(254)On December 31, 2020, Cey Company had b.

1,090,240
outstanding 12% P5.000.000 face amount
convertible bonds maturing on December 31, c. 1,067,200
2025. Interest is payable on June 30 and d. 973,920
December 31. Each P1,000 bond is convertible
into 50 shares of Cey Company with P10 par 3. What is the interest expense for 2020?
value.
a. 200,000
On December 31, 2020, the unamortized
b. 115,200
balance in the premium on bonds payable
account was P300,000. No equity component c. 106,720
was recognized from the original issuance of the
convertible bonds. d. 0

On December 31, 2020, 2,000 bonds were 4. What is the depreciation for 2020?
converted when the share had a market price of
a. 135,200
P24. The entity incurred P20,000 in connection
with the bond conversion. b. 115,200

What is the share premium arising from the c. 67,600

bond conversion?
d. 20,000
a. 1,400,000

b. 1,100,000 for (545)Thorn Company reported the following tax

effects of temporary differences at year-end:
c. 1,380,000

d. 1,120,000 Deferred
Related asset
tax asset
classification
(353)On January 1, 2020. Nun Company leased (liability)
machinery from Chin Accelerated
Company for a 10-year period. The useful life of tax (75,000) Noncurrent
the asset is 20years. Equal annual payments depreciation
under the lease are P200, 000 and are due on Additional cost
January 1 of each year starting January 1, 2020 in inventory
25,000 Current
for tax
The present value on January 1, 2020 of the
purposes
lease payments over the lease term discounted
at implicit interest rate of 10% was P1,352,000. (50,000)
The lease provides for a transfer of title to the
lessee upon expiration of the lease term.
The entity anticipated that P10,000 of the
1. What is the lease liability on December 31,
deferred tax liability will reverse next year.
2020?
What amount should be reported as noncurrent
a. 1,352,000
deferred tax liability at year-end?
b. 1.152,000 a. 40,000
c. 1,067,200
b. 50,000
d. 1,552,000 C. 65,000
2. What is the lease liability to be reported as
d. 75,000
noncurrent on December 31, 2020?

a. 1,215,920 (545)In the year-end statement of financial

position, Sheen Company had income tax
payable of P260,000 and a deferred tax asset of
P400,000.
The entity had reported a deferred tax asset of
P300,000 at the beginning of current year. No
estimated tax payments were made during the
current year.
The entity determined that it was probable that
the deferred tax asset would be realized.
In the income statement for the current year,
what amount should be reported as total
income tax expense?
a. 260,000
b. 150,000
c. 170,000
d. 160,000
1. The purpose of interperiod tax allocation is to
a. Allow entities to utilize carryforward loss,
b. Allow entities whose tax liabilities vary
significantly from year to year to smooth tax
payments.
c. Recognize an asset or liability for the tax
consequences of temporary differences that
exist at year-end.
d. Amortize the deferred tax liability.
2. Intraperiod tax allocation
a. Involves the allocation of income taxes
between current and future periods.
b. Associates tax effect with different items in
the income statement.
c. Is not generally acceptable.
d. Arises because different income statement
items are taxed at different rates.
(254)Spare Company had an outstanding share
capital with par value of P50,000,000 and a 12%
convertible bond issue in the face amount of
P10,000,000. Interest payment dates of the
bond issue are June 30 and December 31.
The conversion clause in the bond indenture
entitled the bondholders to receive 40 shares of
Spare Company with P20 par value in exchange
for each P1,000 bond.
The holder of P5,000,000 face value bonds
exercised the conversion privilege at year-end.
The market price of the bonds at year-end was
P1, 100 per bond and the market price of the
share was P30.
The total unamortized bond discount was
P500,000 and the share premium from
conversion privilege has a balance of
P2,000,000 at the date of conversion.
What amount of share premium should be
recognized by reason of the conversion of bonds
payable into share capital?
a. 2,000,000
b. 2.750,000
c. 3,000,000
d. 1,750,000 do 50%
3. Which is true about intraperiod tax
allocation?
a. Intraperiod tax allocation arises because
certain items are recognized for accounting and
tax purposes.
b. Intraperiod tax allocation is required for the
effect of accounting policy.
C. The purpose is to allocate income tax
expense evenly over a number of accounting
periods.
d. The purpose is to relate the income tax
expense to the items which affect the amount
of tax.
4. All would require intraperiod tax allocation,
except
a. Discontinued operation
b. Prior period error
e. Change in accounting estimate
d. Income from continuing operations
5. Tax expense should be allocated to all, except
a. Discontinued operation
b. Prior period error
c. Gross profit
d. Other comprehensive income d. 1.214,604

(387) On January 1, 2020, Northstar Company
entered into an 8-year lease of a floor of
building with useful life of 15 years with the
following terms:
 Annual rental for the first three years
payable at the end of each year 300,000
 Annual rental for the next five years
payable at the end of each year 400.000
(354)Oak Company leased equipment for the
entire nine-year useful lite, agreeing to pay
P500,000 at the start of the lease term on
December 31, 2020 and P500,000 annually on
each December 31 for the next eight years. The
present value on December 31, 2020, of the
nine lease payments over the lease term, using
the rate implicit in the lease which Oak
Company knows to be 10%, was P3,165,000.

The December 31, 2020, present value of the

 Implicit interest rate 10%
 PV of an ordinary annuity of 1 at 10%
for three periods 2.49
 PV of an ordinary annuity of I at 10% for
five periods 3.79
 PV of at 10% for three periods 0.75
The lease provides for neither a transfer of title
to the lessee nor a purchase option.
1. What is the lease liability on January 1, 2020?
a. 1,516,000
b. 2,263,000
c. 1,884,000
d. 1,697,250
2. What is the interest expense for 2020?
lease payments using the incremental
borrowing rate of 12% was P2.985,000.
What amount should be reported as lease
liability on December 31, 2021?
a. 8,500,000
b. 2,481,500
c. 2,283,200
d. 2.485.000
(354)On January 1, 2020, 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, 2020, and continuing each year
for 30 years. On January 1, 2020, the present
value of the lease payments is P1,125,000 at the
8% interest rate implicit in the lease.

a. 188.400 What amount should be reported as lease

liability on December 31, 2020?
b. 226,300
a 1,025,000
c. 151.600
b. 1.115,000
d. 169,725
c 1.125.000
3. What is the interest expense for 2028?
d. 2,900,000
a 151,460
(354) On December 31, 2020, Rafferty Company
b. 126,606 leased equipment under a finance lease. Annual
c. 164,964 lease payments of P200,000 are due December
31 for 10 years. The equipment useful life is 10
d. 200,000 years, and the interest rate implicit in the lease
is 10%.
4. What the lease liability on December 31,
2023? The lease obligation was recorded on December
31, 2020 at P1.350,000 and the first lease
a. 1,614,604
payment was made on that date.
b. 1,266,064
What amount should be included in current
c. 1,366,064 liabilities on December 31, 2020 in relation to
the lease?
a. 65,000
b. 85.000
c. 115,000
d. 200,000
(251)Armada Company issued P5,000,000 face
amount, 5-year at 109. Each P1,000 bond was
issued with 10 share warrants, each of which
entitled the bondholder to purchase one share
of P100 par value at P120. Immediately after
isssuance, the market value of each warrant was
P5.
The stated interest rate on the bonds is 11%
payable annually every end of the year.
However, the prevailing market rate of interest
for similar bonds without warrants is 12%.
The present value of 1 at 12% for 5 periods is
0.57 and the present value of an ordinary
annuity of 1 at 12% for 5 periods is 3.60.
1. What is the carrying amount of the bonds
payable on the date of issuance?
a. 5,450,000
b. 4.830,000
c. 5,000,000
d. 4,380,000
2. What amount should be recorded initially as
discount or premium on bonds payable?
a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 discount
3. What is the equity component arising from
the issuance of bonds payable?
a. 450,000
b. 500,000
c. 620,000
d. 0 
4. What amount is credited to share premium if
all of the share warrants are exercised?
a. 1,000,000
b. 1,450,000
c. 1,500,000
d. 1,620,000
(384)On January 1, 2020. Justine Company
leased an office building with the following
terms:
 Annual rental at the end of each year
300,000
 Lease term and useful life of the
building 4 years
 Implicit rate in the lease 10%
 Present value of an ordinary annuity of
1 at 10% for 4 periods 3.17
On January 1, 2022, Justine Company and the
lessor agreed to amend the original terms of the
lease with the following information:
 Annual rental payable at end of each
year 300,000
 Extension of lease term 3 years
 Implicit rate in the lease 12%
 Present value of an ordinary annuity of
 1 at 12% for 5 periods 3.605
Required:
1. Prepare a table of amortization for 2020 and
2021.
2. Prepare journal entries for 2020.
3. Remeasure the lease liability on January 1,
2022.
4. Prepare a new table of amortization from
2022 to 2026.
5. Prepare journal entries for 2022
At the beginning of current year, Racquel
Company building and immediately leased it
back. The following pertain to the sale and
leaseback transaction:
Sale price at above fair value 9,000,000
 Fair value of building 8,000,000
 Carrying amount of building 7,200,000
 Annual rental payable at the end of
each year 600,000
  Remaining life of building 20 years Payment of a penalty None 15,000

 Lease term 4 years

 Implicit interest rate 12% The enacted tax rate for current year is 30% and
25% for all future years
 Present value of an ordinary annuity of
1 at 12% for four periods 3.037
What amount should be reported as current
1. What is the initial lease liability? portion of income tax expense in the income
statement for the current year?
a. 1,822,200
a. 111,000
b. 2,400,000
b. 102,000
e. 1,200,000
c. 115,500
d. 1,000,000
d. 92,500
2. What is the cost of right of use asset?
(542)Pine Company reported pretax income of
a. 1.639,980 P800, 000 for the current year.

b. 739,980 In the computation of income taxes, the

following data were considered:
c. 822,200
 Nontaxable gain 350,000
d. 411,100
 Depreciation deducted for tax purposes
3. What is the gain on right transferred to buyer-
in excess of depreciation for book
lessor?
purposes 50,000
a. 800,000
 Estimated tax payments during current
b. 720.000 year 70,000

c. 717,780  Enacted tax rate 30%

d. 400,000 What amount should be reported as current tax

liability at year-end?
4. What is the annual rental income of the
buyer-lessor? a. 135,000

a. 600,000 b. 120,000

b. 329,272 c. 50,000

c. 270,728 d. 65,000

d. 300,000 (463)On July 1, 2020, Meg Company leased

equipment to Wee Company for an 8-year
period.

Total payments under the lease are P600,000

(542)Huskie Company reported in the income
and are due on July 1 of each year. The first
statement for the current year pretax income of
payment was made on July 1, 2020
P400,000.
The interest rate contemplated by Meg
The following items are treated differently on
Company and Wee Company is 10%.
the tax return and on the book.
The cash selling price of the equipment is
Tax return Per book P3,520,000 and the cost of the equipment on
Royalty income 20,000 40,000 Meg Company's accounting records is
P2,800,000.
Depreciation expense 125,000 100,000
The lease is appropriately recorded as a sales a. 5,000,000
type lease.
b. 4,750,000
1. What amount of profit on sale should be
c, 5,150,000
recognized for the year ended December 31,
2020? d. 4,550,000
a. 600,000 2. What amount of the proceeds from the bond
b. 720,000 issue should be recognized as an increase in
shareholders' equity?
c. 360,000
a. 600,000
d. 300,000
b. 300,000
2 What amount of interest revenue should be
recorded for the year ended December 31, e. 200,000
2020? d. 400,000
a. 292,000 3. What amount is credited to share premium if
all of the share warrants are exercised?
b. 146,000

c. 352,000 a. 4,350,000

b. 3,750,000
d. 176,000
c. 4,150,000

6. An entity, cash basis taxpayer, prepares

accrual basis financial statements. In the year-
7. An entity reported deferred tax assets and
end statement of financial position, the
deferred tax liabilities at the end of the prior
deferred tax liabilities increased compared to
year and at the end of the current year. For the
the prior year. Which of the following changes
current year, the entity should report deferred
would cause this increase in deferred tax
income tax expense or benefit equal to the
liabilities?
a. Decrease in the deferred tax assets
a. An increase in prepaid insurance
b. Increase in the deferred tax liabilities
b. An increase in rent receivable
c. Amount of the current liability plus the sum
C. An increase in warranty obligation
of the net changes in deferred tax assets and
d. An increase in prepaid insurance and increase deferred tax liabilities
in rent receivable
d. Sum of the net changes in deferred tax assets
(252)At the beginning of current year beginning and deferred tax liabilities
of current year, Case Company issued
(385) On January 1, 2020, Madelle Company
P5,000,000 of 12% nonconvertible bonds
entered into a lease for floor space with the
payable at 103 which are due in five years.
following information:
In addition, each P1,000 bond was issued with
 Floor space 5,000 square meters
30 detachable share warrants, each of which
entitled the bondholder purchase, for P50, one  Annual rental payable at the end of
ordinary share of Case Company, par value P25. each year 200.000

On the date of issuance, the quoted market  Lease term 5 years

value of each warrant was P4. The market value
of the bonds ex-warrants at the time of issuance  Implicit rate in the lease 10%
is 95.
 Present value of an ordinary annuity of I
1. What is the carrying amount of the bonds for 10% at 5 periods 3.7908
payable on the date of issuance?

On January 1, 2022. Madelle Company and the
lessor agreed to amend the original terms of the
lease with the following information:
 Floor space 3,750 square meters
 Annual rental payable at the end of
each year 150,000
 Implicit rate in the lease 8%
 Present value of an ordinary annuity of
1 for 8% at 3 periods 2.5771
 Lease bonus paid to lessor before
commencement of lease 100,000
 Discounted amount of restoring the
building as required by contract
200,000
 Purchase option that is not reasonably
certain to be exercised 300.000
 Lease term 5 years
 Useful life of building 8 years
 Implicit interest rate 8%

Required:  Present value of an annuity of 1 in

1. Prepare the amortization schedule for 2020
and 2021.
2. Prepare the journal entries for 2020.
3. Compute the termination gain or loss on
January 1, 2022.
advance at 8% for 5 periods 4.31
 Present value of 1 at 8% for 5 periods
.68
1. What is the initial lease liability?
a. 4,514,000

4. Remeasure the lease liability on January 1, b. 4,310,000

2022.
c. 4,614,000
5. Prepare the amortization schedule for 2022,
2023 and 2024. d. 4,764,000

6. Prepare the journal entries for 2022. 2. What is the cost of right of use asset?

a. 4,814,000

8. Because an entity uses different methods to b. 4,810,000

depreciate equipment for accounting and
c. 4,710,000
income tax purposes, the entity has temporary
differences that will reverse during the next d. 4,610,000
year and add to taxable income. Deferred
income taxes that are based on these 3. What is the annual depreciation?
temporary differences shall be classified as a. 912,800
a. Contra account to current assets b. 588,750
b. Contra account to noncurrent assets c. 962,000
c. Current liability d. 601,250
d. Noncurrent liability 4. What is the interest expense for the current
(359)At the beginning of current year, Southstar year?
Company leased a building with the following a. 344,800
information:
b. 205,984
 Annual fixed payment in advance at the
beginning of each lease year 1,000,000 c. 264.800

 Initial direct cost paid 350,000 359

 Lease incentive received 150,000

9. The accounting concept that is principally
used to classify leases into operating and
finance on the part of lessor is
a. Substance over form
b. Prudence
c Neutrality
d. Completeness
(255)On December 31, 2020, Tamia Company
showed the following balances:
Bonds payable - 6% 4,000,000
Discount on bonds payable 500,000
Share premium – issuance 5,000,000
Share premium-conversion privilege 700,000
The interest is payable annually every
December 31. The convertible bonds are not
converted but fully paid on December 31, 2020.
On such date, the quoted price of the
convertible bonds with conversion option is 105
which is the payment to the bondholders plus
interest.
However, the quoted price of the bonds without
the conversion privilege is 95.
1. What is the carrying amount of the bonds
payable on December 31, 2020?
a. 4,000,000
b. 4,500,000
c. 3,500,000
d. 4,200,000
2. What is the gain or loss from extinguishment
of bonds?
a. 700,000 gain
b. 700,000 loss
c. 300,000 gain
d. 300,000 loss
3. What is the total payment to the bondholders
on December 31, 2020?
a. 4,200,000
b. 4,440,000
C. 4,240,000
d. 4,040,000
10. Which statement is correct regarding the
lease capitalization criteria?
a The lease transfers ownership to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to at least 75% of the
economic life of the underlying asset.
d. The lease payments are at least 90% of fair
value of asset.
11. Which condition would require lease
capitalization?
a. The lease does not transfer title to the lessee.
b. There is an uncertain purchase option.
c. The present value of the lease payments is
significantly more than the fair value of the
asset.
d. The lease term is below the useful life of
asset.
12. One of the four determinative criteria for a
finance lease specifies that the lease term be
equal to or greater than
a. The economic lite of the underlying asset.
b. 90 percent of the economic life of the asset.
c. 75 percent of the economic life of the asset.
d..50 percent of the economic life of the asset.
(307)The following information pertains to the
transfer of real estate pursuant to a debt
restructuring by Knob Company to Mene
Company in full liquidation of Knob Company's
liability to Mene Company:
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred
1,000,000
Fair value of real estate transferred 1,200,000
What amount of pretax gain on extinguishment
should Knob Company report as component of
income from continuing operations?
a. 300,000
b. 500,000
 c. 200,000 a. 4,000,000

d. 0 b. 2,880,000

13. One of the four determinative criteria for a c. 5,760,000

finance lease is that the present value at the
d. 6,720,000
beginning of the lease term of the lease
payments equals or exceeds 4. What is the interest expense of the seller-
lessee for the current year?
a The fair value of the underlying asset
a. 120,000
b. 90 percent of the fair value of the underlying
asset b. 576,000

c. 75 percent of the fair value of the underlying c. 672,000

asset
d. 432,000
d. 50 percent of the fair value of the underlying
asset 5. What is the net annual rent income of the
buyer-lessor?

a. 400,000
(499)At the beginning of current year, Judy
Company sold a building with remaining useful b. 200,000
life of 30 years and immediately leased it back
c. 300,000
for 5 years.
d. 100,000
 Sale price at below fair value
18,000,000

 Fair value of building 20,000,000 (465)Reagan Company used leases as a method

 Carrying amount of building 24,000,000
 Annual rental payable at the end of
each year 1,000,000
 Implicit interest rate 12%
 Present value of an ordinary annuity of
1 at 12% for 6 periods 3.60
1. What is the initial lease liability?
of selling product.
In 2020, Reagan Company completed
construction of a passenger ferry.
On January 1, 2020, 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.

a. 3,600,000  Original cost of the ferry 8,000,000

b. 4,000,000  Fair value of ferry at lease date

13,000,000
c. 4,800,000
 Lease payments in advance 1,500,000
d. 0
 Residual value 2,000,000
2. What the cost of right of use asset?
 Implicit interest rate 12%
a. 3,000,000
 Date of first lease payment January 1,
b. 4,320,000 2020

c. 5,760,000  Lease term 20 years

d. 6,720,000  Present value of an annuity due of l at
10% for 20 periods 8.37
3. What is the loss on right transferred?
  Present value of 1 at 12% for 20 periods a. 6,000,000
0.10
b. 5,000,000
1. What is the gross investment in the lease?
c. 5,494,500
a. 30,000,000
d. 3,850,000
b. 32,000,000
2. What is the gain on modification of debt to
c. 10,000,000 be recognized for 2020?

d. 38,000,000 a. 500,000

2. What is the net investment in the lease? b. 350,000

a. 12,555,000 c. 505,500

b. 13,000,000 3. What is the interest expense for 2020 as a

result of the modification?
c. 12,755,000
a. 650,000
d. 8,000,000
b. 450,000
3. What is the gross profit on sale for 2020?
c. 494,505
a. 6,555,000
d. 540,000
b. 4,555,000

c. 5,000,000
(432)On January 1, 2020, Lyle Company
d. 7,000,000
entered into a direct financing lease. A third
4. What is the interest income for 2020? party guaranteed the residual value of the asset
under the lease estimated to be P1,200,000 on
a. 1,506,600
January 1, 2025, the end of the lease term.
b. 1,560,0CO
Annual lease payments are P1,000,000 due
c. 1,326,600 each December 31, beginning December 31,
2020. The last payment is due December 31,
d. 1,380,000
2024.

The remaining useful life of the asset was six

(309)Due to adverse economic circumstances
and poor management, Tagaytay Highlands
Company had negotiated a restructuring of a 9%
P6,000,000 note payable to SecondBank due on
January 1, 2020. There was no accrued interest
on the note on January 1, 2020.
The bank reduced the principal obligation from
P6,000,000 to P5,000,000 and extended the
maturity to three years on December 31, 2022,
However, the new interest rate is 13% payable
annually every December 31.
years at the commencement of the lease.
The lessor used 10% as the implicit interest rate.
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.
1. What is the net lease receivable of the lessor
at the commencement of the lease?
a. 4,534,000
b. 3,790,000

The present value of 1 at 9% for three periods is c. 4,990,000

.77 and the present value of an ordinary annuity
d. 2,590,000
of 1 at 9% for three periods is 2.53.
2. What is the gross investment in the lease?
1. What is the present value of the new note
payable on January 1, 2020? a. 5.000.000
b. 6,200,000
c. 3,800,000
d. 5,744,000
3. What is the total unearned interest income?
a. 2,410,000
b. 1,666,000
c. 1,210,000
d. 466,000
4. What is the interest income for 2020?
a. 379,000
b. 620,000
c. 453,400
d. 500,000
(436)At the beginning of current year, Yolk
Company signed a ten-year noncancelable 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 at the inception of
the lease 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.
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.
1. What is the annual lease payment?
a. 400,000
b. 435,044
c. 480,000
d. 522,053
2. What is the total annual lease payment?
a. 420,000
b. 455,044
c. 542,053
d. 500,000
3. What is the unearned interest income of the
lessor at the beginning of current year?
a. 1,850,400
b. 2,342,000
c. 1,542,000
d. 2,542,000
14. The classification of a lease is normally
carried out
a. At the end of the lease term
b. After a "cooling off" period of one year
c. At the inception of the lease
d. When the entity deems it to be necessary
15. The classification of a lease 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 lease payments being at least 50% of fair
value.
d. The economic life of the underlying asset.
16. 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. Option to purchase at a value below the fair
value of the underlying asset.
c. The lease term is for a major part of the
asset's life.
d. The present value of the lease payments is
50% of the
fair value of the asset.
17. In case of lease of land and building, the
lease payments should be split
a. According to relative fair value of the two and four year-end rental payments. The lease
elements. qualified as a direct financing lease.

b. Based on the useful life of the two elements.
c. Using the sum of digits method.
d. According to method devised by the entity.
18. Where there is a lease of land and building
and the title to the land is not transferred,
generally the lease is treated as if
a. The land is finance lease.
b. The land is finance and the building is
operating,
c. The land is operating and the building is
finance.
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. 2,000,000
b. 3,000,350
c. 2,800,000

d. The land and building are an operating lease. d. 2,599,650

(435)Irene Company acquired a specialized

machine for P2,300,000. At the beginning of
(546)Abigail Company reported in the income current year, the entity leased the machine for a
statement for the first year of operations pretax period of six years, after which title to the
income of P6,000,000. In addition, the following machine is transferred to the lessee.
differences existed between the tax return and
accounting record: The six annual lease payments are due in
advance at the beginning of each lease year. The
Tax Accounting residual value of the machine is P200,000.
return record
The lease terms are arranged so that a return of
Uncollectible
2,200,000 2,500,000 12% is earned by the lessor. The present value
accounts expense
of 1 at 12% for six periods is 0.51, and the
Depreciation present value of an annuity in advance of 1 at
8,600,000 5,700,000
expense 12% for six periods is 4.60.

Tax exempt What is the annual lease rental payable in

- 500,000
interest revenue advance?

a. 500,000

The current year tax rate is 30% and the b. 477,826

enacted rate for future year is 40%.
c. 383,333
What amount should be reported as deferred
tax expense for the current year? d. 460,000

a. 1,480,000 (469)On January 1, 2020, Dexter Company

b. 1,240,000
c. 1,040,000
d. 780,000
(435)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%
leased equipment to another entity. The lease is
for an eight-year period expiring December 31,
2027. The first of eight equal annual payments
of P900,000 was made on January 1, 2020.
Dexter Company had previously purchased the
equipment for P4,800,000. The lease is
appropriately accounted for as a sales type
lease by Dexter Company.
The present value on January 1, 2020 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 2020?
a. 490,000
b. 480,000
c. 438,000
d. 391,800
(403)At the beginning of current year, Wren
Company leased a building to Brill Company
under an operating lease for ten years at
P500,000 per year, payable the first day of each
lease year. Wren Company paid P150,000 to a
real estate broker as initial direct cost.
The building is depreciated P120,000 per year.
Wren Company incurred insurance and property
tax expense totaling P90,000 for the current
year.
What is the net rent income for the current
year?
a. 275,000
b. 290,000
c. 350,000
d. 365,000
(403)At the beginning of current year, Rapp
Company leased a new machine to Lake
Company for 5 years. The annual rental is
P900,000.
Additionally. Lake Company paid P500,000 to
Rapp Company as a lease bonus and P250,000
as a security deposit to be refunded upon
expiration of the lease.
What amount should be reported as rent
revenue for the current year?
a. 1,400,000
b. 1,250,000
c. 1,000,000
d. 900,000
(403) At the beginning of current year, Jade
Company purchased a new machine for
P4,800,000 and leased it to East the same day.
The machine has an estimated 12-year life and
will be depreciated P400,000 per year. The lease
is for a three-year period at an annual rental of
P850,000.
Additionally, East paid P300,000 to Jade as a
lease bonus to obtain the three-year lease. Jade
incurred insurance expense of P80,000 for the
leased machine during the current year.
What is the operating profit of the lessor on the
leased asset for the current year?
a. 670,000
b. 550,000
c. 470,000
d. 370,000
19. Gross investment in the lease is equal to
a. Sum of the lease payments receivable by a
lessor under
a. finance lease and any unguaranteed residual
value accruing to the lessor.
b. The lease payments under a finance lease of
the lessor
c. Present value of lease payments under a
finance lease of the lessor and any
unguaranteed residual value.
d. Present value of the lease payments under a
finance lease of the lessor.
20. Net investment in a direct financing lease is
equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid
by the lessor
C. Cost of the asset minus guaranteed residual
value
d. Cost of the asset plus unguaranteed residual
value
(307)Hull Company is indebted to Apex
Company under a P5,000,000, 12%, three-year
note dated December 31, 2018.
Because of financial difficulties developing in
2020, Hull Company owed accrued interest of
P600,000 on the note on December 31, 2020.
Under a debt restructuring on December 31,  Annual rental payable at the end of
2020, Apex Company agreed to settle the note each year 500,000
and accrued interest for a tract of land having a
fair value of P4,500,000. The acquisition cost of  Lease term 5 years
the land is P3,600,000.
 Remaining life of machine 20 years
What amount of pretax gain on extinguishment
 Implicit interest rate 6%
should Hull Company report as component of
income from continuing operations in 2020?  PV of an ordinary annuity of 1 at 6% for
5 periods 4.21
a. 2,000,000
1. What is the cost of right of use asset?
b. 1,400,000
a. 2,105,000
c. 1,100,000
b. 2,526,000
d. 900,000
c. 2,895,000

21. Which is the correct accounting treatment d. 1,500,000

for a finance lease in the accounts of a lessor?
2. What is the loss on right transferred to the
a. Treat as a noncurrent asset equal to net buyer-lessor?
investment in lease and recognize all finance
payments in income statement. a. 579,000

b. Treat as a receivable equal to gross amount b. 505,200

receivable on lease and recognize finance
c. 500,000
payments in cash by reducing debt.
d. 0
c. Treat as a receivable equal to net investment
in the lease and recognize finance payments by 3. What is the lease liability at year-end?
reducing debt and taking interest to income
statement. a. 2,177,560

d. Treat as a receivable equal to net investment b. 1,605,000

in the lease and recognize finance payments in
c. 1,731,300
cash by reduction of debt.
d. 2,105,000
22. Lessors shall recognize asset held under a
finance lease as a receivable at an amount equal 4. What is the net annual rental income of the
to the buyer-lessor?

a. Gross investment in the lease a. 373,700

b. Net investment in the lease b. 200,000

c. Gross rentals e. 500,000

d. Residual value, whether guaranteed or d. 250,000

unguaranteed
(554)Rona Company started to manufacture in
2020 copy machine that are sold on the
installment basis.
Problem 15-12 (IFRS)
Rona Company recognizes revenue when
At the beginning of current year, Arianne
equipment is sold for financial reporting
Company sold a machine and immediately
purposes, and when installment payments are
leased it back.
received for tax purposes.
 Sale price at fair value 5,000,000

 Carrying amount of machine 6,000,000

In 2020, the entity recognized gross profit of b. 1,350,000
P6,000,000 for financial reporting purposes and
P1,500,000 for tax purposes. c. 1,500,000

d. 1,320,000
The amounts of gross profit expected to be
recognized for tax purposes in 2021 and 2022 4. What is the current tax expense for the
are P2,500,000 and P2,000,000 respectively current year?
The entity guaranteed the copy machines for a. 180,000
two years.
b. 600,000
Warranty costs are recognized on the accrual
basis for financial reporting purposes and when c. 750,000
paid for tax purposes.
d. 0
Warranty cost accrued in 2020 is P2,500,000 but
5. What is the total tax expense for the current
only P500,000 of warranty cost is paid in 2020.
year?
It is expected that in 2021 and 2022, P1,000,000
a. 600,000
and P1,000,000 respectively, of warranty cost
will be paid. b. 630,000
In addition during 2020, P500,000 interest, net c. 480,000
of 20% final income tax, was received and
earned.

Insurance premium of P100,000 on life (402)On January 1, 2020, Abba Company leased
insurance policy that covered the life of entity's a building to Bee Company under a four-year
president was paid. The entity is the beneficiary operating lease.
for this policy.
The monthly rental for 2020, 2021, 2022 and
Pretax accounting income in 2020 was 2023 is P100,000, P150,000, P200,000 and
P2,000,000. Any 2020 operating losa will be P250,000, respectively.
carried forward to 2021.
Rentals are payable at the end of each month.
The tax rate is 30% All rental payments within the year were made
when due.
1. What is the accounting income subject to
tax? What amount should be reported as rent
receivable from Bee Company on December 31,
a. 2,000,000 2021?
b. 1,600,000 a. 1,000,000
c. 2.100.000 b. 1.200,000
d. 1,500,000 600,000
2. What is the deferred tax asset on December d. 900,000
31, 2020?
(402)Abe Company, lessor, leased an equipment
a. 870,000 under an operating lease.
b. 600,000 The lease term is 5 years and the lease
payments are made in advance on January 1 of
c. 270,000
each year as shown in the following schedule:
d. 480,000
January 1, 2020 1,000,000
3. What is the deferred tax liability on
January 1, 2021 1,000,000
December 31, 2020?
January 1.2022 1,400,000
a. 1,800,000
January 1, 2023 1,700,000
January 1, 2024 1,900,000
On December 31, 2021, what amount should be
reported as rent receivable?
a. 1,400,000
b. 800,000
c. 400,000
d. 0 January 1, 2020
(469)Liza Company is a car dealer. On January 1,
2020, the entity entered into a finance lease
with a customer under which the customer
would pay P200,000 on January 1 each year for
5 years, commencing in 2020.
The cost of the car is P600,000 and the cash
selling price was P750,000. The entity paid legal
fees of P20,000 to a law firm in connection with
the arrangement of the lease.
What amount of gross profit on sale should be
recognized for the year ended December 31,
2020?
a. 150,000
b. 130,000
c. 20,000
d. 0 b. 6,000,000
22. Which is not included in lease payments?
a. Any payment required by a purchase option
that is reasonably certain to be exercised
b. Costs for services and taxes paid by and
lessee
c. Required payments over the lease term
d. Amount guaranteed by a party related to the
lessee
23. Which is not part of the lease payments?
a. The rental payments called for by the lease
b. Any residual value guarantee of the lessee
c. Any residual value at the end of the lease
term
d. Any payment the lessee must make to
purchase the underlying asset under a purchase
option that is reasonably certain to be exercised
(310)On January 1, 2020, Granada Company had
an overdue 100 note payable to First Bank at
P8,000,000 and accrued interest of P800,000.
As a result of a restructuring agreement on
First Bank agreed to the following provisions:
The principal obligation is reduced to
P6,000,000.
• The accrued interest of P800,000 is forgiven.
• The date of maturity is extended to December
31, 2023
Annual interest of 12% is to be paid for 4 years
every December 31
The present value of 1 at 10% for 4 periods is
0.683 and the present value of an ordinary
annuity of 1 at 10% for 4 periods is 3.17
1. What is the present value of the new note
payable on January 1, 2020?
a. 6.380,400
c. 4,098,000
d. 5,464,000
2. What is the gain on extinguishment of debt to
be recognized for 2020?
a. 2,000,000
b. 2,800,000
c. 2,419,600
d. 1,619,600
3. What is the interest expense to be recognized
for2020?
a. 720,000
b. 800,000
c. 600,000
d. 638,040
24. The lease payments include all, except
a. The residual value guarantee
b. The lessee's obligation to pay executory cost
C. The purchase option that is reasonably
certain to be exercised
d. Any payment that the lessee must make upon
failure to extend or renew the lease
25. What is the interest rate used when the
implicit interest rate cannot be determined?
a. The prime rate
b. The lessor's published rate
c. The lessee's average borrowing rate
d. The lessee's incremental borrowing rate
26. Under a sales type lease, what is the
meaning of gross investment in the lease?
a. Present value of lease payments
b. Absolute amount of lease payments
c. Present value of lease payments plus present
value of unguaranteed residual value
d. Sum of absolute amount of lease payments
and unguaranteed residual value
27. Net investment in a sales type lease is equal
to
a. Gross investment in the lease less unearned
finance income
b. Cost of the underlying asset
c. The lease payments
d. The lease payments less unguaranteed
residual value
28. Which statement characterizes a sales type
lease?
a. The lessor recognizes only interest revenue
over the useful life of the asset.
b. The lessor recognizes only interest revenue
over the lease term
c. The lessor recognizes a dealer profit at lease
inception and interest revenue over the lease
term.
d. The lessor recognizes a dealer profit at lease
inception and interest revenue over the useful
life of the asset.
29. What is the treatment of initial direct cost
incurred by the lessee in a finance lease?
a. Added to the lease liability
b. Added to the carrying amount of the right of
use asset
C. Expensed immediately
d. Added to the carrying amount of the right of
use asset and lease liability
30. Which of the following statements
concerning residual value guarantee is
appropriate for the lessee?
a. The asset and related liability should be
increased by the absolute amount of the
residual value.
b. The asset and related liability should be
decreased by the absolute amount of the
residual value.
c. The asset and related liability should be
decreased by the present value of the residual
value.
d. The asset and related liability should be
increased by the present value of the residual
value.
31. 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. An unguaranteed residual value and
depreciate over the lease term.
c. The residual value guarantee and depreciate
over the useful life of the asset.
d. An unguaranteed residual value and
depreciate over the useful life of the asset.
32. If the residual value of an underlying asset is
greater than the amount guaranteed by the
lessee
a. The lessor pays the lessee for the difference.
b. The lessee recognizes a gain at the end of the
lease term.
c. The lessee has no obligation related to the a. Not be recognized separately from finance
residual value. income

d. The lessee pays the lessor for the difference. b. Be recognized in the normal way on the
transaction

c. Only be recognized at the end of the lease

(549)Jillian Company has a noncurrent asset
which had a carrying amount of P1,800,000 in
the statement of financial position at year-end.
The tax written down value or tax base of the
asset at that date was P900,000. The tax rate is
P30%.
What is the deferred tax balance in respect of
the asset at year-end?
a. 900,000 asset
b. 270,000 liability
c. 270,000 asset
term
d. Be recognized on a straight line basis over the
lease term
(357)On December 31, 2020, Ames Company
leased equipment for 10 years. The entity
contracted to pay P400,000 annual rent on
December 31, 2020 and on December 31 of
each of the next time years.
The lease liability was recorded at P2,700,000
on December 31, 2020 before the first payment.

d. 900,000 liability The equipment's useful life is 12 years and the

(549) Ranger Company located business in two
jurisdictions, Singapore and Malaysia.
In both countries, the entity has the legal right
to offset the taxes receivable and payable.
The following information related to deferred
tax assets and liabilities:
Taxing
Classification Amount
jurisdiction
interest rate implicit in the lease is 10%.
The entity used the straight line method to
depreciate all equipment.
1. In recording the December 31, 2021
payment, by what amount should the lease
liability be reduced?
a. 270,000
b. 230,000

Deferred tax asset 800,000 Singapore c. 225,000

Deferred tax d. 170,000

300,000 Malaysia
liability
2. What is the interest expense for 2021?
Deferred tax
600,000 Singapore
liability a. 270,000

b. 230,000
How should the entity present deferred taxes at
year-end? c. 200,000

Deferred tax asset Deferred tax liability 3. What is the lease liability on December 31,
2021?
a. 800,000 900,000
a. 2,700,000
b. 0 1,000,000
b. 2,300,000
c. 200,000 600,000
c. 2,130,000
d. 200,000 300,000
d. 1,900,000
33. The profit on a finance lease transaction for
lessors who are manufacturers or dealers 34. What is the principal accounting for a
should compound financial instrument?
a. The issuer shall classify a compound
instrument either liability or equity.
b. The issuer shall classify the liability and equity
components of a compound instrument
separately a liability or equity instrument.
c. The issuer shall classify a compound
instrument as a liability in its entirety, until
converted into equity.
d. The issuer shall classify a compound
instrument as a liability in its entirety.
35. How are the proceeds from issuing a
compound instrument allocated between the
liability and equity?
a. The liability component is measured at fair
value and the remainder of the proceeds is
allocated to the equity component.
b. The proceeds are allocated to the liability and
equity based on fair value.
c. The proceeds are allocated to the liability and
equity based on carrying amount.
d. The proceeds are not allocated because the
compound instrument is accounted for either as
liability or equity.
36. The proceeds from an issue of bonds with
share warrants should not be allocated between
the liability and equity components when
a. The fair value of the warrants is not readily
available.
b. The exercise of the warrants within the next
reporting period seems remote.
C. The warrants issued are nondetachable.
d. The proceeds should be allocated between
liability and equity under all of these
circumstances.
37. When the cash proceeds from bonds issued
with share warrants exceed the fair value of the
bonds without the warrants, the excess should
be credited to
a. Share premium - ordinary
b. Retained earnings
c. Liability account
d. Share premium - share warrants
38. When bonds are issued with share warrants,
the equity component is equal to
a. Zero
b. The excess of the proceeds over the face
amount of the bonds.
c. The market value of the share warrants.
d. The excess of the proceeds over the fair value
of the bonds without the share warrants.
39. What is the main reason for issuing
convertible bond?
a The ease with which convertible bond is sold
even if the entity has a poor credit rating.
b. The fact that equity capital has issue cost and
convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond will always sell at a
premium.
40. The major difference between convertible
bonds and bonds issued with share warrants is
that upon exercise of the warrants
a. The shares are held by the issuer for a certain
period before issuance to the warrant holder.
b. The holder has to pay a certain amount to
obtain the shares.
c. The shares involved are restricted.
d. No share premium can be part of the
transaction.
41. What is the accounting for issued
convertible bond?
a. The instrument should be presented solely as
bond
b. The instrument should be presented either as
bond or equity but not both.
c. The instrument should be presented solely as
equity
d. The instrument should be presented as part
bond and part equity.
42. Issued convertible bonds are
a. Separated into debt and equity components
with the liability component recorded at fair
value and the residual assigned to the equity
component.
b. Always recorded using the fair value option.
C. Recorded at face amount for the liability
along with the associated premium or discount.
d. Recorded at face amount without
consideration of a premium or discount.
43. When convertible bond payable is not
converted but paid at maturity
a. A gain or loss is recorded for the difference
between the carrying amount of the bond and
the present value of the cash flows.
b. The amount allocated to equity is recorded as
a gain.
C. The amount allocated to equity is recorded as
a loss.
d. The carrying amount of the bond equal to
face amount is derecognized.
44. In a debt restructuring that is considered an
asset swap. The gain on extinguishment is equal
to
a. Excess of the fair value of the asset over its
carrying amount
b. Excess of the carrying amount of the debt
over the fair value of the asset
c. Excess of the fair value of the asset over the
carrying amount of the debt
d. Excess of the carrying amount of the debt
over the carrying amount of the asset
45. For a debt restructuring involving substantial
modification of terms, it is appropriate for a
debtor to recognize a gain when the carrying
amount of the debt
a. Exceeds the total future cash payments
specified by the new terms.
b. le less than the total future cash payments
specified by the new terms.
c. Exceeds the present value of the future cash
payments specified by the new terms.
d. Is less than the present value of the future
cash payments specified by the new terms.
46. For a debt restructuring involving a
substantial modification of terms, which of the
following specified by the new terms would be
compared to the carrying amount of the debt to
determine if the debtor should report a gain on
extinguishment?
a. The total future cash payments
b. The present value of the new debt at the
original interest rate
C. The present value of the new debt at the
modified interest rate
d. The amount of future cash payments
47. Under a debt restructuring involving
substantial modification of terms, the future
cash flows under the new terms shall be
discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate
48 An entity shall initially measure equity
instrument issued to extinguish a financial
liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
49. If the fair value of the equity instruments
issued cannot be reliably measured, the equity
instruments issued to extinguish a financial
liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued
50. If both the fair value of the equity
instruments issued and the fair value of the
financial liability extinguished cannot be
measured reliably, the equity instruments
issued shall be measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Carrying amount of the equity instruments
issued
d. Value assigned by the Board of Directors
51. The difference between the carrying amount
of the financial liability extinguished and the fair
value of equity instruments issued shall be
recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. General reserve
52. The gain or loss from extinguishment of a
financial liability by issuing equity instruments is
presented as
a. Other income or other expense
b. Separate line item in the income statement
C. Component of other comprehensive income
d. Component of finance cost
52. Which statement concerning discount on
note payable is incorrect?
a. Discount on note payable may be debited
when entity discounts its own note with the
bank.
b. The discount on note payable is a deduction
from the face amount note payable.
c. The discount on note payable represents
interest charges applicable to future periods.
d. Amortizing the discount on note payable
gradually decreases the carrying amount of the
liability over the life of the note.
6. A note payable with no ready market is
exchanged for property whose fair value is
currently indeterminable.
When such a transaction takes place
a. The present value of the note payable must
be approximated using an imputed interest rate.
b. The note payable should not be recorded
until the fair value of the property becomes
evident.
c. The entity receiving the property should
estimate a value for the property.
d. Both entities involved in the transaction
should negotiate a value to be assigned to the
property.
7. When a note payable is issued for property,
the present value of the note is measured by
a. The fair value of the property
b. The fair value of the note payable
c. Using an imputed interest rate to discount all
future payments on the note payable
d. All of these are considered in measuring the
present value of the note payable
8. When a note payable is exchanged for
property, the stated interest rate is presumed to
be fair when
a. No interest rate is stated.
b. The stated interest rate is unreasonable.
C. The face amount of the note is materially
different from the cash sale price for similar
property.
d. The stated interest rate is equal to the market
rate.
1. When an entity issued a note solely in
exchange for cash, the present value of the note
at issuance is equal to
a. Face amount
b. amount discounted at the prevailing interest
rate
c. Proceeds received
d Proceeds received discounted at the prevailing
interest rate
2. If the present value of a note issued in
exchange for a property is less than face
amount, the differences should be
a. Included in the cost of the asset
b. Amortized as interest expense over the lite
c. Amortized as interest expense over the life of
the asset
d. Included in interest expense in the year of
issuance
3. An entity borrowed cash from a bank and
issued to the bank a short-term noninterest
bearing note payable. The bank discounted the
note at 10% and remitted the proceeds to the
entity. The effective interest rate paid by the
entity in this transaction would be
a. Equal to the stated discount rate of 10%
b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of
10%
4. At issuance date, the present value of a
promissory note is equal to the face amount if
the note
a Bears a stated rate of interest which is
realistic.
b. Bears a stated rate of interest which is less
than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit
interest rate is less than the prevailing market
rate for similar notes.
d. Is noninterest bearing and the implicit
interest rate is equal to the prevailing market
rate for similar notes.
(282)On January 1, 2020, Jonathan Company
borrowed P500,000 8% note due in four years.
The present value of the note on the date of
issuance was P367,500.
The entity elected irrevocably the fair value
option in measuring the note payable. On
December 31, 2020, the fair value of the note is
P408, 150.
1. What is the carrying amount of the note
payable on December 31, 2020?
a. 500,000
b. 367,500
c. 408,150
d. 460,000
2. What amount should be reported as interest
expense for 2020?
a. 40,000
b. 29,400
c. 32,562
d. 20,000
3. What amount of gain from change in fair
value of the note payable should be reported
for 2020?
a. 132,500
b. 172,500
c. 91,850
d. 29,400
4. At what amount should the discount on note
payable be presented on December 31, 2020?
a. 132,500
b. 103,100
c. 91,850
(279)On January 1, 2020, Solemn Company sold
land to Glory Company. There was no
established market price for the land.
Glory gave Solemn a P2,400,000 noninterest
bearing note payable in three equal annual
installments of P800,000 with the first payment
due December 31, 2020.
The note has no ready market. The prevailing
rate of interest for a note of this type is 10%.
The present value of a P2,400.000 note payable
in three equal annual installments of P800.000
at a 10% rate of interest is P1,989,600.
What is the carrying amount of the note
payable on December 31, 2020?
a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000
(279)On January 1, 2020, Easy Company
reported a note payable of P1,200,000.
The note is dated October 1, 2019, bears
interest at 15%, and is payable in three equal
annual payments of P400,000.
The first interest and principal payment was
made on October 1, 2020.
What amount should be reported as interest
expense for 2020?
a. 165,000
b. 180,000

e. 135,000

d. 30,000

(277)On December 31, 2020, Bart Company

purchased a me from Fell Company in exchange
for a noninterest be note requiring eight
payments of P200,000.

The first payment was made on December 31,

2020 and others are due annually on December
31.

At date of issuance, the prevailing rate of

interest for this type of note was 11%.

PV of an ordinary annuity of 1 at 11% for 8

periods 5.146

PV of an annuity of l in advance at 11% for 8

periods 5.712

On December 31, 2020, what is the carrying

amount of the note payable?

a. 1,142,400

b. 1,029,200

c. 1,046,200

d. 942,400

(277)At the beginning of current year, Pares

Company borrowed P3,600,000 from a major
customer evidenced by a noninterest bearing
note due in three years.

The entity agreed to supply the customer's

inventory needs for the loan period at an
amount lower than market price.

At the 12% imputed interest rate for this type of

loan, the present value of the note is
P2,550,000 at the date of issuance.

What amount of interest expense should be

reported in the income statement for the
current year?

a. 432,000

b. 350,000

c. 306,000

d. 0