The incremental borrowing rate for Exalta
SEATWORK 1 Corporation is 12% and the implicit interest rate
Question 1
The right of use asset is reported as
a. Intangible asset
b. Noncurrent as separate line stem
c. Property, plant and equipment
d. Investment property
Question 2
In computing depreciation of a right of use asset
under a lease, the lessee should deduct
a. The residual value guarantee and depreciate
over the lease term
b. The residual value guarantee and depreciate
over the useful life of the asset.
c. An unguaranteed residual value and
depreciate over the lease term.
d. An unguaranteed residual value and
depreciate over the useful life of the asset.
Question 3
On January 2, 2016, Exalta Corporation leased
six computers for use in its engineering
department. The lease period is five years and
the estimated economic life of the leased
property is six years. The lease does not contain
automatic title transfer and a bargain purchase
option. Annual lease payments are payable in
advance every January 2 in the amount of
P90,000.
(known to Exalta is 10%. The company uses
straight-line depreciation for this type of
equipment.
Assume that the lessee guarantees a residual
value of P30,000 at the end of the lease term.
What is the depreciation expense for 2016?
a. P65,946
b. P72,786
c. P75,060
d. P65,655
Question 4
The lessee's lease liability for a finance lease
would be periodically reduced by
a. Lease payment plus the depreciation of the
asset
b. Lease payment
c. Lease payment less the portion allocable to
interest
d. Lease payment less the depreciation of the
asset
Question 5
On December 31, 2016, Chrysler Company
signed a five-year, non-cancelable lease for a
machine with Hyundai Company. The terms of
the lease called for Chrysler Company to make
annual payments of P80.000 in advance starting
on December 31, 2016 and every December 31
thereafter. The machine has an estimated
useful life of six years and a P40,000
unguaranteed residual value at the end of the
five-year lease term. The machine reverts back
to the lessor at the end of the five-year lease
term. Chrysler Company uses the straight-line
method of depreciation for all of its depreciable
assets.
The rate implicit in this contract, which is known
to Chrysler, is 12%. The market value of the
machine is P340.000. The present value of an
annuity due of 1 at 12% for 5 periods is 4.037.
The present value of 1 for a single payment at
12% for 5 periods is 0.567.
What is the carrying amount of the leased
machine at December 31, 2017?
a. P284,512
b. P258,368
c. P269,133
d. P266,368
Question 6
Auto Corporation purchased a machine on
March 31, 2016 for P1,500,000 for the purpose
of leasing it. The machine is expected to have a
six-year life, no salvage, and will be depreciated
on a straight-line basis.
On April 1, 2016 under a cancelable lease, Auto
Corporation leased the machine to Matic
Company for P920,000 a year for a three-year
period ending on March 31, 2019. Auto
Corporation incurred maintenance and other
related costs under the provisions of the lease
of P50,000 relating to the year ended December
31, 2016. Matic Company paid Auto
Corporation P920,000 on April 1, 2016.
What is the profit before income tax derived by
Auto Corporation from this lease for the year
ended December 31, 2016?
a. P690,000
b. P390,000
c. P452,500
d. P425,500
Question 7
Kia Company acquires equipment under a non-
cancelable lease at an annual rental of P45,000
payable in advance for five years. Under the
lease contract, Kia Company is given the option
to purchase the asset for P75,000 which is
significantly lower than the expected market
value of the asset at the end of five years. The
appropriate interest rate is 12%. Present value
of 1 at 12% for 5 periods is 0.5674, Present
value of an annuity due of 1 at 12% for 5
periods is 4.0373.
What is the capitalized cost of the asset and the
first year's interest expense?
a. P204,771 and P19,173
b. P204,771 and P21,508
c. P224,234 and P21,508
d. P224,234 and P26,908
Question 8
Which is not included in lease payments?
a. Required payments over the lease term
b. Costs for services and taxes paid by and
lessee
c. Any payment required by a purchase option
that is reasonably certain to be exercised
d. Amount guaranteed by a party related to the
lessee
Question 9
A right of use asset is initially measured at
a. Fair value
b. Current cost
c. Cost
d. Present value of expected cash inflows
Question 10
On August 1, 2016, PAF Aviation leased two
helicopters from Fast Aircraft for an initial
period of 12 months with a provision for a
continuation of a month-to-month basis. The
lease is properly classified as an operating lease.
Lease payments are to be made as follows:
1st two months - P15,000 per month
Next three months - P12,000 per month
Next three months - P10,000 per month
Last four months - P7,500 per month
After the first year, the rent continues at P6,000
per month.
How much is PAF Aviation's prepaid rent
balance at December 31, 2016?
a. P66,000
b. P55,500
c. P23,500
d. P13,500
Question 11
A lease liability is measured at
a. The present value of lease payments
b. The present value of fixed lease payments
c. The fair value of the underlying asset
d. The absolute amount of lease payments
Question 12
A short-term lease is defined as
a. Two-year lease with option to terminate
b. Twelve-month lease with a purchase option
c. Six months or less
d. Twelve months or less
Question 13
The lease payments include all, except
a. The purchase option that is reasonably
certain to be exercised
b. The residual value guarantee
c. Any payment that the lessee must make upon
failure to extend or renew the lease
d. The lessee's obligation to pay executory cost
Question 14
Under IFRS, a lessee is required to recognized
a. Lease liability but not right of use asset
b. Neither right of use asset nor lease liability
c. Right of use asset but not lease liability
d. Right of use asset and lease liability
Question 15
What is the treatment of initial direct cost
incurred by the lessee in a finance lease?
a. Added to the carrying amount of the right of
use asset and lease liability
b. Expensed immediately
c. Added to the lease liability
d. Added to the carrying amount of the right of
use asset
Question 16
On January 2, 2016, Exalta Corporation leased
six computers for use in its engineering
department. The lease period is five years and
the estimated economic life of the leased
property is six years. The lease does not contain
automatic title transfer and a bargain purchase
option. Annual lease payments are payable in
advance every January 2 in the amount of
P90,000.
The incremental borrowing rate for Exalta
Corporation is 12% and the implicit interest rate
(known to Exalta is 10%. The company uses
straight-line depreciation for this type of
equipment.
What is the depreciation expense of the leased
asset for the year 2016?
a. P64,800
b. P72,720
c. P68,220
d. P75,060
Question 17
On January 2, 2016, Exalta Corporation leased
six computers for use in its engineering
department. The lease period is five years and
the estimated economic life of the leased
property is six years. The lease does not contain
automatic title transfer and a bargain purchase
option. Annual lease payments are payable in
advance every January 2 in the amount of
P90,000.
The incremental borrowing rate for Exalta
Corporation is 12% and the implicit interest rate
(known to Exalta is 10%. The company uses
straight-line depreciation for this type of
equipment.
How much is the interest expense recognized in
profit or loss for the year 2016?
a. P25,110
b. P37,530
c. P28,530
d. P34,110
Question 18
Auto Corporation purchased a machine on
March 31, 2016 for P1,500,000 for the purpose
of leasing it. The machine is expected to have a
six-year life, no salvage, and will be depreciated
on a straight-line basis.
On April 1, 2016 under a cancelable lease, Auto
Corporation leased the machine to Matic
Company for P920,000 a year for a three-year
period ending on March 31, 2019. Auto
Corporation incurred maintenance and other
related costs under the provisions of the lease
of P50,000 relating to the year ended December
31, 2016. Matic Company paid Auto
Corporation P920,000 on April 1, 2016.
What is the rent expense incurred by Matic
Company for the year ended December 31,
2016?
a. P920,000
b. P0
c. P766,667
d. P690,000
Question 19
The carrying amount of the right of use asset
would be periodically reduced by
a. Depreciation of the right of use asset
b. Lease payment
c. Portion of the lease payment allocable to
reduction of the lease liability
d. Portion of the lease payment allocable to the
interest
Question 20
On January 2, 2016, Exalta Corporation leased
six computers for use in its engineering
department. The lease period is five years and
the estimated economic life of the leased
property is six years. The lease does not contain
automatic title transfer and a bargain purchase
option. Annual lease payments are payable in
advance every January 2 in the amount of
P90,000.
The incremental borrowing rate for Exalta
Corporation is 12% and the implicit interest rate
(known to Exalta is 10%. The company uses
straight-line depreciation for this type of
equipment.
What is the capitalized cost of the leased asset?
a. P341,100
b. P375,300
c. P324,000
d. P363,000
Question 21
Austin Company closed a lease contract for
newly constructed terminals and freight storage
facilities on January 1, 2016. Although the
terminals have a composite life of 15 years, the
lease runs for 10 years with a favorable bargain
purchase option of P500,000 upon expiration of
the lease.
The annual rental is P1,000,000 payable at the
beginning of each lease year starting January 1,
2016. The lessee must also make annual
payments of P200,000 for taxes and insurance.
The contract was negotiated to assure the
lessor a 10% rate of return.
Present value of 1 for a single payment at 10%
for 10 periods is 0.385.
Present value of an annuity due of 1 at 10% for
10 periods is 6.759.
Present value of an ordinary annuity of 1 at 10%
for 10 periods is 6.145.
What is the finance lease liability balance at
December 31, 2016?
a. P6,951,500
b. P5,337,500
c. P5,546,650
d. P5,951,500
Question 22
Auto Corporation purchased a machine on
March 31, 2016 for P1,500,000 for the purpose
of leasing it. The machine is expected to have a
six-year life, no salvage, and will be depreciated
on a straight-line basis.
On April 1, 2016 under a cancelable lease, Auto
Corporation leased the machine to Matic
Company for P920,000 a year for a three-year
period ending on March 31, 2019. Auto
Corporation incurred maintenance and other
related costs under the provisions of the lease
of P50,000 relating to the year ended December
31, 2016. Matic Company paid Auto
Corporation P920,000 on April 1, 2016.
Assuming that the machine intended for leasing
given in the problem was purchased by Auto
Corporation on January 1, 2016, all other data
being the same, what is the profit before
income tax reported by Auto Corporation for
the year ended December 31, 2016?
a. P390,000
b. P920,000
c. P452,500
d. P690,000
Question 23
On August 1, 2016, PAF Aviation leased two
helicopters from Fast Aircraft for an initial
period of 12 months with a provision for a
continuation of a month-to-month basis. The
lease is properly classified as an operating lease.
Lease payments are to be made as follows:
1st two months - P15,000 per month
Next three months - P12,000 per month
Next three months - P10,000 per month
Last four months - P7,500 per month
After the first year, the rent continues at P6,000
per month.
How much is PAF Aviation's rent expense for
the year ended December 31, 2016?
Select one:
a. P10,500
b. P52,500
c. P66,000
d. P126,000

Question 24

On December 31, 2016, Chrysler Company

signed a five-year, non-cancelable lease for a
machine with Hyundai Company. The terms of
the lease called for Chrysler Company to make
annual payments of P80.000 in advance starting
on December 31, 2016 and every December 31
thereafter. The machine has an estimated
useful life of six years and a P40,000
unguaranteed residual value at the end of the
five-year lease term. The machine reverts back
to the lessor at the end of the five-year lease
term. Chrysler Company uses the straight-line
method of depreciation for all of its depreciable
assets.

The rate implicit in this contract, which is known

to Chrysler, is 12%. The market value of the
machine is P340.000. The present value of an
annuity due of 1 at 12% for 5 periods is 4.037.
The present value of 1 for a single payment at
12% for 5 periods is 0.567.

What are the balances of finance lease

obligation at December 31, 2016 and December
31, 2017, respectively?

a. P265,640 and P217,517

b. P242,960 and P162,960

c. P242,960 and P192,115

d. P265,640 and P185,640


QUIZ 1
Question 1
If the residual value of a underlying asset is
greater than the amount guaranteed by the
lessee
a. The lessee recognizes a gain at the end of the
lease term
b. The lessee pays the lessor for the difference.
c. The lessee has no obligation related to the
residual value.
d.The lessor pays the lessee for the difference.
Question 2
Robbin Company leased a machine from Ready
Leasing Company. The lease qualified as a
finance lease and required 10 annual payments
of P100,000 beginning immediately. The lease
specified an interest rate of 12% and a purchase
option of P100,000 at the end of the tenth year,
even though the machine's estimated value on
that date was P200,000.
Present value of an annuity due (in advance) of
1 at 12% for 10 periods - 6.328; and
Present value of 1 at 12% for 10 periods - 0.322.
What amount should be recorded as lease
liability at the beginning of the lease term?
a.697,200
b.648,600
c.621,600
d.665,000
Question 3
Newton Company leased machinery with a fair
value of P2,500,000 from another entity on
December 31, 2013. The contract is a six-year
noncancelable lease with an implicit interest
rate of 10%. The lease required annual payment
of P500,000 beginning December 31, 2013. The
entity appropriately accounted for the lease as
a finance lease. The incremental borrowing rate
is 12%. The present value of an annuity due of 1
for 6 years at 10% is 4.7908 and the present
value of an annuity due of 1 for 6 years at 12%
is 4.6048. What is the lease liability that should
be reported on December 31, 2014?
a.1,584,940
b.1,700,000
c.1,895,400
d.1,518,688
Question 4
On December 31, 2013, Action Company signed
a 7-year finance lease for an airplane. The
airplane's fair value was P8,415,000. The entity
made the first annual lease payment of
P1,530,000 on December 31,2013. The entity's
incremental borrowing rate was 12%, and the
interest rate implicit in the lease, which was
known by Action, was 9%. The rounded present
value factors for an annuity due are:
9% for 7 years - 5.5; and
12% for 7 years - 5.1.
What amount should be reported as finance
lease liability on December 31, 2013?
a.7,803,000 a.4,500,000

b.6,273,000 b.2,800,000

c.8,415,000 c.2,912,000

d.6,885,000 d.4,680,000

Question 5 Question 7

Elysee Company leased a machine with a fair The lessee may apply the operating lease model
value of P 1,650,000 for a period of 5 years under what condition?
under a finance lease. The initial direct costs
a.Both short-term lease and long value lease
included in negotiating the lease amounted to
P12,500. The present value of the minimum b.Low value lease
lease payments discounted at the rate implicit
in the lease is P1,584,000. At what amount c.Short-term lease
should the machine be recognized initially by
d.Under all circumstances
Elysee Company as Right of use asset?

a.1,596,500
Question 8
b.1,650,000
Which statement concerning residual value
c.1,584,000
guarantee is appropriate for the lessee?
d.1,662,500
a.The asset and related liability should be
decreased by the present value of the residual
value
Question 6
b.The asset and related liability should be
Neal Company entered into a nine-year finance decreased by the absolute amount of the
lease on a warehouse on December 31, 2013. residual value.
Lease payment of P520,000 which includes real
estate taxes and other executory cost of c.The asset and related liability should be
P20,000, are due annually, beginning on increased by the absolute amount of the
December 31, 2014 and every December 31 residual value.
thereafter. The interest rate implicit in the
d.The asset and related liability should be
lease is 9%. The rounded present value of an
increased by the present value of the residual
ordinary annuity of 1 for nine years at 9% is 5.6.
value.
What amount should be reported as lease
liability on December 31, 2013?

Select one:
Question 9
Conn Company owns an office building and
normally charges tenants P3,000 per square
meter per year for office space. Because the
occupancy rate is low, Conn Company agreed to
lease 1,000 square meters to Hanson Company
at P1,200 per square meter for the first year of
a three-year operating lease. Rent for remaining
years will be at the P3,000 rate. Hanson
Company moved into the budding on January 1,
2014, and paid the first year's rent in advance.
What amount of rental revenue should be
reported in the income statement for the year
ended September 30, 2014 under operating
lease?
a.900,000
b.1,800,000
c.1,200,000
d.2,400,000
Question 10
Which statement is true about low value lease?
a.The term of a low value lease may be more
that twelve months.
b.An underlying asset does not qualify as low
value lease if the nature of the asset such that
the asset is typically not of low value when new.
c.The value of an underlying asset is based on
the value of the asset when new regardless of
the age of the asset.
d.All of these statements are true about low
value lease.
Question 11
What is the cost of a right of use asset acquired
in a finance lease?
a.The present value of the fair value of the asset
discounted at an appropriate rate
b.The present value of the lease payments
exclusive of executory costs discounted at an
appropriate rate
c.The absolute sum of the lease payments over
the lease term
d.The present value of the lease payments
including executory costs discounted at an
appropriate rate
Question 12
On January 1, 2014, Abba Company leased a
building to Bee Company under a four-year
operating lease. The monthly rental for 2014,
2015, 2016 and 2017 is P100,000, P150,000,
P200,000 and P250,000, respectively. Rentals
are payable at the end of each month. All rental
payments within the year were made when
due. What amount should be reported as rent
receivable from Bee Company on December 31,
2015?
a.600,000
b.900,000
c.1,000,000
d.1,200,000
Question 13
On January 1, 2014, Nori Company entered into
a 5-year lease for drilling equipment. The entity
accounted for the acquisition as a finance lease
for P2,400,000, which included a P100,000
bargain purchase option. At the end of the
lease, the entity is expected to exercise the
bargain purchase option. The entity estimated
that the equipment's fair value will be P200,000
at the end of its 8-year life and regularly used
straight line depreciation on similar equipment.
What amount should be recognized as
depreciation expense of the right of use asset
for 2014?
a.275,000
b.480,000
c.460,000
d.300,000
Question 14
The lease payments include all of the following,
except
a.Termination penalty if the lease term reflects
the termination option
b.Exercise price of a purchase option that is not
reasonably certain to be exercised
c.Residual value guarantee of the lessee
d.Periodic rentals
Question 15
On January 1, 2014, Cole Company signed an
eight-year noncancelable lease for a new
machine, requiring P 150,000 annual payments
at the beginning of each year. The machine has
a useful life of 12 years, with no residual value.
Title passes to Cole Company at the lease
expiration date. Cole Company used straight-
line depreciation for all plant assets. Aggregate
lease payments have a present value on January
1, 2014, of P1,080,000 based on an appropriate
rate of interest.
What amount should be recorded as
depreciation expense of the right of use asset
for 2014?
a.135,000
b.90,000
c.0
d.150,000
Question 16
What is the interest rate used when the implicit
interest rate cannot determined?
a.The prime rate
b.The lessee's incremental borrowing rate
c.The lessor's published rate
d.The lessee's average borrowing rate
Question 17
The cost of right of use asset comprises all,
except
a.Initial direct cost incurred by lessee
b.The present value of lease payments
c.Lease payments made to lessor on or before
commencement date
d.Estimated cost of dismantling, removing or
restoring the underlying asset for which the
lessee has no present obligation.
Question 18
Barnel Company owns and manages
apartments. On signing a lease, each tenant
must pay the first month and last month rent
and a P50,000 refundable security deposit. The
security deposit is rarely refundable in total
because cleaning costs of P15,000 per
apartment are almost always deducted. About
30% of the time, the tenants are also charged
for damages to the apartment which typically
cost P10,000.
If a one-year operating lease is signed on a
P90,000 per month apartment, what amount
should be reported as refundable security
deposit?
a.140,000
b.32,000
c.50,000
d.35,000
Question 19
On January 1, 2014, Blaugh Company signed a
long-term lease for an office building. The terms
of the lease required Blaugh Company to pay
P100,000 annually, beginning December 31,
2014, and continuing each year for 30 years.
The lease qualifies as a finance lease. On
January 1, 2014, the present value of the lease
payments is P1,125,000 at the 8% interest rate
implicit in the lease. What amount should be
reported as lease liability on December 31,
2014?
a.1,115,000
b.1,125,000
c.2,900,000
d.1,025,000
Question 20
A lessee had a ten-year finance lease requiring
equal annual payments. The reduction of the
lease liability in the second year should equal
a.One-tenth of the original lease liability
b.The current liability shown for the lease at the
end of the first year
c.The current liability shown for the lease at the
end of the second year
d.The reduction of the lease liability in the first
year
Question 21
At the beginning of current year, Ashe Company
entered into a ten-year noncancelable lease
requiring year-end payments of P 100,000.
Ashe's incremental borrowing rate is 12%, while
the lessor's implicit interest rate, known to
Ashe, is 10%. Present value factors for an
ordinary annuity for ten periods are 6.145 at
10%, and 5.650 at 12%. Ownership of the
property remains with the lessor at expiration
of the lease. There is no bargain purchase
option. The leased property has an-estimated
economic life of 12 years. What amount should
be capitalized as right of use asset?
a.565,000
b.1,000,000
c.0
d.614,500
Question 22
Which is not part of the lease payments?
a.Any payment the lessee must make to
purchase the underlying asset under a purchase
option that is reasonably certain to be exercised
b.Any residual value guarantee of the lessee
c.The rental payments called for by the lease
d.Any residual value at the end of the lease
term
Question 23
On December 31, 2014, Amor Company leased
equipment under a finance lease for 10 years.
The entity contracted to pay P400,000 annual
rent on December 31, 2014 and on December
31 of each of the next nine years. The finance
lease liability was recorded at P2,700,000 on
December 31, 2014, before the first payment.
The equipment's useful life is 12 years, and the
interest rate implicit in the lease is 10%. In
recording the December 31, 2015 payment, by
what amount should the finance lease liability
be reduced?
a.270,000
b.170,000
c.225,000
d.230,000
Question 24
A lessee with the 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 the lease term,
whichever is longer
d.Useful life of the asset or the lease term,
whichever is shorter
Question 25
On January 1, 2014, Kosovo Company entered
into a 10-year lease for an equipment. The
entity accounted for the acquisition as a finance
lease for P4,900,000 which includes a P200,000
guaranteed residual value. At the end of the
lease, the asset will revert back to the lessor. It
is estimated that the asset's fair value at the
end of its 12-year useful life will be P100,000.
The straight line depreciation is used. What
amount should be recognized as depreciation
expense of the right of use asset?
a.490,000
b.400,000
c.470,000
d.480,000
Question 26
Neal Company entered into a nine-year finance
lease on a warehouse on December 31, 2014.
Lease payment of P520,000 which included real
estate taxes and other executory cost of
P20,000, are due annually, beginning on
December 31, 2015 and every December 31
thereafter. The interest rate implicit in the lease
is 9%. The rounded present value of an ordinary
annuity of 1 for nine years at 9% is 5.6. What
amount should be reported as lease liability on
December 31, 2014?
a.4,500,000
b.2,912,000
c.4,680,000
d.2,800,000
Question 27
Yemen Company leased an equipment for 6
years from another entity on January 1, 2014.
The entity recorded the asset at P4,800,000
which included a bargain purchase option of
P100,000. The equipment had an eight-year
useful life and a fair value of P300,000 at end of
the useful life. On January 1, 2020, the entity
did not exercise the bargain purchase option.
What is the loss on finance lease to be
recognized by Yemen Company in the
statement of comprehensive income for 2020?
a.1,325,000
b.0
c.200,000
d.1,425,000
Question 28
A six-year finance lease entered into on
December 31 of the current year specified equal
annual lease payments due on December 31 of
each year. The first annual lease payment paid
on December 31 of the current year consists
which of the following?
a.Both interest expense and lease liability
bNeither interest expense nor lease liability
c.Lease liability
d.Interest expense
Question 29 a.160,000

At the end of the current year, Mercedez b.235,000

Company purchased a machinery that it had
c.80,000
been leasing under a finance arrangement. The
leased asset and lease liability were originally d.85,000
recorded at P2,000,000. At the time of the
purchase, the accumulated depreciation on the
leased asset was P800,000 and the remaining
balance of the lease liability was P1,300,000.
The leased asset was purchased for P1,440,000
cash. What amount is debited as cost of the
machinery on the date of purchase?

a.2,000,000

b.1,440,000

c.1,340,000

d.1,200,000

Question 30

Myriad Company purchased a tractor on

January 1, 2014 at a cost of P1,600,000 for the
purpose of leasing it. The tractor is estimated to
have a useful life of 5 years with residual value
of P100,000. Depreciation is on a straight line
basis. On April 1, 2014, Myriad Company
entered into an operating lease contract for the
lease of the tractor for a term of two years up
to March 31, 2016. The lease fee is P50,000
monthly and the lessee paid P600,000, the lease
fee for one year. Myriad Company paid P1?
0,000 commission associated with negotiating
the lease, P15,000 minor repairs, and P10,000
transportation of the tractor to the lessee
during 2014. What amount should be reported
as net rent revenue for 2014?

Select one:

SEATWORK 2
Question 1
Which of the following statements is correct
regarding initial direct costs incurred by the
lessor?
a.In a direct financing lease, initial direct costs
are added to the net investment in the lease.
b.In an operating lease, initial direct costs are
deferred and allocated over the lease term.
c.In a sales type lease, initial direct costs are
expensed as component of cost of sales.
d.All of these statements are correct.
Question 2
Initial direct cost incurred by a lessor in a sales
type lease shall be
a.Deferred and allocated over the lease term on
a straight line basis.
b.Charged to cost of sales in the first period of
the lease term.
c.Charged to unearned interest income in the
first period of the lease term.
d.Deferred and allocated over the lease term in
proportion to the recognition of rent revenue.
Question 3
On January 1, 2014, Gallant Company entered
into a lease agreement with Blacksheep
Company for a machine which was carried on
the accounting records of Gallant Company at
P2,000,000. Total payments under the lease
which expires on December 31, 2023 aggregate
P3,550,800 of which P2,400,000 represents cost
of the machine to Blacksheep Company.
Payments of P355,080 are due each January 1
of each year. The interest rate of 10% which
was stipulated in the lease is considered fair
and adequate compensation to Gallant
Company for the use of its funds. Blacksheep
Company expects the machine to have a 10-
year life, no residual value and be depreciated
on a straight line basis. The lease qualifies as a
sales type lease. What total income before tax
should be recognized by Gallant Company from
the lease for the year ended December 31,
2014?
a.204,492
b.604,492
c.755,080
d.355,080
Question 4
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Marianas Company adopted the policy of
leasing as the primary method of selling
products. The entity's main product is a small
cargo vessel. Marianas Company constructed
such a cargo vessel for Jade Company at a cost
of P8,500,000.
The terms of the lease provided for annual
advance payments of P2,500,000 to be paid
over 10 years with the ownership transferring
to Jade Company at the end of the lease period.
It is estimated that the cargo vessel will have a.
residual value of P1,600,000 at that date.
The lease payments began January 1, 2014.
Marianas Company incurred initial direct cost of
P500,000 in financing the lease agreement with
Jade Company. The sale price of the cargo
vessel is P14,875,000. Financing the
construction was at a 14% rate. The present
value of an annuity due of 1 at 14% for 10
periods is 5.95.
What is the unearned interest income on
January 1, 2014?
a.9,625,000
b.10,125,000
c.8,525,000
d.11,725,000
Question 5
On December 31,2013, Benz Company, a lessor,
sold a machinery that it had been leasing under
a direct financing lease. On January 1,2013
after receipt of the lease payment for the year,
the following account balances were associated
with the lease:
The interest rate implicit in the lease is 10%. On
December 31, 2013, Benz Company sold the
leased machinery to the lessee for P3,250,000
cash. What is the loss on sale of machinery that
should be recognized on December 31,2013?
a.2,600,000
b.2,015,000
c.2,085,000
d.1,600,000
Question 6
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
On December 31, 2014, Benz Company, a
lessor, actually sold a machinery that it had
been leasing under a sales type lease. On
January 1, 2014 after receipt of the lease
payment for the year, the following account
balances were associated with the lease:
The interest rate implicit in the lease is 10%. On
December 31, 2014, Benz Company actually
sold the leased machinery to the lessee for
P3,250,000 cash.
What is the carrying amount of the lease
receivable on December 31, 2014?
a.5,335,000
b.5,850,000
c.4,850,000
d.5,365,000
Question 7
Which of the following statements characterizes
a sales type lease?
a.The lessor recognizes only interest revenue
over the life of the asset.
b.The lessor recognizes a dealer's profit at lease
inception and interest revenue over the lease
term.
c.The lessor recognizes only interest revenue
over the lease term.
d.The lessor recognizes a dealer's profit at lease
inception and interest revenue over the life of
the asset.
Question 8
Net investment in a direct financing lease is
equal to
a.Cost of the asset plus unguaranteed residual
value
b.Cost of the asset
c.Cost of the asset minus guaranteed residual
value
d.Cost of the asset plus initial direct cost paid by
the lessor
Question 9
What is the treatment of an unguaranteed
residual value in determining the cost of sales
under a sales type lease?
a.The unguaranteed residual value is ignored.
b.The unguaranteed residual value is deducted
from the cost of the leased asset at absolute
amount.
c.The unguaranteed residual value is deducted
from the cost of the leased asset at present
value.
d.The unguaranteed residual value is added to
the cost of the leased asset.
Question 10
All of the following situations would prima facie
lead to a lease being classified as a finance
lease, except
a.Transfer of ownership to the lessee.
b.The lease term is for a major part of the
asset's life.
c.The present value of the lease payments is
50% of the fair value of the asset.
d.Option to purchase at a value below the fair
value of the underlying asset.
Question 11
In an operating lease recorded by the lessor, the
equal monthly rental payments should be
a.Recorded as reduction in the lease receivable.
b.Allocated between reduction in lease
receivable and interest expense.
c.Recorded as a rental income.
d.Recorded as reduction of depreciation.
Question 12
Which statement is true regarding initial direct
costs incurred by the lessor?
a.In a direct financing lease, initial direct costs
are added to the net investment in the lease.
b.In a sales type lease, initial direct costs are
expensed as component of cost of goods sold.
c.All of these statements are correct. Question 15

d.In an operating lease, initial direct costs
incurred by the lessor are deferred and
allocated over the lease term.
Question 13
Under a direct financing lease, the excess of
aggregate rentals over the cost of the
underlying asset should be recognized as
income of the lessor
a.After the cost of the underlying asset has
been fully recovered through rentals
b.In constant amounts during the term of the
lease
c.In decreasing amounts during the term of the
lease
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Frances Company is a dealer in equipment. On
January 1, 2014, an equipment was leased to
another entity with the following provisions:
At the end of the lease term on December 31,
2018, the equipment will revert to the lessor.
The perpetual inventory system is used. The
entity incurred initial direct cost of P200,000 in
finalizing the lease agreement.
What is the total financial revenue over the
lease term?
a.2,315,000
b.2,100,000
c.2,600,000

d.In increasing amounts during the term of the d.1,815,000

lease

Question 16
Question 14
The accounting concept that is principally used
Where there is a lease of land and building and to classify leases into operating and finance on
the title to the land is not transferred, generally the part of lessor is
the lease is treated as if
a.Completeness
a.The land is operating and the building is
finance. b.Substance over form

c.Prudence
b.The land is finance and the building is
operating. d.Neutrality
c.The land and building are an operating lease.

d.The land is finance lease.

Question 17
Glade Company leases a computer equipment
under a direct financing lease. The equipment
has no residual value at the end of the lease and
the lease does not contain bargain purchase
option. The entity wishes to earn 8% interest on
a 5-year lease of equipment with a cost of
P3,234,000. The present value of an annuity
due of 1 at 8% for 5 years is 4.312.
What total amount of interest revenue should
be recognized over the lease term?
a.516,000
b.750,000
c.1,394,500
d.1,293,600
Question 18
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
On January 1, 2014, Yolk Company signed a ten-
year non-cancelable lease agreement to lease a
storage building from Warehouse Company.
The agreement required equal rental payments
at the end of each year. The fair value of the
building on January 1, 2014 is P2,949,600.
However, the carrying amount to Warehouse
Company is P2,458,000. The building has an
estimated economic life of 10 years with no
residual value. Yolk Company depreciates
similar building on the straight line method. At
the termination of the lease, the title to the
building will be transferred to Yolk Company.
The incremental borrowing rate of Yolk
Company is 12% per year. Warehouse Company
set the annual rental to insure a 10% rate of
return. The implicit rate of the lessor is known
by the lessee. The annual total lease payment
included P20,000 of executory costs related to
taxes on the property. Round off present value
factor to three decimal places.
What is the minimum annual lease payment?
a.480,000
b.522,053
c.435,044
d.400,000
Question 19
The classification of a lease on the part of lessor
as either operating or finance lease is based on
a.The length of the lease.
b.The transfer of the risks and rewards of
ownership.
c.The economic life of the underlying asset.
d.The lease payments being at least 50% of fair
value.
Question 20
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Easter Company leased equipment to Faye
Company on January 1,2013. The lease is for an
eight-year period expiring December 31,2020.
The first of eight equal annual payments of
P900,000 was made on January 1, 2013. The
entity had purchased the equipment on
December 29, 2012 for P4,800,000. The lease is
appropriately accounted for as a sales type
lease. The present value on January 1, 2013 of
all rent payments over the lease term
discounted at a 10% interest rate was
P5,280,000.
What amount of interest revenue should be
recorded in 2014?
a.438,000
b.490,000
c.391,800
d.480,000
Question 21
Cassandra Company is in the leasing business.
The entity acquired a specialized packaging
machine for P3,000,000 cash and leased it for a
period of six years, after which the machine is
to be returned to Cassandra Company for
disposition. The guaranteed residual value of
the machine is P200,000.
The lease term was arranged so that a return of
12% is earned by Cassandra Company. The PV
of 1 at 12% for six periods is .51, and the
present value of an annuity of 1 in advance at
12% for six periods is 4.60.
What is the annual lease payment payable in
advance required to yield the desired return?
a.608,695
b.652,174
c.732,000
d.630,000
Question 22
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Reagan Company used leases as a method of
selling products. In 2014, Reagan Company
completed construction of a passenger ferry. On
January 1, 2014, the ferry was leased to the
Super Ferry Line on a contract specifying that
ownership of the ferry will transfer to the lessee
at the "end of the lease period. Annual lease
payments do not include executory costs. Other
terms of the agreement are as follows:
What is the gross profit on sale for 2014?
a.4,755,000
b.6,555,000
c.4,355,000
d.4,555,000
Question 23
One of the four determinative criteria for a
finance lease is that the present value at the
beginning of the lease term of the lease
payments equals or exceeds
a.50 percent of the fair value of the underlying
asset
b.The fair value of the underlying asset
c.75 percent of the fair value of the underlying
asset
d.90 percent of the fair value of the underlying
asset
Question 24
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Marianas Company adopted the policy of
leasing as the primary method of selling
products. The entity's main product is a small
cargo vessel. Marianas Company constructed
such a cargo vessel for Jade Company at a cost
of P8,500,000.
The terms of the lease provided for annual
advance payments of P2,500,000 to be paid
over 10 years with the ownership transferring
to Jade Company at the end of the lease period.
It is estimated that the cargo vessel will have a.
residual value of P1,600,000 at that date.
The lease payments began January 1, 2014.
Marianas Company incurred initial direct cost of
P500,000 in financing the lease agreement with
Jade Company. The sale price of the cargo
vessel is P14,875,000. Financing the
construction was at a 14% rate. The present
value of an annuity due of 1 at 14% for 10
periods is 5.95.
What amount should be reported as gross profit
on sale for 2014?
a.5,875,000
b.4,775,000
c.4,275,000
d.6,375,000
Question 25
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Easter Company leased equipment to Faye
Company on January 1,2013. The lease is for an
eight-year period expiring December 31,2020.
The first of eight equal annual payments of
P900,000 was made on January 1, 2013. The
entity had purchased the equipment on
December 29, 2012 for P4,800,000. The lease is
appropriately accounted for as a sales type
lease. The present value on January 1, 2013 of
all rent payments over the lease term
discounted at a 10% interest rate was
P5,280,000.
What is the gross profit on sale for 2013?
a.1,920,000
b.2,400,000
c.240,000
d.480,000
Question 26
Gross investment in the lease is equal to
a.Present value of lease payments under a
finance lease of the lessor and any
unguaranteed residual value.
b.Sum of the lease payments receivable by
lessor under a finance lease and any
unguaranteed residual value accruing to the
lessor.
c.The lease payments under a finance lease of
the lessor.
d.Present value of the lease payments under a What is the annual rental over the lease term?
finance lease of the lessor.
a.834,940

b.817,470
Question 27
c.800,000
On January 1, 2014, Lessor Company leased a
d.779,980
machine to Lessee Company. The machine had
an original cost of P6,000,000. The lease term is
five years and the implicit interest rate on the
lease is 15%. The lease is properly classified as a Question 29
direct financing lease.
The primary difference between a direct
The annual lease payments of Pi,730,541 are financing lease and a sales type lease is the
made each December 31. The machine reverts
a.Recognition of the manufacturer or dealer
to Lessor Company at the end of the lease term,
profit at the inception of the lease.
at which time the residual value is P400,000.
The residual value is unguaranteed. The PV of 1 b.Depreciation recorded each year by the
at 15% for 5 periods is .4972, and the PV of an lessor.
ordinary annuity of 1 at 15% for 5 periods is
3.3522. At the commencement of the lease, c.Allocation of initial direct costs incurred by the
what is balance of Lessor's net receivable and lessor over the lease term.
Lessee's liability? <Lease receivable><Lease
d.Manner in which rental collections are
liability>
recorded as rental income.
a.6,000,000 and 6,000,000

b.6,000,000 and 5,801,120

c.5,801,120 and 5,801,120
d.5,801,120 and 6,000,000
Question 28
Oceanic Company is engaged in leasing
equipment. Such an equipment was delivered
to a lessee on January 1, 2014 under a direct
financing lease with the following provisions:
The annual rental is payable at the end of each
year. The equipment will revert to the lessor
upon the lease expiration.
Question 30
Magnum Company had an asset costing
P5,239,000. The asset was leased on January 1,
2014 to another entity. Five annual lease
payments are due each January 1, beginning
January 1, 2014. The lessee guaranteed the
P2,000,000 residual value of the asset at the
end of the lease term on December 31, 2018.
The lessor's implicit interest rate is 8%. The PV
of 1 at 8% for 5 periods is .68, and the PV of an
annuity of 1 in advance at 8% for 5 periods is
4.31.
What is the annual lease payment?
a.1,531,090

b.900,000

c.751,500

d.1,215,545

QUIZ 2
Question 1
Howe Company leased equipment to Kew
Company on January 1, 2014 for an eight-year
period expiring December 31, 2021. Equal
payments under the lease are P500,000 and are
due on January 1 of each year. The first
payment was made on January 1, 2014. The
selling price of the equipment is P2,900,000 and
the carrying amount is P2,000,000. The lease is
appropriately accounted for as a sales type
lease. The present value of the lease payments
at an implicit interest rate of 12% is P2,780,000.
What amount of profit on the sale should be
reported for the year ended December 31,
2014?
a.900,000
b.333,600
c.240,000
d.780,000
Question 2
Lessors shall recognize asset held under a
finance lease as a receivable at an amount
equal to the
a.Net investment in the lease
b.Residual value, whether guaranteed or
unguaranteed
c.Gross rentals
d.Gross investment in the lease
Question 3
Which condition would require lease
capitalization?
a.The lease does not transfer title to the lessee.
b.The present value of the lease payments is
significantly more than the fair value of the
asset.
c.The lease term is below the useful life of
asset.
d.There is an uncertain purchase option.
Question 4
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Camia Company is in the business of leasing
new sophisticated equipment. As lessor, the
entity expects a 12% return. At the end of the
lease term, the equipment will revert to Camia
Company. On January 1,2013 an equipment is
leased to another entity under a direct financing
lease.
What is the interest income for 2013?
a.322,000
b.660,000
c.544,860
d.496,860
Question 5 Question 7

Irene Company acquired a specialized machine Lease payments under an operating lease shall
for P2,300,000. On January 1, 2014, the entity be recognized as an income by the lessor on
leased the machine for a period of six years,
after which title to the machine is transferred to a.Cash basis
the lessee. The; six annual lease payments are b.Diminishing balance basis
due each January 1 and the first payment was
made on January 1, 2014. The residual value of c.Sum of units basis
the machine is P200,000. The lease terms are
d.Straight line basis over the lease term
arranged so that a return of 12% is earned by
the lessor. The present value of 1 at 12% for six
periods is 0.51, and the present value of an
annuity in advance of 1 at 12% for six periods is Question 8
4.60. What is the annual lease rental payable in
The classification of a lease is normally carried
advance?
out
a.500,000
a.At the inception of the lease
b.477,826
b.After a "cooling off" period of one year
c.460,000
c. At the end of the lease term
d. 383,333
d.When the entity deems it necessary

Question 6
Question 9
Which is correct regarding lease capitalization
Which statement characterizes an operating
criteria?
lease:
a.The lease payments are 90% of fair value of
a.The lessor transfers title of the underlying
asset.
asset to the lessee for the duration of the lease
b.The lease contains a purchase option. term.

c.The lease transfers ownership to the lessor. b. The lessee records a lease obligation.

d.The lease term is equal to at least 75% of the c.The lessee records depreciation and interest.
economic life of the underlying asset.
d.The lessor records depreciation and lease
revenue.
Question 10
All of the following would be included in the
lease receivable, except
a. All would be included
b.A purchase option that is reasonably certain
c.Guaranteed residual value
d.Unguaranteed residual value
Question 11
Gross investment in the lease is the
a.The minimum lease payments under a finance
lease of the lessor.
b.Aggregate of the minimum lease payments
under a finance lease of the lessor and any
unguaranteed residual value accruing to the
lessor.
c.Present value of minimum lease payments
under a finance lease of the lessor and any
unguaranteed residual value.
d.Present value of the minimum lease payments
under a finance lease of the lessor.
Question 12
One of the four determinative criteria for a
finance lease specifies that the lease term be
equal to or greater than
a.90 percent of the economic life of the asset.
b.The economic life of the underlying asset.
c.50 percent of the economic life of the asset.
d.75 percent of the economic life of the asset.
Question 13
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Camia Company is in the business of leasing
new sophisticated equipment. As lessor, the
entity expects a 12% return. At the end of the
lease term, the equipment will revert to Camia
Company. On January 1,2013 an equipment is
leased to another entity under a direct financing
lease.
What is the unearned interest income on
January 1,2013?
a.1,616,500
b.2,176,000
c.2,576,000
Question 14
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Frances Company is a dealer in equipment. On
January 1, 2014, an equipment was leased to
another entity with the following provisions:
At the end of the lease term on December 31,
2018, the equipment will revert to the lessor.
The perpetual inventory system is used. The
entity incurred initial direct cost of P200,000 in
finalizing the lease agreement.
What amount of interest income should be
reported for 2014?
Select one:
a.900,000 a.Treat as a receivable equal to net investment
in the lease and recognize finance payments in
b.648,000 cash by reduction of debt.
c.960,000 b.Treat as a receivable equal to net investment
d.682,200 in the lease and recognize finance payments by
reducing debt and taking interest to income
statement.

Question 15 c.Treat as a noncurrent asset equal to net

When should a lessor recognize in income
nonrefundable lease bonus paid by a lessee?
a.At the inception of the lease
b.When received
investment in lease and recognize all finance
payments in income statement.
d.Treat as a receivable equal to gross amount
receivable on lease and recognize finance
payments in cash by reducing debt.

c.Over the lease term

d.At the lease expiration Question 18

On January 1,2013, Nueva Company, acting as a

Question 16
In a direct financing lease, unearned interest
income
a.Should be recognized at the lease expiration.
b.Should be amortized over the lease term
using the straight line method.
c.Should be amortized over the lease term using
the interest method.
lessor, leased an equipment for ten years at an
annual rental of P1,200,000, payable by Caster
Company, the lessee, at the beginning of each
year under a direct financing lease. The
equipment had a cost of P8,400,000 with an
estimated life of 12 years and no residual value.
The implicit rate is 9%. What amount of interest
income should be reported in 2013?
a.756,000
b.360,000

d.Does not arise. c.500,000

d.648,000

Question 17

Which is the correct accounting treatment for a

finance lease in the accounts of a lessor?

Select one:
Question 19
Ericson Company leased an asset to another
entity. The cost of the asset was P7,994,000.
Terms of the lease specify four-year life for the
lease, an annual interest rate of 15%, and four
year-end rental payments. The lease qualified
as a direct financing lease. The lease provided
for a transfer of title to the lessee at the end of
the lease term. After the fourth year, the
residual value was estimated at P1,000,000. The
PV of 1 at 15% for 4 periods is .572, and the PV
of an ordinary annuity of 1 at 15% for 4 periods
is 2.855. What is the annual rental payment?
a.2,800,000
b.2,000,000
c.2,599,650
d.3,000,350
Question 20
Meg Company leased equipment from Wee
Company on July 1, 2014 for an 8-year period.
Equal payments under the lease are P600,000
and are due on July 1 of each year. The first
payment was made on July 1, 2014.
The interest rate contemplated by Meg
Company and Wee Company is 10%. The cash
selling price of the equipment is P3,520,000 and
the cost of the equipment on Wee Company's
accounting records is P2,800,000. The lease is
appropriately recorded as a sales type lease.
What amount of profit on sale and interest
revenue should be recognized for the year
ended December 31, 2014? <Profit on
sale><Interest revenue>
Select one:
a.720,000 and 146,000
b.45,000 and 176,000
c. 45,000 and 146,000
d.720,000 and 176,000
Question 21
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
On January 1, 2014, Yolk Company signed a ten-
year non-cancelable lease agreement to lease a
storage building from Warehouse Company.
The agreement required equal rental payments
at the end of each year. The fair value of the
building on January 1, 2014 is P2,949,600.
However, the carrying amount to Warehouse
Company is P2,458,000. The building has an
estimated economic life of 10 years with no
residual value. Yolk Company depreciates
similar building on the straight line method. At
the termination of the lease, the title to the
building will be transferred to Yolk Company.
The incremental borrowing rate of Yolk
Company is 12% per year. Warehouse Company
set the annual rental to insure a 10% rate of
return. The implicit rate of the lessor is known
by the lessee. The annual total lease payment
included P20,000 of executory costs related to
taxes on the property. Round off present value
factor to three decimal places.
What is the total annual lease payment?
a.500,000
b.542,053
c.455,044
d.420,000
Question 22 What is the interest income to be recognized in
2016?
Liza Company is a car dealer. On January 1,
2014, the entity entered into a finance lease a.180,000
with a customer under which the customer
would pay P200,000 on January 1 each year for b.210,000
5 years, commencing in 2014. The cost of the c.360,000
car is P600,000 and the cash selling price Was
P750,000. The entity paid legal fees of P20,000 d.420,000
to a law firm in connection with the
arrangement of the lease. What amount of
gross profit on sale should be recognized for the Question 24
year ended December 31, 2014?
Rent received in advance by the lessor in an
a.120,000 operating lease should be recognized as
revenue
b.130,000
a.At the lease expiration
c.150,000
b.When received
d.0
c. In the period specified by the lease

d.At the lease inception

Question 23

THE NEXT ITEM(S) IS/ARE BASED ON THE

FOLLOWING Question 25
On January 1, 2014, Pamela Company leased The lease receivable in a direct financing is
equipment to another entity under a finance
lease. The terms of the lease called for annual a.The gross amount of lease payments.
lease payments to be made in advance at the
b.The difference between the gross rentals and
beginning of each year starting January 1, 2014.
the fair value of the leased asset.
The implicit interest rate for the transaction is
12%. On July 1, 2016, the lessor actually sold c.The present value of lease payments.
the equipment to the lessee and received
P3,000,000 to complete the transaction. After d.The cost of the asset less any accumulated
the January 1, 2016 payment was made, the depreciation
balance of the "net lease receivable" was
P3,500,000.
Question 26
In case of lease of land and building, the lease
payments should be split
a.Using the sum of digits method.
b.Based on the useful life of the two elements.
c.According to relative fair value of the two
elements.
d.According to method devised by the entity.
Question 27
Ondoy Company leased an asset to another
entity on January 1, 2014. A third party
guaranteed the residual value of the asset
under the lease, estimated to be PI,200,000 on
January 1, 2019, the end of the lease term. The
lease is properly classified as a direct financing
lease. Annual lease payments are P1,000,000
due each December 31, beginning December
31, 2014. The last payment is due December 31,
2018. Both the lessor and lessee use 10% as the
interest rate. The remaining useful life of the
asset is six years at the commencement of the
lease. The PV of 1 at 10% for 5 periods is .62,
and the PV of an ordinary annuity of 1 at 10%
for 5 periods is 3.79. What is the net asset
balance for the lessor, and net liability balance
for the lessee, on January 1, 2014? <Net asset
(Lessor)><Net liability (Lessee)>
a.4,534,000 and 4,534,000
b.4,534,000 and 3,790,000
c.3,790,000 and 3,790,000
d.3,790,000 and 4,3534,000
Question 28
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
On December 31, 2014, Benz Company, a
lessor, actually sold a machinery that it had
been leasing under a sales type lease. On
January 1, 2014 after receipt of the lease
payment for the year, the following account
balances were associated with the lease:
Gross lease receivable 5,850,000
Unearned interest income 1,000,000
The interest rate implicit in the lease is 10%. On
December 31, 2014, Benz Company actually
sold the leased machinery to the lessee for
P3,250,000 cash.
What is the interest income for 2014?
a.0
b.325,000
c.485,000
d.585,000
Question 29
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Frances Company is a dealer in equipment. On
January 1, 2014, an equipment was leased to
another entity with the following provisions:
At the end of the lease term on December 31,
2018, the equipment will revert to the lessor.
The perpetual inventory system is used. The
entity incurred initial direct cost of P200,000 in
finalizing the lease agreement.
What amount should be reported as gross profit
on sale for 2014?

a.1,485,000

b.3,500,000

c.4,000,000

d.1,685,000

Question 30

Hitech Company, a dealer in machinery and

equipment, leased equipment to Quality
Company on July 1, 2013. The lease is
appropriately accounted for as a sale by Hitech
and as a purchase by Quality. The lease is for a
ten-year period equal to the useful life of the
asset expiring June 30,2023. The first often
equal annual payments of P250,000 was made
on July 1, 2013. Hitech had purchased the
equipment for P1,337,500 on January 1,2013,
and established a list selling price of P1,687,500
on the equipment. The present value on July
1,2013 of the rent payments over the lease
term discounted at 12% was P1,582,500. What
amount of profit on sale and interest income
should be recorded for the year ended
December 31,2013, respectively?

a.350,000 and 79,950

b.350,000 and 94,950

c.245,000 and 79,950

d.245,000 and 94,950


SEATWORK 3
Question 1
A deferred tax liability is computed using
a.expected future tax law regardless of whether
enacted or not
b.Current tax law unless a future enacted tax
law is different
c.Either current or expected future tax law
regardless of whether the expected future tax
law is enacted or not
d.Current tax law regardless of expected or
enacted future tax law
Question 2
Abigail Company reported in the income
statement for the first year of operations pretax
income of P6,000,000. In addition, the following
differences existed between the tax return and
accounting record:
The current year tax rate is 30% and the
enacted rate for future year is 40%. What
amount should be reported as deferred tax
expense for the current year?
a.1,040,000
b.780,000
c.1,480,000
d.1,240,000
Question 3
Regal Company paid P200,000 in January 2014
for fire insurance premiums on a two-year
policy on the entity's premises. Additionally, the
financial statements for the year ended
December 31, 2014 revealed that the entity
paid P1,050,000 in income tax during the year
and also accrued estimated litigation loss of
P2,000,000.
The lawsuit was resolved in February 2015 at
which time a P2,000,000 loss was recognized for
tax purposes. The entity followed the cash basis
for tax purposes. The tax rate is 30% for both
2014 and 2015.
What amount should be reported as net
deferred tax expense or benefit in the income
statement for 2014?
a.570,000 expense
b.630,000 benefit
c.570,000 benefit
d.630,000 expense
Question 4
Which is true about intraperiod tax allocation?
a.The purpose is to relate the income tax
expense to the items which affect the amount
of tax.
b.Intraperiod tax allocation arises because
certain items are recognized for accounting and
tax purposes.
c.The purpose is to allocate income tax expense
evenly over a number of accounting periods.
d.Intraperiod tax allocation is required for the
effect of accounting policy.
Question 5
In arriving at the profit before tax for the year
ended December 31, 2013, Jerry Company has
accrued royalties' receivable of P200,000 arid
interest payable of P250,000. Both royalties and
interest are dealt with on a cash basis in tax
computations. What is the net temporary
difference on December 31,2013?
a.450,000 deductible temporary difference
b.50,000 deductible temporary difference
c.450,000 taxable temporary difference
d.50,000 taxable temporary difference
Question 6
Dunn Company reported P900,000 income
before provision for income tax during the
current year.
To compute the provision for income tax, the
following data are provided:
What amount of current tax liability should be
reported at year-end?
a.225,000
b.125,000
c.100,000
d.210,000
Question 7
Intraperiod tax allocation
a.Arises because different income statement
items are taxed at different rates.
b.Involves the allocation of income taxes
between current and future periods.
c.Is not generally acceptable.
d.Associates tax effect with different items in
the income statement.
Question 8
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Zeff Company prepared the following
reconciliation for the first year of operations:
What amount should be reported as current tax
expense?
a.420,000
b.480,000
c.465,000
d.495,000
Question 9
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Chamber Company reported the following
differences between the book basis and tax
basis of assets and liabilities on December 31,
2013:
It is expected that the litigation liability will be
settled in 2014. The difference in accounts
receivable will result in taxable amounts of
P600,000 in 2014 and P400,000 in 2015. The
entity has a taxable income of P7,000,000 in
2013 and is expected to have taxable income in
each of the following two years. The income tax
rate is 30%. This is the first year of operations
and the operating cycle of the business is two
years.
What is the deferred tax expense?
a.300,000
b.60,000
c.240,000
d.360,000
Question 10
Income tax expense should be allocated to all of
the following, except
a.Discontinued operation
b.Other comprehensive income
c.Prior period error
d.Gross profit
Question 11
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING
Canterbury Company has one temporary
difference at the end of 2013 that will reverse
and cause taxable amounts of P1,100,000 in
2014, P1,200,000 in 2015 and P1,200,000 in
2016. The entity has also a deductible
temporary difference of P1,500,000. The pretax
accounting income for 2013 is P6,000,000 and
the tax rate is 30%. There are no deferred taxes
at the beginning of 2013.
What is the net deferred tax expense for 2013?
a.1,050,000
b.1,200,000
c.600,000
d.450,000
Question 12
Tantrum Company began operations at the
beginning of current year. At the end of the first
year of operations, the entity reported
P6,000,000 income before income tax in the
income statement but only P5,100,000 taxable
income in the tax return.
Analysis of the P900,000 difference revealed
that P500,000 was a permanent difference and
P400,000 was a temporary tax liability
difference related to a current asset. The
enacted tax rate for the current year and future
years is 30%.
What is the total income tax expense to be
reported in the income statement for the
current year?
a.1,950,000
b.1,650,000
c.1,530,000
d.1,800,000
Question 13 Tax depreciation in excess of book depreciation
- P800,000;
An entity shall offset a deferred tax asset and
deferred tax liability Accrual for product liability claim in excess of
actual claim - P1,200,000;
a.Under all circumstances.
Reported installment sales income in excess of
b.When the income taxes are levied by different taxable installment sales income - P2,600,000;
taxing authority. and
c.When the entity has no legal enforceable right Income tax rate - 30%.
to offset.
What is the deferred tax expense for 2013?
d.When the income taxes are levied by the
same taxing authority and the entity has a legal a.660,000
enforceable right to offset a current tax asset
b.1,020,000
against a current tax liability
c.1,380,000

d.360,000
Question 14

It is the aggregate amount included in the

determination of net income for the period in Question 16
respect of current tax and deferred tax.
THE NEXT ITEM(S) IS/ARE BASED ON THE
a.Deferred tax benefit FOLLOWING
b.Tax expense Zeff Company prepared the following
reconciliation for the first year of operations:
c.Current tax expense

d.Deferred tax expense What amount should be reported as total

income tax expense?

a.420,000
Question 15
b.495,000
THE NEXT ITEM(S) IS/ARE BASED ON THE
FOLLOWING c.480,000

d.465,000
Stabilizer Company reported taxable income of
P8,000,000 in the income tax return for the year
ended December 31,2013, the first year of
operations. Temporary differences between
financial income and taxable income for the
year are as follows:
Question 17 The income tax rate is 30%. There are no other
temporary or permanent differences.
Which statement is incorrect concerning tax
assets and liabilities? What amount should be reported as deferred
tax asset or liability on December 31, 2015?
a.Tax assets and liabilities shall present
separately from other assets and liabilities in a.720,000 liability
the statement of financial position.
b.720,000 asset
b.Deferred tax assets and liabilities shall be
c.1,320,000 liability
discounted.

c.Deferred tax assets and liabilities shall be d.1,320,000 asset

distinguished from current tax assets and
liabilities.
d.When an entity makes a distinction between
current and noncurrent assets and liabilities, it
shall classify deferred tax assets and liabilities as
noncurrent.
Question 18
Question 20
Stabilizer Company reported taxable income of
P8,000,000 in the income tax return for the year
ended December 31,2013, the first year of
operations. Temporary differences between
financial income and taxable income for the
year are as follows:

Tax depreciation in excess of book depreciation

All would require intraperiod tax allocation,
except - P800,000;

Accrual for product liability claim in excess of

a.Income from continuing operations
actual claim - P1,200,000;
b.Prior period error
Reported installment sales income in excess of
c.Change in accounting estimate taxable installment sales income - P2,600,000;
and
d.Discontinued operation
Income tax rate - 30%.

What is the deferred tax liability on December

Question 19 31, 2013?
Tower Company began operations on January 1, a.780,000
2014. For financial reporting, the entity
recognized revenue from all sales under accrual b.0
method. However, in the. income tax return,
c.240,000
the entity reported qualifying sales under the
installment method. The gross profit on these d.1,020,000
installment sales under each method was:
Question 21 The entity guaranteed the copy machines for
two years. Warranty costs are recognized on
All of the following would require intraperiod the accrual basis for financial accounting
tax allocation, except purposes and when paid for tax purposes.
a.Income from continuing operations Warranty expense accrued in 2013 is
P2,500,000, but only P500,000 of warranty cost
b.Prior period error is paid in 2013. It is expected that in 2014 and
2015, P1,000,000 and P1,000,000 respectively,
c.Change in accounting estimate
of warranty costs will be paid. In addition during
d.Discontinued operation 2013, P500,000 interest, net of 20% final
income tax, was received and earned, and
PI00,000 insurance premium on life insurance
policy that covered the life of the president was
Question 22
paid. The entity is the beneficiary. The tax rate
A temporary difference which would result in a is 30%. Pretax accounting income in 2013 was
deferredtax asset is P2,000,000. Any 2013 operating loss will be
carried to 2014.
a.Excess tax depreciation over accounting
depreciation What is the total tax expense?

b.Dividend received on share investment. a.600,000

c.Rent received in advance included in taxable b.0

at the time of receipt but deferred for
c.630,000
accounting purposes.
d.480,000
d.Tax, penalty or surcharge.

Question 24
Question 23
What is the current tax expense?
Bond Company started to manufacture in 2013
copy machines that are sold on the installment a.300
basis. The entity recognized revenue when
equipment is sold for financial reporting b.350
purposes, and when installment payments are
c.0
received for tax purposes. In 2013, the entity
recognized gross profit of P6,000,000 for d.420
financial reporting purposes, and P1,500,000 for
tax purposes. The amounts of gross profit
expected to be recognized for tax purposes in
2014 and 2015 are P2,500,000 and P2,000,000,
respectively.
Question 25
Justification for the method of determining
periodic deferred tax expense is based on the
concept of
a.Objectivity in the calculation of periodic
expense.
b.Recognition of asset and liability.
c.Matching of periodic expense to periodic
revenue.
d.Consistency of tax expense measurement
with actual tax planning strategies.
Question 26
The financial reporting basis of the plant assets
exceeded the tax basis because a different
method of reporting depreciation is used for
financial reporting purposes and tax purposes.
What is reported if there are no other
temporary differences?
a.Deferred tax liability
b.Deferred tax asset
c.Current tax asset
d.Current tax payable
Question 27
On December 31, 2014, Ramona Company
reported a deferred tax liability of P90,000
which was attributable to a taxable temporary
difference of P300,000. The temporary
difference is scheduled to reverse in 2016.
During 2015, a new tax law increased the
corporate tax rate from 30% to 40%. What
account and amount should be debited to
record the change in tax rate?
a.Retained earnings 9,000
b.Income tax expense 30,000
c.Income tax expense 9,000
d.Retained earnings 30,000
Question 28
Because an entity uses different methods to
depreciate equipment for accounting and
income tax purposes, the entity has temporary
differences that will reverse during the next
year and add to taxable income. Deferred taxes
that are based on these temporary differences
should be classified in the statement of financial
position as
a.Contra account to noncurrent assets
b.Noncurrent liability
c.Current liability
d.Contra account to current assets
Question 29
These are differences that will result in future
taxable amount in determining taxable income
of future periods.
a.Temporary differences
b.Deductible temporary differences
c.Taxable temporary differences
d.Permanent differences
Question 30

Which of the following statements in relation to

deferred tax assets or liabilities is true?

I. Deferred tax liabilities are the amounts of

income taxes payable in future periods in
respect of taxable temporary differences.

II. Deferred tax assets are the amounts of

income taxes recoverable in future periods in
respect of deductible permanent differences.

a.Both I and II

b.I only

c.II only

d.Neither I nor II

QUIZ 3
Question 1
Hilton Company reported pretax financial
income of P6,200,000 for the current year.
Included in other income was P200,000 of
interest revenue from government bonds held
by the entity.
The income statement also included
depreciation expense of P500,000 for a machine
costing P3,000,000. The income tax return
reported P600,000 as depreciation on the
machine. The enacted tax rate is 30% for the
current year and future years.
What is the current tax expense for the current
year?
a.1,770,000
b.1,800,000
c. 1,860,000
d.1,830,000
Question 2
Aris Company computed a pretax accounting
income of P5,000,000 for the first year of
operations. The tax rate is 30%.
What is the current tax expense?
a.1,500,000
b.1,110,000
c.1,410,000
d.1,140,000
Question 3
The amount of income tax applicable to
transactions that are not reported in the
continuing operations section of the income
statement is computed
a.By multiplying the item by the difference
between the effective income tax rate and the
statutory income tax rate.
b.As the difference between the tax computed
on the item based on the amount used for
financial reporting and the amount used in
computing taxable income.
c.By multiplying the item by the effective
income tax rate.
d.As the difference between the tax computed
based on taxable income without including the
item and the tax computed based on taxable
income including the item.
Question 4
Which of the following statements is incorrect
concerning tax assets and liabilities?
a.When an entity makes a distinction between
current and noncurrent assets and liabilities, it
shall not classify deferred tax assets and
liabilities as current.
b.Tax assets and liabilities shall be presented
separately from other assets and liabilities in
the statement of financial position.
c.Deferred tax assets and liabilities shall be
discounted.
d.Deferred tax assets and liabilities shall be
distinguished from current tax assets and
liabilities.
Question 5
Caleb Company has three financial statement
elements for which the year-end carrying
amount is different from the tax base:
The entity is the beneficiary of the officers' life
insurance policy. As a result of these
differences, what is the future taxable amount?
a.2,050,000
b.1,550,000
c.800,000
d.500,000
Question 6
The result of interperiod tax allocation is that
a.Tax liability shown in the statement of
financial position is equal to the deferred taxes
shown in the previous year's statement of
financial position plus the income tax expense
shown in the income statement.
b.Wide fluctuations in an entity's tax liability
payments are eliminated.
c.Tax expense shown in the income statement is
equal to the deferred taxes shown in the
statement of financial position.
d.Tax expense shown in the income statement
is equal to income taxes payable for the current
year plus or minus the change in the deferred
tax asset or liability balances for the year.
Question 7
In 2014, Tiger Company reported pretax
financial income of P5,000,000. Included in the
pretax financial income are P900,000 of
nontaxable life insurance proceeds received as
a result of the death of an officer, P1,200,000 of
estimated warranty expenses accrued on
December 31, 2014, and P200,000 of life
insurance premiums for a policy for an officer.
No income tax was previously paid during the
year and the income tax rate is 30%. What is the
income tax payable on December 31, 2014?
a.1,650,000
b.1,500,000
c.1,290,000
d.1,230,000
Question 8
Recognizing tax benefits in a loss year due to a
loss carry-forward requires
a.Creating a deferred tax liability.
b.Creating a deferred tax asset.
c.Creating a new carry-forward for the next
year.
d.Only a footnote disclosure.
Question 9
Canterbury Company has one temporary
difference at the end of 2014 that will reverse
and cause taxable amounts of P1,100,000 in
2015, P1,200,000 in 2016 and P1,200,000 in
2017. The entity has also a deductible
temporary difference of P1,500,000. The pretax
accounting income for 2014 is P6,000,000 and
the tax rate is 30%.  There are no deferred taxes
at the beginning of 2014. What is the net
deferred tax expense for 2014?
a.450,000
b.1,050,000
c.1,200,000
d.600,000
Question 10
Aries Company reported a deferred tax asset of
P90,000 on January 1, 2014. During the year,
the entity reported pretax financial income of
P3,000,000. Temporary differences of
P1,000,000 resulted in taxable income of
P2,000,000 for the year. On December 31, 2014,
the entity had cumulative taxable differences of
P700.000. The income tax rate is 30%. What
amount should be reported as deferred tax
expense for the current year?
a.300,000
b.600,000
c.120,000
d.210,000
Question 11
Intraperiod tax allocation
a.Associates tax effect with different items in
the income statement.
b.Arises because certain revenue and expenses
appear in the financial statements either before
or after they are included in the income tax
return.
c.Arises because different income statement
items are taxed at different rates.
d.Involves the allocation of income taxes
between current and future periods.
Question 12
Herbie Company has cumulative taxable
temporary differences on December 31, 2014
and December 31, 2013 of P1,350,000 and
P960,000 respectively. The tax rate enacted for
2014 is 40% while the tax rate enacted for
future years is 30%. Taxable income for 2014 is
P2,400,000 and there are no permanent
differences.  What is the pretax financial income
for 2014?
a.2,790,000
b.2,010,000
c.1,050,000
d.3,750,000
Question 13
Marie Company reported a pretax accounting
income of P5,000,000 for the current year. To
compute taxable income, the following items
are noted:
What amount should be reported as total
income tax expense for the current year?
a.1,254,000
b.1,500,600
c.1,350,000
d.1,650,000
Question 14
On January 1, 2014, North Company has spent
P600,000 in developing a new product. This cost
meets the definition of an intangible asset and
has been recognized in the statement of
financial position. The tax law allows this cost to
be deducted for tax purposes when incurred.
Thus, the entity has recognized this amount as
expense in 2014 for tax purposes. On December
31, 2014, the intangible asset is deemed
impaired by P50,000. What is the tax base for
the intangible asset on December 31, 2014?
a.0
b.550,000
c.600,000
d.650,000
Question 15
Tax expense should be allocated to all, except
a.Discontinued operation
b.Prior period error
c.other comprehensive income
d.Gross income
Question 16
Which of the following is an example of a
temporary difference that would result in a
deferred tax liability?
a.Rent revenue collected in advance when
included in taxable income before it is included
in pretax accounting income.
b.Investment losses recognized earlier for
accounting purposes than for tax purposes.
c.Use of straight-line depreciation for
accounting purposes and an accelerated rate for
income tax purposes.
d.Use of a shorter depreciation period for
accounting purposes than is used for income tax
purposes.
Question 17
Which of the following statements is correct
about the presentation of deferred tax assets
and liabilities?
a.All noncurrent deferred tax assets are netted
against noncurrent deferred tax liabilities.
b.Deferred tax assets are never netted against
deferred tax liabilities
c.Current deferred tax assets are netted against
current deferred tax liabilities.
d.Deferred tax assets are netted against
deferred tax liabilities if they relate to the same
tax authority.
Question 18
In computing the change in deferred tax asset
or liability, which of the following tax rate is
used?
a.Enacted future tax rate
b.Estimated future tax rate
c.Past years' tax rate
d. Current tax rate
Question 19
Boom Company prepared the following
reconciliation of financial income and taxable
income for 2014:
Cumulative taxable temporary difference is
P300,000 on January 1, 2014 and P500,000 on
December 31, 2014. The tax rate is 30%.
What amount should be reported as deferred
tax liability in the December 31, 2014 statement
of financial position?
a.60,000
b.150,000
c.90,000
d.0
Question 20
Viking Company reported in the income
statement for the current year pretax income of
P1,000,000. The following items are treated
differently in the tax return and in the
accounting records:
The tax rate is 30%. The entity is the beneficiary
of the officers' life insurance policies.  What is
the current provision for income tax for the
current year?
a.360,000
b.327,000
c.300,000
d.294,000
Question 21
Aloha Company provided the following
information on December 31, 2013:
The depreciation rates for accounting and
taxation are 15% and 25% respectively. The
deposits are taxable when received and
warranty costs are deductible when paid. An
allowance for doubtful debts of P250,000 has
been raised against accounts receivable for
accounting purposes but such debts are
deductible only when written off as
uncollectible. The tax rate is 30%. What amount
should be reported as deferred tax liability on
December 31, 2013?
a.120,000
b.156,000
c.36,000
d.81,000
Question 22
Which of the following statements is correct
regarding the provision for income taxes in the
financial statements of a sole proprietorship?
a.No provision for income taxes is required.
b.The provision for income taxes should be
based on business income using corporate tax
rate.
c.The provision for income taxes should be
based on the proprietor's total taxable income,
allocated to the proprietorship at the
percentage that business income bears to the
proprietor's total income.
d.The provision for income taxes should be
based on business income using individual tax
rate.
Question 23
Zambal Company reported depreciation of
P2,500,000 in the 2013 tax return. However, in
the 2013 income statement, the entity reported
depreciation of PI,000,000. The difference in
depreciation is a temporary difference that will
reverse over time. The tax rate is 30%. What
amount should be added to the deferred tax
liability on December 31,2013?
a.300,000
b.0
c.450,000
d.750,000
Question 24
A deferred tax liability arising from the use of an
accelerated method of depreciation for tax
purposes and the straight line method for
financial reporting purposes would be classified
as
a.A noncurrent liability.
b.An offset to the accumulated depreciation.
c.A current liability.
d.A current liability for the portion of the
temporary difference reversing within a year
and a noncurrent liability for the remainder.
Question 25
Which of the following statements is true about
intraperiod tax allocation?
a.The purpose is to relate the income tax
expense to the items which affect the amount
of tax.
b.It arises because certain revenue and expense
items appear in the income statement either
before or after they are included in the tax
return.
c.The purpose is to allocate income tax expense
evenly over a number of accounting periods.
d.It is required for the cumulative effect of
accounting changes but not for prior period
errors.
Question 26
On December 31, 2014, South Company has
revalued a property and has recognized the
increase in the revaluation in the financial
statements. The carrying amount of the
property was P8,000,000 and the revalued
amount was P10,000,000. However, the tax
base of the property was only P6,000,000. The
income tax rate is 30%. What is the deferred tax
asset or liability on December 31, 2014?
a.600,000 liability
b.1,200,000 asset
c.1,200,000 liability
d.600,000 asset
Question 27
Which of the following statements in relation to
income tax accounting is true?
I. Interest expense accrued but included in
taxable profit on a cash basis shall be classified
under deductible temporary differences.
II. Where accumulated depreciation on an asset
is greater than accumulated tax depreciation,
the amount shall be classified under deductible
temporary differences.
a.I only
b.Both I and II
c.II only
d.Neither I nor II
Question 28
Temporary differences arise when revenues are
taxable
I. After they are recognized in financial income
II. Before they are recognized in financial
income
a.Both I and II
b.Neither I nor II
c.I only
d.II only
Question 29
Regal Company paid P200,000 in January 2013
for fire insurance premiums on a two-year
policy. Additionally, the financial statements for
the year ended December 31,2013 revealed
that the entity paid P1,050,000 in income tax
during the year and also accrued estimated
litigation loss of P2,000,000. The lawsuit was
resolved in February 2014 at which time a
P2,000,000 loss was recognized for tax
purposes. The entity used the cash basis for tax
purposes. The tax rate is 30% for both 2013 and
2014.  What amount should be reported as
deferred tax asset on December 31, 2013?
a.570,000
b.540,000
c.630,000
d.600,000
Question 30

It is the amount attributable to an asset or

liability for tax purposes.

a.Tax base

b.Measurement base

c.Taxable amount

d.Carrying amount
 Question 3
QUIZ 4
On January 1, 2014, Dakak Company reported
Question 1 the following information in relation to a
defined benefit plan:
Brad Company provided the following
information for the current year: Fair value of plan assets 7,000,000

Current service cost 520,000 Projected benefit obligation 7,500,000

Actual return on plan assets 810,000 During the current year, the entity determined
that the current service cost was P1,400,000
Interest expense on PBO 590,000 and the discount rate is 10%.
Interest income on plan assets 350,000 The actual return on plan assets during the year
Loss on plan settlement 240,000 was P840,000. Other related information for the
current year is as follows:
Past service cost during the year 360,000
Contribution to the plan 1,200,000
Contribution to the plan 1,500,000
Benefits paid to retirees 1,500,000
What is the prepaid or accrued benefit cost for
the year? Decrease in projected benefit obligation due to

a.140,000 prepaid changes in actuarial assumptions 200,000

b.600,000 prepaid Present value of defined benefit obligation

settled 500,000
c.140,000 accrued
Settlement price of defined benefit obligation
d.600,000 accrued 400,000

What amount should be reported in the income

statement for the current year as employee
Question 2
benefit expense?
What are compensated absences?
a.1,450,000
a.A form of healthcare
b.2,150,000
b.Paid time off
c.2,050,000
c.Payroll deductions
d.1,350,000
d.Unpaid time off
Question 4
Which of the following statements is true in
relation to the recognition of past service cost?
a.Vested past service cost shall be recognized as
expense and unvested past service cost shall be
amortized over the remaining vesting period.
b.The expense recognized for a defined benefit
plan is not necessarily the amount of
contribution due for the period.
c.The defined benefit plan must be fully funded.
d.The obligation is measured on a discounted
basis.

b.Vested and unvested past service cost shall be

amortized over the remaining vesting period.
c.Vested and unvested past service cost shall be
recognized in retained earnings.
d.Vested and unvested past service cost shall be
expensed immediately.
Question 7
Liberty Company provided the following
information concerning a defined benefit plan
on January 1, 2014 prior to the adoption of PAS
19R:

Fair value of plan assets 9,500,000

Question 5 Unamortized past service cost 2,600,000

A profit-sharing plan requires an entity to pay a Projected benefit obligation (12,000,000)

specified proportion of the cumulative profit for
the year to employees who serve the entity Unrecognized actuarial gain ( 1,800,000)
throughout the year. The profit-sharing plan is Prepaid/accrued benefit cost - credit
a.A termination benefit. ( 1,700,000)

The transactions for the current year related to

b.Other long-term employee benefit.
the defined benefit plan are:
c.A short-term employee benefit.
Current service cost 1,800,000
d.A postemployment benefit.
Actual return on plan assets 1,100,000

Contribution to the plan 2,700,000

Question 6
Benefits paid to retirees 2,000,000
Which is incorrect concerning the recognition
Increase in projected benefit obligation due to
and measurement of a defined benefit plan?
changes
a.Actuarial assumptions are required to
in actuarial assumptions 400,000
measure the obligation and expense and there
is a possibility of actuarial gains and losses. Present value of defined benefit obligation
settled 600,000
Settlement price of defined benefit obligation
800,000
What is the balance of the prepaid/accrued
benefit cost on December 31, 2014?
a.1,900,000 credit
b.1,900,000 debit
c.2,300,000 debit
d.2,300,000 credit
Question 8
In computing the current service cost
component of pension expense
a.The projected benefit obligation using future
compensation level provides a realistic measure
of present pension obligation and expense.
b.The actual and estimated return on pan assets
should be recognized.
c.The accumulated benefit obligation provides a
more realistic measure of the pension
obligation on a going concern basis.
d.An entity should employ an actuarial funding
method to report pension expense that best
reflects the cost of benefits to employees.
Question 9
An entity contributes to an industrial pension
plan that provides a pension arrangement for its
employees. A large number of other employers
also contribute to the pension plan, and the
entity makes contributions in respect of each
employee. These contributions are kept
separate from corporate assets and are used
together with any investment income to
purchase annuities for retired employees. The
only obligation of the entity is to pay the annual
contributions. This pension scheme is a
a.Defined benefit plan only.
b.Multiemployer plan and a defined benefit
scheme.
c.Defined contribution plan only.
d.Multiemployer plan and a defined
contribution scheme.
Question 10
Liberty Company provided the following
information concerning a defined benefit plan
on January 1, 2014 prior to the adoption of PAS
19R:
Fair value of plan assets 9,500,000
Unamortized past service cost 2,600,000
Projected benefit obligation (12,000,000)
Unrecognized actuarial gain ( 1,800,000)
Prepaid/accrued benefit cost - credit
( 1,700,000)
The transactions for the current year related to
the defined benefit plan are:
Current service cost 1,800,000
Actual return on plan assets 1,100,000
Contribution to the plan 2,700,000
Benefits paid to retirees 2,000,000
Increase in projected benefit obligation due to
changes
 in actuarial assumptions 400,000
Present value of defined benefit obligation
settled 600,000
Settlement price of defined benefit obligation
800,000
What is the net amount of "remeasurements"
for 2014?
a.250,000
b.550,000
c.400,000
d.450,000
Question 11
Which of the following statements is incorrect
in relation to termination benefits?
a.A benefit resulting from termination of
employment at the request of an employee
without an entity offer is not a termination
benefit.
b.A benefit that is in any way dependent on
providing service in the future is a termination
benefit.
c.A benefit resulting from mandatory
retirement is a postemployment benefit rather
than a termination benefit.
d.The event that gives rise to an obligation for
termination benefit is the termination of
employment.
Question 12
The vested benefits in a pension plan represent
a.Benefits that are not contingent on the
employee's continuing in the service of the
employer.
b.Benefits to be paid to the retired employee.
c.Benefits to be paid to the retired employee.
d.Benefits accumulated in the hands of trustee.
Question 13
Plan assets are assets held by a long-term
benefit fund and must satisfy all of the following
conditions, except
a.The assets in the fund can be returned to the
entity even if the remaining assets are
insufficient to meet all employee benefit
obligations.
b.The assets in the fund are not available to the
reporting entity's own creditors.
c.The assets in the fund are available to pay
only employee benefits.
d.The assets are held by an entity, the fund
itself, that is legally separate from the reporting
entity.
Question 14
When an entity amends a pension plan, past
service cost should be
a.Treated as a prior period adjustment because
no future periods are benefited.
b.Reported as an expense in the period the plan
is amended.
c.Amortized over the remaining service period
of employees.
d.Recorded in other comprehensive income.
Question 16
An entity shall recognize the expected cost of
profit sharing and bonus plans when
I. The entity has a present legal or
constructive obligation to make such payment
as a result of past event.

II. A reliable estimate of the obligation can

Question 15 be made.
On January 1, 2014, Maximus Company had a a.Both I and II
projected benefit obligation of P10,000,000 and
a pension fund with a fair value of P9,200,000. b.II only

The entity provided the following information c.I only

related to the pension plan during the current
year: d.Either I or II

Current service cost 1,200,000

Actual return on the pension fund 250,000 Question 17

Under which category should lump sum benefit

Benefits paid to retirees 1,100,000
expressed as a certain percent of the final salary
Contribution to the pension fund 1,050,000 for each year of service and actuarial gain be
accounted for?
Discount rate 9%
a.Lump sum benefit should be accounted for
Expected return on pension fund 10% under short-term employee benefit and
What is the amount of pension expense for the actuarial gain should be accounted for under
current year? defined benefit plan.

a.1,850,000 b.Lump sum benefit and actuarial gain should

be accounted for under defined benefit plan.
b.1,050,000
c.Lump sum benefit and actuarial gains should
c.2,100,000 be accounted for under defined contribution
plan.
d.1,272,000
d.Lump sum benefit should be accounted for
under defined benefit plan and actuarial gain
should be accounted for under defined
contribution plan.
Question 18 Question 20

The return on plan assets On January 1, 2013, Rachel Company reported

the fair value of plan assets at P6,700,000 and
a.Includes interest, dividends and change in the projected benefit obligation at P7,600,000. The
fair value of the plan assets. entity revealed the following for the current
b.Is equal to the change in the fair value of the year:
plan assets during the year. Current service cost 1,450,000
c.Is equal to the expected rate of return times Past service cost 300,000
the fair value of plan assets at the beginning of
the period. Discount rate 10%

d.Is equal to the discount rate times the fair Actual return on plan assets 500,000
value of the plan assets at the beginning of the
Contribution to the plan 1,500,000
period.
Benefits paid to retirees 800,000

What is the projected benefit obligation on

Question 19
December 31?
The defined benefit obligation is the measure of
a.9,050,000
pension obligation that

a.Is not sanctioned under international financial b.9,310,000

reporting standards for reporting the current c.9,010,000
service cost component of pension expense.
d.8,250,000
b.Is required to be used for reporting the
current service cost component of pension
expense.
Question 21
c.Requires pension expense to be determined
The service cost component of the net periodic
solely on the basis of the plan formula applied
pension cost is measured using the
to years of service to date and based on existing
salary levels. a.Projected benefit obligation.
d.Requires the longest possible period for b.Unfunded accumulated benefit obligation.
funding to maximize the tax deduction.
c.Actual return on plan assets.

d.Unfunded vested benefit obligation.

Question 22 Question 23

On January 1, 2014, Dakak Company reported An employer's obligation for postretirement

the following information in relation to a
defined benefit plan:
Fair value of plan assets 7,000,000
Projected benefit obligation 7,500,000
During the current year, the entity determined
that the current service cost was P1,400,000
and the discount rate is 10%.
The actual return on plan assets during the year
was P840,000. Other related information for the
current year is as follows:
Contribution to the plan 1,200,000
Benefits paid to retirees 1,500,000
Decrease in projected benefit obligation due to
changes in actuarial assumptions 200,000
Present value of defined benefit obligation
settled 500,000
health benefits that are expected to be
provided to an employee must be fully accrued
by the date the
a.Employee retires
b.Benefits are utilized
c.Employee is fully eligible for benefits
d.Benefits are paid
Question 24
It is a benefit plan under which an entity pays a
fixed contribution into a separate fund and will
have no legal or constructive obligation to pay
further contribution if the fund becomes
insufficient to pay employee benefits.
a.Defined benefit pain
b.Defined contribution plan

Settlement price of defined benefit obligation c.Postemployment benefit plan

400,000
d.Multiemployer plan
What is the fair value of plan assets on
December 31, 2014?

a.8,200,000 Question 25

Which statement characterizes defined

b.7,540,000
contribution plan?
c.7,140,000
a.The employer's obligation is satisfied y making
d.7,000,000 the appropriate amount of periodic
contribution.

b.The investment risk is borne by the employer.

c.Defined contribution plans are more complex

than defined benefit plans.
d.Contributions are made in equal amounts by Question 28
employer and employees.
Brad Company provided the following
information for the current year:

Question 26 Current service cost 520,000

Brad Company provided the following Actual return on plan assets 810,000
information for the current year:
Interest expense on PBO 590,000
Current service cost 520,000
Interest income on plan assets 350,000
Actual return on plan assets 810,000
Loss on plan settlement 240,000
Interest expense on PBO 590,000
Past service cost during the year 360,000
Interest income on plan assets 350,000
Contribution to the plan 1,500,000
Loss on plan settlement 240,000
What is the total defined benefit cost?
Past service cost during the year 360,000
a.1,820,000
Contribution to the plan 1,500,000
b.900,000
What is the employee benefit expense for the
current year? c.740,000

d.960,000
a.1,470,000

b.1,350,000
Question 29
c.1,710,000

d.1,360,000 Short-term employee benefits include all of the

Question 27
These are the changes in the present value of
the defined benefit obligation resulting from
experience adjustments and the effects of
changes in actuarial assumptions.
a.Actuarial gains and losses
following, except
a.Wages, salaries and social security
contributions.
b.Short-term compensated absences.
c.Nonmonetary benefits, such as medical care,
housing, car and free and subsidized goods.

d.Profit-sharing and bonuses payable in more

b.Gains and losses
c.Actual gains and losses
d.Actual return on plan assets
than twelve months after the end of the period
in which the employees render the related
service.
Question 30

On January 1, 2014, Dakak Company reported

the following information in relation to a
defined benefit plan:

Fair value of plan assets 7,000,000

Projected benefit obligation 7,500,000

During the current year, the entity determined

that the current service cost was P1,400,000
and the discount rate is 10%.

The actual return on plan assets during the year

was P840,000. Other related information for the
current year is as follows:

Contribution to the plan 1,200,000

Benefits paid to retirees 1,500,000

Decrease in projected benefit obligation due to

changes in actuarial assumptions 200,000

Present value of defined benefit obligation

settled 500,000

Settlement price of defined benefit obligation

400,000

What is the projected benefit obligation on

December 31, 2014?

a.9,650,000

b.7,650,000

c.7,950,000

d.7,450,000