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CHAPTER 3

Problem 3-1
1.
2.
3.
4.
5.

A
D
D
D
C

6.
7.
8.
9.
10.

Problem 3-2
C
A
C
D
C

1.
2.
3.
4.
5.

C
C
A
B
C

6.
7.
8.
9.
10.

Problem 3-3
B
B
A
D
D

1.
2.
3.
4.
5.

D
B
A
A
B

6.
7.
8.
9.
10.

B
A
D
A
D

Problem 3-4
Book of Marian Company (Lessor)
Jan. 1 Machinery
Cash

2,400,000
2,400,000

Mar. 1 Cash
Rent income
Dec. 31 Repair and maintenance

600,000
600,000
30,000
30,000

31 Rent income
Unearned rent income (600,000 x 2/12)

100,000

31 Depreciation (2,400,000 / 6)
Accumulated depreciation

400,000

Cash

100,000
400,000

Book of Delia Company (Lessee)
Mar. 1 Rent expense
Cash

600,000

Dec. 31 Prepaid rent
Rent expense

100,000

600,000
100,000

Problem 3-5
Requirement 1
Books of Lessor
1. Equipment
Cash

3,000,000
3,000,000

2. Cash (40,000 x 9)
Rent income

360,000

3. Cash
Unearned rent income

120,000

4. Repairs
Cash

360,000
120,000
20,000
20,000

5. Unearned rent income
Rent income (120,000 / 3 = 40,000 x 9/12)
6. Depreciation
Accumulated depreciation (3,000,000 / 10)

30,000
30,000
300,000
300,000

Books of Lessee
1. Rent expense
Cash

360,000

2. Prepaid rent
Cash

120,000

360,000
120,000

3. Rent expense
Prepaid rent

30,000
30,000
Requirement 2

Rent income (360,000 + 30,000)
Less: Repairs
Depreciation
Net income of lessor

390,000
20,000
300,000

320,000
70,000

Problem 3-6
Books of Lessor
1. Tractor
Cash

1,600,000
1,600,000

2. Cash
Rent income

600,000

3. Repairs
Transportation
Cash

15,000
5,000

600,000

20,000

4. Rent income
Unearned rent income (50,000 x 3)

150,000

5. Depreciation
Accumulated depreciation (1,500,000 / 5)

300,000

150,000
300,000

Books of Lessee
1. Rent expense
Cash

600,000

2. Prepaid rent
Rent expense

150,000

600,000
150,000

Problem 3-7
Books of Lessor
1. Machinery
Cash

2,400,000
2,400,000

2. Cash (36,000 x 9)
Rent income

324,000

3. Machinery
Cash

120,000

324,000
120,000

4. Amortization of initial direct costs
Machinery (120,000 / 4 = 30,000 x 9/12)
5. Depreciation
Accumulated depreciation (2,400,000 / 10 x 9/12)

22,500
22,500
180,000
180,000

Books of Lessee
1. Rent expense
Cash

324,000
324,000

Problem 3-8
1. Rent expense
Prepaid rent
Rent deposit
Leasehold improvement
Cash
2. Depreciation
Accumulated depreciation (360,000 / 5 x 1/12)

60,000
60,000
80,000
360,000
560,000
6,000
6,000

Problem 3-9
1. Rent expense
Cash
2. Cash
Sales
3. Prepaid rent
Cash

900,000
900,000
6,000,000
6,000,000
250,000
250,000

4. Rent expense (5% X 1,000,000)
Accrued rent payable

50,000

5. Rent expense
Prepaid rent (250,000 / 10)

25,000

Problem 3-10

50,000
25,000

1. Machinery
Cash

4,800,000
4,800,000

2. Cash
Rent income

850,000

3. Cash
Unearned rent income

300,000

4. Insurance
Cash

850,000
300,000
80,000
80,000

5. Depreciation
Accumulated depreciation (4,800,000 / 12)

400,000

6. Unearned rent income
Rent income (300,000 / 3)

100,000

400,000
100,000

Problem 3-11
2008
1. Equipment
Cash
2. Equipment
Cash
2009
1. Cash
Rent income
2. Repairs
Transportation
Cash

375,000
375,000
75,000
75,000
180,000
180,000
7,000
3,000
10,000

3. Depreciation
Accumulated depreciation (450,000 / 5)

90,000

4. Rent income
Unearned rent income (15,000 x 3)

45,000

90,000
45,000

Problem 3-12
2007
Jan. 1
1
1
2007

Building (800,000 x 4.17)
Lease liability
Building
Cash
Lease liability
Cash

3,336,000
3,336,000
100,000
100,000
800,000
800,000

600 253.790.960 800.000 379.000 / 10) Accumulated depreciation 379.960 Taxes Cash 40.000.436.000 Accrued interest payable Lease liability Cash 253.989.000 683. Building (1. Depreciation (3.000 800. Interest expense 200.600 198.000.000 379.400 Depreciation Accumulated depreciation 343. Taxes Insurance Cash 75.000.600 10% interest Principal 253.000 1.79) Lease liability 3.000 Payment 10% interest Principal 1.000 800.600 198.169.485. 31 31 Depreciation (3.100 Present value 3.000 2.900 3.000 316.600 Interest expense Accrued interest payable 253.000 3. 31 31 31 Payment 343.600 546.790.000 2009 1.536.388.000 3.000 40.000 1.790.000 2.960 800.000 125.000 x 3. 2 Dec. Interest expense Lease liability Cash Year 01/01/2008 12/31/2008 12/31/2009 379.000 / 10) Accumulated depreciation 343.000 546.000 316.Dec.000 621.900 .900 621.600 1.000 40.000 Problem 3-13 2008 1.600 Interest expense Accrued interest payable 198.040 800.000 Taxes Cash Present value 3.000 343.560 40.000 4.336.400 601.000 1.000.000 2.600 Year 01/01/2008 01/01/2008 01/01/2009 01/01/2010 31 2009 Jan.790.

000.000 x 7. Taxes Insurance Cash 683. 31 31 Lease liability Cash Dec.912 Depreciation Accumulated depreciation 426.160 Interest expense Accrued interest payable 647.488 4.067 .000 507. 31 31 1.000.000 426.277 Accrued interest payable Lease liability Cash 647.392.088 12% interest 1.739 Problem 3-15 1.000 200.160 Interest expense Accrued interest payable 604.000 x .739 1.000 75.606.912 395.328.000.160 647.322) Total cost 1 Dec.000 Problem 3-14 2007 Jan.000 7.392.088 Year 01/01/2008 01/01/2008 01/01/2009 01/01/2010 2009 Jan.606.Lease liability Cash 2.000 64.328) Present value of bargain option (200.400 / 15) Accumulated depreciation 426. Depreciation Accumulated depreciation 7.000.100 3.261 Present value 6.392.000.400 6.000.000.000 647.392.400 5.000.400 6. 1 Machinery Lease liability 6.000 1.644.606) Lease liability 2. Depreciation Accumulated depreciation 379.400 5.000 x 6.392.000.000 1.000 1.088 604.400 Payment 426.000 Depreciation (6.067 507.000.039.000 1.739 Principal 1.400 Present value of rentals (1.160 604. Building (1.000 379.000 352. 1 6.000 125.088 352.392.

025.000 Depreciation Accumulated depreciation (3.742 474.700 3.400 592. the depreciation is computed using the term of the lease. 3.536 1.400 1.000 1.188 x 5) Lease liability Equipment 3.000.4761) Total present value 3.000 1.060 x .00 0 1.606.500.600 510.188 Requirement 3 Accumulated depreciation (605.000 x 3.500.318 440.794 796.936 313.940 474.060 3.000 – 474. Interest expense (10% x 7.000) Lease liability Cash 760.000 440.188 Interest expense Lease liability Cash 489.000 3.500.682 Present value 3.000.957.000.000.600 1.060 Requirement 2 2008 Jan.500.000 .060.500.600 407. Since this is the basis of the finance lease.000 2.000 560.300 225.000.274.000 1. 1 Dec.064 686.000.000 The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of the leased asset.000 3. Year 01/01/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 Payment 16% interest Principal 1. which is shorter than the life of the asset.206 203.000.000 605.600 239. 31 31 Equipment Lease liability Interest expense Lease liability Cash 3.188 605.188 1.000 489.500.000 560.000 Problem 3-16 Requirement 1 Present value of rentals (1.The term of the lease is at least 75% of the life of the asset (15/20).549. 31 31 2009 Dec.2743) Present value of guaranteed residual value (474.000.270.000 510.000.000 1.060 / 5) 605.400 Depreciation Accumulated depreciation 605.

Cost of sales Inventory 2. 1 1 Lease receivable Machinery Unearned interest income 500.300 100.940 474.000 3.000.444 12% interest Principal 36.500 1.000 100.500.000 100.556 71.000 4. 31 Unearned interest income Interest income 36.183 Present value 403.000 63. 31 Unearned interest income Interest income Year 01/01/2008 01/01/2008 01/01/2009 01/01/2010 Payment 100.060 – 300.144 168.000.000 28.Requirement 4 Accumulated depreciation Lease liability Equipment 3. Unearned interest income Interest income (10% x 3.000.060 3.072.000 3.072.000 Dec.000 2009 Jan.060 Problem 3-17 1.700 303. Cash Lease receivable 500.817 28.025.700 96.817 .927.000) 174.961 100.500) 307.700 240.000 Loss on finance lease Cash (474.000 307.250 Problem 3-18 2008 Jan.500 2.000 2.817 100.000 403. 1 Cash Lease receivable Dec.000 100.000 Cash Lease receivable 100. Lease receivable Sales Unearned interest income 5.060 174.250 500.444 36.444 28.

000 4.000 1 Cost of sales Inventory 2.000 319.176 500.000 3. 1 Lease receivable (500.000 Year 01/01/2008 01/01/2008 01/01/2009 600.520. Initial direct costs Cash 50.000 Dec.000.000 2.675.484.000 2.165.000 1.000 600.800.000 180.280.675.612.000 1 Cash Lease receivable 500.000 500.000 1.800 298.000 2. 31 Unearned interest income Interest income 319.000 3. 1 Equipment 3.800 2.976 500.000 500.920. 1 Cash Lease receivable Present value 3.000 Problem 10-4 Books of Fox Company (Lessor) 2008 Jan.000 2.000 2.000 292. Cash Lease receivable 600.000 308.176 298.800 Payment 12% interest Principal 500.000 Present value 3.000 Payment 10% interest Principal 600.000 500.800 Year 01/01/2008 01/01/2008 01/01/2009 01/01/2010 500.520.835.000 292.165.200 201.000 600.000 Dec.282.000 2.000 x 8) Sales Unearned interest income 4.000 50.000 3.Problem 10-3 1.165. Unearned interest income Interest income 292.000 319.000 .824 2009 Jan. 31 Unearned interest income Interest income 298.000 x 10) Sales Unearned interest income 5.665.176 Books of Tiger Company (Lessee) 2008 Jan. Lease receivable (600.

000 – 300.000 – 180.000 406.000 Loss on finance lease Cash (300.000 2.000 Problem 10-5 Books of Universal Company (Lessor) Gross rentals (700.000 x 4.500 319.000 500.968) Unguaranteed RV (400.000.000 2.000 x .330.000 2.000 600. Equipment Lease liability 316.000 x 5) Equipment 300.600 3.000 400.030.477.639.330.000 3.000 Dec. Lease liability Accumulated depreciation (406.000 / 5) 406.000 / 10) Accumulated depreciation 31 Interest expense Accrued interest payable 2009 Jan.200 . 31 Depreciation (3.176 1.330.165.000) Lease liability Cash 279. Lease liability Accumulated depreciation Equipment 300.330.000 x 8) Unguaranteed residual value Lease receivable Present value: Gross rentals (700.000 1 Lease liability Cash 500.600 161.000 120.000 2.500 31 Interest expense Accrued interest payable Problem 3-21 298.800 180.500 298. 31 Depreciation Accumulated depreciation 316.600 320.Lease liability 3.330.500 316.000 Interest expense (12% x 2.404) 5.030.400 Depreciation Accumulated depreciation (2.000) 120.000 6.176 2.000 2.800 319. 1 Accrued interest payable Lease liability Cash 316.000 2.330.200 500.165.800 319.000 Dec.000 3.600.

000.000) ( 300.477.000 lessee’s lease .000 10.370.000 11.477.400 3.000 x .000 11.639.000.370.477.312 282.704 Books of National Company (Lessee) 1.600) Lease liability Cash 417. 2.000.000 16.800.60) Residual value (1.000 x 5) Residual value – guaranteed Gross investment Present value: Rentals (3.200) 436.838.477.Unearned interest income 2.700 Problem 10-6 Gross rentals (3.800 2.704 700.800 Cost of equipment sold Less: PV of unguaranteed RV Cost of sales 2. Depreciation Accumulated depreciation (3.000. so it is not included in the computation of the liability. Cash Lease receivable 700.600 The residual value is unguaranteed.838.000 2.000 570.477.000) 3.000 161. Unearned interest income Interest income (12% x 3.000.070.600 3.360.000 ( 8.000 1.360.630.000.000.600 / 8) 434. Equipment Lease liability 3.688 3.000. Interest expense (12% x 3.000 434.000 x 3.000.000 4.57) Total unearned financial revenue Sales Cost of sales: Cost of machinery Initial direct costs Gross income 15.600 2.000 1.000 3.000.600 1.400 1. Lease receivable Cost of sales Sales (equal to PV of rentals only) Unearned interest income Inventory 6.000 436.700 700.

635.000 . Interest expense Lease liability Cash 1.390.000.364.000) 1.889 (11. Gross rentals (600.533.533. Equipment Cash Lease receivable Equipment Unearned interest income 6.400 Books of Thunder Company 1.674 5.370.000 3.466.400 6.400) 2.533.000 x 10) Net investment in the lease: Cost of equipment Initial direct costs Total financial revenue 2.000 Unearned interest income Interest income (11% x 3.000 388. Unearned interest income Interest income (12% x 11.600 Cash Lease receivable 600.400 / 600.364.000.Books of Vanderbilt Company 1.370.000 8.000.074.000 2.370.000) ( 143.600 143.000 3.364.000) 600.000.000 11.000 / 5) 2.000. Cost of sales (Initial direct costs) Cash 16.466.000 (3.400 1.000 11.000 1.400 143.000 4.000.000 300.600 3. Machinery Lease liability 11.400 2.000 3. Cash Lease receivable 3.400) 388.000 Problem 3-24 1.074.370.000.370.400 3.000 300.000.674 PV factor (3.000 2. Depreciation Accumulated depreciation – 1.000.000 8. Lease receivable Cost of sales Sales Unearned interest income Inventory 2.630.000 4.

440.000 50.000) ( 200.328.000 40.000 40.000 110.000 40.000 Problem 3-26 Books of German Company 1.500.000.605) Total unearned financial revenue 16.000 90.100.000 4. Interest income for first year (12% x 12.000 3.000) 1.000 1. Depreciation (1.000 1.100.This factor is applicable to 11%.000. Problem 3-24 1.000 ( 8.100.000 100.000.000 2.800.000 90.100.000 1.000.643.000 is ignored by the lessor because ownership of the asset transferred to the lessee at the end of the lease term. Cash Accumulated depreciation Equipment Gain on sale and leaseback 2.000 / 10) Accumulated depreciation 1.550 The residual value of P500. this is the new implicit rate in computing interest income.000 450. 2. Lease receivable (3.000 110. Rent expense Cash 1. Cash Rent income 3.550 12. Sales price (equal to present value of rentals) Cost of sales: Cost of equipment Initial direct costs Manufacturer’s profit 12. Equipment Cash 2.500.000) 3.000 is .000 Books of Sterling Company 1. Thus. Cash Accumulated depreciation Loss on sale and leaseback Machinery 2.643.328.000 Problem 3-27 Books of Canada Company 1.710 x 5) PV of gross rentals (3.000 40.710 x 3.000. Rent expense Cash 500.

415. Building Lease liability 2.000 90.000 2.000 x 10) 5.000 2.500 5. Depreciation (2.000.400 Problem 3-29 Answer B Rent for June 200.000 2.415.000 3.000 50. Unearned interest income Interest income 386. Lease receivable (500.585. Depreciation (500. Cash Accumulated depreciation Building Deferred gain on sale and leaseback 2.000 5.415.Books of Saigon Company 1.000 386.000) Lease liability Cash 386. Interest expense (16% x 2.000 Books of Mexico Company 1.600 500. Cash Lease receivable 500.000 815.000 / 15) Accumulated depreciation 161.400 500.000 2.000 3.000 500. Building Cash 2.415.400.000 Building income 2.000. Cash Rent income 90.000 / 10) Accumulated depreciation 50.000 / 10) 81.000 2.500 81.000 3.000 Problem 3-28 Books of Cuba Company 1. Machinery Cash 500.000 2.000 161.415. Deferred gain on sale and leaseback Gain on sale and leaseback (815.000 3.415.000 Unearned interest .415.000 4.415.400 113.000 4.

800.000) Total rental revenue 1.000 1.000 Problem 3-32 Answer B Total rent expense (600.000 Problem 3-30 Answer B Annual rent (15.000 150.250.000.200.000 180.200 x 1.000 x 1.400.250.400.000 x 51 remaining months) Average annual rent expense.000 680.000 Problem 3-33 Answer C First year (1.000 Rental revenue from January1 to September 30.000 x 6/12) Second year Third year Fourth year Fifth year Total rental revenue 400.000 Average annual rental (7.040.000.200.000 7.250.000 . July 1.000 5% x 3.000) Second year (3.Amortization of bonus (prepaid rent)[600.200.400.000.020.000 x 3/12) 1.000 50.000 x 117 remaining months) 70.000 / 10) 7.000 Rent expense from October 1 to December 31.000 120.020.000 Property taxes Insurance Total expenses 180.200.000 3.000 1.000 / 3) 2.250.000 / 5) 10.000 3.000 Problem 3-34 Answer C First year (800.200. 2008 (7.200.000 Problem 3-31 Answer A Total rent expense (200.000 x 9/12) 1. 2006 to June 30.000 1. 2007 (10.000.080.000 2.000 Average annual rent (70.000 / 5) 1.000 Average annual rental revenue (5.000 210.000 1.000 5. 2008 (2.200.000) Third year (3.400.000 / 5 x 1/12] Rent expense for the month of June 10.000 x 1.000 x 12) Additional rent 6% x 3.755.

Problem 3-40 Answer B Problem 3-41 Answer B Present value of rentals (400.95) 2.000 / 5) Total rent revenue 900.000 15. .000 90.000 275. the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12). 2008 240. 4.000 / 3) 120.000 x 6.000 x 2) Less: Rentals received: First 12 months Second 12 months Rent receivable. Again.000. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%).000.000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option.000 x 5. 2008 (120.5% of the P4.000 Rent revenue from July 1.000 150.000 Problem 3-37 Answer C Annual rental Amortization of lease bonus (500.000 90.000 120.500 The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years). The present value of the rental of P3. 2006 to June 30.000 Problem 3-38 Answer D This is not a finance lease and therefore no liability is recorded because: 1.76) is only 84. fair value of Problem 3-39 Answer B Cost of leased property (100.000 225. June 30.000 60.000 1.000 x 6.Problem 3-35 Answer C Average annual rental revenue (360.000 90.000 (500.380.380. There is no a bargain purchase option. There is no transfer of ownership or title to the lessee at the end of the lease term.000 / 10) Depreciation Insurance and property tax Net rent income 500.145) 614.000 Problem 3-36 Answer A Rent income Less: Amortization of initial direct costs (150.000 100.000.000 The purchase option of P500. 3. 2.

000 Problem 3-47 Answer A Interest expense for 2008 (10% x 3.000 1. .200 200.000 500.800 Present value 1.000 84.000 Interest (10% x 2.000 / 8) 275.000 / 12) 90.352.067.000) 10.125. 2007 (all applicable to principal) Balance – December 31.115.000 200.000 2.067.790.665. 2008 3.500 2. 2007 Less: Principal payment on December 31.000 2.000 233.200 2. 2008 Payment 500.400. 2008 Less: First payment on December 30.000 Problem 3-43 Answer B Depreciation (1.000 ( 90.431.200.000 84. Interest expense for 2008 115.000 / 20) Problem 3-45 Answer B 67.000 Depreciation (2.152.500 Problem 3-46 Answer B Present value.800 1. 2008 Current portion Noncurrent liability 1.Problem 3-42 Answer D Cost of leased property Less: Residual value Depreciable cost 2.165.200 Lease liability – December 31. 2008 1. December 31.000 200.352.000 100.125. Depreciation for 2008 (1.500 Lease liability – December 31.152.200 3.665.200.Answer C Payment 10% interest Principal 200. Problem 3-44 Question 1 – Answer C 1.000 115.080. January 1. Date 01/01/2007 01/01/2007 01/01/2008 Question 2 – Answer B Question 3 .600 Present value (using implicit rate of 10%) Less: Payment on December 31.000 1.000) 266.000 If the “transfer of ownership criterion” is used in qualifying a finance lease. the depreciation is based on the life of the asset.000) 379.000 1. 2008 Interest for 2008 (8% x 1.000) Lease liability.

14) 6.300.340.150.440. 2008 (all applicable to principal) Lease liability – 12/31/2008 Less: Second payment on December 31.000.000 2.000 The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee.000 The present value of an “annuity due” factor is used in the computation because the rental is payable in advance.000 Problem 3-52 Answer A Problem 3-53 Answer A Cash payment Book value of leased asset (2.640.000.000 200.000) Total consideration Balance of lease liability Cost of machinery purchased 1. January 1.200.65) Total lease liability – 1/1/2008 Less: First payment on January 1.000 1.000) 115.000 .000 Problem 3-49 Answer A Present value of rentals (1.000 6.862.000 4.065. January 1.000 800.000) 1.000.150.300.000 1.24) Present value of guaranteed residual value (1.512.000 1.000 x 0.162.000 115.000 Principal payment Lease liability – 12/31/2009 1.000 1.000 – 800. January 1.000 The entry to record the actual purchase of the leased asset is: Machinery (purchased) Lease liability Accumulated depreciation 1.300. In this case.300.000 650.000 1. 2008 Less: First payment on January 1. 2009: Payment 200.150.000 85.000 1.Problem 3-48 Answer B Present value. 2008 (all applicable to principal) Lease liability – 12/31/2008 5.350.140.000 1.150.340. 2007 (1. Problem 3-50 Answer B Lease liability.000 x 4. 2008 (all applicable to principal) Lease liability. 2008 Interest expense for 2008 (10% x 1. the residual value is guaranteed by a third party and therefore excluded in computing the lease liability. Problem 3-51 Answer B Present value – 12/31/2008 Less: First payment on December 31.350.000 200.000 1.000 Interest for 2009 (10% x 1.000 x 6.

Gain on sale (3.000 308.000 x 5) Present value of rentals (fair value) Total interest revenue Problem 3-57 Answer A Cost of equipment Present value of residual value (200.000 x 12%) Problem 3-59 Answer A Problem 3-60 Answer B 522. Lease receivable (75.492 604.520.000 600.000 Present value 3.250.044.000.588 Selling price or fair value Less: Cost to Gallant Company Dealer’s profit Add: Interest income – 2008 Total income before tax Present value 2.000 2.800.000 2.000 July 1 to December 31.000 .000 2.894.268.520.000 204.268.000. Date 07/01/2008 07/01/2008 07/01/2009 720.000 x 1/2) 146.080 355.000 – 900.000 x .000 600.000 400.466) Net investment to be recovered Annual rental (4.000 Payment 10% interest Principal 600.920 1.920.312 or P75.Cash Machinery (leased) Problem 3-54 1.000 – 2. Accordingly.200) 4.000 / 5. 2008 (292.000 2.492 Problem 3-56 Answer C This is mathematical.612.000 2.000 800.000 323.000) 2.000.000 Problem 3-55 Answer B Date 01/01/2008 01/01/2008 01/01/2009 Payment 10% interest Principal 355.332 2.440.335) 375.400.400. the annual rental is equal to P323.080 204. The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1”.200 ( 93.080 150.000 Problem 3-58 Answer B Interest income (5.400 divided by 4.492 355.600 4.000 292.400 51.361.000 Question 1 – Answer A Question 2 – Answer B 1.

085.326.000 ( 515.600 Problem 3-63 Question 1 – Answer B Interest income for 2008 (10% x 4.250.000 11.000 x 8.000 12.Problem 3-61 Answer D Problem 3-62 Question 1 . Note also that the residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term.000 8.000) 1.000 Observe that the present value of rentals is the same as the fair value of the asset.500. To record the sale of the machinery: 485.000 x 20) Present value or fair value of asset (1.000) 485.000 485.Answer B Fair value of asset Cost of asset Profit on sale 12.000 17. 2008 – all applicable to principal Balance – January 1.000) Loss on sale of machinery 3.000 5.445. 2008 12.000 1.000 – 485.850.000) 5.000.000.000 (2. Question 2 .055.850.555.000 Question 2 – Answer A Sales price Book value of lease receivable: Lease receivable Unearned interest income (1.335.000 Question 3 – Answer C PV of rentals equals to the fair value of asset Payment of January 1.000 Interest income for 2008 (11.Answer A Gross rentals (1.555.37) Unearned financial revenue 30.555.555.055.000 4. To recognize the interest income for 2008: Unearned interest income Interest income 2.500.000 .000.500.000 x 12%) 1.

000 1. Problem 3-70 Answer A Sales price Carrying amount Deferred gain – 12/31/2008 Problem 3-71 Answer D Sales price Carrying amount Gain on sale and leaseback 7.000 450.000 2.000 5.000 .500.000 50.850.800.500.500.000 120.000 The gain is not deferred but recognized immediately because the leaseback is an operating lease.000 500.085.000.000 360.000.950. Problem 3-72 Answer C Sales price Fair value Deferred gain 6.000 515.000 Problem 3-64 Answer D Problem 3-65 Answer B Problem 3-66 Answer C Problem 3-67 Answer C Problem 3-68 Answer B Sales price Cost of equipment sold Deferred gain on sale and leaseback Less: Realized gain in 2008 (500.000 Problem 3-69 Answer A Sales price Carrying amount Deferred revenue 480.250.000 Fair value Carrying amount Gain on sale and leaseback to be recognized immediately 5.000 5.000 1.000 360.000.Cash Unearned interest income Loss on sale of machinery Lease receivable 3.000 / 10) Deferred gain – December 31.000.000 5.000 3.850.000.000 30. 2008 1.000 1.000 The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%).000 1.000 330.

000) 2.000 2. 9.000) 1.000. Income tax payable Cash 500. Deferred tax asset Income tax benefit (35% x 1. Income tax expense Income tax payable (35% x 7. 3.000.000 3. 7.450.000 500.000) 1. Income tax expense Income tax payable (35% x 1.400.000 350.000 700. Income tax expense Deferred tax liability (35% x 500.000 ( 350. 4.000 Current tax expense Income tax benefit Total income tax expense 1.CHAPTER 4 Problem 4-1 1.000 3.050.500. 5. Income tax expense Income tax payable (35% x 4.000 Problem 4-4 2008 1.000. B A B A D Problem 4-2 1.000 .000.400. 8. Deferred tax asset Income tax benefit (35% x 1.000) Income statement presentation 2.000 Problem 4-3 1.000 525.000 175. C A D D A 6.000) 175.400.000 Current tax expense Deferred tax expense Total income tax expense 525.000) 350. 10. Income tax payable Cash 200.000 350.000 175.000 1.000 2.450.000) 525.000 350. 2.000 200.000 2.

Income tax expense Deferred tax asset 6.000) 2.000 2.625.000 1.000 .800.850.575.500.000 1.000 Income statement presentation Income before income tax Income tax expense: Current tax expense Decrease in deferred tax asset Net income 9.000.750.000 5.000 2.Income before income tax Income tax expense: Current tax expense Income tax benefit Net income 2009 1.000 ( 2.000 4.000 3.000 2.000.000) 2.000) 2.550.000. Income tax expense Income tax payable (35% x 8.000 175.000 175.000 3.000) 2.000 2.450.450.000 Income statement presentation Income before income tax Income tax expense: Current tax expense Deferred tax expense Net income 2009 1.925.000.625.000 2.000 Problem 4-5 2008 1.750.000 2. Income tax expense Income tax payable (35% x 5.000. Deferred tax liability Income tax expense 5.000 350.750.625. Income tax expense Deferred tax liability (35% x 500.000 175.800.500.000) 2.000 ( 175.000 3.000) 1.900.000 175.000 175.000 350.800.000 Income statement presentation Income before income tax Income tax expense: Current tax expense Decrease in deferred tax liability Net income 7.100. Income tax expense Income tax payable (35% x 7.000 1.000 350.000 350.150.

000) 70.000 3.600.000 .000) 2.400.000) 175. Income tax expense Income tax payable (35% x 3.000) ( 50.000) 2009 1.200.260.000 ( 70.000 100.000) Income before construction income Construction income 720T 720T 180T 180T 1080T 1080T 450T 450T 1860T 1860T 3. Income tax expense Deferred tax liability (30% x 600.000) 2.000 2.635.000 3.260.600.500.000 4.000 ( 450.000) 1. Income before income tax Income tax expense Current tax expense Deferred tax expense Income tax benefit Net income 175. Deferred tax asset Income tax benefit (35% x 200.000 3.260.000) 3.000 70.000 ( 300. Income tax expense Income tax payable (30% x 6.000 200.000) 2010 1.000 2.000 Problem 11-10 2008 1. Income tax expense Deferred tax liability (35% x 500.365. Income tax expense Income tax payable (30% x 2.000) 100.900.000 1.600.000.200. Income tax expense Deferred tax liability (30% x 1.000 1.000 4.000. Income tax expense Income tax payable (30% x 3.000) 4.000 1.Problem 4-6 Accounting income Permanent differences: Nondeductible expenses Nontaxable revenue Accounting income subject to tax Taxable temporary differences: Deferred income Excess tax depreciation Deductible temporary differences: Doubtful accounts Estimated warranty cost Taxable income 1.000.000 175.

000 2.330. Deferred tax liability Income tax expense 2011 1. Deferred tax liability Income tax expense (35% x 2. Income tax expense Income tax payable 2.260.000 1.000 3.000 Current tax expense (35%) 1.000 1.200.500 52.500 .330.000 17. Income tax expense Deferred tax liability 2010 1.295.800.000) 35% ( 17.330.000 1.000.000 52.260.000 2010 4.000 2009 4.700.500) Balance 2008 1.000) 630T 630T Problem 4-8 Requirement 1 The “current expense” is computed as follows: Income before depreciation Depreciation – SYD Taxable income 2008 4.Taxable income 6.500 1.000 35% 17.295.260.000 3.500 1.000 The deferred tax liability arising from the taxable temporary difference is computed as follows: Temporary difference Rate Deferred tax liability 2008 150.000 2011 4.365.295.500 1.500 2009 50. Deferred tax liability Income tax expense 1.500 2010 ( 50.600.000 1.000.100.365.000 3.000 200.000 400.000 100.000 1.900.000 52.000 17.500 17.500) 2011 (150. Income tax expense Income tax payable 2. Income tax expense Income tax payable 2.000.000 1.000. Income tax expense Deferred tax liability 2009 1.000 35% 52.500 17.500 52. Income tax expense Income tax payable 2.365.000 1.000 300.000 3.000) ( 52.

000.760.000.000 120.000 42. Income tax expense Income tax payable 2.000 Accounting income Doubtful accounts Rent income Warranty cost Taxable income Tax rate Current tax expense Temporary difference 2008 2009 2010 2011 Balance 520.000) ( 84.000 ( 40.000 Rate Deferred tax asset 35% 35% 35% 35% 182. Income tax expense Deferred tax asset 2009 3.880.000) ( 40.358. Income tax expense Income tax payable 2.000) (120.000 1.000 ( 100.666.520.000 ( 56.000 994.000) ( 80.000 84.000 35% 994.000 300.000 994.358.000 35% 1.000 182.000) 2.000 1. Income tax expense Income tax payable 2.000) 882.000 182.000) - 2008 1.000) ( 200.000 84.000) (240.000) 4.000 42. 2009 Noncurrent liabilities: Deferred tax liability 70.000 35% 882.000 1.000.000 2010 4.666.000 .000 56.000 882.000 35% 1.000 100.000) 3.Requirement 2 – Balance sheet on December 31.000 1.000 2011 5.000 (160. Deferred tax asset Income tax benefit 2009 1.000.000 ( 40. Income tax expense Deferred tax asset 2010 1.000) ( 42.000 2.666.358.000 Problem 4-9 Requirement 1 2008 2.840. Income tax expense Deferred tax asset 2011 1.000 56.000) ( 20. Income tax expense Income tax payable 2009 2.

900.000 350.000) 245.000.000) 105.000) ( 35. 1.100.000 (1.000 245.000 100. Deferred asset Income tax benefit (35% x 700. Deferred tax asset (35% x 300.000 350.000) Problem 4-11 Accounting income Taxable temporary difference: Tax depreciation Deductible temporary differences: Litigation loss Warranty cost Taxable income 1.000 105.000 (130.000 (200.000 3.000 105.000 2.000 2. 2008 Noncurrent assets: Deferred tax asset 182.000 35.600.000) 1.900.000 The interest income is part of taxable income because it arises from note receivable and not from bank deposit.600.000.000 300.000) 350.000 .000 70.000.000 2. Income tax expense Income tax payable (35% x 7.Requirement 2 – Balance sheet on December 31. Income tax expense (35% x 100.000) Income tax benefit Income statement presentation Loss before income tax Income tax expense: Current tax expense Income tax benefit Net loss 35.000 7.000 Income statement presentation Income before income tax Income tax expense: Current tax expense Deferred tax expense 7.660.000) 7.660.000) 400.000 Problem 11-13 Operating loss Interest income on note receivable Taxable income (1. Income tax expense Deferred tax liability (35% x 1.000) Income tax payable 2.000 2.660.

800.000 2. Revaluation surplus Deferred tax liability (35% x 2.000.000.000 ( 7.000 1.000 7.000 13.000 5.000 2. Income before income tax Income tax expense: Current tax expense Deferred tax expense Income tax benefit Net income 2.450.000) 4.150.000 3.000.765.000 Current tax expense (35% x 8.000 x 3/8) (12.000.000) 2.000.000.000) Balance sheet presentation Noncurrent assets: Deferred tax asset Current liabilities: Income tax payable Noncurrent liabilities: Deferred tax liability Problem 4-12 2.000.000.000 875.500.450.000 3.500.550.000.000 2.000 2.450. Equipment Accumulated depreciation Revaluation surplus Equipment Accumulated depreciation ( 8. Income tax expense Income tax payable Pretax accounting income Future taxable amount Future deductible amount Taxable income 2.000 .000 2.000. Income tax expense Income tax payable Appreciation 4.000.000 13.000.000 1.000 2.000 2.000) 3.800.000 12.000.000 8.000 Problem 4-13 1.800.000 3.500.500.000) 3.000 2.000 700.000 8.000 700.000 Cost Replacement cost 8.000) 2.660.500.000 5.000 350.000 x 3/8) BV / SV / RS 4.000 ( 700.450.000 2.135.000 245.000. Deferred tax asset Income tax benefit (35% x 2.000 875.500.800. Income tax expense Deferred tax liability (35% x 7.150.500.000 1.000.000 4.000) 4.000.Income tax benefit Net income ( 245.

000 4.610.000) Deferred tax liability – 01/01/2008 Decrease in deferred tax liability 700.000.000.000) 5. Revaluation surplus (2.000 4.000.000. Deferred tax liability Income tax expense 175.000 ( 3.500.000 5.975.000.000.000 Deferred tax liability – 12/31/2008 (35% x 2.000 ( 600.000.525.000 875.000 Equipment at replacement cost Accumulated depreciation: January 1.500.000 2.000.000) 2.000.000.000 3.150.000 / 5) Taxable income 10.000 300.000.000) 3.000.000.000) 4.000 1.600.000.000 Carrying amount – 12/31/2008 Tax base – 12/31/2008 Taxable temporary difference 6.000 ( 1.000 175.000 Equipment at cost Accumulated depreciation: January 1.000 Current tax expense (35% x 9.500.000 4. Income before depreciation Depreciation on revalued amount income tax Income tax expense: Current tax expense Decrease in deferred tax liability Net income 325.000.000 4.150.000 10.000 / 5) Carrying amount – 12/31/2008 12.000 1. 2008 Depreciation on cost for 2008 Tax base – 12/31/2008 6.000.000) 4.000.900.000 (175.000 ( 100.500.000 ( 1.000) 8.000 Problem 4-14 Answer A Pretax accounting income Dividend received Financial income subject to tax Estimated litigation loss Revenue from installment sale Taxable income Current tax expense (35% x 4.500.000 6.000 8. 2008 Depreciation on revalued amount for 2008 (7.000) 9.600.000 325.000 4.000.000) 5.000 – 875.000 1.000 / 5) Retained earnings 6.000 175.Pretax income before depreciation Depreciation on cost (5.000.000 Income before .500.

200.000 1.000 Problem 4-17 Answer D The two items are nondeductible expense for tax purposes and therefore permanent differences.000 90. Problem 4-19 Answer A Current tax expense (35% x 150.000.000 ( ( 50.000 2.500.Problem 4-15 Answer A Pretax accounting income Proceeds from life insurance Accounting income subject to tax Excess tax depreciation Cash received – taxable in 2008 Taxable income Total income tax expense (4.000) 60.500.090.000 Problem 4-22 Answer C Pretax accounting income Permanent difference: Premium on officers’ life insurance (nondeductible) Accounting income subject to tax Temporary differences: Rent income Depreciation 1.000) ( 120.000 1.000 Problem 4-16 Answer C Percentage of completion Cost recovery method Temporary difference 3.575. 2008 of P200.000) . Problem 4-21 Answer D Current tax expense Income tax benefit (400.300.000) 52.000 x 35%) 70.000. Problem 4-18 Answer C Deferred tax asset (200.000 Deferred tax liability (35% x 1.000) Total income tax expense 260.000 x 35%) 5.000) 160.000 will result to a deferred tax asset because it is a future deductible temporary difference.000 1.000 (100.000) 455.000 The unearned income on December 31.000 – 300.500.000 is noncurrent.300.000 ( 200.000) 4.180.000) 4.500 Problem 4-20 Answer D The deferred tax liability of P75.000 ( 500.

Taxable income 980.000 Problem 4-24 Answer D Taxable income Excess tax depreciation (134.000 x 35%) 343.000 87.000 560.000 x 35%) Question 2 – Answer C Deferred tax liability – noncurrent (250. Therefore.000 in warranty liability is a higher taxable income and therefore will result to a deferred tax asset.000 The income tax payable is actually the current tax expense since there is no income tax payment during the year. Problem 4-23 Answer B Income before tax and depreciation Tax depreciation for 2008 Taxable income Current income tax liability (1.000 is a higher financial income and therefore will result to a deferred tax liability.000) 2.000 54.000 (1. Problem 4-26 Question 1 – Answer B Current tax expense (1.000 1.500.000. this difference has no deferred tax consequence. it is a future deductible temporary difference.000 x 35%) 490. The difference of P75.200.000) 25.000 Income tax payable (980. Problem 4-25 Answer C The impact of the difference in the equipment of P80. it is a future taxable temporary difference.000) (1.600.000.400.000) (1.600.000 414.000 – 80.500 Problem 4-27 Answer D Accounting income Future taxable amounts: 2009 2010 2011 Taxable income 6.000) Goodwill impairment loss Interest on treasury bills Pretax accounting income 380.000 The pretax accounting income is the accounting income per book and not the accounting income subject to tax.000 ( 45.000 400.000 x 35%) 2.200.100. Accordingly. Accordingly. The impact of the difference of P50.000 is a permanent difference because the officers’ insurance premium is nondeductible.000 .

000 2.500.000 The deferred tax liability is based on the cumulative future taxable temporary difference of P500.000.450. Problem 4-31 Answer A Deferred tax expense (1.000 6.000 x 35%) Problem 4-32 Answer A 350. 2008.000 Problem 4-28 Answer A Pretax accounting income Permanent differences: Interest income Insurance premium Accounting income subject to tax Temporary differences: Gross profit on installment sale Warranty liability Net loss carryover 2.000 1.000.000 7.650.000.000) 2.Income tax payable (2.000 2.000 x 35%) 175.000 Gross deferred tax liability (4.000 x 35%) 875.000) Warranty liability (2.000) 7.000) 280.000 Problem 4-30 Answer A Deferred tax liability – 12/31/2008 (500.000.000 x 35%) Income tax benefit (200.000.600.015.000 Problem 4-29 Answer D Pretax accounting income Taxable temporary differences Deductible temporary differences Taxable income Income tax payable (19.000.000 ( 3.000 ( 70.000 1.000 on December 31.000.000 x 35%) Taxable income Installment accounts receivable Litigation liability Accounting income subject to tax Income tax expense – total (7.000 x 35%) Gross deferred tax asset 700.000 19.000) 100.000.000 x 35%) 1.000 1.000 x 35%) Net loss carryover (900.000 315.000.000.575.800.000 ( 500.500.730.000.000 x 35%) Net deferred tax expense Current tax expense (7.000 x 35%) 20.000 ( 900.000 ( 200.000.000 (4.800.000) 2.000 .500.

000 3.000) 1.600.400.Answer A Excess tax depreciation Installment sales income Total future taxable amount 800. this will result to future taxable income. Problem 4-33 Answer D The deferred tax asset on December 31.250.000 1. 2008 is supposed to be the total deductible temporary differences of P2.000 3. Accordingly.000.600.200.000 times 35% or P700.000) 8.000 .000 The accrual for product liability in excess of actual claim is a future deductible amount and therefore will result to a deferred tax asset.650.000 400. warranty and deposit are future deductible differences and therefore will give rise to deferred tax asset. Question 3 .200.190.000 10. the deferred tax asset on December 31.000 800.000 The differences in accounts receivable.000.000 140.570. 2008 is recognized only to the extent of the taxable temporary differences of P1.000 2.000) 420.000) 2.000 ( 1.000.200.000.000 Deferred tax liability – 12/31/2008 (35% x 3.000 times 35% or P420. Problem 4-34 Question 1 – Answer A Taxable income Excess tax depreciation Estimated product claim liability Installment sales income not included in taxable income Accounting income subject to tax Total income tax expense (35% x 10. Since there are taxable temporary differences that will reverse in 2009.000 Question 2 – Answer B Deferred tax asset – 12/31/2008 (35% x 1.Motor vehicle – carrying amount Motor vehicle – tax base Future taxable amount Deferred tax liability (35% x 400. this amount cannot be fully recognized because there is strong evidence that future taxable income may not be available. PAS 12 provides that a deferred tax asset shall be recognized only to the extent that it is probable that future taxable income will be available against which the deductible temporary difference can be used.200.000) 1.200. However.400.

000.000 2.000 – 140.000 1.000 x 5%) 200. To record decrease in deferred tax asset: Income tax expense Deferred tax asset 40. 2. 14.000 50. A 10. 15. C 2. 3. D 6. A 8. C A A C D 11. A 8. A 4.000 Benefit expense Cash (4. Problem 6-3 1.050.000 Noncurrent liability – 12/31/2008 Acrued benefit cost 150. 3.000 4.000 x 5%) 210. A 6. A A A C A Problem 6-2 1.000 210. 4. B 9. A 7. 5. D 3.000.000) 4. 4. A 5.000 Noncurrent liability – 12/31/2009 Accrued benefit cost 100.Problem 4-35 Answer C Deferred tax asset – 12/31/2008 (2. 13.000 CHAPTER 6 Problem 6-1 1. B B C A A C Problem 6-4 2008 2009 Benefit expense Cash (4. D 7.000 200. 2. 12. To record increase in deferred tax liability: Income tax expense Deferred tax liability (144.000 x 35%) 700.200.000 Problem 4-36 Answer B 1.000 Problem 6-6 . D 10.000 Problem 6-5 2008 Benefit expense Cash Prepaid/accrued benefit cost 2009 Benefit expense Prepaid/accrued benefit cost Cash 850.000 40.000 1. C 9.000 700. 5.000 150.000.

000 x 3% x 12) 108.100.000 ( 600.000.000.792. Future salary – PBO (500.000 1.000 650.400 8.000 PBO – January 1 Service cost Interest cost Balance – December 31 Prepaid/accrued benefit cost – December 31 Problem 6-9 4.000 4.047.750.255 0.000 5.000 x 1.146 261.900 0.000 x 2.000 400.000) Debit adjustment Debit balance 1.559 1.550.000.000 Annual pension payment – PBO (1.000.000) 1.500.000 1.000 (460.000 8.500.150.047.000.000 .350. Service cost Interest cost (10% x 4.000 7.000 Problem 6-7 1.000 600.000 150.840 2. Annual pension payment – PBO (300. Current service cost Interest cost (10% x 6.000) Expected return (12% 5.48 x 3% x 12) 159.000 1.961 1.000 1.000 150. Annual pension payment – ABO (500.000 – 4.094) 100. P/ABC – January 1 (5.000 x 2% x 10 years) Multiply by PV of an ordinary annuity of 1 at 8% for 15 years Present value – 1/1/2034 Multiply by PV of 1 at 8% for 25 periods Projected benefit obligation – 1/1/2009 209.000 1.559 855.000) 790.000) Expected return (8% x 5.150.000 x 2% x 10 years) Multiply by PV of an ordinary annuity of 1 at 8% for 15 years Present value – 1/1/2034 Multiply by PV of 1 at 8% for 25 years Accumulated benefit obligation – 1/1/2009 2. Annual pension payment – ABO (300.000) Benefit expense 600.950.000 400.550.000) Benefit expense 2.000.350.669 Problem 6-8 1.000 1.000 3. FVPA – January 1 Contribution Actual return Balance – December 31 5.1.000 1. Benefit expense Prepaid/accrued benefit cost Cash 1.000.500.146 124.

725.047.000 ( 640.000) Expected return (8% x 6.000 110.500.000 7.000 172.000 538.750.000 3. FVPA – January 1 Contribution Actual return Balance – December 31 5.000) Benefit expense 1. Benefit expense Prepaid/accrued benefit cost Cash 790. Benefit expense Cash Prepaid/accrued benefit cost 500.000) 4.000) 1.000 760.750.2.000 900.000 1.000 600.000 Actual return Expected return Actuarial loss – deferred 2.000 3.450.500.000 PBO – January 1 Current service cost Interest cost Balance – December 31 P/ABC – December 31 (credit) Problem 6-11 7.000 ( 538.000 900.000) 110.000 8.000 1.000 8.000 760.810.000 460.000 1.600.047. FVPA – January 1 Contribution Actual return Balance December 31 Actuarial loss Total debits 6.763.000) . Current service cost Interest cost (10% x 7.110.000) Problem 6-10 1.000 PBO – January 1 Current service cost Interest cost Balance – December 31 P/ABC – December 31(credit) 6.000 650.450.000) 1.000 1.000 38.000 (1.725.000 500.000 9.000 (640.000 4.000 172.725.672.000 7.500.000 ( 38. P/ABC – January 1 (credit) Credit adjustment Balance – December 31 875.600.672. P/ABC –January 1 (credit) Debit adjustment Balance – December 31 (750.

000 2008 Current service cost (75.000 5.000 5.000 4.000) Bee (10% x 6.000.150.800.000 Problem 6-14 Cumulative actuarial loss Corridor – 10% of greater Aye (10% x 5.000. 2008.000.300 3.750.000) 2009 (12% x 6.000 650.080.000 810.600. Actual fair value Expected fair value Actuarial gain 1/1/2009 6.249 33. Fair value of plan assets – 1/1/2008 Add: Expected return in 2008 Expected fair value – 1/1/2009 5.800.150.000 600.500.000 925.000 0 3.000.200.000 720. 2009 Actuarial gain – 1/1/2009 Corridor (10% x 7.000 5.500.000 900.000.000 450.Annual benefit (5% x 1. Actual fair value of plan assets Expected fair value Actuarial gain -1/1/2008 7.000 700.000 500.000 5.549 1.000 125.000.400. 2008 – No amortization because there is no actuarial gain or loss on January 1.000) Excess gain to be amortized 1.000 x .000 / 10) 45.000) Excess actuarial gain 1.075 0 27.000) 75.600.000 _______ 250.000 Amortization of actuarial gain (1.000 1.000 2.200.750.000 _______ 0 .000 / 10) 108.404) Interest cost (12% x 27.000 1.000 800.000 1.075 2009 Current service cost (75.000 Amortization of actuarial gain (450.000 1/1/2008 5.000 x .000) Excess Aye Bee Cee 350. Expected return 2008 (12% x 5.075) Benefit expense Problem 6-12 30.000 Problem 6-13 1.000) 600.080.000 2.000) Cee (10% x 8. Actuarial gain Corridor (10% x 7.361) Interest cost Benefit cost 27.000.

000 ( 440.000 ( 200.000) FVPA – January 1 Contribution Actual return FVPA – December 31 PBO – January 1 Service cost Interest cost PBO – December 31 Deferred actuarial gain – December 31 (1.000) ( 75.000. FVPA PBO Net actuarial gain .750.000.000) Excess over corridor 1.000 4.750.000) Total credits P/ABC – December 31 Problem 6-16 5.500.000 440.000) 2008 Gain (Loss) Expected Actual .500.000 / 8) Cee (125.235.235.000 2.000 (1.000) (1.000 435.000 1.000) 1.000 1.500.800. Current service cost Interest cost Expected return (8% x 5.000 700.000 8.000 5.500.000 4.450.000 Deferred actuarial gain – January 1 Corridor (10% x 5.000 750.000.300.000 Amortization actuarial gain (750.000 1.000 6.000 5.500.300.000 Problem 6-15 1.000 7.935.000 Actual 5.000 1. Benefit expense Cash Prepaid/accrued benefit cost 1.250 25.000 – 75.000 Gain (Loss) 1.225. actual Deferred actuarial gain Total credits P/ABC – January 1 (credit) 5.000 ( 800. P/ABC – January 1 Credit adjustment Balance – December 31 ( 800. FVPA – January 1.675.000) Amortization of actuarial gain Total benefit expense 1.935.000 1.300.440.300.500.000) 3.300.000 700.000 / 5) None 31.000 550.500.000) ( 435.000 / 10) 75.500. actual PBO – January 1.000) 1.000 5.000.Amortization of actuarial loss Aye Bee (250.1/1/2008 Expected 4.000 7.000 5.

800.000 450.000 / 10) Net actuarial loss – 12/31/2010 Gain (Loss) (3.600. Current service cost Interest cost Expected return Amortization of actuarial loss Amortization of past service cost Total benefit expense 2.000 400.000 (1.000.650.600.000) 1.000 1.000) 1.000 6.350.000 2.000) (1.000) 600.000 ( 600.000 ( 50.000 7.000 900.000) Excess over corridor 6.000) 400.000 / 10) Net actuarial gain – 12/31/2009 800.1/1 Net actuarial loss Net actuarial gain – 1/1/2010 Cumulative actuarial loss Corridor (10% x 8.000 8.400.000 1.000) Excess over corridor 9.000 Cumulative actuarial loss Amortization of actuarial loss for 2010 (850.000 7.000 60.000) 800.000 740.060.400.000 140.000 240.000 6.565.000) 85. Current service cost Interest cost Expected return Amortization of past service cost (300.000 2.200.000 (400.1/1 Net actuarial gain Add: Net actuarial gain – 1/1/2009 Cumulative actuarial gain Corridor (10% x 9.000) Excess over corridor 7.000.000 ( 380.000.000 9.000 ( 850.400.350.000 ( 200.650.1/1 PBO .000 / 3) 800.000.000.000 2010 Expected Actual FVPA .000) 40.000 2.000 7.800.000.000.100.060.000 500.000 .000) 1.600.400.000 (1.000) Problem 6-17 1.FVPA .000 0 Gain (Loss) 1.000 (3.1/1 PBO .000.000 8.1/1 PBO .000 Cumulative actuarial gain Amortization of actuarial gain for 2009 (500.200.000) 100.1/1 Net actuarial gain Corridor (10% x 7.000 Problem 6-18 1.600.600.000 2009 Expected Actual FVPA .000 7. Benefit expense Prepaid/accrued benefit cost Cash 2.600.

Benefit expense Cash Prepaid/accrued benefit cost 750.000) Excess over corridor 850.000) 125.000.000 200.950.000) PBO P/ABC – December 31 4.000 240.000 – 100.000 / 10) Amortization of actuarial gain Total benefit expense 925.000 300.000 150.110.000 3. FVPA – January 1 Contribution Actual return Total Less: Benefits paid FVPA – December 31 6.000 6.250.000 (6.000 / 10) 2.000 Amortization actuarial gain (300.000) 550.500.000 P/ABC – January 1 Credit adjustment P/ABC – December 31.000 250.000 150. debit 800.Total benefit expense 2.950.000 450.000 500.000 ( 30.000 1.600.000 Actuarial gain – January 1 Corridor (10% x 5.000 660. Benefit expense Prepaid/accrued benefit cost 6.000 Problem 13-23 1.750.000 50.000 750.500.000 6.000 6. Current service cost Interest cost Expected return Amortization of PSC (1.000 PBO – January 1 Current service cost Interest cost Total Less: Benefits paid PBO – December 31 5.000 500.000 FVPA Unamortized past service cost (300.000 550.100. Benefit expense Prepaid/accrued benefit cost 30.000 .000 500.110.000) 550.000 600.000 Debit balance – surplus Limit (200.000 50.000 7.000 ( 570.600.000 50.000 + 300.000) Adjustment 550.000 800.000 ( 250.000) 1.

000 ( 110.000) 820.000 PBO Unrecognized actuarial gain Total credits P/ABC – December 31 6.000.000 925.000 15.000) 35.000 995.000 850.000 570. Current service cost Interest cost (10% x 7.000) P/ABC – January 1 Debit adjustment P/ABC – December 31 ( 350.000.000 660.000 30.500.000 PBO –January 1 Current service cost Interest cost Increase due to changes n actuarial assumptions Total Less: Benefits paid PBO – December 31 Unrecognized actuarial gain – January 1 Amortization for 2008 Balance Actuarial loss due to increase in accrued benefit obligation Net unrecognized gain – December 31 FVPA Unamortized PSC Total debits 5.000 6.000 3.000) 680.000 ( 125. FVPA – January 1 Contribution Actual return Total Less: Benefits paid FVPA – December 31 Past service cost Amortization for 2008 Unamortized PSC – December 31 4.230.000 / 10) Amortization of actuarial loss (150.500.230.250.000 1.750.000 ( 140.000 .000 / 10) Total benefit expense Unamortized actuarial loss – January 1 Corridor (10% x 8.350.000 7.000) Expected return (10% x 8.Cash 1.350.000 1.000 6.670.125.000 995.000 950.000 ( 5.675.000 ( 110.000 6.000 750.000 5.000 140.000) Excess loss to be amortized 1.000 1.000 150.000 850.800.000) Problem 13-24 1.000) 1.000 6.500.910.225.125.675.000) Amortization of PSC (350.500.000) 240.000 ( 850.000 680.000 1.

550.000 10.000) ( ( 170.2.500.020.000 1.500.600.000) Net unrecognized actuarial loss – December 31 PBO – January 1 Current service cost Interest cost Total Less: Benefits paid Decrease in obligation PBO – December 31 1.000 .550.500.000 315.000 1.600.000 1.000 1.000) P/ABC – December 31 2.200.000 1.250.000 ( 200.000) 615. P/ABC – January 1 Overfunding (1.600.000 15.600.000 1.670.000) 9.700.000 200.000 Unrecognized actuarial loss – January 1 Amortization for 2008 Balance – December 31 Actuarial gain due to decrease in accrued benefit obligation Actuarial gain due to the difference in actual and expected return (1.150.000 – 850.000 1.000 9.720.000) 315.000 3.000 9.000 Problem 6-21 Answer D Current service cost Actual and expected gain on plan assets Amortization of past service cost Annual interest on pension liability Total pension expense 1. Benefit expense Prepaid/accrued benefit cost (2.000) Total Less: Benefits paid FVPA – December 31 8.000 ( 350. FVPA – January 1 Contribution Actual return (12% x 8.220.000 ( 7.000) 2.000 ( 35.000 500.000 2.000 1.500.800.000 615.000.000 – 950.000 250.350.000 7.500.000 10.000 750.000.000) 985.000 Summary FVPA Unamortized PSC Unrecognized actuarial loss Total PBO P/ABC – December 31 4.000) 50.020.200.000 7.000 1.000 – 930.000 Unamortized PSC – January 1 Amortization for 2008 Balance December 31 350.220.670.

000 x 2.000 900.Problem 6-22 Answer C Current service and interest cost Return on plan assets (10% x 1.300 Problem 6-25 Answer B Projected benefit obligation: Before amendment After amendment Unrecognized PSC 1. Problem 6-24 Question 1 – Answer A Annual pension payment – ABO (750.000) Retirement benefit expense 620.000) 520.400 83.500 591.000 1.000 480.000 Question 2 – Answer A Future salary (750.000 .000 Problem 6-27 Answer D Unrecognized net loss Corridor (10% x 1.200.000 1.000 520.900.000 200.19) Annual pension payment – PBO (1.000 Problem 6-23 Answer C Contribution related to past service cost Amortization of past service cost Prepaid pension cost 114.000 x 3% x 12 years) 270.000) Excess over corridor 235.650.000.000.000 (100.642.000 300.000 The current service cost is fully funded at the end of each year.000 Contribution to the plan Retirement benefit expense Prepaid benefit cost 1.000 Problem 6-26 Answer A Pension expense in 2008 Contribution to the plan in 2008 Accrued benefit cost -12/31/2008 Pension expense in 2009 Total Accrued benefit cost -12/31/2009 Contribution to the plan in 2009 800.000 500.642.000 1.000 70.000 165.300.500 x 3% x 12) 1.000 600.400 31.000.

000 250.200.000) Excess over corridor 1.000 .000) Total Less: Benefits paid PBO – December 31 7.200.000 300.720.500.500.000 1.450.000 3.000) Problem 6-30 Answer C Lump sum payments PV of periodic payments Total liability 475.000 370.000 (2.200.700.000 560.000 4.500.000 The entry to recognize the liability for termination benefits is as follows: Accrued pension cost Loss on termination benefits Liability for termination benefits 45.000.000 280.000 500.400.000 Problem 6-31 Answer A PBO – January 1 Current service cost (squeeze) Interest cost (10% x 3.000 400.000 585.800.000 630.000 / 5) 14.000 9.000) Total Less: Benefits paid PBO – December 31 3.000 630.000.000 8.000 3.000.000 Problem 6-28 Answer D PBO – January 1 Service cost Interest cost (10% x 7.000 650.000 720.000 Problem 6-32 Answer B FVPA – December 31 FVPA – January 1 Increase in fair value Add: Benefits paid Total Less: Contribution to the plan Actual return 3.000 5.Amortization (70.220.000 Problem 6-29 Answer B FVPA PBO Prepaid/accrued benefit cost 3.000 700.250.900.000 155.000 Problem 6-33 Answer D Unrecognized actuarial gain Corridor (10% x 6.000 1.000 640.

000) Excess to be amortized 1.000 ( 600.200.000) 100.500.000 600.000 / 3) Total benefit expense 900.000 Problem 6-34 Answer D Current service cost Interest cost Expected return Amortization of PSC (500.000 / 8) 70.600.000) Total Benefits paid PBO – December 31 3.Amortization (560.000 350.000 ( 60.000 / 10) Amortization of actuarial gain (600.000) 4.000 Problem 6-35 Answer C Problem 6-36 Answer D Problem 6-37 Answer A PBO – January 1 Current service cost (squeeze) Interest cost (10% x 3.000 (1.100.200.000.000 / 5) Amortization of actuarial loss (1.000 50.000 750.000) 260.000 ( 600.750.000 / 10) Benefit expense Actuarial gain – January 1 Corridor (10% x 12.000 1.000 10.000.000 Question 2 – Answer B FVPA – January 1 9.200.000 1.000 1.000 ( 250.400.000 700.000 4.250.000 Problem 6-39 Question 1 – Answer A Current service cost Interest cost Expected return Amortization of past service cost (2.000 Problem 6-38 Answer B FVPA – January 1 Contribution to the fund Actual return on plan assets Total Benefits paid FVPA – December 31 8.000 / 5) Amortization of transition loss (150.500.000 .450.500.000 600.000 1.000) 9.800.000 950.800.000 50.000 – 750.800.000) 2.300.

050.460.000 1.800.000 ( 2.000 ( 60.000) 13.000 ( 2.000 (1.100.200.400.000.000) 1.000 1.000 250.700.000 Question 2 – Answer A Fair value of pension fund – January 1 Actual return Contribution to the fund Benefits paid Fair value of pension fund – December 31 Question 3 – Answer A 9.000 (13.000) 9.000 280.000 Question 4 – Answer D Actuarial gain – January 1 Amortization for 2008 Actuarial loss during 2008 due to increase in PBO Net actuarial gain – December 31 1.000.700.200.000) ( 280.000) Expected return (10% x 9.000 900.100.460.300.200.000 1.000) 1.000 .600.000 Question 3 – Answer C PBO – January 1 Current service cost Interest cost Increase in PBO due to changes in actuarial assumptions Benefits paid PBO – December 31 12.200.000 – 2.000) Proof FVPA Unamortized past service cost (2.700.Contribution to the plan Actual return Benefits paid FVPA – December 31 2.000) 500.000 Question 5 – Answer B Prepaid/accrued benefit cost – January 1 (credit) Overfunding (2.340.000 2.000 – 260.300.000 (1.000) PBO Net actuarial gain Prepaid/accrued benefit cost – December 31 (credit) 11.000) ( 1.000) 11.380.000.000) Problem 6-40 Question 1 – Answer A Service cost Interest cost (9% x 10.200.000.800.000) ( 1.000 ( 920.180.200.000 1.380.000) Pension expense 1.300.000) Balance – December 31 (credit) (1.

000 Question 4 – Answer A Unrecognized pension gain – January 1 Amortization of pension gain ( 420.200.000 315.000 – 1.850.000) Balance – December 31 (800.000 / 10) 3.000.000 250.000) Excess to be amortized 420.000 Question 4 – Answer B Expected return Actual return Unrecognized actuarial loss 920.000 27.000) (130.000 ( 3.000 390.050.000 670.000 Amortization of pension gain (30.000 ( 1.000) .180.000) 11.000 900.000) Proof Fair value of pension fund – December 31 Deferred actuarial loss Projected benefit obligation – December 31 Prepaid/accrued benefit cost 9.000) ( 27.000 (11.PBO – January 1 Service cost Interest cost Benefits paid PBO – December 31 10.000.000) Actual return Pension loss deferral in 2008 342.000.000 1.000 3.000 670.100.900.000 30.000) Problem 6-41 Question 1 – Answer A Expected return (12% x 2.400.000 Question 3 – Answer C Pension expense before pension gain or loss component Amortization of pension gain Pension loss deferral in 2008 Pension expense including pension gain or loss 530.000 Question 2 – Answer D Unrecognized pension gain – January 1 Corridor (10% x 3.000 Question 5 – Answer C Prepaid/accrued benefit cost – January 1 (credit) Underfunding (1.000) 500.000) ( 930.000) (930.

000) 390.Pension loss deferral in 2008 Unrecognized pension gain – December 31 ( 27.000 .