1.

On January 1, 2018, MM Company leased a machine to BB Company for P38,000 annually, P3,000 of which
represents reimbursements for maintenance and taxes, payable every December 31, for a 4-year period. The
cost of the machine to MM Company was P94,000. The fair value at the date of the lease was P125,856. The
implicit rate of interest is 8%. Commissions and legal fees incurred by MM Company in connection with the
negotiation for the lease amounted to P4,000

a) Prepare the necessary entries for 2018 - 2019

b) Compute for the following:

b1) net effect on the 2018 income statement
b2) net investment as of December 31, 2018
b3) interest income 2019
b4) net investment included in the current asset section of the 2014 statement of financial position

2. On December 28, 2017 VR Company leases a machine to CN Company for a period of 5 years to commence on
January 1, 2018.
The fair value of the machine is P349,085 and its residual value at the end of the lease term is estimated to be
P15,000. The lease agreement stipulates that CN Company will pay annual rentals at the beginning of each year
starting in 2018 plus P5,500 for maintenance and taxes. Likewise, CN Company guaranteed the residual value of
the machine upon its return to VR Company.
VR Company incurred costs of P305,000 to construct the machine and paid P12,000 in negotiating and closing
the lease contract. The implicit rate in the lease is 12%
5 periods
PVF P1 @ 12% 0.57
PVF of an ordinary annuity of P1 @ 12% 3.60
PVF of an annuity in advance of P1 @ 12% 4.03

a. Prepare the necessary entries for 2018 - 2019

b. Compute for the following

c1) Sales and cost of sales amount reported in relation to the lease
c2) Net profit recognized at commencement date
c3) Net effect on the 2018 income statement
c4) Lease receivable reported in the December 31, 2018 balance sheet
c5) Interest income in 2019 income statement of VR Company

3. On January 1, 2023, EM Company agreed to a non-cancelable 5-year lease agreement with OS Company for its
equipment. The contract stipulates that OS Company will pay an annual rental of P450,000 at the end of year
plus P30,000 for maintenance and taxes. OS Company, likewise paid P80,000 in direct costs. At the end of the
lease title will revert back to EM Company. The fair value of the equipment was P1,750,343 The equipment’s
remaining useful life was 6 years. The implicit rate of the lease was 9%. OS Company uses the straight-line
method to depreciate its equipments and machineries
a) Prepare the entries related to the lease in 2023 – 2024
b) Lease liability recorded at commencement date
c) Carrying value of the lease liability December 31, 2023
d) Depreciation expense for 2023
e) Interest expense for 2024

4. On January 1, 2018, WD Company leased a plastic molding machine from MT Company. The fair value of the
machine at inception date was 175,670. Lease term 4 years; Annual rental payment, in advance starting January
1, 2018, P46,500; Residual value at end of the lease term, P20,000; Residual value guaranteed by WD
Company P0. Implicit rate 8%
Expected useful life of the machine is six years. WD Company intends to return the machine to MT Company at
the end of the lease. The annual rental payment includes P1,500 to cover the costs of maintenance and
insurance. WD Company, likewise paid P6,000 to its broker for securing the lease.

a) Lease liability at the inception date

b) Lease liability initially recorded WD
c) Interest expense to be reported in WD in 2018
 d) Carrying value of the lease liability - current at December 31,2018
e) Carrying value of the lease liability – non-current at December 31,2018
f) Depreciation expense reported in 2018
g) Carrying value of the leased asset at December 31, 2018

5. The following items were provided by Buzz Company for 2019:

Service costs 120,000
Interest cost related to the pension obligation 14,400
Actual return on plans 22,000
Inerest on plan assets 25,000
prior service costs 20,000
Contributions made to plan assets in 2019 110,000
The amount reported by Buzz Company as pension expense in 2019 is
6. Pen Company provides the following information about its defined benefit pension plan for 2019:
Service costs P 45,000
Contribution to the plan 52,500
Prior service cost 5,000
Actual return on the plan assets 32,000
Benefits paid 20,000
Plan assets at January 1, 2019 320,000
Projected benefit obligation at January 1, 2019 400,000
Interest/discount (settlement) rate 5%
Compute the pension expense for 2019
7. RV Company began operations on January 1, 2018 and reported a pretax financial income, of P1,300,000 as of
the year ending December 31, 2018.
This amount includes;
a) Non-taxable revenues (interest on government bonds), P200,000
b) Non-deductible expenses (penalties and fines), P120,000
 Depreciation expense on its machines of P115,000
 Rental income of P250,000

The depreciation expense and rental income included in the 2018 tax return were higher by P85,000 and
P40,000 respectively The enacted tax rate in 2018 and future years is 30%.
a. Taxable income for 2018
b. Current tax expense
c. Income tax expense (benefit) – deferred
d. Deferred tax liability
e. Deferred tax asset
8. JLO Company reported income before taxes of P320,000 for the year ended December 31, 2019. Included in
the computation were the following revenues and expenses:
Donation for a political ad campaign (non-deductible) P 40,000
Depreciation – machinery (20%) 120,000
Salaries expense – compensated absences 44,800
Rent revenue 96,000
For tax purposes the following applies:
Depreciation – machinery 25%
Paid compensated absences 52,000
Rent received 80,000
Current year tax expense assuming a tax rate of 30% is
9. The following facts relate to MJ Company
 Deferred tax liability, January 1, 2019; P360,000:
 Deferred tax asset, January 1, 2019; P105,000
 Pretax financial income for 2019; P2,000,000
 Non-taxable revenues, P340,000; Non-deductible expenses, P210,000
 Cumulative difference at December 31, 2019, giving rise to future taxable amounts, P1,800,000
 Cumulative difference at December 31, 2019, giving rise to future deductible amounts, P520,000
 Tax rate for current and future years 30%
Prepare the entries to record:
a. Income tax expense – current
 b. Income tax expense (benefit) – deferred
10. The following items were identified to comprise NY Company’s liabilities as of December 31, 2015
Accounts payable P 1,200,000
Income tax payable 650,000
Share dividends payable 200,000
Customer credit balance 80,000
6% Notes payable – due January 15, 2015 1,300,000
7% Notes payable – due January 31, 2015 1,450,000
8% Notes payable – due January 31, 2015 1,600,000
Deferred tax liability 937,500
Serial bonds, payable in semi-annual installments of
P100,000 1,000,000
The following information was made available at the time the 2010 financial statements were being
prepared:

 The accounts payable balance included a P175,000 advance from the company’s president which is due on
June 30, 2017

 The stock dividend was declared on December 12, 2015 wherein the distribution was scheduled on January
31, 2016

 At December 28, 2015, NY Company completed an agreement with Giants Financing Company to reschedule
the maturity date of the note to January 15, 2018.

 The board of directors of NY Company in its December 28, 2015 meeting decided unanimously that it would
refinance its 7% notes from Yankees Lending Company.

 On January 4, 2017, NY Company completed an agreement with Knicks Financing Company to refinance its
existing note

 The deferred tax liability due to a temporary taxable amount of P500,000 was expected to reverse in 2016.
The enacted tax rate was 32%

a. The current liabilities in NY Company’s December 31, 2015 statement of financial position is

b. The non-current liabilities in NY Company’s December 31, 2015 statement of financial position is