FAR – EMPLOYEE BENEFITS

Employee Benefits
THEORY
1. According to PAS 19, short-term employee benefits are recognized
a. at each year-end
b. at each month-end
c. on a semi-monthly basis
d. when an employee has rendered service in exchange for those benefits.

2. According to PAS 19, contributions to a defined contribution plan are recognized

a. at each year-end
b. when an employer makes those contributions.
c. when an employee has rendered service in exchange for those contributions.
d. at the beginning of each reporting period.

3. If the present value of the defined benefit obligation exceeds the fair value of the plan assets, there is
a. deficit c. expense
b. surplus d. prepaid accrued benefit cost

4. If the fair value of the plan assets exceeds the present value of the defined benefit obligation, there is
a. deficit c. expense
b. surplus d. prepaid accrued benefit cost

5. The net defined benefit liability is equal to the

a. deficit c. asset ceiling
b. surplus d. lower of b and c

6. The net defined benefit asset is equal to the

a. deficit c. asset ceiling
b. surplus d. lower of b and c

7. The balance of the present value of defined benefit obligation is affected by all of the following except
a. actuarial gains or losses c. current service cost
b. interest cost d. contributions to the fund

8. Actuarial gains or losses arising during the period are

a. ignored in the computation of actuarial gains or losses included in the defined benefit cost recognized
during that period.
b. amortized over the average remaining service lives of the plan participants.
c. recognized immediately during the period in profit or loss
d. recognized immediately during the period in other comprehensive income
e. partly c and partly d

9. All of the following are components of the defined benefit cost except
a. unvested past service cost c. loss on settlement
b. interest on the effect of the asset ceiling d. return on plan assets

10. Which of the following are recognized in other comprehensive income?

a. service cost
b. net interest in net defined benefit liability (asset)
c. amortization of actuarial gains or losses
d. difference between interest income on plan assets and return on plan assets

11. The discount rate used to determine the interest income on plan assets is
a. the rate used to discount the defined benefit obligation
b. the expected rate of return
c. the expected rate of return determined based on market yields at the start of the year
d. the actual rate of return during the period

12. If the retirement benefit earned by an employee during the period is P10,000, how much is the current
service cost?
a. the present value of P10,000
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FAR – EMPLOYEE BENEFITS

b. the future value of P10,000

c. the accumulated present value of P10,000
d. the accumulated future value of P10,000

13. How is the interest cost on a defined benefit plan computed?

a. Discount rate multiplied by the beginning balance of the present value of the defined benefit obligation.
b. Discount rate multiplied by the ending balance of the present value of the defined benefit obligation.
c. Discount rate multiplied by the beginning balance of the net defined benefit liability (asset).
d. Discount rate multiplied by the ending balance of the net defined benefit liability (asset).

14. The components of the defined benefit cost includes all of the following except
a. service cost
b. net interest in the net defined benefit liability (asset)
c. remeasurements of the net defined benefit liability (asset)
d. amortization of the past service cost

15. The component of the defined benefit cost recognized in profit or loss is
a. service cost
b. net interest in the net defined benefit liability (asset)
c. remeasurements of the net defined benefit liability (asset)
d. a and b

16. The component of the defined benefit cost recognized in other comprehensive income is
a. service cost
b. net interest in the net defined benefit liability (asset)
c. remeasurements of the net defined benefit liability (asset)
d. a and b

17. The remeasurements of the net defined benefit liability (asset) includes all of the following except
a. actuarial gains and losses arising during the period
b. difference between the return on plan assets and the interest income on plan assets.
c. difference between the change in the effect of the asset ceiling and the interest on the asset ceiling
d. difference between the current service cost and the past service cost

18. Which of the following methods of accounting for defined benefit plans is not outlawed by the current PAS 19?
a. The use of the ‘corridor approach’ in accounting for actuarial gains and losses.
b. The use of an expected rate of return in recognizing interest income on plan assets.
c. The method of amortizing unvested past service cost over the vesting period.
d. Recognizing interest cost on the defined benefit obligation in profit or loss.

19. Other long-term employee benefits are accounted for

a. using a more complex method as compared to the accounting for post-employment benefits.
b. similarly with procedures established for post-employment benefits except that all benefit costs are
recognized in other comprehensive income.
c. similarly with procedures established for post-employment benefits except that all benefit costs are
recognized in profit or loss.
d. similarly with termination benefits and short-term employee benefits.

20. Why are termination benefits accounted for separately and differently from other types of employee benefits?
a. because payments for termination benefits are unplanned and cannot be reasonably foreseen before the
period of termination.
b. because the act of terminating employees are governed under strict laws which generally favor the
welfare of employees, rather than employers.
c. because the obligation for termination benefits arises from the act of terminating employment rather than
from employee service.
d. because terminating employees is an act of cold-heartedness and CPAs are loving, gentle and kind.

PROBLEMS
1. Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period.
Odiong Company accrues salaries expenses only at its December 31 year-end. Data relating to salaries earned
in December 31, 2014 are as follows:
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• Last payroll was paid on December 26, 2014 for the 2-week period ended December 26, 2014
• Overtime pay earned in the 2-week period ended December 26, 2014 was P10,500.
• Remaining work days in 2014 were December 27, 28, and 29, on which days, there was no overtime
• The recurring biweekly salaries total P187,500.

Assuming a five-day workweek, what amount should Odiong Company record as accrued salaries at December 31,
2014?
A. 56,250 B. 66,750 C. 112,500 D. 123,000
(Adapted)
2. Junior Corporation 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 amounts of Junior Corporation’s obligations as of
December 31, 2014 are reasonably estimated as follows:

Vacation pay P1,100,000

Sick pay 900,000

In its December 31, 2014 statement of financial position, what amount should Junior Corporation report as its
liability for compensated absences?
A. 0 B. 900,000 C. 1,100,000 D. 2,000,000
(Adapted)
3. AKR Company has an employee benefit plan for compensated absences that gives employees 10 paid vacation
days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect
to receive payment in lieu of vacation days. However, no payment is given for sick days not taken. At December
31, 2014, AKR Company’s unadjusted balance of liability for compensated absences was P210,000. AKR
Company estimated that there were 150 vacation days and 75 sick days available at December 31, 2014. AKR
Company’s employees earn an average of P1,000 per day.

In its December 31, 2014 statement of financial position, what amount of liability for compensated absences is AKR
Company is required to report?
A. 150,000 B. 210,000 C. 225,000 D. 360,000
(Adapted)
4. Jo-ann Company grants all employees 2 weeks of paid vacation for each full year of employment. Unused
vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in
effect when vacations are taken or when employment is terminated. There was no employee turnover in 2014.
Additional information relating to the year ended December 31, 2014 is as follows:
Liability for accumulated vacations at December 31, 2013 350,000
Pre-2014 accrued vacations taken from January 1,
2014 to September 30, 2014 (the authorized
period for vacations) 200,000
Vacations earned for work in 2014 (adjusted to
current rates) 300,000
Jo-ann Company granted a 10% salary increase to all employees on October 1, 2014, its annual salary increase
date.

What amount should Jo-ann Company report as vacation pay expense for the year ended December 31, 2014?
A. 300,000 B. 315,000 C. 335,000 D. 450,000
(Adapted)
5. JMR Company has a bonus plan covering all employees. The total bonus is equal to 10% of JMR Company’s
preliminary (pre-bonus, pre-tax) income reduced by the income tax (computed on the preliminary income less
the bonus itself) JMR Company’s preliminary income for 2014 is P1,000,000 and the income tax rate is 30%.
How much is the bonus for 2014?
A. 63,000 B. 70,000 C. 72,165 D. 100,000

What amount should JMR Company recognize as a distribution of profit related to their bonus plan in 2014?
A. 0 B. 63,000 C. 70,000 D. 72,165
(Adapted)

Defined contribution plan

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FAR – EMPLOYEE BENEFITS

Use the following information for the next two questions:

AMNESTY PARDON Co. has a post-employment benefits plan that is considered as defined contribution plan.
According to the plan, AMNESTY agrees to contribute P800,000 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 P320,000 to the fund. On December 31, 20x2, because of a profitable year, AMNESTY decided
to contribute P1,800,000 to the retirement fund. On January 12, 20x3, an employee retired and was eligible to a
P60,000 retirement benefits based on the operating efficiency and investment earnings of the fund.

6. How much is the retirement benefits expense recognized in 20x2?

a. 800,000 b. 320,000 c. 1,800,000 d. 60,000

7. How much is the retirement benefits expense recognized in 20x3?

a. 800,000 b. 320,000 c. 1,800,000 d. 60,000

Present value of benefit obligation

8. Information on ENVISAGE VISUALIZE Co.’s defined benefit plan is shown below:
• Present value of benefit obligation, Jan. 1 P480,000
• Current service cost 120,000
• Interest cost 10%
• Benefits paid to retirees 200,000
• Decrease in present value of defined benefit obligation during the year due to changes in 40,000
actuarial assumptions

How much is the ending balance of the present value of defined benefit obligation?
a. 448,000 b. 480,000 c. 608,000 d. 408,000

Current service cost

9. Information on EQUANIMITY COMPOSURE Co.’s defined benefit plan is shown below:
• PV of defined benefit obligation, Jan. 1 P480,000
• PV of defined benefit obligation, Dec. 31 488,000
• Interest cost 10%
• Benefits paid to retirees 200,000
• Increase in present value of defined benefit obligation during the year due to changes in actuarial 40,000
assumptions

How much is the current service cost?

a. 120,000 b. 200,000 c. 160,000 d. 220,000

Projected Unit Credit Method

Use the following information for the next three questions:
PELLUCID CLEAR Co. agrees to provide lump-sum retirement benefits to employees equal to 6% of final salary for
each year of service. Information on an employee is shown below:
• Average annual salary level on January 1, 20x1 P12,000,000
• Average annual salary increase starting January 1, 20x2 and every year thereafter. 3%
• Average service lives before entitlement to retirement benefits (January 1, 20x1 to December 5 years
31, 20x5)
• Discount rate per year 10%

10. How much is the ultimate cost of the defined benefit plan? (or How much is the total amount of retirement
benefits to be received by the employee?)
a. 13,506,104 b. 810,366 c. 4,051,832 d. 4,891,725

11. How much is the current service cost in 20x2?

a. 553,492 b. 669,724 c. 618,724 d. 608,840

12. How much is the present value of the defined benefit obligation on December 31, 20x2?
a. 1,298,437 b. 1,217,680 c. 1,085,710 d. 1,908,117

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FAR – EMPLOYEE BENEFITS

13. Christine Company has established a defined benefit pension plan for its employees. Annual payments under
the pension plan are equal to 2% of an employee’s highest lifetime salary multiplied by the number of years
with the company. As of the beginning of 2014, an employee had worked for the company for 10 years. The
employee’s salary in 2014 was P500,000. The employee is expected to retire in 25 years, and his salary
increases are expected to average 3% per year during that period. The employee is expected to live for 15
years after retiring and will receive the first annual pension payment one year after retirement. The discount
rate is 8% and the relevant present value and future value factors are:

PV of an ordinary annuity of 1 at 8% for 15 periods 8.559

PV of 1 at 8% for 25 periods 0.146
FV of 1 at 3% for 25 periods 2.094

What is the amount of annual pension payment that should be used in computing the defined benefit obligation
(DBO) as of December 31, 2014?
A. 100,000 B. 124,961 C. 209,400 D. 261,669

What is the defined benefit obligation (DBO) on January 1, 2014?

A. 100,000 B. 124,961 C. 209,400 D. 261,669
(Adapted)

14. RKR Company maintains a fund to cover its pension plan. The following data relate to the fund for 2014:

January 1, 2014 balances:

Fair Value of Plan Assets (FVPA) 8,750,000
Market-related value of the pension fund
(5-year weighted average) 7,150,000

During 2014, the following transactions occurred:

Pension benefits paid 600,000
Contribution made to the fund 700,000
Actual return on plan assets 950,000

What is the fair value of plan assets (FVPA) on December 31, 2014?
A. 7,250,000 B. 8,200,000 C. 8,850,000 D. 9,800,000
(Adapted)

15. On January 1, 2014, the memorandum records of a defined benefit plan of Roy Corporation showed the following
data:

Expected Actual
Fair value of plan assets (FVPA) 2,470,000 1,950,000
Defined benefit obligation (DBO) 2,530,000 2,340,000

During the year, the following transactions occurred in relation to the Plan Assets:

Interest earned from investments of plan assets P500,000

Dividends received from investment of plan assets 150,000
Payables resulting from derivative financial instruments 50,000
Administrative expenses of the plan assets 25,000

The following transactions in relation to the defined benefit obligation also occurred during the year:

Contributions made to the fund 2,000,000

Current service cost 1,800,000
Retirement benefits paid 1,500,000
Assumed discount rate 10%
16. What is the fair value of plan assets on December 31?
A. 1,950,000 B. 2,970,000 C. 3,025,000 D. 3,075,000
17. What is defined benefit liability on December 31?

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FAR – EMPLOYEE BENEFITS

A. 2,340,000 B. 2,530,000 C. 2,684,000 D. 4,184,000

(Adapted)

Net defined benefit asset

Use the following information for the next two questions:
Fact pattern
Information on MISTIFY PUZZLE Co.’s defined benefit plan is shown below.
Fair value of plan assets, Dec. 31 5,200,000
Present value of defined benefit obligation, Dec. 31 4,400,000
18. Case #1: Within limitThe present value of economic benefits available in the form of refunds from the plan
and reductions in future contributions to the plan is P1,000,000. How much is the net defined benefit liability
(asset) as of Dec. 31?
a. 800,000 asset c. 1,000,000 asset
b. 800,000 liability d. 200,000 asset

19. Case #2: Outside limit

The present value of economic benefits available in the form of refunds from the plan and reductions in future
contributions to the plan is P600,000. How much is the net defined benefit liability (asset) as of Dec. 31?
a. 800,000 asset c. 600,000 asset
b. 800,000 liability d. 200,000 asset

20. Past service cost

INDEBTED OWING Co. amends its retirement plan on January 1, 20x1. Information is shown below:
Jan. 1, 20x1 Jan. 1, 20x1
(before amendment) (after amendment)
PV of defined benefit obligation 4,000,000 6,000,000
Fair value of plan assets 3,600,000 5,200,000

How much is the past service cost to be recognized immediately in 20x1?

a. 2,000,000 b. 1,200,000 c. 400,000 d. 1,600,000
4M before amendment vs. 6M after amendment = 2M past service cost, increase in obligation

21. Defined benefit cost

1. Information on QUELL PUT DOWN Co.’s defined benefit plan is shown below:
• Fair value of plan assets, Jan. 1 7,200,000
• Present value of defined benefit obligation, Jan. 1 8,000,000
• Vested past service cost 800,000
• Unvested past service cost (vesting period is 5 yrs.) 1,200,000
• Current service cost 2,400,000
• Benefits paid to retirees during the year 1,600,000
• Net loss on settlement of plan during the year 200,000
• Actuarial gains during the period 80,000
• Return on plan assets during the period 480,000
• Discount rate based on high quality corporate bonds 10%

How much is the defined benefit cost?

a. 4,840,000 b. 4,680,000 c. 4,360,000 d. 5,000,000

22. On January 1, 2014, Epoc Psychological Clinic provided the following information pertaining to its defined benefit
plan:

Fair value of plan assets P8,000,000

Projected benefit obligation 7,000,000
Prepaid/accrued benefit cost – surplus (debit) P1,000,000

During the current year, the actuary determined the current service cost at P1,800,000 and the discount rate at
10%. The actual return on plan assets was P1,000,000. Contribution to the plan amounted to P400,000.

Required:

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FAR – EMPLOYEE BENEFITS

A. Determine the employee benefit expense for the year.

B. Compute the “remeasurement” gain or loss
C. Prepare journal entry to record the employee benefit expense
D. Determine the prepaid/accrued benefit cost on December 31, 2014.(Adapted)

23. On January 1, 2014, Jane Company provided the following information concerning its defined benefit plan:

Fair value of plan assets P9,500,000

Defined benefit obligation 12,000,000
Prepaid/accrued benefit cost – credit P2,500,000

The transactions for the current year are as follows:

Current service cost P1,800,000

Actual return on plan assets 1,100,000
Contribution to the plan 2,700,000
Benefits paid to retirees 2,000,000
Increase in defined benefit plan due to change in
actuarial assumptions 150,000
Present value of defined benefit obligation settled 600,000
Settlement price of defined benefit obligation 800,000
Discount rate 10%

Required:
A. Determine the amount that should be reported as employee benefit expense for the current year.
B. Compute the net amount of “remeasurement” for 2014.
C. Determine the fair value of plan assets on December 31.
D. Determine the defined benefit obligation on December 31.
E. Prepare journal entry to record the employee benefit expense
F. Determine the prepaid/accrued benefit cost on December 31 (Adapted)

24. Ceazar Computers, Inc. provided the following information for 2014:

January 1 December 31
Fair value of plan assets P2,600,000 P3,000,000
Defined benefit obligation 2,000,000 2,100,000
Prepaid/accrued benefit cost – surplus 600,000 900,000
Asset ceiling 200,000 300,000
Effect of asset ceiling 400,000 600,00

Current service cost 100,000

Contribution to the plan 150,000
Benefits paid 150,000
Discount rate 10%

Required:
A. Determine the actual return on plan assets for the current year.
B. Determine the actuarial gain due to decrease in defined benefit obligation.
C. Compute the employee benefit expense for 2014.
D. Compute the net “remeasurement” loss for 2014. (Adapted)

Accounting for Income Tax

MULTIPLE CHOICE QUESTIONS - PROBLEMS
1. It is the net profit for a period before deducting tax expense.
A. Accounting profit B. Taxable profit C. Gross profit D. Net profit
2. It is the deferred tax consequence attributable to a taxable temporary difference.
A. Deferred tax liability B. Deferred tax asset C. Current tax liability D. Current tax asset
3. It is the aggregate amount included in the determination of net profit for the period in respect to current tax
and deferred tax.

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FAR – EMPLOYEE BENEFITS

A. Tax expense B. Current tax expense C. Deferred tax expense D. Deferred tax expense
4. It is the amount of income tax paid or payable for the year as determined in applying the provisions of the
enacted tax law to the taxable profit.
A. Current tax expense B. Deferred tax expense C. Deferred tax benefit D. Income tax expense

5. A deferred tax liability shall be recognized for all:

A. permanent differences
B. temporary differences
C. taxable temporary differences
D. deductible temporary differences

6. It is the deferred tax consequence attributable to a deductible temporary difference and operating loss
carryforward.
A. Deferred tax liability B. Deferred tax asset C. Current tax liability D. Current tax asset

7. The deferred tax expense is equal to:

A. increase in deferred tax asset less the increase in deferred tax liability
B. increase in deferred tax liability minus the increase in deferred tax asset
C. increase in deferred tax asset
D. increase in deferred tax liability

8. It is the amount attributable to an asset or liability for tax purposes.

A. Carrying amount B. Tax base C. Measurement base D. Taxable amount

9. Which statement is incorrect concerning tax assets and liabilities?

A. Deferred tax assets and liabilities should be discounted
B. Tax assets and liabilities should be presented separately from other assets and liabilities in the
statement of financial position
C. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities
D. When an entity makes a distinction between current and noncurrent assets and liabilities, it should not
classify deferred tax assets and liabilities as current

10. A deferred tax asset shall be recognized for all deductible temporary differences and operating loss carryforward
when:
A. it its probable that taxable profit will be available against which the deferred tax asset can be used
B. it is probable that accounting profit will be available against which the deferred tax asset can be used
C. It is possible that taxable profit will be available against which the deferred tax asset can be used
D. It is possible that accounting profit will be available against which the deferred tax asset can be used

11. A machine with a 10-year life is being depreciated on a straight-line basis for financial statement purposes and
over 5 years for income tax purposes under the accelerated system. Assuming that the company is profitable
and that there are no other timing differences, the related deferred income tax reported on the statement of
financial position at the end of the first year of the estimated useful life is a:
A. current liability B. noncurrent asset C. current asset D. noncurrent liability

12. Differences between taxable profit and pretax accounting profit arising from transactions that, under applicable
tax laws and regulations, will not be offset by corresponding differences or “turn around” in future periods is a
definition of:
A. intraperiod tax allocation
B. interperiod tax allocation
C. timing differences
D. permanent differences

13. For the first taxable year, a nonpublic construction entity follows the percentage of completion method for
financial reporting and the cost recovery method for tax purposes. Which statement is correct?
A. The taxable profit may be lower or higher than the pretax accounting profit for the year
B. The company is not required to apply deferred tax accounting

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FAR – EMPLOYEE BENEFITS

C. The use of the two methods creates a temporary difference

D. The company’s income on the contract should be treated as deferred income

14. A temporary difference which would result in a deferred tax liability is:
A. accrual of estimated litigation loss
B. accrual of estimated warranty cost
C. subscription received in advance
D. an installment sale which is included in accounting income at the time of sale and included in taxable
income when collected

15. An entity lost its tax exempt status as a result of a new tax law. Which of the following should not be done?
A. The entity should include in income from continuing operations the effect of recognizing the deferred
tax liability
B. The entity should recognize the effect of the loss of its tax exempt statues at the end of the taxable
year
C. The entity should recognize a deferred tax liability for temporary differences at the date it becomes a
taxable entity
D. The entity should recognize the effect of the change in its tax status on the enactment date of the new
tax law

16. A temporary difference which would result in a deferred tax liability is:
A. interest revenue on municipal bonds
B. accrual of warranty expense
C. excess of tax depreciation over accounting depreciation
D. subscription received in advance

17. A temporary difference which would result in a deferred tax asset is:
A. tax, penalty or surcharge
B. dividend received on stock investment
C. excess tax depreciation over accounting depreciation
D. rent received in advance included in taxable income at the time of receipt but deferred for accounting
purposes

18. It is the excess of taxable revenue over tax deductible expenses and exemptions for the year as defined by the
BIR.
A. Expenses or losses that are deductible after they are recognized in accounting profit
B. Revenues or gains that are taxable before they are recognized in accounting profit
C. Expenses or losses that are deductible before they are recognized in accounting profit
D. Revenues or gains that are recognized in accounting profit but are never included in taxable profit

19. Which of the following differences would result in future taxable amounts?
A. Taxable profit
B. Accounting profit per book
C. Accounting profit subject to tax
D. Comprehensive profit

20. Taxable temporary difference is the:

a. temporary difference that will result in taxable amount in determining taxable income of future periods when
the carrying amount of the asset or liability is recovered or settled
b. temporary difference that will result in deductible amount in determining taxable income of future periods
when the carrying amount of the asset or liability is recovered or settled.
A. Both I and II B. I only C. only D. Neither I nor II

PROBLEMS
1. Temporary and Permanent Differences. Christian Corporation reported a pre-tax financial income of
P10,800,000 for the year 2014. Among the items reported in the 2014 statement of income are
Interest income on bank deposits P 432,000
Proceeds received from life insurance on death of an officer
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of the corporation (the corporation is the beneficiary) 2,160,000

There are no timing and permanent differences in prior years.
What amount should be the permanent differences to be considered for purposes of accounting for income tax?
A. 0 B. 432,000 C. 2,160,000 D.2,592,000

2. Temporary and Permanent Differences. The December 31, 2014 statement of income of CPR Company reported,
among others, the following items:
Payment of tax penalties, surcharges and fines 170,000
Insurance premium on life of an office with CPR
Hospital Supply International as the beneficiary 340,000

There are no timing and permanent differences in prior years. What amount should be the temporary differences
to be considered for purposes of accounting for income tax?
A. 0 B. 170,000 C. 340,000 D. 510,000
(Adapted)
3. Effect of Temporary Differences on Taxable Income. As of December 31, 2014, its first year of operations, LPR
Company had taxable temporary differences totalling P3,000,000. Of this total, P1,000,000 relates to current
items. LPR Company also had deductible temporary differences totalling P1,500,000, P250,000 of which relates
to current items. Pre-tax financial income for the year was P20,000,000. The income tax rate is 30%. What
amount should LPR Company report as income tax payable on December 31, 2014?
A. 5,550,000 B. 5,775,000 C. 6,000,000 D. 6,450,000

(Adapted)
4. Pre-tax Accounting Income. Lianne Company is determining the amount of its pre-tax accounting income for
2014 by making adjustment to taxable income from the entity’s 2014 income tax return. The tax return
indicates taxable income of P4,000,000, on which a tax liability of P1,400,000 has been recognized. Following
is the list of items that may be required to determine pre-tax accounting income from the amount of taxable
income:
• Accelerated depreciation for income tax purposes was P500,000. Straight line financial depreciation on
these assets is P400,000.
• Goodwill impairment loss of P300,000 was not included as a deduction in the tax return but may be deducted
in the statement of income.
• Interest on treasury bills was not included in the tax return. During the year, P600,000 was received on
these investments.
What is the amount of the entity’s pre-tax accounting income?
A. 4,100,000 B. 4,200,000 C. 4,300,000 D. 4,400,000

(Adapted)
5. Current Income Tax Liability. Angelica Company purchased a rotating display platform for P1,400,000 on
January 1, 2014. This rotating display platform has a five-year useful life, a residual value of P200,000, and is
depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation
expense was P500,000 for 2014 and P400,000 for 2015. The 2015 income before tax and depreciation expense
of Angelica Company was P2,000,000 and its tax rate was 30%. Angelica Company has made no estimated tax
payments during 2015. What amount of current income tax liability should Angelica Company report in its
December 31, 2015 statement of financial position?
A. 330,000 B. 450,000 C. 480,000 D. 600,000
(Adapted)
6. Future Taxable Amounts. AJ Company presented the following differences between the book basis and tax basis
of the following assets and liabilities at the end of 2014:
Book basis Tax basis
Equipment 200,000 120,000
Prepaid officer’s insurance policy 75,000 0
Warranty liability 50,000 0
What is the amount of future taxable amounts as a result of the above differences?
A. 50,000 B. 80,00 C. 155,000 D. 205,000
(Adapted)
7. Income Tax Payable. Jandyn Company has one temporary difference at the end of 2014 that will reverse and
cause taxable amounts of P1,100,000 in 2015, P1,200,000 in 2016 and P1,200,000 in 2017. The pre-tax
accounting income of Jandyn Company for 2014 is P6,000,000 and the tax rate is 30%. There are no deferred

Prepared by: Erlinda Bialno

FAR – EMPLOYEE BENEFITS

taxes at the beginning of 2014. What is the amount of Income Tax Payable of Jandyn Company on December
31, 2014?
A. 750,000 B. 1,080,000 C. 1,470,000 D. 1,800,000

(Adapted)
8. Income Tax Payable. JFRO Company presented the following items which were treated differently on the tax
return and in the accounting records:
Tax Accounting
Return Record Difference
Lease income 70,000 120,000 50,000
Depreciation 280,000 220,000 60,000
Premiums on officers’ life insurance 0 90,000 90,000

The statement of income of JFRO Company for the year ended December 31, 2014 shows a pre-tax income of
P1,000,000 and the tax rate is 30%. What is the amount of income tax payable on December 31, 2014?
A. 294,000 B. 300,000 C. 327,000 D. 360,000
(Adapted)
9. Provision for Income Tax. Cassandra Company prepared the following reconciliation of income per book with
income per tax return for the year ended December 31, 2014:
Book income before tax 750,000
Add: Temporary difference:
Construction revenue which will reverse in 2015 100,000
Total 850,000
Less: Temporary difference:
Depreciation expense which will reverse in
equal amounts in each of the next four years 400,000
Taxable income 450,000

The income tax rate is 30%.

What amount should Cassandra Company report in its 2014 statement of income as the current provision for income
tax?
A. 135,000 B. 225,000 C. 255,000 D. 315,000
(Adapted)
10. Deferred Tax Liability. On January 1, 2014, JMO Corporation prepaid a P600,000 premiums on an annual
insurance policy. The premium payment was a tax deductible expense in JMO’s 2014 cash basis tax return.
The accrual basis statement of income will report a P300,000 insurance expenses in 2014 and 2015. The income
tax rate is 30%. What amount related to the insurance should be reported as deferred tax liability in the
December 31, 2014 statement of financial position of JMO Corporation?
A. 0 B. 90,000 C. 150,000 D. 300,000
(Adapted)
11. Deferred Tax Liability. A reconciliation of the financial statement and taxable income for 2014 of Aurora
Corporation is presented as follows:
Pre-tax accounting income 6,000,000
Permanent difference ( 500,000)
Accounting income subject to tax 5,500,000
Temporary difference ( 200,000)
Taxable income 5,300,000

The temporary difference represents interest which was capitalized in the books but was expensed for tax purposes.

Cumulative temporary difference (future taxable amount) as at December 31, 2013 is P300,000 and as at December
31, 2014 is P500,000. The tax rate was 30%.

What amount should Aurora Corporation report as deferred tax liability in its December 31, 2014 statement of
financial position?
A. 0 B. 30,000 C. 90,000 D. 150,000
(Adapted)
12. Deferred Tax Asset. ARG Corporation leased a building and received P4,000,000 annual rental payments on
June 15, 2014. The beginning of the lease was July 1, 2014. Rental income is taxable when received. The

Prepared by: Erlinda Bialno

FAR – EMPLOYEE BENEFITS

income tax rate is 30%. ARG Corporation had no other permanent or temporary differences. What amount of
deferred tax asset should ARG Corporation report in its December 31, 2014 statement of financial position?
A. 0 B. 300,000 C. 600,000 D. 1,200,000
(Adapted)
13. Deferred Tax Asset / Liability. Angela Corporation began operations on January 1, 2014. For financial reporting,
Angela Corporation recognizes revenues from all sales under accrual method. However, in its income tax return,
Angela Corporation reports qualifying sales under the installment method. The gross profit on these installment
sales under each method was:
Accrual method Installment method
2014 3,840,000 1,440,000
2015 6,240,000 3,360,000

The income tax rate is 30% for 2014 and future years. There are no other temporary or permanent differences.
What amount should Angela Corporation report as deferred tax asset or liability in its December 31, 2015 statement
of financial position?
A. 864,000 deferred tax asset B. 864,000 deferred tax liability C. 1,584,000 deferred tax asset
D. 1,584,000 deferred tax liability
(Adapted)
14. Deferred Tax Asset / Liability. In 2014, AMG Corporation started to manufacture dental chairs that are sold on
installment basis. For reporting purposes, AMG Corporation recognizes revenue when dental chair is sold;
however for tax purposes, revenue is recognized when installment payments are received. In 2014, AMG
Corporation recognized gross profit of P6,000,000 for financial reporting purposes, and P1,500,000 for tax
purposes. The amounts of gross profit expected to be recognized for tax purposes in 2015 and 2016 are
P2,500,000 and P2,000,000, respectively.

15. Deferred Tax Expense, Current Tax Expense, Income Tax Expense. Camille Corporation presented the following
differences between the book basis and tax basis of the assets and liabilities at the end of 2014:

Book basis Tax basis

Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0
It is estimated that the litigation liability will be settled in 2015. The difference in accounts receivable will result in
taxable amounts of P600,000 in 2015 and P400,000 in 2016. Camille Corporation has a taxable income of
P7,000,000 in 2014 and is expected to have taxable income in each of the following two years. The income tax
rate is 30%. This is the first year of operations of Camille Corporation and the operating cycle of the business is
two years.

What are the net deferred tax expense, current tax expense and income tax expense of Camille Corporation
respectively?
A. 240,000; 2,100,000; 2,340,000
B. 300,000; 2,100,000; 2,340,000
C. 360,000; 2,100,000; 2,100,000
D. 240,000; 2,100,000; 2,100,000 (Adapted)

16. Current Tax Expense, Total Income Tax Expense, Deferred Tax Asset, Deferred Tax Liability. On January 1,
2014 Glympse Corporation acquired an equipment for P5,000,000 which has a five-year estimated useful life
and zero residual value. The corporation uses straight line depreciation for financial accounting purposes. The
depreciation deduction for income tax purposes is P1,500,000 in the first year of the life of the equipment.

An investment in securities for P1,000,000 was also acquired by Glympse Corporation on January 1, 2014. The
securities which were classified as trading had a fair value of P700,000 on December 31, 2014. The securities have
not been sold as of the date of the statement of financial position.

For the year 2014, Glympse Corporation reported a net income before tax of P4,000,000 which excludes the trading
securities and the depreciation.

There are no other book-tax differences. The income tax rate is 30% for the current year and future years.

1. What is the current tax expense for 2014?

A. 660,000 B. 750,000 C. 900,000 D. 1,200,000

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FAR – EMPLOYEE BENEFITS

2. What is the total income tax expense to be reported in the 2014 statement of income?
A. 660,000 B. 810,000 C. 900,000 D. 990,000
3. What is the December 31, 2014 deferred tax asset and deferred tax liability respectively?
A. 60,000 and 150,000 B. 90,000 and 150,000 C. 150,000 and 60,000 D. 150,000 and 90,000
(Adapted)
17. Deferred Tax Liability, Deferred Tax Asset, Current Tax Expense Total Income Tax Expense. GRM Corporation
has three financial statement elements for which the December 31, 2014 book value is different from the
December 31, 2014 tax basis:
Book basis Tax basis .
Property and equipment 15,000,000 12,000,000
Accrued liability – accident insurance 2,000,000 0
Computer software cost 4,000,000 0

The property and equipment which was acquired on January 1, 2014 for P20,000,000, has an estimated useful life
of four years with no residual value. For accounting purposes, the straight line method is used to depreciate the
property and equipment but the sum-of-years’-digits method is used for tax purposes.

The accrued liability for accident insurance was a result of an accident coverage plan that was entered into by GRM
Corporation in January 2014 to provide accident benefits to its employees. The cost of such accident coverage plan
was P2,000,000 for 2014. This amount was accrued as expense in 2014 for accounting purposes. However, accident
benefits are deductible for tax purposes only when actually paid.

As a result of the research activities of GRM Corporation, the corporation incurred a cost of P6,000,000 in January
2014 for the development of a computer software product. Considering technical feasibility of the product, this cost
was capitalized and amortized over three years for accounting purposes using straight line method of amortization.
However, the total cost was expensed in 2014 for tax purposes.

GRM Corporation reported a pre-tax accounting income of P13,000,000 for 2014. The tax rate is 30% and there
are no deferred taxes on January 1, 2014.

What amount of deferred tax liability and deferred tax asset should be reported in the December 31, 2014
respectively?
A. 600,000; 2,100,000 B. 900,000; 2,100,000 C. 2,100,000; 600,000 D.2,100,000; 900,000
What is the amount of the 2014 current tax expense and the total income tax expense that will be reported in the
2014 statement of income respectively?
A. 1,500,000; 2,400,000 B. 2,400,000; 3,900,000 C. 3,900,000; 2,400,000 D. 3,900,000; 1,500,000
(Adapted)
18. Deferred Tax on Revaluation. Karla Corporation purchased a machine for P8,000,000 on January 1, 2014. The
machine with an estimated useful life of 8 years with no residual value is depreciated using straight line method.

On January 1, 2017 after 3 years, the equipment was revalued at a replacement cost of P12,000,000 with no change
in the useful life.

The pre-tax accounting income before depreciation for 2017 is P10,000,000. The income tax rate is 30% and there
are no other temporary differences at the beginning of the year.

What is the amount of the deferred tax liability on January 1, 2017 arising from the revaluation?
A. 0 B. 450,000 C. 750,000 D. 1,200,000
What is the amount of decrease in the deferred tax liability on December 31, 2017 arising from the revaluation?
A. 0 B. 150,000 C. 600,000 D. 750,000
What is the amount of the total income tax expense to be reported in the 2017 statement of income?
A. 2,550,000 B. 2,700,000 C. 3,000,000 D. 3,750,000
What is the amount of the revaluation surplus on December 31, 2017?
A. 1,400,000 B. 1,750,000 C. 2,000,000 D. 2,500,000

(Adapted)
19. Statement of Income and Statement of Financial Position Methods. On January 1, 2014, Eya Corporation prepaid
a P380,000 premiums on an insurance policy. The premium payment was a tax-deductible expense in Eya
Corporation’s 2014 cash basis tax return. The accrual basis income statement will report a P190,000 insurance
expenses in 2014 and 2015. The income tax rate is 30%.

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FAR – EMPLOYEE BENEFITS

What amount related to the insurance should be reported as deferred liability in the December 31, 2014
statement of financial position of Eya Corporation, using the statement of income liability-method?
A. 0 B. 57,000 C. 114,000 D. 171,000

Comprehensive problem
Use the following information for the next six questions:
HOMOLOGOUS MATCHING Co. has pretax income of P400,000. The following information was gathered:
Loss on expropriation of property 140,000
Non-deductible premium on life insurance premium of
key employees 24,000
Interest income received on government securities
subjected to final tax 20,000
Excess of accelerated depreciation used in taxation over
straight line depreciation used in financial reporting 40,000
Warranty expense accrued for financial reporting
purposes but is tax deductible only when actually paid 60,000
Rent received in advance 32,000
Quarterly income tax payments
(1st quarter to 3rd quarter) 80,000
Tax rate 30%
Beginning balance of taxable temporary difference 48,000
Beginning balance of deductible temporary difference 36,000

1. How much is the income tax expense?

a. 163,020 b. 178,800 c. 172,200 d. 163,200

2. How much is the current tax expense?

a. 163,020 b. 178,800 c. 172,200 d. 163,200
3. How much is the deferred tax expense (benefit)?
a. 15,600 b. (15,600) c. 22,200 d. (22,200)
4. How much is the current tax payable?
a. 163,020 b. 178,800 c. 98,800 d. 86,400
5. How much is the deferred tax liability to be presented in the year-end statement of financial position?
a. 24,600 b. 28,400 c. 26,400 d. 24,800
6. How much is the deferred tax asset to be presented in the year-end statement of financial position?
a. 34,600 b. 38,400 c. 36,400 d. 34,800

Prepared by: Erlinda Bialno