Reference no: EM133178463

Question 1 - Bergify Company entered into a 10-year lease of a commercial space on January 1, 2022. Annual lease payment payable at the beginning of each year amounted to P500,000. The company has paid commissions of P200,000 to Army, a real estate brokerage firm that have helped the company closed the reasonable deal with the lessor. Details found on the signed contract of lease are as follows:

Residual value at the end of the lease term (20% is not guaranteed) - P250,000

Purchase option at the end of the lease term - P150,000

Annual property taxes (amount to be shouldered by the lessee) - P50,000

Lessee's share in annual insurance - P30,000

Annual budgeted repairs and maintenance expenses - P20,000

The cost of dismantling the improvements and fixtures and restoring the commercial space into its original intended use after the end of the lease term is estimated to be at P350,000.

Considering the flooding, fault line and deterioration in the vicinity and the current plan to build a cemetery in front of the leased premises, the appraiser estimated that the fair value of the leased commercial space at the end of the lease term is just P125,000. He also estimated the remaining economic life of the property to be 12 years.

Bergify incremental borrowing rate is 8%, which is also the prevailing interest rate in 2022. Based on the unrevealed intelligence gathered by Army, the implicit interest rate is 6%. (Round off the PV factor to four decimal places)

How much are the lease liability and the right of use asset after first payment as of January 1, 2022 and after determining the most likely decision of the company as to whether it will purchase or return the commercial space at the end of the lease term?

Lease Liability - P3,761,085; Right of Use Asset - P4,311,085

Lease Liability - P3,761,085; Right of Use Asset - P4,078,205

Lease Liability - P3,192,930; Right of Use Asset - P3,892,930

Lease Liability - P3,692,925; Right of Use Asset - P4,055,045

Question 2 - The following information relates to Puregold Price Club Inc. (PPCI) for the year 2022. PPCI has a pricing policy that allows 30% profit on the sales price.

Unearned Revenue from Gift Certificates Outstanding, January 01, 2022 - P250,000

Gift certificates sold during the year - P900,000

Gift certificates issued relating to sales promotion during the year - P100,000

Gift certificates redeemed during the year - P900,000

Gift certificates relating to the entity's promotion that expired during the year - P12,500

Additional outstanding gift certificates expected to expire in 2022 - P6,000

How much is the unearned revenue from gift certificates outstanding at December 31, 2022?

P331,500

P337,500

P232,050

P236,250

Question 3 - Honesty Company was sued by a competitor for P5,000,000 for infringement of a trademark during 2021. Based on the advice of the legal department, it is probable that Honesty will be liable therefore, in its financial statement for the year ended December 31, 2021, an amount of P3,000,000 was accrued as a provision. On February 10, 2022, the Supreme Court decided in favor of the party alleging infringement of the trademark and ordered the defendant to pay a sum of P3,500,000. The financial statements of Honesty Company were issued on February 15, 2022.

How much provision should have been accrued by Honesty Company on December 31, 2021?

P5,000,000

P3,000,000

P3,500,000

P4,000,000

Question 4 - On June 1, 2022, Bergify Company signed a 10-year non-cancelable lease for a machine requiring annual payments at the beginning of each lease year. The machine has a useful life of 15 years without salvage value. The asset will revert to the lessor at the end of the lease term. Bergify Company's accounting year ends on December 31 and it uses straight-line method of depreciation for all of its property, plant and equipment, computed to the nearest full month. Aggregate lease payments have a present value of P2,520,000 on June 1, 2022 based on an appropriate rate of interest.

For the year 2022, what amount of depreciation expense should Bergify record for the leased machine?

P252,000

P168,000

P147,000

P98,000