exam IA part 1 (1-80)

Question 1

Information on the defined benefit plan of Entity A as of December 31, 20x1 is as follows:
* Fair value of plan assets ₱ 800,000
* Present value of the defined benefit obligation ₱1,000,000

How much is (are) presented in Entity A’s December 31, 20x1 statement of financial position in relation to its post-employment benefits plan?

a. ₱800,000 in noncurrent assets and ₱1M in noncurrent liabilities
b. ₱200,000 net defined benefit asset in noncurrent assets
c. ₱200,000 net defined benefit liability in noncurrent liabilities
d. ₱1M in noncurrent liabilities

Answer 1

c. ₱200,000 net defined benefit liability in noncurrent liabilities

Question 2

ABC Co. has the following information from its comparative financial statements.
20x2
20x1
Trade account receivable from service revenues
1,500,000
1,200,000
Prepaid insurance
120,000
100,000
Building - net of accumulated depreciation
9,000,000
9,500,000
Estimated liability for warranty obligation
300,000
280,000
Additional information:
* ABC recognizes revenues from service fees as services are rendered but are taxed only when cash is collected. Total collections in 20x2 amounted to ₱800,000.
* The prepaid insurance account pertains to the unexpired portion of life insurance premiums taken on the life of key personnel. ABC is the irrevocable beneficiary of the insurance policy. Total premiums paid in 20x2 were ₱50,000.
* The building was acquired on January 1, 20x1 and is depreciated over an estimated useful life of 20 years with no residual value. The straight line method of depreciation is used for financial reporting while the double declining balance method is used for taxation.
* Warranty expense is recognized at the time goods are sold but are tax deductible only when actually paid. Tax deductible warranty expense for 20x2 amounted to ₱40,000.
* Pretax income in 20x2 is ₱1,000,000. Income tax rate is 30%.

1. How much is the deferred tax asset as of December 31, 20x1?
   a. 84,000
   b. 96,000
   c. 102,000
   d. 114,000
2. How much is the deferred tax liability as of December 31, 20x1?
   a. 360,000
   b. 410,000
   c. 510,000
   d. 620,000
3. How much is the deferred tax asset as of December 31, 20x2?
   a. 72,000
   b. 86,000
   c. 90,000
   d. 110,000
4. How much is the deferred tax liability as of December 31, 20x2?
   a. 510,000
   b. 680,000
   c. 720,000
   d. 810,000
5. How much is the income tax expense in 20x2?
   a. 1,050,000
   b. 350,000
   c. 309,000
   d. 105,000
6. How much is the current tax expense in 20x2?
   a. 1,050,000
   b. 350,000
   c. 309,000
   d. 105,000

Answer 2

1) a. 84,000
2) c. 510,000
3) c. 90,000
4) c. 720,000
5) c. 309,000
6) d. 105,000

Question 3

Who was the first Filipino Certified Public Accountant?

a. Lapu-lapu
b. Andres Bonifacio
c. Spongebob Squarepants
d. Don Vincente Fabella

Answer 3

d. Don Vincente Fabella

Question 4

Entity A reacquires 10,000 of its own shares for ₱50. The shares have par value of ₱10 and were originally issued at ₱15 per share. Subsequently, Entity A reissues half of the reacquired shares at ₱58 per share and retires the other half. The journal entry to record the retirement of the shares includes which of the following? (Hint: Provide the entries for both the reissuance and the retirement.)

a. Debit to Retained earnings for ₱175,000
b. Credit to Share premium - retirement for ₱40,000
c. Debit to Share premium for ₱50,000
d. Debit to Retained earnings for ₱135,000

Answer 4

d. Debit to Retained earnings for ₱135,000

Question 5

Entity A was incorporated on January 1, 20x1 with an authorized capitalization is ₱1,000,000 divided into 100,000 shares with par value of ₱10 per share. The following were the share-related transactions of Entity A during the year:

• Cash subscriptions of 30,000 shares at ₱12 per share.
• Subscriptions of 40,000 shares at ₱18 per share. Seventy-five percent of the subscription price was collected during the year.

How much is the Entity A’s total shareholders’ equity after recording the transactions above?
a. 900,000
b. 680,000
c. 540,000
d. 360,000

Answer 5

a. 900,000

Question 6

Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A for the benefit of Entity A’s employees. When reporting to Entity A regarding the status and performance of the fund, Entity B would most likely apply which of the following standards?

a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6

Answer 6

c. PAS 26

Question 7

Entity A receives 20,000 shares with par value of ₱100 and fair value of ₱210 on November 2, 20x1. The shares have fair value of ₱220 per share on December 31, 20x1. How much additional capital is recognized in Entity A’s December 31, 20x1 balance sheet as having resulted from the receipt of the donated shares?

a. 2,000,000
b. 4,200,000
c. 4,400,000
d. 0

Answer 7

d. 0

Question 8

In accounting for a defined benefit plan which is fully funded at the start of the year, any difference between the defined benefit cost recognized and the contributions made to the fund during the year should be reported as

a. An offset to the liability for past service costs.
b. Net defined benefit liability.
c. An operating expense in this period.
d. An accrued actuarial liability.

Answer 8

b. Net defined benefit liability.

Question 9

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

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

1. How much is the provision for lawsuit at December 31, 20x1?
   a. 436,360
   b. 446,908
   c. 326,836
   d. 0
2. Use the fact pattern above. However, in this question, the entity’s lawyers believe there is a 60 per cent chance that the court will dismiss the case and the entity will incur no outflow. How much is the provision for lawsuit at December 31, 20x1?
   a. 186,764
   b. 446,908
   c. 326,836
   d. 0

Answer 9

1) c. 326,836
2) d. 0

Question 10

On January 1, 20x1, KISMET FATE Co., purchased inventory with a list price of ₱4,400,000 and a cash price of ₱4,000,000 by issuing a noninterest-bearing note of ₱4,800,000 due on December 31, 20x3.

1. How much is the carrying amount of the note on initial recognition?
   a. 4,400,000
   b. 4,000,000
   c. 4,800,000
   d. 3,786,309
2. How much is the interest expense in 20x1?
   a. 400,000
   b. 279,830
   c. 250,780
   d. none of these
3. How much is the carrying amount of the note on December 31, 20x1?
   a. 4,250,780
   b. 4,279,830
   c. 4,400,000
   d. 4,000,000

Answer 10

1) b. 4,000,000
2) c. 250,780
3) a. 4,250,780

Question 11

UNKEMPT UNTIDY Co. requires advance payments for custom-built guitar effects, gadgets, and racks. The records of UNKEMPT Co. show the following:
* Unearned revenue, January 1, 20x1 P 4,000,000
* Advances received during 20x1 40,000,000
* Advances applied to orders shipped in 20x1 32,000,000
* Advances pertaining to orders cancelled in 20x1 1,200,000
How much is the current liability if the advance payments received are refundable?

a. 10,800,000
b. 13,200,000
c. 12,000,000
d. 0

Answer 11

c. 12,000,000

Question 12

On January 1, 20x1, SALIENT PROMINENT Co. issued 1,000, ₱4,000, 12%, 3-year bonds for ₱4,412,336. Principal is due on December 31, 20x3 but interests are due annually every year-end. In addition, SALIENT incurred bond issue cost of ₱213,388.The effective interest rate before adjustment for transaction costs is 8%. How much is the carrying amount of the note on December 31, 20x1?

a. 4,019,832
b. 4,198,948
c. 4,288,776
d. 4,138 ,843

Answer 12

d. 4,138 ,843

Question 13

Use the following information for the next two questions:
Information on ABC Co.’s operations during the year is shown below.

• Revenues are recognized for financial reporting at point of sale while revenues are taxed on cash basis. Gross profit recognized for financial reporting amounted to ₱1,000,000 while taxable gross profit is ₱800,000.
• Retirement benefit costs are deducted for financial reporting as services are rendered by employees but are tax deductible only when actually paid to retiring employees. Current service cost recognized during the year is ₱100,000 while benefits paid to retiring employees amounted to ₱150,000.
• Research costs amounting to ₱90,000 are expensed immediately during the year for financial reporting. For taxation purposes, research costs are amortized over a three-year period. Amortization of research cost deducted for taxation purposes is ₱30,000.
• Unrealized losses of ₱10,000 were recognized during the year in profit or loss on an investment in held for trading equity securities. No equivalent adjustment was made for taxation purposes. Any gain or loss on actual disposal of such securities is taxable (tax deductible).
• Payments during the year for fines, surcharges, and penalties arising from violation of law amounted to ₱40,000.
• ABC reported pretax income of ₱100,000. Income tax rate is 30%.
• Any operating loss can be carried over to the next period. ABC expects to realize the economic benefit of any operating loss carry forward.

1. How much is the deferred tax liability?
   a. 75,000
   b. 69,000
   c. 82,000
   d. 33,000
2. How much is the deferred tax asset?
   a. 75,000
   b. 69,000
   c. 82,000
   d. 33,000

Answer 13

1) a. 75,000
2) d. 33,000

Question 14

Provisions, contingent liabilities and contingent assets are accounted for using

a. PAS 37
b. PFRS 6
c. PAS 29
d. PAS 8

Answer 14

a. PAS 37

Question 15

Interest receivable has a carrying amount of P4,000. The related interest revenue will be taxed on a cash basis. How much is the tax base of the asset?

a. 4,000
b. 2,400
c. 1,600
d. 0

Answer 15

d. 0

Question 16

Arrange the following steps in the accounting for defined benefit plans in the correct order.

I. Determine the components of the defined benefit cost to be recognized in P/L and OCI.
II. Determine the net defined benefit liability (asset)
III. Determine the deficit or surplus

a. I, III and II
b. III, II and I
c. II, III and I
d. I, II and III

Answer 16

b. III, II and I

Question 17

A loan receivable has a carrying amount of P4,000. The repayment of the loan will have no tax consequences. How much is the tax base of the asset?

a. 4,000
b. 2,400
c. 1,600
d. 0

Answer 17

a. 4,000

Question 18

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.’s sole depreciable asset, acquired in 20x1, exceeded its tax basis by ₱250,000 at December 31, 20x1. This difference will reverse in future years. The enacted tax rate is 30% for 20x1, and 40% for future years. Noor has no other temporary differences. In its December 31, 2001, balance sheet, how should Noor report the deferred tax effect of this difference - Asset (Liability)?

a. ₱75,000
b. ₱100,000
c. (₱75,000)
d. (₱100,000)

Answer 18

d. (₱100,000)

Question 19

According to PAS 19, how are other long-term benefits accounted for?

a. similar to defined benefit plans.
b. similar to short-term employee benefits except that the cash flows are discounted.
c. similar to defined benefit plans except that all the components of the defined benefit cost is recognized in other comprehensive income.
d. similar to defined benefit plans except that all the components of the defined benefit cost is recognized in profit or loss.

Answer 19

d. similar to defined benefit plans except that all the components of the defined benefit cost is recognized in profit or loss.

Question 20

These are differences that do not have future tax consequences.

a. Permanent differences
b. Taxable differences
c. Temporary differences
d. Deductible differences

Answer 20

a. Permanent differences

Question 21

An equipment cost P4,000. For tax purposes, depreciation of P2,400 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated by using the equipment is taxable, any gain on disposal of the equipment will be taxable and any loss on disposal will be deductible for tax purposes. How much is the tax base of the equipment?

a. 4,000
b. 2,400
c. 1,600
d. 0

Answer 21

c. 1,600

Question 22

If not yet vested, past service cost (under the revised PAS 19)

a. is recognized immediately in profit or loss
b. is amortized over the vesting period which is at least 10 million years
c. prior period financial statements are restated
d. recognized as expense in the current and future periods until the end of the world or until the moon turns blue, whichever comes earlier.

Answer 22

a. is recognized immediately in profit or loss

Question 23

Use the following information for the next two questions:
ABC Co. started its operations on January 1, 20x1. Information on temporary differences during the first two years of operations is shown below:
Dec. 31, 20x2
Dec. 31, 20x1
Carrying
Tax base
Difference
Carrying
Tax base
Difference

Assets
100,000
90,000
10,000
120,000
100,000
20,000
Liabilities
50,000
43,000
7,000
60,000
45,000
15,000
Pretax incomes were ₱400,000 and ₱500,000 in 20x2 and 20x1, respectively. Income tax rate is 30%. (bahala na kayo intindihin shuta)

1. How much is the income tax expense in 20x2?
   a. 150,000
   b. 148,500
   c. 120,000
   d. 120,600
2. How much is the current tax expense in 20x2?
   a. 150,000
   b. 148,500
   c. 120,000
   d. 120,600

Answer 23

1) c. 120,000
2) d. 120,600

Question 24

Entity A received a subscription for 2,000 shares at ₱18 per share on March 31, 20x1. Entity A’s shares have a par value ₱5 per share. Entity A collected the subscription receivable on May 15, 20x1. Which of the following statements is correct?

a. Entity A should credit share premium for ₱13,000 on March 31, 20x1.
b. Entity A should credit share premium for ₱26,000 on March 31, 20x1.
c. Entity A should credit share premium for ₱13,000 on May 15, 20x1.
d. Entity A should credit share premium for ₱26,000 on May 15, 20x1.

Answer 24

b. Entity A should credit share premium for ₱26,000 on March 31, 20x1.

Question 25

If the current tax expense is greater than the income tax expense during the period, there must be a

a. deferred tax benefit
b. deferred tax expense
c. income tax payable
d. prepaid income tax

Answer 25

a. deferred tax benefit

Question 26

ABC Co. has the following information relating to its income tax on December 31, 20x1:

• Provision for probable loss on litigation of ₱300,000 is recognized for financial reporting. This amount is tax deductible only when actually paid. ABC expects to pay for the accrued loss in 20x2.
• Revenue for financial reporting is recognized based on percentage of completion while revenue for taxation purposes is recognized based on collections on progress billings. Total revenue recognized for financial reporting is ₱1,000,000 while revenue recognized for taxation purposes is ₱800,000.
• Pretax income for the year is ₱1,000,000. Income tax rate for 20x1 is 30%. However, an enacted tax law that will take effect starting January 1, 20x2 requires a tax rate of 32%.
• There are no temporary differences on January 1, 20x1.
  How much is the income tax expense?

a. 320,000
b. 300,000
c. 298,000
d. 289,000

Answer 26

c. 298,000

Question 27

Leases are accounted for under

a. PAS 16
b. PFRS 14
c. PFRS 15
d. PFRS 16

Answer 27

d. PFRS 16

Question 28

You and I are the accountants of A Corporation. Our company’s authorized capitalization is ₱100M divided into 100M shares with par value per share of ₱1. Which of the following statements is correct?

a. If our company issues 10,000 shares for ₱5 each, we will recognize a share premium of ₱50,000.
b. Our company can issue shares at a subscription price that is below ₱1.
c. Our company can issue more than 100M shares without amending its articles of incorporation.
d. If our company receives share subscription for 20,000 shares at ₱15 per share, we will most likely recognize the related share premium on subscription date rather than on the collection date.

Answer 28

d. If our company receives share subscription for 20,000 shares at ₱15 per share, we will most likely recognize the related share premium on subscription date rather than on the collection date.

Question 29

ABC Co. has pretax income of ₱100,000. The following information was gathered:
Loss on expropriation of property
35,000
Non-deductible premium on life insurance of key
employees
6,000
Interest income received on government securities
subjected to final tax
(5,000)
Excess of accelerated depreciation used in taxation over
straight line depreciation used in financial reporting
(10,000)
Warranty expense accrued for financial reporting
purposes but is tax deductible only when actually paid
15,000
Rent received in advance
8,000
Quarterly income tax payments (1st quarter to 3rd quarter)
20,000
Tax rate
30%
Beginning balance of taxable temporary difference
12,000
Beginning balance of deductible temporary difference
9,000

1. How much is the income tax expense?
   a. 40,800
   b. 42,600
   c. 44,700
   d. 46,200
2. How much is the current tax expense?
   a. 40,800
   b. 42,600
   c. 44,700
   d. 46,200
3. How much is the deferred tax expense (benefit)?
   a. 4,900
   b. (4,900)
   c. 3,900
   d. (3,900)
4. How much is the current tax payable?
   a. 44,700
   b. 42,600
   c. 24,700
   d. 22,600
5. How much is the deferred tax liability to be presented in the statement of financial position?
   a. 3,600
   b. 6,600
   c. 3,000
   d. 6,000
6. How much is the deferred tax asset to be presented in the statement of financial position?
   a. 9,000
   b. 9,600
   c. 10,200
   d. 11,000

Answer 29

1) a. 40,800
2) c. 44,700
3) d. (3,900)
4) c. 24,700
5) b. 6,600
6) b. 9,600

Question 30

Entity A has the following share capital transactions during the year:

• Issued 10,000 shares with par value of ₱10 per share for a total consideration of ₱160,000.
• Received share subscriptions for 20,000 shares at a subscription price of ₱22 per share. Only half of the subscriptions were collected by the end of the year.

How much is the total share premium arising from the share transactions above?

a. 60,000
b. 320,000
c. 300,000
d. 180,000

Answer 30

c. 300,000

Question 31

On February 26, 20x1, Entity A acquires 10,000 of its own shares for ₱3 per share. The shares have a par value of ₱1 and were selling in the stock market at ₱4 per share on this date. To record the reacquisition, Entity A should

a. debit Treasury shares account for ₱30,000.
b. credit Treasury shares account for ₱30,000.
c. debit Share premium account for ₱10,000.
d. credit Treasury shares account for ₱40,000.

Answer 31

a. debit Treasury shares account for ₱30,000.

Question 32

According to PAS 37, contingent liabilities are
a. recognized and disclosed.
b. always disclosed.
c. disclosed, only if their expected occurrence is remote.
d. not disclosed if their expected occurrence is remote.

Answer 32

d. not disclosed if their expected occurrence is remote.

Question 33

Actuarial gains or losses result from the accounting for which of the following employee benefits?

a. Short-term compensated absences
b. Post-employment defined contribution plans
c. Post-employment defined benefit plans
d. Profit sharing and bonus plans

Answer 33

c. Post-employment defined benefit plans

Question 34

The tenant (as opposed to the landlord) in a lease contract is referred to as the

a. Lessor
b. Lessee
c. Leasee
d. Tenor

Answer 34

b. Lessee

Question 35

On January 1, 20x1, ABC Co., acquired transportation equipment in exchange for cash of ₱100,000 and ₱1,000,000 noninterest-bearing note payable due in 4 equal annual installments starting December 31, 20x1. The prevailing rate of interest for this type of note is 12%. How much is the current portion of the note on December 31, 20x2?

a. 158,880
b. 177,945
c. 199,298
d. 223,214

Answer 35

b. 177,945

Question 36

Kemp Company must determine the December 31, 2005, year-end accruals for advertising and rent expense. A P50,000 advertising bill was received January 7, 2006, comprising cost of P35,000 for advertisements in December 2006 issues, and P15,000 for advertisements in January 2006 issues of the newspaper.

A store lease, effective December 16, 2004, calls for fixed rent of P120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P6,000,000 per calendar year is payable on January 31 of the following year. Net sales for 2005 were P9,000,000.

In its December 31, 2005 balance sheet, Kemp should report accrued liabilities of
a. 260,000
b. 185,000
c. 210,000
d. 245,000

Answer 36

d. 245,000

Question 37

Entity A’s total shareholders’ equity was ₱900,000 before recording the following share transactions:

• Received cash subscriptions for 10,000 shares with par value of ₱1 at ₱14 per share. Share issuance costs amounted to ₱2,000.
• Received subscriptions for 20,000 shares at ₱20 per share. Twenty-five percent down payment was collected on subscription date.
• Collected the remaining unpaid subscription price of 15,000 subscribed shares and issued the related share certificates. Share issuance costs amounted to ₱3,000.
  How much is the balance of Entity A’s total shareholders’ equity after recording the transactions above? (Hint: Preparing journal entries makes this problem easier to solve.)

a. 1,490,000
b. 1,510,000
c. 1,360,000
d. 1,610,000

Answer 37

c. 1,360,000

Question 38

On January 1, 20x1, ABC Co. borrowed 10%, ₱1,000,000 loan from XYZ Bank. Principal is due on January 1, 20x4 but interests are due annually starting January 1, 20x2. The bank charged ABC a 3% nonrefundable loan origination fee representing service fee. How much is the carrying amount of the loan on initial recognition?

a. 1,000,000
b. 970,000
c. 930,000
d. 870,000

Answer 38

b. 970,000

Question 39

This type of difference will give rise to deferred tax asset.

a. Taxable temporary difference
b. Permanent difference
c. Deductible temporary difference
d. No difference

Answer 39

c. Deductible temporary difference

Question 40

On December 31, 20x1, an entity has an asset of ₱4,000 for interest receivable that will be taxed when the cash is received in 20x2. Tax is payable at 20% on the first ₱500,000 of taxable profit earned and 30% on any remainder (i.e., excess above ₱500,000). In 20x1 the entity earned taxable profit of ₱450,000. In 20x2 the entity expects to earn taxable profit of ₱550,000. How much is the deferred tax liability on Dec. 31, 20x1?

a. 864.15
b. 748.19
c. 891.23
d. 836.40

Answer 40

d. 836.40

Question 41

Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20x9. Under the terms of the operating lease, rent for the first year is ₱8,000 and rent for years 2 through 5 is ₱12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free. In its December 31, 20x9, income statement, what amount should Wall report as rental income?

a. 12,000
b. 11,600
c. 10,800
d. 8,000

Answer 41

c. 10,800

Question 42

Entity A reacquires 10,000 of its own shares for ₱50. The shares have par value of ₱10 and were originally issued at ₱15 per share. Subsequently, Entity A reissues the 10,000 shares at ₱48 per share. The journal entry to record the reissuance involves which of the following?

a. Debit to Retained earnings for ₱20,000
b. Credit to Cash for ₱480,000
c. Debit to Share premium for ₱50,000
d. Debit to Treasury shares for ₱500,000

Answer 42

a. Debit to Retained earnings for ₱20,000

Question 43

ABC Co. is contemplating on issuing a 12%, 3-year, ₱1,000,000 bonds. Principal is due at maturity but interest is due semi-annually every July 1 and December 31. ABC determines that the current market rate on January 1, 20x1 is 14%. ABC Co. plans to issue the bonds on September 30, 20x1. How much is the estimated total proceeds from the issuance of the bonds on September 30, 20x1?

a. 666,342
b. 962,563
c. 952,334
d. 992,563

Answer 43

d. 992,563

Question 44

Which of the following is a characteristic of a finance lease?

a. The lease term is substantially less than the estimated economic life of the leased property.
b. The lease contains a bargain-purchase option.
c. The present value of the minimum lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the inception of the lease.
d. The lease obligation does not appear in the balance sheet of the lessee.

Answer 44

b. The lease contains a bargain-purchase option.

Question 45

Current liabilities include accrued expenses with a carrying amount of P4,000. The related expense has already been deducted for tax purposes. How much is the tax base of the liability?

a. 4,000
b. 2,400
c. 1,600
d. 0

Answer 45

a. 4,000

Question 46

PFRSs are adopted from the standards issued by the

a. IASC
b. IASCF
c. IASB
d. FASB

Answer 46

c. IASB

Question 47

The actuarial valuation report of Entity A’s post-employment benefit plan shows the following information:
Service cost
300,000
Net interest on the net defined benefit liability (asset)
90,000
Remeasurements of the net defined benefit liability
(20,000)
Total defined benefit cost
370,000

How much will be shown in profit or loss and in other comprehensive income?

Profit or loss - Other comprehensive income
a. 370,000 - 0
b. 300,000 - 70,000
c. 390,000 - (20,000)
d. 0 - 370,000

Answer 47

c. 390,000 - (20,000)

Question 48

As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine months of free rent under a five-year operating lease. The lease is effective on July 1, 20x5, and provides for monthly rental of ₱1,000 to begin April 1, 20x6. In Art’s income statement for the year ended June 30, 20x6, rent income should be reported as

a. 10,200
b. 9,000
c. 3,000
d. 2,550

Answer 48

a. 10,200

Question 49

On January 1, 20x1, SPITEFUL MALICIOUS Co. issued 1,000, ₱4,000, 10%, 3-year bonds for ₱3,807,852. Principal is due on December 31, 20x3 but interests are due annually every year-end. The effective interest rate is 12%. SPITEFUL Co. incorrectly used the straight line method instead of the effective interest method to amortize the discount.

1. What is the effect of the error on the carrying amount of the bonds on December 31, 20x1? (over) understated
   a. 7,107
   b. (7,107)
   c. 6,341
   d. (6,341)
2. What is the effect of the error on the 20x1 profit? (over) understated
   a. 7,107
   b. (7,107)
   c. 6,341
   d. (6,341)

Answer 49

1) b. (7,107)
2) a. 7,107

Question 50

On January 1, 20x1, Entity X (Customer) enters into a 4-year lease of equipment with Entity Y (Supplier). The annual rent is ₱220,000, payable at the end of each year. The equipment has a remaining useful life of 10 years. The interest rate implicit in the lease is 10% while the lessee’s incremental borrowing rate is 12%. Entity X uses the straight-line method of depreciation. The relevant present value factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=4………… 3.16987
- PV of an ordinary annuity of ₱1 @12%, n=4………… 3.03735

1. How much is the lease liability to be recognized by Entity X on initial recognition?
   a. 702,345
   b. 697,371
   c. 668,217
   d. 0
2. How much is the annual depreciation on the right-of-use asset?
   a. 174,343
   b. 175,586
   c. 167,054
   d. 0
3. Assume the lease qualifies for accounting as a lease of “low-value asset.” How much is the lease liability to be recognized by Entity X on initial recognition?
   a. 702,345
   b. 697,371
   c. 668,217
   d. 0
4. How much is the lease (rent) expense in 20x1?
   a. 220,000 c. 167,054
   b. 174,343 d. 0
5. Assume the lease is a finance lease. How much is the net investment in the lease to be recognized by Entity Y on initial recognition?
   a. 702,345
   b. 697,371
   c. 668,217
   d. 0
6. Assume the lease is an operating lease. How much is the lease (rent) income in 20x1?
   a. 220,000
   b. 174,343
   c. 167,054
   d. 0

Answer 50

1) b. 697,371
2) a. 174,343
3) d. 0
4) a. 220,000
5) b. 697,371
6) a. 220,000

Question 51

On January 1, 20x1, ABC purchased machinery for ₱1,000,000. The equipment is depreciated using the straight line method over an estimated useful life of 10 years with no residual value. On January 1, 20x3, the equipment was revalued at a fair value of ₱1,200,000 with no change in useful life. The pretax income before deduction for depreciation expense in 20x3 is ₱1,000,000. Income tax rate is 30%.

1. How much is the deferred tax liability as of January 1, 20x3?
   a. 400,000
   b. 280,000
   c. 120,000
   d. 90,000
2. How much is the deferred tax liability as of December 31, 20x3?
   a. 280,000
   b. 245,000
   c. 120,000
   d. 105,000
3. How much is the income tax expense in 20x3?
   a. 850,000
   b. 900,000
   c. 270,000
   d. 255,000
4. How much is the current tax expense in 20x3?
   a. 850,000
   b. 320,000
   c. 270,000
   d. 255,000

Answer 51

1) c. 120,000
2) d. 105,000
3) d. 255,000
4) c. 270,000

Question 52

Current liabilities include accrued expenses with a carrying amount of P4,000. The related expense will be deducted for tax purposes on a cash basis. How much is the tax base of the liability?
a. 4,000
b. 2,400
c. 1,600
d. 0

Answer 52

d. 0

Question 53

Two years ago, Entity A reacquired 2,000 of its own shares with par value of ₱100 per share for ₱240,000. Today, Entity A reissues half of the treasury shares at ₱160 per share. The journal entry to record the reissuance includes which of the following?

a. Credit to Retained earnings – unrestricted account for ₱240,000
b. Debit to Treasury shares account for ₱120,000
c. Credit to Share premium – treasury shares for ₱80,000
d. Credit to Share premium – treasury shares for ₱40,000

Answer 53

d. Credit to Share premium – treasury shares for ₱40,000

Question 54

Entity A reacquires 1,000 of its own shares for ₱25 and immediately retires them. The shares have par value of ₱10 and were originally issued at ₱30 per share. The journal entry to record the retirement of the shares includes which of the following?

a. Debit to Retained earnings for ₱5,000
b. Credit to Treasury shares for ₱30,000
c. Credit to Share capital for ₱10,000
d. Credit to Share premium - retirement for ₱5,000

Answer 54

d. Credit to Share premium - retirement for ₱5,000

Question 55

Which of the following factors is least likely to affect the amount of retirement benefits under a defined benefit plan?

a. The age of the retiring employee.
b. The level of the employee’s compensation.
c. The employee’s length of service.
d. The amount of employer contributions to a fund.

Answer 55

d. The amount of employer contributions to a fund.

Question 56

PARADIGM EXAMPLE Co. has a 10%, P4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2. Interest on the loan is due every July 1 and December 31. On February 1, 20x2, PARADIGM Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable of honoring the agreement’s provisions. PARADIGM’s financial statements were authorized for issue on March 15, 20x2. How much is presented as current liability in relation to the loan in PARADIGM’s 20x1 year-end financial statements?
a. 4,000,000
b. 200,000
c. 4,200,000
d. 0

Answer 56

a. 4,000,000