Solution Set P

FINANCIAL ACCOUNTING & REPORTING
ðÖŃG QÜÏZ ŠËT – P

Use the following information for the next three (3) questions:
Babe Time Company issued share appreciation rights (SARs) to 20 of its employees. The SARs will vest at the end of 3
years, provided the employees remain with the company and provided the average revenue growth over the period will
exceed 5%. If the average grown in revenue is between 5 and 10 percent, each employee will receive 1,000 SARs. If the
average growth in revenue is between 11 and 15 percent, each will receive 2,000 SARs. If the average growth in revenue is
more that 15 percent, the employees will each receive 3,000 SARs. On the grant date, each SAR is determined to have a
fair value of P60. Baby Time expects average revenue growth rate of 8% during the 3-year vesting period, and that 8 of its
employee will leave before the vesting period ends.
1) Assuming the estimate do not change during Year 1, what amount of compensation expense should be included in
Babe Time’s income statement in Year 1?
A. 480,000 B. 400,000 C. 240,000 D. 160,000
2) At the end of Year 2, revenue growth projection is 11 percent and 16 employees are expected to remain in the entity’s
employ. Also, the fair value of each SAR is P70. What amount of compensation expense should be reported in Babe
Time’s income statement in Year 2?
A. 1,493,333 B. 1,253,333 C. 1,093,333 D. 720,000
3) At the end of Year 3, revenue growth was 18 percent and 18 employees did not leave the company, further, the fair
value of each SAR is P80. What amount of compensation expense should be reported in Babe Time’s incomes
statement in Year 3?
A. 2,826,667 B. 1,493,333 C. 1,386,667 D. 1,706,667
ANSWER: C, B, C
Year 1 Year 2 Year 3
Fair value / intrinsic value 60 70 80
Number of SARs for each employee 1,000 2,000 2,000
Number of employees expected to receive 12 16 18
Vesting period ratio 1/ 3 2/3 3/ 3
Cumulative expense 240,000 1,493,333 2,880,000
Expense already recorded -- (240,000) (1,493,333)
Compensation expense 240,000 1,253,333 1,386,667
Use the following information for the next two (2) questions:
At the beginning of Year 1, an entity grants to a senior executive 3,000 share options, conditional upon the executive
remaining in the entity’s employ until the end of Year 3. The exercise price is P40. However, the exercise price drops to P30
if the entity’s earnings increase by at least an average of 10 percent per year over the three-year period. On grant date, the
entity estimates that the fair value of the share options, with an exercise price of P30, is P15 per option. If the exercise price
is P40, the entity estimates that the share options have a fair value of P12 per option.
During year 1, the entity’s earnings increased by 12 percent, and the entity expects that earnings will continue to increase
at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and hence the
share options will have an exercise price of P30.
During year 2, the entity’s earnings increased by 13 percent, and the entity continuous to expect that earnings tartget will
be achieved.
During year 3, the entity’s earnings increased only by 3 percent, and therefore the earnings target was not achieved. The
executive completes three-year service and therefore satisfies the service condition. Because the earnings target was not
achieved, the 3,000 vested share options have an exercise price of P40.
4) What is the compensation expense in year 2?

A. 40,000 B. 30,000 C. 15,000 D. 12,000
5) What is the compensation expense in year 3?

A. 60,000 B. 15,000 C. 12,000 D. 6,000

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 1 OF 14 •
ANSWER: C, D
Number of options per employee 3,000 3,000 3,000
Vesting period ratio 1/3 2/3 2/3
Cumulative expense 15,000 30,000 36,000
Expense already recorded -- (15,000) (30,000)
Compensation expense 15,000 15,000 6,000
6) On January 1, 2020, Malang Company established a share appreciation rights plan for the executives. The plan entitled
them to receive cash at any time after the four year vesting period for the difference between the market price of
ordinary share and a pre-established price of P20 on 60,000 rights. Current market prices of shares are P20, P38, P30,
P33 and P28 on January 1, 2020, December 31, 2020, December 31, 2021, December 31, 2022 and December 31,
2023, respectively. What amount of accrued liability should be recognized on December 31, 2022?
A. 780,000 B. 270,000 C. 285,000 D. 585,000
ANSWER: D
Year 2
Fair value / intrinsic value 13
Number of employees expected to receive 60,000
Vesting period ratio 3/ 4
Cumulative expense 585,000
7) Derby Company, a public limited company, has granted share options to its employees with a fair value of
P12,000,000. The options vest in three years’ time. The company uses the fair value model to estimate the fair value of
the options, the number of employees that will vest and the revision of estimates such as the following:
• Grant date – January 1, 2016, estimate of employees leaving the company during the vesting period – 5%.
• Revision of estimate – January 1, 2017 estimate of employees leaving the company during the vesting period – 6%.
• Actual number of employees leaving the company – December 31, 2018 – 5%.
What would be the amount of expense charged in the income statement for the year ended December 31, 2018?
A. 3,760,000 B. 3,800,000 C. 3,880,000 D. 4,000,000
ANSWER: C
Fair value / intrinsic value 12,000,000 12,000,000 12,000,000
Number of employees expected to receive 95% 94% 95%
Vesting period ratio 1/ 3 2/3 3/ 3
Cumulative expense 3,800,000 7,520,000 11,400,000
Expense already recorded -- (3,800,000) (7,520,000)
Compensation expense 3,800,000 3,720,000 3,880,000

Rose Company granted share options to employees with a fair value of P3,000,000. The options vest in three years. The
Monte Carlo model was used to value the options. On January 1, 2022, which is the date of grant, the estimate of
employees leaving the entity during the vesting period is 5%. On December 31, 2023, the estimate of employees leaving
before vesting date is revised to 6%.
On December 31, 2024, only 5% of the employees actually left the entity and on such date a total of 50,000 shares were
issued as a result of the exercise of share options. The shares have a P100 par value and option price of P130.
8) What is the compensation expense for 2024?

A. 500,000 B. 950,000 C. 930,000 D. 970,000
9) What is the share premium to be recognized as a result of the exercise of share options?
A. 1,500,000 B. 2,850,000 C. 4,350,000 D. 5,000,000
ANSWER: D, C
Fair value / intrinsic value 3,000,000 3,000,000 3,000,000
Number of employees expected to receive 95% 94% 95%
Cumulative expense 950,000 1,880,000 2,850,000
Expense already recorded -- (950,000) (1,880,000)
Cash received (50,000 x 130) 6,500,000

Value of options returned 3,000,000 x 95% 2,850,000
Total consideration 9,350,000
Par value of shares issued (50,000 x 100) (5,000,000)
Share premium – excess 4,350,000
On January 1, 2023, Alarciööööööööööööö! Company granted share options to its key officers for the purchase of
20,000, P100 par value ordinary shares at P250 per share. The options are exercisable within a 5-years period beginning
January 1, 2025, by officer still in the employ of Alarciööööööööööööö!, and expiring December 31, 2029. Using an
option pricing model, the total compensation expense is P4,000,000. On April 1, 2024, 3,000 options were forfeited when
some officers resigned from the entity. The market price of the share on this date was P350. On March 31, 2025, 12,000
options were exercised when the market price of the share was P400.
10) What is the compensation expense for 2024?

A. 4,000,000 B. 3,400,000 C. 2,000,000 D. 1,400,000
11) What amount of share premium from issue of share capital is recognized on March 31, 2025?
A. 2,400,000 B. 4,200,000 C. 3,000,000 D. 6,000,000
ANSWER: D, B
Year 1 Year 2
Fair value / intrinsic value 4,000,000/20,000 200 200
Total number of options expected to grant 20,000 17,000
Vesting period ratio 1/ 2 2/2
Cumulative expense 2,000,000 3,400,000
Expense already recorded -- (2,000,000)
Compensation expense 1,000,000 1,400,000
Cash received (12,000 x 250) 3,000,000

Value of options returned 12,000 x 200 2,400,000
Par value of shares issued (12,000 x 100) 1,200,000
Share premium – excess 4,200,000

On January 1, 2020, the shareholders of Jaybo Company approve a plan that grants the company’s five executives options
to purchase 3,000 shares each of the company’s P50 par value ordinary shares. The options are granted on January 2,
2020 and may be exercised anytime from January 1, 2023 to December 31, 2023.
Based on an option pricing model used by Jaybo Company, the fair value of the option on the date of grant was P40. The
market price per share on January 1, 2020 was P95, while the option price is P60. Other information follow:
• The executive must be in the employ of the company when exercising the options.
• 1 executive left the company during 2021.
• The remaining options vested and all vested options were exercised in 2023.
12) How much is the compensation expense for the year ended 2021?
A. 120,000 B. 200,000 C. 400,000 D. 80,000
13) How much is the share premium to be credited in recording the exercise of the option in 2023?
A. 720,000 B. 120,000 C. 600,000 D. 1,200,000
ANSWER: D, C
Number of option for each employee 3,000 3,000 3,000
Cumulative expense 200,000 320,000 480,000
Expense already recorded -- (200,000) (320,000)
Cash received 3,000 x 4 executives x P60 option price 720,000

Value of options returned 3,000 x 4 executives x P40 FV of option 480,000
Par value of shares issued 3,000 x 4 executives x P50 Par value 600,000
Share premium – excess 600,000
14) Dividends receivable from a subsidiary have a carrying amount of P4,000. The dividends are not taxable. How much is
the tax base of the asset?
A. 4,000 B. 2,400 C. 1,600 D. 0
ANSWER: A
Asset arising from a revenue that will result to a permanent difference (non-taxable or revenue already subjected to a final
tax), its tax base is equal to its carrying amount.
15) Accursed Entity has the following information:

12/31/20 12/31/21
Cumulative temporary difference giving rise to future taxable amount 8,000,000 10,000,000
Cumulative temporary difference giving rise to future deductible amount 6,000,000 5,000,000
Tax rate 30% 30%
The deferred tax expense for the year 2021 is

A. 1,50,000 B. 900,000 C. 600,000 D. 300,000
ANSWER: B
Deferred Tax Asset
Beginning 6M x 30% 1,800,000
Deferred tax benefit . 300,000 E Deferred tax expense
Ending 1,500,000
Deferred Tax Liability

2,400,000 8M x 30% 1/1/20 Beginning
Deferred tax benefit . 600,000 E Deferred tax expense
3,000,000 10M x 30% 12/31/20 Ending
(Increase in DTA = benefit) (Decrease in DTA = expense) 300,000 E

(Increase in DTL = expense) (Decrease in DTL = benefit) 600,000 E

Deferred tax expense/benefit 900,000 E
16) Krillin Company reports taxable income of P1,658,000 on its income tax return for the year ended December 31, 2021.
Temporary differences between financial income and taxable income for the year are:
• Book depreciation in excess of tax depreciation, P160,000.
• Accrual of product warranty claims in excess of actual claims, P250,000.
• Reported installment sales revenue, P530,000.
What is Krillin’s Company’s financial income subject to tax for the year ended December 31, 2021?
A. 2,598,000 B. 1,778,000 C. 1,658,000 D. 1,538,000
ANSWER: B
Accounting Income SQUEEZE 1,778,000
Permanent differences:
Non Taxable Income ---
Non Deductible Expense --- ---
Accounting Income subject to tax 1,778,000 % --- Total Tax Expense
Temporary Differences (current year):
Deductible Temporary ( + ) 160,000 % --- Increase in DTA ( benefit )
Taxable Temporary ( – ) (530,000) Increase in DTL ( expense )
Total --- (120,000) % --- --- Deferred Tax Expense (Benefit)
Taxable Income 1,658,000 % --- Current Tax Expense
Goten Company, a domestic corporation, started operations in the latter part of the first quarter of 2021. The company
opted to report its financial statements for the nine month ended December 31, 2021. The pretax financial income for the
period was P1,200,000. In preparing the income tax return for the period, the tax accountant determined the following
differences between 2021 financial income and taxable income.
• Because of non-compliance with some local government requirements, the city treasurer assessed fines and penalties
totaling P22,500.
• The company made a donation to Hospicio de San Kanor amounting to P25,000. Tax laws consider a donation of this
kind as non-deductible in full amount.
• Cash dividends received from equity investments in a domestic corporation, P5,200.
• Rent was paid in advance for one year amounting to P240,000. The financial statement of Goten Company reported
prepaid rent of P60,000.
• The company uses straight-line depreciation for all its depreciable assets and sum-of-the-years’ digits for tax purposes,
resulting to a difference in depreciation expense of P50,000.
• Currently, the income tax rate is 30%. There are no changes in tax rates that have been enacted or substantially
enacted for future years.
17) How much is the deferred tax liability at December 31, 2021?
A. 33,000 B. 30,000 C. 18,000 D. 15,000
18) What is the taxable income?

A. 1,352,300 B. 1,132,300 C. 1,242,300 D. 1,200,000
19) What is the total income tax expense?

A. 372,690 B. 360,000 C. 330,690 D. 306,690
ANSWER: A, B, A
Accounting Income 1,200,000
Non Taxable Income (5,200)
Non Deductible Expense 22,500
Non Deductible Expense 25,000 42,300
Accounting Income subject to tax 1,242,300 30% 372,690 Total Tax Expense
Taxable Temporary ( - ) (60,000) 30% 18,000 Increase in DTL
Taxable Temporary ( - ) (50,000) 30% 15,000 Increase in DTL
Total --- (110,000) % --- 33,000 Deferred Tax Expense (Benefit)
20) The following information is taken from Piccolo Company’s 2021 profit and loss:

Profit before income taxes 3,000,000
Income tax expense
Current 1,128,000
Deferred 84,000 1,212,000
Profit 1,788,000
Piccolo Company’s first year of operation was 2021. The company has a 30% tax rate. Piccolo decided to use
accelerated depreciation for tax purposes and the straight-line method for financial reporting purposes. The amount
charge to depreciation expense in 2021 was P1,200,000. Assuming the temporary difference existed between the
book income and taxable income, what amount did Piccolo Company deduct for depreciation on its tax return for
2021?
A. 1,480,000 B. 1,280,000 C. 1,200,000 D. 920,000
ANSWER: A,
Deferred tax expense (expense, since it was added to the current tax expense) 84,000
Tax rate 30%
Taxable temporary difference due to excess tax depreciation 280,000
Accounting depreciation 1,200,000
Tax depreciation 1,480,000
21) The following differences enter into the reconciliation of financial income and taxable income of One Click Company for
the year ended December 31, 2021, its first year of operations.
Accounting profit 4,500,000
Excess tax depreciation 3,000,000
Litigation accrual 450,000
Unearned rent income deferred on the books but appropriately recognized in taxable income 250,000
Interest income from long-term certificate of deposit 100,000
Additional information:
• Excess tax depreciation will reverse equally over a four-year period, 2022-2025.
• It is estimated that the litigation liability will be paid in 2025.
• Rent income will be recognized during the last year of lease, 2025.
• Interest income from long-term certificate of deposit is tax exempt.
• Tax rate is 35%
What is the current income tax expense for 2021?

A. 735,000 B. 647,500 C. 560,000 D. 770,000
ANSWER: A
Accounting Income 4,500,000
Non Taxable Income (100,000)
Non Deductible Expense --- (100,000)
Accounting Income subject to tax 4,400,000
Taxable Temporary ( – ) (3,000,000)
Deductible Temporary ( + ) 450,000
Deductible Temporary ( + ) 250,000
Total --- (2,300,000)
Taxable Income 2,100,000 35% 735,000 Current Tax Expense
22) At December 31, 2021, Torpedo Corporation’s taxable profit is P5,000,000. The following items are the temporary
differences that caused Torpedo’s income in the income tax return to differ from the amount reported in the income
statement: future deductible amounts expected to reverse in 2022 of P400,000 and future taxable amounts expected
to reverse in 2022 and 2023 of P500,000 and P900,000, respectively. Torpedo’s income tax rate is 35%.
The income tax expense reported by Torpedo in its December 31, 2021 income statement is
A. 2,100,000 B. 1,400,000 C. 1,750,000 D. 1,785,000
ANSWER: A
Accounting Income subject to tax SQUEEZE 6,000,000 35% 2,100,000 Total Tax Expense
Taxable Temporary ( – ) (1,400,000) % --- Increase in DTL ( expense )

Total --- (1,000,000) % --- --- Deferred Tax Expense (Benefit)
23) On its December 31, 2021 statement of financial position, Magda Company has income tax payable of P260,000 and a
deferred tax asset of P400,000. Magda had reported a deferred tax asset of P300,000 at December 31, 2020. No
estimated tax payments were made during 2021. At December 31, 2021, Magda determined that it was probable that
the deferred tax asset would be realized. In its 2021 income statement.
What amount should Magda report as total income tax expense?

A. 260,000 B. 150,000 C. 170,000 D. 160,000
ANSWER: D
Current tax expense (equal to the amount of increase in income tax payable account) 260,000 E
Deferred tax benefit (equal to amount of increase of DTA) 100,000 B
Income tax expense 160,000 E
24) The tax return of Jayree Company indicates taxable profit of P15,000,000 on which a tax liability of P5,250,000 has
been recognized. Following is a list of items that may be required to determine accounting profit from the amount of
taxable profit.
Accelerated depreciation for income tax purposes was P2,000,000 and straight line financial depreciation P1,500,000.
Insurance premium of P100,000 on an office with Jayree as beneficiary was not included as a deduction in the tax
return. Interest on treasury bills was not included in the tax return. During the year, Jayree received P2,500,000 on
these investments. What was Jayree Company’s accounting profit?
A. 15,500,000 B. 17,400,000 C. 18,000,000 D. 17,900,000
ANSWER: D
Accounting Income SQUEEZE 17,900,000
Non Taxable Income (2,500,000)
Non Deductible Expense 100,000 (2,400,000)
Accounting Income subject to tax 15,500,000
Taxable Temporary ( – ) (500,000)
Taxable Income 15,000,000
25) On April 1, 2023, the company rate of income tax was changed from 35% to 30%. At the previous date (June 30,
2022) Puto Company had the following tax balances:
Deferred tax assets 26,250
Deferred tax liabilities 21,000
What is the impact of the tax rate change on income tax expense?
A. Increase P750 B. Decrease P750 C. Increase P875 D. Decrease P875
ANSWER: A
Deferred tax asset at 35% 26,250
Deferred tax asset at 30% (26,250 / 35%) x 30% 22,500
Decrease in DTA or deferred tax expense 3,750
Deferred tax liabilities at 35% 21,000

Deferred tax liabilities at 30% (21,000 / 35%) x 30% 18,000
Decrease in DTL or deferred tax benefit 3,000
Decrease in DTA or deferred tax expense 3,750
Net deferred tax expense due to change in TR 750
26) Bersarino Limited has an asset which cost P300,000 and against which depreciation of P100,000 has accumulated.
The accumulated depreciation for tax purposes is P180,000 and the company tax rate is 30%. Which statement is
correct?
A. The tax base of the asset is P180,000.
B. The entity has a taxable temporary difference of P120,000.
C. The entity should recognized deferred tax asset of P36,000.
D. The entity should recognize deferred tax liability of P24,000.

ANSWER: D
A – is false, the tax base should be P120,000 (300,000 – 180,000).
B – is false, the taxable temporary difference should be P80,000 (CA of 200,000 – TB of 120,000).
C – is false, DTL will arise from taxable temporary not DTA.
D – is true, taxable temporary of P80,000 x 30% = P24,000.
27) Margarettttttttttttt! Company sponsors a defined benefit pension plan for the current year ended December 31, the
following information relevant to the plan has been accumulated:
Defined benefit obligation, January 1 10,000,000
Fair value of plan asset, January 1 9,000,000
Current service cost 3,000,000
Gain on settlement 500,000
Actual return on plan assets 630,000
Increase in defined benefit obligation due to changes in actuarial assumptions 800,000
Market yield on high quality corporate bonds 6%
Yield on bonds issued by the entity 8%
Expected return on plan assets 9%
What amount should Margarettttttttttttt! contribute in order to report an accrued pension liability of P500,000 in its
December 31 statement of financial position?
A. 2,060,000 B. 2,770,000 C. 3,060,000 D. 3,770,000
ANSWER: D
Fair value of plan asset SQUEEZE** 13,400,000
Projected benefit obligation* (13,900,000)
Prepaid benefit cost / accrued benefit cost (500,000)
Fair Value of Plan Asset

Plan asset, Beginning 9,000,000 0 Settlement price of PBO settled in advance
Contribution SQUEEZE 3,770,000 0 Payment to retirees
Actual return on plan asset 630,000
Plan asset, Ending **13,400,000
Present Value of Benefit Obligation

CA of PBO settled in advance 500,000 10,000,000 PBO, Beginning
Actuarial gain on PBO 0 3,000,000 Current service cost
Benefits paid to retirees 0 0 Past service cost
800,000 Actuarial loss on PBO
600,000 Interest expense
*13,900,000 Plan asset, Ending
28) Sorry Sorry Company adopted a defined benefit plan. the balance as of January 1, 2021 were P210,000 for plan assets
and P215,000 for the projected benefit obligation. Other data relating to 3 years’ operation of the plan are as follows:
2021 2022 2023
Annual service cost 40,000 51,000 66,000
Settlement rate 12% 12% 12%
Expected rate of return 10% 10% 10%
Actual return on plan asset 18,200 35,000 40,000
Annual contribution 45,000 35,000 55,000
Benefits paid 60,000 20,000 25,000
Past service cost 0 80,000 0
Change in actuarial assumption
PBO of (December 31, 2022 – 2023) 419,500 518,000
The December 31, 2021 balance sheet will include a

A. 2,600 prepaid B. 2,600 accrued C. 7,600 prepaid D. 7,600 accrued
ANSWER: D
Fair value of plan asset 213,200
Projected benefit obligation* (220,800)
Prepaid benefit cost / accrued benefit cost (7,600)

Plan asset, Beginning 210,0000 60,000 Settlement price of PBO settled in advance
Contribution SQUEEZE 45,000 0 Payment to retirees
Actual return on plan asset 18,200
Plan asset, Ending 213,200

CA of PBO settled in advance 0 215,000 PBO, Beginning
Actuarial gain on PBO 0 40,000 Current service cost
Benefits paid to retirees 60,000 0 Past service cost
0 Actuarial loss on PBO
220,800 Plan asset, Ending
The following information is made available in relation to the defined benefit plan of Nozomi Company for the year 2022:
Current service cost 200,000
Fair value of plan asset – December 31, 2022 4,000,000
Asset ceiling – January 1, 2022 200,000
Fair value of plan asset – January 1, 2022 2,000,000
Contribution to the plan 700,000
Discount rate 12%
Defined benefit obligation – December 31, 2022 3,440,000
Asset ceiling – December 31, 2022 340,000
Benefits paid to retirees 400,000
Defined benefit obligation – January 1, 2022 1,700,000
29) What amount of defined benefit cost should be reported in profit or loss?
A. 164,000 B. 560,000 C. 176,000 D. 384,000
30) What is the remeasurement loss related to the change in the effect of asset ceiling?
A. 112,000 B. 220,000 C. 108,000 D. 0
31) What is the total net remeasurement gain/loss to be reported as a component of other comprehensive income?
A. 176,000 B. 384,000 C. 276,000 D. 560,000
32) How much is the actual return on plan assets for the year 2022?
A. 240,000 B. 1,460,000 C. 1,220,000 D. 1,700,000
33) How much is the overfunding/underfunding for the year 2022?

A. 140,000 over B. 140,000 under C. 248,000 over D. 248,000 over
34) How much is the balance of prepaid pension (asset) or accrued pension (liability) that should be presented in the
statement of financial position as of December 31, 2022?
A. 340,000 B. 220,000 C. 300,000 D. 560,000
ANSWER: C, C, B, D, A, A
Current service cost (+) 200,000
Past service cost (+) 0
Loss on settlement of PBO paid in advance (+) 0
Gain on settlement of PBO paid in advance (–) 0
Total service cost 200,000
Interest expense (beginning PBO x interest rate) 1,700,000 x 12% 204,000 L

Interest income (beginning FVPA x interest rate) 2,000,000 x 12% 240,000 G
Interest on effect 12,000 L
Net interest expense / income 24,000 G
Total service cost 200,000 L

Net interest 24,000 G
Total benefit expense 176,000 L
Gain or loss on the actual return on plan asset 1,460,000 G

Gain or loss on actuarial assumption on the benefit obligation 1,736,000 L
Change in effect after the interest 108,000 L
Total remeasurement 384,000 L
Actual return on plan asset 1,700,000

Interest income (beginning FVPA x interest rate) 240,000
Gain (loss) on the actual return on plan asset 1,460,000 G
Total service cost 200,000 L

Net interest 24,000 G
Total remeasurement 384,000 L
Total benefit cost 560,000 L

Plan asset, Beginning 2,000,000 400,000 Settlement price of PBO settled in advance
Contribution 700,000 Payment to retirees
Actual return on plan asset SQUEEZE 1,700,000
Plan asset, Ending 4,000,000

CA of PBO settled in advance 0 1,700,000 PBO, Beginning
Actuarial gain on PBO 200,000 Current service cost
Benefits paid to retirees 400,000 0 Past service cost
1,736,000 SQUEEZE Actuarial loss on PBO
3,440,000 Plan asset, Ending
January 1 December 31
Fair value of plan asset 2,000,000 4,000,000
Present value of benefit obligation 1,700,000 3,440,000
Surplus (deficit) 300,000 560,000
Asset ceiling 200,000 340,000
Effect of asset ceiling 100,000 220,000 120,000 Change in effect
Interest on effect (beg. effect x interest rate) X 12% 12,000 Profit or loss
Effect after the interest on effect 108,000 O.C.I.
Contribution made to the plan 700,000

Total benefit cost 560,000
Overfunding (underfunding) 140,000
Fair value of plan asset 4,000,000

Projected benefit obligation 3,440,000
Prepaid benefit cost / accrued benefit cost 560,000
Should not exceed the asset ceiling. P340,000 is the answer (asset ceiling).
35) At the beginning of current year, Atasha Company reported the fair value of plan assets at P7,800,000 and projected
benefit obligation at P10,400,000. During the year, the entity made a lump sum payment to certain plan participants in
exchange for their rights to received specific post employment benefits. The lump sum payment was P1,040,000 and
the present value of the defined benefit obligation settled was P1,300,000. During the current year, the entity reported
current service cost P1,170,000, actual return on plan assets P1,040,000, contribution to the plan P910,000 and
discount rate 12%.
What is the employee benefit expense?

A. 1,482,000 B. 2,418,000 C. 1,170,000 D. 1,222,000
SOLUTION: D
Current service cost 1,170,000
Past service cost ---
Gain or loss on advance settlement (1,040,000 – 1,300,000) (260,000)
Total service cost 910,000
Net interest cost on plan asset and PBO (1,248,000* – 936,000**) 312,000
Interest on the effect of asset ceiling ---
Benefit expense 1,222,000

*10,400,000 x 12% = 1,248,000
**7,800,000 x 12% = 936,000
36) Baltazar Company implemented a defined benefit plan on January 1, 2019. The following data are provided on
December 31, 2019:
Projected benefit obligation P 103,000
Plan assets at fair value 78,000
Net periodic pension cost 90,000
Employer’s contribution 70,000
What amount should be recorded as pension liability on December 31, 2019?

A. 45,000 B. 25,000 C. 20,000 D. 0
SOLUTION: A
Accrued benefit cost beg 25,000
Benefit cost 90,000
Contribution 70,000
Accrued benefit cost ending 45,000
37) On December 31, 2019, Asayas Company reported fair value of plan assets P9,000,000 and projected benefit
obligation P9,400,000. On December 31, 2020, the entity reported fair value of plan assets P9,900,000 and projected
benefit obligation P11,100,000. During 2020, contribution was P1,260,000 and benefits paid were P1,125,000. The
discount rate for 2019 and 2020 were 10% and 9%, respectively. What is the remeasurement gain or loss attributable
to plan assets for 2020?
A. 135,000 loss B. 135,000 gain C. 45,000 loss D. 45,000 gain
SOLUTION: A
Actual return on plan asset *765,000
Interest income (beginning FVPA x interest rate) 9M x 10% 900,000
Gain (loss) on the actual return on plan asset 135,000 L

Plan asset, Beginning 9,000,000 Settlement price of PBO settled in advance
Contribution 1,260,000 1,125,000 Payment to retirees
Actual return on plan asset SQUEEZE *765,000
Plan asset, Ending 9,900,000
38) A director of an entity receives a retirement benefit of 10% of his final salary per annum for his contractual period of
three years. The director does not contribute to the scheme. His anticipated salary over the three years is Year 1
P10,000, Year 2 P120,000, and Year 3 P144,000. Assume a discount rate of 5%. The benefit obligation at the end of
the second year is?
A. 29,520 B. 27,429 C. 26,775 D. 22,500
ANSWER: C
Service cost year 1 144,000 x 10% 14,400
Service cost year 2 144,000 x 10% 14,400
Total unpaid service cost 28,800
Present value one period 0.9524
Present value of obligation 27,429
Use the following information for the next one (1) questions:
Glamorous Company, the lessor, leased to Fergie Company, the lessee, a machine for 5 years. The machine has an
economic life of 20 years. The lease is non-cancellable over the lease term. Details of the lease contract are as follows:
• Fair value of the machine = P10,000.
• Five annual rentals payable in advance of P2,100.
• Lessor’s unguaranteed estimated residual value at end of five years = P1,000.
• The lessee’s incremental borrowing rate for a similar type of lease and risk = 8.53%.
39) What is the rate that should be used by the lessor?

A. 6.62% B. 7.53% C. 8.53% D. Not determinable

ANSWER: A
Amount Present value factor Present value
Periodic rent 2,100 4.41647266 9,278.59
GRV or URV 1,000 0.72578279 725.79
Net investment FV 10,004.4
Trial and error each choices. Difference due to rounding
40) Deadlift Company leased out a building costing P20,000,000 for 20 years to Cat Company with effect from January 1,
2022. The useful life of the building is 40 years. As part of the negotiations for the lease, Deadlift granted Cat Company
a rent-free period. Annual rentals of P1,600,000 are payable in advance on January 1, commencing in 2023. The net
income to be reported by Deadlift in 2022 is
A. 1,600,000 B. 1,100,000 C. 1,020,000 D. 1,520,000
ANSWER: A
Total rent over the lease term 1.6M x 19 years 30,400,000
Lease term 20
Straight line rent revenue per year 1,520,000
Depreciation 20M / 40 years (500,000)
Net income 1,020,000
41) Lovely Company owns office space held for leasing. The carrying amount of this property on January 1, 2021 is
P2,000,000 and has an estimated useful life of 10 years. Lovely Company computes depreciation on the straight-line
basis. On January 2, 2021, Lovely Company entered into a lease contract with Precious Company for a term of three
years until December 31, 2023. The lease fee is P100,000 per month, under an agreement for an increase annually at
the rate of 5%. Lovely Company also requires a refundable deposit of P300,000 to be paid in advance upon
occupancy. Lovely paid P120,000 commissions and other fees with negotiating the lease. Lovely Company should
report net rental income for 2023 at
A. 1,221,000 B. 1,060,000 C. 1,021,000 D. 941,000
ANSWER: A
Rent revenue
1. Straight line rent revenue [1,200,000 + (1,200,000 x 1.05) + (1,200,000 x 1.05 x 1.05)] / 3 1,261,000
1. Amortization of initial direct cost (120,000/3) (40,000)
Net rent income 1,221,000
42) Johnree Company purchased a new machine for P8,000,000 on January 1, 2020 for the purpose of leasing it. The
machine has an estimated 10-year life. On April 1, 2020, Johnree leased the machine to Bibi for three years at a
monthly rental of P200,000. Bibi Company paid the rental for one year of P2,400,000 on April 1, 2020 and additionally
paid P600,000 to Johnree as a lease bonus to obtain the three-year lease. For 2020, Johnree incurred insurance of
P50,000 for the leased machine. What is Johnree’s 2020 operating profit on this leased asset?
A. 1,100,000 B. 1,300,000 C. 1,700,000 D. 1,400,000
ANSWER: A
Rent revenue
1. Straight line rent revenue 200,000 x 9 1,800,000
2. Amortization of lease bonus (600,000 / 3 years) x 9/12 150,000
3. Contingent rent --
Total 1,950,000
Rent related expenses
1. Depreciation 8,000,000/10 years (800,000)
2. Executory cost (50,000)
3. Amortization of initial direct cost (300,000/3 years) x 9/12 --
Net rent income 1,100,000
43) On January 1, 2020, Slow Company entered into a lease agreement with Fast Company for a machine which was
carried on its accounting records at P3,000,000. Total payments under the lease aggregate P5,000,000 of which
P3,380,000 represents the fair value and cost of the machine to Fast. Payment of P%00,000 are due on January 1
each year starting January 1, 2020.
The interest rate of 10% which was stipulated in the lease is considered fair and adequate compensation to Slow for
the use of its funds. Fast expects the machine to have a 10-year life, no residual value and be depreciated on a straight

line basis. The lease is appropriately classified as a sales type lease by Slow. What should be the total income before
tax that is derived by Slow from this lease for the year ended December 31, 2020?
A. 668,000 B. 298,000 C. 338,000 D. 718,000
ANSWER: A
Sales (PV of periodic rent + PV of GRV) also equal to FV 3,380,000
Cost of sale (Cost + Initial direct cost) 4,000,000 + 200,000 3,000,000
Gross profit 380,000
Net investment 3,380,000

First payment (500,000)
Carrying amount of lease receivable after the first payment 2,880,000
Interest rate 10%
Interest income 288,000
Gross profit 380,000
Total income 668,000
44) Britney Company leased office premises to a lessee for a five year term beginning January 1, 2020. Under the terms of
the operating lease, rent for the first year is P80,000 and rent for years two through five is P125,000 per annum.
However, as an inducement to enter the lease, Britney granted the lessee the first six months of the lease rent-free.
What amount should be reported as rental income for 2020?
A. 120,000 B. 116,000 C. 108,000 D. 80,000
ANSWER: C
First year payment 80,000 x 6/12 40,000
2nd to 5th year payment 125,000 x 4 500,000
Total payment 540,000
Lease term 5
Straight line rent revenue 108,000
45) Torry leased an asset to Sorry that cost P100,000 when purchased by Torry. The lease term was for six years and
specified year-end rentals. Torry earns a P12,000 dealer’s profit and uses an interest rate of 14 percent to compute the
annual rentals. The amount of each annual rental must be:
A. 16,666 B. 18,666 C. 21,280 D. 28,802
ANSWER: D
Periodic rent SQUEEZE 28,806 3.888 112,000
GRV --- -- ---
Sales SQUEEZE 112,000
Cost of sales 100,000
Gross profit 12,000
46) Saitomi entered into a sales-type lease to lease BB an asset that cost Saitomi P120,000. The lease agreement requires
five annual year-end rentals of P40,000 each. Saitomi used a 15 percent interest rate to compute the rentals. The
dealer’s profit (or loss) that Saitomi recognized was:
A. 14,086 loss B. 14,086 gain C. 18,000 gain D. 80,000 gain
ANSWER: A
Sales 40,000 x 3.352155 134,086
Cost of sales 120,000
Gross profit 14,086
Use the following information for the next four (4) questions:
Chelu Company used leases as a method of selling products. During the current year, the entity completed construction of
a passenger ferry. At the beginning of current year, the ferry was leased on a contract specifying that ownership of the ferry
will transfer to the lessee at the end of the lease period.
Original cost of the ferry 8,000,000
Fair value of ferry at the inception of lease 13,000,000
Residual value – guaranteed 2,000,000
Annual rental payable in advance at the beginning of each year 1,500,000
Implicit interest rate 12%
Lease term 20 years

Present value of an annuity due of 1 at 12% for 20 periods 8.37
Present value of an ordinary annuity of 1 at 12% for 20 periods 7.47
Present value of 1 at 12% for 20 periods 0.10
47) What is the gross investment in the lease?

A. 30,000,000 B. 32,000,000 C. 38,000,000 D. 10,000,000
48) What is the net investment in the lease?

A. 12,555,000 B. 13,000,000 C. 12,755,000 D. 11,205,000
49) What is the gross profit on sale for the current year?
A. 6,555,000 B. 4,555,000 C. 5,000,000 D. 3,205,000
50) What is the interest income for the current year?

A. 1,506,000 B. 1,560,000 C. 1,326,600 D. 1,380,000
ANSWER: A, A, B, A, C
Amount Lease term Total amount
Periodic rent 1,500,000 20 30,000,000
GRV or URV* 0
Gross investment 30,000,000

Periodic rent 1,500,000 8.37 12,555,000
GRV or URV 0
Gross investment 30,000,000

Unearned rent 17,445,000
Net investment / CA of lease receivable after first payment 12,555,000 – 1,500,000 11,055,000
Interest rate 12%
Interest income 1,326,600
Sales (PV of periodic rent + PV of GRV) 5,400,000 + 285,000 12,555,000

Cost of sale (Cost + Initial direct cost) 4,000,000 + 200,000 8,000,000
Gross profit 4,555,000
Residual value in this problem should be completely ignored since there is a TRANSFER OF OWNERSHIP.
J ËÑD ÖF ðÖŃG QÜÏZ ŠËT – P J


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4) What is the compensation expense in year 2?

5) What is the compensation expense in year 3?

8) What is the compensation expense for 2024?

Cash received (50,000 x 130) 6,500,000

10) What is the compensation expense for 2024?

Cash received (12,000 x 250) 3,000,000

Cash received 3,000 x 4 executives x P60 option price 720,000

15) Accursed Entity has the following information:

The deferred tax expense for the year 2021 is

Deferred Tax Liability

(Increase in DTA = benefit) (Decrease in DTA = expense) 300,000 E

18) What is the taxable income?

19) What is the total income tax expense?

What is the current income tax expense for 2021?

What amount should Magda report as total income tax expense?

Deferred tax liabilities at 35% 21,000

Fair Value of Plan Asset

Present Value of Benefit Obligation

The December 31, 2021 balance sheet will include a

Present Value of Benefit Obligation

33) How much is the overfunding/underfunding for the year 2022?

Interest expense (beginning PBO x interest rate) 1,700,000 x 12% 204,000 L

Total service cost 200,000 L

Gain or loss on the actual return on plan asset 1,460,000 G

Actual return on plan asset 1,700,000

Total service cost 200,000 L

Fair Value of Plan Asset

Present Value of Benefit Obligation

Contribution made to the plan 700,000

Fair value of plan asset 4,000,000

What is the employee benefit expense?

What amount should be recorded as pension liability on December 31, 2019?

Fair Value of Plan Asset

39) What is the rate that should be used by the lessor?

Net investment 3,380,000

47) What is the gross investment in the lease?

48) What is the net investment in the lease?

50) What is the interest income for the current year?

Amount Present value factor Present value

Gross investment 30,000,000

Sales (PV of periodic rent + PV of GRV) 5,400,000 + 285,000 12,555,000

J ËÑD ÖF ðÖŃG QÜÏZ ŠËT – P J

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