor may not use the straight line basis for recognizing lease income under an
operating lease if another systematic basis is more representative of the pattern in which
benefit from the use of the underlying asset is diminished.
b. The amount of lease income recognized each year under an operating lease is typically
constant even though the contractual payments increase every year by a certain amount
specified in the contract.
c. It is possible that the lessor does not depreciate the leased asset even if the lease is
classified as an operating lease.
d. Under an operating lease, the lessor capitalizes initial direct costs. These costs will
C increase the lease income each year.
15.Which of the following is correct regarding the accounting for operating leases?
a. A lessor under an operating lease may classify the lease as either direct operating lease
or sales type operating lease.
b. A lessor includes a rent collected in advance as part of the cost of the leased asset.
c. A lessor includes initial direct costs incurred on the operating lease as part of the cost of
the leased asset to be recognized in profit or loss on the same basis as rent income is
recognized.
d. A lessor includes initial direct costs incurred on the operating lease as part of the cost of
the leased asset to be recognized in profit or loss on the same basis as depreciation
expense is recognized.
16.All of the following can result in a temporary difference between pretax financial income and
taxable income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. provision for pending lawsuits.
d. product warranty costs.
(Adapted)
17.Which of the following items results in a temporary difference deductible amount for a given
year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value
through profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes
(Adapted)
18.Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on held for trading securities
d. Depreciation
(Adapted)
19.When enacted tax rates change, the asset and liability method of interperiod tax allocation
recognizes the rate change as
a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year's net income.
d. a separate charge or benefit to income tax expense.
(Adapted)
20.Current financial reporting standards currently are moving toward the
a. no-deferral approach.
b. partial recognition approach.
c. comprehensive recognition approach.
d. discounted comprehensive recognition approach.
(Adapted)
21.If all temporary differences entering into the determination of pretax accounting income are
considered in the computation of deferred taxes and income tax expense, then
a. the no-deferral approach is being applied.
b. the comprehensive recognition approach is being applied.
c. the partial recognition approach is being applied.
d. the net-of-tax method is being applied.
(Adapted)
22.If there is a change in the tax rate applicable in future periods, which of the following
statements is incorrect?
a. Current tax expense may be equal to taxable profit multiplied by the enacted tax rate(s)
applicable to the period(s) where the profit was earned.
b. Deferred tax asset or liability is computed based on the substantially enacted tax rate
that is applicable in the period where the deferred tax is expected to reverse.
c. Income tax expense is equal to accounting profit multiplied by the substantially enacted
future tax rate.
d. Deferred tax expense (benefit) is equal to the net change in deferred tax asset and
deferred tax liability during the year.

23.Which of the following situations would require interperiod income tax allocation
procedures?
a. A temporary difference exists because the tax basis of capital equipment is less than its
reported amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire exceed the book
value of the equipment.
c. Last period's ending inventory was understated causing both net income and income tax
expense to be understated.
d. Nontaxable interest payments are received on municipal bonds.
(Adapted)
24.The result of interperiod income tax allocation is that
a. wide fluctuations in a company's tax liability payments are eliminated.
b. tax expense shown in the income statement is equal to the deferred taxes shown on the
balance sheet.
c. tax liability shown in the balance sheet is equal to the deferred taxes shown on the
previous year's balance sheet plus the income tax expense shown on the income
statement.
d. tax expense shown on the income statement is equal to income taxes payable for the
current year plus or minus the change in the deferred tax asset or liability balances for
the year.
(Adapted)
25.Assuming no prior period adjustments, would the following allocations affect net income?
Interperiod Tax Allocation Intraperiod Income Tax Allocation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(Adapted)
26.Which entities are required to apply deferred tax accounting?
I. Public entities
II. Non-public entities
a. I only c. Both I and II
b. II only d. Neither I nor II
27.It is the profit for a period determined in accordance with the rules established by taxation
authorities upon which income taxes are payable.
a. Accounting profit c. Net profit
b. Taxable profit d. Accounting profit subject to tax
28.It is the net profit for a period before deducting tax expense.
a. Accounting profit c. Gross profit
b. Taxable profit d. Net profit
29.These are differences between the carrying amount of an asset or liability in the statement
of financial position and its tax base.
a. Temporary Differences c. Permanent differences
b. Timing differences d. Accounting differences
30.These are differences that will result in future taxable amount in determining taxable profit
of future periods when the carrying amount of the asset or liability is recovered or settled.
a. Temporary differences c. Deductible temporary differences
b. Taxable temporary differences d. Permanent differences.
31.These are differences that result in future deductible amount in determining taxable profit in
future periods when the carrying amount of the asset or liability is recovered or settled.
a. Taxable temporary differences d. Deductible temporary and permanent
b. Deductible temporary differences differences
c. Taxable temporary and permanent
differences
32.It is the differed tax consequence attributable to a taxable temporary difference.
a. Deferred tax liability c. Current tax liability
b. Deferred tax asset d. Current tax asset
33.It is the deferred tax consequence attributable to a deductible temporary difference and
operating loss carry-forward.
a. Deferred tax liability c. Current tax liability
b. Deferred tax asset d. Current tax asset
34.It is the amount of income tax payable in respect of the taxable profit.
a. Current tax expense c. Deferred tax expense
b. Total Income tax provision d. Deferred tax benefit
35.The deferred tax expense is equal to
a. Increase in deferred tax asset less c. Increase in deferred tax asset.
the increase in deferred tax liability. d. Increase in deferred tax liability
b. Increase in deferred tax liability
minus the increase in deferred tax
asset.
36.It is the aggregate amount included in the determination of net profit for the period in
respect of current tax and deferred tax.
a. Tax expense c. Deferred tax expense
b. Current tax expense d. Deferred tax benefit
37.It is the amount attributable to an asset or liability for tax purposes.
a. Carrying amount c. Measurement base
b. Tax base d. Taxable amount

38.A deferred tax liability shall be recognized for all

a. Permanent differences
b. Temporary differences
c. Taxable temporary differences
d. Deductible temporary differences
39.A deferred tax asset shall be recognized for all deductible temporary differences and
operating loss carryforward when
a. It is probable that taxable income will be available against which the deferred tax asset
can be used.
b. It is probable that accounting income will be available against which the deferred tax
asset can be used.
c. It is possible that taxable income will be available against which the deferred tax asset
can be used.
d. It is possible that accounting income will be available against which the deferred tax
asset can be used.
40.An entity shall offset a deferred tax asset and deferred tax liability when
 I. The deferred tax asset and deferred tax liability relate to income taxes levied by
the same taxing authority.
II. The entity has a legal enforceable right to offset a current tax asset against a
current tax liability.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
41.Which of the following statements in relation to deferred tax asset and liabilities is true?
i. Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable temporary differences.
ii. Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of deductible permanent differences.
a. I only c. Both I and II
b. II only d. Neither I nor II
42.Deferred tax assets are the amount of income taxes recoverable in future periods in respect
of
a. The carry-forward of unused tax losses only
b. Taxable temporary differences and carry-forward of unused tax losses
c. Deductible temporary differences and carry-forward of unused tax losses
d. Permanent differences
43.All of the following must be disclosed separately, except?
a. The tax bases of major items on which deferred tax has been calculated.
b. The amount of deductible temporary difference for which no deferred tax liability is
recognized.
c. The amount of taxable temporary difference associated with investments in subsidiaries
and associates for which no deferred tax liability is recognized.
d. The amount of income tax relating to each component of other comprehensive income.
44.Which of the following statements in relation to classification of items under PAS 12 is true?
I. Interest expense accrued but included in taxable profit on a cash basis shall be
classified under deductible temporary differences.
II. Where accumulated depreciation on an asset is greater than accumulated tax
depreciation, the amount shall be classified under deductible temporary differences.
a. I only c. Both I and II
b. II only d. Neither I nor II
45.Which of the following statements in relation to a deferred tax asset is true?
I. Development costs have been capitalized and will be amortized but were deducted in
determining taxable profit in the period in which they were incurred. This will give rise to
a deferred tax asset.
II. The tax base for a machine for tax purposes is greater than the carrying amount in the
financial statements up to the end of the reporting period. This will give rise to a deferred
tax asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
46.Justification for the method of determining periodic deferred tax expense is based on the
concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in calculation of periodic expense
c. Recognition of assets and liabilities
d. Consistency of tax expense measurement with actual tax planning strategies
47.Which of the following differences would result in future taxable amount?
a. Expenses or losses that is deductible after they are recognized in accounting income.
b. Revenues or gains that is taxable before they are recognized in accounting income.
c. Expenses or losses that is deductible before they are recognized in accounting income.
d. Revenues or gains that are recognized in accounting income but are never included in
taxable income.
48.A temporary difference which would result in deferred tax liability is
a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess of tax depreciation over accounting depreciation
d. Subscription received in advance
49.A temporary difference which would result in a deferred tax asset is
a. Tax, penalty or surcharge.
b. Dividend received on share investment
c. Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable income at the time of receipt but deferred
for accounting purposes.
50.An entity, cash basis taxpayer, prepares accrual basis financial statements. In its year-end
statement of financial position, the entity’s deferred income tax liabilities increased
compared to the prior year.
Which of the following changes would cause this increase in deferred tax liabilities?
I. An increase in prepaid insurance
II. An increase in rent receivable
III. An increase in warranty obligation
a. I only
b. II only
c. Both I and II
d. Neither I nor II
51.An entity reported deferred tax assets and deferred tax liabilities at the end of the prior year
and at the end of the current year. For the current year, the entity should report deferred
income tax expense or benefit equal to the
a. Decrease in the deferred tax assets
b. Increase in the deferred tax liabilities
c. Amount of the current liability plus the sum of the net changes in deferred tax assets and
deferred tax liabilities
d. Sum of the net changes in deferred tax assets and deferred tax liabilities
52.Because an entity uses different methods to depreciate equipment for accounting and
income tax purposes, the entity has temporary differences that will reverse during the next
year and add to taxable income. Deferred income taxes that are based on these temporary
differences shall be classified in the entity’s statement of financial position as
a. Contra account to current assets
b. Contra account to noncurrent assets
c. Current liability
d. Noncurrent liability
53.At the most recent year-end, an entity had a deferred tax liability arising from accelerated
depreciation that exceeded a deferred asset relating to rent received in advance which is
expected to reverse in the next year. Which of the following shall be reported in the entity’s
most recent year-end statement of financial position?
a. The excess of the deferred tax liability over the deferred tax asset as a noncurrent
liability.
b. The excess of the deferred tax liability over the deferred tax asset as a current liability.
c. The deferred tax liability as a noncurrent liability
d. The deferred tax liability as a current liability
54.An entity’s financial reporting basis of its plant assets exceeded the tax basis because it uses
a different method of reporting depreciation for financial reporting purposes and tax
purposes. If it has no other temporary differences, the entity shall report a
a. Current tax asset
b. Deferred tax asset
c. Deferred tax liability
d. Current tax payable
55.A deferred tax liability is computed using
 a. Current tax law regardless of expected or enacted future tax law
b. Expected future tax laws regardless of whether enacted or not
c. Current tax law unless a future enacted tax law is different
d. Either current or expected future tax law regardless of whether the expected future tax
law is enacted or not
56.The purpose of inter-period tax allocation is to
a. Allow reporting entities to fully utilize tax losses carried forward from a previous year
b. Allow reporting entities whose tax liabilities vary significantly from year to year to
smooth payments to taxing agencies.
c. Recognize an asset or liability for the tax consequences of temporary differences that
exist at the end of the reporting period.
d. Amortize the deferred tax liability shown in the statement of financial position.
57.The result of inter-period tax allocation is that
a. Wide fluctuation in an entity’s tax liability payments are eliminated
b. Tax expense shown in the income statement is equal to the deferred taxes shown in the
statement of financial position.
c. Tax liability shown in the statement of financial position is equal to the deferred taxes
shown in the previous year’s statement of financial position plus the income tax expense
shown in the income statement.
d. Tax expense shown in the income statement is equal to income taxes payable for the
current year plus or minus the change in the deferred tax asset or liability balances for
the year.
58.Which of the following is an example of a temporary difference that would result in a
deferred tax liability?
a. Use of straight line depreciation for accounting purposes and an accelerated rate for
income tax purposes.
b. Rent revenue collected in advance when included in taxable income before it is included
in pretax accounting income.
c. Use of a shorter depreciation period for accounting purposes than is used for income tax
purposes.
d. Investment losses recognized earlier for accounting purposes than for tax purposes.
59.Which of the following is the most likely item to result in a deferred tax asset?
a. Using accelerated depreciation for tax purposes but straight line depreciation for
accounting purposes.
b. Using the cost recovery method of recognizing construction revenue for tax purposes but
using percentage of completion method for financial reporting purposes
c. Prepaid expense
d. Unearned revenue

60.An example of a “deductible temporary difference” occurs when

a. The instalment sales method is used for tax purposes but the accrual method of
recognizing sales revenue is used for financial accounting purposes.
b. Accelerated depreciation is used for tax purposes but straight line depreciation is used
for accounting purposes.
c. Warranty expenses are recognized on the accrual basis for financial accounting purposes
but recognized for tax purposes as the warranty conditions are met.
d. The cost recovery method of recognizing construction revenue is used for tax purposes
but the percentage of completion method is used for financial accounting purposes.
61.A deferred tax liability arising from the use of an accelerated method of depreciation for tax
purposes and the straight line method for financial reporting purposes would be classified in
the statement of financial position as
a. A current liability
b. A noncurrent liability
c. A current liability for the portion of the temporary differences reversing within a year and
a noncurrent liability for the remainder
d. An offset to the accumulated depreciation reported in the statement of financial position.
62.An item that would create a permanent difference in pretax financial income and taxable
income would be
a. Using accelerated depreciation for tax purposes and straight line depreciation for book
purposes.
b. Purchasing equipment previously leased with an operating lease in prior year.
c. Using the percentage of completion method on long-term construction contracts.
d. Paying fines for violation of laws.
63.Recognizing tax benefit in a loss year due to a loss carry-forward requires
a. Only a footnote disclosure. c. Creating a deferred tax asset.
b. Creating a new carry-forward for the d. Creating a deferred tax liability.
next year.
64.Intraperiod tax allocation
a. Involves the allocation of income taxes between current and future periods.
b. Associates tax effect with different items in the income statement.
c. Arises because certain revenue and expenses appear in the financial statement either
before or after they are included in the income tax return.
d. Arises because different income statement items are taxed at different rates.
65.In computing the changes in deferred tax asset or liability, which tax rate is used?
a. Current tax rate c. Enacted future tax rate
b. Estimated future tax rate d. Prior tax rate
66.If the carrying amount of an asset exceeds its tax base, the difference is a
a. Deductible temporary difference c. Deferred tax asset
b. taxable temporary difference d. Deferred tax liability
67. This causes the profit determined under PFRSs to be greater than the taxable profit determined
under tax laws.
a. Deductible temporary difference c. Deferred tax asset
b. taxable temporary difference d. Deferred tax liability
68.This causes the profit determined under PRFSs to be less than the taxable profit determined
under tax laws.
a. Deductible temporary difference c. Deferred tax asset
b. taxable temporary difference d. Deferred tax liability
69.Taxable temporary difference multiplied by the tax rate equals
a. Income tax expense c. deferred tax asset
b. Current tax expense d. deferred tax liability
70.Deductible temporary difference multiplied by the tax rate equals.
a. Income tax expense c. deferred tax asset
b. Current tax expense d. deferred tax liability
71.It is the net changes in deferred tax liabilities and deferred tax assets during the period.
a. Income tax expense (benefit) c. Income tax payable
b. Current tax expense d. Deferred tax expense (benefit)
72.If the increase in deferred tax liability exceeds the increase in deferred tax assets during the
period, there is
a. Income tax expense (benefit) c. Deferred tax benefit
b. Current tax expense d. Deferred tax expense
73.If the increase in deferred tax asset exceeds the increase in deferred tax liability during the
period, there is
a. Income tax expense (benefit) c. Deferred tax benefit
b. Current tax expense d. Deferred tax expense
74.If the current tax expense is greater than the tax expense during, there must be a
a. Deferred tax benefit c. Income tax payable
b. Deferred tax expense d. Prepaid income tax
75.If the current tax expense is less than the income tax expense during the period, there must
be a
a. Deferred tax benefit c. Income tax payable
b. Deferred tax expense d. Prepaid income tax
76.All of the following can result in a temporary difference between pre-tax financial income
and taxable income except for
a. payment of premiums for life c. provision for pending lawsuits
insurance d. product warranty costs
b. depreciation expense
77.Which of the following items result in a temporary difference deductible amount for a given
year?
a. premiums on officer’s life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value on
through profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes.
78.Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs c. Unrealized losses on held for trading
b. Subscription revenue received in securities
advance d. Depreciation
79.When enacted tax rates change, the asset and liability method of inter period tax allocation
recognizes the rate change as
a. A cumulative effect adjustment
b. An adjustment to be netted against the current income tax expense.
c. A separate charge to the currents year’s net income.
d. A separate charge or benefit to income tax expense
80.Currents financial reporting standards currently are moving toward the
a. No-deferral approach. c. Comprehensive recognition approach
b. Partial recognition approach d. Discounted recognition approach
81.If all temporary differences entering into the determination of pretax accounting income are
considered in the computation of deferred taxes and income tax expense, then
a. The no-deferral approach is being c. the partial recognition is being
applied applied
b. The comprehensive recognition d. the net-of-tax method is being
approach is being applied. applied
82.If there is a change in the rate applicable in future periods, which of the following
statements is incorrect?
a. Current tax expense may be equal to taxable profit multiplied by the enacted tax rate(s)
applicable to the period(s) where the profit was earned.
b. Deferred tax asset or liability is computed based on the substantiality enacted tax rate
that is applicable in the period where the deferred is expected to reverse.
c. Income tax expense is equal to accounting profit multiplied by the substantially enacted
future tax rate
d. Deferred tax expense (benefit) is equal to the net change in deferred tax asset and
deferred tax liability during the year.
83.Which of the following situations would require inter-period income tax allocation
procedures?
a. A temporary difference exists because the tax basis of capital equipment is less than its
reported amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire exceed the book
value of the equipment.
c. Last period’s ending inventory was understated causing both net income and income tax
to be understated.
d. Non-taxable interest payments are received on municipal bonds.
84.The result of inter-period income tax allocation is that
a. Wide fluctuations in a company’s tax liability payments are eliminated.
b. Tax expense shown in the income statement is equal to the deferred taxes shown on the
balance sheet.
c. Tax liability shown in the balance sheet is equal to the deferred taxes shown on the
previous year’s balance sheet plus the income tax expense shown on the income
statement.
d. Tax expense shown on the income statement is equal to income taxes payable for the
current year plus or minus the change in the deferred tax asset or liability balances for
the year.
85.Assuming no prior period adjustments, would the following allocations affect net income?
Interperiod Tax Allocation
a. Yes
b. Yes
c. No
d. No
86. On January 2, 20x9, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori recognized
a lease liability of ₱240,000 at the commencement date. This amount includes the ₱10,000 exercise price of a
purchase option. At the end of the lease, Nori expects to exercise the purchase option. Nori estimates that the
equipment's fair value will be ₱20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation
on similar equipment. For the year ended December 31, 20x9, what amount should Nori recognize as
depreciation expense on the leased asset?
a. 48,000 b. 46,000 c. 30,000 d. 27,500
87. In the long-term liabilities section of its balance sheet at December 31, 20x9, Mene Co. reported a lease liability
of ₱75,000, net of current portion of ₱1,364. Payments of ₱9,000 were made on both January 2, 2x10, and January
 2, 2x11. Mene's incremental borrowing rate on the date of the lease was 11% and the lessor's implicit rate, which
was known to Mene, was 10%. In its December 31, 2x10, balance sheet, what amount should Mene report as
lease liability, net of current portion?
a. 66,000 b. 73,500 c. 73,636 d. 74,250
88. Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay ₱50,000 at the start of the lease
term on December 31, 20x8, and ₱50,000 annually on each December 31 for the next eight years. The present
value on December 31, 20x8, of the nine lease payments over the lease term, using the rate implicit in the lease
which Oak knows to be 10%, was ₱316,500. The December 31, 20x8, present value of the lease payments using
Oak's incremental borrowing rate of 12% was ₱298,500. Oak made a timely second lease payment. What amount
should Oak report as lease liability in its December 31, 20x9, balance sheet?
a. 350,000 b. 243,150 c. 228,320 d. 0
89. On January 2, 20x5, Marx Co. as lessee signed a five-year noncancelable equipment lease with annual payments
of ₱200,000 beginning December 31, 20x5. The five lease payments have a present value of ₱758,000 at January 2,
20x5, based on interest of 10%. What amount should Marx report as interest expense for the year ended
December 31, 20x5?
a. 0 b. 48,000 c. 55,800 d. 75,800
90. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The rent in 20x1 is ₱10,000 and shall
increase by 10% annually starting on January 1, 20x2. Rentals are payable at the end of each year. ABC Co. pays
the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC Co. opts to use the practical expedient allowed under
PFRS 16 for leases of low value assets. How much is the lease expense in 20x1?
a. 10,000 b. 11,000 c. 11,603 d. 12,853
On January 1, 20x1, IMBROGLIO Co. leased equipment to COMPLICATION, Inc. Information on the lease is shown
below:

Cost of equipment ₱ 1,200,000

Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of each 400,000
year
Interest rate implicit in the lease 10%

Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting.
91. How much is the gross investment in the lease on January 1, 20x1?
a. 2,000,000 b. 1,600,000 d. 1,200,000 d. 1,800,000
92. How much is the net investment in the lease on January 1, 20x1?
a. 1,200,000 b. 1,280,000 c. 1,394,740 d. 1,474,741
93. How much is the total interest income (finance income) to be recognized by IMBROGLIO over the lease term?
a. 205,260 b. 235,260 c. 125,259 d. 525,259
94. How much is the gross profit from the sale?
a. 114,740 b. 194,740 c. 125,259 d. 45,25
95. How much is the net profit from the sale?
a. 125,259 b. 45,259 c. 194,740 d. 114,740

Use the following information for the next three questions:

On January 1, 20x1, YATAGHAN Financing Co. leased equipment to LONG KNIFE, Inc. Information on the lease is
shown below:

Cost of equipment ₱ 1,322,588

Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the end of each year 400,000
Interest rate implicit in the lease 10%
Residual value 80,000

The equipment will revert back to YATAGHAN at the end of the lease term. The lease is classified as direct
financing lease.

96. Assuming the residual value is guaranteed, how much is the gross investment in the lease on January 1, 20x1?
 a. 1,600,000 b. 1,680,000 c. 1,520,000 d. 2,080,000
97. Assuming the residual value is unguaranteed, how much is the net investment in the lease?
a. 1,322,588 b. 1,267,948 c. 1,213,308 d. 1,345,981
98. How much is the total interest income to be recognized by YATAGHAN over the lease term if the residual value
is unguaranteed and guaranteed, respectively?
Unguaranteed Guaranteed
a. 357,412 341,270
b. 341,270 357,412
c. 341,753 341,985
d. 357,412 357,412
99. Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20x9. Under the terms of
the operating lease, rent for the first year is ₱8,000 and rent for years 2 through 5 is ₱12,500 per annum.
However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free. In its
December 31, 20x9, income statement, what amount should Wall report as rental income?
a. 12,000 b. 11,600 c. 10,800 d. 8,000
100. As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine months of free
rent under a five-year operating lease. The lease is effective on July 1, 20x5, and provides for monthly rental of
₱1,000 to begin April 1, 20x6. In Art's income statement for the year ended June 30, 20x6, rent income should be
reported as
a. 10,200 b. 9,000 c. 3,000 d. 2,550