PRACTICE QUESTIONS 1 (IA3) (Midterms)

Theories
1. The sales revenue recognized at the commencement of the lease by a manufacturer or dealer
lessor is…
Answer: Fair value of the asset or present value of the minimum lease payments, whichever is
lower.
2. When an entity is in bankruptcy, its financial statements may not be prepared using the:
Answer: going concern assumption
3. In presenting a statement of financial position, an entity
Answer: must make the current and noncurrent presentation, except when a presentation
based on liquidity provides information that is reliable and more relevant
4. In a sale and leaseback transaction, which of the following statements is most incorrect?
Answer: The buyer-lessor recognizes a gain.
5. Financial statements characterized as consistent when
Answer: accounting entities give similar events the same accounting treatment each period
6. When a lease modification results in partial termination of a lease, the change shall be
accounted for as any of the following except:
Answer: The increase (decrease) in lease liability as a result of the lease modification is
accounted for as termination loss (gain).
7. Disclosure of information about key sources of estimation uncertainty
Answer:is mandatory
8. Under a sales-type lease, what constitutes a gross investment in the lease?
Answer: Aggregate of minimum lease payments and unguaranteed residual value.
9. When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on
signing an operating lease?
Answer:over the lease term
10. Which of the following best describes faithful representation in relation to information
presented in the financial statements?
Answer: freedom from material error
Problem 1
The following balances from A Company's books as of December 31, 2020 are presented to you:

Cash P3,400,000

Accounts receivable 10,500,000

Allowance for bad debts 80,000

Notes receivable 3,600,000

Prepaid rent expense 200,000

Financial assets at fair value 3,000,000

Merchandise inventory 9,000,000

Accounts payable 4,850,000

Note payable 2,000,000

Accrued expenses 440,000

Bonds payable (due semi-annually in June and December at P600,000) 6,000,000

Income tax payable 600,000

SSS and PAG-IBIG premiums payable 240,000

Withholding tax payable 180,000

Mortgage payable, due July 31, 2022 4,000,000

Contingent liability 1,600,000

Cash balance had the following components:

 Cash in bank per bank statement (outstanding checks, P240,000) - P3,340,000
 Customer's advance deposit in check dated January 15, 2021 - P60,000

Accounts receivable are collectible from trade transactions and include P2,500,000 selling price of
goods on consignment at 125% of cost and not included in inventory.

Notes receivable include discounted notes of P1,600,000.

Accounts payable include P800,000 cost of purchases in transit FOB destination but not included in
inventory. It also includes customer's advance deposit in check dated January 15, 2021 of P60,000.

The Note payable is a promissory note dated October 1, 2020, due March 31, 2021 with 12% interest.
This is in connection with a loan. Accrued expenses exclude interest payable on the note.
Required:
1. How much is the reported Cash?
Solution:
Cash 3,400,000
Customer’s advance deposit (60,000)
Outstanding checks (240,000)
Total Cash 3,100,000

*Outstanding checks are reconciling items per bank, not books.

*Check dated 1/15/21 should not be part of Cash yet, and should be reverted back to payables
until the check is demandable.
*Outstanding check should be deducted from bank statement balance. If the cash in bank is
the amount per books, no need to deduct
2. How much is the reported Trade and Other Receivables?
Solution:
Accounts Receivable 10,500,000
Collections from consignment not included in inv. (2,500,000)
Allowance for bad debts (80,000) 7,920,000
Notes receivable 3,600,000
Discount on N/R (1,600,000) 2,000,000
Trade and other receivable 9,920,000

*Goods out on consignment are included in inventory, excluded from receivables until reported
as sold by the consignee.
*Discounted notes receivable should be excluded from Notes Receivable. The related liability
upon discounting will be reported as part of current liability, unless not demandable within the
next reporting period.

3. How much is the reported Current Liabilities?

Solution:
Account Payable 4,850,000
Purchase in transit (800,000)
Advance Deposit (60,000) 3,990,000
Accrued Expenses 440,000
Note Payable 2,000,000
Interest on N/P (2M x 12% x 3/12) 60,000
Income tax Payable 600,000
SSS & PAG-IBIG premiums payable 240,000
Withholding tax payable 180,000
Bonds payable Current (due June & Dec, 600,000 x 2) 1,200,000
Current Liabilities 8,710,000

*Check dated 1/15/21 should not be part of Cash yet, and should be reverted back to payables
until the check is demandable.
*Purchases in transit, FOB destination is not considered owned by the purchasing entity yet,
thus should be excluded from inventory and the liability subsequently excluded from trade
payables.
*Government-related liabilities, especially taxes and remittances, are usually reported as
current liabilities since they are demandable within the next remittance period.

4. How much is the reported Non-current Liabilities?

Solution:
Bonds Payable Noncurrent (6,000,000 - 1,200,000) 4,800,000
Mortgage payable (due July 31, 2022) 4,000,000
Contingent Liability 1,600,000
Non-current Liabilities 10,400,000
Problem 2
A manufacturer of shipping equipment decided to lease an equipment with a fair value of P2,500,000
on January 1, 2020 to a company needing the equipment but lacks sufficient funds to pay the entire
list price. The transaction was recorded as a sale in the manufacturer's books and as a purchase by
the buyer.
The equipment had a carrying amount of P1,800,000 in the manufacturer's inventory at the time, and
an estimated useful life of 6 years.
The following information is presented regarding the lease:

Year-end annual lease payments P700,000

USE
Implicit rate 10%
PV
Lease term 5 years

FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.
Determine total income recognized by the manufacturer in 2020 related to the sale and lease.
Solution:
PV of annuity 1 @ 10% for 5 years 3.7908

Annual Lease Payment 700,000

PV of annuity 1 @ 10% for 5 years 3.7908
PV of minimum lease payment 2,653,560

Sales (@FV) 2,500,000

Carrying amount of Equipment (1,800,000)
Gross profit 700,000
Interest Income (2,500,000 x 12.38%) 309,500
Total Income 1,009,500

*BONUS - requires interpolation

Sales is the lower between FV and Net investment

*If Fair Value is to be used as amount of sales, interpolate interest rate that would
result to the fair value if future lease payments are discounted.
Problem 3

At the beginning of 2020, a financing company leased out a machine that initially cost P1,200,000 and
had a guaranteed residual value of P100,000, with the following terms:

Year-end annual payments P300,000

Lease term 5 years

Implicit rate 10%

Purchase option P150,000

It was ascertained that the purchase option is reasonably certain to be exercised by the lessee.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine net lease receivable as of December 31, 2020.

Solution:

Net lease Receivable 1/1 (equal to cost) 1,200,000

Interest Expense (1,200,000 x 10.9307%) 131,160
Annual Payments (300,000)
Net Lease Receivable 12/31/2020 1,031,160

*BONUS - requires interpolation

*By interpolation, implicit rate using cost of P1,200,000 is 10.9307%

*Differences arise from rounding off of rate and PV factor

If cost is equal to PV of MLP, residual value/PO, and initial direct costs, there is no need to
interpolate.

Problem 4

On January 1, 2020, Lessee Company entered into an a lease agreement to use an equipment and pay
year-end payments of P200,000 for 5 years at an implicit rate of 10%. On January 1, 2021, the lease
payments were decreased by P50,000. which led to a re-adjusted implicit rate of 12%.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine the interest expense recognized due to the lease liability in 2021.

Solution:

PV of 1 annuity @ 12% for 4 years 3.0373

PV of a annuity @ 10% for 5 years 3.7908

Modified Liability 1/1/21 (150,000 x 3.0373) 455,595

Interest rate 12%
Interest Expense 54,671
Problem 5

On January 1, 2020, Lessee Company entered into an a lease agreement to pay advance payments of
P100,000 for 10 years, for the right to occupy an office space of 2,000 sq.m. The implicit rate for the
lease was determined to be 10%.

On January 1, 2023, both parties to the lease agreed for modifications to the lease. In exchange for
the right to use another 1,500 sq.m. of adjacent office space, the lessee will pay another P100,000 for
the rest of the remaining lease term, including the 2023 payment. The implicit rate on the additional
space was 9%.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine the depreciation expense recognized on right of use asset in 2023.

Solution:

PV of Advance annuity @10% for 10 years 6.759

PV of advance annuity @ 9% for 7 years 5.4859

Old ROUA
Lease Payment advance 100,000
PV of advance annuity @ 10% for 10 years 6.759
Old ROUA 675,900
÷ Lease terms 10
Annual Depreciation 67,590
New ROUA
Lease payment Advance 100,000
PV of advance annuity @ 9% for 7 years 5.4859
New ROUA 548,590
÷Remaining Years 7
New Annual Deprecation 78,370
Total Depreciation Expense 145,960
Problem 6

A Company provided the following information on December 31, 2020:

Cash in bank - P6,000,000

Petty cash fund - P100,000

Account receivable - P5,000,000

Inventory - P2,000,000

Bond sinking fund - P3,000,000

Notes receivable - P2,500,000

Accounts payable - P8,000,000

Notes payable - P3,000,000

Bond payable due July 31, 2021 - P1,000,000

Accrued expenses - P450,000

Other information are as follows:

 The accounts payable and accounts receivable are net of abnormal balances of accounts
amounting to P1,050,000 and P1,250,000, respectively.
 Per reconciliation made by the petty cash custodian, there were vouchers for expenses
amounting to P20,000 that were still unreplenished.
 The cash in bank balance is net of a bank overdraft of P1,000,000.

Required:

1. What is the total current assets?

Solution:
Cash 6,000,000
Petty Cash Fund 100,000
Cash in bank (bank overdraft) 1,000,000
Reconciliation Expense (Unreplenished) (20,000) 7,080,000
Accounts receivable 5,000,000
A/R (abnorman balance) 1,250,000
A/P (abnormal Balance) 1.050.000 7,300,000
Inventory 2,000,000
Bond Sinking fund 3,000,000
Notes Receivable 2,500,000
Total Current Asset 21,880,000

*Since the bonds payable are due currently, the sinking fund related to the bond
should be classified as current as well.

2. What is the total current liabilities?

Solution:
Accounts Payable 8,000,000
A/R (abnormal balance) 1,250,000
A/P (abnormal Balance) 1.050.000
Bonds Payable 1,000,000 11,300,000
Notes Payable 3,000,000
Bank overdraft 1,000,000
Accrued expenses 450,000
Total Current Liabilities 15,750,000

*Entry on Bank overdraft Dr. A/P 1,000,000 Cr. Cash 1,000,000. so ibabalik sya sa
Payable
 3. What is the working capital ratio of A Company? Express answers in nearest whole
percentage (ex. 51%)
Solution:
Total Current Asset 21,880,000
÷Total Current Liabilities 15,750,000
Working Capital Ratio 1.39 or 139%

Problem 7

A Company provided the following information for the current year:

December 31 January 1

Current assets 1,200,000 ?

Property, Plant and Equipment 2,700,000 3,500,000

Current liabilities ? 700,000

Non-current liabilities 1,500,000 ?

Working capital ? 800,000

Net loss 100,000 -

REQUIRED (3 ITEMS):

Assuming there were no dividends declared nor other changes in capital:

1. How much is the current liabilities in December 31 if working capital remained unchanged as
of year-end?
Solution:
Current Asset 12/31 1,200,000
Working Capital (800,000)
Current Liabilities 400,000

2. How much is the shareholder's equity on January 1?

Solution:
Current Asset 1,200,000
PPE 2,700,000
Current Liabilities (400,000)
Non-current Liabilities (1,500,000)
Shareholders Equity 12/31 2,000,000
Net Loss 100,000
Shareholders Equity 1/1 2,100,000

*Add back net loss to get beginning shareholder's equity.

3. How much is the noncurrent liabilities in January 1?

Solution:
Working Capital 800,000
PPE 1/1 3,500,000
Current Asset (2,100,00)
Noncurrent Liabilities 2,200,000
Problem 8

On January 1, 2020, A Company sold a building to B Company with a carrying amount of P4,200,000 for
P5,500,000 and immediately leased it back. The building had a fair value of P4,700,000 at the date of
sale, and had a remaining useful life of 10 years.

Additional information on the lease is as follows:

Lease term 5 years

Annuity made in advance P500,000

Implicit rate 10%

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine total rent income recognized by B Company in 2020.

Solution:
PV advance annuity @ 10% for 5 years 4.1699

Annual Payment Advance 500,000

PV advance annuity @ 10% for 5 years 4.1699
Lease Liability 2,084,950

Sale 5,500,000
Building @ FV (4,700,000)
Financial Asset 800,000

Annual Payment Advance 500,000

Multiply by: (2,084,950 - 800,000) 1,284,950
÷ Lease Liability 2,084,950
Rent Income 308,149
Problem 9

On January 1, 2020, Lessee Company entered into an a lease agreement to use an office space for 8
years. The initial contract signed on that date reflected payments to be made annually starting
December 31, 2020 of P500,000 for two floors of a building totaling 5,000 sq.m. The implicit rate for
the lease was determined to be 8%.

On January 1, 2022, the contract was amended because Lessee Company intended to cut costs. The
lessee will no longer occupy a portion of the first floor with a size of 1,000 sq.m. In exchange, the
lease payments will be reduced to P400,000 for the remaining term on the lease. Computed implicit
rate is 9%.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine the net increase (decrease) in Lessee Company's 2022 net income due to lease
transactions.
Solution:
PV of ordinary annuity of 1 @ 8% for 8yrs 5.7466
PV of ordinary annuity of 1 @ 8% for 6yrs 4.6229
PV of ordinary annuity of 1 @ 9% for 6 yrs 4,4859

Lease payment 500,000

PV of ordinary annuity of 1 @ 8% for 6yrs 4.6229
Lease liability before modification 2,311,450
Multiply by: 1/5
Decrease in LL due to termination 462,290

Lease Payment 500,000

PV of ordinary annuity of 1 @ 8% for 8yrs 5.7466
Lease Liability 2,873,300
Lease terms x 6/8
ROUA 2,154,975
Multiply by: 1/5
Decrease in ROUA due to termination (430,995)
Termination Gain 31,295

Lease liability after termination 1/1/22 (2,311,450 x 4/5) 1,849,160

Lease liability 1/1/22 after all modification (400,000 x 4.4859) (1,794,360)
Decrease in liab due to modification apart from termination 54,800

ROUA, 1/1/2022 after termination (P2,154,975*4/5) P1,723,980

ROUA, 1/1/2022 after termination & adjustments

(P1,723,980-P54,800) 1,669,180

Interest expense, 2022 (P1,794,360*9%) P161,492

Depreciation expense, 2022 (P1,669,180/6) P278,197

Total decrease on net income (P31,295-P161,492-P278,197) (P408,394)

*Alternatively, if you computed Lease Liability before modification by amortization

from 2020, net decrease may be P408,405
Problem 10

On January 1, 2020, A Company sold a building to B Company with a carrying amount of P4,200,000 for
P5,500,000 and immediately leased it back. The building had a fair value of P4,700,000 at the date of sale,
and had a remaining useful life of 10 years.

Additional information on the lease is as follows:

Lease term 5 years

Annuity made in advance P500,000

Implicit rate 10%

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine total rent income recognized by B Company in 2020.

Solution:

Lease liability 1/1/2020 (P500,000*4.1699) = P2,084,950

Financial Asset (P5,500,000-P4,700,000) = P800,000

Rent income, 2020 (P500,000*P1,284,950/P2,084,950) = P308,149

Problem 11

On January 1, 2020, Lessee Company entered into an a lease agreement to use an office space for 8 years.
The initial contract signed on that date reflected payments to be made annually starting December 31, 2020
of P500,000 for two floors of a building totaling 5,000 sq.m. The implicit rate for the lease was determined
to be 8%.

On January 1, 2022, the contract was amended because Lessee Company intended to cut costs. The lessee will
no longer occupy a portion of the first floor with a size of 1,000 sq.m. In exchange, the lease payments will be
reduced to P400,000 for the remaining term on the lease. Computed implicit rate is 9%.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine the net increase (decrease) in Lessee Company's 2022 net income due to lease transactions.

Solution:

Lease Liability 1/1/2020 (P500,000*5.7466) = P2,873,300

ROUA, 1/1/2022 (P2,873,300*6/8) = P2,154,975
Lease liability before modification, 1/1/2022 (P500,000*4.6229) = P2,311,450

Decrease in LL due to termination (P2,311,450*1/5) = P462,290

Decrease in ROUA due to termination (P2,154,975*1/5) = P430,995
Termination Gain (P462,290-P430,995)= P31,295

Lease liability, after termination 1/1/2022 (P2,311,450*4/5) = P1,849,160

Lease liability 1/1/2022, after all modification (P400,000*4.4859) = P1,794,360
Decrease in lease liability due to modification, apart from termination (P1,849,160-P1,794,360)
= P54,800

ROUA, 1/1/2022 after termination (P2,154,975*4/5) = P1,723,980

ROUA, 1/1/2022 after termination and adjustments (P1,723,980-P54,800) = P1,669,180

Interest expense, 2022 (P1,794,360*9%) = P161,492

Depreciation expense, 2022 (P1,669,180/6) = P278,197

Total decrease on net income (P31,295-P161,492-P278,197) = (P408,394)

Alternatively, if you computed Lease Liability before modification by amortization from 2020,
net decrease may be P408,405.
Problem 12

A company established in retailing machinery leased a machine to another entity on January 1, 2020. The
machine had a useful life of 8 years and was bought by the company for P4,000,000. On January 1, 2020, the
machine had a fair value of P5,500,000, with an unguaranteed residual value of P500,000.

It was agreed that the lessee will pay annual payments of P1,500,000 starting December 31, 2020 for 5 years
at an implicit rate of 12%.

There was no transfer of title provided in the lease contract.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine realized interest income recognized by the lessor in 2020.

Solution:

PV of minimum lease payments (P1,500,000*3,6048) = P5,407,200

Realized interest income @ 12% = P648,864

Problem 13

A machine was bought by a financing company for P2,000,000. It was later leased out to another company
under direct financing on January 1, 2020. The machine had an unguaranteed residual value of P200,000.

At the end of the lease term of 5 years, the lessee will return the machine to the financing company. The
lease involved advance annual payments of P500,000 and had an implicit interest rate of 10%.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine net lease receivable of the lessor as of December 31, 2020.

Solution:

*BONUS - requires interpolation

By interpolation, implicit rate using cost of P2,000,000 is 15.823%

Net Lease Receivable, 1/1 (equal to cost) = P2,000,000

Interest expense (P2,000,000*15.823%) = P316,460

Net Lease Receivable, 12/31 (P2,000,000+P316,460-P500,000) = P2,116,460

*Differences arise from rounding off of rate and PV factor

*If cost is equal to PV of MLP, residual value/PO, and initial direct costs, there is no need to
interpolate.

Problem 14

On March 1, 2020, a company leased a machine from a lessor for 1 year. On the basis of the lease term, it was
appropriately accounted for as an operating lease by the company.

The lease required a total payment of P1,200,000 and the lessee paid an additional 10% as an incentive to
obtain the lease.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine total rent expense recognized by the lessee in 2020.

Solution:

Total payments related to the lease (P1,200,000*1.1) = P1,320,000

Rent expense, 2020 (P1,320,000*10/12) = P1,100,000

*Rent expense is recognized on a straight-line basis for operating leases. Any lease incentive
shall be amortized over the lease term.
Problem 15

On January 1, 2020, A Company sold a machine for P10,000,000 and immediately leased it back. At the time,
the fair value of the machine was P11,000,000. B Company agreed to lease it to A Company at annual year-end
payments of P500,000 for 6 years at an implicit rate of 10%.

The machine initially cost A Company P12,000,000 and was depreciating it for a total economic useful life of
24 years. It was ascertained that the machine had an accumulated depreciation of P500,000 right before the
sale was made.

USE PV FACTORS ROUNDED TO 4 DECIMALS.

ROUND FINAL ANSWERS TO NEAREST PESO.

Determine total gain (loss) recognized by A Company on the sale on January 1, 2020.

Solution:

Lease Liability (P500,000*4.3553) = P2,177,650

Excess of fair value over sales price = P1,000,000

Right transferred (P11,000,000-P2,177,650-P1,000,000) = P7,822,350

Total loss (P11,000,000-(P12,000,000-P500,000)) = (P500,000)

Loss on right transferred (-P500,000*P7,822,350/P11,000,000) = (P355,561)

Problem 16

The summarized general ledger trial balance of A Company, an investment company, includes the following
accounts as of December 31, 2020:

Debit Credit

Cash P140,000

Savings deposits 2,257,380

Dividends receivable 313,860

Interest receivable 9,560

Outstanding settlements receivable 98,000

Financial assets at fair value through profit or

1,369,100
loss
Financial assets at fair value through other
37,609,440
comprehensive income

Deferred tax 13,100

Outstanding settlements payable P205,060

Interest payable 5,600

Other payables 1,660

Current tax payable 4,840

Provision for employee benefits 15,040

Deferred tax 1,128,280

Share capital 27,360,480

Net Unrealized Gains on Financial Assets at Fair

7,521,800
Value through Other Comprehensive Income

Retained Earnings 5,567,680

P41,810,440 P41,810,440

 Financial assets classified at fair value through other comprehensive income is held for long-term returns.
 P10,00 included in Provision for employee benefits is expected to be settled within the next reporting
period.

Required:

1. Determine working capital as of December 31, 2020.

Solution:

Current assets
(P140,000+P2,257,380+P313,860+P9,560+P98,000+P1,369,100) = P4,187,900
Current liabilities
(P205,060+P5,600+P1,660+P4,840+P10,500) = P227,660

Working Capital (P4,187,900-P227,660) = P3,960,240

2. Determine total shareholders' equity as of December 31, 2020.

Solution:

Shareholder's Equity (P27,360,480+P7,521,800+P5,567,680) = P40,449,960

*Cumulative unrealized gains/losses on FA@FVOCI are reported as separate line item as part of
SHE in SOFP. The movement thereto during the period is reported as part of other
comprehensive income in SOCI.
 PRACTICE QUESTIONS 1 (IA3) (Midterms)

Problem 1

A company has a total of 70 employees. The employees are granted 10 days of paid sick leaves each if the
employees are still employed at the end of the year. The sick leaves accumulate and may be taken starting
January 1 of the next year.

The employees' hourly wage in 2020 is P50, while in 2021, this increased to P65. Employees work 8 hours per
day.

On average, an individual employee took 7 sick leaves in 2020.

If the liability for sick leaves are recorded at each year-end using the wage rate for that year, how
much should be reported as accrued sick leave benefits on December 31, 2021?

Solution:

Sick leaves earned (2020-2021) = 1400

Sick leaves taken in 2020 = 490
Rem, 12/31/21 = 910

Accrued sick leave benefits, using CY rate = 473,200

Problem 2

A company leased machinery on January 1, 2020. The machinery had a useful life of 20 years.

The lease term was 15 years and the company is obligated to pay annual rental of P600,000 in advance, with
the first payment to be made on January 1, 2020. The fair value of the machinery at commencement date was
deemed to be P5,000,000, the same amount the company recorded its lease asset and liability on its books at
the time.

Implicit interest rate was 10%.

Determine lease liability to be reported under noncurrent liabilities in the December 31, 2021
statement of financial position

Solution:

Use PVF for annuity in advance. Compute interest expense after payment is deducted.

PV of LL, 1/1/20 = 5000000

Deduct first payment, add interest expense.

PV of LL, 12/31/20 = 4840000

Deduct second payment, add interest expense.

PV of LL, 12/31/21 = 4664000

Current portion is 600000 (payment on 1/1/22). Since this is made in advance, no discount will
be deducted.

Difference between 4664000 and the current portion is:

Noncurrent portion = 4,064,000

Problem 3

A company grants its employees a week of paid vacation leave for each full year of employment. Vacation
leaves are cumulative and carried forward to succeeding years, paid at the rate of the salary in effect when
the vacation was taken or when employment is terminated, whichever is earlier.

At the beginning of the current year, the company had a liability for accumulated vacations of P400,000.

The entity granted a 5% salary increase in July 1, 2020. P150,000 of accrued vacations was taken by
employees in the first half of 2020, before the salary increase took place.

Meanwhile, total amount of vacations earned for the employment in 2020 adjusted to the current salary rate
amounted to P180,000.

Assuming no turnover of employees during the current year, what amount should be reported as vacation
leave expense during the current year?

Solution:

Leaves not taken as of 7/1/20 = 250000

Adjusted to current rate = 262500
Liability, 12/31 = 442500
Liability, 1/1 = 400000
Increase = 42500
CY leaves earned, granted at current rate = 180000

CY vacation leave expense = 192,500

Problem 4

A company reported the following temporary differences between financial income and taxable income for
the current year:

Accounting depreciation in excess of tax depreciation 500,000

Taxable installment sales income in excess of reported installment
1,200,000
sales income
Accrual made for warranty liability in excess of actual claims 850,000

Taxable income for the year amounted to P9,300,000. Enacted rate for tax purposes is 30%.

Determine the total tax expense.

Solution:

Accounting income subject to tax (work back from tax income, consider temporary differences)
= 6,750,000

Total tax expense (30%) = 2,025,000

Problem 5

At the beginning of the current year, a company reported the fair value of its plan assets at P5,000,000 and
its projected benefit obligation at P7,500,000.

The company paid a lump sum payment of P640,000 to certain participants in exchange for their rights to
receive specified postemployment benefits. The present value of the defined benefit obligation settled was
P980,000.

Current service cost during the year was P540,000. Actual return on plan assets was P720,000. The company
also made contributions of P300,000 to the plan.

Using a discount rate of 10%, determine the total employee benefit expense to be reported in profit or
loss.

Solution:

Net Interest expense = 250000

CSC = 540000
Gain on DBO settled = 340000

Employee benefit expense = 450,000

Problem 6

A company has established a defined benefit pension plan. Annual payments are 3% of the highest lifetime
salary multiplied my the number of years spent with the entity. On December 31, 2020, an employee has
worked for the company for 8 years. 2020 salary was P400,000, and will increase at an average of 5% per
year.

The employee is expected to retire in 20 years, and will live for 10 more years after retirement. The
employee will receive their first annual pension payment one year after retirement.

Using a discount rate of 7%, determine the interest expense on the defined benefit obligation to be
reported on the December 31, 2021 income statement.

(use PV factor rounded to 4 decimal points)

(round final answer to nearest peso)

Solution:

Future Salary = 1061320

Annual Payment = 254716.80
PV of payments, 12/31/45 = 1789029
PBO, 12/31/20 = 462285.07
Interest expense, 2021 = 32,360

Problem 7

The following beginning balances are provided regarding Company A's financials for 2020:

Dec-31 01-Jan

PBO 2,100,000 3,500,000

FV of plan assets 3,500,000 3,800,000

Asset ceiling 1,200,000 200,000

During the year, current service costs amounted to P800,000. Actual return on plan assets was P750,000.
The company also made contributions to the plan of P550,000.

The employee benefit liability increased by P85,000 due to actuarial assumptions. Discount rate used was 8%.

Determine the net remeasurement gain (loss) for the year 2020.

(If necessary, use "( )" or "-" to mark your answer properly)

Solution:

Rem Gain on FVPA = 446000

Rem Loss on PBO = 85000
Rem Loss on EAC = 92000

NET REM GAIN = 269,000

Problem 8

A company started its operations in 2020, manufacturing machines to be sold on installment. The company
recognizes revenue when the machine is sold for financial purposes and when installment payments are
received for tax purposes.

In 2020, gross profit from operations was P2,500,000 for financial purposes and P1,200,000 for tax purposes.
P1,000,000 will be received in 2021 and P300,000 in 2022.

In addition, the company provides for a warranty service on its products for two years. The company accrued
P1,200,000 in warranty expense during 2020 and paid P750,000 in warranty costs for the same year.
P268,000 and P182,000 will be paid in 2021 and 2022, respectively.

During 2020, the company also earned P175,000 in interest income, net of final tax, and paid P80,000 in
insurance premiums for a life insurance taken on one of its officers. The entity is the beneficiary of the
policy.

If pretax accounting income in 2020 was P3,000,000 and tax rate is 30%, how much is the reported
total tax expense for 2020?

Solution:

Accounting income subject to tax (take out permanent differences: interest income not
subject to tax and life insurance premium) = 2905000

Total tax expense (30% of 2905000) = 871,500

Problem 9

A company has an established profit sharing bonus plan whereby a qualified employee is allowed a 10% bonus
based on the company's income if the employee has continuously served during the current year and the
succeeding year. Due to this, the company expects that it will be able to avoid 6% of the maximum possible
bonus payment. The bonus will be paid at the end of the succeeding year.

If the income in 2020 was P15,000,000, how much should be reported as employee benefits expense
related to the bonus in 2020?

Solution:

Max possible bonus = 1500000

94% of max possible bonus = 1,410,000

Problem 10

On January 1, 2020, a company entered into a 12-year lease for the use of an equipment. Annual lease
payments of P800,000 are payable at the end of each year.

The equipment had an economic useful life of 15 years.

A residual value for the equipment of P350,000 at the end of the lease was guaranteed by a third party.

Interest rate implicit to the lease is 10%.

Determine the lease liability to be reported under current liabilities in the December 31, 2020
statement of financial position.

(Use present value factors with 4 decimal points)

(Round final answer to nearest peso)

Solution:

Use PVF for regular annuity. Compute interest expense before first payment is deducted.

PV of LL, 1/1/20 = 5450960

Add interest expense, deduct payment.

PV of LL 12/31/20 = 5196056

Since this is regular annuity, deduct discount (next year's interest expense) from next
payment to get PV of current portion:

Current portion of LL = 280,394

Problem 11

A company has a projected benefit obligation with a beginning balance of P5,500,000 in 2020.

During the year, the company recorded total service cost of P950,000 and paid P770,000 in benefits to its
employees. There were no changes in actuarial assumptions during the year.

Using a discount rate of 8%, determine the balance of the projected benefit obligation as of December
31, 2020.

Solution:

Answer 6,120,000

Problem 12

At the beginning of the current year, a company entered a lease agreement for the use of a warehouse. The
transaction was initially recorded at P5,200,000, this included purchase option of P185,000. The company is
reasonably certain to exercise the option.

The warehouse had an estimated fair value of P250,000 at the end of its useful life of 10 years. However,
the company is allowed by the contract to use the warehouse for 8 years only.

Determine depreciation expense for the current year on the right-of-use asset.

(Round final answer to nearest peso.)

Solution:

495,000

Since PO is reasonably certain to be exercised, consider SV to get depreciable amount and use EUL
instead of lease term.
Problem 13

A company provided the following plan information for the current year:

Dec-31 01-Jan
Projected benefit obligation 2,500,000 2,350,000
Accumulated benefit obligation 1,800,000 1,900,000

The company paid benefits to employees amounting to P350,000. Past service cost recognized was P200,000,
while actuarial gains of P100,000 was recognized on the liability.

Using a discount rate of 9%, determine the reported current service cost for the current year.

Answer:

188,500

Problem 14

During the year, a company reported current and past service costs of P250,000 and P120,000, respectively.
Interest income on plan assets was P350,000 while interest expense on the benefits liability was P650,000.

Actual return on plan assets amounted to P180,000.

Determine total defined benefit cost for the current year.

Formula:

Total DBC = EBE + REM L(G)

= 840,000

Problem 15

On January 1, 2020, a company entered into a lease for a machine for 6 years. The company will pay annual
rental of P2,000,000 payable at the end of each year. The company also paid P250,000 to the lessor to obtain
the lease. Annual executory costs of P80,000 will be borne by the lessee.

The lessee also guaranteed a residual value of P200,000 and is required by contract to incur dismantling costs
with present value at commencement date of lease of P320,000.

The machine's economic useful life is 10 years. Rate implicit to the lease is 8%.

Determine carrying amount of the ROUA on December 31, 2021.

(Use present value factors with 4 decimal points)

Solution:

PV of future lease payments (with RVG) = 9371840

ROUA, 1/1/20 (add payment to obtain lease and dismantling costs) = 9941840
2-year depreciation = 3247280

CA of ROUA, 12/31/21 = 6,694,560

Problem 16

At the beginning of 2020, a company leases a new machine for annual rental of P700,000 payable at the
beginning of each year, with the first payment made in the beginning of 2020.

The lease contract was for 6 years and the machine's economic life was 8 years. Interest rate implicit to the
lease was 10%.

Determine lease liability to be reported on December 31, 2021.

(Use present value factors with 4 decimal points)

(Round final answer to nearest peso)

Solution:

Use PVF for annuity in advance. Compute interest expense after payment is deducted.
 PV of LL, 1/1/20 = 3353560

Deduct first payment, add interest expense.

PV of LL, 12/31/20 = 2918916

Deduct second payment, add interest expense.

PV of LL, 12/31/21 = 2,440,808

Problem 17

At the beginning of the current year, a company reported projected benefit obligation of P8,000,000 and fair
value of plan assets of P7,000,000.

During the current year, discount rate is 8%. The current service cost for the year was P200,000. The
company contributed P900,000 to the plan and paid benefits amounting to P700,000.

Actual return on the plan assets amounted to P350,000. While the projected benefit obligation decreased by
P150,000 due to changes in actuarial assumptions.

Determine the prepaid (accrued) benefit cost as of the end of the current year.

(If necessary, use "( )" or "-" to mark your answer properly)

Solution:

FVPA = 7,550,000
PBO = 7,990,000
Accrued Benefit cost = (440,000)