Items1 - 6 are based on the following information:

On January 1, 2020, Enrico Co.(Customer)enters intoa 4-year lease of equipment withCarlos, Inc.(Supplier). The annual rent is220,000, payable at the end of each year. The equipment has a remaining useful life of 10 years. The interest rate implicit in the lease is 10% while the lessee's incremental borrowing rate is 12%. Enricouses the straight-line method of depreciation. The relevant present value factors are as follows:

• PV of an ordinary annuity of1 @10%, n=4............3.16987
• PV of an ordinary annuity of1 @12%, n=4............3.03735

1. How much is the lease liability to be recognized by Enrico Co.on initial recognition?

a. 702,345c. 668,217

b. 697,371d. 0

Answer:

Solution:

2.How much is the annual depreciation on the right-of-use asset?

a. 174,343c. 167,054

b. 175,586d. 0

Answer:

Solution:

3.Assume the lease qualifies for accounting as a lease of "low-value asset." How much is the lease liability to be recognized by Enrico Co.on initial recognition?

a. 702,345c. 668,217

b. 697,371d. 0

Answer:

Solution:

4.How much is the lease (rent) expense in 2020?

a.220,000c. 167,054

b.174,343d. 0

Answer:

Solution:

5.Assume the lease is a finance lease.How much is the net investment in the lease to be recognized byCarlos, Inc.on initial recognition?

a.702,345c. 668,217

b.697,371d. 0

Answer:

Solution:

6.Assume the lease is an operating lease.How much is the lease (rent) income in 2020?

a.220,000c. 167,054

b.174,343d. 0

Answer:

Solution:

7.Which of the following is a characteristic of a finance lease?

a. The lease term is substantially less than the estimated economic life of the leased property.

b. The lease contains a bargain-purchase option.

c. The present value of the minimum lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the inception of the lease.

d. The lease obligation does not appear in the balance sheet of the lessee.

Answer:

8.Entity A (customer)enters intoa contract with Entity B (supplier) for the use of a data processing equipment. According to the contract, Entity A shall operate the equipment only in accordance with the standard operating procedures stated in the accompanying user's manual. In assessing the existence of a lease, does Entity A have theright to direct theuseofthe asset?

a. No, because the asset's use is restricted.

b. Yes, because Entity A has the right to direct how and for what purpose the asset is used.

c. Yes, because the asset's use ispredeterminedand Entity B is precluded from changing that predetermined use.

d. Maybe yes, maybe no, but exactly Idon'tknow.

Answer:

9.Which of the following is not one of the criteria when determining whether a contract is or contains a lease?

a.Identified asset

b.Identified liability

c. Right to obtain substantiallyall ofthe economic benefits from use of an identified asset throughout the period of use

d.Right to direct the use of the identified asset throughout the period of use

Answer:

10.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.

Answer:

11.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

Answer:

On December 30, 2020, HaleCo. leased a new machine from GreenCorp. The following data relate to the lease transaction at the inception of the lease:

Lease term10years

Annual rental payable at the end of each lease year100,000

Useful life of machine12years

Implicit interest rate10%

The lease has no renewal option, and the possession of the machine reverts to Greenwhen the lease terminates. At the inception of the lease, Haleshould record a lease liability of

a. 0b. 615,000c. 630,000d. 676,000

Answer:

Solution:

On January 2, 2020, AceCompanyentered intoa ten-yearnoncancellablelease requiring year-end payments of100,000. Ace's incremental borrowing rate is 12% while the lessor's implicit interest rate, known to Ace, is 10%. Ownership of the property remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount should Ace capitalize for this leased property on January 2, 2020?

a. 1,000,000b. 614,500c. 565,000d. 0

Answer:

Solution:

NoliCorp.entered intoa nine-year lease on a warehouse on December 31, 2020. Lease payments of52,000, which includes payment for non-lease component of2,000 (at stand-alone selling price), are due annually, beginning on December 31, 2020, and every December 31 thereafter. Nolidoes not know the interest rate implicit in the lease; Noli's incremental borrowing rate is 9%. What amount shouldNp;ireport as lease liability at December 31, 2020?

a. 280,000b. 291,200c. 450,000d. 468,000

Answer:

Solution:

Robbins, Inc., leased a machine from Ready Leasing Co. The lease requires 10 annual payments of10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase option of10,000 at the end of the tenth year, even though the machine's estimated value on that date is20,000. It is reasonably certain that Robbins will exercise the purchase option. Robbins' incremental borrowing rate is 14%. What amount should Robbins record the right-of-use asset at the beginning of the lease term?

a. 62,160b. 64,860c. 66,500d. 69,720

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Solution:

On January 1, 2020, Babson, Inc., leased two automobiles for executive use. The lease requires Babson to make five annual payments of13,000 beginning January 1, 2020. At the end of the lease term, Babson guarantees the residual value of the automobiles will total10,000. The interest rate implicit in the lease is 9%.Babson's recorded lease liability on initial recognition is

a. 48,620b. 44,070c. 35,620d. 31,070

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Solution:

On January 1, 2020, ABC Co.enters intoa 4-year lease of office equipment. The rent in 2020is10,000 and shall increase by10% annually starting on January 1, 2021. Rentals are payable at the end of each year.ABC Co. pays the lessor a lease bonus of5,000 on January 1, 2020. 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 2020?

a. 10,000b. 11,000c. 11,603d. 12,853

Answer:

Solution:

Use the following information for the next three questions:

On January 1, 2020, Enrico Co.leases out an equipment toInigo Co. Information on the lease is as follows:

Lease term

3 years

Annual rent payable at the endof 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. The relevant present value factor is as follows:

1. How much is the gross investment on January 1, 2020?

a. 500,000

b. 400,000

c. 300,000

d. 200,000

Answer:

Solution:

2.How much is the net investment on January 1, 2020?

a.238,664

b.242,883

c.248,685

d.252,086

Answer:

Solution:

3.How much is the unearned interest on January 1, 2020?

a.51,315

b.52,313

c.48,992

d. 47,652

Answer:

Solution: