BONDS PAYABLE & OTHER LONG-TERM LIABILITIES

1. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

2. The term used for bonds that are unsecured as to principal is

a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

3. Bonds for which the owners’ names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.

4. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.

5. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate only.
b. nominal rate only.
c. stated rate only.
d. coupon rate, nominal rate, or stated rate.

6. The rate of interest actually earned by bondholders is called the

a. stated rate only.
b. yield rate only.
c. effective rate only.
d. effective, yield or market rate.

Use the following information for questions 07 and 08

Fox Co. issued P1,000,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.

7. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

8. Another step in calculating the issue price of the bonds is to

a. multiply P100,000 by the table value for 10 periods and 10% from the present value of an annuity table.
b. multiply P100,000 by the table value for 20 periods and 5% from the present value of an annuity table.
c. multiply P100,000 by the table value for 20 periods and 4% from the present value of an annuity table.
d. None of these answer choices are correct.

9. Real, Inc. issued bonds with a maturity amount of P2,000,000 and a maturity ten years from date of issue. If the bonds were
issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
10. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

11. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

12. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of
cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

13. Bond issuance costs, including the printing costs and legal fees associated with the issuance, should be
a. expensed in the period when the debt is issued.
b. recorded as a reduction in the carrying value of bonds payable.
c. accumulated in a deferred charge account and amortized over the life of the bonds.
d. reported as an expense in the period the bonds mature or are retired.

14. The amortization of a premium on bonds payable

a. decreases the balance of the bonds payable account.
b. increases the amount of interest expense reported.
c. increases the carrying amount of the bond.
d. increases the cash payment to bondholders.

15. An extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest
dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. All of these answer choices are correct.

16. “In-substance defeasance“ is a term used to refer to an arrangement whereby

a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.

17. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured
by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank P800,000 each
year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given statement of financial position date will be reported as a non-current liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied
to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.

18. A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When
such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair value of the property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis
for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.
19. When a note payable is issued for property, goods, or services, the present value of the note may be measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. All of these answer choices are correct.

20. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar items or from
current fair value of the note.
d. All of these answer choices are correct.

21. A discount on notes payable is charged to interest expense

a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.

22. In a debt extinguishment in which the debt is continued with modified terms and the carrying value of the debt is more than the
fair value of the debt,
a. a loss should be recognized by the debtor.
b. a new effective-interest rate must be computed.
c. a gain should be recognized by the debtor.
d. no interest expense should be recognized in the future.

23. In a debt extinguishment in which the debt is settled by a transfer of assets with a fair value less than the carrying amount of the
debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. None of these answer choices are correct.

24. In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the date of settlement
whenever the
a. carrying amount of the debt is less than the total future cash flows.
b. carrying amount of the debt is greater than the present value of the future cash flows.
c. present value of the debt is less than the present value of the future cash flows.
d. present value of the debt is greater than the present value of the future cash flows.

25. Which of the following is an example of “off-balance-sheet financing “?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of “off-balance-sheet financing.”

26. Many companies believe that off-balance-sheet financing

a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance
sheet.
b. wishes to confine all information related to the debt to the income statement and the statement of cash flows.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
d. is in violation of IFRS.

27. Long-term debt that matures within one year and is to be converted into shares should be reported
a. as a current liability.
b. in a special section between liabilities and equity.
c. as part current and part non-current.
d. as non-current if the refinancing agreement is completed by the end of the year.
28. Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?
a. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next
five years.
b. The present value of scheduled interest payments on long-term debt during each of the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next five years.
d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next
five years.

29. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.

Use the following information for questions 30 through 32

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of P1,000,000 and a stated
interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield
8%. Table values are:
Present value of 1 for 8 periods at 6% ........................................... .627
Present value of 1 for 8 periods at 8% ........................................... .540
Present value of 1 for 16 periods at 3%.......................................... .623
Present value of 1 for 16 periods at 4%.......................................... .534
Present value of annuity for 8 periods at 6%................................... 6.210
Present value of annuity for 8 periods at 8%................................... 5.747
Present value of annuity for 16 periods at 3% ................................. 12.561
Present value of annuity for 16 periods at 4% ................................. 11.652

30. The present value of the principal is

a. P534,000 c. P623,000
b. P540,000. d. P627,000

31. The present value of the interest is

a. P344,820 c. P372,600.
b. P349,560 d. P376,830

32. The issue price of the bonds is

a. P883,560. c. P889,560.
b. P884,820. d. P999,600

The following information applies to both questions 33 and 34

On October 1, 2020 Mack Corporation issued 5%, 10-year bonds with a face value of P1,000,000 at 108
(a 4% yield). Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an
effective-interest basis.

33. The entry to record the issuance of the bonds would include a credit of
a. P25,000 to Interest Payable c. P1,000,000 to Bonds Payable
b. P80,000 to Bonds Payable d. P1,080,000 to Bonds Payable.

34. Bond interest expense reported on the December 31, 2020 income statement of Mack Corporation would
be
a. P10,000 c. P13,500
b. P12,500 d. P21,600

35. Kant Corporation retires its P100,000 face value bonds at 102 on January 1, following the payment of
interest. The carrying value of the bonds at the redemption date is P96,250. The entry to record the
redemption will include a
a. debit of P5,750 to Loss on Extinguishment of Debt.
b. debit of P96,250 to Bonds Payable.
c. credit of P3,750 to Gain on Extinguishment of Debt.
d. debit of P3,750 to Bonds Payable.
36. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2020, contained the following
accounts.
5-year Bonds Payable 8% P1,600,000
Bond Interest Payable 50,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of 2016) 25,000
The total non-current liabilities reported on the statement of financial position are
a. P1,865,000 c. P1,965,000
b. P1,850,000 d. P1,950,000

37. On January 1, 2018, Trader Company issued its 8%, 4-year convertible debt instrument with a face
amount of P6,000,000 for P5,900,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 50,000 ordinary shares with a par value of P100. When the debt
instruments were issued, the prevailing market rate of interest for similar debt without conversion option
is 10%.
PV of 10% for an ordinary annuity of P1 after 4 periods 3.169865
PV of 10% after 4 interest periods .683013

Question 1: What is the amortized cost of the debt as of December 31, 2020?
a. P5,619,616 c. P5,791,735
b. P5,701,578 d. P5,890,909

Question 2: What is the amount of interest expense for the year ended December 31, 2019?
a. P561,962 c. P579,173
b. P570,158 d. P589,091

38. On January 1, 2018, Shredder Company issued its 10%, 4-year convertible debt instrument with a face
amount of P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt instrument is
convertible into equity from the time of issue until maturity. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 8%.

PV of 8% for an ordinary annuity of P1 after 4 periods 3.3121268

PV of 8% after 4 interest periods .7350298
On December 31, 2020, Shredder Company converted all the debt instruments by issuing 30,000 ordinary
shares.
What is the carrying value of the compound instruments as of December 31, 2020?
a. P3,356,829 c. P3,455,899
b. P3,408,269 d. P3,500,000

39. On January 1, 2018, Faith Company issued its 8%, 5-year convertible debt instrument with a face amount
of P8,000,000 for P7,700,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 50,000 ordinary shares with a par value of P100. When the debt
instruments were issued, the prevailing market rate of interest for similar debt without conversion option
is 10%.

PV of 10% for an ordinary annuity of P1 after 5 periods 3.7907868

PV of 10% after 5 interest periods .6209213

On December 31, 2020, all the convertible debt instruments were retired for P8,000,000. The prevailing
rate of interest on a similar debt instrument as of December 31, 2020 is 9% without the conversion
option.
PV of 9% for an ordinary annuity of P1 after 2 periods 1.7591112
PV of 9% after 2 interest periods .8416799

Question 1: What amount of gain or loss that should be reported in the profit or loss on the retirement of
the convertible debt instruments?
a. PP136,957 c. P 165,797
b. PP138,420 d. P 305,760
Question 2: What amount of gain or loss that should be reported directly in the shareholders’ equity on
the retirement of the convertible debt instrument?
a. P136,957 c. P165,797
b. P138,420 d. P305,760
 LEASES
LESSEE
Finance lease model - At the commencement of the lease, a lessee shall recognize a right-of-use asset and a
lease liability.
Operating lease model (IFRS 16 par 5) provides that a lessee is permitted to make an accounting policy to
apply the operating lease model. Under the operating lease model the lessee does not recognize an asset and
lease liability. The lessee may or may not use the operating lease model if the lease is short-term (has a term
of 12 months or less) or if the underlying asset is of low value. The lessee shall recognize the lease payments
as an expense in either a straight-line basis over the lease term or another systematic basis. The accounting
standard does not provide a quantitative threshold as to the amount of a low value lease. Low value asset is a
matter of professional judgment. Low-value underlying assets include personal computers, office equipment
and office furniture.

Initial Measurement:
Right-of-use asset is measured at cost. The cost should comprise:
a. The amount of the initial measurement of the lease liability
b. Any lease payments made at or before the commencement date, less any lease incentives received
c. Any initial direct costs incurred by the lessee and
d. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset,
restoring the site on which it is located or restoring the asset to the condition required by the terms and
conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the
obligation for those costs either at the commencement date or as a consequence of having used the
underlying asset during a particular period.

Lease liability is measured at the present value of the lease payments that are not paid at that date. The
lease payments shall be discounted using the interest implicit in the lease, if that rate can be readily
determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental
borrowing rate. At the commencement date, the lease payments included in the measurement of the lease
liability comprise the following payments for the right to use the underlying asset during the lease term that
are not paid at the commencement date.
A) Fixed payments (including in-substance fixed payments less any lease incentives receivable (such as
payment by the lessor to the lessee associated with a lease or the reimbursement or assumption by the
lessor of the costs of the lessee.
B) Variable lease payments that depend on an index or rate, initially measured using the index or rate as
at the commencement date (example, payments linked to a consumer price index, payments linked to a
benchmark interest rate (such as LIBOR) or payments that vary to reflect changes in market rental
rates).
C) Amounts expected to be payable by the lessee under residual value guarantees, and
D) Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.

Subsequent measurement
Right-of-use asset (under the cost model) is measured at cost less any accumulated depreciation and
impairment loss. The lessee shall apply normal depreciation policy for right-of-use asset. The lessee shall
depreciate the right-of-use asset over the useful life of the underlying asset under the following condition (a)
the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, and (b) the
lessee is reasonably certain to exercise a purchase option. If there is no transfer of ownership to the lessee
or if the purchase option is not reasonably certain to be exercised, the lessee shall depreciate the right -of-
use asset over the shorter between the useful life of the asset and the lease term.
Lease liability – the lease liability should be measured increasing the amount to reflect interest on the lease
liability, reducing the carrying amount to reflect the lease payments and remeasuring the carrying amount
to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.

Lease Modification
A lessee shall account for a lease modification as a separate lease if both
a) The modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
b) The consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
For a lease modification that is not accounted for as a separate lease, at the effective date of the lease
modification a lessee shall account for the remeasurement of the lease liability by
a. Decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the
lease for lease modifications that decreases the scope of the lease. The lessee shall recognize in the
profit or loss any gain or loss relating to the partial or full termination of the lease
b. Making a corresponding adjustment to the right-of-use asset for all other lease modifications.
LESSOR
At the commencement date, the lessor shall classify the lease as either an operating lease of finance lease. A
lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership
of an underlying asset. A lease is an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset. Examples of situations that individually or in
combination would normally lead to a lease classified as an operating lease.
a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
b. The lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the
inception date, that the option will be exercised
c. The lease term is for the major part of the economic life of the underlying asset even if title is not
transferred
d. At the inception date, the present value of the lease payments amounts to at least substantially all of the
fair value of the underlying asset and
e. The underlying asset is of such a specialized nature that only the lessee can use it without major
modification
Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:
a. If the lessee can cancel the lease, the lessor’s losses associated with the cancelation are borne by lessee
b. Gains or losses from the fluctuation in the fair value of the residual value accrue to the less and
c. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower
than market rent
Initial measurement
At the commencement date, the lessor shall recognize assets held under finance lease in its statement of
financial position and present them as a receivable at an amount equal to the net investment in the lease. The
lessor shall use the interest rate implicit in the lease to measure the net investment in the lease. In the case of
a sublease, if the interest rate implicit in the sublease cannot be readily determined, an intermediate lessor may
use the discount rate used for the head lease (adjusted for any initial direct costs associated with the sublease)
to measure the net investment in the sublease Initial direct cost, other than those incurred by manufacturer or
dealer lessors, are included in the initial measurement of the net investment in the lease and reduce the
amount of income recognized over the lease term.
At the commencement date, the lease payments included in the measurement of the net investment in the
lease comprise the following payments for the right to use the underlying asset during the lease term that are
not received at the commencement date:
a. Fixed payments (including in-substance fixed payments less any lease incentives.
b. Variable lease payments that depend on an index or rate, initially measured using the index or rate as at
the commencement date.
c. Any residual value guarantees provided by the lessor by the lessee, a party related to the lessee or a third
unrelated to the lessor that is financially capable of discharging the obligation under the guarantee
d. The exercise price of a purchase option if the lessee is reasonably certain to exercise the option
e. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option
to terminate the lease.
Manufacturer or Dealer lessors
At the commencement date, lessor shall recognize the following for each of its finance leases:
1. Revenue being the fair value of the underlying asset or if lower, the present value of the lease
payments accruing to the lessor, discounted using a market rate of interest
2. The cost of sale being the cost, or carrying amount if different, of the underlying asset less the present
value of the unguaranteed residual value and
3. Selling profit or loss (being the difference between revenue and the cost of sale
Subsequent measurement
A lessor shall recognize finance income over the lease term, based on a pattern reflecting a constant periodic
rate of return on the lessor’s net investment in the lease.
Lease modification
A lessor shall account for a modification to a finance lease as a separate lease if both
a. The modification increases the scope of the lease by adding the right to use one or more underlying
assets and
b. The consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract
For a modification to a finance lease that is not accounted for as a separate lease, a lessor shall account for
the modification as follows:
a. If the lease would have been classified as an operating lease had the modification been in effect at the
inception date, the lessor shall
1. Account for the lease modification as a new lease from the effective date of the modification and
2. Measure the carrying amount of the underlying asset as the net investment in the lease
immediately before the effective date of the lease modification
b. Otherwise, the lessor shall apply the requirements of IFRS 9
Operating leases (lessor)
A lessor shall recognize lease payments from operating leases as income on either a straight-line basis or
another systematic basis. The lessor shall apply another systematic basis if that basis is more representative
of the pattern in which benefit from the use of the underlying asset is diminished.
1. A lessor shall recognize costs, including depreciation, incurred in earning the lease income as an expense.
2. The lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of
the underlying asset and recognize those costs as and expense over the lease term on the basis as the
lease income.
3. The depreciation policy for depreciable underlying assets subject to operating leases shall be consistent with
the lessor’s normal depreciation policy for similar assets.
4. A lessor shall apply IAS 36 to determine whether an underlying asset subject to an operating lease is
impaired and to account for any impairment loss identified.
5. A manufacturer or dealer lessor does not recognize any selling profit on entering into an operating lease
because it is not the equivalent of a sale.
6. A lessor shall account for a modification to an operating lease as a new lease from the effective date of the
modification considering any prepaid or accrued lease payments relating to the original lease as part of the
lease payments for the new lease

Sale and Leaseback Transactions:

A, The transfer of the asset is a sale
a. The seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of
the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee.
Accordingly, the seller-lessee shall recognize only the amount of any gain or loss that relates to the
rights transferred to the buyer-lessor.

b. The buyer-lessor shall account for the purchase of the asset applying applicable standards and for the
lease applying the lessor accounting requirements.
If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or
if payments for the lease are not at market rates, an entity shall make the following adjustments to
measure the sales proceeds at fair value.
a) Any below-market terms shall be accounted for as a prepayment of lease payments; and
b) Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor
to the seller-lessee.

The entity shall measure any potential adjustment required (above) on the basis of the more readily
determinable of:
a) The difference between the fair value of the consideration for the sale and the fair value of the asset;
and
b) The difference between the present value of the contractual payments for the lease and the present
value of payments for the lease at market rates.

B. Transfer of the asset is not a sale

1. The seller-lessee shall continue to recognize the transferred asset and shall recognize a financial
liability equal to the transfer proceeds. It shall account for the financial liability under PFRS 9.
2. The buyer-lessor shall not recognize the transferred asset and shall recognize a financial asset equal
to the transferred proceeds. It shall account for the financial asset under PFRS 9

-----------------------------------------------------------------------------------------------------------------------------

1. Under IFRS 16, a lessee is required to recognize

a. A Right-of-used asset and lease liability at the inception date of the lease
b. A Right-of-used asset and lease liability at the commencement date of the lease
c. A Right-of-use asset and a Revenue at the inception date of the lease
d. A Right-of-use asset and a Revenue at the commencement date of the lease

2. The amount to be recorded as the cost of the Right-of-use asset in the books of the lessee
a. The amount of the initial measurement of the lease liability
b. Any lease payments made at or before the commencement date, less any lease incentives received plus any direct costs
incurred by the lessee
c. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset to the condition required
by the terms and conditions of the lease
d. All of the above comprises the cost of the right-of-use asset

3. The lessee may apply the operating lease model under what condition?
a. Short-term lease
b. Low value lease
c. Both short-term lease and low value lease
d. Under all circumstances
4. A Right-of-use asset is initially measured at
a. Cost
b. Current cost
c. Fair value
d. Present value of expected cash inflows
5. A lease liability is measured at
a. The present value of lease payments
b. The present value of fixed payments
c. The fair value of the underlying asset
d. The absolute amount of lease payments
6. The lease payments include all of the following, except
a. Fixed lease payments
b. Leasehold improvements
c. Residual value guarantee of the lessee
d. Exercise price of a purchase option that is reasonably certain to be exercised
7. A lease containing a purchase option that is reasonably certain to be exercise should depreciate the asset over
a. The useful life of the asset
b. The lease term
c. The useful life of the asset or the lease term, whichever is shorter
d. The useful life of the asset or the lease term whichever is longer
8. What is the proper accounting treatment of initial direct cost incurred by the lessee under a finance lease model?
a. Added to the lease liability
b. Added to the initial cost of the right-of-use asset
c. Expense immediately
d. Added to the initial cost of the right-of-use asset and lease liability
9. The carrying amount of the right-of-use asset from the capitalization of a lease would be periodically reduced by
a. The total lease payments
b. The portion of the lease payment allocable to the interest
c. The portion of the lease payment allocable to reduction of the lease liability
d. The amount of depreciation of the asset
10. In computing depreciation of a right-of-use asset under a lease, the lessee should deduct
a. The guaranteed residual value and depreciate over the lease term
b. The unguaranteed residual value and depreciate over the lease term
c. The guaranteed residual value and depreciate over the life of the asset
d. The unguaranteed residual value and depreciate over the life of the asset

11. If the residual value of an underlying asset is greater than the amount guaranteed by the lessee
a. The lessor pays the lessee for the difference
b. The lessee recognizes a gain at the end of the lease term
c. The lessee has no obligation related to the residual value
d. The lessee pays the lessor for the difference

12. If the residual value of an underlying asset is less than the amount guaranteed by the lessee
a. The lessor pays the lessee for the difference
b. The lessee does not recognize a loss but pays for the difference
c. The lessee has no obligation related to the residual value
d. The lessee pays the difference and recognize a loss
13. Rent received in advance by the lessor in an operating lease should be recognized as revenue
a. In the period specified by the lease contract
b. Upon receipt
c. At the inception of the lease
d. At the commencement of the lease

14. Which statement characterizes an operating lease?

a. Depreciation and interest expense are recorded by the lessee
b. Depreciation and rental revenue are recorded by the lessor
c. Lease rental liability is recorded in the books of the lessee
d. Title of the underlying asset is transferred from the lessor to the lessee

15. In case of lease of land and building, the lease payments should be split
a. According to the book value of the the two assets
b. According to the relative fair value of the two assets
c. Allocated equally between the two assets
d. According to the method devised by the entity
16. Which condition would require lease capitalization?
a. The lease does not transfer title to the lessee
b. There is an uncertain bargain option
c. The present value of the lease payments amounts to substantially all of the fair value of the underlying asset at the
inception of the lease
d. The lease term is below the useful life of the leased asset

17. Gross investment in the lease is equal to

a. Sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed residual value
accruing to the lessor.
b. The lease payments under a finance lease of the lessor
c. Present value of lease payments under a finance lease of the lessor and any unguaranteed residual value.
d. Present value of the lease payments under a finance lease of the lessor

18. Net investment in a direct financing lease is equal to

a. Cost of the leased asset
b. Cost of the leased asset plus initial cost paid by the lessor
c. Cost of the leased asset minus the amount of guaranteed residual value
d. Cost of the leased asset plus the amount of unguaranteed residual value

19. All of the following would be included in the lease receivable, except
a. Guaranteed residual value
b. Unguaranteed residual value
c. A purchase option that is reasonably certain
d. All would be included

20. Which statement characterized a sales type lease?

a. The lessor recognizes only interest revenue over the useful life of the asset
b. The lessor recognizes only interest revenue over the term of the lease
c. The lessor recognizes a dealers profit at the commencement of the lease and interest revenue over the term of the lease
d. The lessor recognizes a dealers profit at the commencement of the lease and interest revenue over the life of the asset.

21. On January 1, 2020 Star Company enters into an arrangement to lease a property from a property
developer, Moon Company, for 5 years, paying in advance, a yearly rental of P80,000. The property has a
current market price of P800,000. The arrangement provides for Star Company an option to purchase at
the end of year 5, at an option price of P655,030. Property prices increase at about 5% per year and the
expected market price of the underlying asset at the end of year 5 is P972,400. The rate Moon Company
charges Star Company is 8%. The property has a useful life of 20 years.

Question 1: What is the amount of annual depreciation should Star Company recognize in relation to the
leased asset?
a. none c. P39,539
b. P35,539 d. 40,000
Question 2: What amount of finance cost should Star Company recognize in its during 2020?
a. P50,852 c. P56,862
b. P55,011 d. P63,262

22. On January 1, 2019, Foresee Company leased a building with a useful life of 8 years from Foretell
Company. The lease term is for a period of 5 years. The annual rental is P2,000,000 payable every
December 31. Foresee Company incurred and paid P200,000 associated with the contract of lease. A
P300,000 lease incentive was received by Foresee Company at the commencement of the lease. Foresee
Company has the option to purchase the building at the end of the lease term and it is reasonably certain
that the option will be exercised. The implicit rate is 10%.
Question 1: What is the cost of the right of use asset?
a. P7,792,034 c. P7,992,034
b. P7,892,034 d. P8,092,034
Question 2: What is the amount of depreciation to be charged against the profit or loss in 2019?
a. P974,004 c. P1,558,407
b. P999,004 d. P1,598,407

Question 3: What is the amount of interest expense to be reported by the lessee in its December 31,
2019 statement of comprehensive income?
a. P534,936 c. P779,203
b. P668,124 d. P789,203
23. On December 31, 2019, Turbine Company leased a vehicle to Brook Company. Turbine Company
purchased the vehicle for P1,345,815. The leased agreement, which cost Turbine Company P21,855 to
have drawn up, contained the following: Lease term, 4 years; Annual payment, payable in advance on
December 31 each year, P358,500. Economic life of the vehicle, 6 years; Estimated residual value,
P225,000; Residual value guarantee, P112,500.

Included in the annual payment is an amount of P28,500 to cover reimbursement for the costs of insurance
and maintenance paid by the lessor. The interest rate implicit in the lease is 7%.

Question 1: At what amount should the Right-of-use vehicle be initially recorded in the accounting books
of the lessee?
a. P688,479 c. P1,281,850
b. P951,850 d. P1,310,350
Question 2: What amount of Lease Liability should be reported in the statement of financial position of
Brook Company for the year ended December 31, 2019?
a. P688,479 c. P1,281,850
b. P951,850 d. P1,310,350

Question 3: What amount of depreciation/amortization should Brook Company report in its December 31,
2020 statement of comprehensive income?
a. P194,792 c. P292,337
b. P264,063 d. P320,313
Question 4: What amount of interest expense should Brook Company report in its December 31, 2021
statement of comprehensive income?
a. P28,467 c. P66,630
b. P48,194 d. P89,688
Question 5: At what amount should the Lease Rental Receivable be recorded by the lessor on December
31, 2019?
a. P504,935 c. P1,037,676
b. P780,313 d. P1,367,676
Question 6: What amount of interest income should the lessor report in its December 31, 2020 statement
of comprehensive income?
a. P14,720 c. P54,622
b. P35,345 d. P72,637
24. The following information pertains to a leased contract entered into by Cartel Company, lessee, on January
1, 2019: Lease term, 5 years, useful life of the leased asset, 20 years; Annual rental payable at year-end,
P800,000 and the implicit rate is 10%.
The lease contract contains an option for Cartel Company to extend for another 5 years but at the
commencement of the lease, the exercise of the option is not reasonably certain, however on January 1,
2022, the lessee decided to extend the lease term by another 5 years. However the annual rental at the
start of the 4th year will be P1,000,000 and the new implicit rate is 8%.
Question 1: What is the new amount of lease liability on January 1, 2022?
a. P3,312,127 c. P4,437,694
b. P3,992,710 d. P4,849,717

Question 2: What is the carrying amount of the right of use asset on January 1, 2022?
a. P1,213,052 c. P4,006,576
b. P3,461,289 d. P4,674,339
Question 3: What is the amount of depreciation to be reported in the Dec. 31, 2022 profit or loss?
a. P467,434 c. P667,763
b. P584,293 d. P934,868
25. On January 1, 2020, Martian Company sold an equipment with a remaining life of 8 years and leased it back
for 5 years. The following information pertains to the sale and leaseback transaction:

Selling price P5,000,000

Carrying amount of the equipment as of 1/1/20 3,000,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 8%
Present value of ordinary annuity of 1 at 8% for 5 years 3.9927

Question 1: If the fair value of the equipment at the time of sale is P5,000,000, what amount of gain or
loss from the sale should Martian recognized?
a. P400,000 c. P1,277,664
b. P722,336 d. P2,000,000
Question 2: If the fair value of the equipment at the time of sale is P4,000,000, what amount of gain or
loss from the sale should Martian recognized?
a. P400,000 c. P 548,540
b. P451,460 d. P1,000,000

Question 3: If the fair value of the equipment at the time of sale is P6,000,000, what amount of gain or
loss from the sale should Martian recognized?
a. P 600,000 c. P1,597,080
b. P1,402,920 d. P3,000,000
 DEFERRED TAX
When a company prepares its tax return for a particular year, the revenues and expenses (and losses) included
on the return are, by and large, the same as those reported on the company's statement of comprehensive
income for the same year. However, in some instances tax laws and financial accounting standards differ. The
reason they differ is that the fundamental objectives of financial reporting and those of taxing authorities are
not the same. Financial accounting standards are established to provide useful information to investors and
creditors. The government through its tax authority, on the other hand, is primarily concerned with raising
public revenues in a socially acceptable manner and, frequently, with influencing the behavior of taxpayers. In
pursuing the latter objective, the government uses tax laws to encourage activities it deems desirable, such as
investment in productive assets, and to discourage activities it deems undesirable, such as violations of laws.
As consequence of differences between IFRS and tax rules is that tax payments frequently occur in years
different from when the revenues and expenses that cause the taxes are generated.

Methods of Accounting for Deferred Tax

DEFERRAL METHOD – the original amount set aside for deferred tax is retained without alteration for
subsequent changes in tax rate. The deferral method does not keep the deferred tax amount up to date as tax
rates change, and is thus generally held to be inferior to the liability method.

The liability method - the deferred tax balance is adjusted as tax rates changes, thus maintaining the amount at
the actual liability expected to arise. It is subdivided into:

The original IAS permitted a free choice of either the deferral method or liability method and the focus was on
the profit or loss. The revised version of the standards prohibits the use of the deferral method. It requires
application of the liability method that focuses on the statement of financial position (known as the balance
sheet liability method).

LIABILITY METHOD
1) Income Statement Liability method – it focuses on the differences between taxable profit and accounting
profit (timing differences).

Timing differences – these are differences between accounting profits and taxable profits that arise
because the period in which some items of income and expenses are included in accounting profits does not
coincide with the period in which they are included in taxable profits. These differences arise because
accounting profits are determined by accounting standards, such as those of the IAS or IFRS, whereas
taxable profits are governed by tax laws, which set out the basis for the computation of income tax payable.
It shall be emphasized that for timing differences to arise, the items of income and expenses must differ only
with respect to the periods in which they are included. The total of each income or expense item included in
accounting profits and taxable profits will eventually be the same. Therefore, the central characteristic of
timing differences is that they originate (arise) in one or more periods, and reverse (or turnaround) in one or
more subsequent periods. Timing differences give rise to tax effects that are carried forward to one or more
subsequent future periods so and accounting entry or entries should be made to reflect these differences
between accounting profits and taxable profits.

Permanent differences – these are the differences between taxable profits and accounting profits for a
period that originate in the current period but are not capable of reversal (or turnaround) in one or more
subsequent future periods. They relate to items of income that are tax-free and items of expenses that are
disallowed for income tax purposes. The permanent differences arise because the items of income or
expenses are either included in accounting profits without a corresponding inclusion in taxable profit.
Permanent differences do not give rise to tax effects in one or more future periods as they are not capable of
reversal or turnaround. They do not normally pose an accounting issue. With their presence, the tax
expense in a period may be high or low compared to the profit before taxation, but there are no accounting
entries to be made. IAS 12 do not permit an entity to correct for the distortion of the effective tax expense
rate caused by such permanent difference.

There is a deferred tax asset on timing difference when:

✓ The amount of revenue recognized for taxation exceeds the amount of revenue recognized for financial
purposes; or
✓ The amount of expense recognized for financial purposes exceeds the amount of expense recognized for
taxation purposes.

There is a deferred tax liability on timing difference when:

✓ The amount of expense recognized for taxation purposes exceeds the amount recognized for financial
purposes; or
✓ The amount of revenue for financial purposes exceeds the amount recognized for taxation purposes.
2) Balance Sheet Liability method – the calculation is made by reference to difference between balance
sheet values and tax values of assets and liabilities (temporary differences). Temporary differences are
defined in IAS 12 as differences between the carrying amount of an asset or liability and its tax base. The
temporary difference is used because ultimately all differences between the carrying amount of assets and
liabilities and their tax bases will reverse.

The deferred tax is calculated by reference to the tax base of an asset or liability. The tax base is the
amount attributed to the asset or liability for tax purposes.

The tax base of an asset is therefore the amount that will be deductible for tax purposes against any future
taxable benefits derived from the asset. If the benefits will not be taxable, the tax base of the asset is
equal to its carrying amount.

The tax base of a liability is the carrying amount less any amount that will be deductible for tax purposes in
respect of that liability in future periods. In the case of revenue received in advance, the tax base of the
resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future
periods.
The difference between the tax base of an asset or liability and its carrying value is described as a
temporary difference:
✓ If the carrying value of an asset exceeds the tax base, tax on the difference is taxable temporary
difference (deferred tax liability).
✓ If the carrying value of an asset is less than the tax base, tax on the difference is a deductible
temporary difference (deferred tax asset).
✓ If the carrying value of a liability exceeds the tax base, tax on the difference is a deductible temporary
difference (deferred tax asset).
✓ If the carrying value of a liability is less than the tax base, tax on the difference is a taxable temporary
difference (deferred tax liability).

Measurement
a) Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected
to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been
enacted or substantively enacted by the end of the reporting period.
b) Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted by the end of the reporting period.
c) When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are
measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods
in which the temporary differences are expected to reverse.
d) The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that
would follow from the manner in which the entity expects, at the end of the reporting period, to recover or
settle the carrying amount of its assets and liabilities.
---------
1. Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation between the two methods of income
determination.
b. differs from accounting income due to differences in interperiod allocation and permanent differences
between the two methods of income determination.
c. is based on international financial reporting standards.
d. is reported on the corporation's income statement.

02 Taxable income of a corporation differs from pretax financial income because of

Permanent Temporary
Differences Differences
a. No No
b. No Yes
c. Yes Yes
d. Yes No

3. The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

4. Each of the following is determined according to IFRS except

a. income before taxes.
b. taxable income.
c. income for financial reporting purposes.
d. income for book purposes.
5. An assumption inherent in a company’s IFRS statement of financial position is that companies recover and settle the
assets and liabilities at
a. the amount that is probable where “probable” means a level of likelihood of at least more than 50%.
b. the present value of future cash flows.
c. their reported amounts.
d. their net realizable value.

6. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could
result in
Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No

7. A temporary difference arises when a revenue item is reported for tax purposes in a period
After it is reported Before it is reported
in financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No

8. Under IFRS
a. “probable” is defined as a level of likelihood of at least slightly more than 60%.
b. a company should reduce a deferred tax asset when it’s likely that some or all of it will not be recognized.
c. a company considers only positive evidence when determining whether to recognize a deferred tax asset.
d. deferred tax assets must be evaluated at the end of each accounting period.

9. Which of the following statements is correct regarding deferred taxes under IFRS?
a. Income tax payable plus or minus the change in deferred income taxes equals income tax expense.
b. The current portion of income tax expense is the amount of change in deferred taxes related to the current period.
c. In computing income tax expense, a company deducts an increase in a deferred tax liability to income tax payable.
d. All of the choices are correct.

10. At the December 31, 2020 statement of financial position date, X Corporation reports an accrued receivable for
financial reporting purposes but not for tax purposes. When this asset is recovered in 20121, a future taxable amount
will occur and
a. pretax financial income will exceed taxable income in 2021.
b. X Company will record a decrease in a deferred tax liability in 2021.
c. total income tax expense for 2021 will exceed current tax expense for 2021.
d. X Company will record an increase in a deferred tax asset in 2021

11. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to
reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only

12. A major distinction between temporary and permanent differences is

a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only once.
c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference
can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent
differences do not reverse.

13. Which of the following are temporary differences that are normally classified as expenses or losses that are deductible
after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.
14. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in
financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. Sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis
for tax purposes.
d. Interest received on government obligations.

15. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income.

16. Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would
create a permanent difference in accounting and taxable incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
c. a fine resulting from violations of environmental regulations.
d. making installment sales during the year.

17. An example of a permanent difference is

a. fines resulting from a violation of law.
b. interest expense on money borrowed to invest in government bonds.
c. percentage depletion of natural resources.
d. All of these answer choices are correct.

18. Which of the following will not result in a temporary difference?

a. Product warranty liabilities
b. Advance rental receipts
c. Gain on involuntary conversion of non-monetary asset.
d. All of these answer choices will result in a temporary difference.

19. A company uses the equity method to account for an investment. This would result in what type of difference and in
what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability

20. A company records an unrealized loss on short-term securities. This would result in what type of difference and in what
type of deferred income tax?
Type of Difference Deferred Tax
a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset

21. Which of the following temporary differences results in a deferred tax asset in the year the temporary difference
originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.

22. Which of the following is not considered a permanent difference?

a. Interest received on government obligations.
b. Fines resulting from violating the law.
c. Percentage depletion of natural resources.
d. Stock-based compensation expense.

23. Which of the following statements is correct regarding permanent differences under IFRS?
a. Permanent differences result from items that enter into pretax financial income but never into taxable income.
b. Permanent differences result from items that enter into taxable income but never into pretax financial income.
c. Permanent differences affect only the period in which they occur.
d. All of these answer choices are correct.
24. Under IFRS when a change in the tax rates is enacted
I. Companies should record its effect on existing deferred tax accounts immediately.
II. Companies report the effect of changes in tax rates on deferred tax accounts in the period the new rate
becomes effective.
III. Companies report the effect of changes in tax rates on deferred tax accounts that arise in future periods when
the new tax rates are in effect.
a. I Only.
b. II Only.
c. III Only.
d. Either I, II, or III, depending on how frequently tax rates change in the company’s tax jurisdiction.

25. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in accounting standards.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a
deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate
change, but not subsequent to the date of the change.
26. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the statement of
financial position if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted or substantially enacted.
d. it appears likely that a future tax rate will be less than the current tax rate.
27. Recognition of tax benefits in the loss year due to a loss carryforward requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.
28. In determining whether to adjust a deferred tax asset, a company should
a. consider all positive and negative information in determining the need for an adjustment.
b. consider only the positive information in determining the need for an adjustment.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.
29. Under IFRS deferred tax assets are recognized for
I. Deductible temporary differences.
II. Deductible permanent differences.
III. Operating loss carryforwards.
IV. Operating loss carrybacks.
a. I, II, and III.
b. I and III only.
c. I and IV only.
d. II and III only.
30. Under IFRS companies are required to provide a reconciliation between actual tax expense and the applicable tax rate.
The purpose(s) of this reconciliation include
I. Making better prediction of future cash flow.
II. Predicating future cash flows for operating loss carryforwards.
III. Assessing the composition of the net deferred income tax liability.
IV. Assessing quality of earnings.
a. I, III, and IV only.
b. I, II and IV only.
c. I and IV only.
d. I, II, III and IV.
31. Major reason(s) for disclosure of deferred income tax information is (are)
a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in predicating future cash flows for operating loss carryforwards.
d. All of these answer choices are correct.
32. Accounting for income taxes can result in the reporting of deferred taxes as any of the following except
a. a current or non-current asset.
b. a current or non-current liability.
c. a contra-asset account.
d. All of these answer choices are acceptable methods of reporting deferred taxes.

33. Deferred taxes should be presented on the statement of financial position

a. as one net debit or credit amount.
b. as a net amount in the non-current section.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.
34. Tanner, Inc. incurred a financial and taxable loss for 2020. Tanner therefore decided to use the carryback provisions as
it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2020 financial
statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2020.

35. Companies allocate income tax expense (or benefit) to all of the following except
a. discontinued operations.
b. prior period adjustments.
c. gross profit.
d. other comprehensive income.
36. All of the following are procedures for the computation of deferred income taxes except to
a. identify the types and amounts of existing temporary differences and carryforwards.
b. measure the deferred tax liability for taxable temporary differences.
c. measure the deferred tax asset for deductible temporary differences and loss carrybacks.
d. All of these answer choices are procedures in computing deferred income taxes.

37. The IASB believes that the method is the most consistent method for accounting for income
taxes.
a. Asset-liability.
b. Income statement.
c. Statement of financial position.
d. Revenue-expense.

38. Joy Corporation computed a pretax financial income of P6,000,000 for the year ended December 31,
2019. In preparing the tax return, the following differences are noted between financial income and
taxable income:

Nontaxable revenue, P600,000; Nondeductible expense, P200,000 Provision for warranty that was
recognized as expense in 2019 but deductible for tax when paid P300,000; Excess tax depreciation over
financial depreciation; P250,000 ; Excess of financial revenue over tax revenue, P200,000.

What is the total tax expense assuming the tax rate for 2019 is 32% and 2020 is 30%?
a. P1,699,000 c. P1,789,000
b. P1,744,000 d. P1,792,000

39. Taft Company leased a facility and received P600,000 annual rental payment on June 16, 2020. The
beginning of the lease was July 1, 2020. Rental income is taxable when received. The income tax rate is
32%. Taft had no other permanent or temporary differences. Taft determined that no valuation is
needed. What amount of deferred tax asset should Taft report in its December 31, 2020 financial
position?
a. P204,000 c. P96,000
b. P192,000 d. none

40. On October 1, 2020, Mania Corporation prepaid a P380,000 premium on an insurance policy. The
premium payment was a tax-deductible expense in Mania’s 2020 cash basis tax return. The accrual basis
income statement will report a P95,000 insurance expense in 2020 and P285,000 in 2020. Assume the
income tax rate is 32%. Using the balance sheet liability method, in Mania’s December 31, 2020 financial
position, what amount related to the insurance should be reported as deferred assets?
a. None c. P91,200
b. P30,400 d. P121,600

41. At the beginning of 2020, Pitman Co. purchased an asset for P600,000 with an estimated useful life of 5
years and an estimated residual value of P50,000. For financial reporting purposes the asset is being
depreciated using the straight-line method; for tax purposes the double-declining-balance method is
being used. Pitman Co.’s tax rate is 40% for 2020 and all future years.

Question 1: At the end of 2016, what is the book basis and the tax basis of the asset, respectively?
a. P440,000 and P310,000 c. P490,000 and P360,000
b. P490,000 and P310,000 d. P440,000 and P360,000

Question 2: At the end of 2020, which of the following deferred tax accounts and balances is reported on
Pitman’s statement of financial position?
a. P52,000 deferred tax asset c. P78,000 deferred tax asset
b. P52,000 deferred tax liability d. P78,000 deferred tax liability
42. Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income P 750,000
Estimated litigation expense 1,000,000
Extra depreciation for taxes (1,500,000)
Taxable income P 250,000
The estimated litigation expense of P1,000,000 will be deductible in 2021 when it is expected to be paid.
Use of the depreciable assets will result in taxable amounts of P500,000 in each of the next three years.
The income tax rate is 30% for all years.
Question 1: Income taxes payable is
a. 0 c. P150,000
b. P75,000 d. P225,000
Question 2: The net deferred tax liability to be recognized is
a. P150,000 c. P450,000
b. P300,000 d. P750,000

43. Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes P3,750,000
Income tax expense
Current P1,035,000
Deferred 90,000 1,125,000
Net income P2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated
depreciation for tax purposes. The amount charged to depreciation expense on its books this year was
P1,500,000. No other differences existed between book income and taxable income except for the
amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the
corporation's tax return for the current year?
a. P1,200,000 c. P1,500,000
b. P1,425,000 d. P1,800,000

44. Cross Company reported the following results for the year ended December 31, 2020, its first year of
operations: 2020
Income (per books before income taxes) P 750,000
Taxable income 1,200,000
The disparity between book income and taxable income is attributable to a temporary difference which
will reverse in 2021. What should Cross record as a net deferred tax asset or liability for the year ended
December 31, 2020, assuming that the enacted tax rates in effect are 40% in 2020 and 35% in 2021?
a. P180,000 deferred tax liability c. P157,500 deferred tax asset
b. P180,000 deferred tax asset d. P157,500 deferred tax liability

45. Toner Company has revalued its property and has recognized the increase in the revaluation reserve in
its financial statements. The carrying value of the property was P8,000,000, and the revalued amount
was P10,000,000. The tax base of the property was P7,000,000. The tax rate 32%. What amount of
deferred tax that should go directly to equity?
a. none c. P640,000
b. P320,000 d. P960,000

46. On January 2, 2019, Alison Company acquired from the stock exchange 20,000 shares of Emilia
Company at the prevailing market price of P60 per share. Alison Company has designated the shares as
Investment at Fair Value to Other Income. On December 31, 2019 the shares of Alison are selling at
P68 per share. On July 1, 2019, Alison Company paid P300,000 for one year insurance that will expire
on June 30, 2020. The current year income tax rate is 32% while the future tax rate is 30%. What
amount of deferred tax expense(savings) should the Alison Company disclose in its 2019 profit or loss?
a. P45,000 c. P51,200
b. P48,000 d. P93,000

47. Titan Company issued a convertible bond on January 1, 2020, that matures in five years. The bond
can be converted into ordinary shares at any time. Titan has calculated that the liability and the equity
components of the bond are P3,000,000 for the liability component and P1,000,000 for the equity
component, giving a total amount of the bond of P4,000,000. The interest rate of the bond is 6% and
local tax legislation allows a tax deduction for the interest paid in cash. What amount of deferred tax
should be reported in the profit or loss at the time the bonds were issued? (Tax rate is 32%.)
a. none c. P 960,000
b. P320,000 d. P1,200,000
 POST RETIREMENT BENEFITS & DEBT RESTRUCTURING
POST EMPLOYMENT BENIFITS

1. Post-employment benefits – are defined as employee benefits (other than termination benefits) that are
payable after the completion of employment or upon retirement.
2. Post-employment benefit plans – are formal or informal arrangements under which an entity provides
post-employment benefits for one or more employees.
3. Types of pension plans:
Pension plan may be a state or government plan or an employer plan. A state plan is one that is
administered by the state or government, such as the plan administered by the Social Security System.
An employer plan is one that is sponsored by the employer.

Pension plan may be contributory or noncontributory. A contributory pension plan is one both the
employer and employee contribute. A noncontributory pension plan is one in which the cost of the plan is
paid solely by the employer; the employee does not contribute to the plan.

Pension plan may be unfunded, partly funded or fully funded. When funded, the contributions are
paid to a separate entity (fund). This entity is tasked to manage the plan’s assets, with the goal of
maximizing their earnings potential.
Pension plan may be a defined contribution plan or a defined benefit plan. A defined contribution
plan defines the amount to be contributed to the plan based on a formula that uses employee
compensation as its basis of calculation. The benefits to be received by the employees will depend on the
total amount contributed plus the earnings on it. A defined benefit plan defines the benefits to be received
by employees upon retirement. The contributions to the plan depend on the defined benefits

4. Definitions relating to the net defined benefit liability (asset)

The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limiting a net
defined benefit asset to the asset ceiling. The deficit or surplus is
a. The present value of the defined benefit obligation less
b. The fair value of plan assets (if any)
The asset ceiling is the present value of any economic benefits available in the form of refunds from the
plan or reduction in future contributions to the plan.
The present value of a defined benefit obligation is the present value, without deducting any plan assets,
of expected payments required to settle the obligation resulting from employee service in the current
and prior periods.

The plan assets – are assets held by a long-term benefit fund and qualifying insurance.
The conditions for assets held by a long-term benefit fund are:
(a) the assets are held by an entity, the fund itself, that is legally separate from the reporting entity
(b) the assets are available to pay only employee benefits
(c) the assets are not available to the reporting entity’s own creditors even in bankruptcy and
(d) the assets cannot be return to the reporting entity or can be returned to the reporting entity if the
remaining assets of the fund are sufficient to meet all employee benefit obligations or the assets are
returned to the reporting entity to reimburse it for employee benefits already paid.

Qualifying insurance policy – is an insurance policy issued by the insurer that is not a related party of the
reporting entity and the proceeds of the policy can be used only to pay employee benefits and are not
available to the reporting entity’s own creditors even in bankruptcy. The proceed of the policy cannot be
paid to the reporting entity, except
a. When the proceeds represent surplus asset not needed for the policy to pay employee benefits.
b. When the proceeds are returned to the reporting entity to reimburse it to employee benefits already
paid.
Plan assets are remeasured at fair value. The fair value is the amount for which an asset could be
exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction.
Plan assets do not include unpaid contributions due from the reporting entity to the fund as well as any
nontransferable financial instruments issued by the entity and held by the fund. Plan assets are reduced by
any liabilities of the fund that do not relate to employee benefits.

5. Definitions relating to defined benefit costs

Service cost comprises:
a) Current service cost which is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period.
b) Past service cost which is the change in the present value of defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (the introduction or withdrawal of , or
changes to, a defined benefit plan) or a curtailment ( a significant reduction by the entity in the number
of employees covered by a plan); and
c) Any gain or loss on settlement
 Net interest on the net defined benefit liability (asset) is the change during the period in the net defined
liability (asset) that arises from the passage of time.
Remeasurement of the net defined benefit liability (asset) comprises:
1. Actuarial gains and losses
2. The return on plan assets, excluding amounts included in the net interest on the net defined liability
(asset); and
3. Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net
defined liability (asset)

Actuarial gains and losses - are changes in the present value of the defined benefit obligation resulting
from experience adjustments and the effect of changes in actuarial assumptions. Experience adjustments
are adjustments from the differences between the previous actuarial assumptions and what has actually
occurred. Actuarial assumptions are the entity’s best estimate of the variables that will determine the
ultimate cost of providing postemployment benefits. Actuarial assumptions comprises of demographic and
financial assumptions.
Causes of actuarial gains and losses are the following
a. Unexpectedly high or low rates of employee turnover, early retirement or mortality or of increases in
salaries, benefits or medical costs.
b. The effect of changes in estimates of future employee turnover, early retirement or mortality or of
increases in salaries, benefits or medical costs.
c. The effect of changes in discount rates; and
d. Differences between the actual return on plan assets and the expected return on plan assets.

Actuarial gains and losses do not include changes in the present value of the defined benefit obligation
because of the introduction, amendment, curtailment or settlement of the benefit plan. Such changes
result in past service cost or gains and losses on settlement.

Return on plan assets – the components of return on plan assets include the following:
a. interest, dividends and other revenue derived from the plan assets
b. realized and unrealized gains or losses on the plan assets
The following shall be deducted in determining the return on plan assets
a. Any costs of managing the plan assets or costs of managing investments
b. Any tax payable by the plan itself or any tax on investment income

The return on plan assets is fully recognized as a “remeasurement” and accounted for as component of
other comprehensive income. The amount of remeasurement is equal to the actual return on plan assets
minus the interest income on the fair value of the plan asset at the beginning of the reporting period. Such
remeasurement is included in other comprehensive income without subsequent recycling or reclassification
to profit or loss.

Settlement – is a transaction that eliminates all further legal or constructive obligations for part or all of the
benefits provided under a defined benefit plan. The gain or loss on settlement is the difference between the
settlement price and the present value of the defined benefit obligation on the date of settlement. The
settlement price includes any plan assets transferred and any payments made directly by the entity in
connection with the settlement. Any gain or loss on settlement is fully recognized and included in service
cost in the computation of employee benefit expense.

Defined Contribution plan: Is a post employment benefit plan under which an entity pays fixed contributions
into a separate entity and will have no legal or constructive obligation to pay further contributions if the fund
does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior
periods.

Defined Contribution Plan recognition and measurement:

An entity should recognize the contribution payable to defined contribution plan in exchange for service
rendered by an employee during a period:
a. as a liability (accrued expense) after deducting any contributions already paid. If the contribution already
paid exceeds the contribution due for service before the balance sheet date, an entity shall recognize that
excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example a
reduction in future payments or a cash refund.
b. As an expense, unless another standard requires or permits the inclusion of the contribution in the cost of
an asset (PAS 2 for inventories and PAS 16 for PPE).
Defined Benefit Plans - Accounting for defined benefit plans is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of actuarial gains and losses.
Moreover, the obligations are measured on a discounted basis because they may be settled many years after
the employees render the related service.

Recognition and measurement:

Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity,
and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from
which the employee benefits are paid. The payment of benefits when they fall due depends not only on the
financial position and the investment performance of the fund but also on an entity’s ability (and willingness) to
make good any shortfall in the fund’s assets. Therefore, the entity is, in substance, underwriting the actuarial
and investment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan
is not necessarily the amount of the contribution due for the period.

Accounting steps for defined benefits are as follows:

A) Using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned
in return for their service in the current and prior periods. This requires an entity to determine how much
benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about
demographic variables and financial variables.

Demographic variables or assumptions deal with matters such as:

a. mortality, both during and after retirement
b. rates of employee turnover, disability and early retirement
c. the proportion of plan members with dependants who will be eligible for benefits, and
d. claim rates under medical plans

Financial variables or assumptions deal with items such as:

a. the discount rate
b. future salary and benefit levels
c. future medical costs, including where material, the cost of administering claims and benefit payments,
and
d. the expected rate of return on plan assets.

B) Discount the benefit using the Projected Unit Credit Method in order to determine the present value of the
defined benefit obligation and the current service cost.

An entity discounts the whole of a post-employment benefit obligation, even if part of the obligation falls
due within twelve months of the balance sheet date.

C) Determine the fair value of any plan assets

D) Where a plan has been introduced or changed, determine the resulting past service cost.
E) Where a plan has been curtailed or settled, determine the resulting gain or loss.

Where an entity has more than one defined benefit plan, the entity applies these procedures for each
material plan separately.

Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as the
benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit
entitlement and measures each unit separately to build up the final obligation.

In determining the present value of its defined benefit obligations and the related current service cost and,
where applicable, past service cost, and entity shall attribute benefit to periods of service under the plan’s
benefit formula. However, if an employee’s service in later years will lead to a materially higher level of benefit
than in earlier years, en entity shall attribute benefit on a straight-line basis from:
a. the date when service by the employee first leads to benefits under the plan ( whether or not the benefits
ate conditional on further service); until
b. the date when further service by the employee will lead to no material amount of further benefits under the
plan, other than from further salary increases.

Balance sheet account for a defined benefit plans:

Pension liability is the net total amount of the following
1. the present value of the defined benefit obligation at the balance sheet date
2. minus the fair value at the balance sheet date of plan assets(if any) out of which the obligations are to be
settled directly.

However, if the result of the above computation is negative (surplus), an entity shall measure the resulting
asset (Pension Asset) at the lower of
a) the negative amount, and
b) the present value of any economic benefits available in the form of refunds from the plan or reductions
in future contributions to the plan.

Composition of the defined benefit cost.

1. Service cost which includes, current service cost, past service cost and any gain or loss on settlement
2. Net interest expense or income – interest on the beginning defined benefit obligation and interest on
the beginning plan asset. The rate to be used is the settlement rate or discount rate.
3. Remeasurement which comprise of the following: (a) actuarial gain and loss (b) actual return on plan
asset less interest income on the plan asset, and (c) any change in the asset ceiling
 Past service cost - is the change in the present value of defined benefit obligation for employee service in
prior periods resulting from plan amendment or curtailment. Plan amendment includes introduction of
defined benefit plan or changes to an existing defined benefit plan. Plan curtailment is a significant
reduction by the entity in the number of employees covered by the defined benefit plan. Curtailment may
arise from an isolated event, such as (a) closing of a plant (b) discontinuance of an operation, and (c)
termination or suspension of a plan. Past service costs whether vested or unvested shall be recognized
outright as an expense

Debt Restructuring – is a situation in which “the creditor for economic or legal reasons related to the debtor’s
financial difficulties grants a concession to the debtor that it would not otherwise consider. That the concession
either from an agreement between the creditor and the debtor or is imposed by law or a court”.

Types of Restructuring:
Asset Swap - transfer of non-cash asset, such as real estate, inventories, receivables or investments, to fully
settle a payable. This type of restructuring usually recognizes gains or losses as the difference between the
carrying amount of the liability and the carrying amount of the non-cash asset.

Equity Swap – a debtor that grants an equity interest to the investor, as a substitute for a liability must
cancel/derecognize the carrying amount of the liability but recognizes an equity instrument equal to the
carrying amount of the liability set-off. This type of restructuring recognizes no gain or loss. Any difference of
the carrying amount of the liability and the par value of instrument issued is recognized as an equity reserve.
Any transaction cost incurred in relation to the issue of equity instrument is charged against the equity reserve
account.
Modification of Terms – This type of restructuring may or may not derecognize the carrying value of the
original liability. If the modification is considered substantial, the carrying value of the original financial liability
is derecognized; the restructured debt is recognized; any gain or loss on debt restructuring is recognized in the
profit and loss. If the modification is not considered substantial, the carrying value of the original financial
liability is not derecognized; the gain or loss is not given accounting recognition and any transaction costs
incurred is being deferred and amortized based on the restructured term of the contract using the effective
interest method.

The modification may involve the interest, the maturity value, or both. Interest concession may involve a
reduction of the interest rate, forgiveness of unpaid interest; or a moratorium on interest payments for a period
of time. Maturity value concessions may involve an extension of the maturity date or a reduction in the amount
to be repaid at maturity.
The accounting standard clarifies that a substantial modification arises when the discounted present value of the
new terms (including any fees paid net any fees received and discounted at the original effective interest rate),
at least 10% different from the discounted present value of the remaining cash flows of the original financial
liability, if it is accounted for as an extinguishment, the difference between the fair value of the new
financial liability obtained and the carrying amount/value of the original financial liability extinguished, shall
be recognized as gain or loss in the profit or loss. Any costs or fees incurred are also included in the calculation
of the gain or loss on the extinguishment.
---------
1. In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following
are considered by the actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these answer choices are considered.

2. In a defined-benefit plan, the process of funding refers to

a. determining the defined benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
d. determining the amount that might be reported for pension expense.

3. In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.

4. In a defined-contribution plan, a formula is used that

a. defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.
5. In a defined-benefit plan, a formula is used that
a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the
employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out
to the employees.

6. Which of the following is not a characteristic of a defined-contribution pension plan?

a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are usually determined by an employee’s three highest
years of salary defined by the terms of the plan.
c. The accounting for a defined-contribution plan is straightforward and uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.

7. In accounting for a defined-benefit pension plan

a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet
the benefits promised.
b. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future salary levels promised to employees.

8. Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future
salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Defined benefit obligation
d. Restructured benefit obligation

9. The accumulated benefit obligation measures

a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest
expected to accumulate at the assumed rate, to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.

10. The defined benefit obligation is the measure of pension obligation that
a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and
based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under international financial reporting standards for reporting the service cost component of pension
expense.

11. Differing measures of the pension obligation can be based on

a. all years of service—both vested and nonvested—using current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. All of these answer choices are correct.

12. Vested benefits

a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these answer choices.

13. The relationship between the amount funded and the amount reported for pension expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
14. The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on defined benefit obligation.
c. interest revenue on plan assets.
d. All of these answer choices are included in the computation.

15. In computing the service cost component of pension expense, the IFRS board concluded that
a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to
employees.
c. the defined benefit obligation using future compensation levels provides a realistic measure of present pension
obligation and expense.
d. All of these answer choices are correct.

16. The interest rate used on the defined benefit obligation component of pension expense
a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same rate used to compute the interest revenue on plan assets.
d. may be stated implicitly or explicitly when reported.

17. One component of pension expense is interest revenue on plan assets. Plan assets include
a. contributions made by the employer and contributions made by the employee when a contributory plan of some type is
involved.
b. plan assets still under the control of the company.
c. only assets reported on the statement of financial position of the employer as pension asset/liability.
d. None of these answer choices are correct.

18. The actual return on plan assets

a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
d. All of these answer choices are correct.

19. In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund
should be reported as
a. an offset to the liability for past service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).

20. Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-
benefit pension plan for its employees?
Fair value Past
of plan assets service cost
a. Yes Yes
b. Yes No
c. No Yes
d. No No

21. A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the
a. defined benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the defined benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.

22. When a company adopts a pension plan, past service costs should be charged to
a. other comprehensive income (PSC).
b. operations of prior periods.
c. operations of the current period.
d. retained earnings.

23. When a company amends a pension plan, for accounting purposes, past service costs should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.
 24. Past service cost is amortized on a
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service life of active employees.
c. straight-line basis over 10 years.
d. past service costs are not amortized.

25. Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date
of amendment
a. both the accumulated benefit obligation and the defined benefit obligation are usually greater than before.
b. both the accumulated benefit obligation and the defined benefit obligation are usually less than before.
c. the expense and the liability should be recognized at the time the benefits are paid.
d. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its
determination has been identified.

26. The unexpected gains or losses that result from changes in the defined benefit obligation are called
Asset Liability
Gains & Losses Gains & Losses
a. Yes Yes
b. No No
c. Yes No
d. No Yes

27. A pension liability is reported when

a. the defined benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.

28. A pension asset is reported when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a past service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the defined benefit obligation.

29. Which of the following statements is correct?

a. There is an account titled Pension Asset / Liability.
b. There is an account titled Defined Benefit Obligation.
c. Unrecognized net gain or loss should be reported in the liability section of the balance sheet.
d. Other comprehensive income (PSC) should be included in net income.

30. Which of the following disclosures of pension plan information would not normally be required?
a. The major components of pension expense
b. The amount of past service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts

31. Presented below is pension information related to Woods, Inc. for the year 2020:
Service cost P72,000
Interest on defined benefit obligation 54,000
Interest on vested benefits 24,000
Interest income on plan assets 18,000
The amount of pension expense to be reported for 2020 is
a. P108,000 c. P144,000
b. P120,000 d. P162,000
32. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the
plan for the year 2020.
Service cost P 200,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Defined benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The discount rate was 10%. The amount of pension expense reported for 2020 is
a. P200,000 c. P280,000
b. P260,000 d. P440,000

33. Presented below is information related to Jensen Inc. pension plan for 2020.
Service cost P900,000
Actual return on plan assets 210,000
Interest on defined benefit obligation 390,000
Net loss 30,000
Past service cost due to increase in benefits 165,000
Interest revenue on plan assets 180,000
What amount should be reported for pension expense in 2020?
a. P1,155,000 c. P1,335,000
b. P1,275,000 d. P1,365,000

34. The following information is related to the pension plan of Long, Inc. for 2020.
Actual return on plan assets P200,000
Net gain on liability 82,500
Past service cost due to increase in benefits 150,000
Interest on plan assets 230,000
Interest on defined benefit obligation 362,500
Service cost 800,000
Pension expense for 2020 is
a. P1,000,000 c. P1,165,000
b. P1,082,500 d. P1,195,000

35. The following information is made available involving the defined benefit pension plan of Princess
Company for the year 2020:

Fair value of plan asset, 1/1/20 P3,500,000

Present value of benefit obligation, 1/1/20 3,750,000
Current service cost 700,000
Actual return on plan asset 420,000
Contribution to the plan 600,000
Benefits paid to retirees 750,000
Decrease in the present value of benefit obligation due to
change in actuarial assumptions 100,000
Present value of defined benefit obligation settled 250,000
Settlement price of defined benefit obligation 200,000
Discount rate 10%

Question 1: What amount employee benefit cost should be reported in the profit or loss?
a. P675,000 c. P1,025,000
b. P725,000 d. P1,075,000

Question 2: What is the net amount of remeasurements for the year 2020?
a. P50,000 c. P100,000
b. P75,000 d. P170,000

Question 3: What is balance of the prepaid or accrued pension as of December 31, 2020?
a. Prepaid pension P155,000 c. Prepaid pension P325,000
b. Accrued pension P155,000 d. Accrued pension P325,000
36. The following information is made available in relation to the defined benefit pension plan of
Roadworthy Company for the year 2020
January 1 December 31
Fair value of plan assets P5,200,000 P6,000,000
Present value of benefit obligation 4,000,000 4,200,000
Surplus P1,200,000 P1,800,000
Asset ceiling 400,000 600,000
Effect of the ceiling P 800,000 P1,200,000

The following data are provided for the current year 2020:
Current service cost P200,000
Contribution to the plan 700,000
Benefits paid 300,000
Discount rate 10%

What is the amount of employee benefits that should be reported in the profit or loss?
a. P 80,000 c. P200,000
b. P160,000 d. P400,000

37. On December 31, 2019, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
P600,000 note with P60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte a
building that has a fair value of P590,000, an original cost of P530,000, and accumulated depreciation
of P130,000. Nolte should recognize a gain on the settlement of the debt of
a. None c. P60,000
b. P10,000 d. P70,000

38. Turtle Company is experiencing financial difficulty and is negotiating trouble debt restructuring with
its creditors to relieve its financial stress. Turtle has a P5,000,000 note payable to Metrobank. The
bank is considering acceptance of an equity interest in Turtle Company in the form of 400,000
ordinary shares with a fair value of P12 per share. The par value of the ordinary share is P10 per
share.

Question 1: If the issue of equity is treated as a conversion of an existing debt, what is the amount
of gain to be reported by Turtle in its profit or loss statement as a result of the restructuring?
a. N0ne c. P 500,000
b. P200,000 d. P1,000,000

Question 2: If the issue of equity is treated as an extinguishment of an existing debt instrument,

what amount of gain or loss should Turtle Company report in its profit or loss statement as a result of
the restructuring?
a. none c. P 500,000
b. P200,000 d. P1,000,000

39. Crow, Inc. is indebted to Scare under an P8,000,000, 10%, four-year note dated December 31, 2017.
Annual interest of P800,000 was paid on December 31, 2018 and 2019. During 2020, Crow
experienced financial difficulties and is likely to default unless concessions are made. On December 31,
2020, Scare agreed to restructure the debt as follows:

i. Interest of P800,000 due December 31, 2020 was waived.

ii. Extended the maturity to December 31, 2021.
iii. The principal amount is reduced to P7,000,000.
iv. Interest of P770,000 of the new principal will be paid on maturity date.
v. The prevailing market interest rate for similar debt instrument is 11%.

Assuming an income tax rate of 32%, how much should Crow report as gain in restructuring in its profit
or loss for the year ended December 31, 2020?
a. P 320,000 c. P1,224,000
b. P1,181,208 d. P1,863,070