CURRENT LIABILITIES_PROVISIONS_CASH TO ACCRUAL BASIS_CASH

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1. NI Co. has the following liabilities as of December 31, 20x1:

Trade account payable net of debit balance in supplier’s account 1,200,000

of ₱20,000,net of unreleased checks of ₱16,000, and net of post-
dated checks ₱8,000.
Credit balance in customer’s accounts 8,000
Financial liability at FVPL 200,000
Bonds payable maturing in 10 equal annual instalments of P400,000 4,000,000
12%, 5-year note payable issued on 01 October 20x1 400,000
Deferred tax liability 20,000
Unearned Rent 16,000
Contingent liability 40,000
Reserve for contingencies 100,000

How much is the total current liabilities?

Refinancing agreement – no discretion

2. PE Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is
maturing on July 1, 20x2. On February 1, 20x2, PE Co. entered into a
refinancing agreement with a bank to refinance the loan on a long-term
basis. Both parties are financially capable of honoring the agreement’s
provisions. PE’s financial statements were authorized for issue on March
12, 20x2. How much is presented as current liability in relation to the
loan in PE 20X1 year-end financial statements?

Refinancing agreement – with discretion

3. QE Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is
maturing on July 1, 20x2. On February 1, 20x2, QE Co. entered into a
refinancing agreement with a bank to refinance the loan on a long-term
basis. Both parties are financially capable of honoring the agreements
provisions. QE has the discretion to refinance or roll over the loan for at
least twelve months from December 31, 20x1 under an existing loan facility.
QE’s financial statements were authorized for issue on March 15, 20x2. How
much is presented as current liability in relation to the loan in QE’s 20x1
year-end financial statements?

Refinancing agreement-completed as of end reporting period

4. RC Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is
maturing on July 1, 20x2. On December 1, 20x1, RC Co. entered into a
refinancing agreement with a bank to refinance the loan on long-term basis.
The refinancing and roll over transaction was completed on December 31,
20x1. How much is presented as current liability in relation to the loan in
RC’s 20x1 year-end financial statements?

Refinancing agreement-with interest payable

5. SO Co. has a 10%, ₱4,000,000 loan payable as of December 31, 20x1 that is
maturing on July 1, 20x2. The loan is dated July 1, 19x1 and pays annual
interest every July1. On February 1, 20x2, SO Co. entered into a
refinancing agreement with a bank to refinance the loan on a long-term
basis. Both parties are financially capable of honoring the agreement’s
provisions. SO has the discretion to refinance or roll over the loan for at
least twelve months from December 31, 20x1 under an existing loan facility.
SO’s financial statements were authorized for issue on March 15, 20x2. How
much is presented as current liability in SO’s 20x1 year-end financial
statements?

Breach of loan agreement-grace period received after year-end

6. On January 1, 20x1, TS Co. took a 3-year, ₱4,000,000 loan from a bank. The
loan agreement requires TS to maintain a current ratio of 2:1. If the
current ratio falls below 2:1, the loan becomes payable on demand. As of
December 31, 20x1, TS’s current ratio is 1.8:1. On January 5, 20x2, the
bank agrees not to collect the loan in 20x2 and gave TS 12 months to
rectify the breach of loan in TS’s 20x1 year-end financial statements?

Breach of loan agreement-grace period received after year-end

7. On January 1, 20x1, DS Co. took a 3-year, ₱4,000,000 loan from a bank. The
loan agreement requires DS to maintain a current ratio of 2:1. If the
current ratio falls below 2:1, the loan becomes payable on demand. As of
December 31, 20x1, DS’s current ratio resulted to 1.8:1 and the bank agreed

Albert I. Rivera, CPA, MBA, CRA

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not to collect the loan in 20x2 and gave DS 12 months to rectify the breach
of loan agreement. How much is presented as current liability in relation
to the loan in DS 20x1 year-end financial statements?

Obligation payable on demand

8. On December 31, 20x1, SR Co. has a ₱4,000,000 note payable on demand.
However on December 31, 20x1, there is no indication that the payee on the
note will demand payment over the next 12 months. How much is the current
liability in relation to the note in SR’s 20x1 year-end financial
statements?

Unearned revenue-sale of goods

UN Co. requires advance payment for custom-built guitar effects, gadgets, and
racks. The records of UN Co. show the following:
 Unearned revenue, January 1, 20x1 ₱4,000,000
 Advances received during 20x1 40,000,000
 Advances applied to orders shipped in 20x1 32,000,000
 Advance pertaining to orders to orders cancelled in 20x1
1,200,000

9. How much is the current liability if the advance payments received are non-
refundable?
10. How much is the current liability if the advance payments received are
refundable?

Unearned subscription – monthly

CC CO. sells subscriptions for an industry publication published monthly and
shipped to subscribers every 15th of the month. However, subscriptions
received after the November 1 cut-off date is held for publication in the
following year. Receipts during 20x1 for subscriptions were made evenly.
Information on subscriptions is shown below:

Unearned revenue – January 1, 20x1 ₱ 12,000,000

Receipts from subscriptions during 96,0000,000
20x1

11. How much is the unearned revenue balance on December 31, 20x1?
12. How much is the revenue from subscriptions during 20x1?

Unearned subscription- semi-annual

ES Co. sells one-year subscriptions for an industry publication published
semiannually and shipped to subscribers on May 1 and November 1. Subscriptions
received after April 1 and October 1 cut-off dates are held for the next
publication. Receipts during 20x1 for subscriptions were made evenly.
Information on subscriptions is shown below:

Unearned revenue – January 1, 20x1 ₱12,000,000

Receipts from subscriptions during 96,000,000
20x1

13. How much is the revenue balance on December 31, 2x10?

Gift certificates
14. IF Co. sells gift certificates that expire one year after their
issuance. Information on a gift certificates is shown below:

Unearned revenue – gift certificates. ₱2,400,000

Jan 1, 20x1
Gift certificates sold during 20x1 4,000,000
Prior year gift certificates redeemed 1,600,000
in 20x1
Gift certificates sold and redeemed in 2,800,000
20x1

IF’s past experience indicates that 10% of gift certificates sold will not be
redeemed. How much is the revenue on December 31, 20x1?

Deposits for returnable containers

15. IU Co. requires deposits from customers for the container goods sold.
The customers are refunded for deposits received when the containers are
returned within two years from date of sale of the related goods. Deposits
for the containers not returned within the limit are regarded as proceeds
from retirement of the containers.

Albert I. Rivera, CPA, MBA, CRA

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Information for 20x3 is as follows:
Container deposits at December 31, 20x2 from deliveries in:
20x1 ₱80,000
20x2 180,000 ₱260,000
Deposits for containers delivered in 20x3 360,000
Deposits for containers returned in 20x3 from
deliveries in:
20x1 ₱36,000
20x2 100,000
20x3 184,000 320,000

How much is the liability for deposits on returnable containers on December

31, 20x3?

Best estimate
16. In 20x1, BABU Co. received a court order requiring the cleanup of
environmental damages caused by one of BABU’s factory. BABU’s has no other
realistic alternative but to comply with the court order. Other entities
have incurred around ₱60M for similar clean-up; however, BABU’s best
estimate of the cost of cleanup is ₱80M. How much is the provision to be
recognized?

Expected value
17. In 20x1, CABU Co. recalled a product due to a possible defect caused by
a manufacturing factory equipment. The products recalled will be repaired
free of charge. CABU is uncertain whether all products recalled will have
possible defect. However, the following estimate was made by estimate was
made by CABU’s engineers and managerial and approved by the board of
directors.
Repair cost Probability
80,000,000 5%
60,000,000 20%
40,000,000 35%
20,000,000 40%

How much is the provision to be recognized?

Mid point
18. In 20x1, a lawsuit was filed against DABU Co. of patent infringement.
The plaintiff is claiming ₱40M in damages DABU’S legal counsel believes
that is probable that DABU will lose the lawsuit and pay damages of not
less than ₱40M but not more than ₱400M. the probability of any amount
within the range is a s likely as any other amount also within the range.
The plaintiff has offered to settle the lawsuit out of court for ₱360M but
DABU did not agree to the settlement. How much is provision to be reported
in DABU’s year-end financial statement?

Reimbursement
19. FABU Co. is engaged in logistics services. During the year, a warehouse
was destroyed by fire. It was estimated that FABU will probably pay around
200M in damages caused to the goods owned by customers that were contained
in the destroyed warehouse. The contents of the warehouse at any given
point of time are insured 80M. FABU’s claim for the insurance has been
approved for payment by the insurance company. How much is the provision to
be recognized?

Onerous contract – purchase commitment

20. On January 1, 20x1, GABU Co. signed a three year, non-cancelable
purchase contract, which allows GABU Co. to purchase up to ₱60,000 units of
a microchip annually from HABU Co. at ₱100 per unit and guarantees a
minimum annual purchase of ₱15,000 units. At year-end, it was found out
that the goods are absolute. GABU had ₱10,000 units of this inventory at
December 31, 20x1, and believes these parts can be sold as scrap for ₱20
per unit. How much is the loss on purchase commitment?

Warranty Expense
21. JABU FUNNY Co. provides 3-year warranty for the products it sells. JABU
estimates that warranty costs ₱400 per unit sold. As of January 1, 20x1,
the liability for warranty has a balance of ₱8000,000 for units sold in
20x0. During the year JABU sold 5,000 units and actual warranty costs
incurred were ₱1,240,000.How much is the warranty expense recognized in
20x1?

22. How much is the balance of the warranty obligation as December 31, 20x1?

Albert I. Rivera, CPA, MBA, CRA

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Warrant liability
23. KABU provides2-year warranty for products sold. Estimated cost of
warranty is 2% in the year of sale and 4% after the year of sale.
Information on KABU’s sale is shown below:

Year Sale Actual Warranty Costs

20x1 40,000,000 1,600,000
20x2 48,000,000 2,000,000

How much is the balance of the warranty obligation as of December 31, 20x2
assuming those pertaining to 20x1 sales have not yet expired as of 20x2 year-
end?

Premium expense
24. LABU Co. launched a sales promotion in
returned to LABU plus ₱200,000, customers
knives. LABU estimates that 40% of the
Information on transactions during the year
20x1.For every ten empty packs
will receive a set of kitchen
packs sold will be redeemed.
is as follows:

Units Amount
SALES 500,000 3B
Sets of kitchen knives
purchased (₱800 per set) 300,000 240M
Number of packs redeemed 45,000

How much is the premium expense in 20x1?

Premium liability
25. MABU FRANK Co. launched a sales promotion in 20x1. For every five
bottles returned to MABU, customers will receives a T-shirt. The unit cost
of the T-shirt Is ₱400. MABU estimates that 80% of sales will be redeemed.
Additional information is as follows:

Units
Sales in 20x1 500,000
Sales in 20x2 900,000
T-shirts distributed in 20x1 60,000
T-shirts distributed in 20x2 147,000

How much is the liability for premiums as of December 31, 20x2 ?

Liability for refunds

26. NABU RECKLESSLY BOLD Co. has a policy of refunding purchases to
unsatisfied customers even though NABU is under no legal obligation to do
so. NABU’s policy of making refunds is made known to the public. Past
experience shows that 10% of sales are returned and customers are refunded.
It also estimated that 60% of sales returns are from sales on account. In
20x1, NABU Co. had ₱4,000,000 total sales, 60% of which were on account.
How much is the provision to be recognized?

Guarantee for indebtedness of others

27. On January 1, 20x1, PABU Co. guaranteed a ₱4,000,000 loan obtained by
RABU, Inc. from a bank. On December 31, 20x1, RABU defaulted on its loan
and it became probable that PABU will be held liable to the bank for
₱4,000,000 loan taken by RABU. How much is the provision to be recognized?

Cash/Accrual Basis - Sales

The following information was taken from the records of Feliciano Co.
Cash sales - gross 2,000,000
Trade accounts receivable- beg. 2,400,000
Trade accounts receivable – end 1,600,000
Trade notes receivable increased by 1,200,000
Collections on receivables 4,000,000
Sales returns and discounts (inclusive of 20,000 payments to 80,000
customers)
Write-offs of accounts receivable 40,000
Recoveries of accounts receivable written-off (included in 16,000
collections)
Trade notes receivable discounted (Note receivable was 120,000
directly credited)

28. How much is the net sales under cash basis of accounting?
29. How much is the net sales under accrual basis of accounting?

Albert I. Rivera, CPA, MBA, CRA

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Purchases and cost of goods sold

The following information was taken from the records of Lagasca Company
Cash purchases – gross 1,200,000
Trade accounts payable – beg. 2,000,000,
Trade accounts payable – end 1,600,000
Trade notes payable decreased by 800,000
Cash payments on payables 4,000,000
Purchase returns and discounts (inclusive of 60,000 receipts 80,000
from suppliers)
Inventory increased by 400,000

30. How much is the net purchases under cash basis of accounting?
31. How much is the cost goods sold under cash basis of accounting?
32. How much is the net purchases under accrual basis of accounting?
33. How much is the goods sold under accrual basis of accounting?

Other items of income

Celestino Co. has the following information:
Accrued rent income – January 1 1,600,000
Accrued rent income – December 31 800,000
Unearned rent, January 1 1,200,000
Unearned rent, December 2,000,000
Rental payments received 4,000,000

34. How much is the rent income under cash basis accounting?
35. How much is the rent income under accrual basis of accounting?

Other items of income

36. The following information was taken from the records of Cabuco Inc.
Accrued rent income –January 1 1,600,000
Accrued rent income –December 31 800,000
Unearned rent, January 1 1,200,000
Unearned rent, December 2,000,000
Rent income under account basis 2,400,000
How much is then rent income under cash basis?

Other items of expense

37. Correa Co. has the following information:
Prepaid insurance –January 1 1,600,000
Prepaid insurance –December 31 800,000
Insurance payable – Decreased by 1,200,000
Insurance payments 4,000,000
How much is the rent expense under accrual basis?

Other items of expense

38. The following information was taken from the records of Alvarez Co.

Prepaid insurance – January 1 1,6900,000

Prepaid insurance - Dec 31 800,000
Insurance payable decreased by 1,200,000
Rent expense under accrual basis 3,600,000

How much is the rent expense under cash basis?

CASH FLOW STATEMENT

Analysis of Cash account Method
The movements in the cash account of Austin Co. during 20x2 are shown below.
Cash
Beg 400 7,600 Purchases
Sales 12,000 2,400 Operating expenses
Interest income 40 60 Interest expenses
Rent income 540 140 Income taxes
Divided income 80
200 Investment in FVOCI
Sale of held for trading securities 1,600 2,200 Purchase of equipment
Sale of old building 1,040 Loan granted to
260 employee
Collection of non-trade note 120 Payment of loan

Albert I. Rivera, CPA, MBA, CRA

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480 borrowed
Proceeds from Bank loan 3,200 400 Reacquisition of shares
Issuance 1,940 180 Dividends
7,040 end

39. How much is the cash flows from operating activities?

40. How much is the cash flows from investing activities?
41. How much is the cash flows from financing activities?

T-Account Method
ALANIS had the following information during 20x2:
Accounts receivables, January 1, 20x2 2,400
Accounts receivables, December 31, 20x2 1,600
Sales on account and cash sales 32,000
Bad debts expense 800
Accounts payable, January 1, 20x2 1,400
Accounts payable, December 31, 20x2 800
Cost of sales 16,000
Increase in inventory 3,600
Operating expenses on accrual basis 4,880
Increase in accrued payables for operating 1,640
expenses
Decrease in prepaid operating expenses 1,560
Property, plant, and equipment, January 1, 20x2 7,200
Property, plant, and equipment, December 31, 20x2 10,800
Additional information
 There were no write-offs of accounts receivables during the year.
 Equipment with an accumulated depreciation of ₱800 was sold during the
year for ₱480 resulting to a gain on sale of ₱60.

42. How much is the cash receipts from customers?

43. How much is the cash payments to suppliers?
44. How much is the cash payments for operating expenses?
45. How much is the cash payment for acquisition of property, plant, and
equipment?

T-Account Method-Cash receipts (w/ write-off)

46. Kirsten Co. has the following information as of December 31, 20x1:
Jan. 1 Dec. 31
Accounts receivables 100,000 250,000
Allowance for bad debts 15,000 20,000
Net credit sales 850,000
Bad debt expense 60,000
Recoveries 20,000

How much is the total cash receipts from customers during the period?

Cash flow from operating activities – Indirect method

47. Kurt Co. has the following information as of December 31, 20x2:

Jan. 1 Dec. 31
Accounts receivable 16,000 20,000
Allowance for bad debts (400) (1,000)
Prepaid rent 3,840 3,200
Accounts payable 6,800 8,800

Kurt reported profit of ₱8,800 for the year, after depreciation expense of
₱200. Gain on sale of Equipment of ₱240, and restructuring and other
provisions of ₱400. None of the provisions recognized during the period
affected cash.

How much is the cash flows from operating activities?

Cash flow from investing and financing activities

Karen Co. had the following information for 20x2:
 Acquired 3-month treasury bills for ₱200,000
 Acquired equipment with a purchase price of ₱4,000,000 by paying 20% in
cash and issuing a note payable for the balance. There were no payments
made on the note during the year.

Albert I. Rivera, CPA, MBA, CRA

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 Acquired land with fair value of ₱3,200,000 by issuing shares with
aggregate par value of ₱2,400,000. The excess is credited to share
premium.
 Extended a ₱1,600,000 loan to a director.
 Borrowed ₱1,280,000 from a bank. Used the cash proceeds as follows:
₱800,000 for additional working capital and ₱480,000 to settle scrip
dividends declared in 20x1
 Settled an outstanding note payable by issuing shares with aggregate par
value of ₱800,000. Share premium resulted from the transaction amounted
to ₱280,000.

48. How much is the net cash flows from (used in) investing activities?
49. How much is the net cash flows from (used in) financing activities?

OPERATING SEGMENT
Quantitative thresholds
50. AIR Co. is preparing its year-end financial statements and has identified the following operating segments:

Segments Revenues Profit (loss) Assets

A 4,000,000 800,000 56,000,000
B 4,800,000 560,000 72,000,000
C 1,080,000 (280,000) 48,000,000
D 960,000 (2,800,000) 4,000,000
E 1,160,000 200,000 5,600,000
Totals 12,000,000 (1,520,000) 185,600,000
What are the reportable segments?
Management approach and Aggregation
51. AIR Co. engages in five diversified operations namely, operations A,B, C, D and E Information on these
segments are shown below:
Segments Revenues Profit (loss) Assets
A 3,200 800 40,000
B 3,200 400 8000
C 200 40 4,000
D 600 80 8,000
E 800 280 24,000
Totals 8,000 1,600 84,000

Additional information:
 For internal reporting purposes segments A and B are considered as one operating segment.
 Segment E is considered as an operating segment for internal decision making purposes.
 Segments C and D have similar economic characteristics and share a majority of the aggregation criteria

What are the reportable segments?

Limit on external revenue

52. AIR Co. is preparing its year-end financial statements and has identified the following operating segments:

External Inter-segment Total

Segments revenues revenues revenues Profit Assets
A 4,800,000 2,400,000 7,200,000 2,800,000 48,000,000
B 1,600,000 400,000 2,000,000 1,600,000 28,000,000
C 1,000,000 - 1,000,000 400,000 4,000,000
D 800,000 - 800,000 320,000 3,200,000
E 600,000 - 600,000 280,000 2,800,000
F 400,000 - 400,000 200,000 2,000,000
Totals 9,200,000 2,800,000 12,000,000 5,600,000 88,000,000

Management believes that between segments C, D, E and F, segment C is most relevant to external users of
financial statements. What are the reportable segments?

Major customers
53. AIR Co. has the following information its reporting segments.

External Inter-segment Total

Segments revenues revenues revenues Profit Assets
A 4,800,000 2,400,000 7,200,000 2,800,000 48,000,000
B 1,600,000 400,000 2,000,000 1,600,000 28,000,000
C 1,000,000 - 1,000,000 400,000 4,000,000

Albert I. Rivera, CPA, MBA, CRA

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D 800,000 - 800,000 320,000 3,200,000
E 600,000 - 600,000 280,000 2,800,000
F 400,000 - 400,000 200,000 2,000,000
Totals 9,200,000 2,800,000 12,000,000 5,600,000 88,000,000

AIR Co. shall provide disclosure for major customers if revenues from transactions with single external customer
amount to how much?

INTERIM REPORTING
Recognition and measurement in interim periods
54. AIR Co. reports profit before tax of ₱1,500,000 in its 2 nd quarter
interim financial statements before consideration for the following:
a. Inventory with a carrying amount ₱200,000 has a net realizable value of
₱120,000.it is expected that the decline in value will reverse in the
3rd quarter.
b. An investment property measured under the cost model has a carrying
amount of ₱350,000 but its recoverable amount is ₱210,000.
c. An investments in FVPL measured at acquisition cost of ₱200,000 has a
fair value of ₱250,000 as at the end of 2 nd quarter however, the
increase in fair value is expected to be temporary.
d. No depreciation is recognized during the 2nd quarter. The annual
straight-line depreciation of items of PPE is ₱600,000.
e. ABC co. has a policy of providing 12 days paid vacation leaves for its
employees. The vacation leaves are vesting and accumulating amounting to
₱440,000 for the year. However, only ₱100,000 worth paid vacation leaves
has been availed of during the quarter.

How much is the adjusted profit before taxes for current quarter?

Cost incurred unevenly

55. AIR Co. is preparing its interim financial statements for the period
ended March 31, 20x1. The following relate to the transactions during the
first quarter:
a. Total sales for the interim period was ₱4,000,000
b. Cost of sales was ₱1,800,000.
c. AIR is liable for 5% commission on its sales to its sales
representatives and agents. No commission has yet been paid as of March
31, 20x1.
d. The allowance for doubtful accounts has a balance of ₱20,000 as of
January 1,20x1 the required balance as of March 31, 20x1 is ₱60,000.
There were no write-offs or recoveries during the period.
e. A building with historical cost of ₱4, 800,000 is being depreciated over
5 years using straight line method.
f. AIR prepaid one-year insurance on its assets for ₱160,000 on January
1,20x1.
g. Property taxes for 20x1 amounting to₱104,000 was paid in January.
h. Advertising costs of ₱200,000 were incurred in February on promotional
activities held on Valentine’s Day.
i. Year-end staff bonuses are expected to be around ₱368,000 employees
become entitled to the bonuses as they provide services to AIR during
the year.
j. AIR’s president is entitled to 10% bonus on profit before bonus taxes
k. Loss on sale of used equipment on March 2, 20x1 was ₱120,000.
l. AIR incurred ₱48,000 on unanticipated repairs on its factory equipment
on March 16, 20x1.
m. Due to the unexpected breakdown of the factory equipment on March 16,
20x1, AIR has planned a major periodic overhaul of its other equipment
to be held annually starting December 31, 20x1. The cost of the major
planned periodic overhaul is estimated at ₱192,000.
n. AIR leases one of its retail stores. Monthly rentals are ₱20,000,
however, the lease contracts provide for a contingent rent equal to 2%
of the excess of sales over ₱3,600,000.
o. AIR’s budget for 20x1 included charitable contributions of ₱96,000 and
employee training costs of ₱52,000. None of those costs were incurred as
of March 31, 20x1.
p. Other operating expenses incurred during the first quarter totalled
₱480,000.

Albert I. Rivera, CPA, MBA, CRA

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How much is the profit (loss) for the first quarter ended March 31, 20x1?

Provision-Changes in estimates
56. Among the transactions of AIR WIPEOUT Co. for the first two quarters of
20x1 were the following:
 AIR recognized a ₱400,000 write-down in its inventory during the first
quarter. AIR had expected that the write down will reverse in the second
quarter, and in fact, in the second quarter, the recovery exceeded the
previous write-down by ₱80,000.
 AIR provides warranty for its sales. In the first quarter, AIR estimated
a 5% warranty obligation on its first quarter sales of 4,000,000. In the
second quarter, a change in accounting estimate was made. It was
estimated that the cost of warranty should be 10% of total sales. The
second quarter sales amounted ₱4,800,000.
 AIR has been estimating its bad debt expense as 2% of credit sales.
However, in the second quarter, a change was made to the percentage of
ending receivable. Under this method, the required balance of the
allowance for doubtful accounts as of June 30, 20x1 is computed
₱120,000. The allowance has a balance of ₱20,000 at the beginning of the
year. Total write-offs during the first six months of 20x1 amounted to
48,000; recoveries totalled ₱12,000. Credit sales for the 1st and 2nd
quarters amounted to ₱4,000,000 and ₱8,000,000, respectively.

What is the net effect of the transactions listed above on profit loss before
tax in the first quarter interim financial statements?

57. What is the net effect of the transactions listed above on profit or
loss before tax in the second quarter interim financial statements?
Measurement of interim income tax expenses
58. AIR Co. expects to earn 400,000 pre-tax profit each quarter. AIR has tax
rates of 20% on the first 800,000 of annual earnings and 30% on all
additional earnings. Actual earnings match expectations. How much is the
weighted average annual income tax rate?
59. How much is the income tax expense recognized in the first quarter
interim financial statements?
60. How much is the income tax expense recognized in the third quarter
interim financial statements?
Income tax benefit
AIR Company expects to incur losses of ₱60,000 in each of the first and second
quarters of the year but expects to earn pre-tax profits of₱ 60,000 in each of
the last two quarters (thus having zero profit for the year). AIR estimated a
weighted average income tax rate of 30%. Actual earnings match expectations.

61. How much is the income tax expense recognized in the first quarter
interim financial statements?
62. How much is the income tax expense recognized in the third quarter
interim financial statements
Tax year and financial year do not coincide
AIR PAY Co.’s financial reporting year ends JUNE 30 and reports quarterly. Its
taxable year ends December 31. For the financial year that begins July 1, 20x1
and ends June 30,20x2, AIR earns ₱80,000 pre-tax profit each quarter. The
estimated average annual income tax rate is 30% in 20x1 and 40% in 20x2.

63. How much is the income tax expense recognized in the first quarter
interim financial statements?
64. How much is the income tax expense recognized in the third quarter
interim financial statements?

Net operating loss carry forward

AIR Co. reports quarterly and has a operating loss carry forward of ₱40,000
for income tax purposes at the start of the current financial year for which a
deferred tax asset has not been recognized. AIR earns ₱40,000 in the first
quarter of the current year and expects to earn ₱40,000 in each of three

Albert I. Rivera, CPA, MBA, CRA

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CURRENT LIABILITIES_PROVISIONS_CASH TO ACCRUAL BASIS_CASH
FLOW_OPERATING SEGMENT_INTERIM REPORTING AIR-OCT2019
MODULE 3
remaining quarters. Excluding the carry forward, the estimated average annual
income tax rate is expected to be 40%.

65. How much is the income tax expense recognized in the first quarter
interim financial statements?
66. How much is the income tax expense recognized in the third quarter
interim financial statements?

Net operating loss carry forward

AIR Company reported a net operating loss carry forward of 80,000 in its most
recent annual financial statements. During the year, AIR earned 40,000 in each
of the first two quarters and ₱60,000 in each of the last two quarters.
Excluding the carry forward, the estimated average annual income tax rate is
40%.

67. How much is the income tax expense recognized in the first quarter
interim financial statements?
68. How much is the income tax expense recognized in the third quarter
interim financial statements?

Albert I. Rivera, CPA, MBA, CRA

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