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Acctg 11 Finals Q2 and Q3 Answerkey
accountancy (Mindanao State University – General Santos City)
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Chapter 6
Financial Assets
QUIZ
1. It is a report that is prepared for the purpose of bringing the balances of cash per records and per bank statement
into agreement.
a. bank reconciliation statement
b. bank statement
c. bank balance report
d. all of these
2. If the unadjusted balance of cash per bank statement is greater than the adjusted balance and there no other
reconciling items or errors, the difference would most certainly be caused by a
a. Credit memo
c. Deposits in transit
b. Debit memo
d. Outstanding checks
3. Which of the following does not qualify as cash equivalent for a government entity?
a. Money market placement with an original term of 1 year but matures within 3 months after the reporting
date.
b. Money market placement with an original term of 3 months.
c. Temporary investments in stocks that are expected to be sold within 1 month after the reporting date.
d. All of these qualify as cash equivalents.
4. Entity A estimates a risk of loss on a recognized asset at 20%. However, Entity A can only accept a risk of 5%.
Entity A then enters into a forward contract to offset the excess risk of 15%. This process is best described as
a. Risk management
b. Forward hedging
c. Hedge accounting
d. Process risk hedge
5. Which of the following may not be included as part of cash in the note disclosures?
a. Post-dated checks drawn
b. Unreplenished petty cash fund consisting of only the coins and currencies held as at the reporting date
c. Issued checks that were cancelled because they became stale
d. Treasury bills acquired 3 months before maturity date
6. The entry to record a disbursement from the petty cash fund is
a.
b.
c.
d.
Expense accounts
Cash-Modified Disbursement System
(MDS), Regular
Expense accounts
Petty Cash
Expense accounts
Cash-Collecting Officers
Expense accounts
Cash-Treasury/Agency Deposit, Regular
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xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
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e.
None of these.
7. According to the GAM for NGAs, government entities shall prepare bank reconciliations
a. on a daily basis
b. on a monthly basis
c. only at year-end
d. only as needed
8. Which of the following statements is incorrect regarding the accounting for unreleased checks by a government
entity?
a. Unreleased checks are reverted back to cash.
b. Unreleased checks are physically cancelled.
c. The accounting procedures for unreleased checks prescribed under the GAM for NGAs apply only to
commercial checks.
d. At the start of the year, a reversing entry is made for the unreleased checks in the previous year.
9. All of the following may cause the cancellation of a check drawn by a government entity except
a. The check becomes stale.
b. Wrong spelling or unnecessary markings on the check.
c. The check is dishonored.
d. The check is prepared using a pen with red ink.
10. It is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm
commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a
particular risk and could affect surplus or deficit.
a. Fair value hedge
b. Hedge of a recognized asset or liability
c. Cash flow hedge
d. Hedge of a net investment in a foreign operation
#2
Solution:
Per bank, end.
100
Add: DIT
Less: OC
(20)
Adjusted balance
80
Chapter 7
Inventories
QUIZ
1. For government entities, inventories are assets (choose the incorrect one)
a. Held for sale, consumption, distribution, or exchange.
b. In the process of production for sale, consumption, distribution or exchange.
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c. In the form of materials or supplies to be consumed in the production process or in the rendering of services.
d. Used in the production of goods.
D – PPE, e.g., factory equipment used in the production of goods.
2. Entity A, a government entity, purchases office supplies. Entity A would most likely record the purchase
a. by debiting the Purchases account
b. as Inventory Held for Consumption
c. as Inventory Held for Distribution
d. by debiting the Office Supplies Expense account
3. Who owns the goods in transit under FOB shipping point?
a. buyer
b. seller
c. either a or b
d. none
4. Which of the following documents is prepared when issuing semi-expendable property to end-users?
a. Requisition and Issue Slip (RIS)
b. Inventory Custodian Slip
c. Supplies Ledger Card (SLC)
d. Waste Materials Report
5. The carrying amount of inventory is not recognized as expense in this type of event or transaction.
a. The inventory is sold.
b. The inventory is used in the production of another asset.
c. The inventory is consumed by end users in providing service.
d. The inventory is written-off.
6. Which of the following is subsequently measured at the lower of cost and current replacement cost?
a. Inventories held for sale
b. Inventories held for distribution
c. Inventories that are undergoing manufacturing process for completion as finished goods for sale.
d. None of these.
7. The supply or property office of a government entity uses this to record and monitor the movements and balances
of inventories.
a. Stock Card
b. Inventory Listing
c. Stock Ledger Card
d. Registry of Inventory
8. The following information is available from Entity A’s (a government entity) accounting records:
Purchases ............................................
₱530,000
Purchase discounts ...................................
10,000
Beginning inventory ..................................
160,000
Ending inventory .....................................
215,000
Freight-out ..........................................
40,000
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Entity A’s cost of sales is
a. 465,000
b. 475,000
c. 505,000
d. 585,000
A
Solution:
beg.
Purchases
Inventory
160,000
10,000
530,000 465,000
215,000
Purchase Disc.
COGS (squeeze)
end.
9. Entity A, a government entity and a manufacturer of military equipment, had inventories at the beginning and
end of its current year as follows:
Beginning
End
Raw materials
11,000
15,000
Work in process
20,000
24,000
Finished goods
12,500
9,000
During the year, the following costs and expenses were incurred:
Raw materials purchased
Direct labor cost
Indirect factory labor
Taxes and depreciation on factory building
Taxes and depreciation on sales room and office
Sales salaries
Office salaries
Utilities (60% applicable to factory, 20% to sales room, and 20% to office)
150,000
60,000
30,000
10,000
7,500
20,000
12,000
25,000
Entity A's cost of sales for the year is
a. 257,000
b. 260,500
c. 261,000
d. 269,500
B
Solution:
beg.
Purchases
Raw materials
11,000
150,000 146,000
15,000
beg.
Direct materials
Direct labor
Factory overhead:
Indirect factory labor
Taxes and depn. - factory bldg.
Utilities (60% x 25,000)
DM
end.
WIP
20,000
146,000
60,000
30,000
10,000
15,000
257,000
24,000
COGM
end.
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beg.
COGM
Finished goods
12,500
257,000 260,500
9,000
COGS
end.
10. Entity A, a government entity, is a wholesaler of Product A, a non-unique good. The activity for Product A during
July is shown below:
Balance/
Date
Transaction
Units
Cost
July 1
Inventory
2,000
₱36.00
7
Purchase
3,000
37.00
12
Sales
3,600
21
Purchase
5,000
37.88
22
Sales
3,800
29
Purchase
1,600
38.11
How much is the ending inventory on July 31?
a. 153,400
b. 156,912
c. 158,736
d. Answer cannot be determined due to insufficient information
C
Solution:
Date
Transaction
1-Jul Inventory
7 Purchase
Total
12 Sales
21 Purchase
Total
22 Sales
29 Purchase
Ending inventory
Units
2,000
3,000
5,000
(3,600)
5,000
6,400
(3,800)
1,600
4,200
Cost
36.00
37.00
36.60
36.60
37.88
37.60
37.60
38.11
Total cost
72,000
111,000
183,000
(131,760)
189,400
240,640
(142,880)
60,976
158,736
Chapter 8
Agriculture
QUIZ
1. Which of the following is most likely an acceptable measurement for agricultural produce
Initial measurement
Subsequent measurement
a. fair value less costs to sell
cost
b. fair value less costs to sell
lower of cost and NRV
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c. fair value
lower of cost and FV less costs to sell
d. fair value less costs to sell
fair value less costs to sell
2. Biological assets and agricultural produce are recognized when all of the following are present except
a. control
b. probable future economic benefits
c. probable future event
d. fair value or cost can be measured reliably
3. Which of the following statements is incorrect regarding the accounting for biological assets?
a. Agricultural land used in growing agricultural produce can never qualify for recognition as biological asset.
b. Biological asset is living animal or plant.
c. Agricultural produce is harvested product from a biological asset before any processing.
d. PAS 41 and the GAM for NGAs have the same accounting treatment for consumable and bearer plants.
D – Under PAS 41, bearer plants are classified as PPE.
Use the following information for the next two questions:
On January 1, 20x1, the biological assets of Entity A consist of two 1-year old animals with fair value less costs to sell
of ₱1,000 each.
The following transactions occurred during the period:
a. On July 1, 20x1, two 1-year old animals are acquired for ₱1,100 each, equal to the FVLCS on this date.
b. On October 1, 20x1, two animals are born. The FVLCS of a newborn on this date is ₱500.
The FVLCS on December 31, 20x1 are as follows:
Age
new born
3 mos. old
1 yr. old
1.5 yr. old
2 yrs. old
FVLCS
₱600
₱800
₱1,200
₱1,500
₱2,000
4. How much is change in FVLCS due to price change?
a. 400
b. 1,200
c. 800
d. 3,600
Solution:
Formula:
(FVLCS, end. Age beg.) - (FVLCS, beg. Age beg.) x Qty.
Asset Group
From beg. (1 yr.; 1 yr.)
Purchased on July 1 (1 yr.; 1 yr.)
Born on Oct. 1 (0; 0)
(₱1,200 - ₱1,000) x 2
(₱1,200 - ₱1,100) x 2
(₱600 - ₱500) x 2
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Change in FVLCS
400
200
200
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Change in FVLCS due to Price Change
800
5. How much is change in FVLCS due to physical change?
a. 1,200
b. 2,000
c. 800
d. 3,600
Solution:
Formula:
(FVLCS, end. Age end.) - (FVLCS, end. Age beg.) x Qty.
+ FVLCS of newborn at date of birth
Asset Group
From beg. (2yrs.; 1yr.)
Purchased on July 1 (1.5yrs.; 1yr.)
Born on Dec. 31 (3 mos.; 0 yr.)
FVLCS of new born on Dec. 31 (₱500 x 2)
Change in FVLCS due to Physical Change
(₱2,000 - ₱1,200) x 2
(₱1,500 - ₱1,200) x 2
(₱800 - ₱600) x 2
Change in FVLCS
1,600
600
400
1,000
3,600
6. Which of the following is considered a biological asset?
a. Carcass
b. Ham
c. Pig
d. Piggy bank
7. Which of the following is considered an agricultural produce?
a. eggs to be hatched into chicks
b. condensed milk
c. dairy cow
d. felled trees
8. Which of the following is considered an inventory rather than agricultural produce at the point of harvest?
a. Harvested cotton
b. Harvested cane
c. Tea
d. Picked leaves
9. Which of the following is considered an agricultural activity under PAS 41?
a. fishing in the open seas
b. illegal logging
c. floriculture
d. farming in the computer or cellphone
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10. Which of the following is considered a bearer plant?
a. Palm oil
b. Corn oil
c. Baby oil
d. Oil palm
Chapter 9
Investment Property
QUIZ
1. Which of the following qualifies for classification as an investment property?
a. Property that is currently being developed for future use as investment property
b. Investment property that is currently being developed for future use as owner-occupied property
c. Property that is leased out to another entity under a finance lease
d. Building being rented from another entity under an operating lease and leased out under various operating
leases.
2. Select the correct statement.
a. A leasing company should treat all assets used in providing lease services as investment property.
b. Investment properties that are to be disposed of without further development are treated as investment
property until they are derecognized.
c. All investment properties held for capital appreciation will be classified as held for sale in the long run.
d. Investment properties being redeveloped as investment properties on behalf of third parties are investment
properties.
3. Select the incorrect statement regarding impairments of investment properties.
a. Investment properties are subject to impairment.
b. Impairments of investment properties of government entities are recognized in surplus or deficit.
c. Compensation from third parties for investment property that was impaired or lost shall be recognized in
surplus or deficit when the compensation becomes receivable and not offset with the amount of loss.
d. Impairment losses on investment properties measured under the cost model are never reversed.
4. Derecognition of investment property is not required when
a. it becomes the subject of an operating lease.
b. it is sold.
c. the property is assessed to have no future economic benefits.
d. it becomes the subject of a finance lease.
5. Which of the following assets may be classified as investment property?
a. Land held for long-term capital appreciation
b. Equipment held for lease
c. Intangible asset held for lease
d. Building held for lease
e. a and d only
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6. Which of the following properties falls under the definition of investment property?
I.
Land held for long-term capital appreciation
II.
Property occupied by an employee paying market rent
III.
Property being constructed on behalf of third parties
IV.
A building owned by an entity and leased out under an operating lease
a. I, II
b. II, IV
c. I, IV
d. II, III, IV
7. Which of the following measurement bases is acceptable for the subsequent measurement of an investment
property held by a government entity?
a. fair value
b. fair value less costs to sell
c. cost less accumulated impairment losses
d. none, all of these are unacceptable.
C – Land that is classified as investment property is subsequently measured at cost less accumulated impairment
losses.
8. The distinguishing characteristic that identifies an investment property from the other assets of an entity is?
a. Changes in fair value of the asset is recognized in surplus or deficit.
b. The property does not derive cash flows separate from the other assets of the entity.
c. Generates separately identifiable cash flows from the other assets of the entity.
d. Earns rental as part of the ordinary operations of the entity.
9. Which of the following statements is correct regarding investment property?
a. An entity may classify assets other than land and/or building as investment property.
b. During the period, Entity A, a government entity, reclassifies a building that was previously used as office
space to investment property. Entity A will recognize a gain if the fair value of the asset exceeds its carrying
amount on the date of transfer.
c. When a government entity applies the fair value model to account for its investment properties subsequent
to initial recognition, changes in fair values are recognized in surplus or deficit rather than a direct adjustment
to equity.
d. Transfers to or from investment property shall be made when, and only when, there is a change in use.
10. Under this model, investment properties are measured at cost less accumulated depreciation and accumulated
impairment losses.
a. Impairment loss model
b. Cost model
c. Fair value model
d. Gorgeous model
Chapter 10
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Property, Plant and Equipment
QUIZ
1. All of the following are directly attributable costs in the acquisition or construction of an item of PPE except
a. Costs of employee benefits arising directly from the construction or acquisition of PPE
b. Costs of site preparation
c. Broker’s commission
d. Cost of staff training
2. All of the following are expensed outright and do not form part of the cost of an item of PPE except
a. Installation and assembly costs after the asset is in the location and condition intended by management.
b. Professional fees incurred in the training of staff who will be operating the machinery acquired.
c. Administration and other general overhead costs.
d. Insurance costs while a purchased equipment is in-transit.
3. Which of the following is included in the initial cost of an item of PPE?
a. Trade discounts
b. Cash discounts not taken
c. Present value of the estimates of decommissioning and restoration costs
d. Refundable purchase taxes
4. According to the GAM for NGAs, the costs incurred during the construction of an asset are
a. expensed in the period incurred.
b. capitalized in the building account or other account.
c. capitalized in a construction in progress account.
d. initially recorded in the registries and recorded in the journals only when the construction is complete and
the asset is turned over and accepted by the government entity.
5. Government entities recognize depreciation
a. on a weekly basis.
b. on a monthly basis.
c. only at year-end.
d. any of these as a matter of accounting policy choice.
Use the following information for the next two questions:
Entity A exchanged equipment with Entity B. Pertinent data are shown below:
Entity A
Entity B
Carrying amount
85,000
130,000
Fair value
95,000
115,000
Cash paid by Entity A to Entity B
15,000
6. If the exchange has commercial substance, how much is the initial measurement of the equipment received by
Entity B?
a. 95,000
b. 115,000
c. 100,000
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d. 130,000
(115,000 - 15,000) = 100,000
7. If the exchange has commercial substance, how much is the gain (loss) recognized by Entity B in the exchange?
a. 10,000
b. (15,000)
c. (10,000)
d. 15,000
115,000 fair value of asset given up – 130,000 carrying amount = (15,000) loss
8. Entity A, a government entity, acquires an equipment on December 16, 20x1. Which of the following is correct?
a. The equipment will not be depreciated in the current year.
b. The equipment will be assigned a residual value of 15%.
c. The equipment will be classified as inventory if it has a cost of less than ₱25,000.
d. The equipment will only be depreciated for 2 weeks in the current year.
Use the following information for the next two questions:
At year-end, Entity A determines an indication that an equipment with a carrying amount of ₱400,000 is impaired.
This equipment was acquired 5 years earlier and was originally estimated to have a useful life of 10 years and a 5%
residual value. Entity A determines the following information:
Fair value less costs to sell…………….₱320,000
Replacement cost……………………….₱700,000
9. Assume the indication of impairment is physical damage to the equipment. Entity A estimates that it would cost
₱10,000 to restore the equipment’s service potential to the level before the physical damage. How much is the
impairment loss under the Restoration Cost Approach?
a. 42,667
c. 50,000
b. 47,500
d. 42,500
Solution:
Replacement cost
Accumulated depreciation - (700K x 95% x 5/10)
Depreciated Replacement Cost – Value in use
700,000
(332,500)
367,500
Depreciated replacement cost
Less: Restoration cost
Value in use
367,500
(10,000)
357,500
Recoverable service amount (VIU - higher)
Carrying amount
Impairment loss
357,500
(400,000)
(42,500)
10. Assume the indication of impairment is a significant decline in the expected output of the equipment, which
Entity A estimates to be 10%. How much is the impairment loss under the Service Units Approach?
a. 62,667
c. 50,000
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b. 62,500
d. 69,250
Depreciated replacement cost (see solution above)
Multiply by:
Value in use
367,500
90%
330,750
Recoverable service amount (VIU - higher)
Carrying amount
Impairment loss
330,750
(400,000)
(69,250)
Chapter 11
Intangible Assets
QUIZ
1. According to the GAM for NGAs, to qualify as intangible asset, an item must possess all of the following elements
except
a. Identifiability
b. Held for distribution
c. Control over a resource
d. Existence of future economic benefits or service potential
2. According to the GAM for NGAs, an intangible asset is identifiable when it
a. is separable, i.e., capable of being separated and divided from the entity and sold, transferred, licensed, rented,
or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless
of whether the entity intends to do so.
b. arises from binding arrangements including contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights and obligations.
c. a or b
d. a and b
3. An active market is a market in which all the following conditions exist, except
a. the items traded in the market are homogeneous
b. willing buyers and sellers can normally be found at any time
c. prices are available to the public
d. the price is most advantageous
4. It is the systematic allocation of the depreciable amount of an intangible asset over its useful life.
a. Cost allocation concept
b. Impairment
c. Depreciation
d. Amortization
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5. It refers to the application of research findings or other knowledge to a plan or design for the production of new
or substantially improved materials, devices, products, processes, systems, or services before the start of
commercial production or use.
a. Research
b. Development
c. R & D activities
d. Internal generation
6. A government entity acquires an intangible asset with finite useful life for ₱100. Assuming the entity uses the
maximum amortization period and the estimate of residual value allowed under the GAM for NGAs, the
appropriate annual amortization expense on the intangible asset is
a. ₱10
b. ₱9.5
c. ₱50
d. none of these
A (100 ÷ 10 yrs.) = 10
7. A government entity acquires an intangible asset with finite useful life for ₱100,000 on October 20, 20x1. The
intangible asset is estimated to have a useful life of 5 years. The accumulated amortization on December 31, 20x1
is
a. 3,333
b. 5,000
c. 20,000
d. 0
A (100,000 x 2 mos. /60 mos.) = 3,333
8. Goodwill is considered an unidentifiable asset because
a. it cannot be sold separately and therefore not separable.
b. it does not arise from contractual rights.
c. it has physical substance.
d. a and b
9. At the beginning of Year 1, a government entity acquires an intangible asset for ₱100,000. The intangible asset has
a useful life of 10 years. At the end of Year 3, the entity determines an indication of impairment and makes the
following estimates:
Fair value less costs to sell
60,000
Value in use
50,000
How much is the impairment loss?
a. 10,000
b. 20,000
c. 30,000
d. 0
A (100,000 x 7/10) – 60,000 = 10,000
10. Use the information in #9 above. At the end of Year 6, Entity A determines an indication that the previous impairment
may no longer exist and makes the following estimates:
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Fair value less costs to sell
Value in use
42,000
45,000
How much is the gain on the reversal impairment loss?
a. 10,714
b. 8,714
c. 5,714
d. 0
Recoverable amount (VIU – higher): 45,000
CA had no I.L. been recognized in previous period:
(100,000 x 4/10) = 40,000
CA after the I.L: (60,000 x 4/7) 34,286
Gain on reversal of I.L. = (40,000 – 34,286) = 5,714
Chapter 12
Liabilities
QUIZ
1. A financial liability may arise from which of the following obligating events?
a. Legal obligation
b. Constructive obligation
c. a or b
d. neither a nor b
A – financial liabilities arise from contractual obligations and contractual obligations are considered legal obligations.
2. Legal obligation may arise from which of the following?
a. Law
b. Contract
c. Quasi-contract
d. Quasi-delict
e. All of these
3. A legal obligation to restructure exists if, at the reporting date,
a. the entity has entered into a binding agreement to sell or transfer an operation.
b. the entity has a detailed formal plan for a restructuring.
c. the plan to restructure is announced to those affected by it.
d. b and c
4. On January 1, 20x1, the BTr issues a 5-year, 6%, ₱2,000,000 bonds for ₱1,900,000. Transaction costs on the issuance
(bond issue costs) amount to ₱59,708. Interest payments are due every December 31 but the principal is due only
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at maturity date. The bonds are subsequently measured at amortized cost. How much is the total interest expense
over the term of the bonds?
a. 659,708
b. 759,708
c. 789,709
d. Are you kidding me? There is no way anybody can answer this problem! 
B – Concept: Total interest expense over the term of the bonds equals total interest payments plus the amount of
discount on initial recognition (or minus the amount of premium on initial recognition) plus transaction costs on the
issuance.
Discount (2M - 1.9M)
100,000
Transaction costs
59,708
Interest payments (2M x 6% x 5 yrs.)
600,000
Total interest expense
759,708
5. Entity A issues 5-year bonds at a premium. At the beginning of the 3rd year, Entity A retires the bonds equal to
face amount. Which of the following statements is correct?
a. Entity A recognizes a gain on the retirement.
b. Entity A recognizes a loss on the retirement.
c. Entity A recognizes neither a gain nor a loss on the retirement.
d. Answer cannot be determined due to insufficient data.
6. If plotted on a graph, the periodic interest expenses recognized on bonds issued at a discount will show a: (X axis
– time; Y axis - ₱)
a. straight line
b. downward line sloping to the right
c. upward line sloping to the right
d. curvilinear line sloping here and there
7. A provision may be recognized on all of the following except
a. future operating net deficit
b. onerous contract
c. restructuring
d. a provision may be recognized on all of these items
8. It is a program that is planned and controlled by management, and materially changes either the scope of an
entity’s activities or the manner in which those activities are carried out.
a. Operating segment
b. Discontinued operations
c. Restructuring
d. Responsibility center
9. Transaction costs incurred in issuing financial liabilities are
a. expensed outright
b. capitalized as assets and amortized using the effective interest method
c. deducted from the carrying amount of the financial liability
d. added to the carrying amount of the financial liability
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10. Interest expense on financial liabilities are recognized using the
a. amortized cost
b. effective interest method
c. straight line method
d. any of these
Chapter 13
Leases
QUIZ
1. Which of the following will lead to finance lease classification?
a. Transfer of ownership
b. Bargain purchase option
c. Lease term is at least 75% of the leased asset’s useful life
d. Present value of minimum lease payments is at least 90% of the fair value of the leased asset
e. any of these
2. A lessee under a finance lease recognizes the leased asset and the corresponding finance lease liability at the
a. Fair value of leased property
b. Present value of minimum lease payments
c. lower of a and b
d. higher of a and b
3. Minimum lease payments (MLP) exclude which of the following?
a. Rentals
b. Bargain purchase option
c. Executory costs and contingent rents
d. Guaranteed residual value
4. The discount rate used in accounting for finance leases is the (assume all of the following are determinable)
a. interest rate implicit in the lease
b. lessee’s incremental borrowing rate of interest
c. lease contract stated interest rate
d. interest rate on government bonds
5. Initial direct costs incurred on leases are
a. expensed immediately.
b. capitalized.
c. generally expensed immediately except those incurred by lessors under sales type leases which are
capitalized.
d. generally capitalized except those incurred by lessors under sales type leases which are expensed
immediately.
6. When the lease qualifies as a finance lease under the “major part of the economic life” criterion, the leased asset
is depreciated
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a.
b.
c.
d.
over its useful life
over the lease term
over the shorter of a and b
not depreciated
7. A lessor’s gross investment in a finance lease is computed as
a. minimum lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)
8. A lessor’s net investment in a finance lease is computed as
a. minimum lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)
9. A lessor’s unearned interest income in a finance lease is computed as
a. minimum lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)
10. An office equipment representative has a machine for sale or lease. If you buy the machine, the cost is ₱7,596. If
you lease the machine, you will have to sign a non-cancelable lease and make 5 payments of ₱2,000 each. At the
time of the last payment you will receive title to the machine. The first payment will be made on the first day of
the lease. The interest rate implicit in this lease is approximately
a. 10%
b. 12%
c. Between 10% and 12%
d. 16%
#10. D
Solution:
PV = Cash flows x PV factor
7,596 = 2,000 x PV annuity due @ x%, n=5
First trial @ 12%:
(2,000 x PV annuity due @ 12%, n=5) = 7,596
(2,000 x 4.0373) = 7,596
8,075 is not equal to 7,596
We need a lower amount. Therefore, we will increase the rate. Let us try 16%.
Second trial @ 16%:
(2,000 x PV annuity due @ 16%, n=5) = 7,596
(2,000 x 3.7982) = 7,596
7,596 is equal to 7,596. Therefore, the implicit interest rate is 16%.
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