Fin-Acc 2 Summer Topics

CHAPTER 3
Problem 3-1
1.
2.
3.
4.
5.
A
D
D
D
C
6.
7.
8.
9.
10.
Problem 3-2
C
A
C
D
C
1.
2.
3.
4.
5.
C
C
A
B
C
6.
7.
8.
9.
10.
Problem 3-3
B
B
A
D
D
1.
2.
3.
4.
5.
D
B
A
A
B
6.
7.
8.
9.
10.
B
A
D
A
D
Problem 3-4
Book of Marian Company (Lessor)
Jan. 1 Machinery
Cash
2,400,000
2,400,000
Mar. 1 Cash
Rent income
Dec. 31 Repair and maintenance
600,000
600,000
30,000
30,000
31 Rent income
Unearned rent income (600,000 x 2/12)
100,000
31 Depreciation (2,400,000 / 6)
Accumulated depreciation
400,000
Cash
100,000
400,000
Book of Delia Company (Lessee)

Mar. 1 Rent expense
Cash
600,000
Dec. 31 Prepaid rent

Rent expense
100,000
600,000
100,000
Problem 3-5
Requirement 1
Books of Lessor
1. Equipment
Cash
3,000,000
3,000,000
2. Cash (40,000 x 9)
Rent income
360,000
3. Cash
Unearned rent income
120,000
4. Repairs
Cash
360,000
120,000
20,000
20,000
5. Unearned rent income

Rent income (120,000 / 3 = 40,000 x 9/12)
6. Depreciation
Accumulated depreciation (3,000,000 / 10)
30,000
30,000
300,000
300,000
Books of Lessee
1. Rent expense
Cash
360,000
2. Prepaid rent
Cash
120,000
360,000
120,000
3. Rent expense
Prepaid rent
30,000
30,000
Requirement 2
Rent income (360,000 + 30,000)

Less: Repairs
Depreciation
Net income of lessor
390,000
20,000
300,000
320,000
70,000
Problem 3-6
Books of Lessor
1. Tractor
Cash
1,600,000
1,600,000
2. Cash
Rent income
600,000
3. Repairs
Transportation
Cash
15,000
5,000
600,000
20,000
4. Rent income
Unearned rent income (50,000 x 3)
150,000
5. Depreciation
300,000
150,000
300,000
Books of Lessee
1. Rent expense
Cash
600,000
2. Prepaid rent
Rent expense
150,000
600,000
150,000
Problem 3-7
Books of Lessor
1. Machinery
Cash
2,400,000
2,400,000
2. Cash (36,000 x 9)
Rent income
324,000
3. Machinery
Cash
120,000
324,000
120,000
4. Amortization of initial direct costs

Machinery (120,000 / 4 = 30,000 x 9/12)
5. Depreciation
Accumulated depreciation (2,400,000 / 10 x 9/12)
22,500
22,500
180,000
180,000
Books of Lessee
1. Rent expense
Cash
324,000
324,000
Problem 3-8
1. Rent expense
Prepaid rent
Rent deposit
Leasehold improvement
Cash
2. Depreciation
Accumulated depreciation (360,000 / 5 x 1/12)
60,000
60,000
80,000
360,000
560,000
6,000
6,000
Problem 3-9
1. Rent expense
Cash
2. Cash
Sales
3. Prepaid rent
Cash
900,000
900,000
6,000,000
6,000,000
250,000
250,000
4. Rent expense (5% X 1,000,000)

Accrued rent payable
50,000
5. Rent expense
Prepaid rent (250,000 / 10)
25,000
Problem 3-10
50,000
25,000
1. Machinery
Cash
4,800,000
4,800,000
2. Cash
Rent income
850,000
3. Cash
Unearned rent income
300,000
4. Insurance
Cash
850,000
300,000
80,000
80,000
5. Depreciation
400,000
6. Unearned rent income

Rent income (300,000 / 3)
100,000
400,000
100,000
Problem 3-11
2008
1. Equipment
Cash
2. Equipment
Cash
2009
1. Cash
Rent income
2. Repairs
Transportation
Cash
375,000
375,000
75,000
75,000
180,000
180,000
7,000
3,000
10,000
3. Depreciation
Accumulated depreciation (450,000 / 5)
90,000
4. Rent income
Unearned rent income (15,000 x 3)
45,000
90,000
45,000
Problem 3-12
2007
Jan. 1
1
1
2007
Building (800,000 x 4.17)

Lease liability
Building
Cash
Lease liability
Cash
3,336,000
3,336,000
100,000
100,000
800,000
800,000
Dec. 31
31
Depreciation (3,436,000 / 10)

343,600
Interest expense
Accrued interest payable
253,600
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
31
2009
Jan. 2
Dec. 31
31
31
Payment
343,600
253,600
10% interest
Principal
253,600
198,960
800,000
546,400
601,040
800,000
800,000
800,000
Taxes
Cash
Present value
3,336,000
2,536,000
1,989,600
1,388,560
40,000
40,000

Lease liability
Cash
253,600
546,400
Depreciation
343,600
Interest expense
198,960
800,000
343,600
198,960
Taxes
Cash
40,000
40,000
Problem 3-13
2008
1. Building (1,000,000 x 3.79)
Lease liability
3,790,000
3,790,000
2. Interest expense
Lease liability
Cash
Year
01/01/2008
12/31/2008
12/31/2009
379,000
621,000
1,000,000
Payment
10% interest
Principal
1,000,000
1,000,000
379,000
316,900
621,000
683,100
Present value
3,790,000
3,169,000
2,485,900
3. Taxes
Insurance
Cash
75,000
125,000
4. Depreciation (3,790,000 / 10)

379,000
2009
1. Interest expense
200,000
379,000
316,900
Lease liability
Cash
2. Taxes
Insurance
Cash
683,100
3. Depreciation
379,000
1,000,000
75,000
125,000
200,000
379,000
Problem 3-14
2007
Jan. 1
Machinery
Lease liability
6,392,400
6,392,400
Present value of rentals (1,000,000 x 6.328)

Present value of bargain option (200,000 x .322)
Total cost
1
Dec. 31
31
Lease liability
Cash
Dec. 31
31
1,000,000
1,000,000

426,160
Interest expense
647,088
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
2009
Jan. 1
6,328,000
64,400
6,392,400
Payment
426,160
647,088
12% interest
1,000,000
1,000,000
1,000,000
647,088
604,739
Principal
1,000,000
352,912
395,261
Present value
6,392,400
5,392,400
5,039,488
4,644,277

Lease liability
Cash
647,088
352,912
Depreciation
426,160
Interest expense
604,739
1,000,000
426,160
604,739
Problem 3-15
1. Building (1,000,000 x 7.606)
Lease liability
2. Depreciation
7,606,000
7,606,000
507,067
507,067
The term of the lease is at least 75% of the life of

the asset (15/20). Since this is the basis of the
finance lease, the depreciation is computed
using the term of the lease, which is shorter than
the life of the asset.
3. Interest expense (10% x 7,606,000)
Lease liability
Cash
760,600
239,400
1,000,000
Problem 3-16
Requirement 1
Present value of guaranteed residual value (474,060 x .4761)
Total present value
3,274,300
225,700
3,500,000
The lease is accounted for as finance lease because the present value of rentals is 100% of the fair
value of the leased asset.
Year
01/01/2008
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
Payment
16% interest
Principal
1,000,000
1,000,000
1,000,000
1,000,00 0
1,000,000
560,000
489,600
407,936
313,206
203,318
440,000
510,400
592,064
686,794
796,682
Present value
3,500,000
3,060,000
2,549,600
1,957,536
1,270,742
474,060
Requirement 2
2008
Jan. 1
Dec. 31
31
2009
Dec. 31
31
Equipment
Lease liability
Interest expense
Lease liability
Cash
3,500,000
3,500,000
560,000
440,000
1,000,000
Depreciation
(3,500,000 474,060 / 5)
605,188
Interest expense
Lease liability
Cash
489,600
510,400
Depreciation
605,188
605,188
1,000,000
605,188
Requirement 3
Accumulated depreciation (605,188 x 5)

Lease liability
Equipment
3,025,940
474,060
3,500,000
Requirement 4
Lease liability
Equipment
3,025,940
474,060
3,500,000
Loss on finance lease

Cash (474,060 300,000)
174,060
174,060
Problem 3-17
1. Lease receivable
Sales
Unearned interest income
5,000,000
2. Cost of sales
Inventory
2,000,000
3,072,500
1,927,500
2,000,000
3. Cash
Lease receivable
500,000
4. Unearned interest income

Interest income (10% x 3,072,500)
307,250
500,000
307,250
Problem 3-18
2008
Jan. 1
Lease receivable
Machinery
500,000
Cash
Lease receivable
100,000
403,700
96,300
100,000
Dec. 31 Unearned interest income

Interest income
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
Payment
100,000
100,000
100,000
2009
Jan. 1 Cash
Lease receivable
Interest income
36,444
36,444
12% interest
Principal
36,444
28,817
100,000
63,556
71,183
Present value
403,700
303,700
240,144
168,961
100,000
100,000
28,817
28,817
Problem 10-3
1. Lease receivable (600,000 x 8)
Sales
4,800,000
3,520,000
1,280,000
2. Initial direct costs

Cash
50,000
50,000
3. Cash
Lease receivable
600,000

Interest income
292,000
Year
01/01/2008
01/01/2008
01/01/2009
600,000
292,000
Payment
10% interest
Principal
600,000
600,000
292,000
600,000
308,000
Present value
3,520,000
2,920,000
2,612,000
Problem 10-4
Books of Fox Company (Lessor)
2008
Jan. 1 Lease receivable (500,000 x 10)
Sales
5,000,000
3,165,000
1,835,000
1 Cost of sales
Inventory
2,675,000
2,675,000
1 Cash
Lease receivable
500,000

Interest income
319,800
Year
01/01/2008
01/01/2008
01/01/2009
01/01/2010
500,000
319,800
Payment
12% interest
Principal
500,000
500,000
500,000
319,800
298,176
500,000
180,200
201,824
2009
Jan. 1 Cash
Lease receivable
Present value
3,165,000
2,665,000
2,484,800
2,282,976
500,000
500,000

Interest income
298,176
298,176
Books of Tiger Company (Lessee)

2008
Jan. 1 Equipment
3,165,000
Lease liability
3,165,000
1 Lease liability
Cash
500,000
500,000
Dec. 31 Depreciation (3,165,000 / 10)

31 Interest expense
2009
Jan. 1 Accrued interest payable
Lease liability
Cash
316,500
316,500
319,800
319,800
319,800
180,200
500,000
Dec. 31 Depreciation
316,500
31 Interest expense
Problem 3-21
298,176
1. Equipment
Lease liability
316,500
298,176
2,330,000
2,330,000
Interest expense (12% x 2,330,000)

Lease liability
Cash
279,600
320,400
Depreciation
Accumulated depreciation (2,330,000 300,000 / 5)
406,000
600,000
406,000
2. Lease liability
Accumulated depreciation (406,000 x 5)
Equipment
300,000
2,030,000
3. Lease liability
Equipment
300,000
2,030,000
Loss on finance lease

Cash (300,000 180,000)
120,000
2,330,000
2,330,000
120,000
Problem 10-5
Books of Universal Company (Lessor)

Gross rentals (700,000 x 8)
Unguaranteed residual value
Lease receivable
Present value:
Gross rentals (700,000 x 4.968)
Unguaranteed RV (400,000 x .404)
5,600,000
400,000
6,000,000
3,477,600
161,600
3,639,200
2,360,800
Cost of equipment sold

Less: PV of unguaranteed RV
Cost of sales
2,000,000
161,600
1,838,400
1. Lease receivable
Cost of sales
Sales (equal to PV of rentals only)
Inventory
6,000,000
1,838,400
3,477,600
2,360,800
2,000,000
2. Cash
Lease receivable
700,000

436,704
700,000
436,704
Books of National Company (Lessee)

1. Equipment
Lease liability
3,477,600
3,477,600
The residual value is unguaranteed, so it is not included in the computation of the

liability.
Lease liability
Cash
417,312
282,688
3. Depreciation
434,700
700,000
434,700
Problem 10-6
Gross rentals (3,000,000 x 5)
Residual value guaranteed
Gross investment
Present value:
Rentals (3,000,000 x 3.60)
Residual value (1,000,000 x .57)
Total unearned financial revenue
Sales
Cost of sales:
Cost of machinery
Initial direct costs
Gross income
15,000,000
1,000,000
16,000,000
10,800,000
570,000
11,370,000
4,630,000
11,370,000
( 8,000,000)
( 300,000)
3,070,000
lessees
lease
Books of Vanderbilt Company

1. Lease receivable
Cost of sales
Sales
Inventory
2. Cost of sales (Initial direct costs)
Cash
16,000,000
8,000,000
11,370,000
4,630,000
8,000,000
300,000
300,000
3. Cash
Lease receivable
3,000,000

1,364,400
3,000,000
1,364,400
Books of Thunder Company

1. Machinery
Lease liability
11,370,000
2. Interest expense
Lease liability
Cash
1,364,400
1,635,600
3. Depreciation
1,000,000 / 5)
2,074,000
11,370,000
3,000,000
2,074,000
Problem 3-24
1. Gross rentals (600,000 x 10)
Net investment in the lease:
Cost of equipment
Total financial revenue
2. Equipment
Cash
Lease receivable
Equipment
6,000,000
(3,390,000)
( 143,400)
2,466,600
143,400
143,400
6,000,000
3,533,400
2,466,600
Cash
Lease receivable
600,000

388,674
PV factor (3,533,400 / 600,000)
600,000
388,674
5.889
(11,370,000
This factor is applicable to 11%. Thus, this is the new implicit rate in computing
interest income.
Problem 3-24
1. Lease receivable (3,328,710 x 5)
PV of gross rentals (3,328,710 x 3.605)
Total unearned financial revenue
16,643,550
12,000,000
4,643,550
The residual value of P500,000 is ignored by the lessor because ownership of the asset
transferred to the lessee at the end of the lease term.
2. Sales price (equal to present value of rentals)
Cost of sales:
Cost of equipment
Manufacturers profit
12,000,000
( 8,000,000)
( 200,000)
3,800,000
3. Interest income for first year (12% x 12,000,000)
1,440,000
Problem 3-26
Books of German Company
1. Cash
Equipment
Gain on sale and leaseback
2. Rent expense
Cash
1,100,000
1,500,000
2,500,000
100,000
40,000
40,000
Books of Sterling Company
1. Equipment
Cash
2. Cash
Rent income
3. Depreciation (1,100,000 / 10)
1,100,000
1,100,000
40,000
40,000
110,000
110,000
Problem 3-27
Books of Canada Company
1. Cash
Loss on sale and leaseback
Machinery
2. Rent expense
Cash
500,000
450,000
50,000
1,000,000
90,000
90,000
is
Books of Saigon Company

1. Machinery
Cash
500,000
500,000
2. Cash
Rent income
90,000
3. Depreciation (500,000 / 10)

50,000
90,000
50,000
Problem 3-28
Books of Cuba Company
1. Cash
Building
Deferred gain on sale and leaseback
2,415,000
3,400,000
2. Building
Lease liability
2,415,000
5,000,000
815,000
2,415,000
3. Depreciation (2,415,000 / 15)

161,000
161,000
4. Deferred gain on sale and leaseback

Gain on sale and leaseback (815,000 / 10)
81,500
81,500

Lease liability
Cash
386,400
113,600
500,000
Books of Mexico Company
1. Building
Cash
2,415,000
2. Lease receivable (500,000 x 10)
5,000,000
2,415,000
Building
income
2,415,000
2,585,000
3. Cash
Lease receivable
500,000

Interest income
386,400
500,000
386,400
Problem 3-29 Answer B

Rent for June
200,000
Unearned interest
Amortization of bonus (prepaid rent)[600,000 / 5 x 1/12]

Rent expense for the month of June
10,000
210,000

Annual rent (15,000 x 12)
Additional rent
6% x 3,000,000
5% x 3,000,000
Property taxes
Insurance
Total expenses
180,000
180,000
150,000
120,000
50,000
680,000
Problem 3-31 Answer A
Total rent expense (200,000 x 51 remaining months)

Average annual rent expense, July 1, 2006 to June 30, 2007
(10,200,000 / 5)
10,200,000
2,040,000

Total rent expense (600,000 x 117 remaining months)
70,200,000
Average annual rent (70,200,000 / 10)
7,020,000
Rent expense from October 1 to December 31, 2008

(7,020,000 x 3/12)
1,755,000
Problem 3-33 Answer C

First year
(1,200 x 1,000)
Second year (3,000 x 1,000)
Third year
(3,000 x 1,000)
Total rental revenue
1,200,000
3,000,000
3,000,000
7,200,000
Average annual rental (7,200,000 / 3)
2,400,000
Rental revenue from January1 to September 30, 2008

(2,400,000 x 9/12)
1,800,000

First year (800,000 x 6/12)
Second year
Third year
Fourth year
Fifth year
Total rental revenue
400,000
1,250,000
1,250,000
1,250,000
1,250,000
5,400,000
Average annual rental revenue (5,400,000 / 5)
1,080,000

Average annual rental revenue (360,000 / 3)
120,000
Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2)

Less: Rentals received:
First 12 months
Second 12 months
Rent receivable, June 30, 2008
240,000
60,000
90,000
150,000
90,000

Rent income
Less: Amortization of initial direct costs (150,000 / 10)
Depreciation
Insurance and property tax
Net rent income
500,000
15,000
120,000
90,000
225,000
275,000

Annual rental
Amortization of lease bonus (500,000 / 5)
Total rent revenue
900,000
100,000
1,000,000
Problem 3-38 Answer D

This is not a finance lease and therefore no liability is recorded because:
1. There is no transfer of ownership or title to the lessee at the end of the lease term.
2. There is no a bargain purchase option.
3. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%).
4. The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the
P4,000,000.
fair value of

Cost of leased property (100,000 x 6.145)
614,500
The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years /
12 years).
Present value of rentals (400,000 x 5.95)
2,380,000
The purchase option of P500,000 is not included in the computation of the lease liability because it
approximates the fair value of the asset at the end of the lease term and therefore is not a bargain
purchase option. Again, the lease is a finance lease because the term is 83 1/3% of the life of the
asset (10/12).

Cost of leased property
Less: Residual value
Depreciable cost
2,400,000
200,000
2,200,000
275,000

90,000
If the transfer of ownership criterion is used in qualifying a finance lease, the depreciation is based
on the life of the asset.
Problem 3-44
Question 1 Answer C
1.
Date
01/01/2007
01/01/2007
01/01/2008
Question 2 Answer B
Question 3 - Answer C
Payment
10% interest
Principal
200,000
200,000
115,200
200,000
84,800
Present value
1,352,000
1,152,000
1,067,200
Lease liability December 31, 2008

Current portion
Noncurrent liability
1,152,000
84,800
1,067,200
2. Interest expense for 2008
115,200
3. Depreciation for 2008 (1,352,000 / 20)

67,600
Present value (using implicit rate of 10%)

Less: Payment on December 31, 2007 (all applicable to principal)
Balance December 31, 2007
Less: Principal payment on December 31, 2008
Payment
500,000
Interest (10% x 2,665,000)
266,500
Lease liability December 31, 2008
3,165,000
500,000
2,665,000
233,500
2,431,500

Present value, January 1, 2008
Less: First payment on December 30, 2008
Interest for 2008 (8% x 1,125,000)
Lease liability, December 31, 2008
1,125,000
100,000
( 90,000)
10,000
1,115,000

Interest expense for 2008 (10% x 3,790,000)
379,

Present value, January 1, 2008
Less: First payment on January 1, 2008 (all applicable to principal)
Lease liability, January 1, 2008
Interest expense for 2008 (10% x 1,150,000)
1,350,000
200,000
1,150,000
115,000

Present value of guaranteed residual value (1,000,000 x 0.65)
Total lease liability 1/1/2008
Less: First payment on January 1, 2008 (all applicable to principal)
Lease liability 12/31/2008
5,512,000
650,000
6,162,000
1,300,000
4,862,000
The present value of an annuity due factor is used in the computation because the rental is
payable in advance.
Lease liability, January 1, 2007 (1,000,000 x 6.14)
6,140,000
The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee. In
this case, the residual value is guaranteed by a third party and therefore excluded in computing the
lease liability.
Present value 12/31/2008
Less: First payment on December 31, 2008 (all applicable to principal)
Less: Second payment on December 31, 2009:
Payment
200,000
Interest for 2009 (10% x 1,150,000)
115,000
Principal payment
1,350,000
200,000
1,150,000
85,000
1,065,000

Cash payment
Book value of leased asset (2,000,000 800,000)
Total consideration
Balance of lease liability
Cost of machinery purchased
1,440,000
1,200,000
2,640,000
1,300,000
1,340,000
The entry to record the actual purchase of the leased asset is:
Machinery (purchased)
Lease liability
1,340,000
1,300,000
800,000
Cash
Machinery (leased)
Problem 3-54
1,440,000
2,000,000
Question 1 Answer A
Question 2 Answer B
1. Gain on sale (3,520,000 2,800,000)
2.
Date
07/01/2008
07/01/2008
07/01/2009
720,000
Payment
10% interest
Principal
600,000
600,000
292,000
600,000
308,000
Present value
3,520,000
2,920,000
2,612,000
July 1 to December 31, 2008 (292,000 x 1/2)
146,000

Date
01/01/2008
01/01/2008
01/01/2009
Payment
10% interest
Principal
355,080
355,080
204,492
355,080
150,588
Selling price or fair value

Less: Cost to Gallant Company
Dealers profit
Add: Interest income 2008
Total income before tax
Present value
2,400,000
2,044,920
1,894,332
2,400,000
2,000,000
400,000
204,492
604,492

This is mathematical. The procedure is to determine the annual rental payment which is equal to the
cost of the asset divided by the present value factor of annuity of 1. Accordingly, the annual rental
is equal to P323,400 divided by 4.312 or P75,000.
Lease receivable (75,000 x 5)
Present value of rentals (fair value)
Total interest revenue
Cost of equipment
Present value of residual value (200,000 x .466)
Net investment to be recovered
Annual rental (4,268,000 / 5.335)
375,000
323,400
51,600
4,361,200
( 93,200)
4,268,000
800,000

Interest income (5,250,000 900,000 x 12%)
522,000

Problem 3-62
Question 1 - Answer A
Gross rentals (1,500,000 x 20)
Present value or fair value of asset (1,500,000 x 8.37)
Unearned financial revenue
30,000,000
12,555,000
17,445,000
Observe that the present value of rentals is the same as the fair value of the asset. Note also that the
residual value is ignored because the ownership of the asset will transfer to the lessee at the end of
the lease term.
Question 2 - Answer B
Fair value of asset
Cost of asset
Profit on sale
12,555,000
8,000,000
4,555,000
Question 3 Answer C
PV of rentals equals to the fair value of asset
Payment of January 1, 2008 all applicable to principal
Balance January 1, 2008
12,555,000
1,500,000
11,055,000
Interest income for 2008 (11,055,000 x 12%)
1,326,600
Problem 3-63
Question 1 Answer B
Interest income for 2008 (10% x 4,850,000)
485,000
Question 2 Answer A
Sales price
Book value of lease receivable:
Lease receivable
Unearned interest income (1,000,000 485,000)
Loss on sale of machinery
3,250,000
5,850,000
( 515,000)
5,335,000
(2,085,000)
1. To recognize the interest income for 2008:

Interest income
2. To record the sale of the machinery:
485,000
485,000
Cash
Loss on sale of machinery
Lease receivable
3,250,000
515,000
2,085,000
5,850,000

Sales price
Cost of equipment sold
Deferred gain on sale and leaseback
Less: Realized gain in 2008 (500,000 / 10)
Deferred gain December 31, 2008
1,500,000
1,000,000
500,000
50,000
450,000

Sales price
Carrying amount
Deferred revenue
480,000
360,000
120,000
The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%).
Sales price
Carrying amount
Deferred gain 12/31/2008
Sales price
Carrying amount
Gain on sale and leaseback
7,800,000
5,850,000
1,950,000
360,000
330,000
30,000
The gain is not deferred but recognized immediately because the leaseback is an operating lease.
Sales price
Fair value
Deferred gain
6,000,000
5,000,000
1,000,000
Fair value
Carrying amount
Gain on sale and leaseback to be recognized immediately
5,000,000
3,500,000
1,500,000
CHAPTER 4
Problem 4-1
1.
2.
3.
4.
5.
C
A
D
D
A
6.
7.
8.
9.
10.
B
A
B
A
D
Problem 4-2
1. Income tax expense
Income tax payable (35% x 1,500,000)
525,000

Deferred tax liability (35% x 500,000)
175,000
3. Income tax payable

Cash
200,000
525,000
175,000
200,000
Current tax expense

Deferred tax expense
Total income tax expense
525,000
175,000
700,000
Problem 4-3
1,400,000
1,400,000
2. Deferred tax asset

Income tax benefit (35% x 1,000,000)
350,000
3. Income tax payable

Cash
500,000
350,000
500,000
Current tax expense

Income tax benefit
1,400,000
( 350,000)
1,050,000
Problem 4-4
2008
Income statement presentation
2,450,000
2,450,000
350,000
350,000
Income before income tax

Income tax expense:
Current tax expense
Income tax benefit
Net income
2009
Deferred tax asset
6,000,000
(
2,450,000
350,000)
2,100,000
3,900,000
2,800,000
2,800,000
350,000
350,000

Income tax expense:
Current tax expense
Decrease in deferred tax asset
Net income
9,000,000
2,800,000
350,000
3,150,000
5,850,000
Problem 4-5
2008
1,750,000
1,750,000
175,000
175,000

Income tax expense:
Current tax expense
Net income
2009
2. Deferred tax liability
Income tax expense
5,500,000
1,750,000
175,000
1,925,000
3,575,000
2,625,000
2,625,000
175,000
175,000

Income tax expense:
Current tax expense
Decrease in deferred tax liability
Net income
7,000,000
2,625,000
( 175,000)
2,450,000
4,550,000
Problem 4-6
Accounting income
Permanent differences:
Nondeductible expenses
Nontaxable revenue
Accounting income subject to tax
Taxable temporary differences:
Deferred income
Excess tax depreciation
Deductible temporary differences:
Doubtful accounts
Estimated warranty cost
Taxable income
4,000,000
200,000
( 300,000)
3,900,000
( 450,000)
( 50,000)
100,000
100,000
3,600,000
1,260,000
1,260,000

175,000

Income tax benefit (35% x 200,000)
70,000
4. Income before income tax

Income tax expense
Current tax expense
Income tax benefit
Net income
175,000
70,000
4,000,000
1,260,000
175,000
( 70,000)
1,365,000
2,635,000
Problem 11-10
2008
2009
Deferred tax liability (30% x 1,500,000)
2010
Income before construction income
Construction income
720T
720T
180T
180T
1080T
1080T
450T
450T
1860T
1860T
3,200,000
3,000,000
Taxable income
6,200,000

Income tax expense (35% x 2,100,000)
630T
630T
Problem 4-8
Requirement 1
The current expense is computed as follows:
Income before depreciation
Depreciation SYD
Taxable income
2008
4,000,000
400,000
3,600,000
2009
4,000,000
300,000
3,700,000
2010
4,000,000
200,000
3,800,000
2011
4,000,000
100,000
3,900,000
Current tax expense (35%)
1,260,000
1,295,000
1,330,000
1,365,000
The deferred tax liability arising from the taxable temporary difference is computed as follows:
Temporary difference
Rate
Deferred tax liability
2008
150,000
35%
52,500
2009
50,000
35%
17,500
2010
( 50,000)
35%
( 17,500)
2011
(150,000)
( 52,500)
Balance
2008
Income tax payable
2009
Income tax payable
2010
Income tax payable
Income tax expense
2011
Income tax payable
Income tax expense
1,260,000
1,260,000
52,500
52,500
1,295,000
1,295,000
17,500
17,500
1,330,000
1,330,000
17,500
17,500
1,365,000
1,365,000
52,500
52,500
Requirement 2 Balance sheet on December 31, 2009

Noncurrent liabilities:
70,000
Problem 4-9
Requirement 1
2008
2,000,000
100,000
120,000
300,000
2,520,000
35%
882,000
Accounting income
Doubtful accounts
Rent income
Warranty cost
Taxable income
Tax rate
Current tax expense
2008
2009
2010
2011
Balance
520,000
(160,000)
(120,000)
(240,000)
-
2008
Income tax payable
Income tax benefit
2009
Income tax payable
2009
Deferred tax asset
2010
Income tax payable
Deferred tax asset
2011
Income tax payable
Deferred tax asset
2009
3,000,000
( 100,000)
( 40,000)
( 20,000)
2,840,000
35%
994,000
2010
4,000,000
2011
5,000,000
( 40,000)
( 80,000)
3,880,000
35%
1,358,000
( 40,000)
( 200,000)
4,760,000
35%
1,666,000
Rate
Deferred tax asset
35%
35%
35%
35%
182,000
( 56,000)
( 42,000)
( 84,000)
882,000
882,000
182,000
182,000
994,000
994,000
56,000
56,000
1,358,000
1,358,000
42,000
42,000
1,666,000
1,666,000
84,000
84,000
Requirement 2 Balance sheet on December 31, 2008

Noncurrent assets:
Deferred tax asset
182,000
Problem 11-13
Operating loss
Interest income on note receivable
Taxable income
(1,000,000)
1,100,000
100,000
The interest income is part of taxable income because it arises from note receivable and not from
bank deposit.
1. Income tax expense (35% x 100,000)
Income tax payable
2. Deferred tax asset (35% x 300,000)
Income tax benefit
Loss before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net loss
35,000
35,000
105,000
105,000
(200,000)
( 35,000)
105,000
70,000
(130,000)
Problem 4-11
Accounting income
Taxable temporary difference:
Tax depreciation
Deductible temporary differences:
Litigation loss
Warranty cost
Taxable income
7,900,000
(1,000,000)
400,000
300,000
7,600,000
2,660,000
2,660,000

350,000
3. Deferred asset
Income tax benefit (35% x 700,000)
245,000
350,000
245,000

Income tax expense:
Current tax expense
7,900,000
2,660,000
350,000
Income tax benefit

Net income
( 245,000)
Balance sheet presentation

Noncurrent assets:
Deferred tax asset
Current liabilities:
Income tax payable
Noncurrent liabilities:
Problem 4-12
2,765,000
5,135,000
245,000
2,660,000
350,000

Income tax payable
Pretax accounting income
Future taxable amount
Future deductible amount
Taxable income
2,450,000
2,450,000
700,000
700,000
2,800,000
2,800,000
13,000,000
( 7,000,000)
2,000,000
8,000,000
Current tax expense (35% x 8,000,000)

4. Income before income tax
Income tax expense:
Current tax expense
Income tax benefit
Net income
2,800,000
13,000,000
2,800,000
2,450,000
( 700,000)
4,550,000
8,450,000
Problem 4-13
1. Equipment
Revaluation surplus
Equipment
( 8,000,000 x 3/8)
(12,000,000 x 3/8)
BV / SV / RS
4,000,000
1,500,000
2,500,000
Cost
Replacement cost
8,000,000
12,000,000
3,000,000
5,000,000
2. Revaluation surplus
Income tax payable
Appreciation
4,000,000
4,500,000
7,500,000
1,500,000
2,500,000
875,000
875,000
3,150,000
3,150,000
Pretax income before depreciation

Depreciation on cost (5,000,000 / 5)
Taxable income
10,000,000
( 1,000,000)
9,000,000
3,150,000

Income tax expense
175,000
175,000
Equipment at replacement cost

Accumulated depreciation:
January 1, 2008
Depreciation on revalued amount
for 2008 (7,500,000 / 5)
Carrying amount 12/31/2008
12,000,000
4,500,000
1,500,000
Equipment at cost
Accumulated depreciation:
January 1, 2008
Depreciation on cost for 2008
Tax base 12/31/2008
6,000,000
6,000,000
8,000,000
3,000,000
1,000,000
4,000,000
4,000,000
Carrying amount 12/31/2008

Tax base 12/31/2008
Taxable temporary difference
6,000,000
4,000,000
2,000,000
Deferred tax liability 12/31/2008 (35% x 2,000,000)

Deferred tax liability 01/01/2008
700,000
875,000
(175,000)
5. Revaluation surplus (2,500,000 875,000 / 5)

Retained earnings
6. Income before depreciation
Depreciation on revalued amount
income tax
Income tax expense:
Current tax expense
Net income
325,000
325,000
10,000,000
( 1,500,000)
8,500,000
(
3,150,000
175,000)
2,975,000
5,525,000

Dividend received
Financial income subject to tax
Estimated litigation loss
Revenue from installment sale
Taxable income
5,000,000
( 100,000)
4,900,000
300,000
( 600,000)
4,600,000
1,610,000
Income
before

Proceeds from life insurance
Cash received taxable in 2008
Taxable income
Total income tax expense (4,500,000 x 35%)
5,000,000
( 500,000)
4,500,000
( 200,000)
( 120,000)
4,180,000
1,575,000

Percentage of completion
Cost recovery method
3,500,000
2,200,000
1,300,000
455,000

The two items are nondeductible expense for tax purposes and therefore permanent differences.
Deferred tax asset (200,000 x 35%)
70,000
The unearned income on December 31, 2008 of P200,000 will result to a deferred tax asset because it
is a future deductible temporary difference.
Current tax expense (35% x 150,000)
52,500

The deferred tax liability of P75,000 is noncurrent.
Current tax expense
Income tax benefit (400,000 300,000)
260,000
(100,000)
160,000

Permanent difference:
Premium on officers life insurance (nondeductible)
Temporary differences:
Rent income
Depreciation
1,000,000
90,000
1,090,000
(
(
50,000)
60,000)
Taxable income
980,000
Income tax payable (980,000 x 35%)
343,000
The income tax payable is actually the current tax expense since there is no income tax payment
during the year.
Income before tax and depreciation
Tax depreciation for 2008
Taxable income
Current income tax liability (1,600,000 x 35%)
2,000,000
400,000
1,600,000
560,000

Taxable income
Excess tax depreciation (134,000 80,000)
Goodwill impairment loss
Interest on treasury bills
380,000
54,000
( 45,000)
25,000
414,000
The pretax accounting income is the accounting income per book and not the accounting income
subject to tax.
The impact of the difference in the equipment of P80,000 is a higher financial income and therefore
will result to a deferred tax liability. Accordingly, it is a future taxable temporary difference.
The difference of P75,000 is a permanent difference because the officers insurance premium is
nondeductible. Therefore, this difference has no deferred tax consequence.
The impact of the difference of P50,000 in warranty liability is a higher taxable income and therefore
will result to a deferred tax asset. Accordingly, it is a future deductible temporary difference.
Problem 4-26
Question 1 Answer B
Current tax expense (1,400,000 x 35%)
Question 2 Answer C
Deferred tax liability noncurrent (250,000 x 35%)
490,000
87,500

Accounting income
Future taxable amounts:
2009
2010
2011
Taxable income
6,000,000
(1,100,000)
(1,200,000)
(1,200,000)
2,500,000
Income tax payable (2,500,000 x 35%)
875,000

Permanent differences:
Interest income
Insurance premium
Temporary differences:
Gross profit on installment sale
Warranty liability
Net loss carryover
2,000,000
(
500,000)
100,000
1,600,000
(4,500,000)
2,000,000
( 900,000)
Warranty liability (2,000,000 x 35%)

Net loss carryover (900,000 x 35%)
Gross deferred tax asset
700,000
315,000
1,015,000
Gross deferred tax liability (4,500,000 x 35%)
1,575,000

Taxable temporary differences
Deductible temporary differences
Taxable income
Income tax payable (19,000,000 x 35%)
20,000,000
( 3,000,000)
2,000,000
19,000,000
6,650,000

Deferred tax liability 12/31/2008 (500,000 x 35%)
175,000
The deferred tax liability is based on the cumulative future taxable temporary difference of P500,000
on December 31, 2008.
Deferred tax expense (1,000,000 x 35%)
Income tax benefit (200,000 x 35%)
Net deferred tax expense
Current tax expense (7,000,000 x 35%)
Taxable income
Installment accounts receivable
Litigation liability
Income tax expense total (7,800,000 x 35%)
350,000
( 70,000)
280,000
2,450,000
7,000,000
1,000,000
( 200,000)
7,800,000
2,730,000
Motor vehicle carrying amount

Motor vehicle tax base
Future taxable amount
1,650,000
1,250,000
400,000
140,000
The differences in accounts receivable, warranty and deposit are future deductible differences and
therefore will give rise to deferred tax asset.
The deferred tax asset on December 31, 2008 is supposed to be the total deductible temporary
differences of P2,000,000 times 35% or P700,000.
However, this amount cannot be fully recognized because there is strong evidence that future
taxable income may not be available.
PAS 12 provides that a deferred tax asset shall be recognized only to the extent that it is probable
that future taxable income will be available against which the deductible temporary difference can
be used.
Since there are taxable temporary differences that will reverse in 2009, this will result to future taxable
income.
Accordingly, the deferred tax asset on December 31, 2008 is recognized only to the extent of the
taxable temporary differences of P1,200,000 times 35% or P420,000.
Problem 4-34
Question 1 Answer A
Taxable income
Estimated product claim liability
Installment sales income not included in taxable income
Total income tax expense (35% x 10,200,000)
8,000,000
800,000
( 1,200,000)
2,600,000
10,200,000
3,570,000
Question 2 Answer B
Deferred tax asset 12/31/2008 (35% x 1,200,000)
420,000
The accrual for product liability in excess of actual claim is a future deductible amount and therefore
will result to a deferred tax asset.
Question 3 - Answer A
Installment sales income
Total future taxable amount
800,000
2,600,000
3,400,000
Deferred tax liability 12/31/2008 (35% x 3,400,000)
1,190,000

Deferred tax asset 12/31/2008 (2,000,000 x 35%)
700,000

1. To record increase in deferred tax liability:
Income tax expense
Deferred tax liability (144,000 140,000)
4,000
4,000
2. To record decrease in deferred tax asset:

Income tax expense
Deferred tax asset
40,000
40,000
CHAPTER 6
Problem 6-1
1. D
6.
2. A
7.
3. A
8.
4. B
9.
5. D
10.
C
A
A
C
D
11.
12.
13.
14.
15.
A
A
A
C
A
Problem 6-2
1. A
6.
2. D
7.
3. A
8.
4. C
9.
5. A
10.
Problem 6-3
1. C
2. D
3. A
4. A
5. B
B
C
A
A
C
Problem 6-4
2008
2009
Benefit expense
Cash (4,000,000 x 5%)
200,000
Benefit expense
Cash (4,200,000 x 5%)
210,000
200,000
210,000
Problem 6-5
2008 Benefit expense
Cash
Prepaid/accrued benefit cost
2009 Benefit expense
Cash
850,000
700,000
150,000
1,000,000
50,000
1,050,000
Noncurrent liability 12/31/2008

Acrued benefit cost
150,000
Noncurrent liability 12/31/2009

Accrued benefit cost
100,000
Problem 6-6
1. Annual pension payment PBO (300,000 x 1.48 x 3% x 12)
159,840
2. Annual pension payment ABO (300,000 x 3% x 12)
108,000
Problem 6-7
1. Annual pension payment ABO (500,000 x 2% x 10 years)
Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Multiply by PV of 1 at 8% for 25 years
Accumulated benefit obligation 1/1/2009
2. Future salary PBO (500,000 x 2.094)
100,000
8.559
855,900
0.146
124,961
1,047,000
Annual pension payment PBO (1,047,000 x 2% x 10 years)

Multiply by PV of an ordinary annuity of 1 at 8% for 15 years
Multiply by PV of 1 at 8% for 25 periods
Projected benefit obligation 1/1/2009
209,400
8.559
1,792,255
0.146
261,669
Problem 6-8
1. Service cost
Interest cost (10% x 4,000,000)
Expected return (12% 5,000,000)
Benefit expense
2. Benefit expense
Cash
1,550,000
400,000
( 600,000)
1,350,000
1,350,000
150,000
1,500,000
3. P/ABC January 1 (5,000,000 4,000,000)

Debit adjustment
Debit balance
1,000,000
150,000
1,150,000
4. FVPA January 1
Contribution
Actual return
Balance December 31
5,000,000
1,500,000
600,000
7,100,000
PBO January 1
Service cost
Interest cost
Balance December 31
Prepaid/accrued benefit cost December 31
Problem 6-9
4,000,000
1,550,000
400,000
5,950,000
1,150,000
1. Current service cost

Expected return (8% x 5,750,000)
Benefit expense
600,000
650,000
(460,000)
790,000
2. Benefit expense
Cash
790,000
110,000
900,000
3. P/ABC January 1 (credit)

Debit adjustment
Balance December 31
(750,000)
110,000
(640,000)
4. FVPA January 1
Contribution
Actual return
Balance December 31
5,750,000
900,000
460,000
7,110,000
PBO January 1
Current service cost
Interest cost
Balance December 31
P/ABC December 31(credit)
6,500,000
600,000
650,000
7,750,000
( 640,000)
Problem 6-10
Benefit expense
1,450,000
760,000
( 538,000)
1,672,000
Actual return
Expected return
Actuarial loss deferred
2. Benefit expense
Cash
500,000
538,000
( 38,000)
1,672,000
1,500,000
172,000
3. P/ABC January 1 (credit)

Credit adjustment
Balance December 31
875,000
172,000
1,047,000
4. FVPA January 1
Contribution
Actual return
Balance December 31
Actuarial loss
Total debits
6,725,000
1,500,000
500,000
8,725,000
38,000
8,763,000
PBO January 1
Interest cost
Balance December 31
P/ABC December 31 (credit)
Problem 6-11
7,600,000
1,450,000
760,000
9,810,000
(1,047,000)
Annual benefit (5% x 1,500,000)
75,000
2008 Current service cost (75,000 x .361)

Interest cost
Benefit cost
27,075
0
27,075
2009 Current service cost (75,000 x .404)

Interest cost (12% x 27,075)
Benefit expense
Problem 6-12
30,300
3,249
33,549
1. Actual fair value of plan assets

Expected fair value
Actuarial gain -1/1/2008
7,200,000
5,400,000
1,800,000
2. Actuarial gain
Corridor (10% x 7,200,000)
Excess actuarial gain
1,800,000
720,000
1,080,000
Amortization of actuarial gain (1,080,000 / 10)
108,000
Problem 6-13
1. Expected return
2008 (12% x 5,000,000)
2009 (12% x 6,750,000)
600,000
810,000
2. Fair value of plan assets 1/1/2008

Add: Expected return in 2008
Expected fair value 1/1/2009
5,000,000
600,000
5,600,000
1/1/2008
5,000,000
5,000,000
0
3. Actual fair value

Expected fair value
Actuarial gain
1/1/2009
6,750,000
5,600,000
1,150,000
4. 2008 No amortization because there is no actuarial gain or loss

on January 1, 2008.
2009
Actuarial gain 1/1/2009

Corridor (10% x 7,000,000)
Excess gain to be amortized
1,150,000
700,000
450,000
Amortization of actuarial gain (450,000 / 10)
45,000
Problem 6-14
Cumulative actuarial loss
Corridor 10% of greater
Aye (10% x 5,000,000)
Bee (10% x 6,500,000)
Cee (10% x 8,000,000)
Excess
Aye
Bee
Cee
350,000
900,000
925,000
650,000
_______
250,000
800,000
125,000
500,000
_______
0
Amortization of actuarial loss

Aye
Bee (250,000 / 8)
Cee (125,000 / 5)
None
31,250
25,000
Problem 6-15
1.
FVPA
PBO
Net actuarial gain - 1/1/2008
Expected
4,000,000
4,800,000
Actual
5,500,000
5,000,000
Gain (Loss)
1,500,000
( 200,000)
1,300,000
2. FVPA January 1, actual

PBO January 1, actual
Deferred actuarial gain
Total credits
P/ABC January 1 (credit)
5,500,000
5,000,000
1,300,000
6,300,000
( 800,000)

Interest cost
Amortization of actuarial gain
Total benefit expense
1,750,000
700,000
( 440,000)
( 75,000)
1,935,000
Deferred actuarial gain January 1

Corridor (10% x 5,500,000)
Excess over corridor
1,300,000
550,000
750,000
Amortization actuarial gain (750,000 / 10)
75,000
4. Benefit expense
Cash
1,935,000
1,500,000
435,000
5. P/ABC January 1
Credit adjustment
Balance December 31
( 800,000)
( 435,000)
(1,235,000)
FVPA January 1
Contribution
Actual return
FVPA December 31
PBO January 1
Service cost
Interest cost
PBO December 31
Deferred actuarial gain December 31 (1,300,000 75,000)
Total credits
P/ABC December 31
Problem 6-16
5,500,000
1,500,000
440,000
7,440,000
5,000,000
1,750,000
700,000
7,450,000
1,225,000
8,675,000
(1,235,000)
2008
Gain (Loss)
Expected
Actual
FVPA - 1/1
PBO - 1/1
Net actuarial gain
Corridor (10% x 7,400,000)
6,600,000
6,600,000
7,400,000
7,000,000
2009
Expected
Actual
FVPA - 1/1
PBO - 1/1
Net actuarial gain
Add: Net actuarial gain 1/1/2009
Cumulative actuarial gain
Corridor (10% x 9,000,000)
7,800,000
7,600,000
9,000,000
7,800,000
Cumulative actuarial gain

Amortization of actuarial gain for 2009 (500,000 / 10)
Net actuarial gain 12/31/2009
800,000
(400,000)
400,000
740,000
0
Gain (Loss)
1,200,000
( 200,000)
1,000,000
400,000
1,400,000
900,000
500,000
1,400,000
( 50,000)
1,350,000
2010
Expected
Actual
FVPA - 1/1
PBO - 1/1
Net actuarial loss
Net actuarial gain 1/1/2010
Corridor (10% x 8,000,000)
9,600,000
8,600,000
6,000,000
8,000,000

Amortization of actuarial loss for 2010 (850,000 / 10)
Net actuarial loss 12/31/2010
Gain (Loss)
(3,600,000)
600,000
(3,000,000)
1,350,000
(1,650,000)
800,000
( 850,000)
(1,650,000)
85,000
(1,565,000)
Problem 6-17
Interest cost
Expected return
Amortization of actuarial loss
Amortization of past service cost
2. Benefit expense
Cash
2,100,000
240,000
( 380,000)
40,000
60,000
2,060,000
2,060,000
140,000
2,200,000
Problem 6-18
Interest cost
Expected return
Amortization of past service cost (300,000 / 3)
800,000
450,000
( 600,000)
100,000

2. Benefit expense
Cash
750,000
750,000
500,000
250,000
P/ABC January 1
Credit adjustment
P/ABC December 31, debit
800,000
( 250,000)
550,000
3. FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31
6,000,000
500,000
600,000
7,100,000
150,000
6,950,000
PBO January 1
Interest cost
Total
Less: Benefits paid
PBO December 31
5,500,000
800,000
450,000
6,750,000
150,000
6,600,000
FVPA
Unamortized past service cost (300,000 100,000)
PBO
P/ABC December 31
4. Benefit expense
6,950,000
200,000
(6,600,000)
550,000
50,000
50,000
Debit balance surplus

Limit (200,000 + 300,000)
Adjustment
550,000
500,000
50,000
Problem 13-23
Interest cost
Expected return
Amortization of PSC (1,250,000 / 10)
Amortization of actuarial gain
925,000
660,000
( 570,000)
125,000
( 30,000)
1,110,000
Actuarial gain January 1

Corridor (10% x 5,500,000)
850,000
550,000
300,000
Amortization actuarial gain (300,000 / 10)

2. Benefit expense
30,000
1,110,000
240,000
Cash
1,350,000
3. FVPA January 1
Contribution
Actual return
Total
Less: Benefits paid
FVPA December 31
Past service cost
Amortization for 2008
Unamortized PSC December 31
4,750,000
1,350,000
570,000
6,670,000
995,000
5,675,000
1,250,000
( 125,000)
1,125,000
PBO January 1
Interest cost
Increase due to changes n actuarial assumptions
Total
Less: Benefits paid
PBO December 31
Unrecognized actuarial gain January 1
Balance
Actuarial loss due to increase in accrued benefit obligation
Net unrecognized gain December 31
FVPA
Unamortized PSC
Total debits
5,500,000
925,000
660,000
140,000
7,225,000
995,000
6,230,000
850,000
30,000)
820,000
( 140,000)
680,000
(
5,675,000
1,125,000
6,800,000
PBO
Unrecognized actuarial gain
Total credits
P/ABC December 31
6,230,000
680,000
6,910,000
( 110,000)
P/ABC January 1
Debit adjustment
P/ABC December 31
( 350,000)
240,000
( 110,000)
Problem 13-24
Amortization of PSC (350,000 / 10)
Amortization of actuarial loss (150,000 / 10)
Unamortized actuarial loss January 1
Corridor (10% x 8,500,000)
Excess loss to be amortized
1,000,000
750,000
( 850,000)
35,000
15,000
950,000
1,000,000
850,000
150,000
2. P/ABC January 1
Overfunding (1,200,000 950,000)
P/ABC December 31
2,350,000
250,000
2,600,000
3. FVPA January 1
Contribution
Actual return (12% x 8,500,000)
Total
Less: Benefits paid
FVPA December 31
8,500,000
1,200,000
1,020,000
10,720,000
1,500,000
9,220,000
Unamortized PSC January 1

Balance December 31
350,000
( 35,000)
315,000
Unrecognized actuarial loss January 1

Balance December 31
Actuarial gain due to decrease in accrued benefit obligation
Actuarial gain due to the difference in actual and expected
return (1,020,000 850,000)
Net unrecognized actuarial loss December 31
PBO January 1
Interest cost
Total
Less: Benefits paid
Decrease in obligation
PBO December 31
1,000,000
15,000)
985,000
( 200,000)
(
( 170,000)
615,000
7,500,000
1,000,000
750,000
9,250,000
1,500,000
200,000
1,700,000
7,550,000
Summary
FVPA
Unamortized PSC
Unrecognized actuarial loss
Total
PBO
P/ABC December 31
4. Benefit expense
(2,600,000 930,000)
9,220,000
315,000
615,000
10,150,000
( 7,550,000)
2,600,000
1,670,000
1,670,000

Actual and expected gain on plan assets
Annual interest on pension liability
Total pension expense
1,600,000
( 350,000)
50,000
500,000
1,800,000

Current service and interest cost
Return on plan assets (10% x 1,000,000)
Retirement benefit expense
620,000
(100,000)
520,000
Contribution to the plan

Retirement benefit expense
Prepaid benefit cost
1,000,000
520,000
480,000

Contribution related to past service cost
Prepaid pension cost
114,400
83,400
31,000
The current service cost is fully funded at the end of each year.
Problem 6-24
Question 1 Answer A
Annual pension payment ABO (750,000 x 3% x 12 years)
270,000
Question 2 Answer A
Future salary (750,000 x 2.19)
Annual pension payment PBO (1,642,500 x 3% x 12)
1,642,500
591,300

Projected benefit obligation:
Before amendment
After amendment
Unrecognized PSC
1,300,000
1,900,000
600,000

Pension expense in 2008
Contribution to the plan in 2008
Accrued benefit cost -12/31/2008
Pension expense in 2009
Total
Accrued benefit cost -12/31/2009
Contribution to the plan in 2009
800,000
500,000
300,000
900,000
1,200,000
200,000
1,000,000

Unrecognized net loss
Corridor (10% x 1,650,000)
235,000
165,000
70,000
Amortization (70,000 / 5)
14,000

PBO January 1
Service cost
Total
Less: Benefits paid
PBO December 31
7,200,000
1,800,000
720,000
9,720,000
1,500,000
8,220,000

FVPA
PBO
3,450,000
5,700,000
(2,250,000)

Lump sum payments
PV of periodic payments
Total liability
475,000
155,000
630,000
The entry to recognize the liability for termination benefits is as follows:

Accrued pension cost
Loss on termination benefits
Liability for termination benefits
45,000
585,000
630,000

PBO January 1
Current service cost (squeeze)
Total
Less: Benefits paid
PBO December 31
3,000,000
700,000
300,000
4,000,000
500,000
3,500,000

FVPA December 31
FVPA January 1
Increase in fair value
Add: Benefits paid
Total
Less: Contribution to the plan
Actual return
3,900,000
3,500,000
400,000
250,000
650,000
280,000
370,000

Unrecognized actuarial gain
Corridor (10% x 6,400,000)
1,200,000
640,000
560,000
Amortization (560,000 / 8)
70,000

Interest cost
Expected return
Amortization of PSC (500,000 / 5)
Amortization of actuarial loss (1,000,000 750,000 / 5)
Amortization of transition loss (150,000 / 3)
900,000
750,000
( 600,000)
100,000
50,000
50,000
1,250,000

PBO January 1
Current service cost (squeeze)
Total
Benefits paid
PBO December 31
3,500,000
600,000
350,000
4,450,000
( 250,000)
4,200,000

FVPA January 1
Contribution to the fund
Actual return on plan assets
Total
Benefits paid
FVPA December 31
8,750,000
700,000
950,000
10,400,000
( 600,000)
9,800,000
Problem 6-39
Question 1 Answer A
Interest cost
Expected return
Amortization of past service cost (2,600,000 / 10)
Amortization of actuarial gain (600,000 / 10)
Benefit expense
Corridor (10% x 12,000,000)
Excess to be amortized
1,800,000
1,300,000
(1,100,000)
260,000
( 60,000)
2,200,000
1,800,000
1,200,000
600,000
Question 2 Answer B
FVPA January 1
9,500,000
Contribution to the plan

Actual return
Benefits paid
FVPA December 31
2,700,000
1,100,000
( 2,000,000)
11,300,000
Question 3 Answer C
PBO January 1
Interest cost
Increase in PBO due to changes in actuarial assumptions
Benefits paid
PBO December 31
12,000,000
1,800,000
1,300,000
280,000
( 2,000,000)
13,380,000
Question 4 Answer D
Actuarial loss during 2008 due to increase in PBO
Net actuarial gain December 31
1,800,000
( 60,000)
( 280,000)
1,460,000
Question 5 Answer B
Prepaid/accrued benefit cost January 1 (credit)
Overfunding (2,700,000 2,200,000)
Balance December 31 (credit)
(1,700,000)
500,000
(1,200,000)
Proof
FVPA
Unamortized past service cost (2,600,000 260,000)
PBO
Net actuarial gain
Prepaid/accrued benefit cost December 31 (credit)
11,300,000
2,340,000
(13,380,000)
( 1,460,000)
( 1,200,000)
Problem 6-40
Question 1 Answer A
Service cost
Pension expense
1,200,000
900,000
( 920,000)
1,180,000
Question 2 Answer A
Fair value of pension fund January 1
Actual return
Contribution to the fund
Benefits paid
Fair value of pension fund December 31
Question 3 Answer A
9,200,000
250,000
1,050,000
(1,100,000)
9,400,000
PBO January 1
Service cost
Interest cost
Benefits paid
PBO December 31
10,000,000
1,200,000
900,000
( 1,100,000)
11,000,000
Question 4 Answer B
Expected return
Actual return
Unrecognized actuarial loss
920,000
250,000
670,000
Question 5 Answer C
Prepaid/accrued benefit cost January 1 (credit)
Underfunding (1,180,000 1,050,000)
Balance December 31
(800,000)
(130,000)
(930,000)
Proof
Fair value of pension fund December 31
Deferred actuarial loss
Projected benefit obligation December 31
9,400,000
670,000
(11,000,000)
( 930,000)
Problem 6-41
Question 1 Answer A
Actual return
Pension loss deferral in 2008
342,000
315,000
27,000
Question 2 Answer D
Unrecognized pension gain January 1
Corridor (10% x 3,900,000)
Excess to be amortized
420,000
390,000
30,000
Amortization of pension gain (30,000 / 10)
3,000
Question 3 Answer C
Pension expense before pension gain or loss component
Amortization of pension gain
Pension expense including pension gain or loss
530,000
( 3,000)
( 27,000)
500,000
Question 4 Answer A
Unrecognized pension gain January 1
Amortization of pension gain
420,000
3,000)

Unrecognized pension gain December 31
( 27,000)
390,000

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CHAPTER 3

Book of Delia Company (Lessee)

Dec. 31 Prepaid rent

5. Unearned rent income

Rent income (360,000 + 30,000)

4. Amortization of initial direct costs

4. Rent expense (5% X 1,000,000)

6. Unearned rent income

Building (800,000 x 4.17)

Depreciation (3,436,000 / 10)

Accrued interest payable

4. Depreciation (3,790,000 / 10)

Present value of rentals (1,000,000 x 6.328)

Depreciation (6,392,400 / 15)

Accrued interest payable

The term of the lease is at least 75% of the life of

Accumulated depreciation (605,188 x 5)

Loss on finance lease

4. Unearned interest income

Dec. 31 Unearned interest income

2. Initial direct costs

4. Unearned interest income

Dec. 31 Unearned interest income

Dec. 31 Unearned interest income

Books of Tiger Company (Lessee)

Dec. 31 Depreciation (3,165,000 / 10)

Interest expense (12% x 2,330,000)

Loss on finance lease

Books of Universal Company (Lessor)

Unearned interest income

Cost of equipment sold

3. Unearned interest income

Books of National Company (Lessee)

The residual value is unguaranteed, so it is not included in the computation of the

Books of Vanderbilt Company

4. Unearned interest income

Books of Thunder Company

Unearned interest income

PV factor (3,533,400 / 600,000)

3. Interest income for first year (12% x 12,000,000)

Books of Saigon Company

3. Depreciation (500,000 / 10)

3. Depreciation (2,415,000 / 15)

4. Deferred gain on sale and leaseback

5. Interest expense (16% x 2,415,000)

2. Lease receivable (500,000 x 10)

4. Unearned interest income

Problem 3-29 Answer B

Amortization of bonus (prepaid rent)[600,000 / 5 x 1/12]

Problem 3-30 Answer B

Total rent expense (200,000 x 51 remaining months)

Problem 3-32 Answer B

Average annual rent (70,200,000 / 10)

Rent expense from October 1 to December 31, 2008

Problem 3-33 Answer C

Average annual rental (7,200,000 / 3)

Rental revenue from January1 to September 30, 2008

Problem 3-34 Answer C

Average annual rental revenue (5,400,000 / 5)

Problem 3-35 Answer C

Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2)

Problem 3-36 Answer A

Problem 3-37 Answer C