LIABILITIES and EQUITY ALASTOY BSA 2

PREMIUMS AND WARRANTY LIABILITY
1. In December 2016, Cucumber Company began including one coupon in each

package of goodies that it sells and offering a pen in exchange for P30 and three
coupons. The pens cost P60 each. Eventually, 70% of the coupons will be
redeemed. During December, the entity sold 120,000 packaged of goodies and
no coupons were redeemed.
On December 31, 2016, what amount should be reported as estimated liability for
coupons?
a. 1,200,000 c. 1,680,000
b. 840,000 d. 2,400,000
Answer is b
Solution:
Coupons to be redeemed (70% x 120,000) 84,000
Divide by 3
Number of pens 28,000
Multiply by net cost of pen (60-30) 30
Estimated liability – December 31, 2015 840,000
2. At the beginning of the current year, Masigasig Company began marketing a

bottled chocolate called ChocoMoTo. To help promote the product, the
management is offering a special ChocoMoTo mug to each customer for every
10 marked bottle cops of ChocoMoTo. The entity estimated that out of the
250,000 bottles of ChocoMoTo sold during the year, only 80% of the marked
bottle cops would be redeemed. During the year, the entity purchased 10,000
mugs at a total cost of P400,000 and already distributed 15,000 mugs to
customers.
What is the premium liability at year-end?
a. 200,000 c. 400,000
b. 800,000 d. 600,000
Answer is a
Solution:
Mugs to be distributed (80% x 250,000 / 10) 20,000
Mugs already distributed 15,000
Mugs outstanding 5,000
Estimated liability at year-end (40 x 15,000) 200,000
3. Shark Company sells gift certificates redeemable only when merchandise is

purchased. These gift certificates have no expiration date. Upon redemption or
expiration, the entity recognizes unearned revenue as realized.
Information for the current yeas is as follows:
Unearned revenue, January 1, 2016 550,000
Gift certificates sold 1,250,000
Gift certificates redeemed 750,000
Gift certificates expected not to be redeemed 50,000
Cost of goods sold 50%
On December 31, 2016, what amount should be reported as unearned revenue?
a. 1,000,000 c. 1,050,000
b. 500,000 d. 550,000
Answer is a
Solution:
Unearned revenue – January 1, 2016 550,000
Add: Gift certificates sold 1,250,000
Total 1,800,000
Less: Gift certificates redeemed 750,000
Gift certificates expected not to be redeemed 50,000 800,000
Unearned revenue – December 31, 2016 1,000,000
4. On July 1, 2016, Xilam Company began offering a new product for sale under
one-year warranty. Of the 60,000 units in inventory on July 1, 2015, 40,000 had
been sold by September 30, 2016. Based on its experience with similar products,
the entity estimated that the average warranty cost per unit sold would be P90.
Actual warranty costs incurred from Jul 1 through September 31, 2016 amounted
to P800,000.
On September 31, 2016, what is the estimated warranty liability?
a. 2,600,000 c. 2,800,000
b. 1,800,000 d. 4,400,000
Answer is c
Solution:
Warranty expense (40,000 x 90) 3,600,000
Actual warranty cost ( 800,000)
Warranty liability – September 31, 2016 2,800,000
5. Mayday Company introduced a new product that carried a 2-year warranty

against defects. The estimated warranty cost related to sales is 4% in the year of
sale and 5% in the year after sale. Sales are P3,800,000 for 2016 and P
4,500,000 for 2017. Actual warranty expenditures are P150,000 for 2016 and
P400,000 for 2017.
What amount should be reported as estimated warranty liability on December 31,
2017?
a. 377,000 c. 192,000
b. 197,000 d. 0
Answer is b
Solution:
Warranty expense:
2016 (9% x 3,800,000) 342,000
2017 (9% x 4,500,000) 405,000 747,000
Actual warranty expenditures
2016 150,000
2017 400,000 550,000
Warranty liability – December 31, 2017 197,000
6. During 2016, Yamashita Co. introduced a new line of machines that carry a
three-year warranty against manufacturer’s defects. Based on industry
experience, warranty costs are estimated at 2% of sales in the first year of sale,
3% in the year after sale, and 4% in the second year after sale. Sales and actual
warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2016 P 600,000 P 4,000
2017 1,200,000 35,000
2018 1,600,000 120,000
P3,400,000 P159,000
What amount should Yamashita report as a liability at December 31, 2018?

a. 0 c. 147,000
b. 24,000 d. 112,000
Answer is c
Solution:
Warranty expense:
2016 (9% x 600,000) 54,000
2016 (9% x 1,200,000) 108,000
2017 (9% x 1,600,000) 144,000 306,000
Actual warranty expenditures
2016 4,000
2016 35,000
2017 120,000 159,000
Warranty liability – December 31, 2018 147,000
7. Delfin Co. includes one coupon in each bag of dog food it sells. In return for
eight coupons, customers receive a leash. The leashes cost Delfin P3 each.
Delfin estimates that 40 percent of the coupons will be redeemed. Data for 2016
and 2017 are as follows:
2016 2017
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
What is the premium liability at December 31, 2017?
a. 16,875 c. 33,750
b. 31,875 d. 63,750
Answer is d
Solution:
Coupons to be redeemed – 2016 (40% x 500,000) 200,000
Less: Coupons redeemed – 2016 120,000
Balance 80,000
Add: Coupons to be redeemed – 2017 (40% x 600,000) 240,000
Balance 320,000
Less: Coupons redeemed – 2017 150,000
Total 170,000
Premiums to be distributed (170,000/8) 21,250
Premium liability – December 31, 2017 (21,250 x P3) 63,750
8. Similac Company offered a cash rebate of P8 on each P20 package of

batteries sold during the current year. Historically, 10% of customers mail in
the rebate form. During the year, 8,500,000 packages of batteries are sold,
and 420,000 P8 rebates are mailed to customers.
What amount of rebate expense and liability for rebates should be
reported respectively at year-end?
a. 6,800,000 and 3,440,000
b. 6,800,000 and 6,800,000
c. 3,440,000 and 3,360,000
d. 3,440,000 and 3,440,000
Answer is d
Solution:
Rebate expense (8,500,000 x 10% x 8) 6,800,000
Rebates redeemed (420,000 x 8) (3,360,000)
Liability for rebates at year-end 3,440,000
9. Diego Company sells its only line product at average selling price of P500 per
unit. To promote its sales, a gift item is offered to customers on the return of 5
empty containers as proof of purchase, plus remittance of P50. The cost of gift
item is P150/pc., and it is estimated that 80% of the proof of purchase will be
redeemed. For the current year, Diego Company’s total sales for the product
amounted to P6,000,000, of which actual containers redeemed were 7,600.
How much of the estimated liability for premium payable should be reported in
its current year’s end balance sheet?
a. 20,000 c. 60,000
b. 40,000 d. 240,000
Answer is b
Solution:
Containers to be redeemed (6,000,000 / 500 x 80%) 9,600
Less: Containers redeemed 7,600
Balance 2,000
Gift items to be distributed (2,000 / 5) 400
Estimated Premium Liability – year end (400 x 100) 40,000
10. At December 31, 2016, Dora Company had 1,000 gift certificates outstanding,
which had been sold to customers during 2016 for P75. Dora operates on a gross
margin of 60%. How much revenue pertaining to the 1,000 outstanding gift
certificates should be deferred at December 31, 2016?
a. P0 c. P30,000
b. P45,000 d. P75,000
Answer is d
Solution:
Unearned revenue ( 1,000 x 75) 75,000
DEFERRED REVENUE
1. Malan Depot sells gift certificates redeemable only when product is purchased.
These gift certificates have no expiration date. Upon redemption or expiration,
the entity recognizes the unearned revenue as realized.
Information for the current year is as follows:

Unearned revenue, Jan. 1, 2013 675,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1, 950,000
Gift certificates expected not to be redeemed 100,000
Cost of goods sold 60 percent
On December 31, 2013, what amount should be reported as unearned revenue?

a. 595,000 c. 875,000
b. 485,000 d. 975,000
Answer is c
Solution:
Unearned Revenue, January 1, 2013 675,000
Add: Gift certificates sold 2,250,000
Total 2,925,000
Less: Gift Cert. Redeemed 1,950,000
Gift Cert. expected not to be redeemed 100,000 2,050,000
Unearned Revenue – December 31, 2013 875,000
2. Stilt Corporation sells subscriptions to a directory that is published semiannually

and shippd to subscribers on April 15 and October 15. Subscriptions received
after the March 31 and September 30 cut off dates are held for the next
publication. Cash from subscribers is received evenly during the year and is
credited to deferred revenue from subscriptions. Data relating to current year are
as follows:
Deferred Revenue from subscriptions, January 1, 2010 1,500,000

Cash receipts from subscribers 7,200,000
On December 31, 2010, what amount should be reported as deferred revenue

from subscriptions?
a. 1,800,000 c. 3,600,000
b. 3,300,000 d. 5,400,000
Answer is a
Solution:
Monthly Subscriptions (7,200,000/12) 600,000
Subscriptions after September 30
October 600,000
November 600,000
December 600,000
Total Unearned Subscription revenue – 12/31/10 1,800,000
3. In November and December 2009, Freud Company, a magazine publisher,

received P7,200,000 for 1,000 3-year subscriptions at P2400 per year, starting
with the January 2010 issue. The entity elected to include the entire P7,200,000
in the 2010 income tax return
What amount should be reported in the income statement for subscriptions

revenue for 2009?
a. P7,200,000 c. P 400,000
b. P2,400,000 d. P 0
Answer is d
Solution:
The subscriptions revenue should be reported for accounting purposes
annually at P2,400,000 for 2010, 2011 and 2012. So the answer is 0.
4. Ikaw lang sapat na Company sells magazine subscriptions for one year, two year
or three year period. Cash receipts from subscribers are credited to magazine
subscriptions collected in advance, and this account had a balance of P
2,400,000 on December 31, 2012 expire as follows :
During 2013 650,000

During 2014 830,000
During 2015 470,000
On December 31, 2012, what amount should be reported as magazine

subscriptions collected in advance?
a. P 500,000 c. P 1,900,000
b. P 1,200,000 d. P 2,400,000
Answer is c
Solution:
2013 650,000
2014 830,000
2015 470,000
Total 1,900,000
5. Ibakana Company offers three payment plans on its twelve-month contracts.
Information on the three plans and the number of children enrolled in each plan
for the September 1, 2015 through August 31, 2016 contract year is as follows:
Initial payment Monthly fee Number of

per child per child children
#1 60,000 - 15
#2 30,000 4,200 12
#3 5,500 9
The entity received P990,000 of initial payments on September 1, 2015, and

P324,000 of monthly fees during the period September 1 through December 31,
2015.
On December 31, 2015, what amount should be reported as deferred revenue?
a. 330,000 c. 660,000
b. 438,000 d. 990,000
Answer is c
Solution:
Plan #1 (50,000 x 15) 750,000

Plan #2 (20,000 x 12) 240,000
Total initial payments 990,000
Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000
Plan #2 (3,000 x 12 x 4) 144,000

Plan #3 (5,000 x 9 x 4) 180,000
Total monthly fees – already earned 324,000

6. Umasa Company sells office equipment service contracts agreeing to service
equipment for a two-year period. Cash receipts from contracts are credited to
unearned service contract revenue and service contract costs are charged to
service contract expense as incurred. Revenue from service contracts is
recognized as earned over the lives of the contracts. Additional information for
the current year is as follows:
Unearned service contract revenue at January 1 520,000

Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
What amount should be reported as unearned service contract revenue on

December 31?
a. 380,000 c. 410,000
b. 400,000 d. 640,000
Answer is d
Solution:
Unearned revenue – January 1 520,000
Cash receipts from service contracts sold 980,000
Total 1,500,000
Less: Service contract revenue recognized 860,000
Unearned service contract revenue – December 31 720,000
7. Sinoka Video Company sells 1- and 2-year subscriptions for its video-of-the-
month business. Subscriptions are collected in advance and credited to sales. An
analysis of the recorded sales activity revealed the following:
2015 2016
Sales 420,000 500,000
Less cancelations 20,000 30,000
Net sales 400,000 470,000
Subscription expirations:
2015 120,000
2016 155,000 130,000
2017 125,000 200,000
2018 140,000
400,000 470,000
On December 31, 2016, what amount should be reported as unearned

subscription revenue?
a. 495,000 c. 465,000
b. 470,000 d. 340,000
Answer is c
Solution:
Subscriptions received in 2015 that will expire in 2017 125,000
Unearned subscription revenue – December 31, 2016 465,000
8. Saunalang Company sells equipment service contracts that cover a two-year

period. The sale price of each contract is P600. The past experience is that, of
the total pesos spent for repairs on servicer contracts, 40% is incurred evenly
during the first contract year and 60% evenly during the second contract year.
The entity sold 1,000 contracts evenly throughout 2015.
What amount should be reported as deferred service revenue on December 31,

2015?
a. 540,000 c. 360,000
b. 480,000 d. 300,000
Answer is b
Solution:
First contract year (40% x 600,000) 240,000

Second contract year (60% x 600,000) 360,000
Total contracts sold in 2015 600,000
Since the contracts are sold evenly, one-half of the 40% is earned in 2015 and
one-half will be earned in 2016. One-half of the 60% will be earned in 2016 and
one-half will be earned in 2017.
Thus, the deferred service contract revenue on December 31, 2015 is computed
as follows:
Total contracts sold (1,000 x 600) 600,000

Less: Contracts earned in 2015 (240,000 x ½) 120,000
Deferred service revenue – December 31, 2015 480,000
9. Nasaktan Company requires advance payments with special orders for

machinery constructed to customer specification. These advances are non-
refundable. Information for the current year is as follows:
Advances from customers – January 1 1,180,000

Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000
What amount should be reported as current liability for advances from customers
at year-end?
a. 1,480,000 c. 880,000
b. 1,380,000 d. 0
Answer is c
Solution:
Advances from customers – January 1 1,180,000

Add: Advances received with orders 1,840,000
Total 3,020,000
Less: Advances applied to orders shipped 1,640,000
Advances applicable to orders cancelled 500,000 2,140,000
Advances from customers – December 31 880,000
10. Ditokalang Company records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licenses. The past experience
indicates that only 80% of the stamps sold to licenses would be redeemed. The
liability for stamp redemptions was P6,000,000 on January 1, 2015. Additional
information for the current year is s follows:
Stamp service revenue from stamps sold to licenses 5,000,000

Cost of redemption of stamps sold prior to 1/1/2015 2,750,000
If all the stamps sold in 2015 were presented for redemption in 2016, the
redemption cost would be P2,250,000.
What amount should be reported as liability for stamps redemptions on

December 31, 2015?
a. 7,250,000 c. 5,050,00
b. 5,500,000 d. 3,250,000
Answer is c
Solution:
Liability for stamp redemptions – January 1, 2015 6,000,000

Add: Estimated cost of redemptions for stamps sold
In 2015 (80% x 2,250,000) 1,800,000
Total 7,800,000
Less: Cost of redemption in 2015 2,750,000
Liability for stamp redemptions – December 31, 2015 5,050,000
PROVISION AND CONTINGENT LIABILITY
1. In June 2016, the Hiloma Company began producing and selling a new line of
dishwasher. By the end of the year, it has sold 120,000 to various dealers for
150,000 each. The product was sold under a 1-year warranty, and the company
estimates warranty costs to be P750 per dishwasher. Hiloma had paid out P30
Million in warranty expenses as of December 31, 2016, which is also the amount
shown as warranty expense in its income statement for the current year.
What amount of warranty expense should be shown on Hiloma’s income
statement for the year ended December 31, 2016?
a. P30,000,000 c. P60,000,000
b. P0 d. P90,000,000
Answer is d
Solution:
Warranty Expense (P750 x 120,000) P90,000,000
2. In May 2015, Cherry Company relocated an employee from the Manila head office
to a branch in Cebu City. At the end of reporting period on June 30, 2015, the costs
are estimated at P350,000 analyzed as follows:
Cost for shipping goods 50,000

Airfare 15,000
Temporary accommodation cost for May and June 60,000
Temporary accommodation cost for July and August 80,000
Reimbursement for lease break cost paid in July
(lease was terminated in May) 20,000
Reimbursement for cost of living increases for the
period May 1, 2015 to May 1, 2016 150,000
Total 350,000
What amount should be recognized as provision for relocation costs on June 30,
2015?
a. 145,000 c. 295,000
b. 225,000 d. 170,000
Answer is d
Solution:
Cost for shipping goods 50,000

Airfare 15,000
Temporary accommodation cost for May and June 60,000
Reimbursement for lease break cost 20,000
Reimbursement for cost of living increases for
May and June (120,000x 2/12) 25,000
Total 170,000
3. On November 25, 2014, an explosion occurred at a Tom Company plant causing

extensive property damage to area buildings. By March 10, 2015, claims had been
asserted against the entity. The management and counsel concluded that it is
probable that the entity would be responsible for damages, and that P2,500,000 is
a reasonable estimate of the liability. Tom’s P10,000,000 comprehensive public
liability policy has a P500,000 deductible clause. What should be reported in the
December 31, 2014 financial statements, issued on March 25, 2015, in relation to
this item?
a. An accrued liability of P500,000

b. A disclosure indicating the probable loss of P2,500,000
c. A footnote disclosure indicating the probable loss of P500,000
d. An accrued liability of P2,500,000
Answer is a
Solution:
The accrued amount is P500,000 only because it is the extent of liability of

Tom under the comprehensive insurance policy.
4. Caso Company is the defendant in a lawsuit filed by Smith Company in 2015

disputing the validity of copyright held by Caso. On December 31, 2015, Caso
determined that Smith would probably be successful against Caso for estimated
amount of P500,000. Appropriately, a P500,000 loss was accrued by a charge to
income for the year ended December 31, 2015. On December 31, 2016, Caso and
Smith agreed to a settlement providing cash payment of P350,000 by Caso to
Smith, and transfer of Caso’s copyright to Smith. The carrying amount of the
copyright on Caso’s accounting records was P70,000 on December 31, 2016.
What would be the effect of the settlement on Caso’s income before tax in 2016?
a. 80,000 decrease c. 80,000 increase

b. 70,000 decrease d. 150,000 increase
Answer is c
Solution:
Accrued liability on December 31, 2015 500,000

Cash settlement on December 31, 2016 (350,000)
Carrying amount of copyright transferred ( 70,000)
Gain on settlement in 2016 80,000
5. During 2014, Steel Company became involved in a tax dispute with the BIR. On
December 31, 2014, the tax advisor believed that an unfavourable outcome was
probable and a reasonable estimate of additional taxes was P300,000. After the
2014 financial statements were issued, the entity received and accepted a BIR
settlement offer of P400,000.
What amount of accrued liability should have been reported on December 31,
2014?
a. 300,000 c. 500,000
b. 400,000 d. 0
Answer is a
Solution:
The reasonable estimate of P300,000 is recorded. The accepted BIR offer

is not recorded because it was made after the statements are issued. In 2015,
when the BIR settlement offer of P400,000 is accepted, an additional liability of
P100,000 will be recognized.
6. Orlando Company decided on November 1, 2015 to restructure the entity’s

operations as follows:
Factory A would be closed down and put on the market for sale.
Employees working in Factory A would be retrenched on November 30, 2015, and
would be paid their accumulated entitlements plus six months’ wages.
Some employees working in Factory A would be transferred to Factory B, which

would continue operating.
On December 31, 2015, the following transactions and events had occurred:
The retrenched employees have left and their accumulated entitlements have been
paid. However, an amount of P1,200,000, representing a portion of the six months’
wages for the retrenched employees, has still not been paid.
Costs of P300,000 are expected to be incurred in transferring the remaining

employees to their new work in Factory B. The transfer is planned for January 15,
2016.
One employee, Juan Cruz, remains in order to complete administrative tasks

relating to the closure of Factory A and the transfer of employees to Factory B.
Juan Cruz is expected to stay until January 31, 2016. His salary for January will
be P50,000 and his retrenchment package will be P180,000, all of which will be
paid on the day he leaves.
Juan Cruz, would spend 70% of his time administering the closure of Factory A,
20% on administering the transfer of employees to Factory B, and the remaining
10% on general administration.
What total amount should be recognized as restructuring provision on December

31, 2015?
a. 1,500,000 c. 1,425,000
b. 1,430,000 d. 1,415,000
Answer is d
Solution:
Unpaid wages of retrenched employees 1,200,000

Retrenchment package of Juan Cruz 180,000
Salary for administering closure of
Factory A (70% x P50,000) 35,000
Total restructuring provision 1,415,000
7. Regal Company has several contingent liabilities on December 31, 2014. The
auditor obtained the following brief description of each liability.
In May 2014, Regal Company became involved in litigation. In December 2014,

the court assessed a judgment for P1,000,000 against Regal.
The entity is appealing the amount of the judgment. The entity’s attorneys believed
it is probable that they can reduce the assessment on appeal by 50%.
In July 2014, Pasig City brought action against Regal Company for polluting the
Pasig River with its waste products.
It is probable that Pasig City will be successful but the amount of damages Regal
might have to pay should not exceed P800,000.
What total amount should be accrued as provision on December 31, 2014?
a. 800,000 c. 1,300,000
b. 1,800,000 d. 1,000,000
Answer is c
Solution:
Assessment on appeal (50% x 1,000,000) 500,000
Environmental Cost 800,000
Total provision 1,300,000
8. On November 1, 2014, Tower Company was awarded a judgment of P1,200,000

in connection with a lawsuit. The decision is being appealed by the defendant and
it is expected that the appeal process will be completed by the end of 2015. The
attorney believed that it is highly probable that an award will be upheld on appeal
but that the judgment may be reduce by 25%.
What amount should be reported as a receivable on December 31, 2014?

a. 300,000 c. 900,000
b. 1,200,000 d. 0
Answer is d
Solution:
The contingent asset is only disclosed when probable and measurable. The
asset and related gain are recognized only when realized.
9. During 2015, South Company filed suit against North Company seeking damages
for patent infringement. On December 31, 2015, South’s legal counsel believed
that it was probable that South would be successful against North for an estimated
amount of P2,000,000. In March 2016, South was awarded P1,300,000 and
received full payment thereof.
In South’s 2015 financial statements issued February 2016, how should this award
be reported?
a. As a receivable and deferred revenue of P1,300,000

b. As a receivable and revenue of P1,300,000
c. As a disclosure of a contingent asset of P2,000,000
d. As a disclosure of a contingent asset of P1,300,000
Answer is c
Solution:
The contingent asset is disclosed only. Since the case is settle in March
2016 after the issuance of the 2015 financial statements in February 2016, the
estimated amount of P2,000,000 shall be disclosed.
10. During 2015, Iriga Company is the defendant a breach of patent lawsuit. The
lawyers believe there is an 70% chance that the court will not dismiss the case and
the entity will incur outflow of benefits.
If the court rules in favour of the claimant, the lawyers believe that there is a 60%
chance that the entity will be required to pay damages of P1,000,000 and a 40%
chance that the entity will be required to pay damages of P500,000. Other amounts
of damages are unlikely.
The court is expected to rule in late December 2016. There is no indication that
the claimant will settle out of court.
A 8% risk adjustment factor to the cash flows is considered appropriate to reflect

the uncertainties in the cash flow estimates.
An appropriate discount rate is 12% per year.
What is the measurement of the provision on December 31, 2015?
a. 865,080 c. 801,000
b. 605,556 d. 560,700
Answer is b
Solution:
Weighted probabilities:
60% x 1,000,000 x 70% 420,000

60% x 500,000 x 70% 210,000
Expected cash flows 630,000

Multiply by risk adjustment factor (100% + 8%) 1.08
Adjusted cash flows 680,400
Multiply by PV of 1 at 12% for one period .89
Present value of cash flows 605,556
11. On January 1, 2014, Ranger Company owned a machine with cost of P2,500,000.
The accumulated depreciation was P1,500,000 estimated residual value was
P150,000 and fair value was P3,500,000. On January 3, 2014, this machine was
irreparably damaged by Dean Company and became worthless. In October 2014,
a court awarded damages of P3,500,000 against Dean in favour of Ranger. On
December 31, 2014, the final outcome of this case was awaiting appeal and was
therefore uncertain. However, in the opinion of Ranger’s attorney, Dean’s appeal
would be denied.
On December 31, 2014, what amount of gain should be accrued?
a. 150,000 c. 250,000
b. 350,000 d. 0
Answer is d
Solution:
The contingent asset and related contingent gain are only disclosed
because the case is still under appeal by the defendant.
BONDS PAYABLE and EFFECTIVE INTEREST METHOD
1. Diosa Company issued 5,000, 10-year 10% P1000 bonds on January 1, 2016 at
103 to yield 9%. Interest is payable every June 30 and December 31. On June
30, 2016, how much is the amortized premium?
a) 150,000 c) 18,250
b) 36,500 d) 65,000
Answer is c
Solution:
Interest Paid (5,000,000 x 10% x 6/12) P250,000
Interest Expense (5,150,000 x 9% x 6/12) (231,750)
Amortized Discount P 18,250
2. On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6% bonds
dated January 1, 2016 with interest payments June 30 and December 31. The
entity received cash of P2,150,000 plus accrued interest. What is the discount or
premium from the issuance of bonds?
a) 110,000 premium
b) 150,000 discount
c) 110,000 discount
d) 150,000 premium
Answer is a
Solution:
Cash Received P2,150,000
Accrued Interest (2,000,000 x 6% x 4/12) ( 40,000)
Carrying amount of Bonds P2,110,000
Face Value of Bonds (2,000,000)
Premium on Bonds P 110,000
3. On June 1, 2015, Love Ko To Company issued three thousands, P2000 face

value 10% five-year bonds for P5,568,000. The bonds were issued to yield 12%
interest. Interest is payable semi-annually on December 1 and June 1. Using the
effective interest method, what should be the bond interest expense on June 1,
2016?
a) 334,080 c) 336,125
b) 560,208 d) 280,104
Answer is a
Solution:
First Interest Payment
(June 1,2015 to December 1, 2015)
Interest expense (5,568,000 x 12% x 6/12) P334,080
Interest paid (6,000,000 x 10% x 6/12) (300,000)
Discount amortization P 34,080
Carrying amount as June 1, 2015 5,568,000
Carrying amount as of December 1, 2015 P5,602,080
Second Interest Payment

(December 1, 2015 to June 1, 2016)
Interest expense (5,602,080 x12% x6/12) P336,125
Interest expense related to second interest payment
yet already recognized on December 2015
(336,125 x 1/6) ( 56,021)
Interest expense on June 1, 2016 P280,104
4. Umasa Company issued on January 1, 2015 a one thousand, P5000 face value
8% five-year bonds at 105 and paid bond issue costs of 60,000 to yield 7%.
Interest is payable annually every December 31. What is the carrying amount of
the bonds on December 31, 2015?
a) 5,190,000 c) 5,226,700
b) 5,153,300 d) 5,226,700
Answer is b
Solution:
Bonds payable at issue price (5,000,000 x 105%) P5,250,000
Bond issue costs (60,000)
Carrying amount of bonds, January 1, 2015 P 5,190,000
Interest paid (5,000,000 x 8%) P400,000

Interest expense (5,190,000 x 7%) (363,300)
Premium Amortization P 36,700
Carrying amount P5,190,000

Premium amortization (36,700)
Carrying amount, December 31, 2015 P5,153,300
5. Face Value of bonds 4,000,000

Nominal rate 12%
Effective rate 14%
Date of issue January 1,2016
The bonds mature on every December 31 of each year at the rate of 1,000,000
for 4 years. The interest is payable annually on December 31.
The present value of 1 at 14% is as follows:
One period .8772
Two periods .7695
Three periods .6750
Four periods .5921
What is the present value of the bonds on January 1, 2016?
a) 3,844,928 c) 2,652,608
b) 3,299,528 d) 4,000,000
Answer is a
Solution:
(a) (b) (axb)

Principal Interest Total PV Present
Date Payment Payment Payment Factor Value
12-31-16 1,000,000 480,000 1,480,000 0.8772 1,298,256
12-31-17 1,000,000 360,000 1,360,000 0.7695 1,046,520
12-31-18 1,000,000 240,000 1,240,000 0.6749 837,000
12-31-19 1,000,000 120,000 1,120,000 0.5921 663,152
3,844,928
6. On July 1, 2015, an entity issued bonds with face amount of 7,000,000 and 10%
interest rate for 7,703,000. The bonds are sold to yield 8%. Interest is payable
annually. The entity paid bond issue costs of 150,000. On December 31, 2015,
the fair value of the bonds is determined to be 7,650,000. The entity elects the
fair value option of measuring the bonds payable. What is the carrying amount of
the bonds payable on December 31,2015 and the gain or loss in the change of
fair value, respectively.
a) 7,650,000 and 97,000 gain

b) 7,650,000 and 97,000 loss
c) 7,457,240 and 95,760 gain
d) 7,457,240 and 95,760 loss
Answer is b
Solution:
Carrying amount of bonds—January 1, 2015 P7,553,000
(7,703,000-150,000)
Carrying amount of bonds—December 31, 2015 (7,650,000)
Increase in fair value of bonds payable—loss (P 97,000)
7. On December 31, 2015 the Niloko Company retired its P5,000,000 face value,
10% bonds. The entity paid a total cash of P5,500,000 including the accrued
interest of P400,000. The entity incurred a loss of 150,000 in the retirement of the
said bonds. What is the unamortized premium or discount of the retired bonds?
a) 350,000 premium c) 100,000 discount

b) 250,000 premium d) 50,000 discount
Answer is d
Solution:
Total cash paid P5,500,000
Accrued interest (400,000)
Retirement price P5,100,000
Loss on retirement (150,000)
Carrying amount of bonds P4,950,000
Face value of bonds P5,000,000

Carrying amount of bonds ( 4,950,000)
Unamortized discount (P 50,000)
8. The entity retired its bond with a face value of P5,000,000 and an unamortized
premium of 150,000. The bonds is retired at 105 and paid the accrued interest of
200,000. What is the gain or loss in the retirement of bonds?
a) 300,000 loss c) 100,000 loss

b) 300,000 gain d) 100,000 gain
Answer is c
Solution:
Retirement price (5,000,000 x 105%) P5,250,000
Carrying amount of bonds (5,000,000+150,000) (5,150,000)
Loss on retirement of bonds P 100,000
.
9. On December 31, 2015 the Nanloko Company retired its P8,000,000 face value,
10% bonds. The entity paid a total cash of P8,500,000 including the accrued
interest of P400,000. The entity incurred a gain of 150,000 in the retirement of
the said bonds. What is the unamortized premium or discount of the retired
bonds?
a) 250,000 discount c) 50,000 discount

b) 250,000 premium d) 50,000 premium
Answer is b
Solution:
Accrued interest (400,000)
Gain on retirement 150,000
Carrying amount of bonds P 8,250,000

Face value of bonds (P 8,000,000)
Unamortized premium P 250,000
10. The Makakamove-on Company retired its bond with a carrying amount of
P4,850,000 at a price that would gain P200,000. The entity also paid the accrued
of P200,000. How much is the total cash paid by the entity?
a) 4,850,000 c) 5,050,000
b) 5,250,000 d) 4,650,000
Answer is a
Solution:
Gain on retirement of bonds (200,000)
Accrued interest 200,000
COMPOUND FINANCIAL INSTRUMENT
1. ABC Company issued 6,000 of 12%, 12-year, P1,000 face value bonds with
detachable share warrants at 120. Each bond has a detachable warrant for ten
ordinary shares of ABC Company at a specified option price of P20 per share.
The par value of the ordinary share is P15. Immediately after the issuance, the
market value of bonds ex warrants was P6,500,000 and the market value of the-
warrants was P800,000.
Q1: What is the carrying amount of bonds payable at year end?

a. 6,000,000 c. 6,900,000
b. 6,500,000 d. 7,200,000
Q2: The issuance of the bonds payable with share warrants will show
which of the following?
a. A credit to Cash 7,200,000
b. A credit to Bonds Payable 6,500,000
c. A debit to Discount on bonds payable 500,000
d. A credit to Share warrants outstanding 700,000
Answer is b,d
Solution:
a. Issue price of bonds payable – equal to market value ex-warrants
6,500,000
b. Cash 7,200,000
Bonds Payable 6,000,000
Premiums on bonds payable 500,000
Share warrants outstanding 700,000
2. On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000

face amount convertible bonds payable maturing on December 31, 2020. Interst
is payable on June 30 an December 31. Each P1,000 bond is convertible into 50
shares of P15 par value. On December 31, 2015, the unamortized premium on
bonds payable was P70,000. On December 31, 2015, 400 bonds were converted
when Divergent’s share had a market price of P25. The entity incurred P6,000 in
connection with the conversion. No equity component was recognized when the
bonds were originally issued.
Q1: What is the share premium from the issuance of shares as a result of the
bond conversion on December 21,2015?
a. 108,000 c. 120,000
b. 114,000 d. 130,000
Q2: The carrying amount of converted bonds payable is equal to ______.

a. 300,000 c. 1,035,000
b. 414,000 d. 2,070,000
Answer is a,b
Solution:
Premium on bonds payable 70,000
Carrying amount 2,070,000
Carrying amount converted (400/2,000 x 2,070,000 414,000

Par value of shares issued (400 x 50 x P15) (300,000)
Share premium 114,000
Conversion Expenses (6,000)
Net share premium 108,000
Carrying amount converted (400/2,000 x 2,070,000) 414,000
3. Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on

December 31, 2015. Each P1,000 bond was issued with 25 detachable share
warrants, each of which entitled the bondholder to purchase one ordinary share
of P5 par value at P15. Immediately after issuance, the market value of each
warrant is P7. The stated interest on the bonds is 9% payable annually every
December 31. However, the prevailing market rate of interest for similar bonds
without warrant is 11%.
Q1: On December 31, 2015, what amount should be recorded as discount or

premium on bonds payable?
a. 359,000 c. 539,000
b. 395,000 d. 593,000
Q2: The amount allocated to equity is ____________.

a. 1,239,000 c. 3,129,000
b. 1,329,000 d. 3,192,000
Answer is c,a
Solution:
PV of principal (7,000,000 x 0.59) 4,130,000
PV of interest payments (630,000 x 3.70) 2,331,000
TOTAL PRESENT VALUE OF BONDS PAYABLE 6,461,000
Bonds payable 7,000,000

PV of bonds payable 6,461,000
Discount on bonds payable 539,000
Issue price of bonds with warrants (7,000,000 x 110%) 7,700,000

PV of bonds payable (6,461,000)
Residual amount allocated to warrants 1,239,000
4. Anneth Company issued 8,000 convertible bonds at the beginning of the current
year. The bonds had a five-year term with a nominal rate of interest of 5%, and
were issued at par with a face value of P1,000 per bond. Interest is payable
annually on December 31. Each bond is convertible into 40 ordinary shares with
a par value of P10. The market rate of interest on similar nonconvertible bond is
9%. At the issuance date, the amount of P325,000 was credited to share
premium from conversion privilege. The bonds were not converted and instead,
the entity paid off the convertible bondholders as maturity.
Q1: What amount should be recorded as gain or loss on the full payment
of the convertible bonds at maturity?
a. 8,000,000 loss c. 325,000 gain
b. 325,000 loss d. 0
Q2: Which of the following is false in recording the issuance of the

convertible bonds?
a. A credit to Cash 8,000,000
b. A credit to Bonds Payable 7,675,000
c. A debit to Discount on bonds payable 325,000
d. A credit to Share warrants outstanding 325,000
Answer is d,c
Solution:
There is no gain or loss since the bonds were not converted and instead, the
entity paid off the convertible bondholders as maturity.
Cash 8,000,000
Discount on bonds payable 325,000
Bonds payable 8,000,000
Share Premium - conversion privilege 325,000
9-10)
Fajardo Company had outstanding share capital with par value of P100,000,000 and
a 9% convertible bond payable in the face amount of P20,000,000. Interest payment
dates of the bond issue are June 30 and December 31. The conversion clause in the
bond indenture entitled the bondholders to receive 20 shares of P20 par value in
exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face
value bonds exercised the conversion privilege. The market price of the bonds on
that date was P1,100 per bond and the market price of the share was P30. The total
unamortized bond discount at the date of conversion was P900,000. The share
premium from conversion privilege has a balance of P3,000,000 on June 30, 2015.
Q1: What amount of share premium should be recognized by reason of the
conversion of bonds payable into share capital?
a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000
Q2: The total consideration is equal to ____________.
a. 3,525,000 c. 1,750,000
b. 2,775,000 d. 1,525,000
Answer is d,a
Solution:
Discount on bonds payable (900,000)
Carrying amount converted (5/20 x 11,100,000) 2,775,000
Applicable share premium from conversion privilege
(5/20 x 3,000,000) 750,000
Total consideration 3,525,000
Par value of shares issued (5,000 x 20 x 20) (2,000,000)
Carrying amount converted (5/20 x 11,100,000) 2,775,000
Applicable share premium from conversion privilege
(5/20 x 3,000,000) 750,000
Total consideration 3,525,000
NOTE PAYABLE
1. U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the
existing loan facility, the entity had the discretion to refinance or roll over the note
payable for at least twelve months after the end of reporting period.
On December 31,2015, what amount of the note payable should be reported as

noncurrent liability?
a. 1,500,000 c. 2,250,000
b. 1,800,000 d. 0
Answer is a
Solution:
The entire amount is classified as non-current liability.
PAS 1, paragraph 73, provides that if an entity has the discretion to
refinance or roll over an obligation for at least twelve months after the end of
reporting period, it shall classify the obligation as noncurrent, even if it would
otherwise be due within a shorter period.
2. Fred Company reported the following liabilities on December 31,2015:
Accounts Payable 600,000

Short-term borrowings 300,000
Mortgage payable, current portion P100,000 2,000,000
Note payable, due June 30, 2016 900,000
The P900,000 note payable was refinanced with a 5-year loan on January 15,
2016 with the first principal payment due January 15, 2017. The financial
statements were issued February 28, 2016.
What amount should be reported as current liabilities on December 31, 2015?
a) 900,000 c. 1,000,000
b) 1,900,000 d. 700,000
Answer is b
Solution:
Accounts Payable 600,000
Short-term borrowings 300,000
Mortgage payable- current portion 100,000
Note payable 900,000
Total current liabilities 1,900,000
3. On January 1, 2015, Anne Company sold land to Guring Company. There was
no establish market price for the land. Guring gave Anne a P3,000,000
noninterest bearing note payable in three equal annual installments of
P1,000,000 with the first payment due December 31, 2015.
The note has no ready market. The prevailing rate of interest for a note of this
type is 12%. The present value of a P3,000,000 note payable in three equal
annual installments of P1,000,000 at 12% rate of interest is P2,401,830.
What is the carrying amount of the note payable on December 31, 2015?
a) 2,401,830 c. 1,690,050
b) 1,401,830 d. 3,000,000
Answer is c
Solution:
Note Payable 3,000,000
Present Value (2,401,830)
Discount on note payable - January 1, 2015 598,170
Amortization or interest expense (12% × 2,401,830) 288,220
Discount on note payable - December 31, 2015 309,950
Note payable - January 1, 2015 3,000,000

Annual payment on December 31, 2015 1,000,000
Note payable - December 31, 2015 2,000,000
Discount on note payable - December 31, 2015 309,950
Carrying amount - December 31, 2015 1,690,050
4. On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year
note bearing interest at 8% per annum compounded annually. Interest is payable
in full at maturity on February 28, 2017.
What amount should be reported as accrued interest payable on December 31,

2016?
a) 33,333 c. 76,000
b) 40,000 d. 80,000
Answer is c
Solution:
Accrued interest from March 1, 2015
to February 28, 2016 (500,000 × 8%) 40,000
Accrued interest from March 1 to
December 31, 2016 (500,000 + 40,000 × 8% × 10/12) 36,000
Accrued interest payable - December 31, 2016 76,000
5. On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at

an annual rate of 10%. The loan agreement requires Arman to maintain a
P200,000 compensating balance in its checking account. Arman would otherwise
maintain a balance of only P100,000 in this account. The checking account earns
interest at an annual rate of 5%.
What is the effective interest rate on the borrowing?

a) 10% c. 11.33%
b) 10.67% d. 10.56%
Answer is d
Solution:
Interest expense (1,000,000 × 10% × 180/360) 50,000
Interest income on compensating balance
in excess of the normal checking account
balance (100,000 × 5% × 180/360) (2,500)
Net interest expense 47,500
Net proceeds of loan (1,000,000 - 100,000) 900,000

Effective amount (900,000 × 180/360) 450,000
Effective interest rate (47,500/450,000) 10.56%
6. On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note
at a discount rate of 11%. The entity elected the fair value option for reporting the
note payable.
On December 31, 2015, the credit rating and risk factors indicated that the rate of
interest applicable to its borrowings was 10%. The present value factors at 11%
and 9% are as follows:
PV factor 11%, 3 periods .731 PV factor 10%, 3 periods .751
PV factor 11%, 2 periods .812 PV factor 10%, 2 periods .826
PV factor 11%, 1 period .901 PV factor 10%, 1 period .909
Q1: What is the initial carrying amount of the note payable on January 1, 2015?
a) 146,200 c. 162,400
b) 150,200 d. 165,200
Q2: What is the carrying amount of the note payable on December 31, 2015?
a) 165,200 c. 181,800
b) 162,400 d. 150,200
Answer is a,a
Solution:
a. Fair value of note - January 1, 2015 (200,000 × .731) 146,200
b. Fair value of note - December 31, 2015 (200,000 × .826) 165,200
7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11% five-year note

payable. On December 31, 2015, the fair value of the note is determined to be
P1,950,000 based on market and interest factors. The entity has elected the fair value
option for reporting the financial liability.
Q1: What amount should be reported as interest expense for 2015?
a) 220,000 c. 110,000
b) 214,500 d. 107,250
Q2: What is the carrying amount of the note payable on December 31, 2015?
a) 2,000,000 c. 1,000,000
b) 1,950,000 d. 1,780,000
Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value
option?
a) 150,000 gain c. 75,000 gain
b) 150,000 loss d. 0
Answer is c,b,a
Solution
a. Interest expense for 2015 (2,000,000 × 11% × 6/12) 110,000
b. Carrying amount equal to fair value 1,950,000
c. Note Payable - July 1, 2015 2,000,000

Fair value - December 31, 2015 1,950,000
Decrease in fair value of note payable - gain 150,000
DEBT RESTRUCTURE
1. Balleta Company has the following three loans payable scheduled to be repaid in
February next year. The Balleta’s accounting year ends on December 31. The
company intends to repay loan 1 for P100,000 when it comes due in February. In
the following October, the company intends to get a new loan for P80,000 from
the same bank. The company intends to refinance loan 2 for P150,000 when it is
due in February. The refinancing agreement, for P180,000 will be signed in April
after the financial statements for this year have been authorized issue. The
company intends to refinance loan 3 for P200,000 before it comes due in
February. The actual refinancing, for 175,000 took place in January, before the
financial statements for this year have been authorized for issue.
As of December 31 of the year, what are the total current and non-current
liabilities to be reported?
a. P100,000;P25,000 c. P450,000;0
b. P250,000;P175,000 d. P125,000;P350,000
Answer is c
Solution:
Loan 1 P100,000
Loan 2 150,000
Loan 3 200,000
Total current liabilities P450,000
No non-current liabilities
Under PAS 1: Presentation of Financial Statements, an entity classifies its

financial Liabilities as current when they are due to be settled within 12
months after the end of the reporting period, even if:
a. The original term was for a period longer than 12 months; and
b. An agreement to refinance, or to reschedule payments, on a long-term
basis is completed after the end of the reporting period and before the
financial statements are authorized for issued.
PAS 1 further provides that if the refinancing on a long-term basis occurs
between the end of the reporting period and the date the financial
statements are authorized for issue, such events qualifies or disclosure as
non-adjusting event in accordance with PAS 10.
2. Caramel Company has arranged with its bank to refinance its short-term loan
when it becomes due in 3 months. The new loan will have a term of 5 years. The
following items are based on the financial statements of Caramel:
Current Assets P750,000

Short-Term Loan Payable 600,000
Total Liabilities 3,000,000
Current Ratio 1.5
Debt-to-Equity Ratio 1.5
What are the total current, shareholders’ equity and non-current liabilities?
a. P500,000; P2,000,000; P2,500,000
b. P2,500,000; P500,000; P2,000,000
c. P2,000,000; P2,500,000; P500,000
d. P500,000; P2,500,000; P2,000,000
Answer is b
Solution:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
a. Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑃750,000
1.5 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑃750,000
Current Liabilities = 1.5
= P500,000
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
b. Debt-to-equity ratio = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑃3,000,000
1.5 = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑃3,000,000
Total Equity = 1.5
= P2,000,000
c. Total Liabilities P3,000,000

Less: Current Liabilities 500,000
Non-current Liabilities P2,500,000
3. Al Rey Co. owes P1,998,000 to Lomi Corp. The debt is a 10-year, 11% note.
Because Al Rey Co. is in financial trouble, Lomi Corp. agrees to accept land and
cancel the entire debt. The land has a book value of P800,000 and fair market
value of P1,200,000.
What entry should be made by Al Rey Co. for the restructure?
a. Gain on restructuring of debt 1,998,000

Land 800,000
b. Notes Payable 1,998,000
Land 800,000
Gain on restructuring of debt 1,198,000
c. Note Payable 800,000
Gain on restructuring of debt 1,198,000
Land 1,998,000
d. Notes Payable 1,198,000

Land 800,000
Gain on restructuring of debt 1,998,000 `
Answer is b
Solution:
Notes Payable 1,998,000
Land 800,000
Gain on restructuring of debt 1,198,000 `
Total liability P1,998,000

Book value of land 800,000
Gain in debt restructuring P1,198,000
4. Canela Co. is having financial difficulty and therefore has asked Enriquez Bank
to restructure its 3 million note outstanding. The present note has 3 years
remaining and pays a current rate of interest of 12%. The note was issued at its
face value. Enriquez Bank agrees to accept land in exchange for extinguishing its
claim on this note. The land has a book value of P2,000,000 and a fair value of
P2,500,000. Enriquez Bank agrees to reduce the principal balance due to
P2,000,000 and interest to 10%.
12% 10%
Present value of 1 for 3 periods 0.71178 0.75132

Present value of an ordinary annuity
Of 1 for 3 periods 2.40183 2.48685
Q1: What is the gain on debt restructuring?
a. P1,096,074 c. P480,366
b. P1,903,926 d. P1,423,560
Q2: Discount on note payable
c. P480,366 c. P96,074
d. P903,926 d. P48,532
Answer is a,c
Solution:
Present value principal (P2,000,000 x 0.71178) P1,423,560

Present value of interest payments
(P2,000,000 x 10%= P200,000 x 2.40183) 480,366
Total P1,903,926
a. Note payable – old P3,000,000

Present value of restructured liability 1,903,926
Gain on debt restructuring P1,096,074
b. Face value of note payable – new P2,000,000

Present value of restructured liability 1,903,926
Discount on note payable P 96,074
5. At year-end, Yohannah Company showed the following data with respect to its
matured obligation:

Accrued interest payable 750,000
The entity is threatened with a court suit it could not pay maturing debt.
Accordingly, the entity entered into an agreement with the creditor for the
issuance of share capital in full settlement of the note payable.
The agreement provided for the issue of 40,000 shares with par value of P100.
The share is currently quoted at P120. The fair value of the note payable on the
date of restructuring is P4,700,000
Q1: Under the “equity swap”, what amount should be recognized as gain from
extinguishment of debt?
a. 450,000 c. 950,000
b. 1,000,000 d. 800,000
Q2: What is the share Premium?
a. 450,000 c. 950,000
b. 1,000,000 d. 800,000
Answer is a,d
Solution:
Accrued Interest Payable 750,000
Total carrying amount of liability 5,250,000
Fair value of shares (40,000 x 120) 4,800,000
Gain on extinguishment of debt 450,000
Fair value of shares 4,800,000

Par Value of shares (40,000 x 100) 4,000,000
Share Premium 800,000
6. Due to extreme financial difficulties, Restine Co. had negotiated a restructuring of

a 10% P5,000,000 note payable due on December 31, 2015. 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, 2015.
The PV of 1 at 10% for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at

10% for 3 periods is 2.49
Q1: What is the gain on extinguishment of debt in 2015?
a. 1,703,000 c. 2,000,000
b. 1,203,000 d. 540,000
Q2: What is the interest expense for 2016?

a. 320,000 c. 400,000
b. 379,680 d. 500,000
Answer is a,b
Solution:
PV of principal (4,000,000 x .75) 3,000,000
PV annual interest payments (320,000 x 2.49) 796,800
Total present value of new liability 3,796,800
Note payable – old 5,000,000

Accrued interest payable 500,000
Total old liability 5,500,000
Present value of new liability 3,796,000
Gain on extinguishment 1,703,200
Interest expense for 2016 (10% x 3,796,800) 379,680

Interest paid (8% x 4,000,000) 320,000
Amortization of discount 59,680
7. Kengel Co. had bonds payable with face value of P5,000,000 and a carrying
amount of P4,800,000. In addition, unpaid interest on the bonds was accrued in
the amount of P250,000. The creditor had agreed to the settlement of the bonds
payable in exchange for 50,000 shares of P50 par value. The shares have no
reliable measure of fair value. However, the bonds are quoted at P3,500,000.
Q1: What is the gain on the extinguishment of the bonds payable?
a. 1,500,000 c. 1,550,000
b. 1,300,000 d. 0
Q2: What is the share premium from the issuance of the shares?
a. 2,300,000 c. 1,000,000
b. 1,300,000 d. 0
Answer is c,c
Solution:
Carrying amount of bonds payable 4,800,000
Accrued interest on bonds payable 250,000
Total 5,050,000
Fair value of bonds payable (3,500,000)
Gain on extinguishment of bonds payable 1,550,000
Fair value of bonds payable 3,500,000

Par Value of shares (50,000 x 50)-/
2,500,000
Share premium 1,000,000
OPERATING LEASE
1. On December 1, 2015, Rain Company leased office space for five years at a
monthly rental of P300,000. On the same date, the entity paid the lessor the
following amounts:
Bonus to obtain Lease 150,000

First month’s rent 300,000
Last month’s rent 300,000
Security deposit refundable at
lease expiration 700,000
Installation of new walls and offices 2,400,000
What total amount of the expenses relating to utilization of the office space
should be reported for 2015?
a.) 342,500 c.) 555,000

b.) 810,500 d.) 425,000
Answer is a
Solution:
Amortization of Lease Bonus (150,000 / 5 x 1/12) 2,500

Rent for December 300,000
Depreciation of leasehold improvement
(2,400,000 / 5 x 1/12) 40,000
Total December 2015 Expenses 342,500
2. As an inducement to enter a lease, McDough Company, a lessor, granted

SpaFry Company, a lessee, nine months of free rent under a six year operating
lease. The lease was effective on July 1, 2015 and provided for monthly rental of
P100,000 to begin April 1, 2016.
In the income statement for the year ended June 30, 2016, what amount should
be reported as rent expense?
a.) 1,050,000 c.) 900,000

b.) 300,000 d.) 255,000
Answer is a
Solution:
Total Rent Expense (100,000 x 63 remaining months) 6,300,000
Average annual rent expense, July 1, 2015 to

June 30, 2016 (6.300,000 / 6) 1,050,000
3. On July 1, 2015, Walton Company leased office premises for a three-year period
at an annual rental of P360,000 payable on July 1 each year. The first rent
payment was made July 1, 2015. Additionally on July 1, 2015, the entity paid
P240,000 as a lease bonus to obtain a three-year lease instead of the lessor’s
usual term of six years.
On December 31, 2015, what amount should be reported as prepaid rent?
a.) 240,000 c.) 220,000

b.) 380,000 d.) 180,000
Answer is d
Solution:
Rent payment on July 1, 2015 (360,000 x 6/12) 180,000

Lease Bonus (240,000 x 30/36) 200,000
Prepaid Rent – December 31, 2015 380,000

4. On July 1, 2015, Gold Company leased a delivery truck from Marr Company
under a 3-year operating lease. Total rent for the term of the lease will be
P360,000, payable as follows:
12 months at 6,000 = P 72, 000

12 months at 6,500 = 78,000
12 months at 17,500 = 210,000
All payments were made when due. On June 30, 2017, what amount should be
reported as accrued rent receivable?
a.) 90,000 c.) 210,000

b.) 120,000 d.) 0
Answer is a
Solution:
Average annual rent revenue (360,000 / 3) 120,000
Rent revenue from July 1, 2015 to June 30, 2017

(120,000 x 2) 240,000
Less: Rentals received:
First 12 months 72,000
Second 12 months 78,000
150,000
Rent Receivable – June 30, 2017 90,000
5. B.I. Company leased a new machine to H.I. Company on January 1, 2015. The
lease expires on January 1, 2020. The Annual rental is P900,000. Additionally,
on January 1, 2015, H.I. Company paid P 500,000 to B.I. Company as a lease
bonus and P250,000 as a security deposit to be refunded upon expiration of the
lease.
What amount of rental revenue should be reported for 2015?
a.) 900,000 c.) 1,250,000

b.) 1,000,000 d.) 1,400,000
Answer is b
Solution:
Annual Rental 900,000

Amortization of lease bonus (500,000 / 5) 100,000
Total Rental Revenue 1,000,000
6. Babe Company owns and manages apartment complex. On signing a lease,

each tenant must pay the first and last month’s rent and a P50,000 refundable
security deposit. The security deposits are rarely refunded in total, because
cleaning costs of P15,000 per apartment are almost always deducted. About
30% of the time, the tenants are also charged for damages to the apartment
which typically cost P10,000 to repair.
If one-year lease is signed on a P90,000 per month apartment, what amount

should be reported as refundable security deposit?
a.) 35,000 c.) 32,000

b.) 50,000 d.) 140,000
Answer is b
Solution:
Refundable Security Deposit 50,000
7. Dutch Company leased equipment to Ender Company on July 1, 2015 for a one-
year period expiring June 30, 2016 for P45,000 a month. On July 1, 2016, Dutch
leased this piece of equipment to Foil Company for a three-year period expiring
June 30, 2019 for P60,000 a month. The original cost of the equipment was
P4,200,000. The equipment which has been continually on lease since July 1,
2011 is being depreciated on a straight line basis over an eight-year period with
no residual value. Both the lease to Ender and the lease to Foil are appropriately
recorded as operating lease.
What is the amount of net rental income that would be reported by Dutch
Company for the year ended December 31, 2016?
a.) 350,000 c.) 110,000

b.) 610,000 d.) 105,000
Answer is d
Solution:
Rent income – Ender (45,000 x 6) 270,000

Rent income – Foil (60,000 x 6) 360,000
Total rent income for 2016 630,000

Depreciation (4,200,000 / 8) 525,000
Net rental income for 2016 105,000
8. Cain Company, lessor, leased an equipment under an operating lease. The lease
term is 5 years and the lease payments are made in advance on January 1 of
each year as shown in the following schedule:
January 1, 2015 1,200,000

January 1, 2016 1,150,000
January 1, 2017 1,500,000
January 1, 2018 1,650,000
January 1, 2019 1,900,000
On December 31, 2016, what amount should be recognized as rent receivable?
a.) 1,210,000 c.) 410,000

b.) 610,000 d.) 0
Answer is b
Solution:
Average annual rental (7,400,000 / 5) 1,480,000

Rent Income for 2015 and 2016 (1, 480,000 x 2) 2,960,000
Rent Received for 2015 and 2016 (1,200,000 + 1,150,000) 2,350,000
Rent Receivable – December 31, 2016 610,000
9. Jaguar Company leased office premises to Fox Company for a five-year term
beginning January 1, 2015. Under the terms of the operating lease, rent for the
first years is P900,000 and rent for years 2 through 5 is P1,300,000 per annum.
However, as an inducement to enter the lease, Jaguar granted Fox the first six
months of the lease rent-free.
What amount should Jaguar report as rental income for 2015?
a.) 1,300,000 c.) 900,000

b.) 1,130,000 d.) 450,000
Answer is b
Solution:
First Year (900,000 x 6/12) 450,000

Second Year 1,300,000
Third Year 1,300,000
Fourth Year 1,300,000
Fifth Year 1,300,000
Total rental revenue 5,650,000
Average annual rental revenue (5,650,000 / 5) 1,130,000
10. As an incentive to enter a four-year operating lease for a warehouse, Silent Hill
Company received an upfront cash of P90,000 upon signing an agreement at the
beginning of current year. The annual rental is P1,122,500.
What amount should be recognized as lease expense for the current year?
a.) 1,122,500 c.) 1,032,500

b.) 1,100,000 d.) 0
Answer is b
Solution:
Annual Rental 1,122,500

Amorization of upfront cash received (60,000 / 4) ( 22,500)
Lease expense for current year 1,100,000
FINANCE LEASE – LESSEE
1. Gandalf Company leased a machine from Harry Leasing Company. The lease
qualifies as a finance lease and requires 10 annual payments of P200,000
beginning immediately. The lease specifies an interest rate of 11% and a
purchase option of P200,000 at the end of the tenth year, even though the
machine’s estimated value on that date is 300,000.
Present Value of an annuity due (in advance)

of 1 at 11% for 10 periods. 6.537
Present value of 1 at 11% for 10 periods. 0.352
What amount should be recorded as lease liability at the beginning of the lease
term?
a.) 1,307,400 c.) 1,321,500

b.) 1,377,800 d.) 1,397,200
Answer is b
Solution:
Present value of rentals (200,000 x 6.537) 1,307,400

Present value of bargain purchase option
(200,000 x .352) 70,400
Total lease liability – beginning of lease term 1,377,800
2. At the beginning of current year, Nick Company signed an eight-year

noncancelable lease for a new machine, requiring P150,000 annual payments at
the beginning of each year. The machine has a useful life of 12 years with no
residual value. Title passes to the lessee at the lease expiration date. Cole uses
straight line depreciation for all of the plant assets. Aggregate lease payments
have a present value of P1,080,000 based on an appropriate rate of interest.
What amount should be recorded as depreciation expense of the leased machine

for the current year?
a.) 150,000 c.) 90,000

b.) 135,000 d.) 0
Answer is c
Solution:
Depreciation for current year (1,080,000 / 12) 90,000
3. Ziggurat Company is a lessee under a finance lease. The asset is recorded at

P5,300,000 and has an economic life of 8 years. The lease term is 5 years. The
asset is expected to have a fair value of P1,300,000 at the end of 5 years and a
fair value of P300,000 at the end of 8 years. The lease agreement provides for
the transfer of title of the asset to the lesee at the end of the lease term.
What amount of depreciation expense should be recorded for the first year of the
lease?
a.) 925,000 c.) 625,000

b.) 800,000 d.) 500,000
Answer is c
Solution:
Cost 5,300,000
Residual Value after 8 years ( 300,000)
Depreciable Amount 5,000,000
Annual Depreciation (5,000,000 / 8) 625,000

4. On January 1, 2015, Plow Company entered into a ten-year noncancelable lease
requiring year-end payments of P1,000,000. Plow’s incremental borrowing rate is
12%, while the lessor’s implicit interest rate, known to Plow, is 10%. Present
value factors for an ordinary annuity for ten periods are 6.145 at 10%, and 5.650
at 12%. On same date, Plow Company paid initial direct cost of P200,000 in
negotiating and securing the leasing arrangement. Ownership of the property
remains with the lessor at expiration of the lease. There is no bargain purchase
option. The leased property has an estimated economic life of 12 years.
What amount should be capitalized initially as cost of the leased property?
a.) 5,850,000 c.) 6,145,000

b.) 5,650,000 d.) 6,345,000
Answer is d
Solution:
Present value of rentals (1,000,000 x 6.145) 6,145,000

Initial Direct Cost 200,000
Total Cost of Property 6,345,000
5. Loop Company leased a warehouse with adjoining land for a period of 15 years.
The fair values of the leasehold interests in the land and the warehouse are
P3,000,000 and P1,500,000 respectively. The land has an indefinite economic
life whereas the warehouse has a useful life of 15 years. Title to the land is not
expected to pass at the end of the lease.
At what amount should the asset in relation to finance lease be recognized in the
financial statements of the lessee?
a.) 4,500,000 c.) 1,500,000

b.) 3,000,000 d.) 0
Answer is c
Solution:
The warehouse lease is a finance lease and therefore the leasehold
interest of P1,500,000 is recognized as an asset.
6. Asylum Company leased a machine with a fair value of P2,450,000 for a period
of 5 years under a finance lease. The initial direct costs included in negotiating
the lease amounted to P22,500. The present value of the minimum lease
payments discounted at the rate implicit in the lease is P2,384,000.
At what amount should the machine be recognized initially in the financial

statement?
a.) 2,450,000 c.)2,562,500

b.) 2,406,500 d.)2,384,000
Answer is b
Solution:
Present value of minimum lease payments 2,384,000

Initial Direct Costs 22,500
Total Initial cost of machine 2,406,500
7. Je-Barbie Company entered into a nine-year finance lease on a warehouse on

December 31, 2015. Lease payment of P620,000 which includes real estate
taxes and other executory cost of P20,000, are due annually, beginning on
December 31, 2016 and every December 31 thereafter. The interest rate implicit
in the lease is 9%. The rounded present value of an ordinary annuity of 1 for nine
years at 9% is 5.6.
What amount should be reported as lease liability on December 31, 2015?
a.) 3,360,000 c.) 3,472,000

b.) 3,000,000 d.) 3,584,000
Answer is a
Solution:
Lease Liability (600,000 x 5.6) 3,360,000
8. At the beginning of current year, Forever Company leased a van with a fair value
of P 2,400,000 under a finance lease. The lease term is 6 years and the present
value of the minimum lease payments is P 2,340,000. The useful life of the van
was estimated at 8 years with no residual value. The entity used straight line
depreciation.
What is the depreciation charge on the van for the current year?
a.) 400,000 c.) 300,000

b.) 390,000 d.) 292,500
Answer is b
Solution:
Annual Depreciation (2,340,000 / 6 years) 390,000
9. Lava Company has leased an asset on a finance lease. The present value of the
minimum lease payments is P986,000 and the fair value of the asset is
P1,000,000. The asset has a useful life of 5 years and the lease is for a period of
4 years, after which the asset can be acquired for a near zero cost, which is
substantially below the expected value of the asset at that date. The asset is
depreciated on a straight line basis.
What is the amount of the annual depreciation expense?
a.) 197,200 c.) 246,500

b.) 200,000 d.) 250,000
Answer is a
Solution:
Annual depreciation (986,000 / 5 years) 197,200

10. Tambak Company leased a land and building for 20 years, the useful life of the
building, with effect from January 1, 2015. At that date, the fair value of the
leasehold interest was P10,000,000 and of which 8,000,000 are attributable to
the building. Annual rentals of P900,000 are payable in advance on January 1.
What amount should be recognized as an operating lease expense for 2015?
a.) 900,000 c.) 180,000

b.) 200,000 d.) 0
Answer is c
Solution:
Leasehold interest 10,000,000

Attributable to building 8,000,000
Attributable to land 2,000,000
Operating lease expense

(2,000,000/10,000,000 x 900,000) 180,000
DIRECT FINANCING LEASE – LESSOR
1. On December 31, 2015, Bentong Company, a lessor, sold a machinery that it

had been leasing under a direct financing lease. On January 1, 2015 after receipt
of the lease payment for the year, the following account balances were
associated with the lease:
Gross lease receivable 5,540,000

Unearned interest income 1,000,000
Present value of lease receivable 4,540,000
The interest rate implicit in the lease is 10%. On December 31, 2015, Bentong
Company sold the leased machinery to the lessee for P3,150,000 cash.
What is the loss on sale of machinery that should be recognized on December

31, 2015?
a.) 1,700,000 c.) 2,150,000

b.) 1,754,000 d.) 1,390,000
Answer is b
Solution:
Interest income for 2015 (10% x 4,540,000) 454,000
Sale Price 3,150,000

Carrying amount of lease receivable
Lease receivable 5,450,000
Unearned interest income
(1,000,000 – 454,000) ( 546,000) 4,904,000
Loss on sale of machinery 1,754,000
2. DU30 Company entered into a finance lease on January 1, 2015. A third party
guaranteed the residual value of the asset under the lease estimated to be
P220,000 on January 1, 2020, the end of the lease term.
Annual lease payments are P200,000 dues each December 31, beginning
December 31, 2015. The last payment is due December 31, 2019.
The remaining useful life of the asset was six years at the commencement of the
lease.
Both the lessor and lessee used 10% as the interest rate. The PV of 1 at 10% for
5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is
3.79.
What is the lease receivable of the lessor and lease liability of the lessee at the
commencement of the lease?
Lease Receivable Lease Liability

a.) 894,400 894,400
b.) 758,000 758,000
c.) 894,400 758,000
d.) 758,000 894,000
Answer is c
Solution:
Lessor
Present value of rentals (200,000 x 3.79) 758,000

Guaranteed residual value (220,000 x .62) 136,400
Lease receivable 894,400
Lessee
Lease Liability (200,000 x 3;79) 758,000
3. Kaleidoscope Company had an asset costing P3,912,500. The asset is leased on

January 1, 2015 to another entity. Five annual lease payments are due each
January 1, beginning January 1, 2015. The lessee guaranteed P1,000,000
residual value of the asset as of the end of the lease term on December 31,
2019. The implicit interest rate is 8%. The PV of 1 at 8% for 5 periods is .68, and
the PV of an annuity of 1 in advance at 8% for periods is 4.31.
What is the annual lease payment?
a.) 680,000 c.) 675,754

b.) 907,773 d.) 750,000
Answer is d
Solution:
Cost of asset 3,912,500

PV of guaranteed residual value (1,000,000 x .68) ( 680,000)
Net investment to be recovered from rentals 3,232,500
Divide by PV of an annuity of 1 in advance at 8%
for 5 periods 4.31
Annual lease payment 750,000
4. Peregrine Company decided to enter the leasing business. The entity acquired a
specialized packaging machine for P4,600,000. On January 1, 2015, the entity
leased the machine for a period of six years, after which title to the machine is
transferred to the lessee.
The six annual lease payments are due each January 1 and the first payment
was made on January 1, 2015. The residual value of the machine is P500,000.
The lease terms are arranged so that a return of 12% is earned by Irene
Company. The present value of 1 at 12% for six periods is 0.51, and the present
value of an annuity in advance of 1 at 12% for six periods is 4.60.
What is the annual lease rental payable in advance required to yield the desired
return?
a.) 1,000,000 c.) 745,000

b.) 891,304 d.) 1,255,000
Answer is a
Solution:

Divide by PV of an annuity in advance of 1 at
12% for six periods 4.60
Annual Lease Payment 1,000,000
5. On January 1, 2015, Abram Company signed a ten-year noncancelable lease

agreement to lease a storage building from Lot Company. The agreement
required equal rental payments at the end of each year. The fair value of the
building on January 1, 2015 is P3,871,350. However, the carrying amount to Lot
Company is P3,568,000.
The building has an estimated economic life of 10 years with no residual value.
At the termination of the lease, the title to the building will be transferred to
Abram Company.
The incremental borrowing rate of Abram Company is 12% per year. Lot
Company set the annual rental to insure a 10% rate of return. The implicit rate of
the lessor is known by the lessee.
The annual total lease payment included P20,000 of executor costs related to
taxes on the property. Round off present value factor to three decimal places.
Q1: What is the minimum annual lease payment?
a.) 580,635 c.) 600,000

b.) 630,000 d.) 589,400
Q2: What is the total annual lease payment?
a.) 680,635 c.) 620,000

b.) 650,000 d.) 619,400
Answer is b,b
Solution:
a. Fair Value 3,871,350

Divide by PV of an ordinary annuity of 1 at 10%
for ten periods 6.145
Minimum annual lease payment 630,000
b. Minimum annual lease payment 630,000

Executory costs: 20,000
Total annual lease payment 650,000
6. On January 1, 2015, B.I. Company, acting as a lessor, leased an equipment for

ten years at an annual rental of P800,000, payable by H.I. Company, the lessee,
at the beginning of each year under a direct financing lease. The equipment had
a cost of P5,600,000 with an estimated life of 12 years and no residual value.
The implicit rate is 9%.
What amount of interest income should be reported in 2015?
a.) 800,000 c.) 432,000

b.) 560,000 d.) 610,000
Answer is c
Solution:
Present of rentals equal to the cost of asset 5,600,000

Advance payment on January 1, 2015 800,000
Lease Receivable – January 1, 2015 4,800,000
Interest income for 2015 (4,800,000 x 9%) 432,000
7. Cassandra Company acquired a specialized packaging machine for P5,000,000

cash and leased it for a period of six years, after which the machine is to be
returned to Cassandra Company. The unguaranteed residual value of the
machine is P450,000. The lease terms are arranged so that a return of 12% is
earned by Cassandra. The PV of 1 at 12% for six periods is .51, and the PV of an
annuity in advance of 1 at 12% for six periods is 4.60.
What is the annual lease payment payable in advance required to yield the
desired return?
a.) 680,000 c.) 852,174

b.) 800,000 d.) 732,000
Answer is b
Solution:

PV of unguaranteed residual value (450,000 x .51) ( 229,500)
Net investment to be recovered from rentals 3,680,000
Divide by PV of an annuity in advance of 1 at 12% 4.60
Annual rental payable in advance 800,000
8. Camia Company is in the business of leasing new sophisticated equipment. As

lessor, the entity expects a 12% return. At the end of the lease term, the
equipment will revert to Camia Company.
On January 1, 2015 an equipment is leased to another entity under a direct

financing lease.
Cost of equipment to Camia 5,500,000

Residual value – unguaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2015
Q1: What is the unearned interest income on January 1, 2015?
a.) 1,616,500 c.) 1,776,000

b.) 2,176,000 d.) 2,576,000
Q2: What is the interest income for 2015?
a.) 322,000 c.) 660,000

b.) 544.860 d.) 496,860
Answer is b,b
Solution:
a. Gross rentals (959,500 x 8) 7,676,000

Residual Value 400,000
Gross Investment
8,076,000
Net investment – equal to the
cost of the equipment 5,500,000
Unearned interest income – January 1, 2015 2,576,000
b. Present value of rentals equal

to the cost of the equipment 5,500,000
First Payment on January 1, 2015 959,500
Lease Receivable 4,540,500
Interest Income for 2015 (4,540,000 x 12%) 544,860

SALES TYPE LEASE – LESSOR
1. Dolce Amore Company leased equipment to Faye Company on January 1, 2016.

The lease is for an eight-year period expiring December 31, 2023. The first of
eight equal annual payments of P900,000 was made on January 1, 2016. The
entity had purchased the equipment on December 29, 2015 for P4,800,000. The
lease is appropriately accounted for as sales type lease. The present value on
January 1, 2016 of all rent payments over the lease term discounted at a 10%
interest rate was P5,280,000.
Q1: What is the gross profit on sale for 2016?
a.) 1,920,000 c.) 480,000

b.) 2,400,000 d.) 240,000
Q2: What amount of interest revenue should be recorded in 2016?
a.) 462,000 c.) 438,000

b.) 480,000 d.) 391,800
Answer is c,c
Solution:
Present value of rentals – sales revenue 5,280,000

Cost of sales 4,800,000
Gross profit on sale 480,000
Present Value – January 1, 2016 5,280,000

First Payment on January 1, 2016 900,000
Second payment on January 1, 2017 900,000
Interest for 2016 (10% x 4,380,000) (438,000) 462,000
2. COOLang Company adopted the policy of leasing as the primary method of

selling its products. The entity’s main product is a small helicopter that is very
popular among politicians and entity managers. COOLang Company constructed
such a helicopter for LAOS Company at a cost of P8,500,000.
The terms of the lease provided for annual advance payments of P2,500,000 to
be paid over 10 years with the ownership transferring to the lessee at the end of
the leased 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, 2016, COOLang Company incurred initial
direct cost of P500,000 in financing the lease agreement with LAOS. The sale
price of the helicopter is P14,875,000.
Financing the construction was at a 14% rate. The present value of an annuity
due of 1 at 14% for 10 periods is 5.95.
Q1: What is the gross profit on sale that should be recognized by

COOLang Company?
a.) 5,875,000 c.) 4,275,000

b.) 6,375,000 d.) 4,775,000
a.) 10,125,000 c.) 9,625,000

b.) 11,725,000 d.) 8,525,000
a.) 2,082,500 c.) 2,306,500

b.) 1,732,500 d.) 1,956,500
Answer is a,a,b
Solution:

Cost of good sold ( 8,500,000)
Initial direct cost ( 500,000)
Gross profit on sale 5,875,000
Gross rentals (2,500,000 x 10) 25,000,000
Present value of rentals – equal to sale price 14,875,000
Unearned Interest Income – January 1, 2016 10,125,000
Present value of rentals 14,875,000

Advance rental payments on January 1, 2016 2,500,000
Interest Income for 2016 ( 12,375,000 x 14%) 1,732,500
3. HunterXHunter Company used leases as a method of selling products. In 2016,

the entity completed construction of a passenger ferry.
On January 1, 2016, the ferry was leased to the OnePunch-Ferry Line on a

contract specifying that ownership of the ferry will transfer to the lessee at
the end of the lease period. Annual lease payments do not include executor
costs.
Original cost of the ferry 8,000,000

Fair value of ferry at lease date 12,555,000
Lease payments payable in advance 1,500,000
Estimated residual value 2,000,000
Implicit interest rate 12%
Date of first lease payment January 1, 2016
Lease term 20 years
Present value of an annuity due of
1 at 10% for 20 periods 8.37
Present value of 1 at 12% for 20 periods 0.10

a.) 17,445,000 c.) 19,445,000
b.) 19,245,000 d.) 22,000,000
Q2: What is the gross profit on sale for 2016?

a.) 6,555,000 c.) 4,755,000
b.) 4,555,000 d.) 4,355,000

a,) 1,506,600 c.) 1,326,600
b.) 1,524,600 d.) 1,350,600
Answer is a,b,c
Solution:
Gross rentals (1,500,000 x 20) 30,000,000

PV of fair value of asset (1,500,000 x 8.37) 12,555,000
Unearned interest income – January 1, 2016 17,445,000
Fair value of asset – sales revenue 12,555,000

Cost of goods sold 8,000,000
Gross profit on sale 4,555,000
PV of rentals equal to the fair value of asset 12,555,000

Payment on January 1, 2016 – all applicable to principal 1,500,000
Lease receivable – January 1, 2016 11,055,000
Interest income for 2016 (11,055,000 x 12%) 1,326,600
4. TenTen Company is a car dealer. On January 1, 2016, the entity entered into a
finance lease with a customer under which the customer would pay P200,000 on
January 1 each year for 5 years, commencing in 2016. The cost of the car is
P1,200,000 and the cash selling price was P1,500,000. The entity paid legal fees
of P100,000 to a law firm in connection with the arrangement of lease.
What amount of gross profit on sale should be recognized for 2016?
a.) 200,000 c.) 80,000

b.) 180,000 d.) 0
Answer is b
Solution:
Sales revenue 1,500,000

Cost of goods sold ( 1, 200,000)
Legal fees – initial direct cost ( 100,000)
Gross profit on sale 200,000
5. PotPot Company used leases as a means of marketing its products. On January
1, 2016, PotPot leased an equipment to Pess Company for P500,000 per year
for 10 years, payable on December 31 of each year. The cost of the equipment is
P2,000,000 and the fair value is P3,072,500 on January 1, 2016 using an implicit
rate of 10%.
The fair value of the equipment approximated the present value of rentals. At the
expiration of the lease, title to the equipment passes to Pess Company.
What is the interest income for 2016?
a.) 200,000 c.) 307,250

b.) 192,750 d.) 257,250
Answer is c
Solution:
Interest income for 2016 (10% x 3,072,500) 307,250
SALES AND LEASEBACK
1. Reddit Company sold an item of plant and machinery on January 1, 2015 for
P5,200,000 which is equal to fair value. The carrying amount of the asset was
P3,500,000. The entity leased the item back on that date for remaining useful life
of 5 years. Lease payments are P1,540,000 on January 1 each year.
Q1: What is the gain on disposal to be recognized for 2015?
a.) 400,000 c.) 700,000

b.) 340,000 d.) 0
Q2: What is the total finance charge over the lease term?
a.) 2,500,000 c.) 700,000

b.) 1,700,000 d.) 0
Answer is b,a
Solution:

Carrying Amount (3,500,000)
Deferred Gain – January 1, 2015 1,700,000
Realized gain on disposal for 2015 (1,700,000 / 5) 340,000
Gross rentals (1,540,000 x 5) 7,700,000

Present value of rentals equal to fair value of asset 5,200,000
Total finance charge 2,500,000
2. On January 1, 2015, Senyora Company sold equipment to an unaffiliated entity

for P5,700,000. The equipment had a carrying amount of P4,500,000 and a
remaining life of five years. On the same date, the entity leased back the
equipment at P1,350,000 per year payable in advance for a 5-year period. The
lessor’s implicit interest rate in the lease is 10%. The entity used the double
declining balance method of depreciation.
What is the unearned income on the sale and leaseback on December 31, 2015?
a.) 1,200,000 c.) 720,000

b.) 960,000 d.) 0
Answer is c
Solution:
Unearned income – January 1, 2015

(5,700,000 – 4,500,000) 1,200,000
Realized in 2015 (40% x 1,200,000) ( 480,000)
Unearned income – December 31, 2015 720,000
3. On June 30, 2015, KangKong Company sold equipment for P4,650,000. The
equipment had a carrying amount of P4,050,000 and a remaining useful life of
10 years. That same day, the entity leased back the equipment at P45,000 per
month for 5 years with no option to renew the lease or repurchase the
equipment.
What amount should be reported as rent expense for 2015?
a.) 540,000 c.) 270,000

b.) 600,000 d.) 300,000
Answer is c
Solution:
Rent Expense – July to December 2015 (45,000 x 6) 270,000
4. On June 30, 2015, Master Shifu Company sold an equipment for P4,500,000.
The equipment had a carrying amount of P3,900,000 and a remaining life of 10
years. That same day, the entity leased back the equipment at P12,000 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 P258,650 on June 30, 2015
What is the rent expense for the year ended December 31, 2015?
a.) 70,000 c.) 54,000

b.) 72,000 d.) 64,000
Answer is b
Solution:
Rent Expense – July to December 2015 (12,000 x 6)

72,000
5. On January 1, 2015, Pedro Penduko Company sold a machine and immediately
leased it back at an annual rental that was determined to be sufficiently lower
than market rent. The following data relate to the sale and leaseback transaction:
Sale price below fair value 5,000,000

Fair value of machine 7,500,000
Carrying amount of machine 6,500,000
Remaining life of machine 10 years
Lease term 2 years
What total amount of loss should be recognized in the income statement for
2015?
a.) 1,500,000 c.) 750,000

b.) 1,000,000 d.) 500,000
Answer is c
Solution:

Carrying amount of machine 6,500,000
Deferred Loss on sale and leaseback (1,500,000)
Amortization of deferred loss for 2015

(1,500,000 / 2 years) 750,000
6. On December 31, 2015, Star Apple Company sold a machine with 12-year useful
life to another entity and simultaneously leased It back for one year.

Carrying Amount 3,300,000
Present value of reasonable lease rentals
(P30,000 for 12 months @ 12%) 341,000
What revenue from the sale should be reported in 2015?
a.) 341,000 c.) 41,000

b.) 300,000 d.) 0
Answer is b
Solution:

Gain on sale and leaseback 300,000
7. On December 31, 2015, The Flash Company sold land with a cost of P4,500,000
to The Arrow Company for P5,700,000 when the land’s fair value was
P5,450,000. The Flash Company immediately entered into a cancelable lease
agreement to use the land for 2 years at an annual rental of P40,000.
Q1: What amount of profit should The Flash record on the sale of land for
2015?
a.) 950,000 c.) 650,000
b.) 1,800,000 d.) 725,000
Q2: What amount should be recognized as deferred gain on December

31, 2015?
a.) 800,000 c.) 250,000
b.) 650,000 d.) 400,000
Answer is a,c
Solution:
a. Fair Value of Land 5,450,000

Cost of Land 4,500,000
Outright gain in 2015 950,000
b. Sale Price 5,700,000

Fair Value of Land 5,450,000
Deferred Gain – December 31, 2015 250,000
8. On December 31, 2015, Cornetto Company sold an equipment with remaining
life of 12 years for P3,600,000. The entity immediately leased the equipment
back for 3 years at annual rental of P60,000. The carrying amount of the
equipment was P3,500,000 and the fair value was P3,300,000
What amount should be recognized as deferred gain on sale and leaseback on

December 31, 2015?
a.) 800,000 c.) 300,000

b.) 500,000 d.) 0
Answer is c
Solution:

Fair Value of equipment 3,300,000
Deferred gain – December 31, 2015 300,000
SALES AND LEASEBACK (LESSOR AND LESSEE)
1. Nutmeg Company leased equipment from Acorn Company on July 1, 2012 for an
11- year period. Equal payments under the lease are P 750,000 and are due on
July 1 of each year. The first payment was made on July 1, 2012.
The interest rate contemplated by Nutmeg Company and Acorn Company is

12%. The cash selling price of the equipment is P 3,225,000 and the cost of the
equipment on Acorn’s Company accounting records is P 3,000,000. The lease is
appropriately recorded as a sales type lease.
What amount of profit on sale and interest revenue should be recognized for the
year ended December 21, 2015?
Profit on Sale Interest Revenue
a 1, 987,650 87,650
b 1, 987,750 148, 500
c 1, 987,650 225, 000
d 1, 987,680 2, 475, 000
Present Value of an Annuity of 1 in advance 12% for 11 periods

6.6502
Answer is b
Solution:
Profit (Selling Price vs. Carrying Amount)
Selling Price:
750,000 X 6 .6502 = P4,987,650
Carrying Amount:
(3,000,000)
Profit on Sale P1, 987,650
Interest Revenue
Cash Selling Price:
3,225, 000
Advance Payment
750, 000
Interest Revenue P 2, 475, 000 x 12%x 6/12 = 148, 500
2. Hitachi Company, a dealer in machinery and equipment, leased equipment to

Konoha Company on July 1, 2014. The lease is appropriately accounted for as a
sale By Hitachi Company and as a purchase by Konoha Compnay. The lease
term and its useful life is ten years expiring on June 30, 2024. The first payment
of the ten annual payments was made on July 1,2014.
Hitachi had purchased the equipment for P 1, 337,500 on July 1, 201, and
established a list selling price of P 1, 687,500 on the equipment.
The present value on July 2, 2015 of the rent payments over the lease term
discounted at 12% was P 1, 582, 500.
What amount of profit on sale and interest revenue should be recorded for the
year ended on December 31, 2014, respectively?
Profit on Sale Interest Revenue

a. 245, 000 337, 500
b. 245, 000 79, 950
c. 245, 000 82, 500
d. 245, 000 250, 000
Answer is b
Solution:
Present Value of Rentals 1, 582, 500
Cost of Equipment 1, 337, 500
Profit on Sale 245, 000
Present Value- July 1, 2014 1, 582, 500

Less: Advance Payment on July 1, 2014 250, 000
Lease Receivable 1, 332, 500
Interest Income (7/1/14-6/30/15) 159, 900
Interest Income x 6/ 12 79, 950
3. Tuwan Company adopted the policy of leasing as the primary method of selling
its products. The entity’s main product is a small helicopter. Tuwan Company
constructed such product to Divergent Company at a cost of P 8, 500, 000.
The term of the lease provided for annual payment of P 2, 500, 000 in advance
over ten years with the ownership transferring to the lessee at the end of the
lease period. It is estimated that the product will have a residual value of P 1,
600, 000 at that date.
The lease payment began January 1, 2016. Tuwan Company incurred initial
direct cost of P 500, 000 in financing the lease agreement with Divergent. The
sale price of the product is P 14, 875, 000.
Financing the construction was at 14% for ten periods is 5.95.
Q1: What is the gross profit on sale that should be recognized by Tuwan
Company?
a. 875, 000.
b. 5, 875, 000
c. 4. 8, 520, 000.
d. 8, 560, 000

a. 375, 000
b. 600, 000
c. 10, 125, 000
d. 875, 000.
a. 1, 732,000
b. 14, 875, 000
c. 875, 000.
d. 12, 375, 000
Answer is b,c,a
Solution:
Question 1
Sales Price 14, 875, 000
Cost of Goods Sold 8, 500, 000
Initial Direct Cost 500, 000
Gross Profit on Sale 5, 875, 000
Question 2
Gross rentals 25, 000, 000
Present value of rentals 14, 875, 000
Unearned Interest Income 10, 125, 000
Question 3
Present Value of rentals 14, 875, 000
Advance Rental Payment 2, 500, 000
Lease Receivable 12, 375, 000
Interest Income 1, 732,000
4. Forever Company sold machinery on January 1, 2016 at the fair value of P

2,900, 000 when the carrying amount was P 2,200, 000. Forever Company
leased the asset back on that date for the remaining useful life of five years.
Lease payments are 650, 000 on January 1 each year.
Q1: What amount of gain on disposal should be recognized on the 2016

income statement?
a. 200, 000
b. 250, 000
c. 150, 000
d. 390, 000
Q2: What is the total finance charge over the lease term?
a. 2,900, 000
b. 200, 000
c. 750, 000
d. 350, 000
Answer is c,d
Solution:
:
Question 1 P 2,900, 000
Fair Value
Carrying Amount 2,200, 000
750, 000
/5
Profit on Sale 150, 000
Question 2
Gross Investment (650, 000 x 5) 3, 250, 000
Net Investment 2, 900, 000
Total Finance Charge 350, 000
5. EJ Company sold a machine to Malasa Company and simultaneously leased it back

for one year: The entity provided the following information at this date:
Sale price 460, 000

Carrying Amount 390, 000
Present Value of reasonable rent rentals
(P 30,000 for 12 months at 12%) 341, 000
Estimated remaining useful Life 12 years
In the income statement for 201, what amount should be reported as gain from the
sale of the machine?
A 60, 000
B 49, 000
C 70, 000
D 79, 000
Solution:
Sale Price 460, 000

Carrying Amount 390, 000
Gain from Sale 70, 000
6. On December 31, 2015 Roselle Company sold an equipment with useful life with
useful life of ten years and simultaneously leased back the equipment for two years.
Sale Price above fair value 8,500, 000

Fair Value of equipment on date of sale 6,900, 000
Carrying Amount 5, 000, 000
What amount of gain should be reported in 2015?
A 900, 000
B 1, 900, 000
C 1, 600, 000
D 160, 000
Solution:
6,900, 000
Fair Value of Equipment
Outright Gain 1, 900, 000
7. On December 31, 2015 Laxus Company sold land with a cost of P 2, 750, 000 to Mira
Jane Company for P 2, 300, 000 when the land’s fair value was P 3, 000, 000. Laxus
Company immediately entered into a cancelable lease agreement to use the land for
two years at an annual rental of P 20,000.
What amount of profit should Laxus Company record on the sale of land for 2015?
A 900, 000
B 350, 000
C 600, 000
D 250, 000
Solution:
Fair Value of Equipment 3,000, 000
Outright Gain 250, 000
INCOME TAX
1. Maine Company reported in the income statement for the year ended December
31, 2015 pretax income of P1,500,000.
Tax Return Accounting Record

Rent income 80,000 150,000
Depreciation 290,000 250,000
Premiums on officers’ life insurance 100,000
Income tax rate 30%
What is the current provision for income tax for 2015?
a. 471,000 c. 513,000
b. 447,000 d. 417,000
Answer is b
Solution:
Pretax accounting income 1,500,000

Premium on officers’ life insurance – non-deductible 100,000
Accounting income subject to tax 1,600,000

Rent income – temporary difference ( 70,000)
Depreciation – temporary difference ( 40,000)
Taxable income 1,490,000
Current provision for income tax (1.490,000 x 30%) 447,000

2. During the current year, Diane Company reported accounting income of
P10,000,000 before income tax. The entity revealed the following information for
the current year:
Interest income on government bonds 800,000

Depreciation claimed on tax return in excess of
depreciation per book 1,400,000
Warranty expense on the accrual basis 700,000
Actual warranty payment 400,000
Income from instalment sale reported for tax
Purposes in excess of income recognized per book 300,000
Income tax rate 30%
What is the current tax liability at year-end?
a. 2,310,000 c. 2,070,000
b. 2,940,000 d.2,520,000
Answer is d
Solution:
Accounting income 10,000,000

Interest income on government bonds (800,000)
Depreciation claimed on tax return in excess of
depreciation per book (1,400,000)
Warranty expense on the accrual basis 700,000
warranty payment (400,000)
from instalment sale reported for tax
Purposes in excess of income recognized per book 300,000
Current tax liability (30% x 8,400,000) 2,520,000
The current tax liability is equal to the current tax expense because there is
no income tax payment during the year.
3. Fabs Company is determining the amount of the pretax accounting income for the
current year by making adjustment to taxable income from the income tax return.
The tax return showed taxable income of P5,000,000 on which a tax liability of
P1,300,000 has been recognized.
The entity provided the following items that may be required to determine pretax
accounting income form the amount of taxable income:
 Accelerated depreciation for income tax purposes was P600,000. Straight line
financial depreciation on these assets is P500,000.
 Goodwill impairment loss of P400,000 was not included as a deduction in the tax
return but may be deducted in the income statement.
 Interest income on treasury bills was not included in the tax return. During the year,
P700,000 was received on these investments.
What is the pretax accounting income for the current year?
a. 5,400,000 c. 5,100,000
b. 5,200,000 d. 5,300,000
Answer is a
Solution:

Excess tax depreciation (600,000 – 500,000) 100,000
Goodwill impairment loss ( 400,000)
Interest income on treasury bills 700,000
Pretax accounting income 5,400,000
The pretax accounting income is the accounting income per book and not
the accounting income subject to tax. The accounting income subject to tax
is equal to P5,000,000 plus P100,000 or P5,100,000. The permanent
differences are excluded.
4. Shaw Company prepared the following reconciliation of the financial income and
taxable income for 2016:
Pretax financial income 7,000,000

Permanent difference ( 600,000)
Temporary difference capitalized interest
for book and expensed for tax ( 300,000)
Cumulative temporary differences amounted to P400,000 and P600,000,

respectively on December 31, 2015 and December 31, 2016.
What amount should be reported as deferred tax liability on December 31, 2016?
a. 90,000 c. 120,000
b. 180,000 d. 0
Answer is b
Solution:
Deferred tax liability – 12/31/2016 (600,000 x 30%) 180,000
The permanent difference has no deferred tax consequence.
5. On January 1, 2015, Dell Company purchased a machine for P1,500,000. This

machine has a 5-year useful life, a residual value of P300,000 and is depreciated
using the straight line method for financial statement purposes. For tax purposes,
depreciation was P600,000 for 2015 and P500,000 for 2016. The 2016 income
before tax and depreciation was P3,000,000 and the tax rate was 30%. The entity
made estimated tax payment of P300,000 during 2016.
Q1: What is the income tax payable on December 31, 2016?
a. 250,000 c. 480,000
b. 280,000 d. 450,000
Q2: What is the total income tax expense that is reported in the 2016 income
statement?
a. 540,000 c. 450,000
b. 480,000 d. 528,000
Answer is d,d
Solution:
Income tax before tax and depreciation 3,000,000

Tax depreciation for 2016 ( 500,000)
Current tax expense (30% x 2,500,000) 750,000

Payment during 2016 ( 300,000)
Income tax payable – December 31, 2016 450,000
Income before tax and depreciation 3,000,000

Financial depreciation (1,500,000 – 300,000 / 5) ( 240,000)
Accounting Income 1,760,000
Total income tax expense (30% x 1,760,000) 528,000
6. On January 1, 2014, Shane Company has spent P700,000 in developing a new

product. This cost meets the definition of an intangible asset. The tax law allows
this cost to be deducted for tax purposes when paid. Thus, the entity has
recognized this amount as expense in 2014 for tax purposes. On December 31,
2014, the intangible asset is deemed impaired by P60,000.
What is the tax base for the intangible asset on December 31, 2014?
a. 60,000 c. 640,000
b. 700,000 d. 0
Answer is d
Solution:
The carrying amount of the intangible asset is P700,000 less the impairment
loss of P60,000 or P640,000 but the tax base is zero because the total
amount is expensed in the current year for tax purposes.
7. Paris Company has one temporary difference at the end of 2014 that will reverse
and cause taxable amounts of P1,500,000 in 2015, P1,700,000 in 2016 and
P1,700,000 in 2017. The entity has also a deductible temporary difference of
P2,000,000. The pretax accounting income for 2014 is P6,500,000 and the tax rate
is 30%. There are no deferred taxes at the beginning of 2014.
Q1: What is the current tax expense for 2014?
a. 3,240,000 c. 2,040,000
b. 1,080,000 d. 2,640,000
Q2: What is the net deferred tax expense for 2014?
a. 1,620,000 c. 870,000
b, 1,480,000 d. 1,000,000
Answer is b,c
Solution:
Accounting income 6,500,000

Future taxable amount
(1,500,000 + 1,700,000 + 1,700,000) (4,900,000)
Future deductible amount 2,000,000
Current tax expense (30% x 3,600,000) 1,080,000
Increase in deferred tax liability (30% x 4,900,000) 1,470,000

Increase in deferred tax asset (30% x 2,000,000) ( 600,000)
Net deferred tax expense 870,000
8. At year-end, Alas Company has revalued a property and has recognized the
increase in the revaluation in the financial statements. The carrying amount of the
property was P10,000,000 and the revalued amount was P14,000,000. However,
the tax base of the property was only P8,000,000. The income tax rate is 30%.
What is the deferred tax asset or liability at year-end?
a. 1,200,000 asset c. 1,200,000 liability

b. 1,800,000 asset d. 1,800,000 liability
Answer is d
Solution:
Future taxable amount (14,000,000 – 8,000,000) 6,000,000
Deferred tax liaibilty (30% x 6,000,000) 1,800,000
SHAREHOLDERS’ EQUITY AND RETAINED EARNINGS
1. Legit company had sufficient retained earnings as 2015 as a basis for dividends
but was temporarily short of cash. The entirt declared a dividend of P1,000,000
on April 1,2015, issued promissory notes to the shareholders lieu of cash. The
noted, which were dated April 1,2015,had a maturity date of march 31,2016 and
a 10% interest rate.
How should the scrip dividend and related interest be accounted for?
a. Retained Earnings 1,000,000
Interest Expense 75,000
b. Accrued Interest Payable 75,000

Interest Expense 75,000
Retained Earnings 1,000,000
c. Accrued Interest Payable 75,000
Retained Earnings 75,000
Interest Expense 1,000,000
d. Notes Payable 1,000,000

Interest Expense 1,000,000
Retained Earnings 75,000
Answer is a
Solution:
Interest Expense(1,000,000 x10% x9/12) 75,000

2. At the beginning of the current year Mr. Crabs company declared a 10℅ stock
dividend. The Market Price of the entity's 30,000 oustanding shares of P20 par
value was P90 per share on the date. The stock dividend was distributed on July
1 when the market price was P100 per share.
What amount should be credited to share premium for stock dividend?

a. 270,000 c. 60,000
b. 210,000 d. 330,000
Answer is b
Solution:
Market Value on date of declaration
( 10%x 30,000= 3,000 shares x90) 270,000
Par value of shares issued as dividends(3,000 x 20) 60,000
210,000
3. Wews Company declared a 5% stock dividend on 100,000 issued and

outstanding shares of P20 par value, which had a fair value of P50 per share
before the stock dividends wad declared. The stock dividend was distributed 60
days after.the declaration date.
What is the increase in current liabilities as a result of the stock dividend
declaration?
a. 150,000 c. 100,000
b. 50,000 d. 0
Answer is d
Solution:
Retained Earnings(5,000x 50) 250,000
Stock dividend payable(5,000 x20) 100,000
Share Premium 150,000
4. The directors of parokya ni edgar company whose P50 par value share capital is
currently selling at P60 per share have decided to issue a stock dividend. The
selling price is not expected to be affected by the stock dividend. The entity
which has an authorization for 1,000,000 shares, had issued 500,000 shares, of
which 100,000 shares are now held as treasury.
In order to capitalize P2,400,000 of retained earnings, what percentage should

be declared as a stock dividend by the directors?
a. 8% c. 10%
b. 9% d. 11%
Answer is c
Solution:
Shares to be issued as dividend (P2,400,000/P60) 40,000
Outstanding Shares (500,000-100,000) 400,000
Percentage of Stock Dividend (40,000/400,000) 10%
5. Kenneth Company Provided the following information on January 1,
Share Capital, 250,000 shares authorized:

100,000 shares issued and outstanding 3,000,000
Share Premium 4,000,000
The entity declared a 10% dividends on April 1, 2015 when the market value of
the share was P70. The stock dividend was issued on July 1,2015 when the
market value of the share was P100. The share has a par value of P30. The
entity sustained a net loss of P1,200,000 for 2015.
What amount should be reported as retained earnings on December 31,2015?
a. 6,100,000 c. 8,000,000
b. 1,200,000 d. 700,000
Answer is a
Solution:
Retained Earnings -Jan. 1 , 2015 8,000,000
Stock dividend declared April 1,2015 ( 700,000)
Net loss ( 1,200,000)
Retained Earnings - Dec. 31,2015 6,100,000
6. Angela Company issued 1,000 shares with P5 par to Ken as compensation for
1,000 hrs of legal services performed. Ken usually bills P160 per hour of the
services. On that date of issuance, the share was trading on a public exchange
at P140.
By what amount should the share premium account increase as a result of the
transaction?
a. 135,000 c. 22,400
b. 140,000 d. 160,000
Answer is a
Solution:
Share Premium (P140,000 fair value- P5,000 par) 135,000
7. At the beginning of the current year, Jane Company a closely- held entity, issued
6% bonds with a maturity value of P6,000,000, together with 10,000 ordinary
shares of P50 of par value, for a combined cash amount of P11,000,000. If the
bonds were issued separately, they would have sold for P4,000,000 on an 8%
yield to maturity basis.
What amount should be reported for share premium on the issuance of the
ordinary shares?
a. 7,000,000 c. 6,500,000
b. 11,000,000 d. 600,000
Answer is c
Solution:
Cash Received 11,000,000
Less: Market value of bonds 4,000,000
Residual Amount 7,000,000
Less: Par Value 500,000
Share Premium 6,500,000
8. During the current year, Bev Company received a donation of 2,000 shares with
P50 par value from a shareholder. On that date, the sharr market value was
P350. The shares were originally issued for P250 per share.
What is the decrease in shareholders equity as a result of the donation?

a. 100,000 c. 87,500
b. 500,000 d. 0
Answer is d
Solution:
Donated shares not retired are recorded by means of a memorandum only
and therefore do not affect the total shareholders equity.
9. During the current year, James company declared a 1 for 5 reverse share split
when the market valur of share was P100. Prior to the split, the entity had
100,000 shares of P10 par value issued and outstanding.
After the split, what is the par value of the share?

a. P100 c. P50
b. P20 d. P90
Answer is c
Solution:
New Par Value(10 x 5) P50
10. Beck Company issued 200,000 ordinary share when it began operations in 2014
and issued an additional 100,000 shares in 2015. Thr entity also issued
preference shares convertible into 100,000 ordinary shares. In 2015, the entity
purchased 75,000 ordinary shares to be held in treasury.
On December 31,2015 , how many ordinary shares were outstanding?

a. 300,000 c. 225,000
b. 100,000 d. 75,000
Answer is c
Solution:
Total ordinary shares issued (200,000 + 100,000) 300,000
Treasury shares ( 75,000)
Ordinary Shares Outstanding 225,000
SHARE BASED COMPENSATION
1. On January 1,2015, Lynx Company granted Chrome,the president,

compensatory share options to buy 15,000 ordinary shares of P10 par value. The
options call for a price of P30 per share and are exercisable in 3years following
on the grant date. Chrome exercised the options on December 31,2015. The
market price of the share was P60 on January 1,2015, and P70 on December
31,2015. The fair value of the share option id P60 o the grant date.
What is the net increase in the shareholders equity as a result of the grant and
exercise of the options?
a. 150,000 c. 450,000
b. 300,000 d. 600,000
Answer is c
Solution:
Cash (15,000 x 30) 450,000
Share options outstanding 750,000
Ordinary share capital (15,000 x 10) 150,000
Share premium 1,050,000
2. On January 1,2015, Rain company granted 50 shar options each to 200

employees, conditional upon the employee's remaining in the entity's employ
during thr vesting period. The share options vest at the end of a three-year
period. On grant date, each share option has fair value of P30. The par value per
share is P100 and the option price isP120.
On December 31,2016, 20 employees have left and it is expected that on the

basis of a weighted average probability, a further 15 employees will leave before
the end of the three-year period.
What is the compensation expense for 2016?
a. 100,000 c. 65,000
b. 247,500 d. 300,000
Answer is c
Solution:
2015
Fair value of share options (200 x 50 x 30) 300,000
Compensation expense for 2015 (300,000/3) 100,000
2016
Number of employees 200
Employees who left in 2016 (20)
Employees expected to leav (15)
Employees entitled to share options 165
Fair value of share options (165 x 50 x30) 247,500
Cumulative compensation expense
for 2015 And 2016 (247,500/3 x 2) 165,000
Compensation expense recognized in 2015 (100,000)
Compensation expense in 2016 65,000
3. On June 30, 2015, Dale Company granted compensatory share options for
30,000 P20 per value ordianry shares to certain key employees. The market
price of the share on that date was P36 and the option price was P30. The Black-
Scholes option pricing model measured the total compensation expense to be
P5,400,00. The options are exercisable beginning January 1, 2018, provided the
key employees are still in entity's employ at the time the options are exercised.
The options expire on June 30,2019. On January 15, 2018, when the market
price of the share was P42, all 30,000 options were exercised. What is the
compensation expense for 2017?
a. 2,160,000 c. 5,400,000
b 2,700,000 d. 0
Answer is a
Solution:
(5,400,000/2.5 years) = 2,160,000
4. Reid company granted 20,000 share options to each of its 8 directors on

January 1,2015. The options vest on january 1,2019. The fair value of each
option on January 1,2015 isP60 and it is anticipated that all of the share
options will vest on January1,2019.
What amount should be reported as increase in expense and equity for the
year ended December 31,2015?
a. 2,400,000 c. 2,500,000
b. 9,600,000 d. 3,200,000
Answer is a
Solution:
Fair value of share options (20,000 x 8 x 60) 9,600,000
Compensation expense for 2015 (9,600,000/4) 2,400,000
5. Hitler company issued fully paid shares to 200 employees on December
31, 2015. Normally, shares issued to employees vest over a two-year period but
these shares have been given as a bonus to the employees because of their
exceptional performance during the year. The shares have a market value of
P500,000 on December 31, 2015 and an average fair value of P600,000 for the
year. What amount should be expensed for this share-based payment
transaction?
a. 600,000 c. 300,000
b. 500,000 d. 250,000
Answer is b
Solution:
FAIR VALUE of share options December 31,2015 500,000

6. Santa company granted 150 share appreciation rights to each of the 800
employees in January 2015. The entity estimated that 85% of the awards
will vest on December 31,2017. The fair value of each share appreciation
right on december 31,2015 is P15.
What is the accrued liability on december 31,2015?
a. 1,530,000 c. 150,000
b. 510,000 d. 10,200
Answer is b
Solution:
Total compensation (150 x 800 x 15 x 85%) 1,530,000
Accrued compensation (1,530,000/3) 510,000
7. On January 1,2015, drusty company granted Lox,the president, 25,000
share appreciatiob rights for past services. These rights are exercisable
immediately and expire on January 1,201. On exercise, Lox is entitled to
receive cash in excess of the market price on the exercise date over the
market price on the grant date. Lox did not exercise any of the rights
during 2015. The market price of drusty's share was P60 on January
1,2015 and P80 on December 31,2015.
As a result of the appreciation rights, what amount should be recognized

as compensation expense for 2015?
a. 0 c. 250,000
b. 150,000 d. 500,000
Answer is d
Solution
Market price dec - jan (80-60) P20
Compensation for 2015 (25,000 x 20) 500,000
8. Valix company has granted share options to employees with a fair value of
7,500,000. The options vest in four years. The Monte Carlo model was
used to value the options.
On January 1,2015, which is the date of the grant, the estimated

employees leaving the entity during the vesting period is 15%
What is the compensation expense for 2015?
a. 1,593,750 c. 1,395.570
b. 1,953,750 d. 1,593,705
Answer is a
Solution
(7,500,000 x 85% / 4) 1,593,750
9. On January 1,2015 Lexy Company granted share options to each of the
350 employees working in the sales department.
The share options vest at the end of a three year period provided that the
employees remain in the entity's employ and provided the volume of sales will
increase by more than 10% per year. The fair value of each share option on
grant date is P50.
If the sales increase by more than 10%, each employee will receive 150 share
options.
If the sales increased by more than 15% each employee will receive 300 share
options.
On December 31,2015 the sales increased by more than 10% but not more than
15% and no employees left.
On December 31,2015 the sales increased by more than 15% and no employees
have left.
What amount should be recognized as compensation expense for 2016?
a. 2,625,000 c. 5,250,000
b. 875,000 d. 3,500,000
Answer is a
Solution
2015
Fair Value of share options (350 x 150 x 50) 2,625,000
Compensation expense 2015 (2,625,000/3) 875,000
2016
Fair value of share options (350 x 300 x 50) 5,250,000
Cumulative compensation expense (5,250,000/3 x2) 3,500,000
Compensation expensed recognized in 2015 (875,000)
Compensation expense 2016 2,625,000
10. LOL company granted 18,000 share appreciation rights which entitled key
employees to receive cash equal to the difference between P30 and the
market price of the share on the date each right is exercised. The service
period is 2015 to 2017 and the rights are exercisable in 2018. The market
price of the share was P38 and P42 on December 31,2015 and 2016,
respectively.
What amount should be reported as liability under the share appreciation

rights on December 31,2016?
a.0 c. 72,000
b. 144,000 d. 216,000
Answer is b
Solution
Fair value of share appreciation right (42-30) 12
Accrued compensation december 31,2016
(18,000 x 12 = 216,000/3 x2) 144,000

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PREMIUMS AND WARRANTY LIABILITY

1. In December 2016, Cucumber Company began including one coupon in each

2. At the beginning of the current year, Masigasig Company began marketing a

3. Shark Company sells gift certificates redeemable only when merchandise is

On December 31, 2016, what amount should be reported as unearned revenue?

5. Mayday Company introduced a new product that carried a 2-year warranty

What amount should Yamashita report as a liability at December 31, 2018?

What is the premium liability at December 31, 2017?

8. Similac Company offered a cash rebate of P8 on each P20 package of

Information for the current year is as follows:

On December 31, 2013, what amount should be reported as unearned revenue?

2. Stilt Corporation sells subscriptions to a directory that is published semiannually

Deferred Revenue from subscriptions, January 1, 2010 1,500,000

On December 31, 2010, what amount should be reported as deferred revenue

3. In November and December 2009, Freud Company, a magazine publisher,

What amount should be reported in the income statement for subscriptions

During 2013 650,000

On December 31, 2012, what amount should be reported as magazine

Initial payment Monthly fee Number of

The entity received P990,000 of initial payments on September 1, 2015, and

On December 31, 2015, what amount should be reported as deferred revenue?

Plan #1 (50,000 x 15) 750,000

Total initial payments 990,000

Deferred revenue – December 31, 2015 (990,000 x 8/12) 660,000

Plan #2 (3,000 x 12 x 4) 144,000

Total monthly fees – already earned 324,000

Unearned service contract revenue at January 1 520,000

What amount should be reported as unearned service contract revenue on

On December 31, 2016, what amount should be reported as unearned

Unearned subscription revenue – December 31, 2016 465,000

8. Saunalang Company sells equipment service contracts that cover a two-year

What amount should be reported as deferred service revenue on December 31,

First contract year (40% x 600,000) 240,000

Total contracts sold (1,000 x 600) 600,000

Deferred service revenue – December 31, 2015 480,000

9. Nasaktan Company requires advance payments with special orders for

Advances from customers – January 1 1,180,000

Advances from customers – January 1 1,180,000

Stamp service revenue from stamps sold to licenses 5,000,000

What amount should be reported as liability for stamps redemptions on

Liability for stamp redemptions – January 1, 2015 6,000,000

PROVISION AND CONTINGENT LIABILITY

Cost for shipping goods 50,000

Cost for shipping goods 50,000

3. On November 25, 2014, an explosion occurred at a Tom Company plant causing

a. An accrued liability of P500,000

The accrued amount is P500,000 only because it is the extent of liability of

4. Caso Company is the defendant in a lawsuit filed by Smith Company in 2015

a. 80,000 decrease c. 80,000 increase

Accrued liability on December 31, 2015 500,000

The reasonable estimate of P300,000 is recorded. The accepted BIR offer

6. Orlando Company decided on November 1, 2015 to restructure the entity’s

Some employees working in Factory A would be transferred to Factory B, which

Costs of P300,000 are expected to be incurred in transferring the remaining

One employee, Juan Cruz, remains in order to complete administrative tasks

What total amount should be recognized as restructuring provision on December

Unpaid wages of retrenched employees 1,200,000

In May 2014, Regal Company became involved in litigation. In December 2014,

What total amount should be accrued as provision on December 31, 2014?

8. On November 1, 2014, Tower Company was awarded a judgment of P1,200,000

What amount should be reported as a receivable on December 31, 2014?

a. As a receivable and deferred revenue of P1,300,000

A 8% risk adjustment factor to the cash flows is considered appropriate to reflect