University of San Carlos

School of Business and Economics

Department of Accountancy

AC 506
Fifth Long Exam

Name: __________________________________________________ Schedule: ___________________

INSTRUCTIONS: Write all your FINAL answers in the answer sheet. Refer to the instructions for each
particular type of examination. Refrain from talking to your seatmates, as such will be construed as
cheating. Make your handwriting legible. NO ERASURES ALLOWED.

I. IDENTIFICATION (n x 1). Determine the term that is defined by the following numbers.

1. A lease that does not transfer substantially all the risks and rewards incident to the ownership of an
asset.
2. It is the date from which the lessee is entitled to exercise its right to use the leased asset.
3. The party who depreciates the asset under an operating lease.
4. The portion of the lease payment that is not fixed in amount but is based on a factor other than just
the passage of time
5. It is equal to the gross rentals for the entire lease term plus the absolute amount of the residual value,
whether guaranteed or unguaranteed.
6. It is an arrangement whereby one party sells a property to another party and then immediately leases
the property back from its new owner.
7. It Is the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
8. The best estimate of the variables that will determine the ultimate cost of providing postemployment
benefits.
9. It is a transaction that eliminates all further legal or constructive obligations for part or all of the
benefits provided under a defined benefit plan.
10. Employee benefits provided in exchange for the termination of an employees employment as a result
of either an entitys decision to terminate an employees employment before the normal retirement
date or an employees decision to accept an offer of benefits in exchange for the termination of
employment.

II. TRUE OR FALSE (n x 1). Write TRUE if the statement is correct and FALSE if otherwise.

1. Any security deposit refundable upon the lease expiration shall be accounted for as a receivable by
the lessor.
2. Any initial direct costs incurred by a lessee are added to the amount of the liability recognized in the
statement of financial position.
3. In a direct financing lease, unearned interest income should be amortized over the lease term using
the effective interest method.
4. In sales type lease, initial direct costs are expensed as component of cost of sales.
5. If the sale and leaseback transaction results in an operating lease that is clearly established at fair
value, any gain or loss on sale is recognized immediately in profit or loss.
6. Vesting paid absences are those that are carried forward and can be used in future periods if the
current periods entitlement is not used in full.
7. Termination benefits are conditional on future service being provided.
8. The rate used to discount estimated cash flows should be determined by reference to market yields at
the balance sheet date on high quality corporate shares.
9. Any gain or loss on settlement is fully recognized and included in service cost in the computation of
employee benefit expense.
10. All past service costs, whether vested or unvested, shall be recognized as an expense immediately.

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III. JOURNAL ENTRIES (n x 2). Prepare the required journal entries. Use two decimal places for PV
factors unless otherwise stated.

1. Shing Company leased a machinery with a fair value of P2,800,000 on January 1, 2014. The contract
is a six-year noncancelable lease with a 10% implicit rate. The lease contains neither a transfer of title
nor a bargain purchase option. The lease requires annual payments of P500,000 beginning January
1, 2014. The machinery has an estimated useful life of 8 years. The entity guaranteed a residual
value of P400,000 when the machinery is returned to the lessor upon lease expiration. Use four
decimal places for PV factors.

Prepare the journal entry on January 1, 2020 to record the return of the machinery to the lessor.
Assume the fair value of the asset is P550,000.

2. Kohaku Company closed a lease contract for newly constructed terminals and freight storage facilities
on January 1, 2014.

Although the terminals have a composite life of 10 years, the lease runs for 5 years with transfer of
title to the lessee upon expiration of the lease.

The annual rental is P1,000,000 payable at the end of each year starting December 31, 2014. The
lessee must also make an annual payment of P75,000 for taxes and P125,000 for insurance.

The contract was negotiated to assure the lessor a 10% rate of return.

Prepare the journal entry to record the cost of the asset and the lease liability on January 1, 2014.

3. Hisui Company decided to enter into a leasing business. The entity acquired a specialized machine
for P3,000,000 cash and leased it on January 1, 2014 for a period of 6 years, after which the machine
is returned to Hisui Company for disposition. The expected unguaranteed residual value of the
machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Hisui
Company. The first lease payment is made on January 1, 2014 and subsequent payments are made
each December 31. Use four decimal places for PV factors.

Prepare the journal entry on January 1, 2014 to record the lease receivable and unearned interest
income.

4. Gall Company leased equipment to another entity on January 1, 2014. The terms of the lease called
for annual payment of P500,000 to be made at the end of each year. The lease term is 5 years which
is the useful life of the equipment. The lease is appropriately recorded as a sales-type lease. The cost
of the equipment is P1,000,000. The implicit interest rate in the lease is 12%. On July 1, 2016, Gall
Company actually sold the equipment to the lessee for P1,200,000.

Prepare the journal entry to record the actual sale of the leased asset on July 1, 2016.

5. Ines Company On January 1, 2014, the memorandum records of Holly Company showed the
following balances related to a defined benefit plan prior to the adoption of PAS 19R:

Fair Value of Plan Assets 6,000,000

Unamortized Past Service Cost 300,000
Projected Benefit Obligation (7,500,000)
Prepaid/Accrued Benefit Cost (1,200,000)

The remaining average vesting period for the employees covered by the past service cost is 3 years.

Prepare the journal entry for the adjustment to recognize the transitional effect of PAS 19R.

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IV. MULTIPLE CHOICE: THEORY. (n x 2) Write the letter of the correct or best answer in the appropriate
blanks provided in the answer sheet.

1. In a lease that is recorded as a direct-financing lease by the lessor, interest revenue

A. Does not arise.
B. Should be recognized over the period of the lease in an increasing rate.
C. Should be recognized over the period of the lease in a decreasing rate.
D. Should be recognized in full as revenue at the leases inception.

2. A lessee when accounting for a lease bonus received under an operating lease treats it as a/an:
A. Increase in rental income over the lease term
B. Increase in rental expense over the lease term
C. Reduction in rental expense over the lease term
D. Reduction in rental income over the lease term

3. Which of the following statements characterizes lessor accounting for residual values?
A. Guaranteed residual values are included in the gross investment amount, but unguaranteed
residual values are excluded from the gross investment.
B. Unguaranteed residual values are included in the gross investment amount, but guaranteed
residual values are excluded from the gross investment.
C. Guaranteed residual values and unguaranteed residual values are excluded from the gross
investment.
D. Guaranteed residual values and unguaranteed residual values are included in the gross
investment.

4. If the sale and leaseback transaction results in an operating lease and the sales price is above fair
value, the excess of the sales price over fair value is:
A. Deferred and amortized over the period for which the asset is expected to be used.
B. Recognized immediately in profit or loss.
C. Recognized in other comprehensive income.
D. Not recognized

5. Under a sales type lease, what is the meaning of gross investment in the lease on the part of the
lessor?
A. Present value of minimum lease payments
B. Present value of minimum lease payments and present value of unguaranteed residual value.
C. Absolute amount of the minimum lease payments
D. Aggregate of minimum lease payments and unguaranteed residual value

6. Under the defined contribution plan, the retirement benefit expense is equal to the
A. Enterprises contribution to the plan with respect to the services in a particular period.
B. Retirement benefits actually paid during the year
C. Present value of the retirement benefits with respect to the services rendered in the current period.
D. Present value of retirement benefits with respect to services rendered in the prior period.

7. What is the treatment of actuarial gains and losses?

A. As remeasurements recognized immediately in other comprehensive income and subsequently
recycled to profit or loss.
B. As remeasurements recognized immediately in profit or loss.
C. As remeasurements recognized immediately in retained earnings.
D. As remeasurements recognized immediately in other comprehensive income and permanently
excluded from profit or loss.

8. Which of the following statements is incorrect in relation to termination benefits?

A. The event that gives rise to an obligation for termination benefit is the termination of employment.
B. A benefit that is in any way dependent on providing service in the future is a termination benefit.
C. A benefit resulting from termination of employment at the request of an employee without an entity
offer is a termination benefit.
D. A benefit resulting from mandatory requirement is a postemployment benefit rather than a
termination benefit.

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9. What is the transitional effect of the application of PAS 19R on unamortized past service cost and
unrecognized actuarial gain or loss?
A. Unamortized past service cost and actuarial gain and loss are recognized currently in profit or loss.
B. Unamortized past service cost and actuarial gain and loss are recognized currently in other
comprehensive income.
C. Unamortized past service cost is recognized retrospectively in retained earnings and actuarial gain
and loss are recognized currently in profit or loss.
D. Unamortized past service cost and actuarial gain and loss are recognized retrospectively in
retained earnings.

10. Which of the following statements is true in relation to the recognition of defined benefit cost for other
long-term employee benefits?

I. Current service cost, past service cost and any gain or loss on settlement are fully recognized II
through profit or loss.
II. Remeasurements are fully recognized through profit or loss.

A. I only C. Both I and II

B. II only D. Neither I nor II

V. PROBLEMS - MULTIPLE CHOICE. (n x 2) Read each of the problems very carefully and compute for
what is asked. Write the letter of the answer in the appropriate blanks provided in the answer sheet. Use
two decimal places for PV factors unless otherwise stated.

1. On December 31, 2014, Clinoseraph Company sold Chlorseraph an airplane with an estimated
remaining useful life of ten years. At the same time, Clinoseraph leased back the airplane for three
years. Additional information is as follows:

Sales price P 600,000

Carrying amount of airplane at date of sale 100,000
Monthly rental under lease 6,330
Interest rate implicit in the lease as computed by
Chlorseraph 12%
Present value of operating lease rentals
(P6,330 for 36 months @ 12%) 190,351

The leaseback is considered an operating lease. In the December 31, 2014 statement of financial
position, what amount should be included as deferred revenue on this transaction?
A. P 0 C. P309,419
B. P190,581 D. P500,000

2. Pyrox Company, a lessor of office machines, purchased a new machine for P600,000 on January 1,
2015, which was leased the same day to Peridot Company. The machine will be depreciated P55,000
per year. The lease is for a four-year period expiring January 1, 2019 and provides for annual rental
payments of P100,000 beginning January 1, 2015. Additionally, Peridot Company paid P64,000 to
Pyrox Company as a lease bonus. In the 2015 income statement, what amount of revenue and
expense should be reported respectively on this leased asset?
A. P100,000 and P0 C. P116,000 and P55,000
B. P116,000 and P0 D. P164,000 and P55,000

3. Sydan Company leases equipment to customers under direct financing leases. The equipment has
no residual value at the end of the lease and the leases do not contain bargain purchase options.
Sydan wishes to earn 8% interest on a 5-year lease equipment with a fair value of P3,234,000. The
total amount of interest revenue that Sydan will earn is:
A. P1,293,000 C. P516,000
B. P1,394,000 D. P750,000

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4. Grusslar Company on December 28, 2014 leased a new machine from Labrodor Company to start on
January 1, 2015. The following date relate to the lease transaction at the inception of the lease:

Lease term 10 years

Useful life of the machine 15 years
Annual rental payable at the beginning of each year P 500,000
Fair value of the machine 4,000,000

The lease has no renewal option and the possession of the machine reverts to Labrodor when the
lease terminates. At the inception of the lease, Grusslar should record a lease liability of:
A. P5,000,000 C. P3,075,000
B. P3,380,000 D. P 0

5. Kardia Company is a dealer in machinery. On January 1, 2014, a machinery was leased to another
enterprise with the following provisions:

Annual rental payable at the end of each year 2,000,000

Lease term and useful life of machinery 5 years
Cost of machinery 5,000,000
Residual value-unguaranteed 1,000,000
Implicit interest rate 10%

At the end of the lease term on December 31, 2018, the machinery will revert to Kardia. The
perpetual inventory system is used. Kardia incurred initial direct costs of P200,000 in finalizing the
lease agreement. Kardia Company should report profit on the sale at
A. P5,800,000 C. P3,200,000
B. P6,000,000 D. P3,000,000

6. On January 2, 2014, Iola Company signed an 8-year noncancelable lease for a new machine
requiring P1,500,000 annual payments at the beginning of each year. The machine has a useful life
of 12 years with no residual value. Title passes to Iola at the lease expiration date. Iola uses the
straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value
on January 2, 2014 of P5,400,000 based on an appropriate interest rate. For 2014, Iola should
record depreciation expense for the leased machine at
A. P1,500,000 C. P675,000
B. P 450,000 D. P325,000

Use the following information for numbers 7 and 8:

Floura Company is in the business of leasing new sophisticated equipment. As lessor, Floura expects
a 12% return on its net investment. All leases are classified as direct financing lease. At the end of
the lease term, the equipment will revert to Floura Company.

On January 1, 2014, an equipment is leased to another entity with the following information:

Cost of equipment to Floura 5,500,000

Residual value - unguaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2014

7. What is the unearned interest income on January 1, 2014?

A. P2,576,000 C. P2,176,000
B. P1,776,000 D. P1,616.500

8. What is the gross profit on the sale?

A. P161,553 C. P500,000
B. P544,860 D. P 0

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 For numbers 9 to 13:

The following information relates to the defined benefit pension plan of the Tiz Company as of
January 1, 2014:

Projected benefit obligation (PBO) P16,150,000

Fair value of plan assets 15,135,000
Unrecognized prior service cost 1,050,000
Unrecognized actuarial gain or loss 0

Pension data for the year 2014 follows:

Current service cost P 870,000

Contributions to the plan 1,200,000
Benefits paid to retirees 1,320,000
Actual return on plan assets 2,635,000
Past service cost 210,000
Actuarial change increasing PBO 800,000
Settlement price of obligation 450,000
Present value of defined benefit obligation settled 500,000
Asset ceiling 500,000
Discount rate 11%
Long-term expected rate of return on plan assets 10%

9. What is the 2014 benefit expense?

A. P1,141,650 C. P918,350
B. P1,241,650 D. P1,018,350

10. What is the total remeasurement gain to be recorded in profit or loss?

A. P170,150 C. P900,000
B. P800,000 D. P 0

11. The fair value of plan assets on December 31, 2014 is:
A. P18,970,000 C. P17,650,000
B. P17,200,000 D. P18,100,000

12. The projected benefit obligation on December 31, 2014 is:

A. P16,376,500 C. P18,486,500
B. P16,876,500 D. P17,986,500

13. The prepaid/accrued benefit cost on December 31, 2014 is:

A. P500,000 debit C. P500,000 credit
B. P323,500 debit D. P786,500 credit

14. Agnes Company provided the following comparative information concerning its defined benefit plan in
its memorandum records:
January 1, 2014 December 31, 2014
Fair value of plan assets 10,000,000 11,500,000
Prepaid benefit obligation 12,500,000 13,035,000

The transactions for 2014 related to the defined benefit plan are:

Current service cost 2,000,000

Contribution to the plan 2,800,000
Benefits paid to retirees 2,300,000
Unexpected decrease in the benefit obligation 165,000

The remeasurements to be recorded in other comprehensive income in 2014 is

A. P200,000 C. P1,000,000
B. P365,000 D. P1,165,000

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15. On September 1, 2014, Airy Company offered special termination benefits to employees who had
reached the early retirement age specified in the entitys pension plan. The termination benefits
consisted of lump sum and periodic future payments.

Additionally, the employees accepting the entity offer receive the usual early retirement benefits. The
offer expired on November 30, 2014.

Actual or reasonably estimated amounts on December 31, 2014 relating to the employees accepting
the offer are as follows:

Lump sum payments made on January 1, 2015 475,000

Present value of periodic payments of P60,000 annually
for 3 years which will begin January 1, 2016 155,000
Reduction of accrued pension cost on December 31, 2014
for the terminating employees 45,000

On December 31, 2014, what amount should be reported as total liability for termination benefits?
A. P475,000 C. P630,000
B. P585,000 D. P655,000

VI. PROBLEMS OPEN-ENDED. Read each of the problems very carefully and compute for what is
asked. Write your answer in the appropriate blanks provided in the answer sheet. Use two decimal places
for PV factors unless otherwise stated. Indicate GAIN or LOSS for questions asking such.

Use the following information for numbers 1 to 5:

On January 1, 2014, Gardenia Company entered into a lease contract with Minera Company for a new
equipment that had a selling price of P2,120,000. The lease contract provides that annual payments of
P420,000 will be made for 6 years. Gardenia made the first payment on January 1, 2014, subsequent
payments are made on January 1 of each year. Gardenia guarantees a residual value of P367,122 at the
end of the lease term. After considering the guaranteed residual value, the rate implicit in the lease is
determined to be 12%. Gardenia has an incremental borrowing rate of 15%. The economic life of the
equipment is 9 years. Gardenia depreciates its equipment using straight line method. Based on the
above, compute for the following:

1. Cost of the leased equipment to be recognized by Gardenia Company

2. Annual depreciation expense

3. Interest expense in 2014

4. Liability under finance lease as of December 31, 2015

5. Current portion of the liability under finance lease as of December 31, 2015

Use the following information for numbers 7 and 8:

On January 1, 2013, Paraiba Co. signs a 10-year noncancelable lease agreement to lease a building
from Tourmaline Co. Collectability of lease payments is reasonably predictable and no important
uncertainties surround the amount of costs yet to be incurred by the lessor. The following information
pertains to this lease agreement:
a. The agreement requires equal rental payments at the end of each year.
b. Fair value of the building on January 1, 2013 is P900,000; however the book value t Tourmaline is
P750,000.
c. The building has an estimated economic life of 10 years, with no residual value. Paraiba depreciates
similar buildings on the straight-line method.
d. At the termination of the lease, the title to the building will be transferred to Paraiba.
e. Paraibas incremental borrowing rate is 11% per year. Tourmaline has set the annual rental to insure
a 10% rate of return. Paraiba knows the implicit rate of Tourmaline.
f. The yearly rental payment includes P3,000 of executor costs related to taxes on the property.

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6. What is the amount of the minimum annual lease payment?

7. Paraiba would record depreciation expense on this storage building in 2013 of?

8. Lester Company determined that it has an obligation relating to employees rights to receive
compensation for future absences attributed to employees services already rendered. The obligation
relates to rights that vest and payment of the compensation is probable. The entitys obligations on
December 31, 2014 are reasonably estimated as follows:

Vacation pay 1,100,000

Sick pay 900,000

In the December 31, 2014 statement of financial position, what amount should be reported as liability
for compensated absences?

9. Kikyo Company had the following balances relating to its defined benefit plan on December 31, 2014:

Fair value of plan assets 37,000,000

Projected benefit obligation 33,000,000
Asset ceiling 2,500,000

What is the prepaid/accrued benefit cost to be reported in the December 31, 2014 statement of
financial position?

10. Pension plan information of Praline Company for the current year is as follows:

January 1 Projected benefit obligation 3,500,000

Accumulated benefit obligation 2,800,000
During the year Pension benefits paid to retired employees 250,000
December 31 Projected benefit obligation 4,200,000
Accumulated benefit obligation 3,100,000
Settlement rate 10%

There is no change in actuarial assumptions during the current year. What is the current service cost
for the current year?

Good Luck and God Bless!

People can because they think they can.

MJL (2016)

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 University of San Carlos
School of Business and Economics
Department of Accountancy

AC 506
Fifth Long Exam

ANSWER SHEET

Name: __________________________________________________ Schedule: ___________________

INSTRUCTIONS: Write all your FINAL answers in the next two sheets ONLY. Refer to the instructions for
each particular type of examination. Refrain from talking to your seatmates, as such will be construed as
cheating. Make your handwriting legible. NO ERASURES ALLOWED.

TEST I: TEST II:

1. ___________ 1. ___________
2. ___________ 2. ___________
3. ___________ 3. ___________
4. ___________ 4. ___________
5. ___________ 5. ___________
6. ___________ 6. ___________
7. ___________ 7. ___________
8. ___________ 8. ___________
9. ___________ 9. ___________
10. ___________ 10. ___________

TEST III:

1.

2.

3.

4.

5.

Page 9 of 11
 University of San Carlos
School of Business and Economics
Department of Accountancy

AC 506
Fifth Long Exam

ANSWER SHEET (cont.)

TEST IV:

1. ___________ 6. ___________
2. ___________ 7. ___________
3. ___________ 8. ___________
4. ___________ 9. ___________
5. ___________ 10. ___________

TEST IV:

1. ___________ 6. ___________ 11. ___________

2. ___________ 7. ___________ 12. ___________
3. ___________ 8. ___________ 13. ___________
4. ___________ 9. ___________ 14. ___________
5. ___________ 10. ___________ 15. ___________

TEST V:

1. _____________________ 6. _____________________
2. _____________________ 7. _____________________
3. _____________________ 8. _____________________
4. _____________________ 9. _____________________
5. _____________________ 10. _____________________

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SOLUTIONS: (Note: You may detach this sheet of paper.)

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