1.

The initial fair value of a financial liability is defined as the

a. Amount for which a liability is paid
b. Amount for which a liability is paid in an orderly transaction
c. Amount for which a liability is paid between market participants.
d. Amount for which a liability is paid in an orderly transaction between market participants
at the measurement date

2. After initial recognition, an entity shall measure a financial liability at

I. Amortized cost using the effective interest method.
II. Fair value through profit or loss

a. I only
b. II only
c. Either I or II
d. Neither I nor II

3. The conceptually appropriate method of measuring a liability is to

a. Discount the amount of expected cash outflows that are necessary to liquidate the liability
using the market rate of interest at the date the liability was initially incurred.
b. Discount the amount of expected cash outflows that are necessary to liquidate the liability
using the market rate of interest at the date of the financial statements.
c. Record as liability the amount of cash that would be required to pay the liability in the
ordinary course of business on the date of the financial statements
d. Record as liability the amount of cash actually received when a liability was incurred.

4. What is the relationship between present value and the concept of a liability
a. Present value is used to measure certain liabilities
b. Present value is not used to measure liabilities
c. Present value is used to measure all liabilities
d. Present value is used to measure noncurrent liabilities only.

5. An entity is a retailer of home appliances and offers a service contract on each appliance sold. The
entity sells appliances on installment contracts but all service contracts must be paid in full at the time of
sale. Collections received for service contracts shall be recorded as an increase in
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholders’ equity valuation account
d. Service revenue account

6. Estimated liabilities are disclosed in financial statements by:

a. Note to the financial statements
b. Showing the amount among the liabilities but not extending the liability total
c. An appropriation of retained earnings
d. Appropriately classifying them as regular liabilities in the statement of financial position

7. For an event to be an obligating event, it is necessary that the entity has no realistic alternative but to
settle the obligation created by the event and this is the case only:
I. Where the settlement of the obligation can be enforced by law
II. Where the event creates valid expectation in other parties that the entity will discharge
the obligation as in the case of a constructive obligation

a. I only
b. II only
c. Either I or II
d. Neither I nor II
8. Bondholders exchange their convertible bonds for ordinary shares. The carrying amount of these bonds
was lower than market value but greater than the par value of the ordinary shares issued. If the books
value method is used, which of the following correctly states an effect of the conversion?
a. Shareholders’ equity is increased
b. Share premium is decreased
c. Retained earnings account increased
d. A loss is recognized

9. The proceeds from the issue of the bonds payable

a. Will always be equal to the face amount
b. Will always be less than the face amount
c. Will always be more than the face amount
d. May be equal, more or less than the face amount depending on the market interest rate

10. The proceeds from bonds issued with nondetachable share warrants shall be accounted for
a. Entirely as bonds payable
b. Entirely as shareholders’ equity
c. Partly as unearned revenue and partly as bonds payable
d. Partly as bonds payable and partly as shareholders’ equity

11. An entity issued bonds payable with nondetachable share warrants. In computing interest expense for
the first year, the effective interest rate is multiplied by the
a. Proceeds received from sale of the bonds
b. Face value of the bonds
c. Fair value of the bonds ex-warrant
d. Share warrants outstanding
12. Under a debt restructuring involving substantial modification of terms, the future cash flows under the
new terms shall be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate

13. The market price of a bond issued at a discount is the present value of the principal amount at the
market rate of interest
a. Less the present value of all future interest payments at the market rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the
bond
c. Plus the present value of all future interest payments at the market rate of interest
d. Plus the present value of all future interest payments at the rate of interest stated on the
bond

14. The issuer of a 10-year term bond sold at par three years ago with interest payable May 1 and
November 1 each year, shall report at year-end
a. Liability for accrued interest
b. Addition to bonds payable
c. Increase in deferred charges
d. Contingent liability

15. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense for
the current year ended December 31 is a period of
a. Three months
b. Four months
 c. Six months
d. Seven months

16. If bonds are issued at a premium, this indicates that

a. The yield rate if interest exceeds the nominal rate
b. The nominal rate of interest exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates

17. Treasury shares were reacquired for cash at a price in excess of its par value. The treasury shares were
subsequently reissued for cash at a price in excess of its acquisition price. What is the effect on retained
earnings of the acquisition of treasury shares and of the reissuance of treasury shares?

Acquisition of TS Reissuance of TS
a. No effect Increase
b. Increase No effect
c. No effect No effect
d. Increase Decrease

18. A company issued rights to its existing shareholders to purchase for P30 per share, unissued shares of
P15 par value ordinary share capital. Additional paid-in capital will be credited when the

Rights are issued Rights are exercised Rights lapse

a. Yes No No
b. No No Yes
c. No Yes N
d. Yes Yes Yes

19. A company issued rights to its existing shareholders to purchase ordinary shares. When the rights are
exercised, additional paid-in capital would be credited if the purchase price
a. exceeded the par value
b. was the same as the par value
c. was the same as the par value, but less than the market value at the date of the exercise
d. was less than the par value

20 Fully participating shares means that the

a. ordinary shareholders receive a dividend rate per share equal to the preference share and
all excess dividends are given to the ordinary shareholders
b. ordinary shareholders receive a dividend rate per share equal to the preference share and
all excess dividends go to the preference shareholders
c. ordinary shareholders receive a dividend rate per share equal to the preference share and
all excess dividends are shared proportionately between the two classes
d. preference shareholders receive their full dividend and any excess is given to the ordinary
shareholders

21. Under PFRS 2, Share Based Payment, the value of the options that lapse after vesting shall
a. be credited to expense during the period of the options lapse.
b. be credited to income during the period that the options lapse
c. remain in equity
d. be converted into a liability

22. A company issued rights to its existing shareholders to purchase, for P30 per share, unissued ordinary
shares of P15 par value. When the rights lapse,
a. no entry will be made
b. additional paid-in capital will be debited
c. additional paid-in capital will be credited
 d. stock rights outstanding will be debited

23. Assuming that the issuing company has only one class of share capital, a transfer from retained
earnings to contributed capital equal to the market value of the shares issued is ordinarily a characteristic
of
a. either a bonus issue or a share split
b. neither a bonus issue nor a share split
c. a share split but not a bonus issue
d. a bonus issue but not a share split

24. Select the statement that is incorrect concerning the appropriations of retained earnings
a. appropriation of retained earnings do not change the total amount of shareholders’ equity
b. appropriation of retained earnings reflect funds set aside for a designated purpose, such
as plant expansion
c. appropriations of retained earnings can be made as a result of contractual requirements
d. appropriations of retained earnings can be made at the discretion of the board of
directors

25. Dividends in arrears are show on the financial statements as

a. current liabilities
b. contra-equity accounts
c. contra-assets accounts
d note disclosures only

26. When should the compensation expense be recorded as a result of share options granted by the
enterprise to its employees?
a. during the year of grant
b. during the year that the options ultimately vest
c. during the years when services are required to be rendered by the employees
d. during the year when the option first becomes exercisable

27. Which of the following is not one of the criteria when determining whether a contract is or contains a
lease?
a. Identified asset
b. Identified liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use

28. When a lease transfers ownership to the lessee by the end of the lease term, the underlying asset is
depreciated
a. over its useful life
b. over the lease term
c. over the shorter of a and b
d. not depreciated

29. Initial direct costs incurred by the lessee are

a. expensed immediately
b. capitalized as cost of right-of-use asset
c. included in the initial measurement of lease liability
d. b and c

30. Net investment in the lease is equal to the

a. Gross investment in the lease plus unearned financial income
 b. The present value of lease payments less the present value of any unguaranteed residual
value
c. The present value of the lease payments
d. The present value of lease payments plus the present value of any unguaranteed residual
value

31. Rent income (lease income) under operating leases are normally recognized using
a. effective interest method
b. straight line method
c. sum-of-the-years’ digits
d. none of these

32. A right of use asset is initially measured at cost and subsequently measured using the
a. cost model
b. fair value model
c. revaluation model
d. any of these

33. A lessor recognizes interest (finance) income on a finance lease in a

a. decreasing manner
b. an increasing manner
c. equal amounts each period
d. any of these

34. A lessor’s net investment in a finance lease is computed as

a. lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)

35. Profit-sharing and bonuses payable twelve months or more after the end of the period in which the
employee render the related services are classified, under PAS 19 as
a. short-term employee benefits
b. post-employment benefits
c. other long-term employee benefits
d. termination benefits

36. Which of the following is a valid statement regarding accounting for non-accumulating paid absences?
a. An expense is recognized when the employee renders services in the current period that
increases his entitlement to the benefits.
b. No liability is recognized at year-end for any unused entitlement
c. A liability is recognized at year-end equal to the best estimate of any unused entitlement
that the employee will avail in future periods
d. No expense is recognized for non-accumulating paid absences

37. Dynamax Company follows the practice of paying all employees for 12 days paid vacation for each year
of service, which can be carried over for one year if unused. Under PAS 19, the obligation for earned but
unused vacation days should be
a. recognized as a current liability
b. ignored and recorded only when availed of by employees
c. disclosed only in the notes to the financial statements
d. recognized partly as a current liability and partly as non-current liability

38. In a defined benefit plan, a formula is used to

a. define the benefits that the employee will receive at the date of retirement
 b. insure that retirement benefit expense and the amount contributed to the fund are equal
c. require an employer to contribute a certain amount each period based on a formula
d. insure that employers are at risk to make sure funds are available at retirement

39. in a defined contribution plan, the post-employment benefit expense is equal to

a. enterprise’s contribution to the plan with respect to the services in a particular period.
b. retirement benefits actually paid during the year
c. present value of the retirement benefits with respect to services rendered in the current
period
d. present value of the retirement benefits with respect to services rendered in the current
and prior periods.

40. Which of the following is a characteristic of defined contribution plans?

a. they are more complex than defined benefit plans
b. the employer bears the investment risks
c. contributions are made in equal amounts periodically
d. the employer is relieved of obligation after making the appropriate amount of periodic
contribution

41. Which of the following is not a component of a post-employment benefit cost under the defined
benefit plan?
a. contributions to the plan
b. current service cost
c. interest cost
d. past service cost

42. The actuarially computed cost of a post-employment benefit of an employee for the services rendered
for the current period is called
a. prior service costs
b. past service costs
c. current service cost
d. interest cost

43. If during the current year, taxable profit is greater than accounting profit and the difference is a
temporary difference,
a. a deferred tax asset is recognized at the end of the current year
b. a deferred tax asset will be recognized in future years
c. a deferred tax liability is recognized at the end of the current year
d. a deferred tax liability will be recognized in future years

44. Which of the following shall be classified as permanent difference between pre-tax financial income
and taxable income?
a. payment of premiums for life insurance
b. depreciation expense
c. fines for violation of law
d. product warranty costs

45. Which of the following would create a deferred tax liability?

a. interest revenue on municipal bonds
b. accrual of warranty expense
c. excess of tax depreciation over financial accounting depreciation
d. subscriptions received in advance
46. Which of the following creates a deferred tax asset?
a. tax depreciation exceeding book depreciation
b. using installment sales method for tax purposes and accrual basis for accounting
purposes
c. recognition of prepaid expenses
d. recognition of unearned revenues

47. Recognizing tax benefits in a loss year due to a loss carryforward requires
a. only a note disclosure
b. creating a new carryforward for the next year
c. creating a deferred tax liability
d. creating a deferred tax asset

48. When a company reports deferred tax assets and liabilities for two consecutive years, a deferred tax
benefit or expense should be reported equal to the
a. increase in the deferred tax assets
b. net change in deferred tax liability plus or minus the net change in deferred tax liability
c. decrease in the deferred tax liability
d. amount of the total income tax liability

49. Which of the following is a correct formula to compute for total income tax expense?
a. Current income tax expense plus increase in deferred tax asset minus increase in deferred
tax liability
b. Current income tax expense minus increase in deferred tax asset plus increase in deferred
tax liability
c. Current income tax expense plus increase in deferred tax asset plus increase in deferred
tax liability
d. Current income tax expense minus decrease in deferred tax asset plus decrease in
deferred tax liability

50. The differences between accounting income and taxable income that do not have tax consequences are
called
a. permanent differences
b. non-temporary differences
c. temporary differences
d. timing differences

51. Presented below is information available for Agatha Company

Current assets
Inventories 110,000
Prepaid expenses 30,000
Accounts receivable 61,000
Short-term investments 75,000
Cash 4,000
Total current assets 280,000

Total current liabilities are P120,000. The acid-test ratio for Agatha is
a. 2.33 to 1
b. 2.08 to 1
c. 1.17 to 1
d. .54 to 1
52. In March 31, 2020, an explosion occurred at Brownie’s plant, causing damage to area properties. By
May 2020, no claims had yet been asserted against Brownie. However, Brownie’s management and legal
counsel concluded that it was possible but not probable that Brownie would be held responsible for
negligence, and that P4,000,000 would be a reasonable estimate for damages. Brownie’s P5,000,000
comprehensive public liability policy contains a P400,000 deductible clause. In Brownie’s December 31,
2019 financial statements, for which the auditor’s fieldwork was completed in April 2020, how should the
casualty be reported?
a. as a note disclosing a possible liability of P4,000,000
b. as an accrued liability of P400,000
c. as a note disclosing a possible liability of P400,000
d. No note disclosure of accrual is required for 2019 because the event occurred in 2020

53. Dominic Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No
single amount within the range is a better estimate than any other amount. The loss accrual should be
a. zero
b. the maximum point of range
c. the minimum point of range
d. the mid point of the range

54. CM Corporation has the following liabilities at December 31, 2019:

8.9% note payable issued November 1, 2019 maturing

October 31, 2020 1,550,000
7.25% note payable issued August 1, 2019, payable in twelve
equal installments of P90,000 beginning August 1, 2020 1,080,000

CM’s December 31, 2019 financial statements were issued on March 19, 2020. On January 23, 2020, the
entire P1,550,000 balance of the 8.9% note was refinanced by issuance of a long-term obligation payable
in a lump sum. In addition, on December 29, 2019, CM consummated a non-cancellable agreement with
the lender to refinance the 7.25%, P1,080,000 note on a long term basis, on readily determinable terms
that have not yet been implemented. On December 31, 2019, statement of financial position, the amount
of these notes payable that MC should classify as short-term obligation is
a. 0 c. 1,080,000
b. 1,150,000 d. 2,230,000

55. Gilmore owes P1 million that is due on February 28. The company borrows P800,000 on February 25
(5-year note) and uses the proceeds to pay down the P1 million note and uses other cash to pay the
balance. How much of the P1 million note is classified as long-term in the December 31 financial
statements?
a. 1,000,000 c. 0
b. 800,000 d. 200,000

56. On July 1, 2016, Geraldo Company obtained a P3,000,000, 180-day bank loan at an annual rate of
12%. The loan agreement requires Geraldo to maintain a P600,000 compensating balance in its checking
account at the lending bank. Geraldo would otherwise maintain a balance of only P300,000 in this
account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year (Banker’s
Rule), the effective interest rate on the borrowing is
a. 12.00% c. 13.33%
b. 12.67% d. 13.50%

57. Vanessa Apparel, Inc. operates a retail store and must determine the proper December 31, 2014 year-
end accrual for the following expenses:

The store lease calls for fixed rent of P10,000 per month, payable at the beginning of the month, and
additional rent equal to 6% of net sales over P2,000,000 per calendar year, payable on January 31 of the
following year. Net sales for 2014 are P8,000,000.
Vanessa has property subject to a city property tax. The city’s fiscal year runs from July 1 to June 30 and
the tax, assessed at 3% of property on hand at April 30, is payable on June 30. Vanessa estimates that its
property tax will amount to P60,000 for the fiscal year ending June 30 , 2015. In its December 31, 2015
statement of financial position, how much should Miss Vanjie report as accrued expenses?
a. 390,000 c. 510,000
b. 396,000 d. 516,000

58. Josiah Company inaugurated a promotional campaign on January 2, 2019 to promote the salability of
their product, Mapagmahal Cereals. Josiah placed a coupon redeemable for a premium in each package of
cereal sold at P200. Each premium, anti-cheating device, costs P25 and 10 coupons must be presented by
a customer to receive a premium. Joshua estimated that only 70% of the coupons issued would be
redeemed. For the 6 months ended July 31, 2019, the following transactions occurred:

Packages of cereal sold 120,000

Premium purchased 30,000
Coupons redeemed 54,000

How much should be reported as premium expense for coupons on the fiscal year ended July 31, 2019?
a. 75,000 c. 135,000
b. 135,000 d. 210,000

59. Refer to previous question, how much should be reported as estimated liability for coupons on the
fiscal year ended July 31, 2019?
a. 75,000 c. 210,000
b. 135,000 d. 70,000

60. On January 1, 2018, Caysasay Corp. issued serial bonds with face amount of P3,000,000 and stated
12% interest payable annually every December 31. The bonds have a 10% effective yield. The bonds
mature at an annual installment of P1,000,000 every December 31. The present value of 1 at 10% for:

One period .91

Two periods .83
Three periods .75

What is the present value of the serial bonds on January 1, 2018?

a. 3,106,800
b. 3,060,000
c. 3,045,000
d. 3,149,400

61. Refer to previous problem, how much is the bond carrying value on December 31, 2019?
a. 2,057,480
b. 1,023,228
c. 0
d. Cannot be determined

62. Refer to the previous problem, how much is the interest expense on December 31, 2018?
a. 310,680
b. 205,748
c. 102,323
d. 0

63. Refer to previous problem, how much is the premium amortization on December 31, 2019?
a. 49,320
b. 34,252
c. 17,677
 d. 5,551

64. On January 1, 2018, Shenny Company issued 9% bonds with a face amount of P4,000,000 for
P3,756,000 to yield 10%. The bonds are dated January 1, 2018, mature on December 31, 2027 and pay
interest annually on December 31. The interest method of amortizing bond discount is used.

What amount should be reported as interest expense for 2018?

a. 338,040
b. 360,000
c. 375,600
d. 400,000

65. Refer to previous problem, what amount should be reported as interest expense for 2019?
a. 400,000
b. 375,600
c. 360,000
d. 377,160

66. Due to extreme financial difficulties, Emmanuella Corp. had negotiated a restructuring of a 10%
P5,000,000 note payable due on December 31, 2018. The unpaid interest on the note on such date is
P500,000. The creditor had agreed to reduce the face value to P4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2018. The PV of 1 at
10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for three periods is 2.49.

What is the gain on extinguishment of debt in 2018?

a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000

For nos 67-76

On January 1, 2023, the shareholders’ equity of Toxtricity Company’s balance sheet revealed the following
information:

P5 Convertible Preference Share (P40 par value; 50,000 shares

authorized, 20,000 shares issued and outstanding) 800,000
Ordinary share (P5 stated value; 200,000 shares
authorized, 120,000 shares issued and outstanding) 600,000
Paid-in capital in excess of par 3,000,000
Retained earnings 4,500,000
Total shareholders’ equity 8,900,000

In addition, the following information is known:

a. On February 2, 2023, 15,000 ordinary shares were acquired by the company for P33 per share.

b. On September 30, 2023, 5,000 preference shares were converted to ordinary shares. One share
of preference share is convertible into one share of ordinary share. At the time of conversion, the
ordinary share had a market value of P42 per share.

c. On December 21, 2023, the company received a share subscription of 10,000 ordinary shares at a
subscription price of P33 per share. The subscription contract required a cash down payment equal to
60% of the subscription price, with the balance due on February 1, 2004.

d. On February 1, 2024, 8,500 ordinary shares were issued according to the subscription contract.
Because of default by a subscriber, 1,500 shares were not issued. The subscription contract requires
the subscriber to forfeit all cash advance.
e. On April 15, 2024, 10,000 shares held in treasury were reissued at P50 per shares.

f. On May 16, 2024, a special dividend of preference share was distributed to ordinary shareholders.
One hundred shares of ordinary share entitled a shareholder to one share of preference share. The
market price of preference share was P40 per share at that time.

g. Net income for 2023 was P660,000 and for 2024, P890,000.

Questions
67. The total preference share at December 31, 2023 is:
a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

68. The total ordinary share at December 31, 2023 is:

a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

69. The total additional-paid in capital at December 31, 2023 is:

a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

70. The total retained earnings at December 31, 2023 is:

a. P 4,706,887.50 b. P 5,160,000.00 c. P 5,491,925.00 d. P 5,596,887.50

71. The Treasury share at December 31, 2023 is:

a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

72. The total preference share at December 31, 2024 is:

a. P 548,600 b. P 600,000 c. P 625,000 d. P 651,400

73. The total ordinary share at December 31, 2024 is:

a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

74. The total additional paid-in capital at December 31, 2024 is:
a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

75. The total retained earnings at December 31, 2024 is:

a. P 5,998,900.00 b. P 5,491,925.00 c. P 4,965,000.00 d. P 4,706,887.50

76. The Treasury share at December 31, 2024 is:

a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

77. Grimmsnarl Corp. granted share options to its employees with a fair value of P4,500,000 on January
1, 2022. The options vears in three years and the options are exercisable starting January 1, 2025
until December 31, 2026.

On December 31, 2022, it was estimated that 5% of the employees will leave the entity during the
vesting period. This estimate was revised to 6% during the year 2023. On December 31, 2024,
employees record indicates that 90% of the employees stayed and became entitled to the options.

What would be the expense charged during the year ending December 31, 2022?
a. 1,350,000 c. 1,425,000
b. 1,410,000 d. 1,500,000

78. Use the same information given in no. 77. What would be the expense charged during the year ended
December 31, 2023?
 a. 1,350,000 c. 1,395,000
b. 1,410,000 d. 1,500,000

79. The following information pertains to Oleana Corporation’s defined benefit plan for the year 2019:

Accrued benefit obligation, January 1, 2019 P5,000,000

Fair value of plan assets, January 1, 2019 3,800,000
Current service cost 600,000
Past service cost, determined at 12/31/19 580,000
Interest rate 12%
Actual return on plan assets 550,000
Number of years until vesting of benefits 5 years
Contributions made during the year 750,000
Actuarial gain on plan assets ?
Actuarial gain on benefit obligation 70,000

What was the balance of the retirement benefit asset/liability at January 1, 2019?
a. 5,000,000 liability
b. 1,200,000 liability
c. 800,000 liability
d. 3,800,000 asset

80. Refer to previous problem. What is the amount of past service cost that will be recognized as part of
retirement benefit expense for 2019?
a. 580,000
b. 116,000
c. 58,000
d. 16,000

81. Refer to previous problem. What amount of actuarial gain shall be recognized in profit or loss for the
year 2019?
a. 0
b. 70,000
c. 94,000
d. 164,000

82. Refer to previous problem. How much is the retirement benefit expense for the year 2019?
a. 1,160,000
b. 1,324,000
c. 1,488,000
d. 1,780,000

83. Refer to previous problem. How much is the fair value of the plan assets at December 31, 2019?
a. 3,800,000
b. 4,350,000
c. 5,100,000
d. 5,006,000

84. Refer to previous problem. How much is the defined benefit obligation at December 31, 2019?
a. 5,600,000
b. 6,200,000
c. 6,640,000
d. 6,710,000
85. Refer to previous problem. What is the amount of overfunding (underfunding) in the retirement cost
for 2019?
a. 0
b. (410,000)
c. (574,000)
d. 570,000

86. Refer to previous problem. Defined benefit liability at December 31, 2019 statement of financial
position is
a. 1,160,000
b. 1,200,000
c. 1,446,000
d. 1,610,000

87. Marowak Company has three financial statement elements for which the December 31, 2018 book
basis from the December 31, 2018 tax basis:

Book basis Tax Basis Difference

Equipment 2,000,000 1,200,000 800,000
Prepaid officers’ insurance policy 750,000 0 750,000
Warranty liability 500,000 0 500,000

As a result of these differences, future taxable amounts are (assume that the insurance premium is non
deductible)
a. 500,000
b. 800,000
c. 1,550,000
d. 2,050,000

88. At the end of 2017, its first year of operations, Diminuendo Company prepared a reconciliation
between pretax financial income and taxable income as follows:

Pretax financial income 4,500,000

Estimated litigation expenses 6,000,000
Excess depreciation for taxes (9,000,000)
Taxable income 1,500,000

The estimated litigation expense of P6,000,000 will be deductible in 2018 when it is expected to be paid.
Use of the depreciable assets will result in taxable amounts of P3,000,000 in each of the next three years.
The income tax rate is 30% for all years.

Assuming no payment yet has been paid for income taxes, what is the income tax payable at the end of
2017?
a. 0
b. 450,000
c. 900,000
d. 1,350,000

89. Refer to previous problem, what is the amount of deferred tax asset recorded at December 31, 2017?
a. 450,000
b. 900,000
 c. 1,350,000
d. 1,800,000

90. Refer to previous problem, that is the amount of current and non-current deferred tax liability
reported at December 31, 2017?
a. 900,000 and 1,800,000
b. 0 and 900,000
c. 0 and 2,700,000
d. 0 and 2,250,000

91. On January 1, 2019 Lessor Company leased a machine to Lessee Company. The machine had an
original cost of P6,000,000. The lease term was five years and the implicit interest rate on the lease was
15%. The lease is properly classified as a direct financing lease. The annual lease payments of P1,730,541
are made each December 31. The machine reverts to Lessor at the end of the lease term, at which time the
residual value of the machine will be P400,000. The residual value is unguaranteed.

The PV of 1 at 15% for 5 periods is 0.4972 and the PV of an ordinary annuity of 1 at 15% for 5 periods is
3.3522. At the commencement of the lease, the balance of Lessor’s net receivable and Lessee’s liability
would be:
Lessor Rec. Lessee Liability Lessor Rec. Lessee Liability
a. P 5,801,120 P 5,801,120 c. P 6,000,000 P 5,801,120
b. P 5,801,120 P 6,000,000 d. P 6,000,000 P 6,000,000

92. Mariology Company adopted the policy of leasing as primary method of selling its products. The entity’s
main product is a small helicopter that is very popular among politicians and entity managers. Mariology
Company constructed such a helicopter for Emperor Company at a cost of P8,500,000. Financing the
construction was at a 14% rate. 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 the lessee at the end of the lease period. It is
estimated that the helicopter will have a residual value of P1,600,000 at that date.

The lease payments began January 1, 2019. Mariology Company incurred initial direct cost of P500,000
in financing the lease agreement with Jade. The sales price of the helicopter is P14,875,000. The present
value of an annuity due of 1 at 14% for 10 periods is 5.95.

The profit on the sale to be recognized by Mariology Company should be

a. P 4,275,000 b. P4,775,000 c. P5,875,000 d. P6,375,000

93. What is the unearned interest income on January 1, 2019?

a. P 8,525,000 b. P 9,625,000 c. 10,125,000 d. 11,725,000

94. What is the interest income for 2019?

a. P 1,732,500 b. P1,956,000 c. P2,082,500 d. P 2,306,500

95. Sensitive Company sold an item of plant and machinery on January 1, 2019 for P2,500,000 its fair
value when its carrying amount was P2,000,000. Sensible company leased the item back on that date for
5 years, the item’s remaining useful life. Lease payments are P700,000 on January 1 each year.

The profit on disposal recognized in profit or loss for 2019 should be

a. P 0 b. P 100,000 c. P 250,000 d. P 500,000

96. The total finance charge over the lease term is

a. P 0 b. P 500,000 c. P1,000,000 d. P1,500,000

97. On June 30, 2019 Lee Richard Company sold equipment to an unaffiliated entity for P5,500,000. The
equipment had a book value of P5,000,000 and a remaining life of 10 years. That same day, Lee leased
back the equipment at P15,000 per month for 2 years with no option to renew the lease or repurchase the
equipment. The present value of the lease payments using the appropriate interest rate was P318,650 on
June 30. Lee’s equipment rent expense for the year ended December 31, 2019 should be
a. P 40,000 b. P 50,000 c. P 90,000 d. P 110,000

98. On December 31 of the current year, Bentley Company purchased machinery that it had been leasing
under a finance arrangement. The leased asset and lease liability were originally recorded at P2,000,000.
At the time of the purchase, the accumulated depreciation on the leased asset was P800,000 and the
remaining balance of the lease liability was P1,300,000. The leased asset was purchased for P1,440,000
cash. What amount is debited as cost of the machinery on the date of purchase?
a. P1,200,000 b. P 1,340,000 c. P 1,440,000 d. P 2,000,000

99. Gloriosa Company leases computer equipment to customers under a direct financing lease. The
equipment has no residual value at the end of the lease and the lease does not contain bargain purchase
option. Glade wishes to earn 8% interest on a 5-year lease of equipment with a cost of P3,234,000. The
present value of an annuity due of 1 at 8% for 5 years is 4.312. On January 1, 2019 Glade Company leased
the equipment to Blass Company.

What is the total interest revenue that Gloriosa will earn over the lease term?
a. P 516,000 b. P 750,000 c. P 1,293,600 d. P 1,394,500

100. What is the interest revenue to be reported by Gloriosa for 2019?

a. P 103,200 b. P 198,720 c. P 258,720 d. P 646,800