MARY the QUEEN COLLEGE of PAMPANGA

Department of Accountancy
Intermediate Accounting 2

Name: ______________________________________________________________

Encircle the letter that corresponds to your choice. Write your solutions on a piece of paper and
then write all the letters that correspond to your choice. Write the number and the letters of your
choice at the last page of your answer sheet / paper.

1. Granada Company has an overdue 8% note payable to a bank at P8,000,000 and accrued interest of
P640,000. As a result of a restructuring agreement on January 1, 2017, the bank agreed to the following
provisions:
- the principal obligation is reduced to P7,000,000
- the accrued interest of P640,000 is forgiven
- maturity date will be on December 31, 2020
- annual interest of 10% is to be paid in four years every end of the year
The present value of 1 at 8% for 4 periods is 0.735 and the present value of an ordinary annuity of 1 at 8% for 4
periods is 3.31. What is the premium notes payable that should be recognized upon debt restructuring?
a. P640,000 c. P1,178,000
b. P700,000 d. P 462,000

2. Using the same information in #1; how much is the interest expense to be recognized in 2018?
a. P700,000 c. P596,960
b. P588,717 d. P0

3. ERGO Company bought a new machine on January 1, 2019 and agreed to pay in equal annual installment
of P600,000 at the end of each of the next five years. The prevailing interest rate is 12%. The present value of an
ordinary annuity of 1 at 12% for five periods is 3.60. The present value of 1 at 12% for five periods is 0.567. What
is the carrying value of the note on December 31, 2019?
a. P2,160,000 c. P1,819,200
b. P1,437,504 d. P3,000,000

4. Which of the following statements is correct regarding the accounting for leases?
a. The lessor depreciates the leased asset under a finance lease.
b. The lessee depreciates the leased asset under a “short-term” or a “low-valued asset” lease.
c. When discounting lease payments the lessor and the lessee use the interest rate implicit in
the lease.
d. An entity can never be both a lessor and a lessee of a same leased asset.

5. According to PFRS 16, right-of-use assets are presented in the lessee’s statement of financial
position
a. separately from the other assets of the lessee.
b. together with other assets as if they were owned, with disclosure of the line items that
include the right-of-use assets.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial statements

6. In the long-term liabilities section of its balance sheet at December 31, 2019, Mene Co. reported
a lease liability of ₱75,000, net of current portion of ₱1,364. Payments of ₱9,000 were made on
both January 2, 2020, and January 2, 2021. Mene's incremental borrowing rate on the date of the
lease was 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its
December 31, 2020, balance sheet, what amount should Mene report as lease liability, net of
current portion?
a. 66,000
b. 73,500
c. 73,636
d. 74,250

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7. Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay ₱50,000 at the
start of the lease term on December 31, 2018, and ₱50,000 annually on each December 31 for the
next eight years. The present value on December 31, 2018, of the nine lease payments over the
lease term, using the rate implicit in the lease which Oak knows to be 10%, was ₱316,500. The
December 31, 2018, present value of the lease payments using Oak's incremental borrowing
rate of 12% was ₱298,500. Oak made a timely second lease payment. What amount should Oak
report as lease liability in its December 31, 2019, balance sheet?
a. 350,000 c. 228.320
b. 243,150 d. 0

8. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The rent in 20x1 is
₱10,000 and shall increase by 10% annually starting on January 1, 20x2. Rentals are payable at
the end of each year. ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC
Co. opts to use the practical expedient allowed under PFRS 16 for leases of low value assets.
How much is the lease expense in 20x1?
a. 10,000 b. 11,000 c. 11,603 d. 12,853

9. A lessor’s gross investment in a finance lease is computed as

a. lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)

10. Under operating leases, lessors

a. recognize rent income using a straight line basis, unless another method is more appropriate.
b. recognize interest income using the effective interest method.
c. recognize different amounts of rent income each year depending on the contractual
payments
d. any of these

11. Security deposits that are refundable

a. are treated as unearned income by lessors under an operating lease.
b. are not discounted because they are normally of a short-term nature
c. are treated as receivable by lessees and as payable by lessors.
d. are discounted only by lessees but not by lessors

12. Which of the following statements is false regarding the accounting for leases?
a. The lessor may not use the straight line basis for recognizing lease income under an
operating lease if another systematic basis is more representative of the pattern in which
benefit from the use of the underlying asset is diminished.
b. The amount of lease income recognized each year under an operating lease is typically
constant even though the contractual payments increase every year by a certain amount
specified in the contract.
c. It is possible that the lessor does not depreciate the leased asset even if the lease is classified
as an operating lease.
d. Under an operating lease, the lessor capitalizes initial direct costs. These costs will increase
the lease income each year.

13. Which of the following is correct regarding the accounting for operating leases?
a. A lessor under an operating lease may classify the lease as either direct operating lease or
sales type operating lease.
b. A lessor includes a rent collected in advance as part of the cost of the leased asset.
c. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as rent income is recognized.

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 d. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as depreciation expense is
recognized.

Use the following information for the next questions:

On January 1, 2019, GORIO Co. leased equipment to CORY, Inc. Information on the lease is shown
below:
Cost of equipment ₱ 1,200,000
Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of each 400,000
year
Interest rate implicit in the lease 10%
Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting.

14. How much is the gross investment in the lease on January 1, 2019?
a. 2,000,000 b. 1,600,000 d. 1,200,000 d. 1,800,000

15. How much is the total interest income (finance income) to be recognized by GORIO over the
lease term?
a. 205,260 b. 235,260 c. 125,259 d. 525,259

16. How much is the gross profit from the sale?

a. 114,740 b. 194,740 c. 125,259 d. 45,259

17. How much is the net profit from the sale?

a. 125,259 b. 45,259 c. 194,740 d. 114,740

Use the following information for the next questions:

On January 1, 2019, GHAN Financing Co. leased equipment to LONG KNIFE, Inc. Information on
the lease is shown below:
Cost of equipment ₱ 1,322,588
Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the end of each year 400,000
Interest rate implicit in the lease 10%
Residual value 80,000
The equipment will revert back to GHAN at the end of the lease term. The lease is classified as direct
financing lease.
18. Assuming the residual value is guaranteed, how much is the gross investment in the lease on
January 1, 2019?
a. 1,600,000
b. 1,680,000
c. 1,520,000
d. 2,080,000

19. Assuming the residual value is unguaranteed, how much is the net investment in the lease?
a. 1,322,588
b. 1,267,948
c. 1,213,308
d. 1,345,981

20. Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 2019.
Under the terms of the operating lease, rent for the first year is ₱8,000 and rent for years 2
through 5 is ₱12,500 per annum. However, as an inducement to enter the lease, Wall granted

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 Fox the first six months of the lease rent-free. In its December 31, 2019, income statement, what
amount should Wall report as rental income?
a. 12,000 c. 11,600
b. 10,800 d. 8,000

21. On January 1, 2019, Babson, Inc., leased two automobiles for executive use. The lease requires
Babson to make five annual payments of ₱13,000 beginning January 1, 2019. At the end of the
lease term, Babson gutarantees the residual value of the automobiles will total ₱10,000. The
interest rate implicit in the lease is 9%. Babson's recorded lease liability on initial recognition is
a. 48,620 b. 44,070 c. 35,620 d. 31,070

22. On January 1, 2019, ABC Co. enters into a 4-year lease of office equipment. The rent in 2019 is
₱10,000 and shall increase by 10% annually starting on January 1, 2020. Rentals are payable at
the end of each year. ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 2019. ABC
Co. opts to use the practical expedient allowed under PFRS 16 for leases of low value assets.
How much is the lease expense in 2019?
a. 10,000 b. 11,000 c. 11,603 d. 12,853

23. On January 1, 2019, Entity Y leases out an equipment to Entity X. Information on the lease is as
follows:
Lease term 3 years
Annual rent payable at the end of each year 100,000
Interest rate implicit in the lease 10%

The lease provides for the transfer of ownership of the equipment to the lessee at the end of the lease
term. How much is the unearned interest on January 1, 2019?
a. 51,315
b. 52,313
c. 48,992
d. 47,652

24. Determine if the following statements are true or false.

Statement 1 – At the inception of a capital lease, the guaranteed residual value should be included as
part of the minimum lease payments at absolute amount.
Statement 2 - The present value of the minimum lease payments is not always the amount reflected
as cost of the asset at the inception of the lease on the books of the lessee.
a. The 1st statement is true, the 2nd statement is false.
b. The 1st statement is false, the 2nd statement is true.
c. Both statements are true.
d. Both statements are false.

Data for numbers 25-26

On January 1, 2019, ABC Corporation enters into a 3-year lease of an office space. The annual rent is
P100,000 payable in advance. ABC has an option to extend the lease for another 3 years at an annual
rental of P120,000, which ABC is uncertain to exercise because there is no incentive to do so. The
implicit rate is 12%. On December 31, 2020, due to significant change in circumstances, ABC is now
reasonably certain to extend the lease. The revised implicit rate is 10%.
25. How much is the increase in liability?
a. 100,000 c. 398,422
b. 298,422 d. 89,268
e. 0

26. How much is the 2021 depreciation ?

a. 97,023 c. 89,668
b. 74,696 d. 99,606

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27. Mirage Company is experiencing financial difficulty and is negotiating trouble debt restructuring with its
creditors to relieve its financial stress. Mirage has a P3,000,000 note payable to Megabank. The bank is
considering acceptance of an equity interest in Monkey Company in the form of 200,000 shares of common stock
valued at P12 per share. The par value of the common stock is P10 per share. What is the amount of gain to be
reported by Mirage in its profit and loss as a result of the restructuring?
a. Zero c. 600,000
b. 400,000 d. 1,000,000

28. Karma Company sells televisions at an average price of P7,500 and also offers to each
customer a separate 3-year warranty contract for P750 that requires the company to perform
periodic services and to replace defective parts. During 2006, the company sold 300 televisions
and 270 warranty contracts for cash. It estimates the 3-year warranty costs as P200 for parts
and P400 for labor and accounts for warranties separately. Assume sales occurred on
December 31, 2008, income is recognized on the warranties, and straight line recognition of
warranty revenues occurs.
What amount of current and non-current liability relative to warranty revenue would appear on the
December 31, 2009 balance sheet, respectively?
a. 0 and 202,500 c. 67,500 and 135,000
b. 135,000 and 67,500 d. 202,500 and 0

29. Gallery Department Store sells gift certificates, redeemable for store merchandise that expires
one year after their issuance. Gallery has the following information pertaining to its gift certificates sales and
redemptions:
Unearned at December 31, 2019 P 600,000
2020 sales 2,000,000
2020 redemptions of prior-year sales 200,000
2020 redemptions of current-year sales 1,400,000
Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed.
In its December 31, 2020 balance sheet, what amount should Gallery report as unearned revenue?
a. 400,000 c. 600,000
b. 800,000 d. 1,000,000

30. In 20x1, EXHAUSTIVE COMPLETE Co. received a court order requiring the cleanup of
environmental damages caused by one of EXHAUSTIVE’s factory. EXHAUSTIVE has no other
realistic alternative but to comply with the court order. Other entities have incurred around ₱60M
for similar cleanup; however, EXHAUSTIVE’s best estimate of the cost of cleanup is ₱80M. How
much is the provision to be recognized?
a. 60M b. 80M
c. 70M d. 0

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