chapter 11 15finacc2

7/24/2019 Chapter 11 15FinAcc2

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(Kulang 11-1 to 7)Problem 11-8 (AICPA Adapted)

On January 1, 2015, Mixx Company entered into a lease for a newwarehouse.Rental payments are P00, 000 a year for 5 years, paya!le in ad"an#estartin$ January 1, 2015.

%he warehouse has an estimated life of 10 years. %he entity paid initial dire#t#ost of P100, 000 on January 1, 2015.%he realty taxes of P&0, 000 a year are to !e paid !y the entity.%he entity has the option to pur#hase the property at the #on#lusion of thelease for a nominal amount.%he interest rate impli#it in the lease is 10'. %he rele"ant present "aluefa#tors are(P) of an ordinary annuity of 1 at 10' for 5 periods *.+P) of an annuity of 1 in ad"an#e at 10' for 5 periods&.1+Re-uired(

Prepare ournal entries on the !oo/s of Mixx Company for 2015 and 201.

Pro!lem 11 34CP3 3daptedO"erland Company #losed a lease #ontra#t for newly #onstru#ted terminalsand frei$ht stora$e fa#ilities on January 1, 2015.3lthou$h the terminals ha"e a #omposite life of 10 years, the lease runs for5 years with a transfer of title to the lessee upon expiration of the lease.%he annual rental is P1, 000, 000 paya!le at the end of ea#h year startin$6e#em!er *1, 2015.%he lessee must also ma/e an annual payment of P+5, 000 for taxes andP125, 000 for insuran#e.%he #ontra#t was ne$otiated to assure the lessor a 10' rate of return.%he present "alue of an annuity of 1 at 10' for 7"e periods is *.+.%he present "alue of an annuity of 1 in ad"an#e at 10' for 5 periods is &.1+.Required:

Prepare journal entries on the books of Overland Company for 2015 and 2016 in connection with

the finance lease

Problem 11-10 (AICPA Adapted)

!etty Company leased a machine on "anuary 1# 2015 with the followin$ provisions

%nnual rental payable in advance at the be$innin$

of each year# startin$ "anuary 1# 2015 1# 000# 000!ease term 10 years

&seful life of machine 15 years

'mplicit interest rate in the lease 12(

P) of an ordinary annuity of 1 at 12( for 10 periods 5650P) of an annuity of 1 in advance at 12( for 10 periods 6*2+

P) of 1 at 12( for 10 periods 0*22


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,he entity has the option to purchase the machine on "anuary 1# 2025 by pairin$ P200# 000

which is sufficiently lower than the e-pected fair value of the machine on "anuary 1# 2025 %t theinception of the lease# it is reasonably certain that the option will be e-ercised

Required:

Prepare journal entries on the books of !etty Company for 2015 and 2016


)eroni#a Company ne$otiated a lon$ term lease for newly #onstru#ted!uildin$. On January 1, 2015, the entity too/ possession of the !uildin$. %he!uildin$ has useful life of 20 years. %he lease runs for 15 years from January1, 2015. %he lease #ontains neither a transfer of title nor a !ar$ain pur#haseoption. 3nnual payments of P1, 000, 000 are paya!le to the lessor on6e#em!er *1 of ea#h of the 15 years of the lease term. %he lease wasne$otiated to assure the lessor a 10' rate of return. Present "alue fa#torsare(

P) of an ordinary annuity of 1 at 10' for 15 periods +.0P) of an annuity of 1 in ad"an#e at 10' for 15 periods .*+

Required:

Prepare journal entries on the books of )eronica Company for 2015

Problem 11-12 (IAA)

On January 1, 2015, 8esse Company entered into a lease with 8essorCompany for a new e-uipment that had a fair "alue of P*, 500, 000.%he lease stipulates that annual payments of P1, 000, 000 will !e made for7"e years startin$ 6e#em!er *1, 2015.8essee Company $uaranteed a residual "alue of P&+&, 00 at the end of the5year period. %he e-uipment will re"ert to the lessor at the lease expiration.%he impli#it interest rate for the lease is 1' after #onsiderin$ the$uaranteed residual "alue.%he e#onomi# life of the e-uipment is 10 years. %he present "alue fa#tors at1' for 7"e periods are(Present "alue of 1 0.&+1

Present "alue of an ordinary annuity of 1 *.2+&*Required:

1. Prepare a s#hedule of the annual payments showin$ redu#tion oflia!ility e"ery year.

2. Prepare ournal entries on the !oo/s of 8essee Company for 2015 and201.

*. Prepare ournal entry on 6e#em!er *1, 201, end of lease term, tore#ord the return of the e-uipment to the lessor. 3ssume the fair "alueof the e-uipment is e-ual to the $uaranteed residual "alue.


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&. Prepare ournal entry on 6e#em!er *1, 201 to re#ord the return of thee-uipment to the lessor assumin$ the fair "alue of the e-uipment isonly P*00, 000.

5. Prepare ournal entry on 6e#em!er *1, 201 to re#ord the return of thee-uipment to the lessor assumin$ the fair "alue of the e-uipment isP500, 000.

Problem 11-1 (IAA)

8awton Company leased a ma#hinery with a fair "alue of P2, 00, 000 onJanuary 1, 2015. %he ma#hinery has an estimated useful life of years.

%he #ontra#t is a sixyear non#an#ela!le lease with a 10' impli#it interestrate.

%he lease #ontains neither a transfer of title nor a !ar$ain pur#hase option.

%he lease re-uires annual payments of P500, 000 !e$innin$ January 1, 2015.

%he entity $uaranteed a residual "alue of P&00, 000 when the ma#hinery isreturned to the lessor upon the lease expiration.

%he present "alue of an annuity due of 1 at 10' for six periods is &.+0.%he present "alue of 1 at 10' for periods is .5&5.

Required:

1. 6etermine whether the lease is a 7nan#e lease.2. Prepare a ta!le of amorti9ation of the lease lia!ility and interest

expense.*. Prepare ournal entries for 2015 and 201.

Problem 11-1! (I"R#)

On 6e#em!er *1, 2015, :den Company leased an e-uipment to :"e

Company. On this date, :den Company pur#hased the e-uipment at the fair"alue of P1, +00, 000. %he lease a$reement #ontained the followin$ #lauses(

3nnual rent paya!le in ad"an#e on6e#em!er *1 of ea#h year &20, 000

:stimated residual "alue at the end of lease term *00,000Residual "alue $uaranteed !y lessee 200,0008ease term & years


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:#onomi# life of e-uipment years4mpli#it interest rate +'P) of an annuity of 1 in ad"an#e at +' for & periods *.2&*P) of 1 at +' for & periods .+2

%he lease is $an$elable!ut the #an#elation will re-uire a monetary penaltye-ui"alent to two years; rental payments on the part of the lessee.

4n#luded in the annual rental is an amount of P20, 000 to #o"erreim!ursement for insuran#e paid !y the lessor.

%he dire#tors of :"e Company ha"e indi#ated that they intend to return theasset to :den Company at the end of the lease term.

Required:

1. 6etermine whether the #an#ela!le lease is a 7nan#e lease.2. Prepare a ta!le of amorti9ation of the lease lia!ility and interest

expense.*. Prepare ournal entries for 2015 and 201 on the !oo/ of :"e Company.

&. Prepare ournal entry to re#ord the return of the e-uipment to thelessor on 6e#em!er *1, 201. 3ssume the fair "alue of the e-uipmentis P50, 000.

Problem 11-1% (IAA)

6exter Company has maintained a poli#y of a#-uirin$ e-uipment !y leasin$.On January 1, 2015, 6exter Company entered into a lease a$reement withO#eani# Company for an e-uipment with a fair "alue of P2, 200, 000.

%he lease stipulates an annual rental payment of P00, 000 to !e paid e"ery6e#em!er *1 startin$ 6e#em!er *1, 2015.

%he lease #ontains neither a transfer of title nor a !ar$ain pur#hase option.

%he e-uipment has a residual "alue of P*00, 000 at the end of the 5yearlease period !ut is un$uaranteed !y the lessee. %he e#onomi# life of thee-uipment is years.

%he impli#it interest rate is 12' after #onsiderin$ the un$uaranteed residual"alue.

%he present "alue of an ordinary annuity of 1 at 12' for 5 periods is *.0.

Required:

1. 6etermine whether the lease is an operatin$ lease or a 7nan#e lease.2. Prepare ournal entries on the !oo/s of 6exter Company for 2015.*. Prepare ournal entry on 6e#em!er *1, 201 to re#ord the return of the

e-uipment to the lessor as re-uired !y the #ontra#t. %he fair "alue ofthe e-uipment is P200, 000.


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Problem 11-1& (IAA)

Ma#edon Company leased many assets and #apitali9ed most of the leasedassets.

On 6e#em!er *1, 2015, the entity had the followin$ !alan#es in relation to apie#e of spe#iali9ed e-uipment(

:-uipment under 7nan#e lease &, 000, 0003##umulated depre#iation 2, &5, 0008ease lia!ility 1, *00, 000

6epre#iation has !een re#orded up to the end of the year, and no a##ruedinterest is in"ol"ed.

On 6e#em!er *1, 2015, the entity de#ided to pur#hase the e-uipment for P1,

00, 000 and paid #ash to #omplete the pur#hase.Required:

Prepare ournal entry to re#ord the a#tual pur#hase of the e-uipment on the!oo/s Ma#edon Company.

Problem 11-17 (I"R#)

%roy Company prepared the followin$ amorti9ation s#hedule for the lease ofa ma#hine from another entity. %he ma#hine has an e#onomi# life of sixyears. %he lease a$reement re-uires four annual payments of P**0, 000in#ludin$ exe#utor #osts of P*0, 000, and the ma#hine will !e returned to thelessor at the end of the lease term.

'inimum leae Interet Redu$tion alan$e o*pa+ment e,pene liabilit+ liabilit+

1


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5. Prepare ournal entry to re#ord the minimum lease payment and theexe#utor #ost on 6e#em!er *1, 201.

. Prepare ournal entry to re#ord the return of the ma#hine to the lessor.3ssume the fair "alue is the same as the $uaranteed residual "alue.

Problem 11-18 (I"R#)

:lysee Company leased a ma#hine with a fair "alue of P1, 50, 000 for aperiod of 5 years under a 7nan#e lease. %he initial dire#t #osts in#luded inne$otiatin$ the lease amounted to P12, 500. %he present "alue of theminimum lease payments dis#ounted at the rate impli#it in the lease is P1,5&, 000. 3t what amount should the ma#hine !e re#o$ni9ed initially !y:lysee Company>

a. 1, 50, 000!. 1, 5, 500#. 1, 2, 500d. 1, 5&, 000


3t the !e$innin$ of #urrent year, Clay Company leased a new ma#hine from?axe Company. %he followin$ data relate to the lease transa#tion at thein#eption of the lease(

8ease term 10 years3nnual rental paya!le at !e$innin$ of ea#h lease year 500,000@seful life of ma#hine 15 years4mpli#it interest rate 10'Present "alue of an annuity of 1 in

ad"an#e for 10 periods at 10' .+Present "alue of annuity of 1 in

arrears for 10 periods at 10' .15Aair "alue of the ma#hine &, 000, 000

%he lease has no renewal option, and the possession of the ma#hine re"ertsto ?axe Company when the lease terminates.

3t the #ommen#ement of the lease, what amount should !e re#o$ni9ed as7nan#e lease lia!ility>

a. &, 000, 000!. *, *0, 000#. *, 0+5, 000d. 0


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3t the !e$innin$ of #urrent year, 3she Company entered into a tenyearnon#an#ela!le lease re-uirin$ yearend payments of P100, 000. 3she;sin#remental !orrowin$ rate is 12', while the lessor;s impli#it interest rate,/nown to 3she, is 10'. Present "alue fa#tors for an ordinary annuity for tenperiods are .1&5 at 10', and 5.50 at 12'. Ownership of the propertyremains with the lessor at expiration of the lease. %here is no !ar$ain

pur#hase option. %he leased property has an estimated e#onomi# life of 12years. =hat amount should !e #apitali9ed as #ost of the leased property>

a. 1, 000, 000!. 1&, 500#. 55, 000d. 0

Problem 11-21 (IAA)

On 6e#em!er *1, 2015, %i$er Company leased e-uipment from anotherentity. Pertinent lease transa#tion data are as follows(

%he estimated se"enyear useful e-uipment life #oin#ides with the

lease term. %he 7rst of the se"en e-ual annual P00, 000 lease payments was paid

on 6e#em!er *1, 2015.

%he impli#it interest rate is 12'.

%i$er;s in#remental !orrowin$ rate is 1&'.

Present "alues of an annuity of 1 in ad"an#e for se"en periods are 5.11at 12' and &. at 1&'.

=hat amount should !e re#orded as initial measurement of the e-uipment>

a. 5, 00, 000

!. &, 0, 000#. *, 12, 000d. 0


:ast Company leased a new ma#hine from Borth Company on January 1,2015 under a lease with the followin$ information(


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3nnual rental paya!le at !e$innin$ of ea#h lease year&00, 000

8ease term 10 years@seful life of ma#hine 12years4mpli#it interest rate 1&'Present "alue of an annuity of 1

in ad"an#e for 10 periods at 1&' 5.5Present "alue of 1 for 10 periods at 1&' 0.2+

:ast Company has the option to pur#hase the ma#hine on January 1, 2025,!y payin$ P500, 000 whi#h appro,imate t.e e,pe$ted *air /alueof thema#hine on the option exer#ise date.

=hat is the initial #ost of the leased asset to !e re#o$ni9ed !y :astCompany>

a. 2, 515, 000!. 2, *0, 000

#. 2, 2&5, 000d. 1, 0, 000


3t the !e$innin$ of #urrent year, ?toi# Company !e#ame the lessee of newe-uipment under a non#an#ela!le sixyear lease. %he estimated e#onomi#life of the e-uipment is ten years. %he fair "alue of the e-uipment at thein#eption of the lease was P&, 000, 000. %he lease does not meet the #riteriafor #lassi7#ation as a 7nan#e lease with respe#t to transfer of ownership ofthe leased asset, or !ar$ain pur#hase option, or lease term.

Be"ertheless, ?toi# Company must #lassify this lease as a 7nan#e lease if, atin#eption of the lease, the present "alue of the minimum lease paymentsex#ludin$ exe#utor #ost is e-ual to at least what amount>

a. 2, +00, 000!. *, 000, 000#. *, 00, 000d. &, 000, 000

Problem 11-2! (I"R#)

Mindoro Company leased a land and !uildin$ for 20 +ear, the useful life ofthe !uildin$ with ee#t from January 1, 2015. 3t that date, the fair "alue ofthe leasehold interest was P+, 500, 000 and of whi#h P, 000, 000 was


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attri!uta!le in the !uildin$. 3nnual rentals of P00, 000 are paya!le inad"an#e on January 1. =hat amount should !e re#o$ni9ed as an operatin$lease expense for the year ended 6e#em!er *1, 2015>

a. 00, 000!. &0, 000#. 10, 000d. 0

Problem 11-2% (I"R#)

Casano"a Company leased a warehouse with adoinin$ land for a period of15 years. %he fair "alues of the leasehold interests in the land and thewarehouse are P5, 000, 000 and P2, 500, 000 respe#ti"ely. %he land has aninde7nite e#onomi# life whereas the warehouse has a useful life of 15 years.%itle to the land is not expe#ted to pass at the end of the lease. 3t whatamount should the asset in relation to 7nan#e lease !e re#o$ni9ed in the7nan#ial statements>

a. +, 500, 000!. 5, 000, 000#. 2, 500, 000d. 0

Problem 11-2& (AICPA Adapted)

Ro!!in Company leased a ma#hine from Ready 8easin$ Company. %he lease-uali7ed as 7nan#e lease and re-uired 10 annual payments of P100, 000!e$innin$ immediately. %he lease spe#i7ed an interest rate of 12' and apur#hase option of P100, 000 at the end of the tenth year, e"en thou$h thema#hine;s estimated "alue on that date was P200, 000.

Present "alue of an annuity due in ad"an#eof 1 at 12' for 10 periods .*2

Present "alue of 1 at 12' for 10 periods 0.*22

=hat amount should !e re#orded as lease lia!ility at the !e$innin$ of thelease term>

a. 21, 00!. &, 00#. 5, 000d. +, 200


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3t the !e$innin$ of #urrent year, Bori Company entered into a 5year lease

for drillin$ e-uipment. %he entity a##ounted for the a#-uisition as a 7nan#e

lease for P2,&00,000, whi#h in#luded a P100,000 !ar$ain pur#hase option. 3t

the end of the lease, the entity is expe#ted to exer#ise the !ar$ain pur#haseoption. %he entity estimated that the e-uipment;sfair "alue will !e P200,000

at the end of the year life and re$ularly used strai$ht line depre#iation on

similar e-uipment. =hat amount should !e re#o$ni9ed as depre#iation

expense on the leased asset for the #urrent year>

a. &0,000!. &0,000#. *00,000d. 2+5,000


3t the !e$innin$ of #urrent year, Cole Company si$ned an ei$htyear

non#an#ela!le lease for a new ma#hine, re-uirin$ P150,000 annual

payments at the !e$innin$ of ea#h year. %he ma#hine has a useful life of 12

years, with no residual "alue. %itle passes to Company at the lease expiration

date. Cole Company used strai$htline depre#iation for all plant assets.

3$$re$ate lease payments ha"e a present "alue of P1,00,000 !ased on an

appropriate rate of interest.

a. 0!. 0,000#. 1*5,000d. 150,000


3t the !e$innin$ of #urrent year. Doso"o Company entered into a 10year

lease forane-uipment. %he entity a##ounted for the a#-uisition as a 7nan#e

lease for P&,00,00, =hi#h in#ludesa P200,000 $uaranteed residual "alue. 3tthe end of the lease, the asset will re"ert !a#/ to the lessor. 4t is estimated

that the asset;s fair "alue at the end of its 12year useful life will !e

P100,000. %he strai$ht line depre#iation is used. =hat amount should !e

re#o$ni9ed as depre#iation expense on the leased asset>

a. &0,000!. &00,000#. &+0,000d. &0,000


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Problem 11-0 (I"R#)

Bo"a Company has leased an asset under a 7nan#e lease. %he present "alue

of the minimum lease payments is P,000 and the fair "alue of the asset is

P+00,000. %he asset has a useful life of 5 years and the lease is for a period

of & years, after whi#h is su!stantially !elow the expe#ted "alue of the assetat that date. %he asset is depre#iated on a strai$ht line !asis. =hat is the

annual depre#iation expense>

a. 1+5, 000!. 1&0, 000#. 1*+, 000d. 1+1, 000

Problem 11-1 (I"R#)

3s the !e$innin$ of #urrent year, 6iamond Company leased a "an with a fair

"alue of P*,00,000 under a 7nan#e lease. %he lease term is years, and the

present "alue of the minimum lease payments is P*,552,000. %he useful life

of the "an was estimated at years with no residual "alue. %he entity used

strai$ht line depre#iation. =hat is the depre#iation for the #urrent year>

a. 00,000!. &50,000#. 52,000

d. &&&,000


Beal Company entered into a nineyear 7nan#e lease on a warehouse on6e#em!er *1, 2015. 8ease payment of P520, 000 whi#h in#luded real estate

taxes and other exe#utor #ost of P20, 000, are due annually, !e$innin$ on6e#em!er *1, 201 and e"ery 6e#em!er *1 thereafter. %he interest rateimpli#it in the lease is '. %he rounded present "alue of an ordinary annuityof 1 for nine years at ' is 5.. =hat amount should !e reported as leaselia!ility on 6e#em!er *1, 2015>

a. 2, 00, 000!. 2, 12, 000#. &, 500, 000d. &, 0, 000


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Problem 11- (AICPA Adapted)

Bun Company leased a ma#hinery from Chin Company on January 1, 2015for a 10year period. %he useful life of the asset is 20 years. :-ual annualpayments under the lease are P200, 000 and are due on January 1 of ea#hyear startin$ January 1, 2015. %he present "alue on January 1, 2015 of the

lease payments o"er the lease term dis#ounted at 10' was P1, *52, 000.%he in#remental !orrowin$ rate was 12'. %he lease is appropriatelya##ounted for as a 7nan#e lease !e#ause there is a "ery nominal !ar$ainpur#hase option.

1. =hat is the 7nan#e lease lia!ility to !e reported as noncurrenton6e#em!er *1, 2015>a. 1, 215, 20!. 1, 00, 2&0#. 1, 0+, 200d. +*, 20

2. =hat is the interest expense for 2015>a. 200, 000!. 115, 200#. 10, +20d. 0

*. =hat is the depre#iation for 2015>a. 1*5, 200!. 115, 200#. +, 00d. 20, 000

Problem 11-! (AICPA Adapted)

Oa/ Company leased e-uipment for the entire nineyear useful life, a$reein$to pay P500, 000 at the start of the lease term on 6e#em!er *1, 2015 andP500, 000 annually on ea#h 6e#em!er *1 for the next ei$ht years. %he

present "alue on 6e#em!er *1, 2015, of the nine lease payments o"er thelease term, usin$ the rate impli#it in the lease whi#h Oa/ Company /nows to!e 10', was P*, 15, 000. %he 6e#em!er *1, 2015, present "alue of thelease payments usin$ the in#remental !orrowin$ rate of 12' was P2, 5,000. =hat amount should !e reported as lease lia!ility on 6e#em!er *1,201>

a. *, 500, 000!. 2, &*1, 500#. 2, 2*, 200


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d. 2, &5, 000

Problem 11-% (AICPA Adapted)

On January 1, 2015, Elau$h Company si$ned a lon$term lease for an oF#e!uildin$. %he terms of the lease re-uired Elau$h Company to pay P100, 000

annually, !e$innin$ 6e#em!er *1, 2015, and #ontinuin$ ea#h year for *0years. %he lease -uali7es as a 7nan#e lease. On January 1, 2015, the present"alue of the lease payments is P1, 125, 000 at the ' interest rate impli#it inthe lease. =hat amount should !e reported as lease lia!ility on 6e#em!er*1, 2015>

a. 1, 025, 000!. 1, 115, 000#. 1, 125, 000d. 2, 00, 000

Problem 11-& (AICPA Adapted)

On 6e#em!er *1, 2015, Raerty Company leased e-uipment under a 7nan#elease. 3nnual lease payments of P200, 000 are due 6e#em!er *1 for 10years. %he e-uipment useful life is 10 years, and the interest rate impli#it inthe lease is 10'. %he lease o!li$ation was re#orded on 6e#em!er *1, 2015at P1, *50, 000 and the 7rst lease payment was made on that date. =hatamount should !e in#luded in #urrent lia!ilities on 6e#em!er *1, 2015 inrelation to the 7nan#e lease>

a. 5, 000!. 5, 000#. 115, 000d. 200, 000

Problem 11-7 (I"R#)

Mira#le Company leased ma#hinery for the entire useful life of 10 years withee#t from January 1, 2015. 3t that date, the fair "alue of the ma#hinery wasP&, 00, 000. 3nnual rentals of P+00, 000 are paya!le in ad"an#e on January1 of ea#h year, !e$innin$ January 1, 2015 and the interest rate impli#it in thelease is '.

=hat total amount of lease lia!ility in#ludin$ interest should !e re#o$ni9ed inthe statement of 7nan#ial position on 6e#em!er *1, 2015>


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a. &, 5+, 000!. &, &1, 000#. +00, 000d. 0


On 6e#em!er *1, 2015, Roe Company leased a ma#hine from Colt Companyfor a 7"eyear period. :-ual annual payments under the lease are P1, 050,000 in#ludin$ P50, 000 annual exe#utor #ost and are due on 6e#em!er *1 ofea#h year. %he 7rst payment was made on 6e#em!er *1, 2015, and these#ond payment was made on 6e#em!er *1, 201. %he 7"e lease paymentsare dis#ounted at 10' o"er the lease term. %he present "alue of minimumlease payments at the in#eption of the lease and !efore the 7rst annual

payment was P&, 1+0, 000. %he lease is appropriately a##ounted for as a7nan#e lease.

On 6e#em!er *1, 201, what amount should !e reported as lease lia!ility>

a. *, 1+0, 000!. *, 150, 000#. 2, 5*, 000d. 2, &+, 000

Problem 11- (AICPA Adapted)

On January 1, 2015, Ea!son Company leased two automo!iles for exe#uti"euse. %he lease re-uired Ea!son Company to ma/e 7"e annual payments ofP1, *00, 000 !e$innin$ January 1, 2015. 3t the end of the lease term,6e#em!er *1, 201. Ea!son Company $uaranteed the residual "alue of theautomo!iles at a total of P1, 000, 000. %he lease -uali7ed as a 7nan#e lease.%he interest rate impli#it in the lease is '. Present "alue fa#tors for the 'rate impli#it in the lease are as follows(

Aor an annuity due with 5 payments in ad"an#e

&.2&0Aor an ordinary annuity with 5 payments *.0Present "alue of 1 for 5 periods 0.50

=hat amount should !e reported as 7nan#e lease lia!ility immediately afterthe 7rst re-uired payment>

a. &, 2, 000!. &, &0+, 000#. *, 52, 000d. *, 10+, 000


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Problem 11-!0 (AICPA Adapted)

On January 1, 2015, 6ay Company entered into a 10year lease a$reementwith =ard Company for industrial e-uipment. 3nnual lease payments of P1,000, 000 are paya!le at the end of ea#h year. 6ay Company /nows that thelessor expe#ts a 10' return on the lease. %he e-uipment is expe#ted to ha"e

an estimated useful life of 10 years. 4n addition, a third party has $uaranteedto pay =ard Company a residual "alue of P500, 000 at the end of the lease.%he present "alue of an ordinary annuity of 1 at 10' for 10 years is .1&.%he present "alue of 1 at 10' for 10 years is .*.

=hat is the prin#ipal amount of the lease o!li$ation on 6e#em!er *1, 2015>

a. , **5, 000!. , 1&0, 000#. 5, +5&, 000d. 5, , 500

Problem 11-!1

On January 1, 2015, Garrow Company si$ned a 7"e year non#an#ela!lee-uipment lease with annual payments of P1,000,000 !e$innin$ 6e#em!er*1, 2105. %he entity treated this transa#tion as a 7nan#e lease. %he 7"elease payments ha"e a present "alue of P*,+0,000 on January 1, 201 !asedon a impli#it interest rate of 10'. =hat amount should !e reported asinterest expense for 2015>

a. *+,000!. 2+,000#. 2&2,000d. 0

(KA3 11-!2-!%)

(C4AP56R 12- 4AA4)

Problem 1-1 'ultiple C.oi$e (PA# 17)


16/55

1@nder a sales type lease, what is the meanin$ of $ross in"estment in the lease>

a. Present "alue of minimum lease payments

!. 3!solute amount of minimum lease payments

#. Present "alue of minimum lease payments plus present "alue of

un$uaranteed residual "alue

d. 3$$re$ate of minimum lease payments and

un$uaranteed residual "alue

2Bet in"estments in a sales type lease is e-ual to

a. Hross in"estment in the lease less unearned

7nan#e in#ome

!. Cost of the lease asset

#. %he minimum lease payments

d. %he minimum lease payments less un$uaranteed

residual "alue

%hese are in#remental #osts that are dire#tly attri!uta!le to ne$otiatin$ and

arran$in$ lease.

a. 4nitial dire#t #osts

!. %ransa#tion #osts

#. Costs of ser"i#es

d. :xe#utory #osts

!4nitial dire#t #osts in#urred !y the lessor under a sales type lease should !e

a. 6eferred and all allo#ated o"er the e#onomi# life of the leased property.

!. :xpensed un the period in#urred.

#. 6eferred and allo#ated o"er the term of the lease in proportion to the

re#o$nition of rental in#ome.

d. 3dded to the $ross in"estment in the lease and amorti9ed o"er the term of the

lease as a yield adustment.

%=hi#h of the followin$ statements #hara#teri9es a sales type lease>

a. %he lessor re#o$ni9es only interest re"enue o"er the life of the asset.

!. %he lessor re#o$ni9es only interest re"enue o"er the lease term.


17/55

#. %he lessor re#o$ni9es a dealer;s pro7t at lease in#eption and interest re"enue

o"er the lease term.

d. %he lessor re#o$ni9es a dealer;s pro7t at lease in#eption and interest re"enue

o"er the life of the asset

&%he pro7t on a 7nan#e lease transa#tion for lessors who are manufa#turers or

dealers should

a. Bot !e re#o$ni9ed separately from 7nan#e in#ome

!. Ee re#o$ni9ed in the normal way on the transa#tion

#. only !e re#o$ni9ed at the end of the lease term

d. Ee re#o$ni9ed on a strai$ht line !asis o"er the life of the lease

7%he sales re"enue re#o$ni9ed at the #ommen#ement of the lease !y a

manufa#turer or dealer lessor is the

a. Aair "alue of the asset

!. Present "alue of the minimum lease payments

#. Aair "alue of the asset or present "alue of the minimum lease payments,

whi#he"er is lower.

d. Aair "alue of the asset or present "alue of the minimum lease payments ,

whi#he"er is hi$her.

8=hat is the treatment of an un$uaranteed residual "alue in determinin$ the #ost

of sales under sales type lease>

a. %he un$uaranteed residual "alue is i$nored.

!. %he un$uaranteed residual "alue is added to the #ost of the lease asset.

#. %he un$uaranteed residual "alue is dedu#ted from the #ost of the leased asset at

a!solute amount.

d. %he un$uaranteed residual "alue is dedu#ted from the #ost of the leased asset at

present "alue.

%he ex#ess of the fair "alue of leased property at the in#eption of the lease o"er

the #arryin$ amount shall !e re#o$ni9ed !y the dealer lessor as

@nearned in#ome from a sales type lease

!. @nearned in#ome from a dire#t 7nan#in$ lease

#. Manufa#turer;s pro7t from a sales type lease


18/55

d. Manufa#turer;s pro7t from a dire#t 7nan#in$ lease

104n a lease that is re#orded as a sales type lease !y the lessor, interest re"enue

a. 6oes not arise

!. ?hall !e re#o$ni9ed o"er the period of the lease usin$ the interest method

#. ?hall !e re#o$ni9ed o"er the period of the lease usin$ the strai$ht line method

d. ?hall !e re#o$ni9ed in full as re"enue at the in#eption of the lease

(1-2 to 12- 3IA)

Problem 1-11 (IAA)

:smeralda Company leased e-uipment to another entity on January 1, 2015.%he terms of the lease #alled for annual payment of 500,000 to !e made atthe end of ea#h year. %he lease term is 5 years whi#h is the useful life of thee-uipment. %he lease is appropriately re#orded as a sales type lease. %he#ost of the e-uipment is P1,000,000. %he impli#it rate in the lease is 12'.%he P) of an ordinary annuity of 1 at 12' for 5 periods is *.0. On July 1,201+, :smeralda Company Ia#tually sold the e-uipment to the lease forP1,200,000.

Required:

1. 6etermine the unearned interest in#ome on January 1, 2015.

2. 6etermine the $ross pro7t on sale.

*. Prepare ournal entries for 2015, 201 and 201+ to re#ord the salestype lease and the a#tual sale of the leased asset. %he periodi# systemis used.


Gowe Company leased e-uipment to Dew Company on January 1, 2015 foran ei$htyear period expirin$ 6e#em!er *1, 2022. :-ual payments under thelease are 500,000 and are due on January 1 of ea#h year. %he 7rst paymentwas made on January 1, 2015. %he sellin$ pri#e of the e-uipment isP2,00,000 and the #arryin$ amount is P2,000,000. %he lease isappropriately a##ounted for as a sales type lease. %he present "alue of thelease payments at an impli#it interest rate of 12' is P2,+0,000. =hatamount of pro7t on the sale should !e reported for the year ended6e#em!er *1, 2015>


19/55

a. 00,000

!. +0, 000

#. 2&0,000

d. ***,00


Me$ Company leased e-uipment from =ee Company on July 1, 2015 for an

year period. :-ual payments underthe lease are 00,000 and are due on

July 1 of ea#h year. %he 7rst payment was made on July 1, 2015.

%he interest rate #ontemplated !y Me$ Company and =ee Company is 105.%he #ash sellin$ pri#e of the e-uipment is P*,520,000 and the #ost of the

e-uipment on =ee Company;s a##ountin$ re#ords is P2,00,000. %he lease is

appropriately re#orded as a sales type lease.

=hat amount of pro7t on sale and interest re"enue should !e re#o$ni9ed for

the year ended 6e#em!er *1, 2015>

Pro7t on sale 4nterest Re"enue

a. +20,000 1+,000

!. +20,000 1&,000

#. &5,000 1+,000

d. &5,000 1&,000

Problem 1-1! (AICPA Adapted)

On January 1, 2015, Hallant Company entered into a lease a$reement with

Ela#/sheep Company for a ma#hine whi#h was #arried on the a##ountin$

re#ords of Hallant Company at P2,000,000. %otal payments under the leasewhi#h expires on 6e#em!er *1, 202& a$$re$ate P*,550,00 of whi#h

P2,&00,000 represents #ost of the ma#hine to Ela#/sheep Company.

Payments of P*55,00 are due ea#h January 1 of ea#h year. %he interest rate

of 10' whi#h was stipulated in the lease is #onsidered fair and ade-uate

#ompensation to Hallant Company for the use of its funds. Ela#/sheep

Company expe#ts the ma#hine to ha"e a 10year life, no residual "alue and

!e depre#iated on a strai$ht line !asis. %he lease -uali7es as a sales type


20/55

lease. =hat total in#ome !efore tax should !e re#o$ni9ed !y Hallant

Company from the lease for the year ended 6e#em!er *1,2015>

a. 20&, &2

!. 0&, &2

#. *55,00

d. +55,00

Problem 1-1% (IAA)

Rea$an Company used leases as a method of sellin$ produ#ts. 4n 2015,

Rea$an Company #ompleted #onstru#tion of a passen$er ferry.

On January 1, 2015, the ferry was leased to the ?uper Aerry line on a #ontra#t

spe#ifyin$ that oner.ip o* t.e *err+ ill tran*er to t.e leee at t.e

end o* t.e leae period %he annual lease payments do not in#lude

exe#utory #osts.

Ori$inal #ost of the ferry

,000,000

Aair )alue of ferry at lease date 12,555,000

8ease payments in ad"an#e

1,500,000

:stimated residual "alue

2,000,000

4mpli#it interest rate

12'

6ate of 7rst lease payment January 1,2015

8ease term 20

years

P) of an annuity due of 1 at 10' for 20 periods .*+

P) of 1 at 12' for 20 periods

0.10


21/55

1. =hat is the total 7nan#ial re"enue o"er the lease term>

a. 1+,&&5,000

!. 1,2&5,000

#. 1,&&5,000

d. 22,000,000

2. =hat is the $ross pro7t on sale for 2015>

a. ,555,000

!. &,555,000

#. &,+55,000

d. &,*55,000

*. =hat is the interest in#ome for 2015>

a. 1,50,00

!. 1,52&,00

#. 1,*2,00

d. 1,*50,00

(KA3 1-1&-17 pa t+pe nalang :9)

Problem 1-18 (IAA)

Marianas Company adopted the poli#y of leasin$ as the primary method of

sellin$ produ#ts. %he entity;s main produ#t is a small #ar$o "essel. Marianas

#ompany #onstru#ted su#h a #ar$o "essel for Jade Company at a #ost of

P,500,000.

%he terms of the lease pro"ided for annual ad"an#e payments of P2,500,000

to !e paid o"er 10 years it. t.e oner.ip tran*erring to ade

Compan+ at t.e end o* t.e leae period 4t is estimated that the #ar$o

"essel will ha"e a residual "alue of P1,00,000 at the date.

%he lease payments !e$an January 1, 2015. Marianas Company in#urred

initial dire#t #ost of P500,000 in 7nan#in$ the lease a$reement with Jade

Company. %he sale pri#e of the #ar$o "essel is P1&,+5,000.

Ainan#in$ the #onstru#tion was at a 1&' rate. %he present "alue of an

annuity due of 1 at 1&5 for 10 periods is 5.5


22/55

1. =hat amount should !e reported as $ross pro7t on sale for

2015>

a. 5,+5,000

!. ,*+5,000

#. &,2+5,000

d. &,++5,000

2. =hat is the unearned interest in#ome on January 1, 2015>

a. 10,125,000

!. 11,+25,000

#. ,25,000

d. ,525,000

*. =hat is the interest in#ome for 2015>

a. 2,02,500

!. 1,+*2,500

#. 2,*0, 500

d. 1,5,500

Problem 1-1 (IAA)

6exter Company leased e-uipment to another entity on January 1,2015. %he

lease is for an ei$htyear period expirin$ 6e#em!er *1, 2022. %he 7rst of

ei$ht e-ual annual payments of 00,000 was made on January 1,2015.

6exter Company had pur#hased the e-uipment on 6e#em!er 2, 201& for

P&,00,000. %he lease is appropriately a##ounted for as a sales type lease !y

6exter #ompany. %he present "alue on January 1, 2015 of all rent payments

o"er the lease term dis#ounted at a 105 interest rate was P5,20,000. =hat

amount of interest re"enue should !e re#orded in 201>

a. &0,000

!. &0,000

#. &*,000

d. *1,000


23/55


3##enture Company, a dealer in e-uipment, leased e-uipment to another

entity on July 1,2015. the lease is appropriately a##ounted for as a sale !y

3##enture Company.

%he lease is for the entire tenyear useful life of the e-uipment expirin$ June

*0, 2025. the 7rst of ten e-ual annual payments of P500,000 was made on

July 1, 2015.

3##enture #ompany had pur#hased the e-uipment for P2,+5,000 on January

1, 2015, esta!lished a list sellin$ pri#e of P*,*+5,000 on the e-uipment.

%he present "alue on July 1, 2015 of the rent payments o"er the lease terms

dis#ounted at 12' is P*,15,000.

=hat amount of $ross pro7t on sale and interest in#ome should !e

re#o$ni9ed, respe#ti"ely for 2015>

a. &0,000 and 1,00

!. &0,000 and 15,00

#. +00,000 and 15,00

d. +00,000 and 1,00

Problem 1-21 (I"R#)

8i9a Company is a #ar dealer. On January 1,2015, the entity entered in

7nan#e lease with a #ustomer under whi#h the #ustomer would pay

P200,000 on January 1 ea#h year for 5 years, #ommen#in$ in 2015. %he #ost

of the #ar is P00,000 and the #ash sellin$ pri#e was P+50,000. %he entity

paid le$al fees of P20,000 to a law 7rm in #onne#tion with the arran$ement

of the lease. =hat amount of $ross pro7t on sale should !e re#o$ni9ed for

the year ended 6e#em!er *1, 2015>

a. 150,000

!. 1*0,000

#. 20,000

d. 0

Problem 1-22 (IAA)


24/55

Ga9el #ompany leased ma#hinery to 3nne #ompany on July 1, 2015 for a ten

year period expirin$ June *0, 2025. :-ual annual payments under the lease

are P+50,000 and are due on July 1 of ea#h year. %he 7rst payment was

made on July 1, 2015. %he impli#it rate of interest is '. %he #ash sellin$

pri#e of the ma#hinery is P5,250,000 and the #arryin$ amount is P&,50,000.

%he lease is appropriately re#orded as a sales type lease.

1. =hat is the $ross pro7t on sale for 2015>

a. 00,000

!. *00,000

#. &+2,500

d. 0

2. =hat amount of interest re"enue should !e re#orded for 2015>

a. 1+5,500

!. 2*,250

#. &05,000

d. 202,500

Problem 1-2(IAA)

On 6e#em!er *1,2015, Een9 Company, a lessor, a#tually sold a ma#hinery

that it had !een leasin$ under a sales type lease. On January 1, 2015 after

re#eipt of the lease payment for the year, the followin$ a##ount !alan#es

were asso#iated with the lease(

Hross lease re#ei"a!le 5,50,000

@nearned interest in#ome 1,000,000

%he interest rate impli#it in the lease is 10'. On 6e#em!er *1,2015, Een9

Company a#tually sold the leased ma#hinery to the lessee for P*,250,00

#ash.

1. =hat is the interest in#ome for 2015>


25/55

a. 55,000

!. &5,000

#. *25,000

d. 0

2. =hat is the #arryin$ amount of the lease re#ei"a!le on de#em!er*1,2015>

a. 5,50,000

!. &,50,000

#. 5,**5,000

d. 5,*5,000

*. =hat is the loss on sale of the ma#hinery that should re#o$ni9ed on

6e#em!er *1,2015>

a. 2,05,000

!. 1,00,000

#. 2,00,000

2,015,000

Problem 1-2! (IAA)

On January 1, 2015, Pamela Company leased e-uipment to another entity

under a 7nan#e lease. %he terms of the lease #alled for annual lease

payments to !e made in ad"an#e at the !e$innin$ of ea#h year startin$

January 1, 2015. %he impli#it interest rate for the transa#tion is 12'. On July

1, 201+ the lessor a#tually sold the e-uipment to the lessee and re#ei"ed

P*,000,000 to #omplete the transa#tion. 3fter the January 1, 201+ payment

was made, the !alan#e of the Inet lease re#ei"a!le was P*,500,000.

1. =hat is the interest in#ome to !e re#o$ni9ed in 201+>

a. 210,000

!. &20,000

#. *0,000

d. 10,000

2. =hat is the #arryin$ amount of the lease re#ei"a!le on July 1, 201+>


26/55

a. *,500,000

!. *,+10,000

#. *,20,000

d. *,20,000

*. =hat is the loss on sale of the leased asset to !e re#o$ni9ed on July 1,201+>

a. +10,000

!. 500,000

#. 20,000

d. 0

Problem 1!-1 'ultiple $.oi$e (PA# 17)

1. 4f the sale and lease!a#/ transa#tion results in an operatin$ lease and

the sale pri#e is !elow fair "alue that is #ompensated !y future rental

at !elow mar/et "alue, any indi#ated loss on sale is

a. Re#o$ni9ed immediately in pro7t or loss.

!. Re#o$ni9ed in other #omprehensi"e 4n#ome.

#. 6eferred and amorti9ed in proportion to the lease payments o"er the

period for whi#h the asset is expe#ted to !e used.

d. Bot re#o$ni9ed

2. 4f the sale and lease!a#/ transa#tion results in an operatin$ lease and

the sale pri#e is a!o"e fair "alue, the ex#ess of the sale pri#e o"er fair

"alue is

a. 6eferred and amorti9ed o"er the period for whi#h the asset is expe#ted

to !e used.!. Re#o$ni9ed immediately in pro7t or loss.


27/55

#. Re#o$ni9ed in other #omprehensi"e in#ome.d. Bot re#o$ni9ed.

*. Aor sale and lease!a#/ transa#tion resultin$ in an operatin$ lease, if

the fair "alue of the asset at the time of sale and lease!a#/ is !elow

the #arryin$ amount of the asset, the dieren#e is re#o$ni9ed

a. 3s loss immediately!. 3s $ain immediately#. 3s deferred loss to !e amorti9ed o"er the lease termd. 3s deferred $ain to !e amorti9ed o"er the lease term

&. 4f the sale and lease!a#/ transa#tion results in a 7nan#e lease, any

ex#ess of sales pro#eeds o"er the #arryin$ amount of the asset is

a. 6eferred and amorti9ed as in#ome o"er the lease term!. 6eferred and amorti9ed as in#ome o"er the life of the asset.#. Re#o$ni9ed in pro7t or loss immediatelyd. Re#o$ni9ed in other #omprehensi"e in#ome

5. =hi#h of the followin$ statement is true re$ardin$ sale and lease!a#/transa#tion>

a. Eoth pro7t and loss on sale followed !y an operatin$ lease are

re#o$ni9ed immediately if the transa#tion is esta!lished at fair "alue.!. Pro7t from the sale should !e amorti9ed in proportion to the rental

payments if an operatin$ lease results from the sale and lease!a#/

transa#tion.#. 3ny pro7t on sale and lease!a#/ transa#tion resultin$ in an operatin$

lease deferred and loss is re#o$ni9ed immediately.d. Pro7t from the sale should !e deferred and amorti9ed in proportion to

the amorti9ation of the leased asset if the sale and lease!a#/

transa#tion results in a 7nan#e lease.

.

Problem 1!-2 (ACP)


28/55

On January 1, 2015, Herman Company sold an e-uipment to ?terlin$

Company for P 1,100,000 whi#h is the fair "alue of the e-uipment.

%he e-uipment had a #ost P 2,500,000, #arryin$ amount of P 1,000,000 and

remainin$ useful life of 10 years.

On the same day, Herman Company leased !a#/ e-uipment for 5 years for

an annual rental of P &0,000 paya!le at the !e$innin$ of ea#h year.

Herman Company has no option to renew or repur#hase the e-uipment.

Required:

Prepare Journal entries for 2015 to re#ord the sale and lease!a#/ transa#tion

in the !oo/s of Herman Company and ?terlin$ Company.

Problem 1!- (ACP)

On January 1, 2015, Canada Company sold a ma#hine with a remainin$

useful life of 10 years to ?ai$on Company and simultaneously leased it !a#/

for * years. Pertinent data are as followsK

?ale pri#e 500,000

Ma#hinery 1,000,000

3##umulated 6epre#iation &50,000

3nnual rental 0,000

Required:

Prepare ournal entry to re#ord the sale and lease!a#/ transa#tion on the

!oo/s of Canada Company and ?ai$on Company.

Problem 1!-! (I"R#)


29/55

On January 1, 2015, Juan Company sold a ma#hine and immediately leased it

!a#/ at an annual rental that was determine to !e suF#ien#y lower than

mar/et rent.

%he details of the sale and lease!a#/ are as follows(

?ale pri#e 5,000,000

Aair "alue ma#hine ,500,000

Carryin$ amount of ma#hine +,000,000

3nnual rental 0,000

Remainin$ life of ma#hine 15 years

8ease term 5 years

Required:

Prepare ournal entries for 2015 to re#ord the sale and lease!a#/ on the

!oo/s of Juan Company

Problem 1!-% (I"R#)

On January 1, 2015, Pedro Company sold a ma#hine and immediately leasedit !a#/ at an annual rental that was determine to !e suF#ien#y lower than

mar/et rent.

%he followin$ date relate to the sale and leased !a#/ transa#tionK

?ale pri#e &,000,000

Aair "alue of ma#hine 5,*00,000

Carryin$ amount of ma#hine 5,000,000

3nnual rental 50,000


8ease term 2 years


30/55

Required:

Prepare ournal entries for 2015 to re#ord the sale and lease!a#/ transa#tion

on the !oo/s of Pedro Company.

Problem 1!-& (I"R#)

On January 1, 2015, Ga9el Company sold a ma#hine and immediately lease it

!a#/. %he followin$ data pertain to the sale and lease!a#/ transa#tion.

?ale pri#e &,00,000

Aair "alue of ma#hine &,*00,000

Carryin$ amount of ma#hine *,500,000

3nnual rental 0,000


8ease term * years

Required:


on the !oo/s of Ga9el Company.

Problem 1!-7 (I"R#)

On January 1, 2015, Ra#-uel Company a ma#hine and immediately lease it

!a#/. %he followin$ data pertain to the sale and lease!a#/ transa#tion.

?ale pri#e &,500,000


31/55

Aair "alue of ma#hine &,000,000

Carryin$ amount of ma#hine &,200,000

3nnual rental 0,000


8ease term 2 years

Required:


on the !oo/s of sellerlease.

Problem 1!-8 (AICPA Adapted)

On 6e#em!er *1, 2015, Eain Company sold a ma#hine to a Ryan Companyand simultaneously leased it !a#/ for one year. %he entity pro"ided thefollowin$ information at this date(

?ale Pri#e *0,000

Carryin$ 3mount **0,000

Present )alue of reasona!le leased rental

P*0,000 for 12 months L 12' *&1,000

:stimated remainin$ useful life 12 years

4n the 4n#ome statement for 2015, what amount should !e reported as $ainfrom the sale of the ma#hine>

a. *2,100

!. *0,000

#. &,100

d. 0

Problem 1!- (I"R#)

On January 1, 2015, %ripoli Company sold a ma#hine for P*, 000,000. %he fair"alue on the date of sale was P*, 500,000. %he ama#hine had #arryin$amount of P*, 00,000 and remainin$ life of 10 years. %he entityimmediately leased !a#/ the ma#hine at an annual rental of P50, 000 for fouryears. 4t was determined that the annual rental is u;$ientl+ loer#ompared to the mar/et rent of a similar asset. =hat total amount should !ere#o$ni9ed in pro7t or loss for 2015>


32/55

a. &25, 000

!. &+5, 000

#.200, 000

d.250, 000

Problem 1!-10 (I"R#)

On 6e#em!er *1, 2015, Neta Company sold an e-uipment with an estimatedremainin$ useful life of 10 years for P+, 500,000. 3t the same time, NetaCompany leased !a#/ the e-uipment for 2 years. %he lease !a#/ in anoperatin$ lease. On the date of sale, the fair "alue of the e-uipment is P,000,000 and the #arryin$ amount is P5, 000,000. =hat amount should !ereported as $ain from sale and lease !a#/ for 2015>

a. 2, 500,000

!. 1, 500,000

#. 1, 000,000

d. 1, +50,000

Problem 1!-11 (I"R#)

On 6e#em!er *1, 2015, %hunder Company sold a land with a #ost of P1,500,000 to )i#toria Company for P2, *00,000 when the fair "alue of the landwas P2, 150,000. %he %hunder Company immediately enteredinto a #an#ela!le lease a$reement to use the land for two years at an annual

rental of P200, 000. =hat amount of $ain should !e re#orded on the sale ofland for 2015>

a. 150, 000

!. 00, 000

#. 50, 000

d. +25, 000

Problem 1!-12 (IAA)

On June *0, 2015, Pam Company sold e-uipment for P*, 500,000. %hee-uipment had a #arryin$ amount of P*, 150,000 and a remainin$ useful lifeof 10 years. %he same day, the entity leased !a#/ the entity at P*5, 000 permonth for 5 years with no option to renew the lease or pur#hase thee-uipment. what amount should !e reported as rent expense for 2015>

a. &20, 000

!. 210, 000

#.1+5, 000


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d. 1&0, 000

Problem 1!-1 (AICPA Adapted)

On June *0, 2015, 8ee Company sold e-uipment to an unaFliated entity forP5, 500,000. %he e-uipment had a #arryin$ amount of P5, 000,000 and aremainin$ life for 10 years. %hat same day, 8ee Company leased !a#/ at P15,000per month for 2 years with no option renew the lease or to repur#hase

the e-uipment. %he present "alue of the lease payments usin$ theappropriate interest rate was P*1, 50 on June *0, 2015.

=hat amount should !e reported a rent expense for the year ended6e#em!er *1, 201&>

a. 110, 000

!. 0, 000

#. 50, 000

d. &0, 000Problem 1!-1! (AICPA Adapted)

On 6e#em!er *1, 2015, 8ane Company sold e-uipment to Boll Company andsimultaneously leased it !a#/ for 12 years. Pertinent information on thisdate is as follows(

?ale pri#e &0, 000

Carryin$ amount *0, 000

:stimated remainin$ e#onomi# life 15 years

On 6e#em!er *1, 2015, what amount should !e reported as $ain from sale ofe-uipment>

a. 120,000

!. 112,000

#. 110,000

d. 0

Problem 1!-17 (P4ICPA Adapted) on 6e#em!er *1, 2015, 3l!o#asser Company pur#hased a tra#tor fromCheli #ompany. ?imultaneous with the sale. Cheli leased !a#/ the tra#torfor 12 years for use in the farm that it is de"elopin$. %he sale pri#e of thetra#tor was P+, 00, 000, while the #arryin$ amount in the !oo/s ofCheli on the date of the sale was P5, 50,000. Cheli;s en$ineer hasestimated that the remainin$ e#onomi# life of the tra#tor is 15 year. Cheli isa whollyowned su!sidiary of s @?3 Company.


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=hat is the amount that Cheli Company should report as deferred $ain fromthe sale of the tra#tor on 6e#em!er *1, 2015 in the reportin$ pa#/a$e foruse in #onsolidation with the head oF#e a##ount>

a. 1, 50,000

!. 1, 20,000

#. 1, +*+, 500d. 0

Problem 1!-18(I"R#)

4n an attempt to alle"iate li-uidity pro!lems, Ean#o Company entered into an

a$reement on January 1, 2015 to sell a pro#essin$ plant to another entity for

P *,500,000 whi#h is the fair "alue of the plant. 3t the date of sale, the plant

had a #arryin$ amount of P 2,+50,000. Ean#o Company immediately leased

the pro#essin$ plant !a#/ from the !uyer. %he terms of the lease a$reement

were(

3nnual payment in arrears, #ommen#in$ 6e#em!er *1, 2015 +00,000Reim!ursement to the lessor for maintenan#e Cost in#luded in the annual payment *5,0008ease term years:#onomi# life of plant years4mpli#it interest rate 10'

=hat amount should !e reported as deferred $ain on sale and leased!a#/ on6e#em!er *1, 2015>a. +50,000!. 25,000#. 5,000d. 0

Problem 1!-1(IAA)


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On January 1, 2015, 3##ord Company sold a !uildin$ with a #arryin$ amountof P &,200,000 to another entity for P&,050,000. 3##ord Companyimmediately entered into a leasin$ a$reement where in 3##ord Companywould lease the !uildin$ !a#/ for annual payment of P &0,000. %he term ofthe lease is 10 years, the expe#ted remainin$ useful life of the !uildin$. %he7rst annual lease payment is to !e made immediately, and future paymentswill !e made on January 1 of ea#h su##eedin$ year. %he lessor;s impli#itinterest rate is 12'. =hat amount of loss on sale and lease!a#/ should !ere#o$ni9ed !y 3##ord Company for 2015>

a. 150,00!. 1*5,00#. 15,000d. 0

Problem 1!-20(I"R#)

?ensi!le Company sold a ma#hinery on January 1, 2015 at the fair "alue of P2,500,000 when the #arryin$ amount was P 2,000,000. ?ensi!le #ompanyleased the asset !a#/ on that date for the remainin$ useful life of 5 years.8ease payments are P +00,000 on January 1 ea#h year.=hat amount of $ain on disposal should !e re#o$ni9ed in the 2015 in#omestatement>

a. 500,000!. 100,000#. 250,000d. 0

=hat is the total 7nan#e #har$e o"er the lease term>

a. 1,500,000!. 1,000,000#. 500,000d. 0

Problem 1!-21(IAA)

On January 1, 2015, Ea/er Company sold e-uipment it had re#entlypur#hased to an unaFliated entity for its fair "alue of P 5,+00,000. %hee-uipment had a #arryin$ amount of P &,500,000 and a remainin$ life of 7"eyears. On that same day, Ea/er Company leased !a#/ the e-uipment at P1,*50,000 per year paya!le in ad"an#e for a 5year period. %he lessor;simpli#it interest rate in the lease is 10'. Ea/er Company used the dou!lede#linin$ !alan#e method of depre#iation. =hat amount should !e reportedas unearned in#ome on the sale and lease!a#/ on 6e#em!er *1, 2015>

a. 1,200,000!. 0,000#. +20,000d. 0


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Problem 1!-22(IAA)

On January 1, 2015, Galo Company sold a #omputer system to 8ar/ Companyfor P 2,550,000 and immediately leased the #omputer system !a#/. %he#omputer was #arried on Galo;s !oo/s at a "alue of P 2,250,000. %he term ofthe non#an#ela!le lease is 10 years and title will transfer to Galo at the endof the lease term. %he lease a$reement re-uired e-ual rental payments of P&15,000 at the end of ea#h year. %he in#remental !orrowin$ rate for halo is12' !ut Galo is aware that 8ar/ set the annual rental to ensure a rate ofreturn of 10', the #omputer has a fair "alue of P 2,550,000 on January 1,2015 and an estimated e#onomi# life of 12 years. Galo paid exe#utor #ost ofP &5,000 for the #urrent year. =hi#h of the followin$ would !e re#orded !yGalo on 6e#em!er *1, 2015>

3. 6e!it leased #omputer P 2,550,000E. Credit deferred $ain P *00,000C. 6e!it deferred $ain P 25,0006. 6e!it deferred $ain P *0,000

Problem 1%-1 'ultiple C.oi$e (PA# 12)

1. =hi#h entities are re-uired to apply deferred tax a##ountin$>4. Pu!li# entities44. Bonpu!li# entities

a. 4 only!. 44 only#. Eoth 4 and 44d. Beither 4 nor 44

2. %hese are dieren#es that will result in future taxa!le amount of

determinin$ taxa!le pro7t of future period when the #arryin$ amount of

the asset or lia!ility is re#o"ered or settled.

a. %emporary dieren#es!. %axa!le temporary dieren#es#. 6edu#ti!le temporary dieren#esd. Permanent dieren#es

*. %hese are dieren#es that will result in future taxa!le amount of

determinin$ taxa!le pro7t of future period when the #arryin$ amount of the

asset or lia!ility is re#o"ered or settled

a. %axa!le %emporary dieren#es!. 6edu#ti!le temporary dieren#es#. %axa!le temporary and permanent dieren#esd. 6edu#ti!le temporary and permanent dieren#e


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&. 4t is the deferred tax #onse-uen#e attri!uta!le to a taxa!le temporary

dieren#e.

a. 6eferred tax lia!ility!. 6eferred tax asset#. Current tax lia!ilityd. Current tax asset

5. 4t is the deferred #onse-uen#e attri!uta!le to a dedu#ti!le temporary

dieren#e and operation loss #arryforward.

a. 6eferred tax lia!ility!. 6eferred tax asset#. Current tax lia!ilityd. Current tax asset

. 4t is the pro7t for a period !efore dedu#tion tax expense.

a. 3##ountin$ pro7t

!. %axa!le pro7t#. Hross pro7td. Bet pro7t

+. 4t is the a$$re$ate amount in#luded in the determination of net pro7t

for the period in respe#t of #urrent tax and deferred tax.

a. %ax expense!. Current tax expense#. 6eferred tax expensed. 6eferred !ene7t

. 4t is the pro7t is a period determined in a##ordan#e with the rules

esta!lished !y taxation authorities upon whi#h in#ome taxes are paya!le.

a. 3##ountin$ pro7t!. %axa!le pro7t#. Bet pro7td. 3##ountin$ pro7t su!e#t to tax

. 4t is the amount of in#ome tax paya!le in respe#t of taxa!le pro7t.

a. Current tax expense!. %otal in#ome tax expense#. 6eferred tax expensed. 6eferred tax !ene7t

10. %he deferred tax expense is e-ual to.

a. 4n#rease in deferred tax asset less in#rease in deferred tax lia!ility!. 4n#rease in deferred tax lia!ility less in#rease in deferred tax asset#. 4n#rease in deferred tax assetd. 4n#rease in deferred tax lia!ility


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Problem 1%-2 'ultiple C.oi$e (PA# 12)

1. 4t is the amount attri!uta!le to an asset or lia!ility of tax purposes.

a. Carryin$ amount!. %ax !ase#. Measurement !ased. %axa!le amount

2.A deferred tax liability shall !e re#o$ni9ed for all

a. Permanent dieren#es!. %emporary dieren#es#. %axa!le temporary dieren#esd. 6edu#ti!le temporary dieren#es

*. A diered tax asset shall !e re#o$ni9ed for all dedu#ti!le temporary

dieren#es and operation loss #arryforward when

a. 4t is pro!a!le that taxa!le in#ome will !e a"aila!le a$ainst whi#hthe deferred tax asset #an !e used.!. 4t is pro!a!le that a##ountin$ in#ome will !e a"aila!le a$ainstwhi#h the deferred tax asset #an !e used.#. 4t is possi!le that taxa!le in#ome will !e a"aila!le a$ainst whi#hthe deferred tax asset #an !e used.d. 4t is possi!le that a##ountin$ in#ome will !e a"aila!le a$ainst whi#hthe deferred tax asset #an !e used.

&. 3n entity shall oset a deferred tax asset and deferred tax lia!ility

when

4. %he deferred tax asset and deferred tax lia!ility relate to in#ome

taxes le"ied !y the same taxin$ authority

44. %he entity has a le$al enfor#ea!le ri$ht to oset a #urrent tax asseta$ainst the #urrent tax lia!ility.

a. 4 only!. 44 only#. Eoth 4 and 44

d. Beither 4 and 44

5. =hi#h of the followin$ statements in in#orre#t #on#ernin$ tax asset

and lia!ilities>

a. 6eferred tax assets and lia!ilities shall !e dis#ounted.!. %ax assets and lia!ilities shall !e presented separately from other

assets and lia!ilities in the statement of 7nan#ial position.#. 6eferred tax assets and lia!ilities shall !e distin$uished from

#urrent tax assets and lia!ilities.


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d. =hen an entity ma/es a distin#tion !etween #urrent and

non#urrent assets and lia!ilities, it shall not #lassify

deferred tax assets and lia!ilities as #urrent.

Problem 1%- 'ultiple $.oi$e (I"R#)

1. =hi#h of the followin$ statements in relation to deferred tax assets or

lia!ilities is 5R6>

4. 6eferred tax lia!ilities are the amounts of in#ome taxes paya!le infuture periods in respe#t of taxa!le temporary dieren#es.

44. 6eferred tax assets are the amounts of in#ome taxes re#o"era!le infuture periods in respe#t of dedu#ti!le permanent dieren#es.

a. 4 only!. 44 only#. Eoth 4 and 44

d. Beither 4 nor 44

2. 6eferred tax assets are the amount of in#ome taxes re#o"era!le in future

periods in respe#t of

a. Carryforward of unused tax losses only!. %axa!le temporary dieren#es and #arryforward of unused taxlosses#. 6edu#ti!le temporary dieren#es and #arryforward of unused taxlosses

d. Permanent dieren#es

*. 3ll of the followin$ must !e dis#losed separately, e,$ept

4. 4nterest expenses a##rued !ut in#luded in taxa!le pro7t on a #ash!asis shall !e #lassi7ed under dedu#ti!le temporary dieren#es.


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44. =here a##umulated depre#iation on an asset is $reater thana##umulated tax depre#iation, the amount shall !e #lassi7ed underdedu#ti!le temporary dieren#es.


5. =hi#h of the followin$ statements is true in relation to deferred tax>

4. 6e"elopment #osts ha"e !een #apitali9ed and amorti9ed !ut werededu#ted in determinin$ taxa!le pro7t in the period in whi#h they werea##rued. %his will $i"e rise to deferred tax asset.

44. %he tax !ase for a ma#hine for tax purposes is $reater than the#arryin$ amount in the 7nan#ial statements up to the end of thereportin$ period. %his will $i"e rise to a deferred tax asset.


Problem 1%-! 'ultiple C.oi$e (AICPA Adapted)

1. Justi7#ation for the method of determinin$ periodi# deferred tax expense

is !ased on the #on#ept of

a. Mat#hin$ of periodi# expenses to periodi# re"enue.!. O!e#ti"ity in the #al#ulation of periodi# expense.#. Re#o$nition of assets and lia!ilities.d. Consisten#y of tax expense measurement with a#tual tax plannin$

strate$ies.

2. =hi#h of the followin$ dieren#es would result in future taxa!le amount>

a. :xpenses or losses that are dedu#ti!le a*ter they are re#o$ni9ed ina##ountin$ in#ome.

!. Re"enues or $ains that are taxa!le !efore they are re#o$ni9ed in

a##ountin$ in#ome.#. :xpenses or losses that are dedu#ti!le be*ore they are re#o$ni9edin a##ountin$ in#ome.

d. Re"enues or $ains that are re#o$ni9ed in a##ountin$ in#ome !ut arene"er in#luded in taxa!le in#ome.

*. 3 temporary dieren#e whi#h would result in a deferred tax lia!ility is

a. 4nterest re"enue on muni#ipal !onds!. 3##rual of warranty expense#. :x#ess tax depre#iation o"er a##ountin$ depre#iation


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d. ?u!s#ription re#ei"ed in ad"an#e

&. 3 temporary dieren#e whi#h would result in a deferred tax asset is

a. %ax, penalty or sur#har$e.!. 6i"idend re#ei"ed on share in"estments.#. :x#ess tax depre#iation o"er a##ountin$ depre#iation.d. Rent re#ei"ed in ad"an#e in#luded in taxa!le in#ome at the time of

re#eipt !ut deferred for a##ountin$ purposes.

5. 3n entity, #ash !asis taxpayer, prepares a##rual !asis 7nan#ialstatements. 4n its yearend statement of 7nan#ial position, the entitysdeferred tax lia!ilities in#reased #ompared to the prior year. =hi#h of thefollowin$ #han$es would #ause this in#rease in deferred tax lia!ilities>

4. 3n in#rease in prepaid expense44. 3n in#rease in rent re#ei"a!le444. 3n in#rease in warranty expense

a. 4 only!. 4 and 44#. 44 and 444d. 444 only

. 3n entity reported deferred tax assets and deferred tax lia!ilities at theend of the prior year and at the end of the #urrent year. Aor the #urrent year,the entity should report deferred tax expense or !ene7t e-ual to the

a. 6e#rease in the deferred tax assets

!. 4n#rease in the deferred tax lia!ilities#. 3mount of the #urrent lia!ility plus the sum of the net #han$es indeferred tax assets and deferred tax lia!ilities

d. ?um of the net #han$es in deferred tax assets and deferred taxlia!ilities

+. Ee#ause an entity uses dierent methods to depre#iate e-uipment fora##ountin$ and in#ome tax purposes, the entity has temporary dieren#esthat will re"erse durin$ the next year and add to taxa!le in#ome. 6eferredin#ome taxes that are !ased on these temporary dieren#es shall !e#lassi7ed in the entity;s statement of 7nan#ial position as

a. Contra a##ount to #urrent assets!. Contra a##ount to non#urrent assets#. Current lia!ilityd. Bon#urrent lia!ility

. 3t the #urrent yearend, an entity had a deferred tax lia!ility arisin$ froma##elerated depre#iation that ex#eeded a deferred asset relatin$ to rentre#ei"ed in ad"an#e whi#h is expe#ted to re"erse in the next year. =hi#h ofthe followin$ shall !e reported in the entity;s current year-end statement ofnancial position>


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a. %he ex#ess of the deferred tax lia!ility o"er the deferred tax assetsas a non#urrent lia!ility.

!. %he ex#ess of the deferred tax lia!ility o"er the deferred tax asset as#urrent lia!ility.

#. %he deferred tax lia!ility as non#urrent lia!ility.d. %he deferred tax lia!ility as #urrent lia!ility.

. %he 7nan#ial reportin$ !asis of a plant asset ex#eeded the tax !asis!e#ause a dierent method of reportin$ depre#iation is used for 7nan#iala##ountin$ purposes and tax purposes. =hat is reported if there are no othertemporary dieren#es>

a. Current tax asset!. 6eferred tax asset#. 6eferred tax lia!ility

d. Current tax paya!le

10. 3 deferred tax lia!ility is #omputed usin$

a. Current tax law re$ardless of expe#ted or ena#ted future tax law!. :xpe#ted future tax law re$ardless of whether ena#ted or not#. Current tax law unless a future ena#ted law is dierentd. :ither #urrent or expe#ted future tax law re$ardless of whether the

expe#ted future tax law is ena#ted or not

Problem 1%-% 'ultiple C.oi$e (IAA)

1. %he purpose of interperiodtax allo#ation is to

a. 3llow reportin$ entities to fully utili9e tax losses #arried forward froma pre"ious year.!. 3llow reportin$ entities whose tax lia!ilities "ary si$ni7#antly fromyear to year to smooth payments to taxin$ a$en#ies.#. Re#o$ni9e an asset or lia!ility for the tax #onse-uen#es of temporarydieren#es that exist at the end of the reportin$ period.d. 3morti9e the deferred tax lia!ility shown on the statement of7nan#ial position.

2. %he result of interperiod tax allo#ation is that

a. =ide u#tuations in an entity;s tax lia!ility payments are eliminated.!. %he expense shown in the in#ome statement is e-ual to the deferred

taxes shown in the statement of 7nan#ial position.#. %ax lia!ility shown in the statement of 7nan#ial position is e-ual to

the deferred taxes shown in the pre"ious year;s statement of 7nan#ialposition plus the in#ome tax expense shown in the in#ome statement.


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d. %ax expense shown in the in#ome statement is e-ual to in#ometaxes paya!le for the #urrent year plus or minus the #han$e in the deferredtax asset or lia!ility !alan#es for the year.

*. =hi#h of the followin$ is an example of a temporary dieren#e that wouldresult in a de*erred ta, liabilit+>

a. @se of strai$ht line depre#iation for a##ountin$ purposes and ana##elerated rate for in#ome tax purposes.

!. Rent re"enue #olle#ted in ad"an#e when in#luded in taxa!le in#ome!efore it is in#luded in pretax a##ountin$ in#ome.

#. @se of a shorter depre#iation period for a##ountin$ purposes than isused for in#ome tax purposes.

d. 4n"estment losses re#o$ni9ed earlier for a##ountin$ purposes thanfor tax purposes.

&. =hi#h of the followin$ is the most li/ely item to result in a de*erred ta,aet>

a. @sin$ a##elerated depre#iation for tax purposes !ut strai$ht linedepre#iation for a##ountin$ purposes.

!. @sin$ the #ost re#o"ery method of re#o$ni9in$ #onstru#tion re"enuefor tax purposes !ut usin$ per#enta$e of #ompletion method for 7nan#ialreportin$ purposes.

#. Prepaid expensed. @nearned re"enue

5. 3n example of a dedu#ti!le temporary dieren#e o##urs when

a. %he installment sales method is used for tax purposes !ut thea##rual method of re#o$ni9in$ sales re"enue is used for 7nan#iala##ountin$ purposes.

!. 3##elerated depre#iation is used for tax purposes !ut strai$ht linedepre#iation is used for a##ountin$ purposes.

#. =arranty expense are re#o$ni9ed on the a##rual !asis for 7nan#iala##ountin$ purposes !ut re#o$ni9ed for tax purposes as the warranty#onditions are met.

d. %he #ost re#o"ery method of re#o$ni9in$ #onstru#tion re"enue isused for tax purposes !ut the per#enta$e of #ompletion method isused for 7nan#ial a##ountin$ purposes.

. 3 deferred tax lia!ility arisin$ from the use of an a##elerated method ofdepre#iation for tax purposes and the strai$ht line method for 7nan#ialreportin$ purposes would !e #lassi7ed as

a. 3 #urrent lia!ility!. 3 non#urrent lia!ility#. 3 #urrent lia!ility for the portion of the temporary dieren#e

re"ersin$ within a year and a non#urrent lia!ility for the remainder.d. 3n oset to the a##umulated depre#iation.


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+. 3n item that would #reate a permanent dieren#e in pretax 7nan#ial andtaxa!le in#ome would !e

a. @sin$ a##elerated depre#iation for tax purposes and strai$ht linedepre#iation for !oo/ purposes.

!. Pur#hasin$ e-uipment pre"iously leased with an operatin$ lease inprior years.

#. @sin$ the per#enta$e of #ompletion method on lon$term#onstru#tion #ontra#ts.

d. Payin$ 7nes for "iolation of laws.

. Re#o$ni9in$ tax !ene7ts in a loss year due to a loss #arryforward re-uires

a. Only a footnote dis#losure.!. Creatin$ a new #aryrforward for the next year.#. Creatin$ a deferred tax asset.d. Creatin$ a deferred tax lia!ility.

. Intraperiodtax allo#ation

a. 4n"ol"es the allo#ation of in#ome taxes !etween #urrent and futureperiods.

!. 3sso#iates tax ee#t with dierent items in the in#ome statement.#. 3rises !e#ause #ertain re"enue and expenses appear in the 7nan#ial

statements either!efore or after they are in#luded in the in#ome tax return.d. 3rises !e#ause dierent in#ome statement items are taxed at

dierent rates.

10. 4n #omputin$ the #han$e in deferred tax asset or lia!ility, whi#h of the

followin$ tax rate is used>

a. Current tax rate!. :stimated future tax rate#. :na#ted future tax rated. Past years; tax rate

Problem 1%-& 'ultiple C.oi$e (IAA)

1. 3ll of the followin$ would re-uireintraperiodtax allo#ation, e,$ept

a. 6is#ontinued operation!. Prior period error#. Operatin$ in#omed. 4n#ome from #ontinuin$ operations

2. 4n#ome tax expense should !e allo#ated to all of the followin$, e,$ept

a. 6is#ontinued operation!. Prior period error#. Hross pro7td. Other #omprehensi"e in#ome


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*. %axa!le in#ome

a. 6iers from a##ountin$ in#ome due to dieren#es in interperiodtaxallo#ation

!. 6iers from a##ountin$ in#ome due to dieren#es in interperiodtaxallo#ation and permanent dieren#es.

#. 4s !ased on international 7nan#ial reportin$ standards.d. 4s reported in the in#ome statement.

&. =hi#h of the followin$ statements is true a!out interperiod tax allo#ation>

a. 4t arises !e#ause #ertain re"enue and expense items appear in thein#ome statement either !efore or after they are in#luded in the taxreturn.

!. 4t is re-uired for the #umulati"e ee#t of a##ountin$ #han$es !ut notfor prior period errors.#. %he purpose is to allo#ate in#ome tax expense e"enly o"er a num!er

of a##ountin$ periods.d. %he purpose is to relate the in#ome tax expense to the items whi#hae#t the amount of tax.

5. =hi#h of the followin$ statements is $orre$ta!out the presentation ofdeferred tax assets and lia!ilities>

a. Current deferred tax assets are netted a$ainst #urrent deferred taxlia!ilities.

!. 3ll non#urrent deferred tax assets are netted a$ainst non#urrentdeferred tax lia!ilities.

#. 6eferred tax assets are ne"er netted a$ainst deferred tax lia!ilities.d. 6eferred tax assets are netted a$ainst deferred tax lia!ilities if theyrelate to the same tax lia!ility.

Problem 1%-7 (AICPA Adapted)

1. =hi#h statement is truere$ardin$ reportin$ deferred in#ome taxes in the7nan#ial statements>

a. 6eferred tax assets are always netted a$ainst deferred tax lia!ilities.!. 6eferred taxes of one urisdi#tion are oset a$ainst another

urisdi#tion in the nettin$ pro#ess.#. 6eferred tax assets and lia!ilities may only !e #lassi7ed asnon#urrent.

d. 6eferred tax assets and lia!ilities are #lassi7ed as #urrent andnon#urrent !ased on expiration date.

2. =hen a##ountin$ for in#ome taxes, a temporary dieren#e o##urs in whi#hof the followin$ s#enarios>

a. 3n item is in#luded in the #al#ulation of net in#ome in one year andtaxa!le in#ome in a dierent year.


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!. 3n item is in#luded in the #al#ulation of net in#ome !ut is neithertaxa!le nor dedu#ti!le.

#. %he a##rual method of a##ountin$ is used.d. 3n item is no lon$er taxa!le due to a #han$e in the tax law.

*. =hen temporary dieren#e will result in taxa!le amounts in future years

a. 3 deferred tax lia!ility is re#o$ni9ed in the #urrent year.!. 3 deferred tax asset is re#o$ni9ed in the #urrent year.#. 3 deferred tax asset may !e re#o$ni9ed in the #urrent year if #ertain#onditions are met.d. 3 deferred tax lia!ility may !e re#o$ni9ed in the #urrent year if#ertain #onditions are met.

&. Royalties are re#o$ni9ed when re#ei"ed for in#ome tax purposes andre#o$ni9ed when earned for 7nan#ial statement purposes. %his is an exampleof what>

a. Permanent dieren#e that $i"es rise to deferred tax asset.!. %emporary dieren#e that $i"es rise to deferred tax lia!ility.#. Permanent dieren#e that does not $i"e rise deferred tax.d. %emporary dieren#e that $i"es rise to deferred tax asset.

5. =hi#h of the followin$ statements is $orre$t re$ardin$ the pro"isions forin#ome taxes in the 7nan#ial statements of a ole proprietor.ip>

a. %he pro"ision for in#ome taxes should !e !ased on !usiness in#omeusin$ indi"idual taxes rates.

!. %he pro"ision for in#ome taxes should !e !ased on !usiness in#ome

usin$ #orporate tax rates.#. %he pro"ision for in#ome taxes should !e !ased on the proprietor;stotal taxa!le in#ome.d. Bo pro"ision for in#ome taxes is re-uired.

Problem 1%-8 (ACP)

3EC Company reported pretax 7nan#ial in#ome of P2, 000,000 for the year

ended 6e#em!er *1, 2015. %he taxa!le in#ome was P1, 500,000. %hedieren#e is due to a##elerated depre#iation for the in#ome tax purposes.

%he in#ome tax rate is *0' and 3EC #ompany made estimated tax payment

of P200,000 durin$ the #urrent year.

Required:

a. Prepare ournal entries for 2015.!. Compute the total in#ome tax expense for 2015.


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Problem 1%- (ACP)

?implex Company reported the followin$ information for the year ended6e#em!er *1, 2015(

Operatin$ loss 1,000,0004nterest in#ome on note re#ei"a!le 1,100,0008oss on in"entory writedown *00,000

8oss !efore in#ome tax 200,000

%here are no temporary dieren#es at the !e$innin$ of the year. %he in#ome

tax rate is *0 '.

Required:

1. Prepare ournal entry to re#ord the in#ome tax expense and deferred tax

for 2015.

2. Present the in#ome tax expense in the in#ome statement.

Problem 1%-10 (ACP)

Neus Company reported pretax 7nan#ial in#ome of P*,000,000 for the year

ended 6e#em!er *1, 2015. %he taxa!le in#ome was P&,000,000.

%he dieren#e is due to rental re#ei"ed in ad"an#e. Rental in#ome is taxa!le

when re#ei"ed.

%he in#ome tax rate is *0' and Neus Company made estimated tax

payment of P500,000 durin$ the #urrent year.

Required:

a. Prepare ournal entries relatin$ to in#ome tax for 2015.

!. Compute the total in#ome tax expense for 2015.


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Problem 1%-11 (ACP)

4n 2015, 3r$entina Company re#ei"ed an ad"an#e payment of P1,000,000,

whi#h was su!e#t to tax !ut not supported in a##ountin$ in#ome until 201.

%he in#ome tax rate is *0'.

%he in#ome tax statement and tax return showed the followin$(

201%

201&

4n#ome !efore tax per in#ome statement ,000,000,000,000

4n#ome !efore tax per return +,000,000

,000,000

Required:

1. Prepare ournal entries to re#ord the in#ome tax and deferred tax for 2015

and 201

2. Present the in#ome tax expense in the in#ome statement for 2015 and

201.

Problem 1%-12 (ACP)

Colom!o Company in#luded in 2015 a deferred in#ome on installment sale of

P500,000 in a##ountin$ in#ome. %his deferred in#ome is expe#ted to re"erse

for tax purposes in 201. %he in#ome statement and tax return showed the

followin$(

201% 201&3##ountin$ in#ome 5,500,000 +,000,000%axa!le in#ome 5,000,000 +,500,000

Required:

1. Prepare ournal entries to re#ord the in#ome tax and deferred tax for 2015and 201.

2. Present the in#ome tax expense in the in#ome statement for 2015 and201.


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Problem 1%-1 (ACP)

Qa"ier Company pro"ided the followin$ information for the 7rst year ofoperations(

3##ountin$ in#ome &,000,000Bondedu#ti!le expenses 200,000Bontaxa!le re"enue *00,0006eferred in#ome on installment sale in#luded in 7nan#ial in#ome !ut taxa!le next year &50,0006ou!tful a##ounts re#orded 100,000Ainan#ial depre#iation *00,000%ax depre#iation *50,000:stimated warranty #ost a##rued in the #urrent year !ut not dedu#ti!le for tax purpose until paid 100,0004n#ome tax rate *0'

Required:

1. Prepare ournal entry to re#ord the #urrent tax expense.2. Prepare ournal entry to re#ord the deferred tax lia!ility.*. Prepare ournal entry to re#ord the deferred tax asset.&. Present in#ome tax expense in in#ome statement.5. 6etermine the net deferred tax expense or !ene7t.

Problem 1%-1! (IAA)

On January 1, 2015, )alley Company entered into a *year #onstru#tion#ontra#t that had an estimated $ross re"enue of P*,000,000.

%he entity used the per#enta$e of #ompletion method in re#o$ni9in$ in#omeon its !oo/ and reported #onstru#tion in#ome as follows(

2015 00,000201 1,500,000201+ 00,000

%he #ost re#o"ery method is used for in#ome tax purposes and the entityreported #onstru#tion in#ome on the tax return as follows(

2015201


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201+ *,000,000

%his is the only timin$ dieren#e in#ome be*ore#onstru#tion in#ome andtax as follows(

2015 2,&00,000201 *,00,000201+ *,200,000

Required:

Prepare ournal entries to re#ord in#ome tax and deferred tax for 2015, 201,and 201+. %he in#ome tax rate is *0'.

Problem 1%-1% (IAA)

On January 1, 2015, aye Company pur#hased an e-uipment for P1,000,000.%he e-uipment has an estimated useful life of & years and no residual "alue.

%he entity used the strai$ht line method of depre#iation for a##ountin$purposes and the ?6 method for tax purposes.

%he #omparati"e depre#iation #har$es for ea#h of the four years are(

#traig.t line #=>2015 250,000 &00,000201 250,000 *00,000201+ 250,000 200,000201 250,000 100,000

%he depre#iation #har$e is the only timin$ dieren#es !etween a##ountin$in#ome and taxa!le in#ome.

3ye Company $enerated P&,000,000 in#ome be*oredepre#iation and tax forea#h of the four years and that the appli#a!le tax rate is *0'.

Required:

1. Prepare ournal entries to re#ord in#ome tax and deferred tax for ea#h ofthe four years.2. Present the deferred tax lia!ility on 6e#em!er *1, 201.

Problem 1%-1& (IAA)


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Complex Company re#orded the followin$ information relatin$ to in#ome!efore tax for a##ountin$ purposes(

2015 2,000,000201 *,000,000201+ &,000,000201 5,000,0004n 2015, the entity re#o$ni9ed dou!tful a##ounts of P100,000. ?u#h a##ountswere #onsidered worthless or un#olle#ti!le in 201.

3nalysis of the tax and !oo/s re#ords dis#losed P120,000 in unearned rentin#ome on 6e#em!er *1,2015 that has !een re#o$ni9ed as taxa!le in#ome in2015 when the #ash was re#ei"ed.

3lso on 6e#em!er *1, 2015, estimated warranty #ost of P*00,000 had !eenre#o$ni9ed as expense on the !oo/s in 2015 when the produ#t sales weremade !ut is not dedu#ti!le for tax purpose until paid.

%he unearned rent in#ome on 6e#em!er *1, 2015 is reali9ed and the a#tualwarranty payments were made as follows(

Rent in$ome per boo? A$tualarrant+ pa+ment201 &0,000 20,000201+ &0,000 0,000201 &0,000 200,000

Re-uired(

Prepare ournal entries for 2015, 201, 201+ and 201 to re#ord in#ome taxexpense and deferred in#ome tax arisin$ from the temporary dieren#es.%he in#ome rate is *0'.

2. Present the deferred tax asset on 6e#em!er *1, 201.

Problem 1%-17 (ACP)

?han$ri8a Company reported a pretax a##ountin$ in#ome of P+,00,000

for the year ended 6e#em!er *1 2015. %emporary dieren#es ha"e !een

identi7ed as follows.

%ax depre#iation in ex#ess a##ountin$ depre#iation

1,000,000

8iti$ation loss a##rued for 7nan#ial a##ountin$Purposes !ut will !e dedu#ted for tax purposes4n the distan#e future &00,000


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=arranty #ost expensed for 7nan#ial a##ountin$Purposes ex#eeded the amount #urrently dedu#tedAor tax purposes !y *00,000

%he warranty lia!ility is #lassi7ed as a #urrent lia!ility in the entity;s

statement of 7nan#ial position. %he in#ome tax rate is *0'.

%here are no temporary dieren#es at the !e$innin$ of the #urrent year.

Required:

1. Prepare ournal entries to re#ord the in#ome tax and deferred tax for 2015.

2. Prepare a partial in#ome statement and partial statement of 7nan#ial

position to show the in#ome tax expensed and deferred tax amount.

%he entity has no le$al enfor#ea!le ri$ht to set o a #urrent tax asset a$ainst

a #urrent tax lia!ility.

*. 6etermine the net deferred tax expense or !ene7t.

Problem 1%-18 (I"R#)

On 6e#em!er *1, 2015, the statements of 7nan#ial position a##ounts of

?imple Company ha"e the ame bai for a##ountin$ and tax purposes,

ex#ept the followin$(

Carr+ing amount 5a, bae >i@eren$eComputer software #ost &,000,000 0 &,000,000:-uipment 15,000,000 12,000,000 *,000,0003##rued lia!ilityhealth #are 2,000,000 0 2,000,000

4n January 2015, the entity in#urred #ost of P,000,000 in relation to thede"elopment of a #omputer software produ#t. Considerin$ the te#hni#al feasi!ilityof the produ#t, this #ost was #apitali9ed and amorti9ed o"er * years for a##ountin$purpose usin$ strai$ht line. Gowe"er, the total amount was expensed in 2015 fortax purposes.

%he e-uipment was a#-uired on January 1, 2015 for P20,000,000. %he useful life ofthe e-uipment is & years with no residual "alue. %he e-uipment is depre#iated usin$the strai$ht line for a##ountin$ purposes and sum of & year;s di$its method for taxpurposes.

4n January 2015, the entity entered into an a$reement with the employees topro"ide health #are !ene7ts the #ost of su#h plan for 2015 was P2,000,000. %hisamount was a##rued as an expense in 2015 for a##ountin$ purposes. Gowe"er,health #are !ene7ts are dedu#ti!le for tax purposes only when a#tually paid.


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%he pretax a##ountin$ in#ome for 2015 is P1*,000,000. %he tax rate is *0' andassume there are no deferred taxes on January 1, 2015.

Required:

1. Prepare ournal entries to re#ord the deferred tax lia!ility, deferred tax asset and#urrent tax expense.

2. Present the in#ome tax expense in the in#ome statement.

Problem 1%-1 (I"R#)

On January 1, 2012, :asy Company a#-uired an e-uipment for P,000,000. %hee-uipment is depre#iated usin$ strai$ht line method !ased on useful life of yearswith no residual "alue.

On January 1, 2015, after * years, the e-uipment was re"alued at a repla#ement

#ost of P12,000,000 with no #han$e in useful life.

%he pretax a##ountin$ in#ome !efore depre#iation for 2015 is P10,000,000. %hein#ome tax rate is *0' and there are no other temporary dieren#es at the!e$innin$ of the year.

Required:

1. Prepare ournal entry to re#ord the re"aluation on January 1, 2015.

2. Prepare ournal entry to re#ord the deferred tax lia!ility on January 1, 2015.

*. Prepare ournal entry to re#ord the #urrent tax expense for 2015.

&. Prepare the adustment of the deferred tax lia!ility on 6e#em!er *1, 2015.

5. Prepare the adustment if the re"aluation surplus on 6e#em!er *1, 2015.

. Prepare the in#ome tax expense in the in#ome statement for 2015.


3loha Company pro"ided the followin$ information on 6e#em!er *1, 2015(

Carr+ing Amount 5a, bae3##ounts re#ei"a!le 1,500,000 1,+50,000Motor "ehi#le 1,50,000 1,250,000Pro"ision for warranty 120,000 0


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6eposits re#ei"ed in ad"an#e 150,000 0

%he depre#iation rates for a##ountin$ and taxation are 15' and 25' respe#ti"ely.

%he deposits are taxa!le when re#ei"ed and warranty #osts are dedu#ti!le whenpaid,

3n allowan#e for dou!tful a##ounts of P250,000 has !een raised a$ainst a##ounts

re#ei"a!le for a##ountin$ purposes !ut su#h a##ounts are dedu#ti!le only whenwritten o as un#olle#ti!le.

%he entity showed net in#ome of P,000,000 in the in#ome statement for 2015.

%here are no temporary dieren#es at the !e$innin$ of the #urrent year. %he taxrate is *0'.

Required:

1. 6etermine the deferred tax lia!ility on 6e#em!er *1, 2015.

2. 6etermine the deferred tax asset on 6e#em!er *1, 2015.

*. 6etermine the net deferred tax expense or !ene7t.

&. 6etermine the #urrent tax expense for 2015.

5. 6etermine the total in#ome tax expense for 2015.


=est Company dis#losed the followin$ assets and lia!ilities at #arryin$ amount on6e#em!er *1, 2015(

Property 10,000,000Plant and e-uipment 5,000,0004n"entory &,000,000

%rade re#ei"a!les *,000,000%rade paya!les ,000,000Cash 2,000,000

%he "alue for tax purposes for property plant and e-uipment was P+, 000, 000 andP&,000,000 respe#ti"ely.

%he entity has made a pro"ision for in"entory o!soles#en#e of P2, 000, 000 whi#h isnot allowa!le for tax purposes.

Aurther, an impairment #har$e a$ainst trade re#ei"a!le of P1, 000, 000 has !eenmade. %his #har$e will not !e allowed in the #urrent year for tax purposes.

=est #ompany reported net in#ome of P, 000,000 for 2015 there no temporarydieren#es at the !e$innin$ of the #urrent year. %he tax rate is *0'.

Required:


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1. Prepare ournal entry to re#ord the #urrent tax expenses.

2. Prepare ournal entry to re#ord the deferred tax lia!ility.

*. Prepare ournal entry to re#ord the deferred tax assets.

&. 6etermine the net deferred tax expense or !ene7t.

5.6etermine the total in#ome tax expense.

(KA3 1%-22 to &&)

chapter 11 15finacc2

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