Anette Video Company sells 1 and 2 year subscriptions for the video of the month business.

Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the
following:

2020 2021
Sales 420,000 500,000
Less cancellations 20,000 30,000
Net sales 400,000 470,000
Subscription expirations:
2020 120,000
2021 155,000 130,000
2022 125,000 200,000
2023 140,000
400,000 470,000

1. On December 31, 2021, what amount should be reported as unearned subscription revenue?
Answer: C - 465,000

2. What amount should be reported as subscription revenue for 2021?

Answer: C - 285,000

On November 25, 2020, an explosion occurred at a Rex Company plant causing extensive property damage to area
buildings. By March 10, 2021, claims had been asserted against Rex Company.

The management and counsel concluded that it is probable Rex Company will be responsible for damages, and
that P3,500,000 would be a reasonable estimate of the liability.

The entity’s P10,000,000 comprehensive public liability policy has a P500,000 deductible clause. The financial
statements for 2020 were issued on March 25, 2021.

3. What amount of loss from lawsuit should be reported in the income statement for 2020?
Answer: C - 500,000

4. What amount of liability from lawsuit should be reported on December 31,2020?

Answer: A - 3,500,000

Hancock Company reported the following noncurrent liabilities on December 31, 2020:

Unsecured
9% registered bond, P250,000 maturing annually
Beginning in 2021 2,750,000
11% convertible bonds, callable beginning in 2021,
`due 2022 1,250,000

Secured
12% guaranty security bonds, due 2022 2,500,000
10% commodity backed bonds, P500,000
Maturing in 2021, due 2022 2,000,000

5. What total amount of serial bonds should be reported?

Answer: A - 4,750,000

6. What is the total amount of debenture bonds?

Answer: A - 4,000,000

Joshua Company bought a new machine and agreed to pay in equal annual installment of P600,000 at the end of
each of the next five years. The prevailing interest rate for this type of transaction is 12%.

The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an ordinary
annuity of 1 at 12% for five periods is 6.35. The present value of 1 at 12% for five periods is 0.567.

7. What amount should be reported as note payable if financial statements were prepared today?
Answer: B - 2,160,000

8. What is the interest expense for the first year?

Answer: A - 259,200

On January 1, 2020, Granada Company had an overdue 10% note payable to First Bank at P8,000,000 and accrued
interest of P800,000.

As a result of a restructuring agreement on January 1, 2020, First Bank agreed to the following provisions:
 The principal obligation is reduced to P6,000,000.
 The accrued interest of P800,000 is forgiven.
 The date of maturity is extended to December 31,2023
 Annual interest of 12% is to be paid for 4 years every December 31

9. What is the present value of the new note payable on January 1,2020?
Answer: A - 6,380,400

10. What is the gain on extinguishment of debt to be recognized for 2020?

Answer: C - 2,419,000

On January 1, 2020, Northstar Company entered into an 8 year lease of a floor of building with useful life of 15
years with the following terms:

Annual rental for the first three years payable

At the end of each year 300,000
Annual rental for the next five years payable
At the end of each year 400,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for three periods 2.49
PV of an ordinary annuity of 1 at 10% for five periods 3.79
PV of 1 at 10% for three periods 0.75

The lease provides for neither a transfer of title to the lessee nor a purchase option.

11. What is the lease liability on January 1, 2020?

Answer: C - 1,884,000

12. What is the interest expense for 2020?

Answer: A - 188,400

13. What is the interest expense for 2023?

Answer: A - 151,460

14. What is the lease liability on December 31, 2023?

Answer: B - 1,266,064

Abe Company, lessor, leased an equipment under an operating lease.

The lease term is 5 years and the lease payments are made in advance on January 1 of each year as shown in the
following schedule:

January 1, 2020 1,000,000

January 1, 2021 1,000,000
January 1, 2022 1,400,000
January 1, 2023 1,700,000
January 1, 2024 1,900,000

15. On December 31, 2021, what amount should be reported as rent receivable?
Answer: B - 800,000

On January 1, 2020, Glen Company leased a building to Dix Company for a ten year term at an annual rental of
P500,000.

At inception of the lease, Glen received P2,000,000 covering the first two years rent of P1,000,000 and a security
deposit of P1,000,000

This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of rent for the
last two years of the lease.

16. What amount should be reported as current and noncurrent liability in the December 31,2020 statement of
financial position?
Answer: B - Current Liability 500,000
Noncurrent Liability 1,000,000

Barnel Company owns and manages apartments. On signing a lease, each tenant must pay the first month and last
month rent and a P50,000 refundable security deposit.

The security deposit is rarely refundable in total because cleaning costs of P15,000 per apartment are almost
always deducted.

About 30% of the time, the tenants are also charged for damages to the apartment whihc typically cost P10,000.

17. If a one year lease is signed on a P90,000 per month apartment, what amount should be reported as a
refundable security deposit?
Answer: B - 50,000

France Company is a dealer in equipment. At the beginning of current year, an equipment was leased to another
entity with the following provisions:

Annual rental payable at the end of each year 1,500,000

Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Residual value - unguaranteed 500,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 at 12% for 5 periods 3.60
PV of 1 at 12% for 5 periods 0.57

At the end of the lease term the equipment will revert to the lessor.
The entity incurred initial direct cost of P200,000 in finalizing the lease agreement.

18. What is the gross investment in the lease?

Answer - B - 8,000,000

19. What is the net investment in the lease?

Answer: B - 5,685,000

20. What interest income should be reported for current year?

Answer: A - 682,200

21. What amount should be reported as gross profit on sale?

Answer: A - 1,485,000

Marianas Company adopted the policy of leasing as the primary method of selling products. The entity’s main
product is a small cargo vessel.Marianas Company constructed such a cargo vessel for Jade Company at a cost of
P8,500,000.

The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the
ownership transferring to Jade Company at the end of the lease period. It is estimated that the cargo vessel will
have a residual value of P1,600,000 at that date.

The lease payments began at the beginning of current year. Marianas Company incurred initial direct cost of
P500,000 in financing the lease agreement with Jade Company. The sale price of the cargo vessel is P14,875,000

Financing the construction was at a 14% rate. The present value of an annuity due of 1 at 14% for 10 periods is
5.95.

22. What amount should be reported as gross profit on sale for the current year?
Answer: A - 5,875,000

23. What is the unearned interest income at the beginning of current year?
Answer - A - 10,125,000

24. What is the interest income for the current year?

Answer: B - 1,732,000

On December 31,2020, Benz Company, a lessor, actually sold a machinery that it had been leasing under a sales
type lease.

On January 1, 2020 after receipt of the lease payment fro the year, the following account balances were associated
with the lease:

Gross lease receivable 5,850,000

Unearned interest income 1,000,000

The interest rate implicit in the lease is 10%

On December 31, 2020, Benz Company actually sold the leased machinery to the lessee for P3,250,000 cash.

25. What is the interest income for 2020?

Answer: B - 485,000

26. What is the carrying amount of the lease receivable on December 31, 2020?
Answer: C - 5,335,000

27. What is the loss on sale of the machinery that should recognized on December 31, 2020?
Answer: A - 2,085,000

At the beginning of current year, Arianne Company sold a machine and immediately lease it back

Sale price at fair value 5,000,000

Carrying amount of machine 6,000,000
Annual rental payable at the end of each year 500,000
Lease term 5 years
Remaining life of machine 20 years
Implicit interest rate 6%
PV of an ordinary annuity of 1 at 6% for 5 periods 4.21

28. What is the cost of right of use asset?

Answer: B - 2,526,000

29. What is the loss on right transferred to the buyer-lessor?

Answer: A - 579,000

30. What is the lease liability at year end?

Answer: C - 1,731,300

31. What is the net annual rental income of the buyer-lessor?

Answer: D - 250,000

At the beginning of current year, an entity sold an equipment with remaining life of 10 years and immediately
leased it back for 4 years at the prevailing market rental.

Sale price at fair value 6,000,000

Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 4 periods 3.17

32. What is the initial lease liability?

Answer: A - 2,536,000
33. What is the cost of right of use asset?
Answer: A - 1,902,000

34. What is the gain on right transferred?

Answer: A - 866,000

35. What is the annual depreciation of the lessee?

Answer: A - 475,500

Rona Company started to manufacture in 2020 copy machine that are sold on the installment basis.

Rona Company recognizes revenue when equipment is sold for financial reporting purposes, and when installment
payments are received for tax purposes.

In 2020, the entity 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 2021 and 2022 are P2,500,000 and
P2,000,000 respectively.

The entity guaranteed the copy machines for two years/

Warranty costs are recognized on the accrual basis for financial reporting purposes and when paid for tax
purposes.

Warranty costs accrued in 2020 is P2,500,000 but only P500,000 of warranty cost is paid in 2020.2.19

It is expected that in 2021 and 2022, P1,000,000 and P1,000,000 respectively, of warranty cost will be paid.

In addition during 2020, P500,000 interest, net of 20% final income tax, was received and earned

Insurance premium of P100,000 on life insurance policy that covered the life of entity’s president was paid. The
entity is the beneficiary for this policy.

Pretax accounting income in 2020 was P2,000,000. Any 2020 operating loss will be carried forward to 2021.

The tax rate is 30%

36. What is the accounting income subject to tax?

Answer: B - 1,600,000

37. What is t he deferred tax asset on December 31, 2020?

Answer: A - 870,000

38. What is the deferred tax liability on December 31, 2020?

Answer: B - 1,350,000

39. What is the current tax expense for the current year?
Answer: D - 0

40. What is the total tax expense for the current year?
Answer: C - 480,000

Canterbury Company has one temporary differences at the end of 2020 that will revers and cause taxable amounts
of P1,100,000 in 2021, P1,200,000 in 2022 and P1,200,000 in 2023.

The entity has also a deductible temporary difference of P1,500,000. The pretax accounting income fo 2020 is
P6,000,000 and the tax rate is 30%. There are no deferred taxes at the beginning of 2020.

41. What is the net deferred tax expense for 2020?

Answer: C - 600,000

Jessabel Company has established a defined benefit pension plan for an employee. Annual payments under the
pension plan are equal to the employee’s highest lifetime salary multiplied by 3% multiplied by number of years
with the entity.

On December 31,2020, the employee had worked for Jessabel Company for 15 years. The current salary is
P500,000.

The employee is expected to retire in 5 years and the salary increases are expected to average 4% per year during
that period.

The employee is expected to live for 6 years after retiring and will receive the first annual pension payment one
year after retirement. The discount rate is 12%.

FV of 1 at 4% for 5 periods 1.217

PV of an ordinary annuity of 1 at 12% for 6 periods 4.111
PV of 1 at 12% for 5 periods 0.567
42. What is the projected benefit obligation on December 31, 2020?
Answer: A - 638,629

A director of Ester Company shall receive a retirement benefit of 20% of final salary per annum for a contractual
period of three years.

The anticipated salary is P1,000,000 fir 2929, P1,200,000 for 2021 and P1,500,000 for 2022.

The discount rate is 10%, the PV of 1 at 10% is 0.909 for one period and 0.826 for two periods.

43. Under the projected unit credit method, what is the estimated pension liability on December 31, 2021?
Answer:

At the beginning of current year, Maximus Company had a projected benefit obligation of P10,000,000 and a
pension fund with a fair value of P9,200,000.

The entity provided the following information related to the pension plan during the current year.

Current service cost 1,200,000

Actual return on the pension fund 250,000
Benefits paid to retirees 1,100,000
Contribution to the pension fund 1,050,000
Discount rate 9%
Expected return on pension fund 10%

44. What is the pension expense for the current year?

Answer: A - 1,272,000

45. What is the remeasurement gain or loss for the current year?
Answer: B - 578,000 loss

Theory

1. A pension liability is reported when

A. The projected benefit obligation exceeds the fair value of plan assets.
B. The accumulated benefit obligation is less than the fair value of plan assets
C. The pension expense reported for the period is greater than the funding amount for the same period
D. Cumulative other comprehensive income exceeds the fair value of plan assets.

2. A formula in a defined contribution plan

A. Defines the benefits that the employee will receive at the time of retirement
B. Ensures that the defined benefit cost and funding are the same
C. Requires an employer to contribute a certain sum each period based on the formula
D. Ensures that enough fund would be available

3. Which statement is true concerning the recognition and measurement of a defined contribution plan?
A. The contribution shall be recognized as expense in the period it is payable
B. Any unpaid contribution at the end of the period shall be recognized as accrued liability
C. Any excess contribution shall be recognized as prepaid expense but only to the extent that the prepayment will
lead to a reduction in future payments or a cash refund
D. All of these statements are true about a defined contribution plan

4. Justification for the method of determining periodic deferred tax expense is based on the concept of
A. Matching of periodic expense to periodic revenue
B. Objectivity in the calculation of periodic expense
C. Recognition of asset and liability
D. Consistency of tax expense measurement with actual tax planning strategies

5. Which of the following differences would result in future taxable amount?

A. Expenses or losses that are deductible after they are recognized in accounting income
B. Revenue or gains that are taxable before they are recognized in accounting income
C. Expenses or losses that are deductible before they are recognized in accounting income
D. Revenues or gains that are recognized in accounting income but are never included in taxable income

6. 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 tax depreciation over accounting depreciation
D. Subscription received in advance

7. Under a sales type lease, what is the meaning of gross investment in the lease?
A. Present value of lease payments
B. Absolute amount of lease payments
C. Present value of lease payments plus present value of unguaranteed residual value
D. Sum of aboslute amount of lease payments and unguaranteed residual value

8. Net investment in a sales type lease is equal to

A. Gross investment in the lease less unearned finance income
B. Cost of the underlying asset
C. The lease payments
D. The lease payments less unguaranteed residual value

9. Gross investment in the lease is equal to

A. Sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed residual value
accruing to the lessor
B. The lease payments under a finance lease of the lessor
C. Present value of lease payments under a finance lease of the lessor and any unguaranteed residual value
D. Present value of the lease payments under a finance lease of the lessor

10. Which is the correct accounting treatment for a finance lease in the accounts of a lessor?
A. Treat as a noncurrent asset equal to net investment in lease and recognize all finance payments in income
statement
B. Treat as a receivable equal to gross amount receivable on lease and recognize finance payments in cash by
reducing debt
C. Treat as a receivable equal to net investment in the lease and recognize finance payments by reducing debt and
taking interest to income statement
D. Treat as a receivable equal to net investment in the lease and recognize finance payments in cash by reduction
of debt

11. Which measure requires the use of future salaries in the computation of benefit obligation?
A. Vested benefit obligation
B. Accumulated benefit obligation
C. Projected benefit obligation
D. Current benefit obligation

12. A lessee with a lease containing a purchase option that is reasonably certain to be exercised should depreciate
the right of use asset over
A. Useful life of the asset
B. Lease term
C. Useful life of the asset or the lease term, whichever is shorter
D. Useful life of the asset or the lease term, whichever is longer
13. A lease liability is measured at
A. The absolute amount of lease payments
B. The present value of lease payments
C. The present value of fixed lease payments
D. The fair value of the underlying asset

14. The lease payments include all of the following, except

A. Fixed lease payments
B. Leasehold improvement
C. Exercise price of a purchase option that is reasonably certain to be exercised
D. Residual value guarantee of the lessee

15. The difference between the carrying amount of the financial liability extinguished and the fair value of equity
instruments issued shall be recognized in
A. Profit or loss
B. Other comprehensive income
C. Retained earnings
D. General reserve

16. The gain or loss from extinguishment of a financial liability by issuing equity instruments is presented as
A. Other income or other expense
B. Separate line item in the income statement
C. Component of other comprehensive income
D. Component of finance cost

17. An entity borrowed cash from a bank and issued to the bank a short term noninterest bearing note payable.
The bank discounted the note at 10% and remitted the proceeds to the entity. The effective interest rate paid by
the entity in this transaction would be
A. Equal to the stated discount rate of 10%
B. More than the stated discount rate of 10%
C. Less than the stated discount rate of 10%
D. Independent of the stated discount rate of 10%

18. At issuance date, the present value of a promissory note is equal to the face amount if the note
A. Bears a stated rate of interest which is realistic
B. Bears a stated rate of interest which is less than the prevailing market rate for similar notes
C. Is noninterest bearing and the implicit interest rate is less tham the prevailing market rate for similar notes
D. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes

19. Reporting is required for

A. Loss contingencies that are probable and can be reliably measured
B. Gain contingencies that are probable and can be reliably measured
C. Loss contingencies that are possible and can be reliably measured
D. All gain and loss contingencies

20. Contingent assets are usually recognized when

A. Realized
B. Occurence is reasonably possible and the amount can be reasonably estimated
C. Occurence is probable and the amount can be reasonably estimated
D. The amount can be reasonably estimated

Straight Problems

1. Aloha Company provided the following information on December 31, 2020

Carrying amount Tax base

AR 1,500,000 1,750,000
Warranty 120,000 0
Deposits 150,000 0
Total deductible temporary differences

The depreciation rates for accounting and taxation are 15% and 25% respectively
The deposits are taxable when received and warrant costs are deductible when paid

An allowance for doubtful accounts of P250,000 has been raised against accounts receivable for accounting
purposes but such accounts are deductible only when written off as uncollectible

The entity showed net income of P8,000,000 in the income statement for 2020. The income tax rate is 30%

There are no temporary differences at the beginning of the current year

2. In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30, 2020.

The entity placed a coupon redeemable for a premium in each package of cereal sold.

Each premium cost P20 and five coupons must be presented by a customer to receive a premium.

The entity estimated that only 60% of the coupons issued will be redeemed.

For the six months ended December 31, 2020, the following information is available

Package of cereal sold 160,000

Premiums purchased 12,000
Coupons redeemed 40,000

3. On January 1, 2020, Nun Company leased machinery from Chin Company for a 10 year period. The useful life of
the asset is 20 years. Equal annual payments under the lease are P200,000 and are due on January 1 of each year
starting January 1, 2020

The present value on January 1, 2020 of the lease payments over the lease term discounted at implicit interest rate
of 10% was P1,352,000

The lease provides for a transfer of title to the lessee upon expiration of the lease term.

4. Cassandra Company is in the leasing business. The entity acquired a specialized packaging machine of
P3,000,000 cash and leased it for a period of 6 years, after which the machine is to be returned to Cassandra
Company for disposition. The guaranteed residual value of the machine is P200,000.

The lease term was arranged so that a return of 12% is earned by Cassandra Company. The PV of 1 at 12% for six
periods is 0.51, and the present value of an annuity of 1 in advance at 12% for six periods is 4.60.