Instructions: Read the directions carefully for each part of the test.

Anybody caught in the act of

cheating and the person allowing another to cheat will be sent to the discipline’s office and both will have
a final grade of zero for this subject. The professor is the only person to entertain any questions. Any
violation of the University’s policy shall be dealt with immediately. God bless.
A. TRUE OR FALSE (10 points) – On your answer sheet, write letter A if the statement is
correct and write letter B if the statement is incorrect. Write the letter of your choice in
CAPITAL LETTER.
1. Nontaxable revenues are added to, and nondeductible expenses are deducted from financial income
to determine the income that is subject to tax.
2. Rent revenue received in advance is recognized as revenue for financial reporting purposes prior
to its recognition for tax purpose
3. Permanent difference is always deducted to compute for taxable income of an entity.
4. Deferred tax asset and deferred tax liabilities shall never be classified as current asset (liability) in the
statement of financial position.
5. Fair value of plan assets and the projected benefit obligation are to be reported separately in the
statement of financial position because offsetting is not permitted under PAS 1.
6. A temporary difference originates in one period and reverses, or turns around, in one or more later
periods. 
7. Expenditures currently deducted in the tax return but not included with expenses in the income
statement until subsequent years create deferred tax liabilities. 
8. Future taxable amounts result in deferred tax assets. .
9. A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as
current to the extent that the NOL will be recovered in the following year.
10.  Revenues from installment sales of property reported on financial statements in prior years and
currently reported in the tax return create deferred tax assets.

B. MULTIPLE CHOICE (10 points) – On your answer sheet, write the corresponding letter of
the best answer. Write the letter of your choice in CAPITAL LETTER.
1. The difference between accounting income and taxable income that do not have tax consequence are
called
A. permanent differences
B. timing differences
C. temporary differences
D. perpetual differences

2. Under defined benefit plans,

A. the entity’s obligation is to provide the agreed benefits to current and former employees.
B. the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to
the fund.
C. actuarial risk (that benefits will be less than expected) and investment risk (that assets invested
will be insufficient to meet expected benefits) fall, in substance, on the employee.
D. the amount of the post-employment benefits received by the employee is determined by the
amount of contributions paid by an entity (and perhaps also the employee) to a post-employment
benefit plan or to an insurance company, together with investment returns arising from the
contributions.

3. Which of the following is not classified as part of service component under IAS 19, “Employee
Benefits”?
A. net interest

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 B. past service cost
C. current service cost
D. gain on settlement
E. Both A and D

4. Beefsteak Company pays sick leave to its employee up to a maximum of ten days per year. The
unused sick leave is not carried forward to future years. Beefsteak should:
A. recognized sick leave as expense when actually paid.
B. recognized an estimate current liability for unused sick leave at the end of the period.
C. recognized an estimated non-current liability for unused sick leave at the end of each period.
D. accrue sick leaves based on historical rates of absents.

5. Under IAS 19, how is actuarial gain of loss handled?

A. difference of actual return of plan asset and interest expense is recognized in full in profit or loss.
B. increase in defined benefit obligation after effecting the new actuarial assumption is recognized in
full in other comprehensive income.
C. difference of interest expense and interest income is recognized in full in other comprehensive
income.
D. actuarial gain or loss is not accounted under IAS 19.

6. All of the following can result in a temporary difference between pretax financial income and taxable
income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. provision for pending lawsuits.
d. product warranty costs.

7. Which of the following items results in a temporary difference deductible amount for a given year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value through
profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

8. These are changes in the present value of the defined benefit obligation resulting from experience
adjustments and the effects of changes in actuarial assumptions.
a. Past service cost c. Settlement gains and losses
b. Actuarial gains and losses d. Interest cost

9. Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on held for trading securities
d. Depreciation

10. Financial reporting standards for pension currently in effect

a. allow both the accrued benefit and projected benefit methods.
b. allow only the accrued benefit method/ projected unit credit method.
c. allow only the projected benefit method.
d. do not allow either the accrued benefit or projected benefit methods.

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PROBLEM SOLVING (2 points each – 40 points) – Write your final answers on your answer sheet
and present your solutions in good accounting format using worksheets.

Use the following information for the next four items.

As of January 1, 2019, Logic Company reported accrued pension related to its defined benefit plan
amounting to P450,000. The projected benefit obligation as of this date using the projected credit unit
method amounted to P1,750,000. It was determined by the actuary that the asset ceiling, if needed, was
P1,000,000 as of January 1, 2019 and P1,300,000 as of December 31, 2019.

The interest rate of time deposits, incremental borrowing rate of Logic, and interest rate of high-quality
corporate bonds for 2019 were 1.5%, 7% and 6%, respectively. During 2019, Logic contributed P550,000
to the plan. Current service cost amounted to P300,000 while actuarial loss amounted to P75,000. The
plan assets were able to generate income of P150,000 during the year. Benefits with present value of
P200,000 were settled at a price of P150,000.

1. How much is the prepaid or accrued pension as of December 31, 2018? Indicate if prepaid or accrued.
2. How much is the benefits expense for 2019?
3. How much is the re-measurement gain or loss for 2019? Indicate if gain or loss.
4. How much is the prepaid or accrued pension as of December 31, 2019? Indicate if prepaid or accrued.

Use the following information for the next four items:

The following were obtained from the records of Pilot Company as of December 31, 2019:
Carrying Tax Base
Amount
Computer P1,000,000 -
software
Machinery ? ?
Accrued liability 400,000 -
Additional information:
 The computer software account represents costs that were properly capitalized after establishment of
technological feasibility. As per tax laws, research and development costs must be expensed outright.
 Pilot depreciates its machinery using the straight-line method of depreciation while the machinery is
depreciated using the sum-of-the-years’ digits method for tax purposes. The machinery was acquired
on January 1, 2019 for P3,000,000 with useful life of 5 years and salvage value of P100,000.
 The accrued liability shall be tax deductible upon payment of cash.
 The pre-tax financial profit reported is P2,000,000 and the statutory tax rate is 30%.
 There were no temporary differences as of January 1, 2019.
5. How much is the deferred tax asset (liability), net as of December 31, 2019?
6. How much is the taxable income for 2019?
7. How much is the current income tax expense for 2019?
8. How much is the deferred income tax expense (benefit) for 2019?

Use the following information for the next two items:

As of February 14, 2018, Acer planned to close one of its operating segments. The plan was
approved by the board of directors on March 31, 2018 and the segment will be closed on January
31, 2019. As indicated in the plan, 150 employees will be terminated and each employee will

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receive a lump-sum amount of P120,000. Employees who wish to leave before the closure will
only receive 75% of the lump-sum amount. The decision to close the plant was also announced
to the employees on March 31 on the same date, and all employees accepted the offer. It is
estimated that 16% of the employees will leave before the closure of the plant and the remaining
employees will render services until the plant is closed.

On September 28, 2018, 15 employees left and were paid the amount due to them. A further 7
employees left on December 10, 2018. As of year-end, Acer still expects that 16% of the
employees will leave before the closure of the plant. On January 10, 2019, a further 6 employees
left the entity. The remainder left on the closure date and were paid the full amount due to them.

9. How much is the total expense to be recognized in 2018 by Acer?

10. How much is the total expense to be recognized in 2019 by Acer?

Use the following information for the next three items:

Information on Nine Co.’s defined benefit plan is shows the following information: Fair value of plan
assets, Jan. 1 - 5,000,000; Present value of defined benefit obligation, Jan. 1 - 6,000,000; Current service
cost 2,400,000; Net gain on settlement of plan during the year 160,000; Actuarial losses during the
period 80,000; Gain on change in the fair value of reimbursement asset - Virtually certain 120,000;
Actual rate of return on plan assets 12%; Discount rate 10%

11. How much is the defined benefit cost?

12. How much is the defined benefit cost that affects profit or loss?
13. How much is the defined benefit cost that affects other comprehensive income?

14. Woody Corp. had taxable income of P8,000 in the current year. The amount of MACRS depreciation
was P3,000 while the amount of depreciation reported in the income statement was P1,000. Assuming
no other differences between tax and accounting income, Woody's pretax accounting income was?

15. Bumble Bee Co. had taxable income of P7,000, MACRS depreciation of P5,000, book depreciation
of P2,000, and accrued warranty expense of P400 on the books although no warranty work was
performed. What is Bumble Bee's pretax accounting income?

16. In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and no
deferred tax liability. For 20x1, Quinn reported pretax financial statement income of ₱300,000.
Temporary differences of ₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December
31, 20x1, Quinn had cumulative taxable differences of ₱70,000. Quinn's effective income tax rate is
30%. In its December 31, 20x1, income statement, what should Quinn report as deferred income tax
expense?

17. Basa Air Base Co. is determining the amount of its pretax accounting income for the year by making
adjustment to taxable income from the company’s year-end income tax return. The tax return
indicates taxable income of P100,000, on which a tax liability of P30,000 has been recognized
(P100,000 x 30% = P30,000). Additional information is shown below:

Goodwill impairment loss not included as a deduction in the tax return but may 35,000

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 be deducted for financial reporting
Interest income on savings and time deposits with private banks 6,000
Revenues from instalment sales are recognized as goods are sold but are taxed 40,000
out only when installment payments are collected
Excess depreciation recognized for financial reporting over depreciation 10,000
recognized for taxation purposes due to shorter depreciation period used for
financial reporting
Bad debt expense recognized using the allowance method 15,000

Compute the pretax income?

Use the following information for the next three items:

Fair value of plan assets, Jam. 1 20x1 4,000,000
Present value of defined benefit obligation, Jan. 1, 20x1 4,800,000
Current service cost 1,200,000
Benefits paid 1,000,000
Return on plan assets 320,000
Contributions to the plan 880,000
Actuarial losses during the period 120,000
Discount rate 10%

18. How much is the prepaid/accrued benefit cost as of January, 1 20x1?

19. How much is the net defined liability (asset) as of December 31, 20x1?
20. How much is the defined benefit cost?

STRAIGHT PROBLEM (10 points) – Write your final answers on your answer sheet and present
your solutions in good accounting format using worksheets.

Pore Seasons Company computed its taxable income for the year as follows:
Total Taxable Revenues (a) P10,500,000
Deductible Expenses (b) 8,700,000
Net Taxable Income (before NOL) P1,800,000

The entity had the following additional information at the end of 2019:
(a) The total taxable revenues do not include dividend received from one of its investment in a non-
publicly listed domestic corporation worth P60,000 and tax-exempt interest income of P20,000.
(b) Total expenses for the year amounted to P8,950,000. Of these amounts, P200,000 pertain to fines and
penalties paid to several regulatory agencies for the late filing of business permit and taxes. An
additional amount of P50,000 difference relates to excess entertainment expenditures which were
beyond the limit allowed by the BIR (Bureau of Internal Revenue).

(c) The entity had an allowance for doubtful accounts of P60,000 at the end of the year, wrote-off
P80,000 worth of accounts receivable and recognized a total of P40,000 doubtful accounts expense.

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(d) The entity also had accrued other income at the end of the year amounting to P195,000, collections of
accrued other income worth P240,000 during the year and other income of P90,000 recognized for
the year.

(e) A total of P150,000 was paid in the first three quarters of the year using the enacted tax rate. The
entity’s regular corporate tax rate is 30% in the current and future periods. The entity is also subject
to the minimum corporate income tax (MCIT) which is equivalent to 2% of the total taxable
revenue. The entity expects to continue its business indefinitely and does not forecast any future
losses despite the losses incurred in the prior years. The tax effect of any temporary differences,
carryforward of unused tax losses and carryforward of unused tax credits was appropriately
recognized in the previous years and was expected to be fully realizable. The entity has the following
unutilized NOL and excess MCIT credits from the previous years which are allowed to be utilized
within three years from the year of recognition:
2018 2017
NOL 360,000 150,000
Excess MCIT over RCIT 10,000 45,000

1. How much is the deferred tax asset (liability), net at the beginning of the year?
2. How much is the current tax expense/income tax expense-current for the year?
3. How much is the deferred tax asset (liability), as of December 31, 2019?
4. How much is the deferred tax expense/income tax expense-deferred for the year?
5. How much is the financial income/income before income tax for the current year?

PCC agrees to provide lump-sum retirement benefits to employees equal to 6% of final salary for each
year of service. Information on an employee shows the following: Monthly salary level on January 1,
20x1 P250,000; Annual salary increases by 3% starting January 1, 20x2 and every year thereafter;
Average service lives (5 years) before entitlement to retirement Benefits (January 1, 20x1 to December
31, 20x5); and Discount rate per year 10%.

6. How much is the PBO at year end in 20x1?

7. How much is the PBO at year end in 20x2?
8. How much is the PBO at year end in 20x3?
9. How much is the PBO at year end in 20x4?
10. How much is the PBO at year end in 20x5?

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