ACCOUNTING FOR LEASE
A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property,
owned by the lessor, for a specified period of time. In return for this right, the lessee agrees to make rental payments
over the lease term to the lessor.
Accounting by the Lessee

A lease is defined as a contract or part of the contract that conveys the right to use the underlying asset for a
period of time in exchange for consideration.

The contract must convey the right to control the use of identified assets.

All leases shall be accounted for by the lessee as a finance lease under the new standard

The discout rate to be used will be the Implicit Interest rate, or the lessee’s borrowing rate

It has an option to use operating lease if it is a short term lease (12 months or less ) and low value lease
only ( no threshold given)

At the start of the lease , the lessee shall recognize a right of use of asset and lease liability

The right of use of asset comprises of:
1. Present Value of lease payments including termination penalties
2. Option to purchase in present value if lessee can exercise the option.
3. Lease bonus paid less any incentives
4. Initial direct costs incurred by the lessee
5. Cost Guaranteed Residual Value in present value
6. Estimated dismantling, removing and restoring cost

The lease liability includes the following
1. Present Value of lease payments including termination penalties
2. Option to purchase in present value if lessee can exercise the option.
3. Cost Guaranteed Residual Value in present value

Depreciation method used will be the lesses’s usual method under the following terms
1. Useful life ( if there is an asset transfer and option that can be reasonably exercised)
2. The shorter of useful life or lease term ( others)
Normal Journal Entries
On January 1, 2017, Sto. Tomas Company leased an equipment for 4 years at an annual rental payments of P 100,000,
payable beginning December 31 of each year. The lease states that the equipment will be transferred to Sto. Tomas
Company at the end of its lease term. The implicit rate of this transaction is 12% and the useful life of the equipment
is 4 years. Prepare entries OF Sto. Tomas for 2017 and 2018.
DATE
January
2017
December
31, 2017
ACCOUNT TITLE
1,
Right to use Asset
DEBIT
303,730
Lease Liability
(100,000 x 3.0373) = 303,730
303,730
Depreciation Expense (303,730/4)
Accumulated Depreciation
75,932
Interest Expense (303,730 x .12)
Lease Liability (100,000 – 36,448)
36,448
63,552
75,932
Cash
December
31, 2018
CREDIT
100,000
Depreciation Expense (303,730/4)
Accumulated Depreciation
75,932
Interest Expense (303,730 – 63,552)x .12
Lease Liability (100,000 – 28,821)
28,821
71,179
75,932
Cash
100,000
With Purchase Option
On January 1, 2017, Tanauan Company leased an equipment for 10 years at an annual rental payments of P 1,000,000,
payable end of each year. The lease states that Tanauan Company has the option to purchase the equipment at the end
of its lease term for P 500,000. The implicit and incremental borrowing rates of this transaction is 12% and 14%,
respectively. The useful life of the equipment is 12 years and the residual value is P 600,000.
1. The initial cost of the right to use asset
a.
P 5,650,000
b. P 5,489,000
c. P 5,811,000
PV of lease Payments
(1,000,000 x 5.65)
PV of Option ( 500,000 x .322)
5,650,000
161,000
Initial Cost of Assets/Liability
ROU Asset
5,811,000
Lease Liability
d. P 0
5,811,000
5,811,000
2. The annual depreciation
a. P 420,833
b. P 407,417
c. P 434,250
d. P 0
(P 5,811,000 – 600,000) / 12 useful life (option)
Depreciation Expense
P 434,250
434,250
Accumulated Depreciation
434,250
3. Lease Liability at December 31, 2017
a. P 5,508,320
b. P 5,811,000
c. P 4,811,000
d. P 4,508,320
P 5,811,000 – ( P 1,000,000 – ( 5,811,000 x .12) = P 5,508,320
5,811,000 -
302,680
=
Lease Liability ( 1,000,000 – 697,320)
Interest Expense ( 5,811,000 x .12)
5,508,320
-
302,680
697,320
Cash
1,000,000
Entry when option is exercised (buy the asset)
Lease Liability
P 500,000
Cash
P 500,000
Entry if option is not exercised (not buying the asset)
Accumulated Depreciation
4,342,500
Lease Liability
500,000
Loss on Finance Lease (CV-liab) 968,500
Right to use asset
date
P 5,811,000
Cash flow
interest
Amortization
1.1.2017
PV
5,811,000
12.31.2017
1,000,000
697,320
302680
5508320
12.31.2018
1,000,000
660998
339002
5169318
12.31.2019
1,000,000
620318
379682
4789636
12.31.2020
1,000,000
574756
425244
4364392
12.31.2021
1,000,000
523727
476273
3888119
12.31.2022
1,000,000
466574
533426
3354693
12.31.2023
1,000,000
402563
597437
2757256
12.31.2024
1,000,000
330871
669129
2088127
12.31.2025
1,000,000
250575
749425
1338702
12.31.2026
1,000,000
160644
839356
499346
With Guaranteed Residual Value
On January 1, 2017, Malvar Company leased an equipment for 4 years at an annual rental payments of P 1,000,000,
payable end of each year. The implicit rate of this transaction is 10%. The useful life of the equipment is 5 years and
the guaranteed residual value is P 200,000 at the end of lease term.
4. The initial cost of the right to use asset
a.
P 3,169,870
b. P 3,306,470
c. P 3,033,270
PV of lease Payments ( 1,000,000 x 3.16987)
PV of guaranteed residual value ( 200,000 x .683)
d. P 3,800,000
3,169,870
136,600
3,306,470
ROU Asset
Lease Liability
3,306,470
3,306,470
5. Lease liability balance as of December 31, 2017
a.
P 2,637,117
b. P 3,036,470
c. P 1,737,117
P 3,306,470 – (1,000,000 – (3,306,470 x 10%)
d. P 2,136,470
= 2,637,117
Amortization on Lease Liability
date
Cash flow
interest
principal
1.1.2017
PV
3,306,470
12.31.2017
1,000,000
330,647
669,353
2,637,117
12.31.2018
1,000,000
263,712
736,288
1,900,829
12.31.2019
1,000,000
190,083
809,917
1,090,912
12.31.2020
1,000,000
109,088
890,912
200,000
6. Annual depreciation of the Right to use asset
a.
P 776,618
b. P 709,118
c. P 384,279
(P 3,306,470 – 200,000) / 4 (lower of lease or life)
d. P 484,118
= P 776,618
Entry to record the return of the equipment to lessor
Accumulated Depreciation
Lease Liability
3,106,470 (776,618 x 4)
200,000
Right to use Asset
3,306,470
If the market value of the equipment at the time it was return is P 150,000, prepare the entry of
the of the return
Accumulated Depreciation
Lease Liability
Right to use Asset
Loss on finance lease
3,106,470
200,000
3,306,470
50,000
Cash
50,000
If the market value of the equipment at the time it was return is P 250,000, prepare the entry of
the of the return
Accumulated Depreciation
Lease Liability
Right to use Asset
3,106,470
200,000
3,306,470
With Initial Direct Cost
On January 1, 2017, Lipa Company leased an equipment for 5 years at an annual rental payments of P 1,000,000,
initially payable at the date of lease contract. Lipa Company paid an initial direct cost of P 250,000 and received lease
incentive from the lessor amounting to P 150,000, both on January 1, 2017. The implicit and incremental borrowing
rates of this transaction is 8% and 10%, respectively. The useful life of the equipment is 6 years and has a guaranteed
residual value of P 300,000.
7. The initial cost of the right to use asset
a. P 4,766,280
b. P 4,516,280
c. P 4,616,280
d. P 4,516,280
PV of lease Payments ( 1,000,000 x 4.3121)
4,312,100
PV of guaranteed residual value ( 300,000 x .6806)
Lease Liability
204,180
4,516,280
Initial Direct Cost
Lease Incentive Received
250,000
( 150,000
Cost of the Right to Use
4,616,280
ROU Asset
4,616,280
Lease Liability
Cash (250,000 – 150,000)
8. Interest Expense in 2018
a. P 223,807
b. P 361,302
4,516,280
100,000
c. P 281,302
d. P 201,302
4,516,280 – 1,000,000 = 3,516,280 x .08 = 281,302 – 1,000,000 = 718,698
3,516,280 – 718,698 = 2,797,582 x .08 = 223,807
DATE
CASH FLOW
INTEREST
PRINCIPAL
1.1.2017
PV
4,516,280
1.1.2017
1,000,000
1,000,000
3,516,280
1.1.2018
1,000,000
1.1.2019
1,000,000
281,302
718,698
2,797,582
223,807
776,193
2,021,389
1.1.2020
1.1.2021
1,000,000
161,711
838,289
1,183,100
1,000,000
116,900
883,100
300,000
9. Annual depreciation of the Right to use asset
a. 893,256
b. P 843,256
c. P 863,256
(P 4,616,280 – 300,000) / 5 (lower of lease or life)
d. P 843,256
= P 863,256
With Unguaranteed Residual Value
On January 1, 2017, San Jose Company leased an equipment for 6 years at an annual rental payments of P 600,000,
payable beginning December 31, 2017. San Jose paid an initial direct cost of P 224,000 and is required to restore the
asset per contract for P 400,000. Annual executory cost of P 50,000 is paid by the lessee. The implicit and incremental
borrowing rates of this transaction is 10% and 12%, respectively. The useful life of the equipment is 8 years and has a
unguaranteed residual value of P 200,000. The contract neither provides for the transfer or an option to buy the
equipment at the end of the lease term.
10. The initial cost of the right to use asset
a.
P 2,616,000
b. P 2,840,000
c. P 3,240,000
PV of lease Payments ( 600,000 x 4.36)
Initial Direct costs
d. P 3,040,000
2,616,000
224,000
Estimated Restoration Cost
Cost of the Right to Use
400,000
3,240,000
Residual Value is not included because it is unguaranteed
Executory Cost is outright expense
ROU Asset
Expenses
Lease Liability
3,240,000
50,000
2,616,000
Cash ( 224K+400K+50K)
11. Interest Expense in 2018
a. P 227,760
b. P 261,600
674,000
c. P 338,400
d. P 600,000
2,616,000 x .10 = 261,600 – 600,000 = 338,400
2,616,000– 338,400 = 2,277,600 x .10 = 227,760
12. Annual depreciation of the Right to use asset
a. P 402,667
b. P 436,000
c. P 506,667
d. P 540,000
(P 3,240,000) / 6 (lower of lease or life) = P 540,000
Unguaranteed residual value is ignored in computation of depreciation
Entry upon return of Equipment to lessor
Accumulated Depreciation
3,240,000
ROU Asset
(540,000 x 6)
3,240,000
The same entry be made regardless the fair value may be higher or lower
Extension Option
On January 1, 2017, Batangas Company leased an equipment for 5 years at an annual rental payments of P 500,000,
payable beginning December 31, 2017. The lease term is 25% of the estimated useful life of the asset. The implicit and
incremental borrowing rates of this transaction is 10% and 12%, respectively. The lease contract contained an option
for the lessee to extend for another 5 years. At the inception of the lease, the exercise of the extension option is not
reasonably certain, but after 3 years, Batangas decided to exercise the extension option. The new annual rental is P
600,000 and the new implicit and incremental borrowing rates of this extension is 8% and 10%, respectively.
13. The initial cost of the right to use the asset
a.
P 1,895,500
b. P 891,500
c. P 1,004,000
d. P 2,076,790
(P 500,000 x 3.791) = P 1,895,500
First Five Years
3 yrs
P 500,000/yr
1.1.2017
Extension = 5 years
2 yrs
P500,000/yr
1.1.2020
5 years
P 600,000 / year
1.1.2022
(Actual Extension)
1.1.2027
600,000 x 3.993)
PV of the remaining 2 years at new rate (8%) - P 500,000 x 1.783 = P 891,500
PV of annual rental of Extention – P 600,000 x 3.993 x .857
= 2,053,200
Jan 1, 2020 liability balance
January 1, 2017
Dec. 31, 2017
ROU Asset (P 500,000 x 3.791)
Lease Liability
P 1,895,500
1,895,500
Interest Expense ( 1,895,500 x .10)
189,550
Lease Liability ( 500,000 – 189,550)
Cash
310,450
500,000
Depreciation Expense ( 1,895,500 / 5)
379,100
Accumulated Depreciation
Dec. 31, 2018
2,944,700
379,100
Interest Expense ( 1,895,500 -310,450 =
(1,585,050x .10)
158,505
Lease Liability ( 500,000 – 158,505)
Cash
341,495
500,000
Depreciation Expense ( 1,895,500 / 5)
Accumulated Depreciation
Dec. 31, 2019
379,100
379,100
Interest Expense ( 1,585,050-341,495)x.10 124,356
Lease Liability ( 500,000 – 124,356)
Cash
Depreciation Expense ( 1,895,500 / 5)
375,644
500,000
379,100
Accumulated Depreciation
379,100
January 1, 2020
Get the Value of the new liability
PV of the remaining 2 years at new rate (8%) - P 500,000 x 1.783 = P 891,500
PV of annual rental of Extention – P 600,000 x 3.993 x .857
= 2,053,200
Jan 1, 2020 liability balance
Balance of recorded liability ( January 1, 2020)
2,944,700
( 867,910)
Increase in liability
2,076,790
Adjusting Entries :
Dec 31, 2020
ROU Asset
2,076,790
Lease Liability
2,076,790
Interest Expense
235,576
Lease Liability
Cash
264,424
500,000
New Amortization Table
DATE
CASH FLOW
INTEREST
PRINCIPAL
PV
1.1.2020
2,944,700
12.31.2020
500,000
235,576
264,424
2,680,276
12.31.2021
500,000
214,422
285,578
2,394,698
12.31.2022
600,000
191,576
408,424
1,986,274
12.31.2023
600,000
158,902
441,098
1,545,176
12.31.2024
600,000
123,614
476,386
1,068,790
12.31.2025
600,000
85,503
514,497
554,293
12.31.2026
600,000
45,707
554,293
0
14. The lease liability at the start extension option was exercised (January 1, 2020)
a. P 2,076,790
b. P 2,944,700
c. P 2,053,200
d. P 2,834,990
PV of the remaining 2 years at new rate (8%) - P 500,000 x 1.783 = P
PV of annual rental of Extention – P 600,000 x 3.993 x .857
Jan 1, 2020 liability balance
Balance of recorded liability ( January 1, 2010)
Increase in liability
=
891,500
2,053,200
2,944,700
(
867,910)
2,076,790
15. The balance of the right to use of asset at the start of the extension (January 1, 2020)
a.
P 2,076,790
b. P 2,944,700
c. P 2,053,200
Book Value of Asset as of Janaury 1, 2020 ( 1,895,500 x 2/5)
Increase in liability
Balance of Asset 1.1.2020
d. P 2,834,990
= P
758,200
2,076,790
2,834,990
16. The Interest Expense in 2020 and the balance of liability at the end of 2020.
a. P 166,143, P 2,076,790
c. P 164,256, P 2,053,200
b. P 235,576, P 2,680,276
d. P 226,799, P 2,834,990
( 2,944,700 x .08) = 235,576
2,944,700 – ( 500,000 – 235,576) = 2,680,276
17. The depreciation Expense in 2020 and the carrying value of the asset as of December 31, 2020
a. P 404,999, P 2,429,991
b. P 296,684, P 1,780,106
b.
P 420,671, P 2,524,029
(2,834,990/7 ) =
c. P 293,314, P 1,759,886
404,999
( 2,834,990 – 404,999) = 2,429,991
Lease with Variable Payments
On January 1, 2017, Balagtas Company leased an equipment for 8 years at an annual rental payments of P 300,000,
payable beginning December 31, 2017 for the first 3 years and annual rental payments of P 400,000, payable beginning
every December 31, for the next 5 years . The implicit and incremental borrowing rates of this transaction is 10% and
12%, respectively. The lease contract contained no option for purchase and no provision for any title transfer.
18. The initial amount of the right to use asset and liability
a.
P 1,138,816
b. P 1,884,916
300,000 /year
c. P 2,262,500
d. P 1,516,400
400,000/ yr.
0
3
8
1.1.2017
746,100
(300,000 x 2.487)
(400,000 x 3.791)
1,138,816
1,516,400
X .751
1,884,916
RUO Asset
1,884,916
Lease Laibility
1,884,916
(P 300,000 x 2.487)
=
P 746,100
(P 400,000 x 3.791 x .751)
Balance
=
1,138,816
1,884,916
19. The balance of lease liability and the carrying value of the right on December 31, 2020
a.
b.
P 1,138,816, P 569,408
P1,267,406, P 942,458
DATE
b. P 1,884,916, P 942,458
d. P 1,516,400, P 758,200
CASH FLOW
INTEREST
PRINCIPAL
1.1.2017
PV
1,884,916
12.31.2017
300,000
188,492
111,508
1,773,408
12.31.2018
300,000
177,341
122,659
1,650,749
12.31.2019
300,000
165,075
134,925
1,515,824
12.31.2020
500,000
151,582
348,418
1,167,406
Asset = 1,884,916 x 4/8 = 942,458
Purchase of Leased Asset
On January 1, 2017, Padre Garcia Company purchase its leased asset for P 5,000,000. The carrying values per its record
on leased assets are as follows: Right to Use Asset – P 6,000,000; Accumulated Depreciation – Right to Use asset –
P 1,500,000; Lease Liability – P 3,800,000.
c. The initial cost of the purchased leased asset
P 5,000,000 + ( P 6,000,000 – 1,500,000 ) - 3,800,000
= 5,700,000
Accounting by the Lessor
 . For lessor accounting purposes, all leases may be classified as either operating or finance leases. Finance
leases are further subdivided into: (a) direct financing leases, or (b) sales-type leases. To determine
whether a lease is an operating lease or a finance lease, the lessor uses these criteria :
a.
The lease transfers ownership of the property to the lessee at the end of the lease.
b.
The lease contains a bargain purchase option.
c.
The lease term is for the major part of the economic life of the asset.
d.
The present value of the minimum lease payments amounts to substantially all of the fair value of the leased
asset.
If the lease meets none of the four criteria, the lease should be classified and accounted for as an operating lease.
 The other criteria which are more suggestive in nature that may lead to finance lease:
a. The underlying asset is of such a specialized nature that only the lessee can use it
b.If the lessee can cancell the lease, any loss of the lessor shall be borne by the lessee
c. Gains and losses from fair value fluctuation shall accrue to the lessee.
d.The lessee has the ability to continue the lease for another period at lower market rate
 If the lease comprises of the land and the building, separate the two based on their relative market values
 The land is always treated as having an indefinite economic life
1. Operating Lease
 Lease Payments shall be recognize as income either on a straight line basis or other systematic basis
 Executory costs shall be recognized as expense, if not passed to the lessee
 Initial Direct cost incurred by the lessor shall be added to the carrying amount of the leased asset and recognized
as expense over the lease term.
 Lease bonus received from lessee shall be recognized as Unearned Revenue and recognized as rent income over
the lease term
 Refundable Security Deposit shall be accounted as liability
 If unequal payments of rent, the total cash reciepts for the lease term shall be amortized uniformly on a staright
line over the lease term
 Since still own the leased asset, continue to compute depreciation on the usual manner
2. Direct Financing Method

Recognizes Interest Income Only since the lessor is a financier


Used the effective interest method in computing interest income
Gross investment = Gross Rentals plus Absolute amount of Residual Value guaranteed or not

Net Investment = Cost of Leased Assets plus Initial direct cost paid by the lessor Unearned Interest = Gross
Investment – Net Investment


Annual Rental = Net Investment / PV Annuity using the desired rate of return
Initial Direct Cost added reduces the original implicit rate

If the asset revert back to the lessor, the PV of residual value will be deducted from the cost of the leased
asset. If the asset will not revert back to the lessor, residual value is completely ignored
3. Sales-Type Leases

The lessor in a sales type lease is actually a manufacturer or a dealer, thus it involve a manufacturer or dealer’s
profit in addition to interest income

Gross investment (Lease Receivable) = Gross Rentals plus Absolute amount of Residual Value guaranteed or

not plus Absolute amount of purchase option
Net Investment = PV of Gross Rentals plus PV of residual value guaranteed only plus PV of Purchase Option

Sales = Net Investment or Fair Value of the Asset, whichever is lower


Cost of Goods Sold = Net Investment plus Initial Direct Cost minus any unguaranteed residual value
Gross Profit (Manufacturer’s Profit) = Sales – Cost of Goods Sold


Manufacturer’s Profit = Sales – Cost of Goods Sold
Uneaned Interest Income =Lease Recievable- Sales

If the lessor will actually sell the asset to the lessee, gain or loss is computed by the difference between the
sales price and the balance of lease receivable
Sales and Leaseback

Arrangement where one party sells an asset to another party, and immediately leasses the asset back from the
new owner

There was a sale and there was a lease agreement, no physical transfer of asset

If the leaseback is short period, use operating lease

Sales Price at Fair value
Seller - Lessee
Cash
Buyer- Lessor
XX
Equipment
Right to use the asset XX
During Sales
AssetSold(BV)
XX
Lease Liability
XX
Gain on Right Trans
Annual Rental
Interest Expense
XX
Lease Liability
XX
Cash
Depreciation
Depreciation Exp – Right
Acc. Depreciation
XX
Cash
XX
XX
Cash
XX
Rent Revenue
XX
XX
xx
Depreciation Exp – Right
xx
Acc. Depreciation
xx
xx
Right to Use the asset ( Liability / Sales Price x Book Value of Asset)
Gain = Sales – Carrying Value of Asset
Rights Transferred to buyer = Sales Price - Liability
Gain to be recognized = Right Transferred to Buyer / Sales x

Gain
Sales Price Above Fair
a.
The seller –lessee shall make adjustment to measure the sale equal to the fair value, any excess shall be
deducted from the liability
b.
Cost of Right Use asset ( Deducted Liability / Fair Value x Book Value of Asset)
c.
Gain = Fair Value – Carrying Value of Asset
d.
Rights Transferred to buyer = fair Value - Deducted Liability
e.
Gain to be recognized = Right Transferred to Buyer / Fair Value
f.
Gain not to be recognized = liability / Fair Value x Gain
x
Gain
Seller - Lessee
Cash
Buyer- Lessor
XX
Right to use the asset XX
During Sales
AssetSold(BV)
XX
Lease Liability
XX
Equipment (FV)
XX
Financial Asset
XX
Cash
XX
(PV of lease payment)
Gain on Right Trans
Annual Rental
Interest Expense
XX
Lease Liability
XX
XX
Cash
Cash
XX
XX
Rent Revenue
XX
Financial Asset
XX
Interest income
Depreciation
Depreciation Exp – Right
Acc. Depreciation
xx
XX
Depreciation Exp – Right
xx
Acc. Depreciation
xx
xx
Rent Revenue = (Liability / liability + Financial Asset) x Payment Received
Financial Asset = (Financial Asset / liability + Financial Asset) x Payment minus
Interest = Financial Asset x Interest Rate

Sales Price below Fair
a.
The difference between Sales Price and Fair Value is prepayment of lease payments and is added to liability
b.
Fair Value is a new Sales to compute for the gain or loss
c.
Cost of Right Use asset ( Increased Liability / Fair Value x Book Value of Asset)
d.
Gain = Fair Value – Carrying Value of Asset
e.
Rights Transferred to buyer = fair Value - Increased Liability
f.
Gain to be recognized = Right Transferred to Buyer / Fair Value
g.
Gain not to be recognized = liability / Fair
Gain
x Gain
Seller - Lessee
Cash
Buyer- Lessor
XX
Equipment (FV)
Right to use the asset XX
During Sales
x
AssetSold(BV)
Cash
XX
XX
XX
Lease Liability
XX
(PV of lease Payment)
Gain on Right Trans
Interest Expense
XX
Annual Rental
Lease Liability
XX
Depreciation
Depreciation Exp – Right
XX
Cash
XX
Rent Revenue
Cash
XX
XX
xx
Acc. Depreciation
Depreciation Exp – Right
xx
xx
Acc. Depreciation
xx
 Sale Price at Fair with Loss
a.
Sales Price is below the Carrying Value
b.
Cost of Right Use asset ( Liability / Sale Price x Book Value of Asset)
c.
Loss = Sales Price – Carrying Value
d.
Rights Transferred to buyer = Sales - Liability
e.
Loss to be recognized = Right Transferred to Buyer / Sales
f.
Loss not to be recognized = liability / Fair
x
Loss
x Loss
Seller - Lessee
Cash
Buyer- Lessor
XX
Equipment (FV)
Right to use the asset XX
During Sales
Loss Transferred
Cash
XX
XX
XX
AssetSold(BV)
XX
Lease Liability
XX
(PV of lease Payment)
Annual Rental
Interest Expense
XX
Lease Liability
XX
Cash
Depreciation
Cash
XX
XX
Depreciation Exp – Right
Acc. Depreciation

XX
Rent Revenue
xx
Depreciation Exp – Right
xx
Acc. Depreciation
xx
xx
If Transfer of the Asset is NOT a Sale
a. The seller-lessee shall continue to recognized the transferred asset and shall recognized liability equal to
the transfer proceeds
b. The rental payments is equal to the interest and principal liability
c. The buyer – lessor shal recognized receivable for transferred assets
d. The rental received is part interest income and part payment of liability
Operating lease
On Janury 1, 2017, Alitagtag Company purchased a machine for P 3,000,000 cash for the purpose of leasing it. The
machine is expected to be used for 10 years and no residual value at the end of its life. On April 1, 2017 Alitagtag leased
the machine to an enterprise with an annual rental of P 600,000 payable annually every April 1. The lessee also paid a
lease bonus of P 120,000. Alitagtag also incurred P 300,000 cost during negotiation of the lease and has to pay an
annual repair cost of P 20,000.
20. Compute the Income from lease in 2017
a.
P 180,000
b. P 105,000
c. P 85,000
d. P 0
Revenue ( 600,000 x 9/12) + ( 120,000 / 3 x 9/12)
Depreciation (3,000,000 / 10)
=
P 480,000
( 300,000)
Initial Direct Cost ( 300,000 / 3 x 9/12)
Executory Cost
Net Income
(
(
75,000)
20,000)
85,000
Operating Lease - Unequal rental payments
On Janury 1, 2017, Agoncillo Company purchased a machine for P 3,000,000 cash for the purpose of leasing it. The
machine is expected to be used for 10 years and no residual value at the end of its life. On the same day Agoncillo
leased out the machine to an enterprise for 5 years with an initial rental of P 600,000 payable at the beginning of the
year. The successiding years will have a 10% increase based from the immediately preceeding year. To facilitate the
marketing of the lease, the first 6 months will be free.
21. The annual rental revenue
a.
P 300,000
b. P 600,000
c. P 878,460
d. P 672,612
( 600,000/2+ 660,000 + 726,000 + 798,600 + 878,460) = 3,363,060 / 5 = 672,612
22. The balance of Rent Receivable at the end of 2018
a.
P 385,224
b. P 300,000
c. P 330,000
d. P 363,000
(672,612 x 2 ) – ( 300,000 + 660,000) = 385,224
Direct Financing Lease – Annual Rental payments
On Janury 1, 2017, Tuy Company purchased a machine for P 1,267,960 cash for the purpose of leasing it. The machine
is expected to be used for 10 years and no residual value at the end of its life. If it wil be leased for 4 years so as to
give the lessor a fair rate of return on its investment of 10%,
23. how much will be the annual rent if paid every end of the year. Use up to 4 decimal places.
a.
P 316,990
b. P 400,000
c. P 363,640
P 1,267,960 / 3.1699 = P 400,000
d. P 509,865
Direct Financing Lease – With Initial Direct Cost
On Janury 1, 2017, Tuy Company purchased a machine for P 1,267,960 cash for the purpose of leasing it. The machine
is expected to be used for 4 years and no residual value at the end of its life. The annual rental payable at the end of
the year is P 400,000 to have an implicit rate of 10%. The Company also paid P 56,880 for negotiating the lease.
24. The new implicit rate after the company incurred the direct financing lease
a.
11%
b. P 10%
c. P 8%
d. P 8.5%
Rate will be going down, so trial and error: 8% - 3.3121 x 400,000 = 1,324,840 ( 1,267,960 + 56,880)
25. On December 31, 2018 balance sheet, the current and long term liability category of of Lease Receivable
a.P 400,000, P 400,000 b. P 342,937, P 370,356 c. P 342,937, P 400,000
d. P 370,356, P 400,000
400,000 – 57,063 = 342,937 ( Current)
400,000 – 29,644 = 370,356 ( Long Term)
Date
Receipts
January 1, 2017
December 31, 2017
400,000
December 31, 2018
400,000
December 31, 2019
400,000
December 31,2020
400,000
Interest
105,987
82,466
57,063
29,644
Principal
294,013
317,534
342,937
370,356
Balance
1,324,840
1,030,827
713,293
370,356
0
Direct Financing Lease – With Residual Value
On January 1, 2017, Marawoy Company purchased a machine for P 3,194,410 cash for the purpose of leasing it. The
machine is expected to be used and for rented out for 4 years and with residual value at the end of its life of P 500,000.
The implicit interest rate is 10%.
26. The annual rental if rental payment will be made every December 31.
a. P 850,000
b. P 900,000
c. P 800,000
d. P 950,000
Since the machine will revert back to the lessor, deduct Residual Value or else disregard
Cost
P 3,194,410
PV of Residual Value ( 500,000 x .683)
(341,500)
Net Investment recovered from rental
PV Factor annuity 10% for 4 years
Annual Rental
2,852,910
3.1699
P 900,000
27. Total interest income to be earned for the entire lease
a. P 905,590
b. P 705,590
c. P 505,590
d. P 1,105,590
Proceeds ( 900,000 x 4 ) + 500,000 = P 4,100,000
Cost
( 3,194,410)
Total Interest
905,590
28. If the fair value of the machine at the end of the lease term is P 400,000, the entry if residual value is
guaranted
Machinery
400,000
Cash
100,000
Lease Receivable
500,000
29. If the fair value of the machine at the end of the lease term is P 400,000, the entry if residual value is
unguaranted
Machinery
400,000
Loss on finance lease
100,000
Lease Receivable
500,000
Direct Financing Lease – Transfer of title Pass to the Lessee
On January 1, 2017, Dagatan Company purchased a machine for P 3,449,600 cash for the purpose of leasing it. The
machine is expected to be rented out for 5 years and with residual value at the end of its life of P 500,000. The implicit
interest rate is 8%. The annual rental is payable in advance on January 1 of each year and the title of the equipment will
be transferred to the lessee at the end of the lease term
30. The annual rental of the lease
a. P 800,000
b. P 700,000
c. P 600,000
d. P 500,000
P 3,449,600 / 4.312 = 800,000
Not to include residual value because it will not revert back to the lessor
31. The lease receivable as of December 31, 2018 classified as current
a. P 588,032
b. P 635,075
c. P 685,881
d. P 740,612
Date
January 1, 2017
December
December
December
December
Receipts
Interest
800,000
800,000
800,000
800,000
800,000
31, 2017
31, 2018
31, 2019
31,2020
Principal
211,968
164,925
114,119
59,388
588,032
635,075
685,881
740,612
Balance
3,449,600
2,649,600
2,061,568
1,426,493
740,612
0
Sales Type Lease
On January 1, 2017, Mabini Company purchased a machine for P 1,000,000 cash for the purpose of leasing it. The
machine is to be rented out for 5 years at an annual rent of P 400,000, payable every end of the year. The implicit
interest rate is 12%.
32. The Gross Profit or manufacturer’s profit of Mabini Company is
a. P 440,000
b. P 560,000
c. P 1,000,000 d. P 0
33. The total Interest to be earned during the lease term
a. P 440,000
b. P 560,000
Gross Investment
Net Investment
c. P 1,000,000 d. P 0
( 400,000 x 5 )
( 400,000 x 3.60)
Interest
Net Investment
Cost
P 2,000,000
1,440,000
560,000
( 400,000 x 3.60)
1,440,000
1,000,000
Manufacturers’ Profit
440,000
Sales Type Lease with Guaranteed Residual Value
On January 1, 2017, Mabini Company purchased a machine for P 2,000,000 cash for the purpose of leasing it. The
machine is to be rented out for 5 years, which is also its estimated useful life, at an annual rent of P 800,000, payable
every end of the year. The implicit interest rate is 10%. Mabini paid P 100,000 as initial direct cost, and will received
back the machine at the end of the lease term with an estimated guaranteed residual value of P 200,000. Mabini uses
perpertual inventory system for all its inventory.
34. The Lease receivable on January 1, 2017
a. P 4,000,000
b. P 3,800,000 c. P 4,200,000 d. P 3,400,000
( 800,000 x 5 ) + 200,000 = 4,200,000
35. Total Interest to be earned during the lease term
a. P 800,000
b. P843,180
c. P 1,243,180 d. P 1,043,180
(4,200,000 – 3,156,820) = 1,043,180
36. The Sales of Mabini in the sales type lease
a. P 3,156,820
b. 3,032,640 c. P 3,281,000 d. P 2,908,460
( 800,000 x 3.7908) + ( 200,000 x .6209 ) = 3,156,820
37. The cost of Goods Sold in the Sales type lease
a. P 2,100,000
b. P 2,000,000 c. P 1,900,000 d. P 2,200,000
( 2,000,000 + Initial Direct Cost of P 100,000) = P 2,100,000
38. The Manufacturer’s Profit
a. P 1,156,820
b. P 1,056,820 c. P 1,032,640 d. P 708,460
( 3,156,820 – 2,100,000) = 1,056,820
Sales Type Lease with Unguaranteed Residual Value
On January 1, 2017, Mabini Company purchased a machine for P 2,000,000 cash for the purpose of leasing it. The
machine is to be rented out for 5 years, which is also its estimated useful life, at an annual rent of P 800,000, payable
every end of the year. The implicit interest rate is 10%. Mabini paid P 100,000 as initial direct cost, and will received
back the machine at the end of the lease term with an estimated unguaranteed residual value of P 200,000. Mabini uses
perpertual inventory system for all its inventory.
39. The Lease receivable on January 1, 2017
a. P 4,000,000
b. P 3,800,000 c. P 4,200,000 d. P 3,400,000
( 800,000 x 5 ) + 200,000 = 4,200,000
40. Total Interest to be earned during the lease term
a. P 800,000
b. P843,180
c. P 1,243,180 d. P 1,043,180
(4,200,000 – 3,156,820) = 1,043,180
41. The Sales of Mabini in the sales type lease
a. P 3,156,820
b. 3,032,640 c. P 3,281,000 d. P 2,908,460
( 800,000 x 3.7908) = 3,032,640 ( Not to include unguaranteed residual value)
42. The cost of Goods Sold in the Sales type lease
a. P 2,100,000
b. P 2,000,000 c. P 1,900,000 d. P 1,975,820
( 2,000,000 – PV of Unguranted residual value , 124,180 + Initial Direct Cost of P 100,000) = P 1,975,820
43. The Manufacturer’s Profit
a. P 1,156,820
b. P 1,056,820 c. P 1,032,640 d. P 708,460
( 3,032,640 – 1,975,820) = 1,056,820
Sales type Lease with Purchase Option
On January 1, 2017, Ibaan Company purchased a machine for P 1,000,000 cash for the purpose of leasing it. The
machine is to be rented out for 4 years, while its estimated useful life is 5 years. The annual rental payable at the end of
the year is P 500,000. The implicit interest rate is 8%. Ibaan paid P 100,000 as initial direct cost. The lesse has the option
to purchase the machine at P 200,000. It is reasonable that the lessee can exercise the purchase option at the end of the
lease term.
44. The Lease receivable on January 1, 2017
a. P 2,000,000
b. P 1,800,000 c. P 2,200,000 d. P 2,400,000
( 500,000 x 4 ) + 200,000 = 2,200,000
45. Total Interest to be earned during the lease term
a. P 544,000
b. P 397,000 c. P 147,000
d. P 250,000
2,200,000 - (500,000 x 3.312)- ( 200,000 x .735) = 397,000
46. The Sales of Mabini in the sales type lease
a. P 1,656,000
b. P 1,803,000 c. P 735,000 d. P 921,000
( 500,000 x 3.312)+ ( 200,000 x .735) =1,803,000 ( Equal to PV of Lease Receivable)
47. The cost of Goods Sold in the Sales type lease
a. P 1,000,000
b. P 900,000 c. P 1,100,000 d. P 1,200,000
( 1,000,000+ Initial Direct Cost of P 100,000) = P 1,100,000
48. The Manufacturer’s Profit
( 1,803,000 – 1,100,000) = 703,000
49. Entry upon exercise of the option
Cash
200,000
Lease Receivable
200,000
50. Entry if the option is not exercised and if the machine has a fair value of P100,000
Loss on finance lease
100,000
Inventory
100,000
Lease Receivable
200,000
Sales and Leaseback – Sales at fair Value ( Short Period )
On January 1, 2017, Ibaan Company sold machine to MKahoy Company for P 2,000,000, which is equal to its fair value.
The machine has a remaining life of 10 years.The machine has a carrying amount of P 1,600,000, net of accumulated
depreciation of P 1,400,000. The machine is immediately leased by Ibaan for 1 year at a prevailing annual rental of P
300,000.
51. The asset to be recorded by Ibaan is
a. P 0
b. P 2,000,000 c. P 1,600,000 d. P 1,400,000
0 – This is accounted for as Operating lease since it is short period
52. The interest income to be recognized by Mkahoy is
a. P 400,000
b. P 200,000 c. P 0
d. P 300,000
0 – This is accounted for as Operating lease since it is short period
Sales and Leaseback – Sales at fair Value ( Finance Lease )
On January 1, 2017, Quilo-Quilo Company sold machine to MParang Company for P 6,000,000, which is equal to its fair
value. The machine has a remaining life of 10 years.The machine has a carrying amount of P 4,500,000, net of
accumulated depreciation of P 1,500,000. The machine is immediately leased by Quilo-Quilo for 4 years at a prevailing
annual rental of P 800,000, payable at the end of each year. The implicit interest rate is 10%. Use two decimal places.
53. The Initial amount of the liability
a. P 1,585,000
b. P 4,755,000 c. P 2,536,000 d. P 2,219,000
( 800,000 x 3.17) = 2,536,000
54. The Initial cost of the Right to Use of Asset
a. P 1,902,000
b. P 2,598,000 c. P 1,500,000 d. P 3,000,000
( 2,536,000 / 6,000,000) x 4,500,000 = P 1,902,000
55. The gain to be recognized on sale is
a. P 1,500,000
b. P 866,000 c. P 634,000
d. P 0
P 6,000,000 – 4,500,000 = 1,500,000 total gain
P 6,000,000 – 2,536,000 = P 3,464,000 Rights transferred to buyer seller
P 3,464,000 / 6,000,000 x 1,500,000 = 866,000
Sales and Leaseback – Sales at above fair Value ( Finance Lease )
On January 1, 2017, Lobo Company sold machine to Mburol Company for P 20,000,000. Its fair value is P 18,000,000. The
machine has a remaining life of 20 years.The machine has a cost amounting to P 40,500,000 and an accumulated
depreciation of P 30,500,000. The machine is immediately leased by Lobo for 5 years at a prevailing annual rental of P
1,500,000, payable at the end of each year. The implicit interest rate is 6%. Use three decimal places.
56. The lease liability of the seller – lessee
a. 7,500,000
b. P 6,318,000
c. P 10,000,000
d. P 0
P 1,500,000 x 4.212 = 6,318,000
57. The Initial value of the right to use asset
a. P 6,318,000
b. P 2,000,000 c. P 2,398,889 d. P 4,318,000
P 20,000,000 – 18,000,000 = P 2,000,000 excess of sales price over fair
P 6,318,000 – 2,000,000 = 4,318,000 Present Value related to lease liability
4,318,000 / 18,000,000 x 10,000,000 total gain = P 2,398,889
58. The gain on rights transferred by the seller- lessee
a. P 13,682,000 b. P 8,000,000 c. P 6,080,889 d. P 10,000,000
Fair Value P 18,000,000 – Rights by retained by seller – lessee 4,318,000 = 13,682,000 Transferred to buyer-lessor
Fair Value P 18,000,000 – Book Value 10,000,000 = 8,000,000 adjusted gain
13,682 / 18,000 x 8,000,000 adjusted gain =6,080,889 Gain to be recognized
Sales and Leaseback – Sale Price is below fair value
On January 1, 2017, MPulo Company sold machine to Mburol Company for P 5,000,000. Its fair value is P 5,500,000. The
machine has a remaining life of 8 years.The machine has a cost amounting to P 4,500,000 and an accumulated
depreciation of P 500,000. The machine is immediately leased by MParang for 5 years at a prevailing annual rental of P
900,000, payable at the end of each year. The implicit interest rate is 8%. Use three decimal places.
59. The lease liability of the seller – lessee
a. 4,500,000
b. P 3,593,700
c. P 4,093,700 d. P 3,093,700
P 900,000 x 3.993 = 3,593,700
60. The Initial value of the right to use asset
a. P 2,977,236
b. P 4,000,000 c. P 1,022,764 d. P 4,093,700
P 5,500,000 - 5,000,000 = P 500,000 excess of fair over sales price
P 3,593,700 +500,000 = 4,093,700 Total lease liability ( Right Retained by Seller Lessee)
4,093,700 / 5,500,000 x 4,000,000 total gain = P 2,977,236 Value of the Asset
61. The gain on rights transferred by the seller- lessee is
b. P 1,116,464
b. P 1,228,110 c. P 383,536
d. P 421,890
P 5,500,000 – 4,000,000 = 1,500,000 Total Gain
P 5,500,000 – 4,093,700 ( Right Retained by the Lessee) = 1,406,300 Rights Transferred to buyer – lessor
1,406,300 / 5,500,000 x 1,500,000 = 383,536
62. The annual depreciation Expense of the buyer – lessor
a. P 0
b. P 687,500 c. P 500,000
d. P 625,000
The buyer – lessor shall apply operating lease since the lease term is below 75% of the asset life
( P 5,000,000 / 8 ) =625,000
Sales Price at Fair Value with loss
On January 1, 2017, Lobo Company sold machine to Mburol Company for P 10,000,000. Its fair value is equal to its
selling price. The machine has a remaining life of 25 years.The machine had a cost amounting to P 40,500,000 and an
accumulated depreciation of P 28,500,000. The machine is immediately leased by Lobo for 3 years at a prevailing annual
rental of P 500,000, payable at the end of each year. The implicit interest rate is 8%. Use three decimal places.
63. The lease liability of the seller – lessee
b. 1,500,000
b. P 1,288,500
c. P 10,000,000 d. P 12,000,000
P 500,000 x 2.577 = 1,288,500
64. The Initial value of the right to use asset
b. P 2,977,236
b. P 1,546,200 c. P 1,022,764 d. P 2,093,700
1,288,500 / 10,000,000 x 12,000,000 = P 1,546,200 Value of the Asset
65. The loss on rights transferred by the seller- lessee is
c. P 1,116,464
b. P 1,228,110 c. P 1,742,300 d. P1, 421,890
Sales P 10,000,000 – Book Value 12,000,000 = 2,000,000 Total Loss
Fair ValueP 10,000,000 – 1,288,500 ( Right Retained by the Lessee) =
8,711,500 Rights Transferred to buyer – lessor
8,711,500 / 10,000,000 x 2,000,000 = 1,742,300
66. The annual depreciation Expense of the buyer – lessor
b. P 0
b. P 400,000 c. P 500,000
d. P 625,000
The buyer – lessor shall apply operating lease since the lease term is below 75% of the asset life
( P 10,000,000 / 25 ) =400,000
If the transfer of asset by the seller-lessee does not satisfy the requirement for sale:
a. The seller - lessee shall continue to recognized the transfer asset . Receiving money is a liability.
b. The buyer- lessor shall not recognize the transferred asset. Giving money is just like giving loan
ACCOUNTING FOR INCOME TAX
Due to the fact that tax regulations and accounting principles differ in many ways, taxable income and financial
income frequently differ. The following represent examples of events that can result in such differences: (a)
depreciation computed on a straight-line basis for financial reporting purposes and on an accelerated basis for tax
purposes, (b) income recognized on the accrual basis for financial reporting purposes and on the installment basis for
tax purposes, and (c) warranty costs recognized in the period incurred for financial reporting purposes and when they
are paid for tax purposes.
Accounting Income ( Income Before Tax in the Income Statement)
XX
Permanent Differences:
NonTaxable Revenue
(XX)
Non Deductible Expenses
XX
Income Subject to Tax
Temporary Difference
XX
s:
Deferred Tax Asset
Taxable Temporary Difference
XX
Non-Deductible Temporary Difference
XX
Deferred Tax Liability
Deductible Temporary Difference
(XX)
Non-Taxable Temporary Difference
(XX)
Taxable Income this period ( Amount in the Income Tax Return)
XX
Income Subject to Tax multiply by Tax Rate = Income Tax Expense
Taxable Income this period multiply by Tax Rate = Income Tax payable
Items considered Permanent Difference s:
a. Interest Income on Deposits
b. Dividend Received
c.
Life Insuranace Premium paid where entity is benefeciary
d. Tax penalties, surcharges and fines
Temporary Difference arise:
a.
Items of Income and Expenses included both in accounting and taxable income but of different time period
( timing difference)
b.
Difference in carrying value of asset or liability and the tax base
c.
Accounting Income is based in accrual while Taxable Income is on a cash basis
Financial Statement Valuation
Deferred Tax Asset
Deferred Tax Liability
Recorded Accounting Income
Lower
Higher
Carrying Value of Asset
Lower
Higher
Carrying Amount of Liability
Higher
Lower
Upward Revaluation of Asset
Lower
Higher
Undistributed Income in Subsidiary
Lower
Higher
Exemptions when Deferred Tax liability is not recognized :
a. Goodwill resulting from business combination
b. Initial recognition of asset and liabilities that affects neither accounting and tax inxome
c. Undistibuted Profit of subsidiary, associate or joint venture when the parent, investor, venturer is able to control
the timing of the reversal of the temporary difference.
Accounting for Operation Loss Carryover
An operating loss carryover is an excess of tax deductions over gross income that may be carried forward to
reduce taxable income in a future year.
Tax Rate Used in Computing Deferred tax
When recording deferred income taxes consideration must be given to the tax rate in effect when the timing
differences reverse.
Statement of Financial Position Presentation
Deferred income taxes are reported on the statement of financial position as non-current assets and liabilities. While
deferred tax assets and deferred tax liabilities are separately recognized and measured, they may be offset in the
statement of financial position. The net deferred tax asset or net deferred tax liability is reported in the noncurrent section of the statement of financial position.
Income Statement Presentation
Income tax expense (or benefit) should be allocated to continuing operations, discontinued operations, other comprehensive
income, and prior period adjustments. This approach is referred to as intraperiod tax allocation.
A. Constant Company reported the following year-end balances for 2017 as follows:
Income before tax
P 6,000,000
Penalty for Environmental Default
500,000
Interest income on Deposit
300,000
Bad Debts
200,000
Estimated Warranty Expense , P 200,000 currently paid
600,000
Depreciation computed per book
600,000
Depreciation computed per Return
800,000
Profit on Installment Sales, 20% collected this period
125,000
Income Tax rate
30%
1. The Income Tax Expense for 2017
a. P 1,950,000
b. P 1,860,000 c. P 2,040,000 d. P 1,770,000
2. The Deferred Income Tax Asset
a. P 180,000
b. P 90,000
c. P 60,000
d.P 0
3. The Deferred Tax Liability
a. P 180,000
b. P 90,000
c. P 60,000
d.P 0
4. The Net Income for 2017
a. P 4,140,000
b. P 4,340,000 c. P 6,200,000 d. P 6,500,000
5. The net tax expense or benefit
a. P (90,000)
b. P 90,000
c. P 180,000
d. P (180,000)
Income before Tax
Penalty
Interest Income on Deposit
Income Subject to Tax
Deductible Temporary Difference:
Bad Debts
Warranty Expense Not paid
Taxable Temporary Difference
Understated book depreciation
Profit on Uncollected Installment
Taxable Income
P 6,000,000
500,000
( 300,000)
6,200,000
200,000
400,000
(200,000)
(100,000)
6,500,000
B. Caring Company reported the following information with regards to their books of account:
2017
2018
2019
2020
Income before Tax
2,000,000
3,000,000
4,000,000
5,000,000
Bad Debts recognized
100,000
Accounts considered worthless
100,000
Unearned Rent Income in 2017, recognized in
40,000
40,000
40,000
Warranty expense in 2017, paid in
20,000
80,000
200,000
Income Tax Rate
30%
30%
35%
35%
6. The Income Tax Expense for 2017
b. P 630,000
b. P 600,000
c. P 666,000
d. P 702,000
7. The Deferred Income Tax Asset, end of 2018
b. P 0
b. P 42,000
c. P 126,000
d.P 84,000
8. The Deferred Tax Liability end of 2019
b. P 72,000
b. P 84,000
c. P 126,000
d.P 0
9. The Net Income for 2019
b. P 2,800,000
b. P 4,000,000 c. P 3,880,000 d. P 4,120,000
10. The net tax expense or benefit end of 2020
b. P (84,000)
b. P 0
c. P 84,000
d. P (72,000)
Income before Tax
Bad Debts recognized
Accounts considered worthless
Unearned Rent Income in 2017, recognized in
Warranty expense in 2017, paid in
Taxable Income
2017 2018 2019
2020
2,000,000
3,000,000
4,000,000
100,000
(100,000)
120,000
(40,000)
(40,000)
120,000
(20,000)
(80,000)
2,340,000
2,840,000
3,880,000
5,000,000
(40,000)
(200,000)
4,760,000
C. Chances Company has the following transactions in 2017
a. Incurred development costs on computer software at the beginning of the year, P 5,000,000, to be
amortized on a straight line basis for 5 years
b. Acquired Equipment at the beginning of the year for P 50,000,000 and depreciated by straight line
method for 20 and 10 years for accounting and tax purposes, respectively
c. A health card provider was entered for 35 employees at initially no cost, but each employee can avail
of medical services up to P 5,000 each year and the company will just pay the provider for the actual
services subject to the limit. The entity accrue for the estimated medical cost equivalent to 60% of the
limit, however an average of 50% of the maximum limit was availked by the employees. No adjustments
were made in each year.
d. Income Tax Rate is 30%
11. The Deferred Income Tax Asset, end of 2018
a. P 10,500
b. P 5,250
c. P 15,750
d.P 21,000
12. The Deferred Tax Liability end of 2019
a. P 1,950,000
b. P 2,850,000 c. P 2,400,000 d.P 0
13. The net tax (liability) or asset end of 2020
a. P (2,834,250)
b. P( 3,279,000)
c. P 2,834,250 d. P 3,279,000
14. Deferred Income Tax Asset end of 2017 that will be reported as current item.
a. P 5,250
b. P 10,500
c. 15,750
d. P 0
15. Deferred Tax liability at the end of 2018, classified as current liability.
a. P 2,400,000
b. P1,950,000 c. P 450,000
d. P 0
Development costs
Depreciation
Health Card Expense
2017
2018
1,000,000 1,000,000
1,000,000 1,000,000
2,500,000 2,500,000
105,0000
105,000
Development Costs
Depreciation
Health Card
5,000,000
5,000,000
87,500
2017
Development costs
Depreciation
Deferred Tax liability
Health Card
Defeered Tax Asset
2019
2020
1,000,000 1,000,000
1,000,000 1,000,000
2,500,000 2,500,000
105,000
105,000
-
5,000,000
87,500
2018
5,000,000
87,500
2019
2021
1,000,000
1,000,000
2,500,000
105,000
5,000,000 5,000,000
87,500
87,500
2020
-
2021
(4,000,000) 1,000,000
1,000,000 1,000,000
1,000,000
( 2,500,000) (2,500,000) (2,500,000) (2,500,000) (2,500,000)
(6,500,000) (1,500,000) (1,500,000) (1,500,000) (1,500,000)
1,950,000
450,000
450,000
450,000
450,000
17,500
5,250
17,500
5,250
17,500
5,250
17,500
5,250
17,500
5,250
D. Amazing Company purchased an equipment for P 6,000,000, depreciated under a straight line method based
on a 15 year life on January 1, 2012. Five years after, the equipment was revalued at P 4,500,000 fair value.
16. The net revaluation surplus at the date of revaluation
a. P 500,000 b. P 350,000
c. P 150,000
d. P 0
17. The annual depreciation subsequent to revaluation
a. P 400,000 b. P 450,000
c. P 50,000
d. P 0
18. Revaluation Surplus at the end of 2017
a. P 500,000 b. P 450,000
c. P 350,000
d. P 315,000
19. If income before depreciation and tax is P 3,000,000,how much is the income tax payable
a. P
765,000
b. P 780,000
c. P 900,000
d. P 0
20. The balance of deferred tax liability as of December 31, 2017
P 135,000
b. P 150,000
c. P 165,000
``
D. P 0