CURRENT LIABILITIES

1 – 4. An entity includes one coupon in each box of laundry soap it sells. A towel is offered as a
premium to customers who send in 10 coupons and a remittance of P10. Distribution cost of premium
is P5. Experience indicates that only 30% of the coupons will be redeemed.
2018 2019
Box of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

1. What is the premium expense for 2018?

a. 2,500,000 c. 1,800,000
b. 2,400,000 d. 2,700,000

2. What is the estimated premium liability on December 31, 2018?

a. 1,000,000 c. 800,000
b. 1,100,000 d. 900,000

3. What is the premium expense for 2019?

a. 3,000,000 c. 3,375,000
b. 3,750,000 d. 4,000,000

4. What is the estimated premium liability on December 31, 2019?

a. 1,000,000 c. 1,125,000
b. 1,250,000 d. 1,375,000

5 – 6. An entity, a grocery retailer, operates a customer loyal program. The entity grants program
members loyalty points when they spend a specified amount on groceries. Program members can
redeem the points for further groceries. The points have no expiry date. During 2018, the sales
amounted to P 7,000,000 based on stand-alone selling price. During the year, the entity granted
10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The stand-
alone selling price of each loyalty point is estimated at P100.

On December 31, 2018, 4,800 points have been redeemed. In 2019, management revised its
expectations and now expected that 90% or 9,000 points will be redeemed altogether. During 2019,
the entity redeemed 2,400 points.

5. What amount should be reported as sales revenue including the revenue earned from points for
2018?
a. 7,000,000 c. 6,650,000
b. 6,125,000 d. 7,525,000

6. What is the revenue earned from loyalty points for 2019?

a. 700,000 c. 210,000
b. 175,000 d. 200,000

7 – 8. During 2018, an entity introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in
the second 12 months following sale. The entity reported sales of P 5,000,000 for 2018 and P
6,000,000 for 2019. The actual expenditures incurred and paid amounted to P 150,000 for 2018 and P
550,000 for 2019.

7. What is the warranty expense for 2019?

a. 650,000 c. 500,000
b. 600,000 d. 550,000

8. What is the estimated warranty liability on December 31, 2019?

a. 260,000 c. 240,000
b. 400,000 d. 100,000

9 – 10. During 2018, an entity is the defendant in a patent infringement lawsuit. The lawyers believe
there is a 30% chance that the court will dismiss the case and the entity will incur no outflow of
economic benefits.

However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that
the entity will be required to pay damages of P 200,000 and an 80% chance that the entity will be
required to pay damages of P 100,000.

Other outcomes are unlikely. The count is expected to rule in late December 2019. There is no
indication that the claimant will settle out of court.

At 7% risk adjustment factor to the probability-weighted expected cash flows is considered

appropriate to reflect the uncertainties in the cash flow estimate. An appropriate discount rate is 5%
per year. The present value of 1 at 5% for one period is 0.95.

9. What is the undiscounted provision before risk adjustment on December 31, 2018?
a. 200,0000 c. 150,000
b. 100,000 d. 84,000

10. What amount should be reported as provision for lawsuit on December 31, 2018?
a. 79,800 c. 89,880
b. 95,000 d. 85,386

11. On January 15, 2018, an explosion occurred at an entity plant causing extensive property damage
to area buildings. By March 1, 2019, no claims had been asserted against the entity but
management and counsel concluded that it is likely that claims will be asserted and that it is
probable that the entity will be responsible for damages. Management believed that P 1,250,000
would be a reasonable estimate of the liability. The entity’s P 5,000,000 comprehensive public
would be a reasonable estimate of the liability. The comprehensive public liability policy has a P
250,000 deductible clause. The financial statements for 2018 were issued on March 31, 2019.
What amount of provision should be reported on December 31, 2018?
a. 5,000,000 c. 1,250,000
b. 2,500,000 d. 0
12. During 2018, and entity filed suit against another entity seeking damages for patent infringement.
On December 31, 2018, the legal counsel believed that it was probable that the entity would be
successful against the other entity for an estimated amount of P 1,500,000. On April 15, 2019, the
entity was awarded P 1,000,000 and received full payment thereof. The 2018 financial statements
were issued on March 31, 2019. How should this award be reported in the 2018 financial
statements?
a. As receivable and revenue P 1,000,000
b. As receivable and deferred revenue P 1,000,000
c. As disclosure of contingent asset P 1,000,000
d. As disclosure of contingent asset P 1,500,000

13. An entity sells gift certificates redeemable only when merchandise is purchased. The certificates
have no expiration date. Upon redemption, the entity recognizes the unearned revenue as
realized. Data for 2018 are as follows:
Unearned revenue, January 1 1,500,000
Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Gift certificates expected not to be redeemed 300,000
Cost of goods sold 60%
On December 31, 2018, what amount should be reported as unearned revenue?
a. 2,500,000 c. 1,000,000
b. 2,200,000 d. 0

14. An entity sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash receipts from
subscribers are credited to unearned subscription revenue and this account had a balance of P
1,700,000 on January 1, 2018. The entity provided the following information for the year ended
December 31, 2018:
Cash receipts from subscribers 2,300,000
Subscription revenue credited on December 31, 2018 1,500,000
On December 31, 2018, what amount should be reported as unearned subscription revenue?
a. 1,100,000 c. 1,500,000
b. 2,500,000 d. 2,300,000

15 – 17. An entity sells equipment service contracts that cover a two-year period. The sale price of
each contract is P800. The entity sold 1,000 contracts evenly throughout 2018. The past experience is
that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first
contract year and 60% evenly during the second contract year.

15. What is the contract revenue for 2018?

a. 320,000 c. 400,000
b. 160,000 d. 640,000

16. What is the unearned contract revenue on December 31, 2018?

a. 480,000 c. 240,000
b. 640,000 d. 560,000
17. What is the contract revenue for 2019?
a. 480,000 c. 400,000
b. 240,000 d. 500,000

BONDS PAYABLE

18. On March 1, 2018, an entity issued 5,000 of P 1,000 face value bonds at 110 plus accrued
interest. The entity paid bond issue cost of P 400,000. The bonds were dated November 1, 2017,
mature November 1, 2027, and bear interest at 12% payable semi-annually on May 1 and
November 1. What net amount was received from the bond issuance?
a. 5,500,000 c. 5,300,000
b. 5,700,000 d. 5,100,000

19. During the current year, an entity issued 5,000,000 9% face value bonds at 110 at interest date. In
connection with the issue of the bond, the entity paid the following costs:
Promotion cost 100,000
Engraving and printing cost 200,000
Underwriter commission 400,000
Legal fees 350,000
Fees paid to accountants for registration 50,000
What amount should be recorded initially as discount or premium on bonds payable?
a. 500,000 premium c. 600,000 premium
b. 500,000 discount d. 600,000 discount

20 – 21. On January 1, 2018, an entity issued 9% bonds in the face amount of P 5,000,000 which
mature on January 1, 2028. The bonds were issued for P 4,695,000 to yield 10%. Interest is payable
annually on December 31. The entity used the interest method of amortizing bond discount.

20. What is the interest expense for 2018?

a. 469,500 c. 450,000
b. 500,000 d. 422,500

21. What is the carrying amount of the bonds payable on December 31, 2018?
a. 4,695,000 c. 4,714,500
b. 4,704,750 d. 5,000,000

22 – 23. On January 1, 2018, an entity issued 10-year bonds with face amount of P 5,000,000 for P
5,775,000. The entity paid bond issue cost of P 100,000 on same date. The stated interest rate on the
bonds is 10% payable annually every December 31. The bonds have an 8% yield per annum after
considering the bond issue cost. The entity used the effective interest method of amortizing bond
premium.

22. What is the interest expense for 2019?

a. 454,000 c. 500,000
b. 458,960 d. 450,320
23. What is the carrying amount of the bonds payable on December 31, 2019?
a. 5,695,960 c. 5,629,000
b. 5,579,320 d. 5,737,000

24 – 26. On December 31, 2018, an entity issued 5,000 of 8% 10-year P1,000 face value bonds with
detachable warrants at 110. Each bond carried a detachable warrant for 10 ordinary shares of P 100
par value at a specified option price of P120. Immediately after issuance, the market value of the
bonds without warrants was P 4,800,000 and the market value of the warrants was P 1,200,000.

24. On December 31, 2018, what is the carrying amount of bonds payable?
a. 5,500,000 c. 4,400,000
b. 4,800,000 d. 5,000,000

25. What is the increase in equity as a result of bond issuance?

a. 1,200,000 c. 500,000
b. 1,100,000 d. 700,000

26. What is the share premium from the subsequent exercise of all share warrants?
a. 1,700,000 c. 2,100,000
b. 1,000,000 d. 0

27. On December 31, 2018, an entity issued P 5,000,000 face value 5-year bonds at 120. Each P
1,000 bond was issued with 20 non-detachable share warrants. Each warrant entitled the
bondholder to purchase one share of P20 par value for P25. Immediately after issuance, the
market value of each warrant was P5. The interest rate is 11% payable annually every December
31. The prevailing market rate of interest for similar bonds without warrants is 12%. The PV of 1 at
12% for 5 periods is 0.57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. What
amount should be recorded as increase in equity as a result of the bond issuance on December
31, 2018?
a. 1,170,000 c. 2,000,000
b. 1,000,000 d. 0

28. On January 1, 2018, an entity issued 5,000 convertible bonds with P 1,000 face value per bond.
The bonds mature in three years and are issued at 110. Interest is payable annually every
December 31 at a nominal 6% interest rate. Each bond is convertible at any time up to maturity
into 100 shares with par value of P5. It is reliably determined that the bonds would sell only at P
4,600,000 without the conversion privilege. What is the equity component of the original issuance
of the convertible bonds?
a. 500,000 c. 900,000
b. 400,000 d. 0

29. On December 31, 2018 after recording interest and amortization, an entity converted P 5,000,000
of 12% convertible bonds into 50,000 shares of P50 par value. On the conversion date, the
carrying amount of the bonds payable was P 6,000,000, the market value of the bonds was P
6,500,000, and the share was publicly trading at P150. The entity incurred P 100,000 in
connection with the conversion. When the bonds were originally issued, the equity component was
 recorded at P 1,500,000. What amount of share premium should be recorded as a result of the
conversion?
a. 5,000,000 c. 4,900,000
b. 3,500,000 d. 3,400,000

OPERATING LEASE AND LEASEBACK

30. On January 1, 2018, an entity leased office space for five years at an annual rental of P 700,000
under an operating lease. On the same date, the entity incurred the following amounts:
Bonus to obtain lease 300,000
First year’s rent 700,000
Last year’s rent 700,000
Security deposit refundable at lease expiration 800,000
Installation of new walls and offices 750,000
Insurance 50,000
Property taxes 40,000
Initial direct cost 100,000
What total amount of the expenses relating to the rent of office space should be reported for
2018?
a. 1,100,000 c. 1,800,000
b. 1,000,000 d. 1,340,000

31. On January 1, 2018, an entity purchased a new machine for P 6,000,000 for the purpose of
leasing it. The machine had an estimated 10-year life. On April 1, 2018, the entity leased the
machine to a lessee for three years at a monthly rental of P 400,000. The lessee paid the rental
for one year of P 4,800,000 on April 2018 and additionally paid P 900,000 to the lessor as a lease
bonus to obtain the three-year lease. On April 1, 2018, the entity paid P 300,000 to a broker as a
finder fee. What is the net rental income for 2018?
a. 3,150,000 c. 3,200,000
b. 4,350,000 d. 4,400,000

32. On July 1, 2018, an entity leased an equipment to a lessee under a 3-year operating lease. Total
rent for the lease term is P 3,600,000 payable P 50,000 monthly for the first lease year, P 75,000
monthly for the second lease year and P 175,000 monthly for the third lease year. All payments
were made when due. On June 30, 2020, what amount should be reported as accrued rent
receivable?
a. 2,100,000 c. 900,000
b. 1,200,000 d. 0

33. On December 31, 2018, an entity sold a machine with useful life of 10 years to another entity and
simultaneously leased it back for two years at annual rental of P 360,000.
Sale price at fair value 3,600,000
Carrying amount 3,300,000
What amount of revenue from sale of the machine should be reported in 2018?
a. 150,000 c. 360,000
b. 300,000 d. 180,000
34. On December 31, 2018, an entity sold an equipment with an estimated remaining useful life of 10
years. At the same time, the entity leased back the equipment for 2 years.
Sale price at above fair value 7,500,000
Fair value of equipment on date of sale 6,000,000
Carrying amount of equipment 5,000,000
What amount of gain should be reported in the income statement for 2018?
a. 2,500,000 c. 1,000,000
b. 1,500,000 d. 1,750,000

35. On January 1, 2018, an entity sold a machine with remaining life of 10 years. The entity
immediately leased back the machine for 4 years.
Sale price at below fair value 3,000,000
Fair value of equipment on date of sale 3,600,000
Carrying amount of equipment 4,000,000
What total amount of loss should be recognized in the income statement for 2018?
a. 600,000 c. 550,000
b. 400,000 d. 250,000

36. On January 1, 2018, an entity sold an equipment with remaining useful life of 10 years and
immediately leased it back for 4 years.
Sale price at below fair value 5,000,000
Fair value of equipment on date of sale 7,000,000
Carrying amount of equipment 6,500,000
What is the deferred loss on sale and leaseback on December 31, 2018?
a. 2,000,000 c. 1,125,0000
b. 1,500,000 d. 0

37. On January 1, 2018, an entity sold equipment with a carrying amount of P 1,000,000 and a
remaining useful life of 10 years for P 1,500,000. The entity immediately leased the equipment
back under a 10-year finance lease with a present value of P 1,500,000 and will depreciate the
equipment using the straight line method. The first annual lease payment of P 244,120 was made
on December 31, 2018. The implicit interest rate in the lease is 10%. On December 31, 2018,
what amount should be reported as unearned gain on equipment sale?
a. 500,000 c. 255,880
b. 450,000 d. 0

38. On January 1, 2015, an entity signed a 12-year lease for building. The entity had an option to new
the lease for an additional 6 years on or before January 1, 2020. During January 2018, the entity
made improvements to the building costing P 4,500,000 with useful life of 10 years. On December
31, 2018, the entity intended to exercise the renewal option. What is the carrying amount of the
leasehold improvement on December 31, 2018?
a. 4,500,000 c. 4,000,000
b. 4,050,000 d. 4,125,000
 FINANCE LEASE – LESSEE

39 – 42. On January 1, 2018, an entity leased an equipment from a lessor with the following pertinent
information:
Annual rental payable at the end of the each year 500,000
Lease term 8 years
Useful life of equipment 10 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 8 periods 5.33
PV of 1 for 8 periods at 10% 0.47
The entity has the option to purchase the equipment on January 1, 2026 by paying P 500,000 which is
significantly less than the expected fair value of the equipment on the option exercise date. There is
reasonable certainty that the entity shall exercise the option. On January 1, 2018, the entity incurred
initial direct cost of P 200,000.

39. What is the initial cost of the equipment?

a. 2,900,000 c. 2,865,000
b. 3,100,000 d. 0

40. What is the interest expense for 2018?

a. 290,000 c. 266,500
b. 310,000 d. 316,500

41. What is the lease liability on December 31, 2018?

a. 2,690,000 c. 2,398,500
b. 2,790,000 d. 2,848,500

42. What is the depreciation for 2018?

a. 310,000 c. 290,000
b. 387,500 d. 362,500

43 – 44. On January 1, 2018, an entity leased automobiles for executive use. The lease required the
entity to make five annual payments of P 1,500,000 beginning January 1, 2018. At the end of the
lease term, December 31, 2022, the entity guaranteed the residual value of the automobiles at P
1,000,000. The lease qualified as a finance lease. The interest rate implicit in the lease is 10% and
present value factors at 10% for 5 periods are 4.17 for an annuity due, 3.79 , for an ordinary annuity
and 0.62 for present value of 1.

43. What is the finance lease liability on December 31, 2019?

a. 4,412,500 c. 6,062,500
b. 5,375,000 d. 4,805,000

44. What is the interest expense for 2019?

a. 480,500 c. 441,250
b. 537,500 d. 606,250
45. On January 1, 2018, an entity entered into a 6-year lease with a lessor. Annual lease payments of
P 1,500,000 including annual executor cost of P 300,000 are payable at the end of each year. The
entity had a 12% incremental borrowing rate but the implicit interest rate is 10% on the lease. The
equipment was expected to have an estimated useful life of 6 years. In addition, a third party had
guaranteed to pay the lessor a residual value of P 500,000 at the end of the lease. The present
value of an ordinary annuity of 1 for 6 years is 4.35 at 10% and 4.11 at 12%. The present value of
1 at for 6 periods is 0.56 at 10% and 0.51 at 12%. On December 31, 2018, what is the principal
amount of the lease obligation?
a. 3,796,200 c. 4,323,840
b. 4,542,000 d. 3,556,224

46 – 47. On December 31, 2018, an entity leased equipment under a finance lease. Annual lease
payments of P 400,000 are due December 31 for 10 years. The useful life of the equipment is 10
years and the interest rate implicit in the lease is 10%. The lease obligation was recorded on
December 31, 2018 at P 2,700,000 and the first lease payment was made on that date.

46. What amount should be included in current liabilities in relation to the finance lease on December
31, 2018?
a. 130,000 c. 230,000
b. 170,000 d. 400,000

47. What is the interest expense for 2019?

a. 270,000 c. 213,000
b. 230,000 d. 400,000

48. At the beginning of current year, an entity entered into an 8-year finance lease for an equipment.
The entity accounted for the acquisition of the finance lease at P 5,000,000 which included a P
500,000 bargain purchase option. At the end of the lease, the entity expected to exercise the
bargain purchase option. The expected fair value of the equipment is P 400,000 at the end of the
10 year useful life. The straight line depreciation is used. What amount of depreciation should be
recognized for the current year?
a. 575,000 c. 625,000
b. 460,000 d. 450,000

49. At the beginning of current year, an entity entered into an 8-year lease for an equipment. The
entity accounted for the acquisition as a finance lease for P 6,000,000 which included a P 600,000
guaranteed residual value. At the end of the lease, the asset will revert back to the lessor. It is
estimated that the fair value of the asset at the end of the 10-year useful life would be P 400,000.
The entity used the straight line depreciation. What amount should be recognized as depreciation
expense on the leased asset for the current year?
a. 675,000 c. 540,000
b. 700,000 d. 560,000
 FINANCE LEASE – LESSOR

50 – 54. An entity is a dealer in equipment. On January 1, 2018, an equipment was leased to another
entity with the following provisions:
Annual rental payable at the end of the each year 1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Fair value of the equipment on date of lease 6,000,000
Guaranteed residual value 500,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term on December 31, 2022, the equipment will revert to the lessor. On such
date, the fair value of the asset is P 350,000. The perpetual inventory system is used. The lessor
incurred initial direct cost of P 200,000 in finalizing the lease agreement.

50. What is the gross investment in the lease?

a. 7,500,000 c. 4,000,000
b. 8,000,000 d. 6,000,000

51. What is the net investment in the lease?

a. 5,400,000 c. 4,000,000
b. 5,685,000 d. 3,500,000

52. What is the total financial revenue?

a. 2,315,000 c. 2,000,000
b. 2,285,000 d. 2,600,000

53. What amount of interest income should be recognized for 2018?

a. 682,200 c. 720,000
b. 648,000 d. 480,000

54. What amount should be reported as profit on sale for 2018?

a. 1,485,000 c. 1,800,000
b. 1,685,000 d. 2,000,000

55. An entity acquired an asset costing P 3,165,000. The asset is leased on January 1, 2018 to
another entity. Five annual lease payments are due each December 31, beginning December 31,
2018. The unguaranteed residual value of the asset at the end of the lease term on December 31,
2022 is P 500,000. The asset will revert to the lessor at the end of the lease term. The lessor’s
implicit interest rate is 12%. The PV of 1 at 12% for 5 periods is 0.57 and the PV of an ordinary
annuity of 1 at 12% for 5 periods is 3.60. What is the annual rental payment?
a. 879,166 c. 800,000
b. 740,278 d. 500,000

56 – 59. An entity is in the business of leasing new sophisticated equipment. The lessor expects a
12% return on net investment. All leases are classified as direct financing lease. At the end of the
lease term, the equipment will revert to the lessor. On January 1, 2018, an equipment is leased to a
lessee with the following information:
Cost of equipment to the lessor 5,000,000
Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1,2018

56. What is the gross investment in the lease?

a. 7,200,000 c. 5,000,000
b. 7,800,000 d. 5,250,000

57. What is the net investment in the lease?

a. 5,000,000 c. 4,400,000
b. 5,250,000 d. 4,650,000

58. What is the unearned interest income on January 1, 2018?

a. 2,550,000 c. 3,150,000
b. 1,950,000 d. 1,500,000

59. What amount of interest income should be recognized for 2018?

a. 594,000 c. 630,000
b. 522,000 d. 450,000

60 – 61. An entity decided to enter the leasing business. The entity acquired a specialized packaging
machine for P 2,300,000. On January 1, 2018, 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, 2018. The residual value of the
machine is P 200,000. The lease terms are arranged so that a return of 12% is earned by the lessor.
The present value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1
at 12% for six periods is 4.60 and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11.

60. What is the annual lease payment payable in advance required to yield the desired return?
a. 500,000 c. 559,610
b. 477,826 d. 460,000

61. What is the total financial revenue?

a. 1,057,660 c. 700,000
b. 1,257,660 d. 900,000

NOTE PAYABLE AND DEBT RESTRUCTURING

62 – 63. On September 1, 2018, an entity borrowed on a P 5,400,000 note payable from a bank. The
note bears interest at 12% and is payable in three equal annual payments of P 1,800,000. On this
date, the bank’s prime rate was 11%. The first annual payment for interest and principal was made on
September 1, 2019.

62. On December 31, 2018, what amount should be reported as accrued interest payable?
a. 144,000 c. 132,000
b. 216,000 d. 198,000

63. What is the interest expense for 2019?

a. 576,000 c. 648,000
b. 432,000 d. 594,000

64. On March 1, 2018, an entity borrowed P 5,000,000 and signed a 2-year note bearing interest at
12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2020.
What amount should be reported as accrued interest payable on December 31, 2019?
a. 1,200,000 c. 600,000
b. 1,160,000 d. 560,000

65 – 67. An entity transferred real estate pursuant to a debt restructuring in full liquidation of liability to
the creditor:
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 900,000

65. Under IFRS, what amount of gain on extinguishment of debt should be reported as component of
income from continuing operations?
a. 300,000 c. 200,000
b. 500,000 d. 0

66. Under US GAAP, what is the gain on restructuring?

a. 600,000 c. 100,000
b. 500,000 d. 0

67. Under US GAAP, what amount should be reported as gain or loss on transfer of real estate?
a. 100,000 loss c. 400,000 gain
b. 500,000 gain d. 0

68 – 70. An entity showed the following information at year-end:

Note payable 5,000,000
Accrued interest payable 500,000
The entity is threatened with a court suit if it could not pay the 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 50,000 ordinary shares with par value of P50
and quoted price of P70. The fair value of the note payable is P 4,000,000.

68. What is the gain from extinguishment of debt if the equity swap is measured at the fair value of the
shares?
 a. 2,000,000 c. 3,000,000
b. 1,500,000 d. 0

69. What is the gain from extinguishment of debt if the equity swap is measured at the fair value of
liability?
a. 2,000,000 c. 3,000,000
b. 1,500,000 d. 0

70. What amount should be recognized as share premium if the equity swap is measured at the
carrying amount of liability?
a. 3,000,000 c. 1,000,000
b. 2,500,000 d. 1,500,000

71 – 74. Due to extreme financial difficulties, an entity negotiated a restructuring of a 10%, P

5,000,000 note payable due on December 31, 2018. The unpaid interest on the note on such date is
P 500,000. The creditor agreed to reduce the face amount of P 4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2018. The
present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at
10% for three periods is 2.49.

71. Under IFRS, what is the gain on extinguishment for 2018?

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

72. What is the discount or premium on the new note payable on December 31, 2018?
a. 1,000,000 premium c. 203,200 premium
b. 1,000,000 discount d. 203,200 discount

73. What amount should be reported as interest expense for 2019?

a. 320,000 c. 400,000
b. 379,680 d. 303,680

74. What is the carrying amount of note payable on December 31, 2019?
a. 4,000,000 c. 3,856,480
b. 5,000,000 d. 3,737,120

DEFERRED INCOME TAX

75 – 76. An entity reported pretax financial income of P 8,000,000 for the current year. The taxable
income was P 7,000,000 for the current year. The difference is due to accelerated depreciation for
income tax purposes. The income tax rate is 30% and the entity made estimated tax payment of P
500,000 during the current year.

75. What amount should be reported as current tax expense for the current year?
a. 2,100,000 c. 1,600,000
b. 2,400,000 d. 1,900,000
76. What amount should be reported as income tax payable at year-end?
a. 1,600,000 c. 2,400,000
b. 2,100,000 d. 1,900,000

77. An entity reported pretax accounting income of P 5,000,000 for the current year. The taxable
income was P 5,500,000. The difference is due to rental received in advance. Rental income is
taxable when received. The income tax rate is 30% and the entity made no estimated tax payment
in the current year. What amount should be reported as total income tax expense for the current
year?
a. 1,650,000 c. 1,800,000
b. 1,500,000 d. 3,150,000

78 – 79. At the end of the first year of operations, an entity had taxable temporary differences totaling
P 3,000,000. Of this total, P 500,000 relates to current items. The entity also had deductible
temporary differences totaling P 1,000,000, P 250,000 of which relates to current items. Pretax
financial income for the current year was P 20,000,000. The tax rate is 30%.

78. What amount should be reported as current tax expense for the current period?
a. 5,925,000 c. 6,600,000
b. 6,000,000 d. 5,400,000

79. What is the net deferred tax expense or benefit for the current year?
a. 900,000 expense c. 600,000 expense
b. 300,000 benefit d. 600,000 benefit

80. An entity was organized on January 1, 2018. The entity had pretax accounting income of P
5,000,000 and taxable income of P 7,000,000 for the current year. The only temporary difference
is accrued product warranty cost that is expected to be paid in 2019. The enacted tax rates are
30% for 2018 and 25% for 2019 and thereafter. What amount should be reported as total income
tax expense in the income statement for 2018?
a. 1,500,000 c. 1,250,000
b. 2,100,000 d. 1,600,000

81. On December 31, 2018, an entity reported a deferred tax liability of P 600,000 and a deferred tax
asset of P 150,000. On December 31, 2019, the deferred tax liability is P 900,000 and the
deferred tax asset is zero. What is the deferred tax expense for 2019?
a. 300,000 c. 150,000
b. 450,000 d. 900,000

82 – 85. An entity reported the following information during the first year of operations:
Pretax financial income 9,000,000
Nontaxable interest received 1,000,000
Long-term loss accrual in excess of deductible amount 1,500,000
Tax depreciation in excess of financial depreciation 2,000,000
Income tax rate 30%
82. What is the current tax expense?
a. 2,250,000 c. 1,800,000
b. 2,700,000 d. 2,550,000

83. What is the total tax expense?

a. 2,700,000 c. 3,150,000
b. 2,400,000 d. 2,550,000

84. What is the deferred tax liability at year-end?

a. 600,000 c. 150,000
b. 456,000 d. 900,000

85. What is the deferred tax asset at year-end?

a. 600,000 c. 750,000
b. 450,000 d. 150,000

86 – 87. An entity reported the following assets and liabilities at year end:
Carrying amount Tax base
Property 10,000,000 7,000,000
Plant and equipment 5,000,000 4,000,000
Inventory 2,500,000 4,000,000
Accounts receivable 2,400,000 3,000,000
Liabilities 6,000,000 5,500,000
The entity had made provision for inventory obsolescence of P 1,500,000. Further, an impairment loss
against accounts receivable of P 600,000 has been made. The tax rate is 30%.

86. What amount should be reported as deferred tax liability?

a. 1,200,000 c. 1,050,000
b. 1,350,000 d. 4,000,000

87. What amount should be reported as deferred tax asset?

a. 630,000 c. 480,000
b. 780,000 d. 450,000

EMPLOYEE BENEFIT COST

88 – 92. On January 1, 2018, an entity provided the following information in connection with a defined
benefit plant:
Fair value of plan asset 10,000,000
Projected benefit obligation (13,000,000)
Prepaid/accrued benefit obligation (3,000,000)
On January 1, 2018, the entity revealed the following transactions affecting the plan for the current
year:
Current service cost 2,500,000
Past service cost – remaining vesting period of covered employees is 5 years 1,200,000
Contribution to the plan 3,500,000
Benefits paid to retirees 3,000,000
 Actual return on plan assets 1,500,000
Decrease in projected benefit obligation due to change in actuarial assumptions 400,000
Discount rate 10%
Expected return on plan assets 12%

88. What is the employee benefit expense for the current year?
a. 4,000,000 c. 5,000,000
b. 3,040,000 d. 5,200,000

89. What is the net remeasurment gain for the current year?
a. 500,000 c. 900,000
b. 400,000 d. 0

90. What is the fair value of plan assets on December 31, 2018?
a. 15,000,000 c. 11,700,000
b. 12,000,000 d. 10,500,000

91. What is the projected benefit obligation on December 31, 2018?

a. 14,600,000 c. 15,400,000
b. 15,000,000 d. 13,600,000

92. What amount should be reported as accrued or prepaid benefit cost on December 31, 2018?
a. 3,500,000 accrued c. 2,600,000 accrued
b. 3,500,000 prepaid d. 2,600,000 prepaid

93 – 96. An entity provided the following information during the current year:
January 1 December 31
Fair value of plan asset 6,000,000 9,000,000
Projected benefit obligation 4,500,000 5,000,000
Prepaid/accrued benefit cost – surplus 1,500,000 4,000,000
Asset ceiling 1,000,000 2,500,000
Effect of asset ceiling 500,000 1,500,000
During the year, the entity recognized current service cost of P 2,000,000, actual return on plan
assets P 400,000, and contribution to the plan P 4,550,000 and benefits paid P 1,950,000. The
discount rate is 10%.

93. What is the employee benefit expense for the current year?
a. 1,900,000 c. 1,800,000
b. 1,850,000 d. 2,000,000

94. What is the net remeasurement loss for the current year?
a. 1,150,000 c. 800,000
b. 1,200,000 d. 750,000

95. What is the defined benefit cost?

a. 3,050,000 c. 4,550,000
b. 3,100,000 d. 3,000,000
96. What amount of prepaid benefit cost should be reported on December 31?
a. 4,000,000 c. 1,000,000
b. 2,500,000 d. 1,500,000

97 – 98. An entity is committed to close a factory in 10 months and shall terminate the employement
of all the remaining employees of the factory. Under the termination plan, an employee leaving before
closure of factory shall receive on termination date a cash payment of P 20,000. However, an
employee that renders service until closure of the factory shall receive P 60,000. There are 120
employees at the factory. The entity expects 100 employees to leave before closure and 20
employees to render service until closure.

97. What amount should be recognized as termination benefit?

a. 2,400,000 c. 2,000,000
b. 6,400,000 d. 4,000,000

98. What amount should be recognized as short-term benefits?

a. 3,200,000 c. 2,000,000
b. 1,200,000 d. 800,000

END