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FINANCIAL ACCOUNTING AND REPORTING

PAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

1. Which of the following is the correct definition of a provision?

a. A possible obligation arising from past events
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity

2. A provision shall be recognized as a liability under which of the following conditions?

a. The entity has a present obligation, legal or constructive, as a result of past event
b. It is probable that an outflow of resources embodying economic benefits would be required to
settle the obligation
c. The amount of the obligation can be measured reliably
d. All of these are required conditions

3. A legal obligation is an obligation that is derived from all of the following except:
a. Legislation c. Other operation of law
b. A contract d. An established pattern of past practice

4. A contingent liability
a. Definitely exists as a liability but the amount and due date are indeterminable
b. Is accrued even though not reasonably estimated
c. Is the result of a loss contingency
d. Is not recognized in the financial statements

5. Which of the following is the proper way to report a probable contingent asset?
a. An accrued amount c. As disclosure only
b. As deferred revenue d. No disclosure or accrual required

6. When the provision involves a large population of items, the best estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities
b. Is determined as the individual most likely outcome
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes
d. Midpoint of the possible outcomes

7. When the provision arises from single obligation, the best estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities
b. Is determined as the individual most likely outcome
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes
d. Midpoint of the possible outcomes

8. Reserve for contingencies for general or unspecified risks should

a. Be accrued in the financial statements and disclosed in the notes
b. Not be accrued in the financial statements and need not be disclosed in the notes
c. Not be accrued in the financial statements but should be disclosed in the notes
d. Be accrued in the financial statements but need not be disclosed in the notes

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PAS 32 – FINANCIAL INSTRUMENTS

9. What is the principal of accounting for compound instrument?

a. The issuer shall classify a compound instrument as either liability or equity
b. The issuer shall classify the liability and equity components of a compound instrument
separately as liability or equity instrument
c. The issuer shall classify a compound instrument as liability in its entirety until converted into
equity
d. The issuer shall classify a compound instrument as a liability in its entirety

10. How the proceeds from issuing a compound instrument allowed between the liability and equity
components?
a. First the liability is measured at fair value, and then the remainder of the proceeds is allocated to
the equity component
b. The proceeds are allocated to the liability and equity based on relative fair value
c. The proceeds are allocated to the liability and equity based on carrying amount
d. The proceeds are not allocated because the compound instrument is accounted for either as
liability or equity

11. Proceeds from an issue of debt securities with share warrants should not be allocated between debt
and equity features when
a. The fair value of the warrants is not readily available
b. Exercise the warrants within the next few fiscal periods seem remote
c. The warrants issued with the debt are nondetachable
d. Proceeds should be allocated between debt and equity for all of these

12. The proceeds from the sale of a bond will equal to

a. The face amount of the bond
b. The present value of the face amount of the bond plus the present value of the interest
payments to be made during the life of the bond
c. The face amount of the bond plus the present value of interest payments
d. The sum of the face amount off the bond and the periodic interest payments

13. When the effective interest method is used to amortize bond premium or discount, the periodic
amortization would
a. Increase if the bonds were issued at discount
b. Decrease if the bonds were issued at premium
c. Increase if the bonds were issued at premium
d. Increase if the bonds were issued at either discount or premium

14. Which is true when the effective interest method of amortizing bond discount is used?
a. Interest expense varies from period to period
b. Interest expense remains constant for each period
c. Interest expense increases each period
d. Interest rate decreases each period

15. Under the effective interest amortization, the periodic interest expense is equal to
a. The stated rate of interest multiplied by the face value of the bond
b. The market value of the interest multiplied by the face value of the bond
c. The stated rate multiplied by the beginning carrying amount of bond payable
d. The market rate multiplied by the beginning carrying amount of bond payable

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16. The amortization of the bond premium for each period would impact the financial statements in
what way?
a. Interest expense being greater than the amount of cash paid for interest
b. Cash paid for interest being greater than interest expense
c. Interest expense and cash paid being equal if premium is amortized using straight line
d. Interest expense and cash paid being equal if premium is amortized using effective interest

PFRS 16 – LEASES

17. Under IFRS, a lessee is required to recognize

a. Right of use asset and lease liability c. Lease liability but right of use asset
b. Right of use asset but not lease liability d. Neither right of use asset nor lease liability

18. The lessee may apply the operating lease model under what condition?
a. Short term lease c. Both short term lease and low value lease
b. Low value lease d. under all circumstances

19. A short term lease is defined as

a. Twelve months or less c. Twelve month lease with purchase option
b. Six months or less d. Two year lease with option to terminate

20. Which of the following statements is true about low value lease
a. The value of an underlying asset is based on the value of the asset when new regardless of the
age of the asset
b. The term of a low value lease may be more than twelve months
c. An underlying asset does not qualify as low value lease if the nature of the asset is such that the
asset is typically not of low value when new
d. All of these statements are true about low value lease

21. The cost of use asset comprises all except

a. The present value of lease payments
b. Lease payments made to lessor before commencement date less incentive interest
c. Initial direct cost incurred by lessee
d. Estimated cost of dismantling, removing or restoring the underlying asset for which the lessee
has no present obligation

22. The right of use asset is reported as

a. Noncurrent as separate line item c. Intangible asset
b. Property, plant and equipment d. Investment property

23. A lease liability is measured at

a. The absolute amount of lease payments
b. The present value of lease payments
c. The present value of fixed lease payments
d. The fair value of underlying asset

24. The lease payments include all of the following except

a. Fixed and variable lease payments
b. Termination penalties if the lease term reflects the exercise of termination option
c. Exercise price of purchase option that is reasonably certain to be exercised

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d. Residual value guarantee of the lessee

25. What is the interest rate used when the implicit interest rate cannot be determined?
a. The prime rate c. The lessee’s average borrowing rate
b. The lessor’s published rate d. The lessee’s incremental borrowing rate

26. Which statement concerning residual value guarantee is appropriate for the lessee?
a. The asset and related liability should be increased by absolute amount of residual value
b. The asset and related liability should be decreased by the absolute amount of residual value
c. The asset and related liability should be increased by the present value of residual value
d. The asset and related liability should be decreased by the present value of the residual value

27. 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 lease term
c. The lessee has no obligation related to residual value
d. The lessee pays the lessor to the difference

28. A lessee with a lease containing a purchase option that is reasonably certain to be exercised should
depreciate the right of use asset over
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or lease term, whichever is shorter
d. Useful life of the asset or lease term, whichever is longer

29. In computing depreciation of right of use asset, the lessee should subtract
a. A guaranteed residual value and depreciate over the term of the lease
b. An unguaranteed residual value and depreciate over the term of the lease
c. A guaranteed residual value and depreciate over the life of the asset
d. An unguaranteed residual value and depreciate over the life of the asset

30. Which is correct statement of lease capitalization criteria on the part of the lessor?
a. The lease transfers ownership of the property to the lessor
b. The lease contains a purchase option
c. The lease term is equal to or more than 75% of the economic life of the leased property
d. The minimum lease payments excluding executory costs equal or exceed 90% of the fair value
of the leased property

31. Lessors shall recognize asset held under finance lease as a receivable at an amount equal to
a. Gross investment in the lease c. Gross rentals
b. Net investment in the lease d. Residual value, whether guaranteed or unguaranteed

32. Which of the following would not be included in the lease receivable amount
a. Guaranteed residual value c. A bargain purchase option
b. Unguaranteed residual value d. All would be included

33. The interest rate implicit in the lease is the discount rate that causes the aggregate of the present
value of the minimum lease payments and the unguaranteed residual value to equal the
a. Fair value of the leased asset
b. Fair value of the leased asset and initial direct costs of the lessor
c. Fair value of the leased asset and initial direct costs of the lessee

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d. Gross investment in the lease

34. Lease payments under an operating lease shall be recognized as rent income using the
a. Cash method c. Declining balance method
b. Sum of year’s digit method d. Straight line method, unless another systematic basis is
representative of the time pattern of the user’s benefit

PAS 12 – INCOME TAXES

35. Accounting profit is

a. The profit or loss for a period before deducting tax expense
b. The profit or loss for a period determined in accordance with tax law
c. The profit or loss for a period after deducting tax expense
d. The profit or loss after current tax expense determined in accordance with tax law

36. If is the income tax payable in future periods in respect of taxable temporary difference
a. Deferred tax liability c. Current tax liability
b. Deferred tax asset d. Current tax asset

37. Which temporary difference would result in a deferred tax liability?

a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess tax depreciation over financial depreciation
d. Subscription revenue received in advance

38. Deferred tax asset is the amount of income taxes recoverable in future periods in respect of
a. Deductible temporary differences only
b. Permanent differences
c. Carryforward of unused tax losses
d. Deductible temporary differences and carryforward of unused tax losses

39. Which temporary difference would result in a deferred tax asset?

a. Tax penalty or surcharge
b. Dividend received in share investment
c. Excess tax depreciation over accounting depreciation
d. Rent received in advance included in taxable income but deferred in financial accounting

40. The deferred tax expense is the

a. Increase in deferred tax asset minus the increase in deferred tax liability
b. Increase in deferred tax liability minus the increase in deferred tax asset
c. Increase in deferred tax asset plus the increase in deferred tax liability
d. Decrease in deferred tax asset minus the increase in deferred tax liability

41. Which is correct about the presentation of deferred tax assets and liabilities?
a. Deferred tax assets are always netted against deferred tax liabilities
b. Deferred tax assets are never netted against deferred tax liabilities
c. Deferred tax assets of one jurisdiction are offset against deferred tax liabilities of another
jurisdiction
d. Deferred tax assets and liabilities are classified only as noncurrent

42. Which statement is true about intraperiod tax allocation?

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a. It arises because certain revenue and expense items appear in the income statement either
before or after they are included in the tax return
b. It is required for the cumulative effect of accounting changes but not for prior period adjustments
c. The purpose is to allocate income tax expense only evenly over a number of accounting periods
d. The purpose is to relate the income tax expense to the items which affect the amount of tax

43. Entities uses intraperiod tax allocation for all of the following items except
a. Discontinued operations c. Change in accounting estimate
b. Prior period adjustments d. Income from continuing operations

PAS 19 – EMPLOYEE BENEFITS

44. In a defined contribution plan, the 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 and 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

45. In a defined benefit plan, the formula is used that

a. Requires that the benefit of gain or the risk of loss from the assets contributed to the pension
plan to be borne by the employees
b. Define the benefits that the employee will receive at the time of retirement
c. Requires that the pension expense and the cash funding amount be the same
d. Defines the contribution the employer is to make and no promise is made concerning the
ultimate benefits to be paid to the employees

46. Which of the following statements is true about defined benefit plan?
a. Defined benefit cost includes service cost, net interest and remeasurement
b. Service cost includes current service cost, past service cost and gain or loss on plan retirement
c. Service cost and net interest are recognized in profit or loss and remeasurements are
recognized in other comprehensive income
d. All of these statements are true

47. The interest on the defined benefit obligations 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 as the expected return on plan assets
d. May be stated implicitly or explicitly when reported

48. The return on plan assets

a. Is equal to the change in the fair value of plan assets during the year
b. Includes interest, dividends and changes in the fair value of fund assets
c. Is equal to the expected rate of return times the beginning fair value of the plan assets
d. Is equal to the discount rate times the beginning fair value of plan assets

49. A pension liability is reported when

a. The defined benefit obligation exceeds the fair value of plan assets
b. The accumulated benefit obligation is less than the fair value of plan assets
c. The pension expense reported for this period is greater than the funding amount
d. Plan assets at fair value exceed the defined benefit obligation

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50. Vested benefits

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

51. An entity includes one coupon in each box of laundry soaps it sells. A towel is offered as a premium
to customers who send in 10 coupons and a remittance of P10. Distribution cost of premium is P5.
Experience indicates that only 30% of the coupon will be redeemed
2017 2018
Boxes of soaps sold P2,000,000 P2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

What is the premium expense for 2017?

a. P2,500,000 b. P2,400,000 c. P1,800,000 d. P2,700,000

What is the estimated premium liability on December 31, 2017?

a. P1,000,000 b. P1,100,000 c. P800,000 d. P900,000

What is the premium expense for 2018?

a. P3,000,000 b. P3,750,000 c. P3,375,000 d. P4,000,000

What is the estimated premium liability on December 31, 2018?

a. P1,000,000 b. P1,250,000 c. P1,125,000 d. P1,375,000

52. An entity, a grocery retailer, operates a customer loyalty program. The entity grants program
members loyalty points when they spend a specified amount on groceries. Program members can
redeem the points for further groceries. The points have no expiry date. During 2017, the sales
amounted to P7,000,000 based on stand-alone selling price. During the year, the entity granted
10,000 points. But management expected that only 80% or 8,000 point will be redeemed. The
stand-alone selling price for each loyalty point is estimated at P100.
On December 31, 2017, 4800 points have been redeemed. In 2018, management revised its
expectations and now expected that 90% or 9,000 points will be redeemed altogether. During 2018
the entity redeemed 2,400 points.

What amount should be reported as sales revenue including revenue earned from points for 2017?
a. P7,000,000 b. P6,125,000 c. P6,650,000 d. P7,525,000

What is the revenue earned from loyalty points for 2018?

a. P700,000 b. P175,000 c. P210,000 d. P200,000

53. During 2017, an entity introduced a new product carrying a two year warranty against defects. The
estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in
the second 12 months following the sale. The entity reported sales of P5,000,000 for 2017 and
P6,000,000 for 2018. The actual expenditures incurred and paid amounted to P150,000 for 2017
and P550,000 for 2018.

What is the warranty expense for 2017?

a. P500,000 b. P200,000 c. P250,000 d. P300,000

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What is the estimated warranty liability on December 31, 2017?

a. P350,000 b. P150,000 c. P100,000 d. P50,000

What is the warranty expense for 2018?

a. P650,000 b. P600,000 c. P500,00 d. P550,000

What is the estimated warranty liability on December 31, 2018?

a. P360,000 b. P400,000 c. P240,000 d. P100,000

54. During 2017 an entity is a defendant in patent infringement lawsuit. The lawyers believe there is a
30% chance that the court will dismiss the case and the entity will incur no outflow of economic
benefits. However if the court rules in favor of the claimant, the lawyer believe that there is 20%
chance that the entity will be required to pay damages of P200,000 and an 80% chance that the
entity will be required to pay damages of P100,000.
Other outcomes are unlikely. The court is expected to rule in late December 2018. There are no
indicators that the claimant will settle out of court. A 7% risk adjustment factor to the possibility
weighted cash flows is considered appropriate to reflect the uncertainties in the cash flow estimate.
An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95.

What is the unallocated provision before risk adjustment?

a. P200,000 b. P100,000 c. P150,000 d. P84,000

What is the measurement of the provision for lawsuit?

a. P79,800 b. P95,000 c. P89,880 d. P85,386

55. On January 15, 2017 an explosion occurred at an entity plant causing extensive property damage
to area buildings. By March 1, 2018 no claims had been asserted against the entity but
management and counsel concluded that it is likely that claims will be asserted and that it is
probable that the entity will be responsible for damages. Management believed that P1,250,000
would be a reasonable estimate of the liability. The entity’s P5,000,000 comprehensive pubic
liability policy has a P250,000 deductible clauses. The financial statements for 2017 were issued on
March 31, 2018.

What amount of loss from lawsuit should be reported in the income statement for 2017?
a. P1,250,000 b. P1,000,000 c. P250,000 d. P0

What amount of provision should be reported on December 31, 2017?

a. P5,000,000 b. P2,500,000 c. P1,250,000 d. P25,000

56. During 2017 an entity filed suit against the entity seeking damages for patent infringement. On
December 31, 2017 the legal counsel believed that it was probable that the entity would be
successful against the other entity for an estimated amount of P1,500,000. On March 1, 2018 the
entity was awarded P1,000,000 and received full payment thereof. The 2017 financial statements
were issued on March 31, 2018. How should this award be reported in 2017 financial statements?
a. As receivable and revenue P1,000,000
b. As receivable and deferred revenue P1,000,000
c. As disclosure of contingent asset P1,000,000
d. As disclosure of contingent asset P1,500,000

57. An entity sells gift certificates redeemable only when merchandise is purchased. The certificates
have no expiration date. Upon redemption the entity recognizes the unearned revenue as realized.

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Unearned revenue, beginning of the year P1,500,000

Gift certificates sold during the year 5,000,000
Gift certificates redeemed during the year 4,000,000
Gift certificates expected not to be redeemed 300,0000
Cost of goods sold 60%
What amount should be reported as unearned revenue at year-end?
a. P2,500,000 b. P2,200,000 c. P1,000,000 d. P0

58. An entity requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. The entity provided the following information for
the current year:
Advances from customers beginning of the year P1,100,000
Advances received with orders 1,800,000
Advances applied to orders shipped 1,600,000
Advances applicable to orders canceled 400,000
a. P1,300,000 b. P200,000 c. P900,000 d. P0

59. An entity sells magazine subscriptions for a 1 year, 2 year or 3 year period. Cash receipts from
subscribers are credited to unearned subscription revenue and this account had a balance of
P1,700,000 on January 1, 2017. The entity provided the following information for the year
December 31, 2017:
Cash receipts from subscribers P2,100,000
Subscription revenue credited on December 31, 2017 1,500,000
On December 31, 2017 what amount should be reported as unearned subscription revenue?
a. P1,900,000 b. P2,300,000 c. P1,400,000 d. P2,100,000

60. An entity sells subscriptions to a specialized directory that is published semiannually and shipped to
subscribers on April 15 and October 15. Subscriptions received after March 31 and September 30
cutoff dates are held for the next publications. Cash from subscribers is received evenly during the
year and is credited to unearned subscription revenue.
Unearned subscription revenue January 1, 2017 P750,000
Cash receipts from subscribers during the current year 3,600,000
What amount should be reported as unearned subscription revenue on December 31, 2017?
a. P1,800,000 b. P1,650,000 c. P2,700,000 d. P900,000

61. An entity sells appliance service contracts that cover a two year period. Past experience indicates
that the total amount spent for repairs on service contracts. 40% is incurred evenly during the first
contract year and 60% evenly during the second contract year. Receipts from service contract sales
are P500,000 for 2017 and P600,000 for 2018. Receipts from contracts are credited to unearned
service revenue. All sales are made evenly during the year.

What is the contract revenue for 2017?

a. P100,000 b. P200,000 c. P250,000 d. P500,000

What is the unearned revenue on December 31, 2017?

a. P250,000 b. P250,000 c. P300,000 d. P400,000

What is the revenue earned in 2018?

a. P240,000 b. P370,000 c. P540,000 d. P420,000

What is the unearned revenue on December 31, 2018?

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a. P360,000 b. P630,000 c. P480,000 d. P510,000

62. On March 31, 2017 an entity issued 5,000 of P1,000 face value bonds at 110 plus accrued interest.
The entity paid bond issue cost of P400,000. The bonds were dated November 31, 2016 mature on
November 1, 2026 and bear interest at 12% payable semiannually on May 1 and November 1.
What net amount was received from the bond issuance?
a. P5,500,000 b. P5,700,000 c. P5,300,000 d. P5,100,000

63. During the current year, an entity issued 5,000,000 9% face value bonds at 110 at interest date. In
connection with issue of the bonds, the entity paid the following costs:
Promotion cost P100,000
Engraving and printing cost 200,000
Underwriter’s commission 400,000
Legal fees 350,000
Fees paid to accountants for registration 50,000
What amount should be recorded initially as discount or premium on bonds payable?
a. P500,000 premium b. P500,000 discount c. P600,000 premium d. P600,000 discount

64. On January 1, 2017 an entity issued 9% bond in the face amount of P5,000,000 which mature on
January 1, 2027. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually
on December 31. The entity used the interest method of amortizing bond discount.

What is the interest expense for 2017?

a. P469,500 b. P500,000 c. P450,000 d. P422,500

What is the carrying amount of the bonds payable on December 31, 2017?
a. P4,695,000 b. P4,704,750 c. P4,714,500 d. P5,000,000

65. On January 1, 2017 an entity issued 10 year bond with face amount of P5,000,000 for P5,775,000.
The entity paid bond issue cost of P100,000 on the same date. The stated interest rate on the
bonds is 10% payable annually every December 31. The bonds have an 8% yield per annum after
considering the bond issue cost. The entity used the effective interest method of amortizing bond
premium.

What is the interest expense for 2017?

a. P454,000 b. P400,000 c. P500,000 d. P567,500

What is the carrying amount of the bonds payable on December 31, 2017?
a. P5,000,000 b. P5,675,000 c. P5,629,000 d. P5,737,000

66. On December 31, 2017, an entity issued 5,000 of 8% 10 year P1,000 face value bonds with
detachable warrants at 110. Each bond carried a detachable warrant for 10 ordinary share of P100
par value at a specified option price of P120. Immediately after issuance, the market value of the
bonds without warrants was P4,800,000 and the market value of the warrants was P1,200,000.

On December 31, 2017 what is the carrying amount of bonds payable?

a. P5,500,000 b. P4,800,000 c. P4,400,000 d. P5,000,000

What is the increase in equity as a result of bond issuance?

a. P1,200,000 b. P700,000 c. P500,000 d. P0

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What is the share premium from the subsequent exercise of all share warrants?
a. P1,700,000 b. P1,000,000 c. P2,100,000 d. P0

67. On December 31, 2017 an entity issued P5,000,000 face value, 5 year bonds at 109. Each P1,000
bond was issued with 20 nondetachable share warrants. Each warrant entitled the bondholder to
purchase one share of P20 par value for P25. Immediately after issuance, the market value of each
warrant was P5. The interest rate is 11% payable annually every December 31. The prevailing
market rate of interest for similar bonds without warrants is 12%. What amount should be recorded
as increase in equity as a result of the bond issuance on December 31, 2017?
a. P620,000 b. P450,000 c. P500,000 d. P0

68. On January 1, 2017 an entity issued 5,000 convertible bonds with P1,000 face value per bond. The
bond mature in three years and are issued at 110. Interest is payable annually every December 31
at nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100 shares with
par value of P5. It is reliably determined that the bonds would sell only at P4,600,000 without the
conversion privilege. What is the equity component of the original issuance of the convertible
bonds?
a. P500,000 b. P400,000 c. P900,000 d. P0

69. On December 31, 2017 after recording interest and amortization an entity converted P5,000,000 of
12% convertible bonds into 50,000 shares of P50 par value. On the conversion date, the carrying
amount of the bonds payable was P6,000,000 the market value of the bonds was P6,500,000 and
the share was publicly trading at P150. The entity incurred P100,000 in connection with the
conversion. When the bonds were originally issued the equity component was recorded at
P1,500,000. What amount of share premium should be recorded as a result of the conversion?
a. P5,000,000 b. P3,500,000 c. P4,900,000 d. P3,400,000

70. On January 1, 2017 an entity leased a building from a lessor with the following pertinent
information:
Annual rental payable at the end of each year P1,000,000
Initial direct cost paid 400,000
Lease incentive paid 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%

What is the initial lease liability?

a. P4,100,000 b. P3,790,000 c. P4,500,000 d. P4,290,000

What is the cost of the right of use asset?

a. P4,500,000 b. P4,400,000 c. P4,700,000 d. P4,600,000

What is the interest expense for 2017?

a. P410,000 b. P379,000 c. P450,000 d. P429,000

What is the lease liability on December 31, 2017?

a. P3,510,000 b. P3,169,000 c. P3,950,000 d. P3,719,000

What is the depreciation for 2017?

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a. P880,000 b. P900,000 c. P550,000 d. P575,000

71. On December 31, 2017 an entity leased two automobiles for executive use. The lease required the
entity to make five annual payments of P1,500,000 beginning December 31, 2017. At the end of
lease term December 31, 2022 the entity had a residual value guarantee of the automobiles at
P1,000,000. The interest rate implicit in the lease is 10%.

What is the lease liability on December 31, 2018?

a. P4,412,500 b. P5,375,000 c. P6,062,500 d. P4,805,000

What is the current portion of lease liability on December 31, 2018?

a. P1,500,000 b. P1,058,750 c. P962,500 d. P750,000

What is the interest expense for 2019?

a. P480,500 b. P537,500 c. P441,250 d. P606,250

72. On January 1, 2017 an entity entered into a 6 year lease with lessor. Annual lease payments of
P1,500,000 including annual executory cost of P300,000 are payable at end of each year. The
entity knows that the lessor expects a 10% implicit interest rate on the lease. The entity has a 12%
incremental borrowing rate. The equipment is expected to have a useful life of 10 years. In addition,
a third party has guaranteed to pay the lessor a residual value of P500,000 at the end of the lease.
On December 31, 2017 what is the principal amount of the lease obligation?
a. P5,220,000 b. P4,542,000 c. P4,323,840 d. P4,850,000

73. At the beginning of the current year an entity entered into a 8 year finance lease for an equipment.
The entity accounted for the acquisition of finance lease at P5,000,000 which included a P500,000
purchase option that is reasonably certain to be exercised. The expected fair value of the
equipment if P400,000 at the end of the 10 year useful life. The straight line depreciation is used.
What amount of depreciation should be recognized for the current year?
a. P575,000 b. P460,000 c. P625,000 d. P450,000

74. At the beginning of current year an entity entered into a 8 year lease for an equipment. The entity
accounted for the acquisition of a finance lease for P6,000,000 which included a P600,000 residual
value guarantee. At the end of the lease, the asset will revert back to the lessor. It is estimated that
the fair value of the asset at the end of the 10 year useful life would be P400,000. The entity used
the straight line depreciation. What amount should be recognized as depreciation expense for the
current year?
a. P675,000 b. P700,000 c. P540,000 d. P560,000

75. An entity is a dealer in equipment. On January 1, 2017 an equipment was leased to another entity
with the following provisions:
Annual rental payable at the end of each year P1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Fair value of equipment 6,000,000
Residual value guarantee 500,000
Implicit interest rate 12%
At the end of the lease term on December 31, 2021, the equipment will revert to the lessor. On such
date the fair value of the asset is P350,000. The perpetual inventory system is used. The lessor
incurred initial direct cost of P200,000 is finalizing the lease agreement:

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What is the gross investment in the lease?

a. P7,500,000 b. P8,000,000 c. P4,000,000 d. P6,000,000

What is the net investment in the lease?

a. P5,400,000 b. P5,685,000 c. P4,000,000 d P3,500,000

76. An entity acquired an asset costing P3,165,000. The asset is leased on January 1, 2017 to another
entity. Five annual lease payments are due each December 31, beginning December 31, 2017. The
unguaranteed residual value at the end of the lease term on December 31, 2021 is P500,000. The
asset will revert to the lessor at the end of the lease term. The lessor’s implicit interest rate is 12%.
What is the annual rental payment?
a. P879,166 b. P740,278 c. P800,000 d. P500,000

77. An entity is in the business of leasing new sophisticated equipment. The lessor expects a 12%
return on its net investment. All leases are classified as direct financing lease. At the end of the
lease term, the equipment will revert to the lessor. On January 1, 2017 an equipment is leased to a
lease with the following information:
Cost of equipment to the lessor P5,000,000
Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2017

What is the gross investment in the lease?

a. P7,200,000 b. P7,800,000 c P5,000,000 d. P5,250,000

What is the net investment in the lease?

a. P5,000,000 b. P5,250,000 c. P4,400,000 d. P4,650,000

What is the unearned interest income on January 1, 2017?

a. P2,550,000 b. P1,950,000 c. P3,150,000 d. P1,500,000

What is the interest income for 2017?

a. P594,000 b. P522,000 c. P630,000 d. P450,000

78. An entity decided to enter the leasing business. The entity acquired a specialized packaging
machine for P2,300,000. On January 1, 2017 the entity leased the machine for a period of six years
which title to the machine is transferred to the lessee. The six annual lease payments are due each
January 1 and first payment was made on January 1, 2017. The residual value of the machine is
P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor.

What is the annual lease payment payable in advance required yielding the desired return?
a. P500,000 b. P477,826 c. P559,610 d. P460,000

What is the total financial revenue?

a. P1,057,660 b. P1,257,660 c. P700,000 d. P900,000

79. On January 1, 2017 a lessor signed a 10 year operating lease for office space at P960,000 per
year. The lease included a provision for addition rent of 5% of annual sales in excess of

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P5,000,000. The sales of the lessee for the current year amounted to P6,000,000. Upon execution
of the lease, the lessor received P300,000 from the lessee as a bonus for the lease. What is the
rent income for the year ended December 31, 2017?
a. P1,010,000 b P1,040,000 c. P1,240,000 d. P1,310,000

80. As an inducement to enter lease, a lessor grants a lessee nine months of free rent under a five year
operating lease. The lease is effective on July 1, 2017 and provides for monthly rental of P100,000
to begin April 1, 2018. In the income statement for the year ended June 30, 2018 what amount
should be reported as rent income?
a. P1,020,000 b. P900,000 c. P300,000 d. P255,000

81. On January 1, 2017 an entity purchased a new machine for P6,000,000 for the purpose of leasing
it. The machine has an estimated 10 year life. On April 1, 2017 the entity leased the machine to a
lessee for three years at monthly rental of P400,000. The lessee paid the rental for one year of
P4,800,000 on April 1, 2017 and additionally paid P900,000 to the lessor as a lease bonus to obtain
a three year lease. On April 1, 2017 the entity paid P300,000 to a broker as a finder fee. What is the
net rental income for 2017?
a. P3,150,000 b. P4,350,000 c. P3,200,000 d. P4,400,000

82. On July 1, 2017 an entity leased equipment to a lessee under a 3 year operating lease. Total rent
for the lease term is P3,600,000 payable P50,000 monthly for the first lease year P75,000 monthly
for the second year and P175,000 monthly for the third lease year. All payments were made when
due.

What amount should be reported as rent income for 2017?

a. P600,000 b. P300,000 c. P900,000 d. P450,000

What amount should be reported as rent income for the year ended December 31, 2018?
a. P1,200,000 b. P900,000 c. P600,000 d. P300,000

On June 30, 2019 what amount should be reported as accrued rent receivable?
a. P2,100,000 b. P1,200,000 c. P900,000 d. P0

83. On January 1, 2017 an entity sold equipment with remaining life of 10 years and immediately
leased it back for 4 years at the prevailing market rental.
Sales price at fair value P6,000,000
Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%

What is the initial lease liability?

a. P2,536,000 b. P3,200,000 c. P3,000,000 d. P0

What is the cost of right of use asset?

a. P1,902,000 b. P2,598,000 c. P2,536,000 d. P0

What is the gain on right transferred?

a. P866,000 b. P634,000 c. P750,000 d. P0

What is the annual depreciation off the lessee?

a. P475,500 b .P190,200 c. P634,000 d. P0

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84. On January 1, 2017 an entity sold a building with remaining life of 20 years and immediately leased
it back for 5 years.
Sale price at fair value P20,000,000
Fair value of the building 18,000,000
Carrying amount of building 10,800,000
Annual rental payable at the end of each year 1,500,000
Implicit interest rate 12%

What is the initial lease liability?

a. P5,400,000 b. P3,400,000 c. P7,500,000 d. P7,400,000

What is the cost of right of use asset?

a. P2,040,000 b P4,000,000 c. P2,000,000 d. P3,000,000

What is the gain of right transferred?

a. P7,200,000 b. P1,500,000 c. P5,600,000 d. P5,840,000

85. On September 1, 2017 an entity borrowed on a P5,400,000 note payable from the bank. The note
bears interest at 12% and is payable in three annual principal payments of P1,800,000. On this
date, the bank’s prime rate was 11%. The first annual payment for interest and principal was made
on September 1, 2018.

On December 31, 2017 what amount should be reported as accrued interest payable?
a. 144,000 b. P216,000 c. P132,000 d. P198,000

What is the interest expense for 2018?

a. P576,000 b. P432,000 b. P648,000 d. P594,000

86. On March 1, 2017 an entity borrowed P5,000,000 and signed a 2 year note bearing interest at 12%
per annum compounded annually. Interest is payable in full at maturity on February 28, 2019. What
amount should be reported as accrued interest payable in December 31, 2018?
a. P1,200,000 b. P1,160,000 c. P600,000 d. P500,000

87. An entity transferred land pursuant to a debt restructuring in full liquidation of liability to the creditor:
Carrying amount of liability liquidated P1,500,000
Carrying amount of land transferred 1,000,000
Fair value of land transferred 900,000

Under IFRS what amount of pretax gain on extinguishment of debt should be reported as
component of income from continuing operations?
a. P300,000 b. P500,000 c. P200,000 d. P0

Under US GAAP what is the gain on restructuring?

a. P600,000 b. P500,000 c. P100,000 d. P0

Under US GAAP what amount should be reported as gain or loss on disposal?

a. P100,000 loss b. P500,000 gain c. P400,000 gain d. P0

88. An entity showed the following information at year-end:

Notes payable P5,000,000

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Accrued interest payable 500,000

The entity is threatened with a court suit if could not pay the maturing debt. Accordingly, the entity
entered into an agreement with the creditor for the issuance of share capital in full settlement of the
note payable the agreement provided for the issue of 50,000 ordinary shares with par value of P50 and
quoted price of P70. The fair value of the note payable is P4,000,000.

What is the gain from extinguishment of debt if the equity swap is measured at the fair value of the
shares?
a. P2,000,000 b. P1,500,000 c. P3,000,000 d. P0

What is the gain from extinguishment of debt if the equity swap is measured at the fair value of the
liability?
a. P2,000,000 b. P1,500,000 c. P3,000,000 d. P0

What should be recognized as share premium if the equity swap is measured at the carrying
amount of liability?
a. P3,000,000 b. P2,500,000 c. P1,000,000 d. P1,500,000

89. Due to extreme financial difficulties, an entity negotiated of a 10% P5,000,000 note payable due on
December 31, 2017. The unpaid interest on note on such date is P500,000. The creditor agreed to
reduce the face value to P4,000,000 forgive the unpaid interest, reduce the interest rate to 8% and
extend the due date three years from December 31, 2017.

Under IFRS what is the gain on extinguishment of debt for 2017?

a. P1,703,200 b. P1,203,200 c. P2,000,000 d. P540,000

What is the discount or premium on the new note payable on December 31, 2017?
a. P1,000,000 premium c. P203,200 premium
b. P1,000,000 discount d. P203,200 discount

What is the interest expense for 2018?

a. P320,000 b. P379,680 c P400,000 d. P303,680

What is the carrying amount of note payable on December 31, 2018?

a. P4,000,000 b. P5,000,000 c. P3,856,480 d. P3,737,120

90. An entity reported pretax financial income of P8,000,000 for the current year. The taxable income
was P7,000,000 for the current year. The difference is due to accelerated depreciation for income
tax purposes. The income tax rate is 30% and the entity made estimated tax payment of P500,000
during the current year. What amount should be reported as current tax expense for the current
year?
a. P2,100,000 b. P2,400,000 c. P1,600,000 d. P1,900,000

91. An entity reported pretax accounting income of P5,000,000 for the current year. The taxable income
was P5,500,000. The difference is due to rental received in advance rental income is taxable when
received. The income tax rate is 30% and the entity made no estimated tax payment in the current
year. What amount should be reported as total income tax expense for the current year?
a. P1,650,000 b. P1,500,000 c. P1,800,000 d. P3,150,000

92. At the end of first year of operations, an entity had taxable temporary difference totaling
P3,000,000. Of this total P500,000 relates to current items. The entity also had deductible

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temporary differences totaling P1,000,000 P250,000 of which relates to current items. Pretax
financial income for the current year was P20,000,000. The tax rate is 30%.

What amount should be reported as current tax expense for current year?
a. P5,925,000 b. P6,000,000 c. P6,600,000 d. P5,400,000

What is the net deferred tax expense or benefit for the current year?
a. P900,000 expense c. P600,000 expense
b. P300,000 benefit d. P600,000 benefit

93. An entity was organized on January 1, 2017. The entity had a pretax accounting income of
P5,000,000 and taxable income of P7,000,000 for the current year. The only temporary difference is
accrued product warranty cost that is expected to be paid in 2018. The enacted tax rates are 30%
for 2017 and 25% for 2018 and thereafter. What amount should be reported as total income tax
expense in the income statement for 2017?
a. P1,500,000 b. P2,100,000 c. P1,250,000 d. P1,600,000

94. On December 31, 2017 an entity reported a deferred tax liability of P600,000 and a deferred tax
asset of P150,000. On December 31, 2018 the deferred tax liability is P900,000 and the deferred
tax asset is zero. What is the deferred tax expense for 2018?
a. P300,000 b. P450,000 c. P150,000 d. P900,000

95. An entity reported the following information during the first year of operations:
Pretax financial income P9,000,000
Nontaxable interest received 1,000,000
Long term loss accrual in excess of deductible amount 1,500,000
Tax depreciation in excess of financial depreciation 2,000,000
Income tax rate 30%

What is the current tax expense?

a. P2,250,000 b. P2,700,000 c. P1,800,000 d. P2,550,000

What is the total expense?

a. P2,700,000 b. P2,400,000 c. P3,150,000 d. P2,550,000

What is the deferred tax liability at year-end?

a. P600,000 b. P456,000 c. P150,000 d. P900,000

What is the deferred tax asset at year-end?

a. P600,000 b. P450,000 c. P750,000 d. P150,000

96. An entity reported the following assets and liabilities at year-end:

Carrying amount Tax base
Property P10,000,000 P7,000,000
Plant and equipment 5,000,000 4,000,000
Inventory 2,500,000 4,000,000
Accounts receivable 2,400,000 3,000,000
Liabilities 6,000,000 5,500,000
The entity had made a provision for inventory obsolescence of P1,500,000. Further an impairment loss
against accounts receivable of P600,000 has been made. The tax rate is 30%.

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What amount should be reported as deferred tax liability?

a. P1,200,000 b. P1,350,000 c. P1,050,000 d. P4,000,000

What amount should be reported as deferred tax asset?

a. P630,000 b. P780,000 c. P480,000 d. P450,000

97. On January 1, 2017 an entity provided the following information in connection with a defined benefit
plan:
Fair value of plan assets P10,000,000
Unamortized past service cost 1,500,000
Projected benefit obligation (13,000,000)
Unrecognized actuarial gain (1,000,000)
Prepaid / accrued benefit cost (P2,500,000)
On January 1, 2017 the entity adopted PAS 19R. The entity revealed the following transactions
affecting the plan for the current year:
Current service cost P2,500,000
Past service cost - remaining vesting period of covered employees in 5 years 1,000,000
Contribution to the plan 3,500,000
Benefits paid to the retiree 3,000,000
Actual return on plan assets 1,500,000
Decrease in projected benefit obligation due to change in actuarial assumptions 400,000
Discount rate 10%
Expected return on plan assets 12%

What is the transactional balance of the accrued or prepaid benefit cost on January 1, 2017?
a. P3,000,000 accrued c. P3,000,000 prepaid
b. P2,500,000 accrued d. P2,500,000 prepaid

What is the employee benefit expense for the current year?

a. P3,800,000 b. P3,000,000 c. P4,800,000 d. P3,600,000

What is the net measurement gain for the current year?

a. P500,000 b. P400,000 c. P900,000 d. P0

What is the fair value of plan assets on December 31, 2017?

a. P15,000,000 b. P12,000,000 c. P11,700,000 d. P10,500,000

What is the projected benefit obligation on December 31, 2017?

a. P14,400,000 b. P17,800,000 c. P13,400,000 d. P15,200,000

What amount should be reported as accrued or prepaid benefit cost on December 31, 2017?
a. P3,300,000 accrued c. P2,400,000 accrued
b. P3,300,000 prepaid d. P2,400,000 prepaid

98. An entity provided the following information during the current year:
January 1 December 31
Fair value of plan assets P6,000,000 P8,500,000
Projected benefit obligation 5,000,000 6,500,000
Prepaid / accrued benefit cost – surplus 1,000,000 2,000,000
Asset ceiling 700,000 1,200,000
Effect of asset ceiling 300,000 800,000

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During the year, the entity recognized current service cost of P1,000,000, actual return on plan assets
of P400,000 and contribution to the plan of P2,100,000. The discount rate is 10%.

What is the employee benefit expense for the current year?

a. P930,000 b. P900,000 c. P800,000 d. P870,000

What is the net measurement loss for the current year?

a. P670,000 b. P700,000 c. P730,000 d. P270,000

What is the defined benefit cost?

a. P1,600,000 b. P2,100,000 c. P1,700,000 d. P1,200,000

What amount of prepaid benefit cost should be reported on December 31?

a. P2,000,000 b. P1,000,000 c. P800,000 d. P500,000

99. An entity is committed to close a factory in 10 months and shall terminate the employment of all the
remaining employees of the factory. Under the termination plan, an employee leaving before the
closure of the factory shall receive on termination date a cash payment of P20,000. However an
employee that renders service until closure of the factory shall receive P60,000. There are 120
employees in the factory. The entity expects 100 employees to leave before closure and 20
employees to render service until closure.

What amount should be recognized as termination benefit?

a. P2,400,000 b. P6,400,000 c. P2,000,000 d. P4,000,000

What amount should be recognized as short term benefit?

a. P3,200,000 b. P1,200,000 c. P2,000,000 d. P800,000

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