1. VERSAL ENTIRE Co. has the following liabilities as of December 31, 20x1.

a) Trade accounts payable, including cost of goods ₱

received on consignment of ₱20,000 600,00
0
b) Held for trading financial liabilities 100,00
0
c) Deferred revenue 40,000
d) Bank overdraft 20,000
e) Income tax payable 100,00
0
f) Accrued expenses 10,000
g) Share dividend payable 24,000
h) Advances from affiliates payable in 15 months after 46,000
year-end
i) Loan of WHOLE, Inc. guaranteed by VERSAL – it is
possible that 90,000
VERSAL will be held liable for the guarantee

How much is the total current liabilities?

a. 810,000 b. 834,000 c. 850,000 d. 900,000

Solution:
a) Trade accounts payable, net of cost of goods received on consignment 580,000
(600,000 – 20,000)
b) Held for trading financial liabilities 100,000
d) Bank overdraft 20,000
e) Income tax payable 100,000
f) Accrued expenses 10,00
0
Total current liabilities 810,00
0

2. Eliot Corporation’s liabilities at December 31, 2008 were as follows:

Accounts payable and accrued interest 2,000,000
5-year 10% Notes payable – due December 31, 2011 5,000,000

Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits
and losses annually until the amount of appropriation has equaled the face amount of the obligation.
Non-compliance will render the note as payable on demand by the lender. As of December 31, 2008,
Elliot Corporation has not yet complied with the loan agreement. However, on January 31, 2009, the
lender provided Elliot a grace period of 12 months to rectify the breach and, within which, the
lender will not demand payment. Elliot’s 2008 financial statements were authorized for issue on
March 31, 2009. What amount of current liabilities should Elliot Corporation report in its December
31, 2008 statement of financial position?
a. 2,000,000
b. 5,000,000
c. 7,000,000
d. 0

Solution: (2M + 5M) = 7M

3. Kew Co.'s accounts payable balance at December 31, 20x1 was ₱2,200,000 before considering
the following data:
  Goods shipped to Kew F.O.B. shipping point on December 22, 20x1 were lost in transit. The
invoice cost of ₱40,000 was not recorded by Kew. On January 7, 20x2, Kew filed a ₱40,000
claim against the common carrier.
 On December 27, 20x1, a vendor authorized Kew to return, for full credit, goods shipped and
billed at ₱70,000 on December 3, 20x1. The returned goods were shipped by Kew on
December 28, 20x1. A ₱70,000 credit memo was received and recorded by Kew on January 5,
20x2.
 Goods shipped to Kew F.O.B. destination on December 20, 20x1 were received and recorded
on January 6, 20x2. The invoice cost was ₱50,000.

What amount should Kew report as accounts payable in its December 31, 20x1 statement of
financial position?
a. 2,130,000
b. 2,240,000
c. 2,170,000
d. 2,310,000

Solution:
Unadjusted accounts 2,200,0
payable 00
40,
Shipment lost - FOB S.P. 000
(70,0
Purchase returns 00)
Adjusted accounts 2,170,
payable 000

4. Alex Department Store sells gift certificates redeemable for store merchandise. The certificates
expire one year after their issuance. Alex has the following information pertaining to its gift
certificates sales and redemptions:
Unearned at December 31, 2005 600,000
2006 sales 2,000,000
2006 redemptions of prior-year sales 200,000
2006 redemptions of current-year sales 1,400,000

Alex’s experience indicates that 10% of gift certificates sold will not be redeemed. Alex uses PFRS
15. In its December 31, 2006 statement of financial position, what amount should Alex report as
liability for unredeemed gift certificates?
a. 400,000 c. 800,000
b. 444,440 d. 888,880

Solution:
Unearned revenue
ignored beg.
(a)
Redemptions - prior yr. ignored 2,000,000 2006 sales
Redemptions - current yr. 1,400,000
Breakage (2M x 10% x 77.78% (b)) 155,560
end 444,440

(a)
ignored = no effect on ending balance of liability
(b)
[1.4M ÷ (2M x 90%)] = 77.78%
5. On January 1, 20x1 WRECK RUIN Co. acquired land by issuing a three-year, 12%, ₱4,000,000
note payable. Principal and all accrued interests are due on December 31, 20x3. How much is
the interest expense in 20x2?
a. 1,017,600 c. 537,600
b. 960,000 d. 764,213

Solution:
(4,000,000 x 112% x 12%) = 537,600

6. On January 1, 20x1, SAVOR TASTE Co. acquired a machine by issuing a 3-year, 3%, ₱4,000,000
note payable. Principal is due on January 1, 20x4 but interests are to be paid annually. The
prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note
on initial recognition?
a. 3,247,120 c. 3,135,340
b. 4,000,000 d. 3,174,309

Solution:
Initial measurement:
Present value factors
Future cash flows @12%, n=3 Present value
Principal 4,000,000 0.71178 a 2,847,120
Interest (4M x 3%) 120,000 2.40183 b 288,220
Total 3,135,340
a
(PV of ₱1 @12%, n=3)
b
(PV of ordinary annuity of ₱1 @12%, n=3

7. On January 1, 20x1, SUBDUE Co. borrowed 10%, ₱4,000,000 loan from CONQUER Bank.
Principal is due on January 1, 20x4 but interests are due annually starting January 1, 20x2.
SUBDUE was charged by the bank a 3% nonrefundable loan origination fee representing service
fee. How much is the carrying amount of the note on initial recognition?
a. 3,947,608 c. 3,880,000
b. 3,840,234 d. 3,720,00

Solution:
Principal amount 4,000,000
Origination fee (120,000)
Initial carrying amount of loan 3,880,000

8. On January 1, 20x1, SAUCY BOLD Co. acquired a machine by issuing a 3-year, 3%, ₱4,800,000
note payable. Principal and interests are due in three equal annual installments starting
December 31, 20x1. The prevailing interest rate for this type of note is 12%. How much is the
carrying amount of the note on initial recognition?
a. 4,014,534 c. 4,082,198
b. 4,800,000 d. 4,104,313

Solution:
Principal + Interest on Future cash
Date outstanding balance flows PV factors Present value
12/31/x1 1.6M + (4.8M x 3%) 1,744,000 0.89286 1,557,148
12/31/x2 1.6M + (3.2M x 3%) 1,696,000 0.79719 1,352,034
12/31/x3 1.6M + (1.6M x 3%) 1,648,000 0.71178 1,173,013
Total 4,082,195
9. On January 1, 20x1, SUNDER BREAK APART Co. obtained a ₱4,000,000, 180-day bank loan at an
annual rate of 10%. The loan agreement requires SUNDER to maintain a ₱400,000 compensating
balance in its bank account at the lending bank. SUNDER would otherwise maintain a balance of
only ₱200,000 in this account. The bank account earns interest at an annual rate of 2%. Based on
a 360-day year, what is the effective interest rate on the borrowing?
a. 5.21% c. 13.67%
b. 10.42% d. 12.33%

Solution:
Discounted interest rate for a 1-year loan = Net interest expense ÷ Net loan proceeds
= [(4M x 10% x 180/360) – (200,000 x 2% x 180/360)]
÷ [4M – 200,000]
= 198,000 ÷ 3,800,000
= 5.21% (effective interest for 180 days)
= 5.21% x 2 = 10.42% (effective interest for 360 days)

10. On January 1, 20x1, an entity issues bonds with face amount of ₱5,000,000 for ₱5,773,129. The
bonds mature on December 31, 20x3 and pay annual interest of 14%. The effective interest rate
is 8%. How much is the carrying amount of the bonds on December 31, 20x2?
a. 5,773,129 c. 5,278,787
b. 5,534,979 d. 5,277,778

Solution:
Date Interest paid Interest expense Amortization Present value
1/1/x1 5,773,129
12/31/x1 700,000 461,850.33 238,150 5,534,979
12/31/x2 700,000 442,798.35 257,202 5,277,778
12/31/x3 700,000 422,222.22 277,778 5,000,000

11. On January 1, 20x1, Zevrek Co. issues bonds with face amount of ₱4,000,000 for ₱4,100,000. The
bonds mature on December 31, 20x4 and pay annual interest of 16%. The bonds can be
converted into 10,000 of Zevrek Co.’s ordinary shares with par value of ₱300 per share. On
January 1, 20x1, the bonds, without the conversion feature, were selling at a price that reflects a
yield rate of 18%. On January 1, 20x3, all the bonds were retired. Zevrek Co. paid a call premium
of ₱300,000 on the retirement. On retirement date, the bonds, without the conversion feature,
were selling at 105. How much is the gain (loss) on the retirement of the bonds?
a. 325,247 c. 125,247
b. (325,247) d. 0

Solution:
4,300,00
Total retirement price (4M + 300K)
0
(4,200,00
Fair value of bonds (4M x 105%)
0)
Retirement price allocated to equity
100,000
component

Date Payments Interest expense Amortization Present value

1/1/x1 3,784,798
12/31/x1 640,000 681,264 41,264 3,826,062
12/31/x2 640,000 688,691 48,691 3,874,753
1/1/x3
Bonds payable 4,000,000
Loss on derecognition (squeeze) 325,247
Discount on bonds payable (4M – 3,874,753) 125,247
Cash (allocation to debt component) 4,200,000

Share premium – conversion feature 315,202

Cash (allocation to equity component) 100,000
Share premium 215,202

12. On January 1, 20x1, ZEAL EAGERNESS Co. contemplates on issuing 10% serial bonds with face
amount of ₱12,000,000. The bonds will mature in three equal annual installments. Interest on the
outstanding principal balance is also due annually at each year-end. The effective interest rate is
12%. How much is the estimated issue price of the bonds on January 1, 20x1?
a. 11,601,221 c. 9,645,328
b. 10,314,374 d. 8,745,328

Solution:
Principal Interest on outstanding Interest
Date payments principal balance payments Total payments
Dec. 31, 20x1 4,000,000 12,000,000 x 10% 1,200,000 5,200,000
Dec. 31, 20x2 4,000,000 8,000,000 x 10% 800,000 4,800,000
Dec. 31, 20x3 4,000,000 4,000,000 x 10% 400,000 4,400,000

Total payments PV of ₱1 PVF Present value

5,200,000 PV of ₱1 @ 12%, n=1 0.892857 4,642,856
4,800,000 PV of ₱1 @ 12%, n=2 0.797194 3,826,531
4,400,000 PV of ₱1 @ 12%, n=3 0.711780 3,131,832
11,601,219

13. Boom Co. defaulted in two annual interest payments on its ₱4,000,000 loan. Because of the
default, the lender agrees on December 31, 20x1 to restructure the loan as follows:
 The lender waives the repayment of the unpaid (simple) interest and any future interests.
 The loan, which is originally maturing in lump sum on December 31, 20x1, will be due in four
equal annual payments of ₱1,000,000, to start immediately.

The original effective interest rate is 10%, equal to the stated rate on the original loan contract. The
current market rate on December 31, 20x1 is 12%. What amount of interest expense should Boom
Co. recognize in 20x2?
a. 400,000 c. 248,685
b. 316,987 d. 0

Solution:
Original terms Modified terms
4,000,000 4,000,000
Principal (due in lump sum) (due in installments)
Accrued interest 800,000* -
Nominal rate 10% -
 Maturity due 4 annual installments

* (4M x 10% x 2 years) = 800,000

Present value of new liability

3,486,852
(1M x PV annuity due @10%, n=4)
Carrying amount of old liability (4M + 800K) 4,800,000
Difference 1,313,148

Difference 1,313,148
Divide by: Carrying amount of old liability 4,800,000
Change in liability - Substantial 27%

 Boom Co. derecognizes the existing loan and recognizes a new one.

Supporting journal entries:

Jan. 1, 20x1
Loan payable (old) 4,000,000
Interest payable 800,000
Discount on loan payable (new)** 513,148
Loan payable (new) 4,000,000
Gain on modification 1,313,148

** (4,000,000 – 3,486,852) = 513,148

Jan. 1, 20x1
Loan payable (new) 1,000,000
Cash 1,000,000

Subsequent measurement of the modified (new) liability:

Date Payments Interest expense Amortization Present value
12/31/x1 3,486,852
12/31/x1 1,000,000 - 1,000,000 2,486,852
12/31/x2 1,000,000 248,685 751,315 1,735,537
12/31/x3 1,000,000 173,554 826,446 909,091
12/31/x4 1,000,000 90,909 909,091 0

14. Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions
in the year stamps are sold to licensees. Dunn's past experience indicates that only 80% of the
stamps sold to licensees will be redeemed. Dunn's liability for stamp redemptions was
₱6,000,000 at December 31, 20x5. Additional information for 20x6 is as follows:
Stamp service revenue from stamps sold to
licensees 4,000,000
Cost of redemptions (stamps sold prior to
1/1/x6) 2,750,000

If all the stamps sold in 20x6 were presented for redemption in 20x7, the redemption cost would be
₱2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31,
20x6?
a. 7,250,000 c. 5,050,000
b. 5,500,000 d. 3,250,000
Solution:
Liability for stamp redemptions
6,000,000 1/1/x6
Total redemption
Cost of redemptions (stamps cost of stamps
sold prior to 1/1/x6) 2,750,000 2,250,000 sold in 20x6
Cost estimate of stamps not
to be redeemed
(20% x 2,250,000) 450,000
12/31/x6 5,050,000

15. An entity is the defendant in a patent infringement lawsuit. The entity’s lawyers believe there is a
30% chance that the court will dismiss the case and the entity will incur no outflow of economic
benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a
20% chance that the entity will be required to pay damages of ₱800,000 (the amount sought by
the claimant) and an 80% chance that the entity will be required to pay damages of ₱400,000
(the amount that was recently awarded by the same judge in a similar case). Other outcomes are
unlikely.

The court is expected to rule in late December 20x2. There is no indication that the claimant will
settle out of court. A 7% risk adjustment factor to the probability-weighted expected cash flows
is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate
discount rate is 10% per year.

How much is the provision for lawsuit at December 31, 20x1?

a. 436,360 c. 326,836
b. 446,908 d. 0

Solution:
At twenty per cent chance: (800K x 20%)
160,000

At eighty per cent chance: (400K x 80%)

320,000

Total
480,000
0.909
Multiply by: PV of P1 @10%, n=1
09

Total
436,363
Multiply by: Risk adjustment (100% + 7%) 107%

Total
466,909
Multiply by: Probability of settlement
70%
(100% - 30%)

Provision for lawsuit – Dec. 31, 20x1

326,836

16. A new product introduced by Wilkenson Promotions carries a two-year warranty against defects.
The estimated warranty costs related to peso sales are as follows:
 Year of 3
sale ........................... percent
Year after 5
sale ........................ percent

Sales and actual warranty expenditures for the years ended December 31, 2001 and 2002, are as
follows:
Actual Warranty
Sales Expenditures
2001 ₱ 800,000 ₱20,000
2002 1,000,000 70,000

How much is the warranty expense in 2002?

a. 30,000 c. 70,000
b. 50,000 d. 80,000

Solution: (1,000,000 x 8%) = 80,000

17. Yummy Candy Company offers a coffee mug as a premium for every ten 50-centavo candy bar
wrappers presented by customers together with ₱1.00. The purchase price of each mug to the
company is ₱0.90; in addition it costs ₱0.60 to mail each mug. The results of the premium plan
for the years 2004 and 2005 are as follows (assume all purchases and sales are for cash):
2004 2005
Coffee mugs purchased 960,000 800,000
Candy bars sold 7,500,000 9,000,000
Wrappers redeemed 3,800,000 5,600,000
2004 wrappers expected to be redeemed in 2005 2,600,000
2005 wrappers expected to be redeemed in 2006 3,600,000

How much are the liabilities for premium as of December 31, 2004 and December 31, 2005,
respectively?
a. 130,000; 150,000 c. 148,000; 160,000
b. 130,000; 180,000 d. 148,000; 180,000

Solution:
Wrappers: 2004 2005
Current sales redeemed in current yr. 3,800,000 3,000,000 (a)
Expected to be redeemed the following yr. 2,600,000 3,600,000
Total 6,400,000 6,600,000
Divide by: No. of wrappers 10 10
Total 640,000 660,000
Multiply by: Net cost of premium 0.50(b) 0.50
Premium expense 320,000 330,000

(a)
(5,600,000 total wrappers redeemed – 2,600,000 from 2004) = 3,000,000 wrappers redeemed
from 2005 sales

(b)
(0.90 cost of mug + 0.60 mailing cost - 1.00 cash collection) = 0.50

Liability for premium

- 1/1/2004
Premium
Actual [(3.8M ÷ 10) x .50] 190,000 320,000 expense
 12/31/2004 130,000

Liability for premium

130,000 1/1/2005
Premium
Actual [(5.6M ÷ 10) x .50] 280,000 330,000 expense

12/31/2005 180,000

18. An entity has 100 employees, who are each entitled to five (5) working days of paid sick leave for
each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken
first out of the current year’s entitlement and then out of any balance brought forward from the
previous year (a LIFO basis). At December 30, 20x1, the average unused entitlement is two days
per employee. The entity expects, based on past experience which is expected to continue, that
92 employees will take no more than five days of paid sick leave in 20x2 and that the remaining 8
employees will take an average of six and a half days each. The average salary per day, per
employee in 20x1 is ₱4,000 and it is not expected to change in 20x2. How much is the accrued
salaries as of December 31, 20x1?
a. 24,000 c. 208,000
b. 48,000 d. 0

Solution:
Total sick leave entitlement of employees in
20x2
(100 employees x 5 days each) 500
Sick leave expected to be taken in 20x2 (460
(92 employees x 5 days each) )
Sick leave expected to be taken by the
remaining 8
employees in 20x2 (8 x 6½ days each) (52)
Excess sick leave carried over from 20x1 (12)

19. ADHERE TO STICK Co. grants its managerial employees bonus in the form of profit sharing.
Information on operations in 20x1 is shown below:
Profit before tax ₱4,000,000
Bonus rate or percentage 10%
Income tax rate 30%

How much is the bonus if the bonus scheme is “after bonus but before tax?”
a. 400,000 c. 261,684
b. 363,636 d. 245,798

Solution:
P
B = P -
1 + Br
4,000,0
00
B = 4,000,000 -
1+
10%
 3,636,3
B = 4,000,000 -
64
B = 363,636

20. AMNESTY PARDON Co. has a post-employment benefits plan that is considered a defined
contribution plan. According to the plan, AMNESTY agrees to contribute ₱800,000 annually to a
retirement fund for the benefit of its employees. On December 31, 20x1, because of poor results
of operations and insufficient working capital, AMNESTY was only able to contribute ₱320,000 to
the fund. On December 31, 20x2, because of a profitable year, AMNESTY decided to contribute
₱1,800,000 to the retirement fund. On January 12, 20x3, an employee retired and was eligible to
₱60,000 retirement benefits based on the operating efficiency and investment earnings of the
fund. How much is the retirement benefits expense recognized in 20x2?
a. 800,000 c. 1,800,000
b. 320,000 d. 60,000

21. Information on ELABORATE COMPLICATED Co.’s defined benefit plan is shown below:
 Fair value of plan assets, Jan. 1 ₱480,000
 Actual rate of Return on plan assets for the 10%
period
 Contributions to the fund during the year 800,000
 Benefits paid to retirees 200,000

How much is the balance of the fair value of plan assets as of year-end?
a. 1,080,000 c. 1,128,000
b. 1,328,000 d. 528,000

Solution:
Fair value of plan assets
Jan. 1 480,000
Return on plan assets (10% x 480K) 48,000 200,000 Benefits paid
Contributions to the fund 800,000
1,128,000 Dec. 31

Use the following information for the next three questions:

Information on Entity A’s defined benefit plan is as follows:
2,000,00
PV of DBO – Jan. 1, 20x1 0
1,800,00
FVPA – Jan.1, 20x1 0
2,900,00
PV of DBO – Dec. 31, 20x1 0
2,600,00
FVPA, end. – Dec. 31, 20x1 0
400,00
Current service cost 0
200,00
Actuarial loss 0
120,00
Return on plan assets 0
Discount rate 10%
22. How much is the net defined benefit liability (asset) to be presented in Entity A’s December 31,
20x1 statement of financial position?
a. (300,000) c. (200,000)
b. 300,000 d. 200,000

Solution: 2,900,000 PV of DBO – 2,600,000 FVPA = 300,000 deficit

23. How much is the component of the 20x1 defined benefit cost to be recognized in profit or loss?
a. 400,000 c. 560,000
b. 420,000 d. 680,000

Solution: 400,000 service cost + 20,000 net interest (see computations below) = 420,000

24. How much is the component of the 20x1 defined benefit cost to be recognized in other
comprehensive income – (income)/ loss?
a. (140,000) c. 260,000
b. 140,000 d. (260,000)

Service cost:
(a) Current service cost 400,000
(b) Past service cost -
(c) Any (gain) or loss on settlement -
400,000
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the DBO (2M, beg. x 10%) 200,000
(b) Interest income on plan assets (1.8M, beg. x
(180,000)
10%)
(c) Interest on the effect of the asset ceiling -
20,000
Remeasurements of the net defined benefit liability (asset):
(a) Actuarial (gains) and losses 200,000
(b) Difference between interest income on plan
assets and
60,000
return on plan assets (180,000 – 120,000)
(c) Difference between the interest on the effect
of the asset
-
ceiling and change in the effect of the asset
ceiling
260,000
Total Defined Benefit Cost 680,000

25. 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, 20x8, and ₱50,000 annually on each December 31 for the next
eight years. The present value on December 31, 20x8, 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, 20x8, 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, 20x9, balance sheet?
a. 350,000 c. 228,320
b. 243,150 d. 0

Solution:
Date Payments Int. expense Amortization Present value
 12/31/x8 316,500
12/31/x8 50,000 - 50,000 266,500
12/31/x9 50,000 26,650 23,350 243,150

Use the following information for the next two questions:

At the start of Year 1, Foggy Co. (lessee) enters into a 6-year lease of equipment with Afternoon, Inc.
(lessor). The contract stipulates an annual lease payment of ₱90,000, due at the beginning of each
lease year, and covers both rent and maintenance services. The stand-alone prices of the rent and
the maintenance services are not readily observable, so Foggy Co. makes the following estimates
maximizing the use of observable information:
Rent 85,000
Maintenance services 15,000
Total 100,000
Foggy Co.’s incremental borrowing rate is 10%. Foggy Co. knows that the Afternoon, Inc. expects a
12% return on the lease.
26. What amount of lease liability should Foggy Co. report at the end of Year 1?
a. 332,357 c. 276,500
b. 308,857 d. 232,357

Allocation of total consideration:

Stand-alone prices Allocation
Rent 85,000 (90K x 85/100) 76,500
Maintenance 15,000 (90K x 15/100) 13,500
Totals 100,000 90,000

Lease liability as of beginning of Year 1:

Annual rent 76,500
PV of annuity due of 1 @12%, n=6 4.604776
Total 352,265

Date Payments Interest Amortization Present value

1/1/x1 352,265
1/1/x1 76,500 - 76,500 275,765
1/1x2 76,500 33,092 43,408 232,357

Lease liability as of end of Year 1:

232,357 + 76,500 = 308,857

27. How much is the total lease-related expenses in Year 1?

a. 240,289 c. 125,604
b. 225,604 d. 105,304

Solution:
Interest expense 33,092
Depreciation (352,265 ÷ 6) 58,712
Maintenance 13,500
Total lease-related expenses in Year 1 105,304

Use the following information for the next two questions:

On January 1, 20x1, IMBROGLIO Co. (lessor) leased a piece of equipment to COMPLICATION, Inc.
Information on the lease is shown below:
Cost of equipment ₱1,200,0
00
Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the start of ₱400,00
each year 0
Interest rate implicit in the lease 10%
IMBROGLIO Co. incurred initial direct costs of ₱80,000.
28. How much is the gross investment in the lease on January 1, 20x1 after the first lease payment if
the lease is accounted for as a sales type lease?
a. 2,000,000 c. 1,680,000
b. 1,800,000 d. 1,200,000

Solution: (400,000 x 3 years) = 1,200,000

29. What amount of net selling profit should IMBROGLIO recognize at the lease commencement date
if the lease is accounted for as a sales type lease?
a. 194,740 c. 114,741
b. 125,259 d. 0

Solution:
Sales (400K x PV annuity due
1,394,741
@10%, n=4)
(1,200,00
Cost of sales
0)
Gross profit 194,741
Direct costs (80,000)
Net profit 114,741

Use the following information for the next three questions:

Frey Corporation's income statement for the year ended December 31, 2002, shows pretax income
of ₱1,000,000. The following items are treated differently on the tax return and in the accounting
records:
Tax Return Accounting Records
Rent income ₱ 70,000 ₱120,000
Depreciation expense 280,000 220,000
Premiums on officers' life insurance - 90,000
Frey's tax rate for 2002 is 30 percent.

30. How much is the income tax expense for 2002?

a. 294,000 c. 302,000
b. 298,000 d. 327,000

Solution:
Multiply by
Description of items Description of items
Tax rate
Pretax income 1,000,000
Permanent differences:
Add: Non-deductible
expenses:
 Life insurance premium 90,000
Less: Non-taxable income
Accounting profit subject to tax 1,090,000 30% Income tax expense 327,000
Temporary differences:
Less:  Taxable temporary difference Less:  Deferred tax
(TTD) 'FI>TI': liability (DTL):
Rent income (50,000) 30% (15,000)
Depreciation (60,000) 30% (18,000)
Add:  Deductible temporary difference Add:  Deferred tax asset
(DTD) 'FI<TI' (DTA):
Taxable profit 980,000 30% Current tax expense 294,000

31. How much is the current tax expense for 2002?

a. 294,000 c. 302,000
b. 298,000 d. 327,000

32. How much is the deferred tax expense (benefit) for 2002?
a. 24,000 c. 33,000
b. (24,000) d. (33,000)

Solution: (15,000 increase in DTL + 18,000 increase in DTL – 0 increase in DTA) =

33,000 deferred tax expense

33. The equity section of ROUSE AWAKEN Co.’s statement of financial position showed the following
information:
6% Preference share capital, ₱400 par value 800,000
Share premium – preference share capital 200,000
Ordinary share capital 3,200,000
Share premium – ordinary share capital 1,200,000
Subscribed share capital – ordinary 400,000
Subscription receivable – ordinary share capital (200,000)
Retained earnings 1,600,000

How much is the legal capital assuming the ordinary shares have par value of ₱200 per share?
a. 5,600,000 c. 4,400,000
b. 4,200,000 d. 5,400,000

Solution: C – (800,000 P/S + 3,200,000 O/S + 400,000 Subscribed) = 4,400,000

34. On January 1, 20x1, the statement of financial position of PROFUSE EXTRAVAGANT Co. shows
the following information:
Share capital (authorized 10,000 shares with par value of ₱400) 3,200,000
Share premium 640,000
Share premium – treasury shares 20,000
Retained earnings 2,140,000
Total shareholders’ equity 6,000,000

On July 1, 20x1, PROFUSE reacquires 1,000 shares at ₱560 and immediately retires them. The entry
on July 1, 20x1 includes a
a. debit to “retained earnings” for ₱60,000
b. credit to “share premium – original issuance” for ₱80,000
 c. credit to “share premium – retirement” for ₱560,000
d. b and c

Solution:
Share capital (1,000 x 400) 400,000
Share premium (640,000 x 1,000/8,000*) 80,000
Share premium – treasury shares 20,000
Retained earnings 60,000
Cash (1,000 x 560) 560,000

* 3,200,000 share capital ÷ 400 par = 8,000 issued shares

35. HOMOLOGOUS MATCHING Co. issued 1,000 convertible preference shares with par value of
₱400 for ₱480 per share. Subsequently, the preference shares were converted into ordinary
shares on a “1 ordinary share-for-1 preference share held” basis. The ordinary shares have par
value per share of ₱200. The entry to record the conversion includes a
a. credit to ordinary share capital for ₱400,000.
b. credit to retained earnings for ₱80,000.
c. credit to share premium for ₱280,000.
d. none of these

Solution:
Preference shares (1,000 x 400) 400,000
Share premium - PS 80,000
Ordinary shares (1,000 x 1 x 200) 200,000
Share premium – OS 280,000