CURRENT LIABILITIES

1. Which of the following is not an essential
characteristic of a liability?
a. A liability is a present obligation of an enterprise
b. A liability is payable to a specific party
c. A liability arises from past transaction or event
d. The settlement of a liability will result to outflow
of enterprise resources embodying economic
benefits
2. Current liabilities include all of the following, except
a. Trade payables and accruals for employee and
other operating costs
b. Financial liabilities held for trading
c. Bank overdraft
d. Deferred tax liability
3. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A cash dividend payable to preferred
stockholders
c. A dividend payable in the form of additional
shares of company’s own stock
d. All of these are current liabilities
4. An entity shall measure initially a financial liability
not designated at fair value through profit or loss at
a. Fair value
b. Fair value plus directly attributable transaction
costs
c. Fair value minus directly attributable transaction
costs
d. Face amount
I. At initial recognition, an entity may irrevocably
designate a financial liability at fair value through
profit or loss.
II. The financial liability is measured at every year-
end and any changes in fair value are recognized
in profit or loss.
III. The interest expense on the financial liability is
recognized using the effective interest rate.
a. I and II only c. I and III only
b. II and III only d. I, II and III
9. The discount resulting from the determination of a
note payable’s present value should be reported on
the balance sheet as a (an):
a. Deferred charge separate from the note.
b. Direct reduction from the face amount of the
note.
c. Addition to the face amount of the note.
d. Deferred credit separate from the note.
10. Which of the following statements concerning
discount on note payable is incorrect?
a. Discount on note payable may be credited when
an entity discounts its own note with the bank.
b. The discount on note payable is a contra liability
account which is shown as a deduction from note
payable.
c. The discount on note payable represents interest
charges applicable to future periods.
d. Amortizing the discounts on note payable causes
the carrying amount of the liability to gradually
increase over the life of the note.

5. Transaction costs directly attributable to the issue of 11. An entity borrowed cash from a bank and issued to
a financial liability include all of the following, except the bank a short-term noninterest-bearing note
a. Fees and commissions paid to agents payable. The bank discounted the note at 10% and
b. Levies by regulatory agencies remitted the proceeds to the entity. The effective
c. Transfer taxes and duties interest rate paid by the entity in this transaction
d. Financing costs would be
a. Equal to the stated discount rate of 10%
6. The initial fair value of a financial liability is defined b. Less than the stated discount rate of 10%
as the c. More than the stated discount rate of 10%
a. Amount for which a liability is settled. d. Independent of the stated discount rate of 10%
b. Amount for which a liability is settled in an arm’s
length transaction. 12. The following are taken from the records of Frame
c. Amount for which a liability is settled between Co. as of year-end.
knowledgeable and willing parties. Accounts payable 2,000
d. Amount for which a liability is settled between
Utilities payable 7,000
knowledgeable and willing parties in an arm’s
length transaction. Accrued interest expense 6,000
Advances from customers 1,000
7. After initial recognition, an entity shall measure a
financial liability at Unearned rent 9,000
a. Amortized cost using the effective interest Warranty obligations 5,000
method.
b. Fair value through profit or loss. Income taxes payable 2,000
c. Either a or b. Preference shares issued 10,000
d. Neither a nor b.
8. Which of the following statements is true in relation Constructive obligation 11,000
to the fair value option of measuring a financial Obligation to deliver own shares
liability? worth a fixed amount of cash
FAR 6.1MC: CURRENT LIABILITIES Page 1 of
31
 10,000
SSS contributions payable 6,000 Advances from affiliates payable in 15
months after year-end 23,000
Cash dividends payable 4,000
Loan of XYZ, Inc. guaranteed by Air –
Property dividends payable 7,000
it is possible that Air will be held
Share dividends payable 3,000 liable for the guarantee 45,000
Finance lease liability 35,000
How much is the total current liabilities?
Bonds payable 120,000
a. ₱405,000 c. ₱425,000
Discount on bonds payable (15,000) b. ₱470,000 d. ₱482,000
Security deposit 2,000
15. On December 31, 2017, the bookkeeper of Drang
Redeemable preference shares issued 14,000 Company provided the following information:
Unearned interest on receivables 3,000 Accounts payable, including deposits
and advances from customers of ₱2,500,000
₱500,000
How much is the financial liabilities to be disclosed in
the notes? Notes payable, including note payable
a. ₱171,000 c. ₱178,000 to bank due on December 31, 2017 3,000,000
b. ₱185,000 d. ₱192,000 for ₱1,000,000
Share dividends payable 800,000
13. Fan Co. has the following liabilities as of December
31, 2017. Credit balance in customers’ accounts 400,000
Trade accounts payable, net of debit Serial bonds, payable in semiannual
balance in supplier’s account of installments of ₱1,000,000 x 2 10,000,000
₱5,000, net of unreleased checks of
Accrued interest on bonds payable 300,000
₱4,000, and net of postdated checks ₱300,000
of ₱2,000. Contested BIR tax assessment 600,000
Credit balance in customers’ accounts 2,000 Unearned rent income 100,000
Financial liability designated at FVPL 50,000
In the December 31, 2017 statement of financial
Bonds payable (maturing in 10 equal
position, how much current liabilities should be
annual installments of ₱100,000) 1,000,000
reported?
12%, 5-year note payable issued on a. ₱6,800,000 c. ₱7,300,000
October 1, 2017 100,000 b. ₱7,900,000 d. ₱8,700,000
Deferred tax liability 5,000
16. Watch Co. has a 10%, ₱1,000,000 loan payable as of
Unearned rent 4,000 December 31, 2017 that is maturing on July 1, 2018.
Contingent liability 10,000 Interest on the loan is due every July 1 and December
31. On February 1, 2018, Watch Co. entered into a
Reserve for contingencies 25,000 refinancing agreement with a bank to refinance the
loan on a long-term basis. Both parties are financially
How much is the total current liabilities? capable of honoring the agreement’s provisions.
a. ₱467,000 c. ₱470,000 Watch’s financial statements were authorized for
b. ₱477,000 d. ₱480,000 issue on March 15, 2018.

14. Air Co. has the following liabilities as of December 31, How much is presented as current liability in relation
2017 to the loan in Watch’s 2017 year-end financial
Trade accounts payable, including statements?
cost of goods received on a. None c. ₱50,000
consignment of ₱10,000 ₱300,000 b. ₱100,000 d. ₱1,000,000
(ref.agrem’t – no discretion; disclosed)
Held for trading financial liabilities 50,000 17. Watch Co. has a 10%, ₱1,000,000 loan payable as of
Deferred revenue 20,000 December 31, 2017 that is maturing on July 1, 2018.
Interest on the loan is due every July 1 and December
Bank overdraft 10,000
31. On February 1, 2018, Watch Co. entered into a
Income tax payable 50,000 refinancing agreement with a bank to refinance the
loan on a long-term basis. Both parties are financially
Accrued expenses 5,000
capable of honoring the agreement’s provisions.
Share dividend payable 12,000 Watch has the discretion to refinance or roll over the
FAR 6.1MC: CURRENT LIABILITIES Page 2 of
31
 loan for at least twelve months from December 31,
2017 under an existing loan facility. Watch’s financial
statements were authorized for issue on March 15,
2018.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱50,000
b. ₱100,000 d. ₱1,000,000
(ref.agrem’t w/ discretion)
18. Watch Co. has a 10%, ₱1,000,000 loan payable as of
December 31, 2017 that is maturing on July 1, 2018.
Interest on the loan is due every July 1 and December
31. On December 1, 2017, Watch Co. entered into a
refinancing agreement with a bank to refinance the
loan on a long-term basis. The refinancing and roll
over transaction was completed on December 31,
2017.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱50,000
b. ₱100,000 d. ₱1,000,000
(ref.agrem’t: completed at year-end)
19. Watch Co. has a 10%, ₱1,000,000 loan payable as of
December 31, 2017 that is maturing on July 1, 2018.
Interest on the loan is dated July 1, 2016 and pays
annual interest every July 1. On February 1, 2018,
Watch 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. Watch has the discretion to
refinance or roll over the loan for at least twelve
months from December 31, 2017 under an existing
loan facility. Watch’s financial statements were
authorized for issue on March 15, 2018.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱50,000
b. ₱100,000 d. ₱1,000,000
20. On January 1, 2017, Watch Co. took a 3-year,
₱1,000,000 loan from a bank. The loan agreement
requires Watch 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, 2017,
Watch’s current ratio is 1.8:1. On January 5, 2018, the
bank agreed not to collect the loan in 2018 and gave
Watch 12 months to rectify the breach of loan
agreement.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱33,333
b. ₱66,667 d. ₱1,000,000
(grace period received after year-end)
FAR 6.1MC: CURRENT LIABILITIES
21. On January 1, 2017, Watch Co. took a 3-year,
₱1,000,000 loan from a bank. The loan agreement
requires Watch 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, 2017,
Watch’s current ratio is 1.8:1. On December 31, 2017,
the bank agreed not to collect the loan in 2018 and
gave Watch 12 months to rectify the breach of loan
agreement.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱33,333
b. ₱66,667 d. ₱1,000,000
22. On December 31, 2017, Watch Co. has a ₱1,000,000
note payable on demand. However, on December 31,
2017, there is no indication that the payee on the
note will demand payment over the next 12 months.
How much is presented as current liability in relation
to the loan in Watch’s 2017 year-end financial
statements?
a. None c. ₱33,333
b. ₱66,667 d. ₱1,000,000
23. On December 31, 2017, Case Co. has accounts payable
of ₱1,000,000 before possible adjustment for the
following:
 Goods in transit from a vendor to Case on
December 31, 2017 with an invoice cost of
₱50,000 purchased FOB shipping point was not
yet recorded.
 Goods shipped FOB shipping point from a vendor
to Case on December 31, 2017 amounting to
₱8,000 was recorded and included in the year-
end physical count as “goods in transit”.
 Goods in transit from a vendor to Case on
December 31, 2017 with an invoice cost of
₱10,000 purchased FOB destination was not yet
recorded. These goods were received in January
2018.
 Goods with invoice cost of ₱15,000 was recorded
and included in the year-end physical count as
“goods in transit”. It was found out that the goods
were shipped from a vendor under FOB
destination.
How much is the adjusted accounts payable on
December 31, 2017?
a. ₱1,043,000 c. ₱1,035,000
b. ₱1,055,000 d. ₱1,070,000
24. On December 31, 2017, Cone Co. has accounts
payable of ₱1,000,000 before possible adjustment for
the following:
 Checks drawn but not yet released to payees
amounted to ₱12,000 while checks drawn and
released to payees but were postdated amounted
to ₱5,000.
Page 3 of
31
  On December 28, 2017, a vendor authorized 27. Flat Co. requires refundable advance payments for
Cone to return for full credit goods shipped and custom-built guitar effects, gadgets, and racks. The
billed at ₱25,000 on December 14, 2017, Cone records of Flat Co. show the following:
shipped the returned goods on December 31, Unearned revenue, January 1, 2017 1,000,000
2017 but the credit memo was received and
Advances received during 2017 10,000,000
recorded only on January 3, 2018.
 Goods shipped FOB shipping point, freight Advances applied to orders shipped in 8,000,000
prepaid from a vendor on December 28, 2017 2017
was recorded at invoice cost at shipment date. Advances pertaining to orders 300,000
The invoice cost is ₱14,000 while the freight cost cancelled in 2017
is ₱3,000.
 Goods shipped FOB destination, freight collect
were received on December 29, 2017. The How much is the current liability on unearned
invoice cost of ₱40,000 was credited to accounts revenue?
payable on date of receipt and the related freight a. None c. ₱700,000
of ₱5,000 was debited to an expense account. b. ₱2,700,000 d. ₱3,000,000

How much is the adjusted accounts payable on 28. Black Company requires advance payments with
December 31, 2017? special orders for machinery constructed to customer
a. ₱987,000 c. ₱990,000 specifications. These advances are nonrefundable.
b. ₱992,000 d. ₱994,000 Information for the current year is as follows:
Advances from customers – January ₱1,180,000
25. The balance in Dowarc Company’s accounts payable 1
account at December 31, 2016 was ₱1,170,000 before Advances receive with orders 1,840,000
any year-end adjustments relating to the following:
 Goods in transit from a vendor to Dowarc on Advances applied to orders shipped 1,640,000
December 31, 2017. The invoice cost was Advances applicable to orders 500,000
₱65,000 and the goods were shipped FOB cancelled
shipping point on December 29, 2017. The goods
were received on January 2, 2018.
In the year-end statement of financial position, what
 Goods shipped FOB shipping point on December
amount should be reported as current liability for
20, 2017 from a vendor to Dowarc, were lost in
advances from customers?
transit. The invoice cost was ₱32,500. On January
a. ₱0 c. ₱880,000
5, 2018, Dowarc filed a ₱32,500 claim against the
b. ₱1,380,000 d. ₱1,480,000
common carrier.
 Goods shipped FOB destination on December 21,
Use the following information to answer the next four
2017, from a vendor to Dowarc, were received on
questions:
January 6, 2018. The invoice cost was ₱19,500.
Box Co. sells service contracts that cover a 2-year
period. the sales price of each contract is ₱1,000. Box
What amount should Dowarc report as accounts
sold 1,000 contracts evenly throughout 2017. Box’s
payable on its December 31, 2017 statement of
past experience shows that of the total pesos spent
financial position?
for repairs on service contracts, 40% in incurred
a. ₱1,202,500 c. ₱1,222,000
evenly during the first contract year and 60% evenly
b. ₱1,235,000 d. ₱1,267,500
during the second contract year.
26. Flat Co. requires non-refundable advance payments
29. How much is the current portion of the deferred
for custom-built guitar effects, gadgets, and racks.
revenue to be presented in Box’s 2017 statement of
The records of Flat Co. show the following:
financial position?
Unearned revenue, January 1, 2017 1,000,000
a. ₱200,000 c. ₱500,000
Advances received during 2017 10,000,000 b. ₱800,000 d. ₱1,000,000
Advances applied to orders shipped in 8,000,000
30. How much is the noncurrent portion of the deferred
2017
revenue to be presented in Box’s 2017 statement of
Advances pertaining to orders 300,000 financial position?
cancelled in 2017 a. ₱300,000 c. ₱500,000
b. ₱800,000 d. ₱1,000,000
How much is the current liability on unearned
revenue? 31. How much is the service revenue recognized in 2017?
a. None c. ₱700,000 a. ₱200,000 c. ₱500,000
b. ₱2,700,000 d. ₱3,000,000 b. ₱800,000 d. ₱1,000,000

FAR 6.1MC: CURRENT LIABILITIES Page 4 of

31
32. How much is the service revenue recognized in 2018? 38. Dunne Company sells equipment service contracts
a. ₱200,000 c. ₱500,000 that cover a two-year period. The sales price of each
b. ₱800,000 d. ₱1,000,000 contract is ₱600. Dunne’s past experience is that, of
the total pesos spent for repairs on service contract,
Use the following information to answer the next two 40% is incurred evenly during the first contract year
questions: and 60% evenly during the second contract year.
Glass Co. sells monthly subscriptions for an industry Dunne sold 1,000 contracts evenly throughout 2017.
publication. Subscriptions received after the In its December 31, 2017 statement of financial
November 1 cut-off date are held for publication in position, what amount should Dunne report as
the following year. Receipts during 2017 for deferred service revenue?
subscriptions were made evenly. Information on a. ₱300,000 c. ₱360,000
subscription is shown below: b. ₱480,000 d. ₱540,000
Unearned revenue – January 1, 2017 3,000,000
39. Kent Company sells magazine subscriptions of one of
Receipts from subscriptions during 24,000,000
three-year periods. Cash receipts from subscribers
2017
are credited to magazine subscriptions collected in
advance, and this account had a balance of
33. How much is the unearned revenue balance on ₱2,400,000 on December 31, 2016 expire as follows:
December 31, 2017? During 2017 ₱600,000
a. ₱4,000,000 c. ₱7,000,000
During 2018 900,000
b. ₱12,000,000 d. ₱23,000,000
During 2019 400,000
34. How much is the revenue from subscriptions during
In its December 31, 2016 statement of financial
2017?
position, what amount should Kent report as
a. ₱4,000,000 c. ₱15,000,000
magazine subscriptions collected in advance?
b. ₱23,000,000 d. ₱24,000,000
a. ₱500,000 c. ₱1,200,000
b. ₱1,900,000 d. ₱2,400,000
Use the following information to answer the next two
questions:
40. Greene Company sells office equipment service
Glass Co. sells subscriptions for an industry
contracts agreeing to service equipment for a two-
publication published semiannually and shipped to
year period. Cash receipts from contracts are credited
subscribers on May 1 and November 1. Subscriptions
to unearned service contract revenue and service
received after the April 1 and October 1 cut-off dates
contract costs are charged to service contract
are held for the next publication. Receipts during
expense as incurred. Revenue from service contracts
2017 for subscriptions were made evenly.
is recognized as earned over the lives of the
Information on subscription is shown below:
contracts. Additional information for the year ended
Unearned revenue – January 1, 2017 3,000,000
December 31, 2017 is as follows:
Receipts from subscriptions during 24,000,000 Unearned service contract revenue at 600,000
2017 January 1
Cash receipts from service contracts sold 980,000
35. How much is the unearned revenue balance on
Service contract revenue recognized 860,000
December 31, 2017?
a. ₱4,000,000 c. ₱7,000,000 Service contract expense 520,000
b. ₱12,000,000 d. ₱23,000,000
36. How much is the revenue from subscriptions during
What amount should be reported as unearned service
2017?
contract revenue on December 31, 2017?
a. ₱4,000,000 c. ₱15,000,000
a. ₱460,000 c. ₱480,000
b. ₱23,000,000 d. ₱24,000,000
b. ₱490,000 d. ₱720,000

37. In November and December 2017, Avdent Company

41. Annette Video Company sells 1- and 2-year
received ₱792,000 for 1,000, 3-year subscriptions at
subscriptions for its video-of-the-month business.
₱264 per issue per year, starting with the January
Subscriptions are collected in advance and credited
2018 issue. Avdent elected to include the entire
to sales. An analysis of the recorded sales activity
₱792,000 in its 2017 income statement for tax
revealed the following:
purposes. What amount should Avdent report in its
2016 2017
2017 statement of financial position as unearned
subscription revenue? Sales ₱420,000 ₱500,000
a. None c. ₱44,000 Less cancelations 20,000 30,000
b. ₱264,00 d. ₱792,000
Net sales 400,000 470,000

FAR 6.1MC: CURRENT LIABILITIES Page 5 of

31
 Subscription deliveries in: 2015, ₱9,000; 2016, ₱25,000; and 2017,
expirations: ₱46,000.
2016 120,000
How much is the liability for deposits on returnable
2017 155,000 130,000 containers on December 31, 2017?
a. None c. ₱44,000
2018 125,000 200,000
b. ₱64,000 d. ₱75,000
2019 _____ 140,000
400,000 470,000 45. On the first day of each month, Bell Mortgage
Company receives from Kent Company an escrow
In the December 31, 2017 statement of financial deposit of ₱250,000 for real estate taxes. Bell records
position, what should be reported as unearned the ₱250,000 in an escrow account. Kent’s 2017 real
subscription revenue? estate tax is ₱2,800,000, payable in equal
a. ₱340,000 c. ₱465,000 installments on the first day of each calendar quarter.
b. ₱470,000 d. ₱495,000 On January 1, 2017, the balance in the escrow
account was ₱300,000. On September 30, 2017, what
42. Rubber Co. has just opened a novelty store. Rubber amount should be reported as escrow liability?
decided to sell gift certificates as part of its sales a. ₱150,000 c. ₱450,000
promotion. Transactions relating to the gift b. ₱850,000 d. ₱1,150,000
certificates during the year are shown below:
 Sold gift certificates worth ₱100,000. 46. Clean Co. maintains escrow accounts and pays real
 Gift certificates worth ₱80,000 were redeemed. estate taxes for its customers. Escrow funds are kept
 ₱10,000 gift certificates expired. in interest-bearing accounts. Interest, less a 10%
 ₱2,000 gift certificates were estimated not to be service fee, is credited to the mortgagee’s account
redeemed. and used to reduce future escrow payments.
Information on escrow accounts are shown:
How much is the unearned revenue on gift Escrow accounts liability, January 1, 200,000
certificates as of year-end? 2017
a. None c. ₱8,000
Escrow payments received during 1,500,000
b. ₱10,000 d. ₱100,000
2017
43. Fell operates a retail grocery store that is required by Real estate taxes paid during 2017 500,000
law to collect refundable deposits of ₱5 on soda cans.
Interest on escrow funds during 2017 100,000
Information for the current year follows:
Liability for refundable deposit – 100,000 x 10% = 10,000 – 100,000
January 1 150,000
Cans of soda sold 100,000 How much is current liability for escrow accounts on
Soda cans returned 110,000 December 31, 2017?
a. ₱1,000,000 c. ₱1,200,000
b. ₱1,290,000 d. ₱1,300,000
On February 1, Fell subleased space and received a
₱25,000 deposit to be applied against rent at the 47. Kemp Company must determine the December 31,
expiration of the lease in 5 years. In the December 31 2017 accruals for advertising and rent expense. A
statement of financial position, what amount should ₱50,000 advertising bill was received in January 7,
be reported as current liability for deposit? 2018, comprising costs of ₱35,000 for
a. ₱25,000 c. ₱100,000 advertisements in December 2017 issues, and
b. ₱125,000 d. ₱140,000 ₱15,000 for advertisements in January 2018 issues of
the newspaper. A store lease, effective December 16,
44. Koce Co. requires deposits from customers for the 2016, calls for a fixed rent of ₱120,000 per month,
containers of goods sold. The customers are refunded payable one month from the effective date and
for the deposits received when the containers are monthly thereafter. In addition, rent equal to 5% of
returned within two years from the date of sale of the net sales over ₱6,000,000 per calendar year is
related goods. Deposits for containers not returned payable on January 31 of the following year. Net sales
within the time limit are regarded as proceeds from for 2017 totaled ₱9,000,000. In the December 31,
retirement of the containers. Information in 2017 is 2017 statement of financial position, what amount
as follows: should be reported as accrued liabilities?
a. ₱185,000 c. ₱210,000
Container deposits at December 31, 2016, from b. ₱245,000 d. ₱260,000
deliveries in: 2015, ₱20,000; and 2016, ₱45,000.
Deposits for containers delivered in 2017, ₱90,000.
Deposits for containers returned in 2017 from

FAR 6.1MC: CURRENT LIABILITIES Page 6 of

31
48. Time Co. is preparing its December 31, 2017 year-
end financial statements. The following information
was gathered:
 The bill for December’s utility costs of ₱30,000
was received and paid on January 10, 2018.
 A ₱20,000 advertising bill was received on
January 2, 2018. Of the total billing, ₱15,000
pertain to advertisements in December 2017 and
₱5,000 pertain to advisements in January 2018.
 A lease, effective December 16, 2016, calls for a
fixed rent of ₱100,000 per month, payable one
month after the commencement of the lease and
Answer Key:
BDBCD DCABA CBCAC
DAACD ADCCD BDCCA
ACABB CDBBD CCCBC
BBB
PROVISION, CONTIGENT LIABILITIES AND ASSETS
49. Estimated liabilities are disclosed in financial
statements by
a. Note to the financial statements
b. Showing the amount among the liabilities but not
extending to the liability total
c. An appropriation of retained earnings
d. Appropriately classifying them as regular
liabilities in the statement of financial position
50. It is a marketing scheme whereby an entity grants
award credits to customers and the entity can redeem
the award credits in exchange for free or discounted
goods or services.
a. Customer loyalty program
b. Premium plan
c. Marketing program
d. Loyalty award
51. The award credits granted to customers under a
customer loyalty program it offers is often described
as
a. Points c. Awards
b. Credits d. Royalty
52. The consideration allocated to the award credits is
measured at
a. Fair value of the award credits
b. Carrying amount of goods to be received in
exchange
c. Fair value of the goods to be received in exchange
d. The proportion of the fair value of the award
credits relative to the total consideration received
from the initial sale of the goods
53. Under a loyalty program, if the entity supplies the
awards itself, the consideration allocated to the award
credits
a. Shall be recognized as revenue immediately
b. Shall not be accounted for as revenue separately
FAR 6.1MC: CURRENT LIABILITIES
every month thereafter. In addition, rent equal to
5% of net sales over ₱1,000,000 per year is
payable on January 31 of the following year.
 Total cash sales and collections on accounts
amounted to ₱1,000,000. Accounts receivable has
a net increase of ₱200,000. Commissions of 15%
of sales are paid on the same day cash is received
from customers.
How much is the accrued liabilities on December 31,
2017?
a. None c. ₱125,000
b. ₱135,000 d. ₱140,000
c. Shall be recognized initially as deferred revenue
and amortized as revenue over a reasonable
period not exceeding five years
d. Shall be recognized initially as deferred revenue
and subsequently recognized as revenue upon the
redemption of the award credits
54. An entity sells appliances that include a three-year
warranty. Service calls under the warranty are
performed by an independent mechanic under a
contract with the entity. Based on experience,
warranty costs are expected to be incurred for each
machine sold. When should the entity recognize these
warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold
55. A retail store received cash and issued gift certificates
that are redeemable in merchandise. The gift
certificates lapse one year after they are issued. How
would the deferred revenue account be affected by
redemption and lapse of certificates, respectively?
a. Decrease and No effect
b. Decrease and Decrease
c. No effect and No effect
d. No effect and Decrease
56. Which of the following is the correct definition of a
provision?
a. A possible obligation arising from past event
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
57. A provision shall be recognized as liability when
a. An entity has a present obligation as a result of a
past event.
Page 7 of
31
 b. It is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation.
c. The amount of obligation can be measured
reliably
d. All of the above.
58. Where there is a continuous range of possible
outcomes, and each point in that range is as likely as
any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Summation of the minimum and maximum
59. When the provision involves a large population of
items, the estimate of the amount
a. Reflects the weighing of all possible outcomes by
their associated probabilities.
b. Is determined as the individual most likely
outcome.
c. May be the individual most likely outcome
adjusted for the effect of other possible outcome.
d. Midpoint of the possible outcomes.
60. When the provision arises from a single obligation, the
estimate of the amount
a. Reflects the weighing all possible outcomes by
their associated probabilities
b. Is determined as the individual most likely
outcome
c. Is the individual most likely outcome adjusted for
the effect of other possible outcomes
d. Midpoint of the possible outcomes
61. Which statement is incorrect where some or all of the
expenditure required to settle a provision is expected
to be reimbursed by another party?
a. The reimbursement shall be recognized only when
it is virtually certain that the reimbursement
would be received if the entity settles the
obligation
b. The amount of the reimbursement shall not
exceed the amount of the provision
c. In the income statement, the expense relating to
the provision may be presented net of the
reimbursement
d. The reimbursement shall not be treated as
separate asset and therefore “netted” against the
estimated liability for the provision
62. Which of the following statements is false in relation
to recognition of a provision?
a. No provision is recognized for costs that need to
be incurred to operate in the future
b. A provision for the decommissioning of an oil
installation or a nuclear plant station shall be
recognized to the extent that an entity is obliged
to rectify damage already caused
c. Both a and b
d. Neither a nor b
63. Which of the following statements is incorrect
concerning recognition of a provision?
a. Provisions shall be reviewed at the end of each
reporting period and adjusted to reflect the
current best estimate
b. A provision shall be used only for expenditures for
which the provision was originally recognized
FAR 6.1MC: CURRENT LIABILITIES
c. Provisions shall be recognized for future
operating losses
d. If an entity has an onerous contract, the present
obligation under the contract shall be recognized
and measured as a provision
64. Provisions shall be recognized for all of the following,
except
a. Cleaning-up costs of contaminated land when an
oil entity has a published policy that it will
undertake to clean up all contamination that it
causes
b. Restructuring costs after a binding sale agreement
has been signed
c. Rectification costs relating to defective products
already sold
d. Future refurbishment costs due to introduction of
a new computer system
65. Which of the following statements is true concerning
the measurement of a provision?
a. The amount recognized as a provision should be
the best estimate of the expenditure required to
settle the present obligation at the end of
reporting period.
b. The best estimate of the expenditure required to
settle the present obligation is the amount that an
entity would rationally pay to settle the obligation
at the end of reporting period or to transfer it to a
third party at that time.
c. Both a and b
d. Neither I nor II
66. Which of the following is false in relation to the
measurement of provision?
a. The risks and uncertainties that inevitably
surround many events and circumstances shall be
taken into account in reaching the best estimate of
a provision.
b. Where the effect of the time value of money is
material, the amount of a provision shall be the
present value of the expenditure expected to settle
the obligation
c. Both a and b
d. Neither a nor b
67. Provisions shall be discounted if the effect is material.
The discount rate should (choose the incorrect one)
a. Reflect current market assessment of the time
value of money
b. Reflect risks specific to the liability
c. Not reflect risks from which future cash flow
estimates have been adjusted
d. Be post-tax discount rate
68. This is defined as “a structured program that is
planned and controlled by the management that
materially changes either the scope of a business of an
entity or the manner in which that business is
conducted”.
a. Restructuring c. Liquidation
b. Recapitalization d. Corporate revamp
69. Examples of events that qualify as restructuring
include all of the following, except
a. Sale or termination of business
Page 8 of
31
 b. Closure of business location in a region or
relocation of business from one location to
another
c. Change in management structure such as
elimination of a layer of management
d. Fundamental reorganization of an entity that has
an immaterial and insignificant impact on its
operations
70. It is the abusive practice of manipulation and creative
accounting by dumping all kinds of provisions under
the banner of provision for restructuring.
a. Big bath provision c. Creative accounting
b. Cookie jar d. General reserve
71. An entity is closing one of its operating divisions, and
the conditions for making restructuring provision
have been met. The closure will happen in the first
quarter of the next financial year. At the current year-
end, the entity has announced the formal plan publicly
and is calculating the restructuring provision. Which
of the following costs should be included in the
restructuring provision?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other
divisions
c. Contractually required costs of retraining staff
being made redundant from the division being
closed
d. Future operating losses of the division being
closed up to the date of closure
72. A contingent liability is a
a. Possible obligation that arises from past event and
whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more
uncertain future events not wholly within the
control of the entity.
b. Present obligation that arises from past event and
it is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation and the amount of the
obligation can be measured reliably.
c. Both a and b
d. Neither a nor b
73. Which of the following statements is incorrect
concerning a contingent liability?
a. A contingent liability is not recognized in the
financial statements.
b. A contingent liability is disclosed only.
c. If the contingent liability is remote, no disclosure
is required.
d. A contingent liability is both probable and
measurable.
74. It is a possible asset that arises from past event and
whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain
future events not wholly within the control of the
entity.
a. Contingent asset c. Other asset
b. Suspense account d. Current asset
75. Which of the following is incorrect concerning
contingent asset?
FAR 6.1MC: CURRENT LIABILITIES
a. A contingent asset is not recognized in the
financial statements because this may result to
recognition of income that may never be realized.
b. When the realization of income is virtually certain,
the related asset is no longer contingent asset and
its recognition is appropriate.
c. A contingent asset is only disclosed when the
occurrence of the future event is possible or
remote.
d. The related gain arising from the contingent asset
is recognized usually when it is realized.
76. The likelihood that the future event will or will not
occur can be expressed by a range of outcome. Which
range means that the future event occurring is very
slight?
a. Probable c. Reasonably possible
b. Certain d. Remote
77. The present obligation that is probable and for which
the amount can be reliably measured shall
a. Not be accrued but shall be disclosed in the notes
to the financial statements.
b. Be accrued by debiting an appropriate retained
earnings account and crediting liability account.
c. Be accrued by debiting an expense account and
crediting an appropriated retained earnings
account.
d. Be accrued by debiting an expense account and
crediting a liability account.
78. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount
can be measured reliably
c. Occurrence is probable and the amount can be
reliably measured
d. The amount can be reliably measured
79. Which of the following is the proper accounting
treatment for a contingent asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional
disclosure explaining the nature of the transaction
d. A disclosure only
80. An entity operates a plant in a foreign country. It is
probable that the plant will be expropriated. However,
the foreign government has indicated that the entity
will receive a definite amount of compensation for the
plant. The amount of compensation is less than the fair
value but exceeds the carrying amount of the plant.
The contingent asset shall be reported
a. As a valuation allowance as a part of shareholders’
equity
b. As a fixed valuation allowance account
c. In the notes to the financial statements
d. In the statement of financial position
81. A provision is a liability that is
a. Uncertain as to existence, timing or amount
b. Uncertain as to timing or amount
c. Uncertain as to existence or amount
d. Uncertain as to existence but certain as to timing
or amount
Page 9 of
31
82. An obligation that is contingent on the occurrence of a
future event should be reported in the balance sheet
as a liability if
a. The future event is likely to occur
b. The amount of the obligation can be reasonably
estimated
c. The occurrence of the future event is at least
reasonably possible and the amount is known
d. The occurrence of the future event is probable and
the amount can be reasonably estimated
83. A new product introduced by Eaut Promotions carries
a two-year warranty against defects. The estimated
warranty costs related to sales are as follows:
Year of sale 3%
Year after sale 5%
Sales
and actual warranty expenditures for the years ended
December 31, 2016 and 2017 are as follows:
Sales Actual Warranty
Expenditures
2016 ₱ 800,000 ₱20,000
2017 1,000,000 70,000
What amount should Eaut report as its estimated
liability as of December 31, 2017?
a. ₱4,000 c. ₱24,000
b. ₱54,000 d. ₱74,000
84. On December 2, 2017, an employee filed a ₱3,000,000
lawsuit against Scruicer Company for damages
suffered when one of the Scruicer’s plants exploded on
July 20, 2017. Scruicer’s legal counsel expects the
company will lose the lawsuit and estimates the loss to
be between ₱500,000 and ₱1,000,000. The employee
has offered to settle the lawsuit out of court for
₱900,000, but Scruicer will not agree to the
settlement.
In its December 31, 2017 statement of financial
position, what amount should Scruicer Company
report as provision from lawsuit?
a. ₱500,000 c. ₱750,000
b. ₱1,000,000 d. ₱3,000,000
85. Jekyll Company sells washing machines that carry a
three-year warranty against manufacturer’s defects.
Based on the entity’s experience, warranty costs are
estimated at ₱300 per machine. During the current
year, Jekyll Company sold 2,400 washing machines
and paid warranty costs of ₱170,000. In its balance
sheet for the current year, what amount should Jekyll
Company report as estimated warranty liability?
a. ₱170,000 c. ₱240,000
b. ₱550,000 d. ₱720,000
86. Ethel Company’s president gets an annual bonus of
10% of net income after bonus and income tax.
Assume the tax rate of 30% and the correct income
before bonus and tax is ₱9,600,000. How much should
be reported as current liability in Ethel’s December 31,
2017 statement of financial position?
a. ₱ 395,000 c. ₱ 628,000
b. ₱ 722,000 d. ₱2,240,000
FAR 6.1MC: CURRENT LIABILITIES
87. Beginning 2017, Pains Company began marketing a
new beer called “Red Eagle”. To help promote the
product, the management is offering a special beer
mug to each customer for every 20 specially marked
bottle caps of Red Eagle. Pains estimates that out of
the 300,000 bottles of Red Eagle sold during 2017,
only 50% of the marked bottle caps will be redeemed.
For the year 2017, 8,000 mugs were ordered by the
company at a total cost of ₱360,000. A total of 4,500
mugs were already distributed to customers. What is
the total amount of the liability that Pains Company
should report on its December 31, 2017 statement of
financial position?
a. ₱135,000 c. ₱202,500
b. ₱337,500 d. ₱360,000
88. On January 2, 2017, Greco Company introduced a new
line of products that carry a three-year warranty
against factory defects. Estimated warranty cost
related to peso sales are as follows: 1% of the sales in
the year of sale, 2% in the year after sales and 3% in
the second year after sale. Sales and actual warranty
expenditures for the period 2017 to 2019 were as
follows:
Sales Actual Warranty
Expenditures
2019 ₱100,000 ₱750
2018 250,000 3,750
2017 350,000 11,250
What amount should Greco Company report as
warranty expense in 2017?
a. ₱ 3,500 c. ₱11,250
b. ₱11,500 d. ₱21,000
89. A court case decided on 21 December 2017 awarded
damages against Jenin. The judge has announced that
the amount of damages will be set at a future date,
expected to be in March 2018. Jenin has received
advice from its lawyers that the amount of the
damages could be anything between ₱20,000 and
₱7,000,000. As of December 31, 2017, how much
should be recognized in the statement of financial
position regarding this court case?
a. ₱ 0 c. ₱ 20,000
b. ₱3,510,000 d. ₱7,000,000
90. On February 5, 2018, an employee filed a ₱2,000,000
lawsuit against Monica Company for damages suffered
when one of Monica’s plant exploded on December 29,
2017. Monica’s legal counsel expects the entity will
probably lose the lawsuit and estimates the loss to be
₱500,000. The employee has offered to settle the
lawsuit out of court for ₱900,000 but Monica Company
will not agree to the settlement. In its December 31,
2017 statement of financial position, what amount
should Monica Company report as liability from
lawsuit?
a. ₱ 500,000 c. ₱ 900,000
b. ₱1,000,000 d. ₱2,000,000
91. On November 25, 2017, an explosion occurred at a
Mary Company plant causing extensive property
damage to area buildings. By March 10, 2018, claims
had been asserted against Mary. Mary’s management
Page 10 of
31
 and counsel concluded that it is probable Mary will be
responsible for damages, and that ₱3,500,000 would
be reasonable estimate of its liability. Mary’s
₱10,000,000 comprehensive public liability policy has
a ₱500,000 deductible clause. What should be
reported in the December 31, 2017 financial
statements, issued on March 25, 2017, in relation to
this item?
a. An accrued liability of ₱500,000.
b. An accrued liability of ₱3,500,000.
c. A footnote disclosure indicating the probable loss
of ₱500,000.
d. A footnote disclosure indicating the probable loss
of ₱3,500,000.
92. Gallery Department Store sells gift certificates,
redeemable for store merchandise that expires one
year after their issuance. Gallery has the following
information pertaining to its gift certificates sales and
redemptions:
Unearned at December 31, 2016 600,000
2017 sales 2,000,000
2017 redemptions of prior-years 200,000
sales
2017 redemptions of current-year 1,400,000
sales
Gallery’s experience indicates 10% of gift certificates
sold will not be redeemed. In its December 31, 2017
statement of financial position, what amount should
Gallery report as unearned revenue?
a. ₱400,000 c. ₱600,000
b. ₱800,000 d. ₱1,000,000
93. Goverance Inc. has a bonus plan covering all
employees, the total bonus is equal to 10% of
Governance’s preliminary (pre-bonus, pretax) income
reduced by income tax (computed of the preliminary
income less the bonus itself). Governance’s
preliminary income for 2017 is ₱1,000,000 and the
income tax rate is 32%. How much is the bonus for
2017?
a. ₱61,200 c. ₱65,891
b. ₱68,000 d. ₱70,248
94. In May 2016, West Company filed suit against Brown,
Inc. seeking ₱850,000 damages for patent
infringement. A court verdict in November 2016
awarded West ₱600,000in damages, but Brown’s
appeal is not expected to be decided before 2016.
West’s counsel believes it is probable but not virtually
Answer Key:
DAAAD DBBDC ACDDC
DCDDA DACAD ACDDA
DCBDB CBCAD AAAAD ABDD
FAR 6.1MC: CURRENT LIABILITIES
certain that West will be successful against Brown for
an estimated amount in the range between ₱300,000
and ₱450,000, with ₱400,000 considered the most
likely amount. What amount should West record as a
contingent asset from lawsuit in the year ended
December 31, 2016?
a. None c. ₱300,000
b. ₱400,000 d. ₱600,000
95. On December 31, 2017, Home Company was a
defendant in a pending lawsuit. The suit arose from
the alledge defect of a product that Home sold in 2016.
The opinion of home’s attorney, it is probable that
Home will have to pay ₱500,000 and it is reasonably
possible that Home will have to pay ₱600,000 as a
result of this lawsuit. In its 2017 financial statements,
Home should report
a. An accrued liability of ₱500,000 only.
b. An accrued liability of ₱500,000 and would
disclose a contingent liability.
c. An accrued liability of ₱600,000 only.
d. No information about this lawsuit.
96. Hope guarantee a loan of ₱200,000 to Faith. At the
time when the financial statements of Hope are being
finished, it is clear that Faith is in financial difficulties
and it is probable that Hope will meet the guarantee.
In the financial statements, Hope should
a. Only disclose in the notes the amount of the
guarantee
b. Recognize a provision for liability of ₱200,000
c. Not recognize and need not disclose the guarantee
d. Recognize a provision for liability of ₱200,000 and
also disclose in the notes to financial statements
97. Milder Company has guaranteed a loan of ₱300,000 to
Miller Company. After the balance sheet date of Milder
Company but before directors approved the financial
statements, Milder Company receives notice that
Miller Company is in liquidation and the creditor of
Miller will involve the guarantee. What proper
accounting should Milder Company account for the
guarantee?
a. The amount of the guarantee is not accounted for
in Milder’s books
b. The amount of ₱330,000 should be recognized as
a provision
c. The ₱300,000 be recognized as a liability when
necessary disclosure in the notes to financial
statements.
d. The contingent liability should be disclosed by
way of note to the financial statements
Page 11 of
31
NON-CURRENT LIABILITIES
1. Theoretically, a short-term, non-trade, note payable
with no stated rate of interest should be
a. Recorded at maturity value.
b. Recorded at the face amount.
c. Discounted to its present value.
d. Reported separately from other short-term notes
payable.
2. A short-term note payable may include all of the
following except:
a. Trade notes payable
b. Nontrade notes payable
c. Unearned revenue
d. Current maturity of a long-term liability
3. On August 1, 2017, an entity acquired a new
equipment that it does not have to pay for until
September 1, 2021. The total payment on September
1, 2021, will include both principal and interest. The
initial measurement of the note and the equipment is
a. Payment for the principal multiplied by Present
value of ₱1
b. Payment for interest multiplied by Present value
of ordinary annuity of ₱1
c. a plus b
d. Total payment on the note multiplied by Present
value of ₱1
4. Which of the following represents a liability?
a. The obligation to pay interest on a five-year note
payable that was issued the last day of the current
year.
b. The obligation to pay for goods that a company
expects to order from supplier next year.
c. The obligation to provide goods that customers
have ordered and paid for during the current year.
d. The obligation to distribute share of a company’s
own common stock next year as a result of a stock
dividend declared near end of the current year.
5. Interest expense are incurred
a. Only on interest-bearing liabilities
b. Only on liabilities which are discounted to their
present values
c. Only on liabilities which are initially and
subsequently measured at amortized cost
d. Only due to passage of time
6. When interest expense is calculated using the
effective-interest amortization method, interest
expense (assuming that interest is paid annually)
always equal the
a. Actual amount of interest paid.
b. Carrying amount of the note multiplied by the
stated interest rate.
c. Carrying amount of the note multiplied by the
effective interest rate.
d. Maturity value of the note multiplied by the
effective interest rate.
FAR 6.1MC: CURRENT LIABILITIES
7. The discount resulting from the determination of a
note payable’s present value should be reported on
the balance sheet as a (an):
a. Deferred charge separate from the note.
b. Direct reduction from the face amount of the note.
c. Addition to the face amount of the note.
d. Deferred credit separate from the note.
8. Which of the following statements concerning
discount on note payable is incorrect?
a. Discount on note payable may be credited when
an entity discounts its own note with the bank.
b. The discount on note payable is a contra liability
account which is shown as a deduction from note
payable.
c. The discount on note payable represents interest
charges applicable to future periods.
d. Amortizing the discounts on note payable causes
the carrying amount of the liability to gradually
increase over the life of the note.
9. 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. Less than the stated discount rate of 10%
c. More than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%
10. Loan origination fees are
a. Added to the carrying amount of the loan payable
and subsequently amortized using the straight-
line method.
b. Recognized immediately as income.
c. Added to the carrying amount of the loan payable
and subsequently amortized using the effective
interest method.
d. Deducted from the carrying amount of the loan
payable and subsequently amortized using the
effective interest method.
11. On July 1, 2017, Placper Corporaton issued a five-year
note payable with a face value of ₱250,000 and a 10%
interest rate. The terms of the note require Placper to
make five annual payments of ₱50,000 plus accrued
interest, with the first payment due on June 30, 2018.
With respect to the note, how much would be included
in the current liabilities section of Placper’s December
31, 2017 statement of financial position?
a. ₱12,500 c. ₱50,000
b. ₱62,500 d. ₱75,000
Page 12 of
31
12. On September 1, 2016, Kraccers Company issued a
note payable to PNB in the amount of ₱2,400,000, with
the stated rate of 12% and payable in 3 equal annual
installments. On this date, the bank’s prime rate is
11%. The first interest and principal payment was
made on September 1, 2017. How much should
Kraccers record as accrued interest payable at
December 31, 2017?
a. ₱58,667 c. ₱64,000
b. ₱88,000 d. ₱96,000
13. In its Year 2 financial statements, Crisp Co. reported
interest expense of ₱85,000 in its income statement
and cash paid for interest of ₱68,000 in its cash flow
statement. There was no prepaid interest or interest
capitalization either at the beginning or end of Year 2.
Accrued at December 31, Year 1, was ₱15,000. What
amount should Crisp report as accrued interest
payable in its December 31, Year 2 balance sheet?
a. ₱2,000 c. ₱15,000
b. ₱17,000 d. ₱32,000
14. On September 1, Year 1, Brach Co. borrowed a
₱1,350,000 note payable from Fed Bank. The note
bears interest at 12% and is payable in three equal
principal payments of ₱450,000. On this date, the
bank’s prime rate was 11%. The first annual payment
for interest and principal made on September 1, Year
2. At December 31, Year 2, what amount should Brach
report as accrued interest payable?
a. ₱33,000 c. ₱36,000
b. ₱49,500 d. ₱54,000
15. On December 31, Roth Co. issued a ₱10,000 face value
note payable to Wake Co. in exchange for services
rendered to Roth. The note, made at usual trade terms,
is due in nine months and bears interest, payable at
maturity, at the annual rate of 3%. The market rate is
8%. The compound interest factor of ₱1 due in nine
months at 8% is .944. At what amount should the note
payable be reported in Roth’s December 31 balance
sheet?
a. ₱9,440 c. ₱9,652
b. ₱10,000 d. ₱10,300
16. Leaf Co. purchase from Oak Co. a ₱20,000, 8%, 5-year
note that required five equal annual year-end
payments of ₱5,009. The note was discounted to yield
a 9% rate to Leaf. At the date of purchase, Leaf
recorded the note at its present value of ₱19,485.
What should be the total interest revenue earned by
Leaf over the life of this note?
a. ₱5,045 c. ₱5,560
b. ₱8,000 d. ₱9,000
17. Barr Co. has total debt of ₱420,000 and stockholders’
equity of ₱700,000. Barr is seeking capital to fund an
expansion. Barr is planning to issue an additional
₱300,000 in common stock, and is negotiating with a
bank to borrow additional funds. The bank is requiring
a debt-to-equity ratio of .75. What is the maximum
additional amount Barr will be able to borrow?
a. ₱225,000 c. ₱330,000
b. ₱525,000 d. ₱750,000
18. House Publishers offered a contract in which the
winner would receive ₱1,000,000, payable over 20
years. On December 31, Year 1. House announced the
winner of the contest and signed a note payable to the
FAR 6.1MC: CURRENT LIABILITIES
winner for ₱1,000,000, payable in ₱50,000
installments every January 2. Also on December 31,
Year 1. House purchased an annuity for ₱418,250 to
provide the ₱950,000 prize monies remaining after
the first ₱50,000 installment, which was paid on
January 2, Year 2. In its December 31, Year 1, balance
sheet, what amount should House report as note
payable-contest winner, net of current portion?
a. ₱368,250 c. ₱418,250
b. ₱900,000 d. ₱950,000
19. On December 31, Year 1, Bart Inc. purchased a
machine from Fell Corp. in exchange for a noninterest
bearing note requiring eight payments of ₱20,000. The
first payment was made on December 31, Year 1, and
the others are due annually on December 30. At date
of issuance, the prevailing rate of interest for this type
of note was 11%. On Bart’s December 31, Year 1
balance sheet, the note payable to Fell was: Note:
Round off present value factors to three decimal places.
a. ₱94,240 c. ₱102,920
b. ₱104,620 d. ₱114,240
20. On September 30, World Co. borrowed ₱1,000,000 on
a 9% note payable. World paid the first of four
quarterly payments of ₱264,200 when due on
December 30. In its income statement for the year,
what amount should World report as interest
expense?
a. ₱0 c. ₱14,200
b. ₱22,500 d. ₱30,000
21. On September 30, World Co. borrowed ₱1,000,000 on
a 9% note payable. World paid the first of four
quarterly payments of ₱264,200 when due on
December 30. In its balance sheet, what amount
should World report as note payable?
a. ₱737,800 c. ₱750,000
b. ₱758,300 d. ₱825,800
22. On December 31, Key Co. received two ₱10,000 non-
interest-bearing notes from customers in exchange for
services rendered. The note from Alpha Co., which is
due in nine months, was made under customary trade
terms, but the note from Omega Co., which is due in
two years, was not. The market interest rate for both
notes at the date of issuance is 8%. At what amounts
should these two notes receivable be reported in Key’s
December 31 balance sheet?
a. Alpha, ₱9,440; Omega, ₱8,570
b. Alpha, ₱10,000; Omega, ₱8,570
c. Alpha, ₱9,440; Omega, ₱10,000
d. Alpha, ₱10,000; Omega, ₱10,000
23. On March 1, 2016, Fine Co. borrowed ₱10,000 and
signed a two-year note bearing interest at 12% per
annum compounded annually. Interest is payable in
full at maturity on February 28, 2018. What amount
should Fine report as a liability for accrued interest at
December 31, 2017?
a. ₱0 c. ₱1,000
b. ₱1,200 d. ₱2,320
24. On December 31, 2015, Balk Company acquired a
piece of equipment from Seller Company by issuing a
₱1,200,000 note, payable in full on December 31,
Page 13 of
31
 2019. Balk’s credit rating permits it to borrow funds
from its several lines of credit of 10%. The equipment
is expected to have a 5-year life and a ₱150,000
salvage value. The present value of 1 at 10% is
0.68301. What is the carrying value of the note at
December 31, 2017?
a. ₱819,612 c. ₱991,730
b. ₱1,090,903 d. ₱1,200,000
Use the following information to answer the next two
questions:
Ohrd Company purchased machinery on December 31,
2015, paying ₱80,000 down and agreeing to pay the
balance in four equal installments of ₱60,000 payable
each December 31. Implicit in the purchase price is an
assumed interest of 12%.
25. How much interest expense should be reported on
Ohrd’s income statement for the year ended December
31, 2016?
a. ₱17,293 c. ₱21,869
b. ₱38,131 d. ₱28,800
26. What is the carrying value of the note at December 31,
2017?
a. ₱99,310 c. ₱101,403
b. ₱120,000 d. ₱144,110
27. On January 1, 2017, Keyb Co. issued a 3-year 3%,
₱1,000,000 note payable in exchange for a machine.
Principal is due on January 1, 2020 but interest is due
annually every January 1. The prevailing interest rate
for this type of note is 12%. What is the carrying value
of the note on January 1, 2017?
a. ₱783,835 c. ₱847,895 Jan. 1,2018
b. ₱919,643 Jan. 1, 2019 d. ₱1,000,000 Dec. 31,
2019
28. On January 1, 2017, Keyb Co. issued a 3-year 3%,
₱1,000,000 note payable in exchange for a machine.
Principal is due on January 1, 2020 but interest is due
semi-annually starting July 1, 2017. The prevailing
interest rate for this type of note is 12%. What is the
carrying value of the note on December 31, 2017?
a. ₱778,721 Jan. 1, 2017 c. ₱844,070
b. ₱917,497 Dec. 31, 2018 d. ₱1,000,000 Dec. 31,
2019
29. On January 1, 2017, Keyb Co. issued a 3-year 3%,
₱1,200,000 note payable in exchange for a machine.
Principal is due in three equal annual installments.
Interests on the outstanding principal balance are also
due annually and are to be paid together with the
periodic payments on the principal. The prevailing
interest rate for this type of note is 12%. What is the
carrying value of the note on January 1, 2017?
a. ₱367,857 Jan. 1, 2019 c. ₱707,015 Jan. 1,2018
b. ₱1,020,549 Jan. 1, 2017 d. ₱1,200,000
30. On January 1, 2017, Keyb Co. issued a 3-year 3%,
₱1,000,000 note payable in exchange for a machine.
Both principal and accumulated interests are due on
January 1, 2020. The prevailing interest rate for this
type of note is 12%. What is the carrying value of the
note on December 31, 2017?
a. ₱777,781 Jan. 1, 2017 c. ₱871,115
b. ₱914,749 Jan. 1, 2019 d. ₱1,000,000
Use the following information to answer then next two
questions:
FAR 6.1MC: CURRENT LIABILITIES
On January 1, 2014, Bulb Co. issued a ₱3,000,000,
noninterest-bearing note payable in exchange for
equipment. The current market rate of interest on
January 1, 2014 is 12%. The note is due in three equal
annual installments starting on January 1, 2017.
31. What is the carrying amount of the note on January 1,
2014?
a. ₱1,690,051 Jan. 1, 2017 c. ₱1,914,725
b. ₱2,144,492 Jan. 1, 2015 d. ₱2,401,831
Jan.1,2016
32. What is the carrying amount of the note on January 1,
2017?
a. ₱1,690,051 Jan. 1, 2017 c. ₱1,914,725
b. ₱2,144,492 Jan. 1, 2015 d. ₱2,401,831 Jan. 1,
2016
Use the following to answer the next two questions:
On January 1, 2014, Bulb Co. issued a ₱3,000,000,
noninterest-bearing note payable in exchange for
equipment. The current market rate of interest on
January 1, 2014 is 12%. The note is due in three
annual installments as follows:
Date Amount
January 1, 2017 1,500,000
January 1, 2018 1,000,000
January 1, 2019 500,000
Total 3,000,000
33. What is the carrying amount of the note on January 1,
2016?
a. ₱1,291,454 Jan. 1, 2017 c. ₱1,986,902
Jan.1,2014
b. ₱2,225,330 Jan. 1, 2015 d. ₱2,492,370
34. What is the carrying amount of the note on January 1,
2017?
a. ₱1,291,454 c. ₱1,986,902
b. ₱2,225,330 d. ₱2,492,370
35. On December 1, Year 1, Money Co. gave Home Co. a
₱200,000, 11% loan. Money paid proceeds of
₱194,000 after the deduction of a ₱6,000
nonrefundable loan origination fee. Principal and
interest are due in 60 monthly installments of ₱4,310,
beginning January 1, Year 2. The repayments yield an
effective interest rate of 11% at a present value of
₱200,000 and 12.4% at a present value of ₱194,000.
What amount of income from this loan should Money
report in its Year 1 income statement?
a. ₱0 c. ₱1,833
b. ₱2,005 d. ₱7,833
Use the following to answer the next four questions:
On January 1, 2017, Cand Co. borrowed 10%, ₱1,000,000 loan
from XYZ Bank. Principal is due on January 1, 2020 but
interests are due annually starting January 1, 2018.
The bank charged Cand a 3% nonrefundable loan
origination fee representing service fee.
36. How much is the initial carrying amount of the loan?
a. ₱870,000 c. ₱970,000
b. ₱1,000,000 d. ₱1,030,000
Page 14 of
31
37. What is the effective interest rate of the loan? 40. On January 1, 2017, Davo Co. obtained a ₱1,000,000,
a. 10.00% c. 10.76% 180-day bank loan at an annual rate of 10%. The loan
b. 11.24% d. 13.00% agreement requires Davo to maintain a ₱100,000
compensating balance in its bank account at the
38. How much is the interest expense on 2018? lending bank. Davo would otherwise maintain a
a. ₱100,000 c. ₱108,986 balance of only ₱50,000 in this account. The bank
b. ₱110,021 d. ₱111,119 earns interest at an annual rate of 2%. What is the
effective annual rate on the borrowing based on a 360-
39. What is the carrying value on December 31, 2017? day year?
a. ₱970,000 c. ₱978,832 a. 5.21% c. 10.00%
b. ₱988,982 d. ₱1,000,000 b. 10.42% d. 12.00%

Answer Key:
BCDCD CBACD
BCDCB CCCAB
BBDCC CACBC
CADAB CBBCB

NON-CURRENT LIABILITIES PART 2 NOTES AND LOANS PAYABLE

98. Bonds payable not designated at fair value through
profit loss shall be measured initially at
a. Face amount
b. Fair value
c. Fair value plus bond issue costs
d. Fair value minus bond issue costs
99. Which of the following statements regarding interest
method of allocation is not true?
a. The term “interest method of allocation” refers
both to the convention for periodic reporting and
to the several approaches dealing with changes in
estimated future cash flows.
b. Interest method of allocation is reporting
convention that uses present value technique in
the absence of a fresh-start measurement to
compute changes in the carrying amount of an
asset or liability from one period to the next.
c. Interest method of allocation is grounded in the
notion of current cost.
d. Holding gains and losses are generally excluded
from the allocation system.
100. Bonds issued with scheduled maturities at various
dates are called
a. Convertible bonds c. Term bonds
b. Serial bonds d. Callable bonds
101. The issuer of a 10-year bond sold at par three
years ago with interest payable May 1 and November
1 each year, shall report in its December 31 statement
of financial position
a. Liability for accrued interest
b. Addition to bonds payable
c. Increase in deferred charges
d. Contingent liability
102. The market price of a bond issued at a discount if
the present value of its principal amount at the market
rate of interest
a. Less the present value of all future interest
payments at the market value of interest.
b. Less the present value of all future interest
payments at the rate of interest stated on the
bond.
FAR 6.1MC: CURRENT LIABILITIES
c. Plus the present value of all future interest
payments at the market rate of interest.
d. Plus the present value of all future interest
payments at the rate of interest stated on the
bond.
103. What is the effective interest rate of a bond
measured at amortized cost?
a. The stated rate of the bond.
b. The interest rate currently charged by the entity
or by others for similar bond.
c. The interest rate that exactly discounts estimated
future cash payments through the expected life of
the bond or when appropriate, a shorter period to
the net carrying amount of the bond.
d. The basic risk-free interest rate that is derived
from observable government bond prices.
104. If bonds are issued at a premium, this indicates
that
a. The yield rate of interest exceeds the nominal rate
b. The nominal rate of interest exceeds the yield rate
c. The yield and nominal rates exceeds coincide
d. No necessary relationship exists between the two
rates
105. An entity issued a bond with a stated rate of
interest that is less than the effective interest rate on
the date of issuance. The bond was issued on one of
the interest payment dates. What should the entity
report on the first interest payment date?
a. An interest expense that is less than the cash
payment made to bondholders.
b. An interest expense that is greater than the cash
payment made to bondholders.
c. A debit to the unamortized bond discount.
d. A debit to the unamortized bond premium.
106. A ten-year term bond was issued at a discount
with a call provision to retire the bond. When the bond
issuer exercised the call provision on an interest date,
the carrying amount of the bond was less than the call
price. The amount of bond liability removed from the
accounts should have equaled the
a. Call price
Page 15 of
31
 b. Call price less unamortized discount
c. Face amount less unamortized discount
d. Face amount plus unamortized discount
107. On January 1, 2013, an entity issued bonds at a
discount. The bonds mature on December 31, 2017.
The entity incorrectly used the straight line method
instead of the effective interest method to amortize
the discount. How is the carrying amount of the bonds
affected by the error?
a. Overstated on December 31, 2013 and
understated on December 31, 2017.
b. Overstated on December 31, 2013 and no effect on
December 31, 2017.
c. Understated on December 31, 2013 and
overstated on December 31, 2017.
d. Understated on December 31, 2013 and no effect
on December 31, 2017.
108. Debentures are
a. Unsecured bonds c. Secured bonds
b. Ordinary bonds d. Serial bonds
109. Which of the following is true of a premium on
bonds payable?
a. The premium on bonds payable is a contra
shareholders’ equity account.
b. The premium on bonds payable is an account that
appears only on the books of the investor.
c. The premium on bonds payable increases when
amortization entries are made until maturity date.
d. The premium on bonds payable decreases when
amortization entries are made until its balance
reaches zero at maturity date.
110. When an entity issued bonds payable for working
capital needs, the proceeds from the sale of the bonds
payable
a. Will always be equal to the face amount.
b. Will always be less than the face amount.
c. Will always be more than the face amount.
d. May be equal, more or less than the face amount
depending on market interest rate.
111. An entity neglected to amortize the premium on
outstanding bonds payable. What is the effect of the
failure to record premium amortization on interest
expense and bond carrying amount, respectively?
a. Understate and understate
b. Understate and overstate
c. Overstate and overstate
d. Overstate and understate
112. When an entity issued bonds payable that can be
converted into ordinary shares, what will be the effect
on liabilities and equity, respectively?
a. Increase and no effect c. Increase and increase
b. No effect and increase d. Decrease and increase
113. When an entity issued convertible bonds, how will
share premium be computed if the bonds were
converted into ordinary shares?
a. It is the difference between the carrying amount
of the bonds and the total par or stated value of
the shares issued.
b. It is the difference between the face value of the
bonds and the total par or stated value of the
shares issued.
FAR 6.1MC: CURRENT LIABILITIES
c. It is the difference between the carrying amount
of the bonds plus share premium from conversion
privilege and the total par or stated value of the
shares issued.
d. It is the difference between the face value of the
bonds plus the share premium from conversion
privilege and the total par or stated value of the
shares issued.
114. How are the proceeds from issuing a compound
instrument allocated between a liability and equity
components?
a. First, the liability component is measured at fair
value, and then the remainder of the proceeds is
allocated to the equity component.
b. First, the equity component is measured at fair
value, and then the remainder of the proceeds is
allocated to the liability component.
c. First, the fair values of both the equity component
and the liability component are estimated. Then
the proceeds are allocated to the liability and
equity components based on the relation between
the estimated fair value.
d. The equity component is measured at its intrinsic
value. The liability component is measured at the
face amount less the intrinsic value of the equity
component.
115. Bondholders exchange their convertible bonds for
the entity’s ordinary shares. The carrying amount of
these bonds was lower than market value but greater
than the par value of the ordinary shares issued. If the
book value method is used, which of the following
correctly states an effect of the conversion?
a. Shareholders’ equity is increased.
b. Share premium is decreased.
c. Retained earnings increased.
d. A loss is recognized.
116. On April 1, 2017, Greg Company issued at 99 plus
accrued interest, 2,000 of its 8% ₱1,000 face value
bonds. The bonds are dated January 1, 2017, mature
on January 1, 2027, and pay interest on January 1 and
July 1. Greg paid bond issue cost of ₱70,000. From the
bond issuance, what is the net cash received by Greg
Company?
a. ₱1,910,000 c. ₱1,950,000
b. ₱1,980,000 d. ₱2,020,000
117. On November 1, 2017, Mas Company issued
₱8,000,000 of its 10-year, 8% term bonds dated
October 1, 2017. The bonds were sold to yield 10%
with total proceeds of ₱7,000,000 plus accrued
interest. Interest is paid every April 1 and October 1.
What should Mas report for accrued interest payable
in its December 31, 2017 statement of financial
position?
a. ₱106,667 c. ₱116,667
b. ₱160,000 d. ₱175,000
118. On June 30, 2017, Huff Company issued at 99, five
thousand of its 8%, ₱1,000 face value bonds. The
bonds were issued through an underwriter to whom
Huff paid bond issue cost of ₱425,000. On June 30,
2017, what should be reported as bond liability?
a. ₱4,525,000 c. ₱4,575,000
b. ₱4,950,000 d. ₱5,000,000
Page 16 of
31
119. Aye Company is authorized to issue ₱5,000,000 of
6 percent 10-year bonds dated July 1, 2017 with
interest payments on June 30 and December 31. When
the bonds are issued on November 1, 2017, Aye
Company received cash of ₱4,950,000 including
accrued interest. What is the discount or premium
from the issuance of the bonds payable?
a. No bond premium and discount
b. ₱50,000 bond premium
c. ₱150,000 bond premium.
d. ₱150,000 bond discount
120. On July 1, 2017, Tar Company issued 4,000 of its 8
percent, ₱1,000 face value bonds payable for
₱3,504,000. The bonds were issued to yield 10
percent. The bonds are dated July 1, 2017 and mature
on July 1, 2027. Interest is payable semiannually on
January 1 and July 1. Using the effective interest
method, how much of the bond discount should be
amortized for the six months ended December 31,
2017?
a. ₱15,200 c. ₱19,840
b. ₱24,800 d. ₱30,400
121. On January 1, 2017, Mar Company issued its 10
percent bonds payable in the face amount of
₱6,000,000. The bonds mature on January 1, 2027. The
bonds were issued for ₱5,316,000 to yield 12 percent,
resulting in bond discount of ₱684,000. Mar uses the
effective interest method of amortizing bond discount.
Interest is payable January 1 and July 1. For the six
months ended June 30, 2017, what amount should be
reported as bond interest expense?
a. ₱300,000 c. ₱318,960
b. ₱334,200 d. ₱341,040
122. On January 1, 2017, West Company issued 9%
bonds in the face amount of ₱5,000,000, which mature
on January 1, 2027. The bonds were issued for
₱4,695,000 to yield 10%. Interest is payable annually
on December 31. West uses the interest method of
amortizing bond discount. In the December 31, 2017
statement of financial position, what is the carrying
amount of the bonds payable?
a. ₱4,695,000 c. ₱4,704,750
b. ₱4,714,500 d. ₱5,000,000
123. Web Company has outstanding a 7%, 10-year
₱5,000,000 face value bond. The bond was originally
sold to yield 6% annual interest. Web uses the
effective interest method to amortize bond premium.
On January 1, 2017, the carrying amount of the bond
payable was ₱5,250,000. What amount of unamortized
premium on bond payable should be reported in the
December 31, 2017 statement of financial position?
a. ₱52,500 c. ₱172,500
b. ₱215,000 d. ₱225,000
124. On January 1, 2017, Lu Company issued 3-year
bonds with face value of ₱5,000,000 at 98. Additional,
Lu Company paid bond issue cost of ₱140,000. The
nominal rate is 10% and the effective rate is 12%. The
interest is payable annually on December 31. Lu
Company uses the effective interest method in
FAR 6.1MC: CURRENT LIABILITIES
amortizing bond discount and issue cost. What is the
carrying amount of the bonds payable on December
31, 2017?
a. ₱4,831,200 c. ₱4,840,000
b. ₱4,848,000 d. ₱5,000,000
125. On January 1, 2017, Dom Company issued
₱4,000,000, 8% serial bonds, to be repaid in the
amount of ₱800,000 each year. Interest is payable
annually on December 31. The bonds were issued to
yield 10% a year. Dom amortizes the bond discount by
the interest method. The bond proceeds totaled
₱3,805,600 based on the present value on January 1,
2017 of five annual payments. In the December 31,
2017 statement of financial position, what should be
reported as the carrying amount of the bonds payable?
a. ₱2,787,600 c. ₱2,982,000
b. ₱3,005,600 d. ₱3,066,160
126. On January 1, 2017, Tag Company issued 3-year
bonds with face value of ₱5,000,000 at 99. The
nominal rate is 10% and the interest is payable
annually on December 31. Additionally, Tag Company
paid bond issue cost of ₱150,000. What is the interest
expense for 2017 using the effective interest method?
Note: Use four decimal places when using value factors.
a. ₱528,000 c. ₱550,000
b. ₱559,680 d. ₱576,000
127. On January 1, 2017, Colt Company issued ten-year
bonds with a face amount of ₱5,000,000 and a stated
interest rate of 8% payable annually on January 1. The
bonds were priced to yield 10%. What is the issue
price of the bonds? Note: Use four decimal places when
using value factors.
a. ₱1,927,500 c. ₱4,385,500
b. ₱5,000,000 d. ₱5,614,500
128. White Company issued ₱2,000,000 face value of
10-year bonds on January 1. The bonds pay interest on
January 1 and July 1 and have a stated rate of 10
percent. If the market rate of interest at the time the
bonds are sold is 8 percent, what will be the issuance
price of the bonds? Note: Round off present value factor
to two decimal places.
a. ₱2,113,000 c. ₱2,159,000
b. ₱2,262,000 d. ₱2,279,000
129. The long-term debt section of Moon Company’s
statement of financial position on December 31, 2016
included 9% bonds payable of ₱4,000,000 less
unamortized discount of ₱320,000. Further
examination revealed that these bonds were issued to
yield 10%. The amortization of the bond discount was
recorded using the effective interest method. Interest
was paid on January 1 and July 1 each year. On July 1,
2017, Moon Company retired the bonds at 103 before
maturity. What is the loss on retirement of bonds
payable on July 1, 2017?
a. ₱120,000 c. ₱432,000
b. ₱436,000 d. ₱440,000
130. On December 31, 2016, Fort Company issued
5,000 of its 8% 10-year, ₱1,000 face value bonds with
detachable share warrants at 110. Each bond carried a
detachable warrant for ten ordinary shares of Fort
Company at a specified option price of ₱25 per share.
The par value of the ordinary share is ₱20.
Page 17 of
31
 Immediately after issuance, the market value of the
bonds without the warrants was ₱5,400,000 and the
market value of the warrants was ₱600,000. In the
December 31, 2016 statement of financial position,
what is the carrying amount of the bonds payable?
a. ₱4,900,000 c. ₱4,950,000
b. ₱5,000,000 d. ₱5,400,000
131. On December 31, 2017, Moses Company issued
₱5,000,000 face value, 5-year bonds at 109. Each
₱1,000 bond was issued with 50 detachable share
warrants, each of which entitled the bondholder to
purchase one ordinary share of ₱5 par value at ₱25.
Immediately after issuance, the market value of each
warrant was ₱5. The stated interest rate on the bonds
is 11% payable annually every December 31.
However, the prevailing market rate of interest for
similar bonds without warrants is 12%. On December
31, 2017, what amount should be recorded as discount
or premium on bonds payable? Note: Round off your
present value factor to two decimal places.
a. ₱170,000 discount c. ₱450,000 premium
b. ₱450,000 discount d. ₱800,000 discount
132. On March 1, 2017, Case Company issued
₱5,000,000 of 12% nonconvertible bonds at 103
which are due on February 28, 2022. In addition, each
₱1,000 bond was issued with 30 detachable share
warrants, each of which entitled the bondholder to
purchase for ₱50, one ordinary share of Case
Company, par value ₱25. On March 1, 2017, the quoted
market value of each warrant was ₱4. The market
value of the bonds ex-warrants at the time of issuance
is 95. What amount of the proceeds from the bond
issue should be recognized as an increase in
shareholders’ equity?
a. ₱200,000 c. ₱300,000
b. ₱400,000 d. ₱600,000
133. Marines Company issued ₱5,000,000 face value
12% convertible bonds at 110 on January 1, 2017,
maturing on January 1, 2022 and paying interest
semiannually on January 1 and July 1. It is estimated
that the bonds would sell only at 103 without the
conversion feature. Each ₱1,000 bond is convertible
into 10 ordinary shares with ₱100 par value. How
much is the increase in shareholders’ equity arising
from the issuance of the convertible bonds on January
1, 2017?
a. ₱0 c. ₱150,000
b. ₱350,000 d. ₱500,000
134. Susan Company issued 5,000 convertible bonds on
January 1, 2017. The bonds have a three-year term
and are issued at 110 with a face value of ₱1,000 per
bond. Interest is payable annually in arrears at a
nominal rate 6%. Each bond is convertible at anytime
up to maturity into 100 ordinary shares with par value
of ₱5. When the bonds are issued, the prevailing
market rate of similar debt instrument without
conversion option is 9%. What is the equity
component of the issuance of the convertible bonds on
January 1, 2017? Note: Round off present value factors
to two decimal places.
a. ₱391,000 c. ₱891,000
b. ₱1,150,000 d. ₱1,650,000
FAR 6.1MC: CURRENT LIABILITIES
135. Spare Company had outstanding share capital
with par value of ₱50,000,000 and a 12% convertible
bond payable in the face amount of ₱10,000,000.
Interest payment dates of the bond issue are June 30
and December 31. The conversion clause in the bond
indenture entitles the bondholders to receive 40
shares of ₱20 par value in exchange for each ₱1,000
bond. On June 30, 2017, the holders of ₱5,000,000 face
value bonds exercised the conversion privilege. The
market price of the bonds on that date as ₱1,100 per
bond and the market price of the share was ₱30. The
total unamortized bond discount at the date of
conversion was ₱500,000. The share premium from
conversion privilege has a balance of ₱2,000,000 on
June 30, 2017. How much share premium should be
recognized by reason of the conversion of bonds
payable into share capital?
a. ₱1,750,000 c. ₱2,000,000
b. ₱2,750,000 d. ₱3,000,000
136. Clay Company had ₱600,000 convertible 8%
bonds payable outstanding on June 30, 2017. Each
₱1,000 bond was convertible into 10 ordinary shares
of ₱50 par value. On July 1, 2017, the interest was paid
to bondholders, and the bonds were converted into
ordinary shares, which had a fair value of ₱75 per
share. The unamortized premium on these bonds was
₱12,000 at the date of conversion. No equity
component was recognized when the bonds were
originally issued. What is the increase in the elements
of the shareholders’ equity as a result of the bond
conversion?
a. Ordinary share capital, ₱300,000; Share premium,
₱312,000.
b. Ordinary share capital, ₱306,000; Share premium,
₱306,000.
c. Ordinary share capital, ₱450,000; Share premium,
₱162,000.
d. Ordinary share capital, ₱600,000; share premium,
₱12,000.
137. On December 31, 2017, Cay Company had
outstanding 10%, ₱1,000,000 face amount convertible
bonds payable maturing on December 31, 2020.
Interest is payable on June 30 and December 31. Each
₱1,000 bond is convertible into 50 shares of ₱10 par
value. On December 31, 2017, the unamortized
premium on bonds payable was ₱60,000. On
December 31, 2017, 400 bonds were converted when
Cay’s share had a market price of 24. Cay incurred
₱4,000 in connection with the conversion. No equity
component was recognized when the bonds were
originally issued. What is the share premium from the
issuance of shares as a result of the bond conversion
on December 31, 2017?
a. ₱176,000 c. ₱220,000
b. ₱276,000 d. ₱280,000
Use the following information to answer the next two
questions:
On January 1, 2015, Faith Company issued its 8%, 5-
year convertible debt instrument with a face amount
of ₱8,000,000 for ₱7,700,000. Interest is payable every
December 31 of each year. The debt instrument is
convertible into 50,000 ordinary shares with a par
value of ₱100. When the debt instrument were issued,
the prevailing market rate of interest for similar debt
without conversion option is 10%. On December 31,
Page 18 of
31
 2017, all of the convertible debt instrument were a. ₱138,240 c. ₱139,278
retired for ₱8,000,000. The prevailing rate of interest b. ₱168,160 d. ₱306,400
on the similar debt instrument as of December 31,
2017 is 9% without the conversion option. Note: 139. How much is the gain on cancellation of the equity
Round off present value factors to three decimal places. component to be reported in the shareholders’ equity?
a. ₱138,240 c. ₱139,278
138. How much is the gain or loss that should be b. ₱168,160 d. ₱306,400
reported in the profit or loss on the retirement of the
convertible debt instrument?

Answer Key:
DCBAC CBBCB ADDCC CAACB ADACB BADBC DBDAB BCAAC CB

LEASES PART 2
1. The appropriate valuation of an operating lease in the a. Straight line basis over the lease term unless
statement of financial position of the lessee is another systematic basis is representative of the
a. Zero time pattern of the user’s benefit
b. The absolute sum of the lease payments b. Diminishing balance basis
c. The present value of the sum of the lease payments c. Sum of units basis
discounted at an appropriate rate d. Cash basis
d. The market value of the asset at the inception of the
lease 5. Lessors should show assets that are out on operating
leases and income therefrom as which of the following?
2. Rent in advance by the lessor in an operating lease shall a. The asset should be kept off the statement of
be recognized as revenue financial position and the lease income should go to
a. When received reserves.
b. At the lease inception b. The asset should be kept off the statement of
c. At the lease expiration financial position and the lease income should go to
d. In the period specified by the lease income statement.
c. The asset should be shown in the statement of
3. When should a lessor recognize in income a financial position according to its nature and the
nonrefundable lease bonus paid by a lessee on signing lease income should go to reserves.
an operating lease? d. The asset should be shown in the statement of
a. When received financial position according to its nature and the
b. At the inception of the lease lease income should go to the income statement.
c. At the lease expiration
d. Over the lease term 6. In an operating lease that is recorded by the lessee, the
equal monthly rental payments shall be
4. Lease payments under an operating lease shall be a. Allocated between a reduction in the liability for
recognized as an expense in the income statement on leased asset and depreciation expense.
b. Allocated between a reduction in the liability for
leased asset and interest expense.
FAR 6.1MC: CURRENT LIABILITIES Page 19 of
31
 c. Recorded as a reduction in the liability for leased
asset.
d. Recorded as a rental expense.
7. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to
the leased asset.
c. The lessor transfer title of the leased property to
the lessee for the duration of the lease term.
d. The lessor records depreciation and lease revenue.
8. A twenty-year operating lease provides for a 10%
increase in annual rent every five years. In the sixth
year compared to fifth year, what could be the effect on
the expenses?
a. Rent and interest expense with both increase.
b. Interest expense will increase but not rent expense.
c. Rent expense will increase but not interest
expense.
d. No increase in both rent and interest expense.
9. When a company sells property and then leases it back,
any gain on the sale under operating lease should be
a. Recognized in the current year
b. Recognized at the end of the lease
c. Recognized as a prior period adjustment
d. Deferred and recognized as income over the term
of the lease
10. If the sale and leaseback transaction results in an
operating lease and the sale price is above fair value,
the excess of the sale price over fair value is
a. Not recognized
b. Recognized immediately in profit or loss
c. Deferred and amortized over the period for which
the lease term applies
d. Deferred and amortized over the period for which
the asset is expected to be used
11. If the sale and leaseback transaction results in a finance
lease, any excess of sale proceeds over the carrying
amount of the asset is
a. Deferred and amortized as income over the lease
term.
b. Deferred and amortized as income over the life of
the asset.
c. Recognized in profit or loss immediately.
d. Recognized in other comprehensive income.
12. If the sale and leaseback transaction results in an
operating lease and the carrying amount is above fair
value, the excess of the sale price over fair value is
a. Deferred and amortized over the period for which
the asset is expected to be used.
b. Recognized immediately in profit or loss.
c. Recognized in other comprehensive income.
d. Not recognized.
13. If the sale and leaseback transaction results in an
operating lease that is clearly established at fair value
a. Any gain or loss on sale is recognized immediately
in profit or loss.
b. Any gain or loss on sale is recognized in other
comprehensive income.
c. Any gain on sale is deferred and any loss on sale is
recognized in profit or loss.
d. Any gain or loss on sale is not recognized.
FAR 6.1MC: CURRENT LIABILITIES
14. If the sale and leaseback transaction results in an
operating lease and the price is below fair value that is
compensated by future rental at below market value,
any indicated loss on sale is
a. Recognized immediately in profit or loss.
b. Recognized in other comprehensive income.
c. Deferred and amortized in proportion to the lease
payments over the period for which the asset is
expected to be used.
d. Not recognized.
15. On January 1, 2017, Park Company signed a 10-year
operating lease for office space at ₱960,000 per year.
The lease included a provision for additional rent of 5%
of annual company sales in excess of ₱5,000,000. Park’s
sales for the year ended December 31, 2017 totaled
₱6,000,000. Upon execution of the lease, Park paid
₱240,000 as a bonus for the lease. What is the rent
expense for the year ended December 31, 2017?
a. ₱984,000 c. ₱1,010,000
b. ₱1,034,000 d. ₱1,250,000
16. Jana Company leased a building for 20 years with effect
from January 1, 2017. The useful life of the building is
40 years. As part of the negotiations for the lease, the
lessor granted Jana a free-rent period. Annual rentals of
₱1,600,000 are payable in advance on January 1,
commencing 2019. What rent expense should be
recognized in profit or loss for the year ended
December 31, 2017?
a. ₱0 c. ₱1,440,000
b. ₱1,520,000 d. ₱1,600,000
17. On July 1, 2015, Gee Company leased a delivery truck
from Marr Company under a 3-year operating lease.
Total rent for the term of the lease will be ₱360,000,
payable as follows:
12 months at ₱ 5,000 = ₱ 60,000
12 months at ₱ 7,500 = 90,000
12 months at ₱17,500 = 210,000
All payments were made when due. In Marr’s June 30,
2017 statement of financial position, what should be
reported as accrued rent receivable?
a. 0 c. ₱90,000
b. ₱120,000 d. ₱210,000
18. Myriad Company purchased a tractor on January 1,
2017 at a cost of ₱1,600,000 for the purpose of leasing
it. The tractor is estimated to have useful life of 5 years
with residual value of ₱100,000. Depreciation is on a
straight line basis. On April 1, 2017, Myriad entered
into a lease contract for the lease of the tractor for a
term of two years up to March 31, 2019. The lease fee is
₱50,000 monthly and the lessee paid ₱600,000, the
lease fee for one year. Myriad paid ₱120,000
commission associated with negotiating the lease,
₱15,000 major repairs, and ₱10,000 transportation of
the tractor of the lessee during 2017. What amount of
net rent revenue should be reported in 2017?
a. ₱80,000 c. ₱85,000
b. ₱160,000 d. ₱235,000
Use the following information to answer the next two
questions:
In an attempt to alleviate is liquidity problems, Blanco
Company entered into an agreement on January 1, 2017
to sell its processing plant to another entity for
Page 20 of
31
 ₱3,500,000 which is the fair value of the plant. At the
date of sale, the plant had a carrying amount of
₱2,750,000. Blanco Company immediately leased the
processing plant back from the buyer. The terms of the
lease agreement were:
Annual payment in arrears,
commencing December 31, 2017 ₱700,000
Reimbursement to the lessor for
maintenance cost included in the ₱35,000
annual payment
Lease term 6 years
Economic life of plant 8 years
19. What is the deferred gain on the sale and leaseback on
December 31, 2017?
a. ₱0 c. ₱625,000
b. ₱656,250 d. ₱750,000
20. What is the total finance charge over the lease term?
a. ₱490,000 c. ₱700,000
b. ₱1,240,000 d. ₱1,820,000
21. On June 30, 2017, Lee Company sold equipment to an
unaffiliated entity for ₱5,500,000. The equipment had a
1. The inception of the lease is the
a. Date of the lease agreement.
b. Date of commitment by the parties to the principal
provisions of the lease.
c. Earlier of the date of the lease agreement or the
date of commitment by the parties to the principal
provisions of the lease.
d. Later of the date of the lease agreement or date of
commitment by the parties to the principal
provisions of the lease.
2. The situations which would normally lead to a lease
being classified as a finance lease include all the
following, except
a. The lease transfers ownership of the asset to the
lessee by the end of lease term
b. The lessee has the option to purchase the asset at a
price which is expected to be sufficiently lower
than the fair value at the date the option becomes
exercisable
c. The lease term is for the major part of the economic
life of the asset even if title is not transferred
d. The present value of the minimum lease payments
amounts to at least substantially all the fair value of
the leased asset at the end of the lease
3. Situations which individually or in combination could
also lead to a lease being classified as finance lease
include all of the following, except
a. The leased asset is of a specialized in nature such
that only the lessee can use it without major
modification.
b. If the lessee cancels the lease, the lessor’s losses
associated with the cancelation are borne by the
lessee.
c. Gains or losses from the fluctuation in the fair value
of the residual fall to the lessee.
FAR 6.1MC: CURRENT LIABILITIES
carrying amount of ₱5,500,000. The equipment had a
carrying amount of ₱5,000,000 and a remaining life of
10 years. The same day, Lee leased back the equipment
at ₱15,000 per month for 2 years with no option to
renew the lease or repurchase the equipment. The
present value of the lease payments using the
appropriate interest rate was ₱318,650 on June 30,
2017. What is the equipment rent expense for the year
ended December 31, 2017?
a. ₱40,000 c. ₱50,000
b. ₱90,000 d. ₱110,00
LEASE PART 1
d. The lessee has the ability to continue the lease for a
secondary period at a rent is substantially the same
as the market rent.
4. The interest rate implicit in the lease is the discount
rate that causes the aggregate of the present value of
the minimum lease payments and the unguaranteed
residual value to be equal to the
a. Fair value of the leased asset
b. Gross investment in the lease
c. Fair value of the leased asset and initial direct cost
of the lessee
d. Fair value of the leased asset and initial direct cost
of the lessor
5. At the commencement of the lease, the lessee shall
recognize a finance lease as asset and liability at an
amount equal to
a. Fair value of the leased asset.
b. Present value of the minimum lease payments.
c. Fair value of the leased asset or present value of
the minimum lease payments, whichever is lower.
d. Fair value of the leased asset or present value of
the minimum lease payments, whichever is higher.
6. The minimum lease payments include all of the
following except
a. Rental payments over the lease term
b. Any amount guaranteed by the lessee or by a party
related to the lessee
c. Payment required to exercise an option on the part
of the lessee to purchase the asset at a price which
is expected to be sufficiently lower than its fair
value at the option exercise date
d. Contingent rent
7. Initial direct costs under finance lease
Page 21 of
31
 a. Are added to the amount of the liability
b. Are added to the amount of the asset
c. Both a and b
d. Neither a nor b
8. If there is a reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the
depreciation of the leased asset is based on the
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or lease term, whichever is
shorter
d. Useful life of the asset or lease term, whichever is
higher
9. What is the treatment of unguaranteed residual value in
determining the cost of sales under a sales type lease?
a. Ignored
b. Added to the cost of the leased asset at present
value
c. Deducted to the cost of the leased asset at present
value
d. Deducted to the cost of the leased asset at absolute
amount
10. Gross investment in the lease is
a. Aggregate of the minimum lease payments under a
finance lease of the lessor and any unguaranteed
residual value accruing to the lessor.
b. The minimum lease payments under a finance lease
of the lessor.
c. Present value of the 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.
11. Lessors shall recognize asset held under a finance lease
as a receivable at an amount equal to
a. Gross investment in the lease.
b. Net investment in the lease.
c. Gross rentals.
d. Residual value, whether guaranteed or
unguaranteed
12. Under a direct financing lease, the excess of aggregate
rentals over the cost of the leased property shall be
recognized as income of the lessor
a. In increasing amounts during the term of the lease
during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of the leased property has been fully
recovered through rentals
13. Net investment in a sales type lease is equal to
a. Gross investment in the lease less unearned finance
income
b. Cost of the leased asset
c. The minimum lease payments
d. The minimum lease payments less unguaranteed
residual value
14. Initial direct costs incurred by the lessor under a sales
type lease are
FAR 6.1MC: CURRENT LIABILITIES
a. Charged to unearned income in the first period of
the lease term.
b. Charged to expense in the first period of the lease
term.
c. Deferred and allocated over the lease term in
proportion to the recognition of rent revenue.
d. Deferred and allocated over the lease term on a
straight line basis.
15. The sales revenue recognized at the commencement of
the lease by a manufacturer or dealer lessor is
a. Fair value of the asset
b. Present value of the minimum lease payments
c. Fair value of the asset or present value of the
minimum lease payments, whichever is lower.
d. Fair value of the asset or present value of the
minimum lease payments, whichever is higher.
16. Which of the following characterizes a sales type lease?
a. The lessor recognizes only interest revenue over
the 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 life of the
asset.
17. In a lease that is recorded as a sales type lease by the
lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of the lease
using the interest method
c. Shall be recognized over the period of the lease
using the straight line method
d. Shall be recognized in full as revenue at the
inception of the lease
18. On January 1, 2017, Ashe Company entered into a ten-
year noncancelable lease requiring year-end payments
of ₱1,000,000. Ashe’s incremental borrowing rate is
12%, while the lessor’s implicit interest rate known to
Ashe, is 10%. On same date, Ashe Company paid initial
direct cost of ₱200,000 in negotiating and securing the
leasing arrangement. 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 Ashe capitalize as cost of the leased property on
January 1, 2017? Note: Use three decimal places for
value factors.
a. ₱5,650,000 c. ₱5,850,000
b. ₱6,145,000 d. ₱6,345,000
19. Neal Company entered into a nine-year finance lease on
a warehouse on December 31, 2017. Lease payment of
₱520,000 which includes real estate taxes and other
executory cost of ₱20,000, are due annually, beginning
on December 31, 2018 and every December 31
thereafter. The interest rate implicit in the lease is 9%.
What amount should Neal report as lease liability on
December 31, 2017? Note: Use one decimal place for
value factors.
a. ₱2,750,000 c. ₱3,000,000
b. ₱4,500,000 d. ₱4,680,000
Page 22 of
31
20. On January 1, 2017, Stoic Company become the lessee finance income, what gross profit on sale should Liza
of new equipment under a noncancelable six-year lease. recognize in profit or loss for the year ended December
The estimated economic life of this equipment is ten 31, 2017?
years. The fair value of this equipment on January 1 a. ₱0 c. ₱20,000
was ₱4,000,000. The lease does not meet the criteria b. ₱130,000 d. ₱150,000
for classification as a finance lease with respect to
transfer of ownership of the leased asset, or bargain 25. Valerie Company uses leases as a means of marketing
purchase option, or lease term. Nevertheless, Stoic its products. On January 1, 2017, Valerie leased an
must classify this lease as a finance lease if, at inception equipment to Ann Company for ₱500,000 per year for
of the lease, the present value of the minimum lease 10 years, payable on December 31 of each year. The
payments (excluding executory costs) is equal to at cost of the equipment of Valerie is ₱2,000,000 and its
least fair value is ₱3,072,500 on January 1, 2017 using an
a. ₱2,700,000 c. ₱3,000,000 implicit rate of 10%. The fair value of the equipment
b. ₱3,600,000 d. ₱4,000,000 approximates the present value of rentals. At the
expiration of the lease, title to the equipment passes to
21. On January 1, 2017, Kosovo Company entered into a 10- Ann Company. What is the interest income to be
year lease for an equipment. Kosovo accounted for the recognized for 2017?
acquisition as a finance lease for ₱4,900,000 which a. ₱192,750 c. ₱200,000
includes a ₱200,000 guaranteed residual value. At the b. ₱257,250 d. ₱307,250
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 Use the following information to answer the next three
12-year useful life will be ₱100,000. Kosovo regularly questions:
uses the straight line depreciation on similar Reagan Company uses leases as a method of selling its
equipment. For the year ended December 31, 2017, products. In 2017, Reagan completed construction of a
what amount should Kosovo recognize as depreciation passenger ferry. On January 1, 2017, the ferry was
expense of the leased asset? leased to the Super Ferry Line on a contract specifying
a. ₱400,000 c. ₱470,000 that ownership of the ferry will transfer to the lessee at
b. ₱480,000 d. ₱490,000 the end of the lease period. Annual lease payments do
not include executory costs. Other terms of the
22. Oak Company leased equipment for its entire nine-year agreement are as follows:
useful life, agreeing to pay ₱500,000 at the start of the Original cost of the ferry ₱8,000,000
lease term on December 31, 2016, and ₱500,000
annually on each December 31 for the next eight years. Fair value of the ferry at lease date ₱12,555,000
The present value on December 31, 2016 of the nine Lease payment (paid in advance) ₱1,500,000
lease payments over the lease term, using the rate
implicit in the lease which Oak knows to be 10%, was Estimated residual value ₱2,000,000
₱3,165,000. The December 31, 2016 present value of
Implicit interest rate 12%
the lease payment using Oak’s incremental borrowing
rate of 12% was ₱2,985,000. Oak made a timely second Date of first lease payment January 1, 2017
lease payment. What amount should Oak report as
lease liability in its December 31, 2017 statement of Lease term 20 years
financial position? Present value of an annuity due of
a. ₱2,283,200 c. ₱2,431,500 1 at 10% for 20 periods 8.37
b. ₱2,485,000 d. ₱3,500,000
Present value of 1 at 12% for 20
periods 0.10

23. On December 31, 2017, Rafferty Company leased 26. What is the unearned interest income of January 1,
equipment under a finance lease. Annual lease 2017?
payments of ₱200,000 are due December 31 for 10 a. ₱17,445,000 c. ₱19,245,000
years. The equipment’s useful life is 10 years, and the b. ₱19,445,000 d. ₱22,000,000
interest rate implicit in the lease is 10%. The lease
obligation was recorded on December 31, 2017, at 27. What is the gross profit on sale for 2017?
₱1,350,000 and the first lease payment was made on a. ₱4,355,000 c. ₱4,555,000
that date. What amount should Rafferty include in b. ₱4,755,000 d. ₱6,555,000
current liabilities of this finance lease in this December
31, 2017 statement of financial position? 28. What is the interest income for 2017?
a. ₱65,000 c. ₱85,000 a. ₱1,326,600 c. ₱1,350,600
b. ₱115,000 d. ₱200,000 b. ₱1,506,600 d. ₱1,524,600

24. Liza Company is a car dealer. On January 1, 2017, it
entered into finance lease with a customer under which
the customer would pay ₱200,000 on January 1 each
year for 5 years, commencing in 2017. The cost of the
car is ₱600,000 and its cash selling price was ₱750,000.
Liza paid legal fees of ₱20,000 to a law firm in
connection with the arrangement of the lease. Ignoring
FAR 6.1MC: CURRENT LIABILITIES
29. Magnum Company owns an asset costing ₱5,239,000.
The asset is leased on January 1, 2017 to another entity.
Five annual lease payments are due each January 1,
beginning January 1, 2017. The lessee guarantees the
₱2,000,000 residual value of the asset as of the end of
the lease term on December 31, 2021. The lessor’s
implicit interest rate is 8%. The PV of 1 at 8% for 5
Page 23 of
31
 periods is 0.68, 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. ₱751,500 c. ₱900,000
b. ₱1,215,545 d. ₱1,531,090
30. The commencement of a lease is January 1, 2017. A
third party guarantees the residual value of the asset
under the lease estimated to be ₱120,000 on January 1,
2022, the end of the lease term. Annual lease payments
are ₱100,000 due each December 31, beginning
December 31, 2017. The last payment is due December
31, 2021. Both the lessor and lessee use 10% as the
interest rate. The remaining useful life of the asset was
six years at the commencement of the lease. The PV of 1
at 10% for 5 periods is 0.62 and the PV of the ordinary
annuity of 1 at 10% for 5 periods is 3.79. What is the
lease receivable of the lessor, and lease liability of the
lessee at the commencement of the lease, respectively?
a. ₱379,000; ₱379,000 c. ₱379,000; ₱453,400
b. ₱453,400; ₱379,000 d. ₱453,400; ₱453,40

ACCOUNTING FOR INCOME TAXES

1. It is the profit for a period determined in accordance a. The deferred tax asset and deferred tax liability
with the rules established by tax authorities upon relate to income tax levied by the different taxing
which income taxes are payable. authority.
a. Accounting profit b. The entity has a legal enforceable right to offset a
b. Taxable profit current tax asset against a current tax liability.
c. Net profit c. Both a and b
d. Accounting profit subject to tax d. Neither a nor b

2. These are difference that will result in future taxable 7. A deferred tax liability shall be recognized for all
amount in determining taxable profit of future periods a. Permanent differences
when the carrying amount of the asset or liability is b. Temporary differences
recovered or settled. c. Taxable temporary differences
a. Temporary differences d. Deductible temporary differences
b. Taxable temporary differences
c. Deductible temporary differences 8. Which of the following statements is incorrect
d. Permanent differences concerning tax assets and liabilities?
a. Deferred tax assets and liabilities shall not be
3. It is the deferred tax consequence attributable to a discounted.
taxable temporary difference b. Tax assets and liabilities shall be presented
a. Deferred tax liability separately from other assets and liabilities in the
b. Deferred tax asset statement of financial position.
c. Current tax liability c. Deferred tax assets and liabilities shall be
d. Current tax asset distinguished from current tax assets and liabilities.
d. When an entity makes a distinction between
4. It is the amount of income tax payable in respect of the current and noncurrent assets and liabilities, it
taxable profit. shall classify deferred tax assets and liabilities as
a. Current tax expense current.
b. Total income tax expense
c. Deferred tax expense 9. Deferred tax assets are the amount of income taxes
d. Deferred tax benefit recoverable in future periods in respect of
a. The carryforward of unused tax losses only
5. The deferred tax expense is equal to b. Taxable temporary differences and carryforward of
a. Increase in deferred tax asset less the increase in unused tax losses
deferred tax liability. c. Deductible temporary differences and
b. Increase in deferred tax liability less the increase in carryforward of unused tax losses
deferred tax asset. d. Permanent differences
c. Increase in deferred tax asset.
d. Increase in deferred tax liability. 10. Which of the following statements in relation to income
tax accounting is true?
6. An entity shall offset a deferred tax asset and deferred a. Interest expense accrued but included in taxable
tax liability when profit on a cash basis shall be classified under
taxable temporary differences.

FAR 6.1MC: CURRENT LIABILITIES Page 24 of

31
 b. Where accumulated depreciation on an asset is
greater than accumulated tax depreciation, the
amount shall be classified under taxable temporary
differences.
c. Both I and II
d. Neither I nor II
11. Which of the following differences would result in
future taxable amount?
a. Expenses or losses that are deductible after they
are recognized in accounting income.
b. Revenues or gains that are taxable before they are
recognized in accounting income.
c. Expenses or losses that are deductible before they
are recognized in accounting income.
d. Revenues or gains that are recognized in
accounting income but are never included in
taxable income.
12. A temporary difference which would result in a
deferred tax liability is
a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess of tax depreciation over accounting
depreciation
d. Subscription received in advanced
13. Which of the following is an example of a temporary
differences that would result in a deferred tax liability?
a. Use of straight line depreciation for accounting
purposes and an accelerated rate for income tax
purposes
b. Rent revenue collected in advance when included
in taxable income before it is included in pretax
accounting income
c. Use of a shorter depreciation period for accounting
purposes than is used for income tax purposes.
d. Investment losses recognized earlier for accounting
purposes than for tax purposes.
14. Which of the following is the most likely item to result
in a deferred tax asset?
a. Using accelerated depreciation for tax purposes but
straight line depreciation for accounting purposes
b. Using the cost recovery method of recognizing
construction revenue for tax purposes but using
percentage of completion method for financial
reporting purposes
c. Prepaid expense
d. Unearned revenue
15. An example of a “deductible temporary difference”
occurs when
a. The installment sales method is used for tax
purposes but the accrual method of recognizing
sales revenue is used for financial accounting
purposes.
b. Accelerated depreciation is used for tax purposes
but straight line depreciation is used for accounting
purposes.
c. Warranty expenses are recognized on the accrual
basis for financial accounting purposes but
recognized for tax purposes as the warranty
conditions are met.
d. The cost recovery method of recognizing
construction revenue is used for tax purposes but
the percentage of completion method is used for
financial accounting purposes.
FAR 6.1MC: CURRENT LIABILITIES
16. 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 should be classified in the statement of
financial position as
a. A current liability.
b. A noncurrent liability.
c. A current liability for the portion of the temporary
difference reversing within a year and a noncurrent
liability for the remainder.
d. An offset to the accumulated depreciation reported
in the statement of financial position.
17. An item that would create a permanent difference in
pretax financial income and taxable income would be
a. Using accelerated depreciation for tax purposes
and straight line depreciation for book purposes.
b. Purchasing equipment previously leased under an
operating lease in prior years.
c. Using the percentage of completion method on
long-term construction contracts.
d. Paying fines for violation of laws.
18. In computing the change in deferred tax asset or
liability, which tax rate is used?
a. Current tax rate
b. Estimated future tax rate
c. Enacted tax rate
d. Prior tax rate
19. The result of interperiod tax allocation is that
a. Wide fluctuations in an entity’s tax liability
payments are eliminated.
b. Tax expense shown in the income statement is
equal to the deferred taxes shown in the statement
of financial position.
c. 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.
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.
20. 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. Arises because certain revenue and expenses
appear in the financial statements either before or
after they are included in the income tax return.
d. Arises because different income statement items
are taxed at different rates.
21. Hilton Company reported pretax financial income of
₱6,200,000 for the calendar year 2017. Included in the
other income section of the income statement was
₱200,000 of interest revenue from government bonds
held by the entity. The income statement also included
depreciation expense of ₱500,000 for the machine that
cost ₱3,000,000. The income tax return reported
₱600,000 as depreciation on the machine. The enacted
tax rate is 30% for 2017 and future years. What is the
current tax expense for 2017?
Page 25 of
31
 a. ₱1,770,000 c. ₱1,800,000 ● Accelerated depreciation for income tax purposes
b. ₱1,830,000 d. ₱1,860,000 was ₱500,000. Straight line financial depreciation
on these assets is ₱400,000.
22. Aris Company computed pretax accounting income of ● Goodwill impairment loss of ₱300,000 was not
₱5,000,000 for its first year of operations ended included as a deduction in the tax return but may
December 31, 2017. In preparing the income tax return be deducted in the income statement.
for 2017, the following differences are noted between ● Interest income on treasury bills was not included
the accounting income and taxable income. in the tax return. During the year, ₱600,000 was
Nondeductible expenses ₱200,000 received on these investments.
Nontaxable revenue 500,000 What is the pretax accounting income for 2017?
Gross income on installment sales a. ₱4,100,000 c. ₱4,200,000
reported in accounting income but b. ₱4,300,000 d. ₱4,400,000
1,000,000
not in taxable income
26. On June 30, 2017, Ankh Company prepaid a ₱1,000,000
Provision for doubtful accounts 100,000 premium on an annual insurance policy. The premium
payment was a tax deductible expense in Ankh’s 2017
Income tax rate 30% cash basis tax return. The accrual basis income
statement will report a ₱500,000 insurance expense in
What is the “current tax expense”? 2017 and 2018. The income tax rate is 30%. In Ankh’s
a. ₱1,110,000 c. ₱1,140,000 December 31, 2017 statement of financial position,
b. ₱1,410,000 d. ₱1,500,000 what amount related to the insurance should be
reported as deferred tax asset?
23. In 2017, Tiger Company reported pretax financial a. ₱0 c. ₱150,000
income of ₱5,000,000. Included in the pretax financial b. ₱200,000 d. ₱300,000
income are ₱900,000 of nontaxable life insurance
proceeds received as a result of the death of an officer, 27. West Company leased a building and received
₱1,200,000 of estimated warranty expense accrued on ₱4,000,000 annual rental payment on June 15, 2017.
December 31, 2017, and ₱200,000 of life insurance The beginning of the lease was July 1, 2017. Rental
premiums for a policy for an officer. No income tax was income is taxable when received. The income tax rate is
previously paid during the year and the income tax rate 30%. West had no other permanent or temporary
is 30%. What is the income tax payable on December differences. What amount of deferred tax asset should
31, 2017? West report in its December 31, 2017, statement of
a. ₱1,230,000 c. ₱1,290,000 financial position?
b. ₱1,500,000 d. ₱1,650,000 a. ₱0 c. ₱300,000
–1,290,000= income tax expense b. ₱600,000 d. ₱1,200,000
24. Canterbury Company made an accounting profit of
₱4,000,000 for the year ended December 31, 2017. 28. Caleb Company has three financial statements elements
Included in the accounting profit were the following for which the December 31, 2017 carrying amount is
items of income and expense: different from the December 31, 2017 tax basis:
Donation to political parties ₱1,000,000 Carrying
(nondeductible) amount
Tax basis Difference
Depreciation - 20% 1,600,000 Equipment ₱200,000 ₱120,000 ₱80,000
Annual leave expense 700,000 Prepaid
Rent revenue 1,200,000 officers’
75,000 0 75,000
insurance
Income tax rate 30% policy
Warranty 50,000 0 50,000
For tax purposes, the depreciation rate is 25%, the
liability
annual leave paid is ₱800,000 and the rent received is
₱1,000,000. The entity follows the cash basis for tax
purposes. What is the liability on December 31, 2017? What is the total amount of future taxable differences?
a. ₱1,150,000 c. ₱1,200,000 a. ₱50,000 c. ₱80,000
b. ₱1,290,000 d. ₱1,368,500 b. ₱155,000 d. ₱205,000

25. Cascade Company is determining the amount of its
pretax accounting income for 2017 by making
adjustment to taxable income from 2017 income tax
return. The tax return indicates taxable income of
₱4,000,000 on which a tax liability of ₱1,200,000 has
been recognized. Following is the list of items that may
be required to determine pretax accounting income
from the amount of taxable income:
29. On January 1, 2017, North Company has spent
₱600,000 in developing a new product. This cost meets
the definition of an intangible asset under PAS 38 and
had been recognized in the statement of financial
position. The tax law allows this cost to be deducted for
tax purposes when paid. Thus, the entity has
recognized this amount as expense in 2017 for tax
purposes. On December 31, 2017, the intangible assets
is deemed impaired by ₱50,000. What is the “tax base”
for the intangible asset on December 31, 2017?

FAR 6.1MC: CURRENT LIABILITIES Page 26 of

31
 a. ₱0 c. ₱550,000 what amount related to the insurance should be
b. ₱600,000 d. ₱650,000 reported as deferred liability?
a. ₱0 c. ₱60,800
30. The following information was extracted from the b. ₱121,600 d. ₱182,400
records of Aloha Company on December 31, 2017:
Carrying 35. Toner Company has revalued its property and has
amount recognized the increase in the revaluation reserve in its
Tax base financial statements. The carrying value of the property
Accounts receivable ₱1,500,000 ₱1,750,000 was ₱9,000,000 and the revalued amount was
₱10,000,000. The tax base of the property is
Motor vehicle 1,650,000 1,250,000 ₱6,000,000. The tax rate is 32%. What amount of
deferred tax should be reported directly in equity?
Provision for warranty 120,000 0
a. ₱0 c. ₱320,000
Deposit received in 150,000 0 b. ₱960,000 d. ₱1,280,000
advance
Use the following information to answer the next four
questions:
The depreciation rates for accounting and taxation are The following differences enter into the reconciliation
15% and 25% respectively. The deposits are taxable of accounting profit and taxable profit of Mule Company
when received and warranty costs are deductible. for the year ended December 31, 2017, its first year of
When paid. An allowance for doubtful debts of operations.
₱250,000 has been raised against accounts receivable Life insurance expense ₱100,000
for accounting purposes but such debts are deductible
only when written off as uncollectible. The tax rate is Excess tax depreciation 2,000,000
30%. What amount should Aloha Company report as
Warranty expense 200,000
deferred tax asset on December 31, 2017?
a. ₱36,000 c. ₱81,000 Litigation expense 500,000
b. ₱120,000 –DTL d. ₱156,000
Unamortized computer software 3,000,000
31. In its December 31, 2017 statement of financial Unearned rent income deferred
position, Shin Company had income tax payable of on the books but appropriately
₱130,000 and a deferred tax asset of ₱200,000. Shin
recognized in taxable profit
had reported a deferred tax asset of ₱150,000 on
400,000
December 31, 2016. No estimated tax payments were
made during 2017. In its 2017 income statement, what Interest income from long-term
amount should Shin report as total income tax expense? certificate of deposit
a. ₱80,000 c. ₱100,000 200,000
b. ₱130,000 d. ₱180,000
Additional information:
32. On December 31, 2016, Bolton Company reported a ● On July 1, 2017 Mule paid insurance premium of
deferred tax liability of ₱1,000,000 and a deferred tax ₱200,000 on the life of an officer with Mule
asset of ₱400,000. At the end of 2017, Bolton reported a Company as beneficiary.
deferred tax liability of ₱1,500,000 and a deferred tax ● Excess tax depreciation will reverse equally over a
asset of zero. What is the deferred tax expense for four-year period, 2018-2021.
2017? ● The warranty liability is the estimated warranty
a. ₱100,000 c. ₱400,000 cost that was recognized as expense in 2017 but
b. ₱500,000 d. ₱900,000 deductible for tax purposes when actually paid.
● It is estimated that the litigation will be paid in
Use the following information to answer the next two 2021.
questions: ● In January 2017, Mule Company incurred
On June 30, 2017, Glory Corporation prepaid a ₱4,000,000 of computer software cost. Considering
₱380,000 premium on an insurance policy. The the technical feasibility of the project, this cost was
premium payment was a tax-deductible expense in capitalized and amortized over 4 years for
Glory’s 2017 cash basis tax return. The accrual basis accounting purposes. However, the total amount
income statement will report a ₱190,000 insurance was expensed in 2017 for tax purposes.
expense in 2017 and 2018. Assume the income tax rate ● Rent income will be recognized during the last year
is 32%. of the lease, 2021.
● Interest income from the long-term certificate of
33. Using the income statement liability method, in Glory’s deposit is expected to be ₱200,000 each year until
December 31, 2017 statement of financial position, their maturity at the end of 2021.
what amount related to the insurance should be ● Accounting profit for 2017 is ₱10,000,000. Tax rate
reported as deferred liability? is 35%.
a. ₱0 c. ₱60,800
b. ₱121,600 d. ₱182,400 Compute for the following –
36. Deferred tax liability
34. Using the balance sheet liability method, in Glory’s a. ₱1,050,000 c. ₱1,750,000
December 31, 2017 statement of financial position, b. ₱1,890,000 d. ₱2,100,000

FAR 6.1MC: CURRENT LIABILITIES Page 27 of

31
37. Deferred tax asset a. ₱1,750,000 c. ₱2,500,000
a. ₱210,000 c. ₱245,000 b. ₱2,800,000 d. ₱4,000,000
b. ₱385,000 d. ₱1,085,000
41. What is the deferred tax liability on January 1, 2017
38. Current tax expense arising from the revaluation?
a. ₱1,750,000 c. ₱1,820,000 a. ₱0 c. ₱450,000
b. ₱2,100,000 d. ₱2,800,000 b. ₱750,000 d. ₱1,200,000

39. Tax expense 42. What is the current tax expense for 2017?
a. ₱3,465,000 c. ₱3,500,000 a. ₱2,700,000 c. ₱3,000,000
b. ₱3,535,000 d. ₱4,830,000 b. ₱3,300,000 d. ₱3,450,000

Use the following information to answer the next six 43. What is the deferred tax liability on December 31, 2017
questions: arising from revaluation?
On January 1, 2014, Easy Company acquired an a. ₱0 c. ₱600,000
equipment for ₱8,000,000. The equipment is b. ₱450,000 d. ₱750,000
deprecated using straight line method based on a useful
life of 8 years with no residual value. On January 1, 44. What amount should be reported as total income tax
2017, after 3 years, the equipment was revalued at a expense for 2017?
replacement cost of ₱12,000,000 with no change in the a. ₱2,550,000 c. ₱3,000,000
useful life. The pretax accounting income before b. ₱2,700,000 d. ₱3,750,000
depreciation for 2017 is ₱10,000,000. The income tax is
30% and there are no other temporary differences at 45. What is the revaluation surplus on December 31, 2017?
the beginning of the year. a. ₱1,400,000 c. ₱1,750,000
b. ₱2,000,000 d. ₱2,500,000
40. What is the revaluation surplus on January 1, 2017?

EMPLOYEE BENEFITS, DEFINED BENEFIT PLAN, OTHER BENEFIT

1. Which of the following statements characterizes 5. In accordance with the revised PAS 19, which of the
defined benefit plans? following is reported in profit or loss?
a. They are comparatively simple in construction and a. Actuarial loss on defined benefit obligation
raise few accounting issues for employers. b. Actuarial gain on plan assets
b. Retirement benefits are based on the plan’s benefit c. Interest on the effect of asset ceiling
formula. d. Gain or loss on routine settlements
c. Retirement benefits depend on how well pension
fund assets have been managed. 6. In accordance with the revised PAS 19, which of the
d. All of the above. following is not reported in profit or loss?
a. Gain or loss on non-routine settlements
2. Which of the following is not an issue in accounting for b. Past service cost if not yet vested
defined benefit plans? c. Net interest on defined benefit asset
a. The amount of pension expense to be recognized d. None of the above
b. The amount of pension liability to be reported
c. The amount of funding (contributions) required by 7. What is measured by the present value of defined
the plan benefit obligation?
d. Disclosures needed to supplement the financial a. The pension expense, computed by the plan
statements formula applied to years of service to date,
assuming future salary levels.
3. It is the increase in the present value of the defined b. The pension expense, computed by the plan
benefit obligation resulting from employee service in formula applied to years of service to date,
the current period. assuming existing salary levels.
a. Past service cost c. The pension obligation, computed by the plan
b. Current service and interest cost formula applied to years of service to date,
c. Current service cost assuming future salary levels.
d. Interest cost d. The pension obligation, computed by the plan
formula applied to years of service to date,
4. In accordance with the revised PAS 19, which of the assuming existing salary levels.
following can be deferred?
a. Actuarial gains and losses 8. Under PAS 19, the net defined benefit liability (asset) is
b. Past service cost if not yet vested computed using
c. Both a and b a. Present value of defined benefit obligation and the
d. Neither a nor b fair value of plan assets
b. Net periodic pension cost and the current period
contribution
FAR 6.1MC: CURRENT LIABILITIES Page 28 of
31
 c. Fair value of plan assets and the market-related How much is the year-end balance of the present value
value of plan assets of defined benefit obligation?
d. Projected benefit obligaiton and the market-related a. ₱210,000 c. ₱244,000
value of plan assets b. ₱304,000 d. ₱364,000

9. When the fair value of the pension fund assets is 15. The actuarial valuation report of an entity shows the
greater than the present value of the defined benefit following information:
obligation, the difference is Present value of defined benefit obligation, 280,000
a. Reported as prepaid pension cost Jan. 1
b. Reported as a noncurrent liability
Discount rate 14%
c. Reported as a contra equity adjustment
d. Not recognized on the balance sheet Benefits paid to retirees 90,000
Actuarial gain 60,000
10. A pension liability is reported when:
a. The defined benefit obligation exceeds the fair Present value of defined benefit obligation, 210,000
value of pension plan assets. Dec. 31
b. The accumulated benefit obligation is less than the
fair value of the pension plan assets. How much is the current service cost?
c. The pension expense reported for the period is a. ₱40,800 c. ₱44,800
greater than the funding amount for the same b. ₱48,200 d. ₱79,200
period.
d. Accumulated other comprehensive income exceeds 16. Information on an entity’s plan assets is shown below:
the fair value of pension plan assets. Fair value of plan assets, Jan. 1 120,000

11. Which of these elements are taken into account when Return on plan assets 40,000
determining the discount rate to be used? Contributions to the retirement fund 280,000
a. Markets yields at the statement of financial during the year
positions dates on high-quality corporate bonds.
b. Investment or actuarial risk. Benefits paid to retirees 160,000
c. Specific risk associated with the entity’s business. Actuarial loss 60,000
d. Risk that future experiences may differ from
actuarial assumptions.
How much is the fair value of the plan assets as of year-
12. Which of the following is a component of defined end?
benefit cost? a. ₱220,000 c. ₱240,000
a. Interest cost b. ₱280,000 d. ₱340,000
b. Amortization of transition gain or loss
c. Benefits paid to retirees 17. Information on an entity’s plan assets is shown below:
d. Amortization of prior service cost Fair value of plan assets, Jan. 1 341,000
Contributions to the retirement fund 32,000
13. Which of the following statements is incorrect? during the year
a. Minimum (corridor) amortization of net
Benefits paid to retirees 89,000
unrecognized gain or loss is allowed for
postretirement benefit plans Actuarial loss 50,000
b. Gains and losses on settlement of defined benefit
Fair value of plan assets, Dec. 31 335,000
retirement plans are recognized immediately
c. Actuarial gains and losses are recognized
immediately How much is the return on plan assets during the year?
d. Past service costs are recognized immediately a. ₱1,000 c. ₱51,000
b. ₱81,000 d. ₱101,000
14. The actuarial valuation report of an entity shows the
following information: 18. The following information relates to the defined benefit
Present value of defined benefit obligation, 340,000 pension plan for the Here Company for the year ending
Jan. 1 December 31, 2017.
Present value of defined benefit obligation, 4,600,000
Current service cost 30,000
Jan. 1
Discount rate 10%
Present value of defined benefit obligation, 4,729,000
Benefits paid to retirees 100,000 Dec. 31
Actuarial gain 60,000 Fair value of plan assets, Jan. 1 5,035,000
Fair value of plan assets, Dec. 31 5,565,000

FAR 6.1MC: CURRENT LIABILITIES Page 29 of

31
 Expected return on plan assets 450,000 22. The following information relates to Iras Inc. at
December 31, 2017:
Amortization of deferred gain on 32,500
Fair value of plan assets 1,520,000
settlement of plan
Market related asset value 1,440,000
Employer contributions 425,000
Present value of defined benefit 1,960,000
Benefits paid to retirees 390,000
obligation
Discount rate 10%
Projected benefit obligation 2,040,000
Past service cost 24,000
Current service cost for the year would be
a. ₱59,000 c. ₱94,000
b. ₱129,000 d. ₱390,000 The net defined benefit liability at December 31, 2017,
for Iras Inc. is
19. The following information relates to the defined benefit a. ₱0 c. ₱440,000
pension plan for the Here Company for the year ending b. ₱480,000 d. ₱520,000
December 31, 2017.
Present value of defined benefit obligation, 4,600,000 Use the following information to answer the next two
Jan. 1 questions:
Power Co. sponsors a defined benefit pension plan. For
Present value of defined benefit obligation, 4,729,000
the current period ended December 31, the following
Dec. 31
information relevant to the plan has been accumulated:
Fair value of plan assets, Jan. 1 5,035,000 Defined benefit obligation, 1/1 ₱10,000,000
Fair value of plan assets, Dec. 31 5,565,000 Fair value of plan assets, 1/1 9,000,000
Expected return on plan assets 450,000 Current service cost 1,000,000
Amortization of deferred gain on 32,500 Past service cost 2,000,000
settlement of plan
Gain on settlement 500,000
Employer contributions 425,000
Increase in defined benefit obligation
Benefits paid to retirees 390,000 due to changes in actuarial
800,000
assumptions
Discount rate 10%
Market yield on high quality corporate 6%
bonds
The return on plan assets for the year is
a. ₱105,000 c. ₱495,000 Yield on bonds issued by the entity 8%
b. ₱503,500 d. ₱530,000
Expected return on plan assets 9%
20. On January 1, 2017, Crow Co.’s estimated a present Actual return on plan assets 7%
value of defined benefit obligation of ₱440,000 based
on a settlement rate of 12 percent. Pension benefits
23. How much is the defined benefit cost in profit or loss?
paid to retirees totaled ₱60,000. Service costs for 2017
a. ₱2,440,000 c. ₱2,560,000
amounted to ₱148,000. The fair value of the plan assets
b. ₱3,000,000 d. ₱3,560,000
were ₱350,000 and ₱400,000 on December 31, 2016
(1m+2m-500k)+[(10m-9m)*6%]
and December 31, 2017 respectively. The projected
24. How much is the defined benefit cost in other
benefit obligation at December 31, 2017, was
comprehensive income?
a. ₱528,000 c. ₱580,800
a. ₱0 c. ₱710,000
b. ₱630,800 d. ₱640,800
b. ₱800,000 d. ₱890,000
(9m*6%)-(9m*7%)+800k
21. Ches Company has a defined benefit plan. The fair value
Use the following information to answer the next four
of plan assets on January 1, 2017, was ₱1,500,000. No
questions:
unrecognized net loss or gain existed. On December 31,
At the beginning of the current year, the memorandum
2017, the fair value of the plan assets was ₱1,860,000.
records of Excel Company’s defined benefit plan
Benefits paid to retirees equaled ₱300,000. Company
showed the following:
contributions to the plan totaled ₱360,000. The
Fair value of plan assets ₱7,500,000
settlement rate was 8 percent, and the expected long-
term rate of return on plan assets was 10 percent. The Defined benefit obligation (11,000,000)
actual return on plan assets was
Prepaid (accrued) pension expense ₱(3,500,000)
a. ₱150,000 c. ₱180,000
b. ₱224,000 d. ₱300,000
The entity determined that its current service cost was
₱1,000,000 and the interest cost is 10%. The expected

FAR 6.1MC: CURRENT LIABILITIES Page 30 of

31
 return on plan assets was 12% but the actual return 2017 2016
during the year was 8%. Other related information at Estimated Actual
the end of the year:
PV of defined benefit obligation 400,000 300,000
Contribution to the plan ₱1,200,000
Fair value of plan assets 280,000 250,000
Benefits paid to retirees 1,500,000
Defined benefit cost 40,000 25,000
Decrease in defined benefit obligation
due to changes in actuarial 200,000 Contributions to the plan ? 10,000
assumptions
How much should Sciss contribute in 2017 in order to
25. How much is the defined benefit cost for the year? report a net defined benefit liability of ₱5,000 in its
a. ₱0 c. ₱1,300,000 December 31, 2017 statement of financial position?
b. ₱1,350,000 d. ₱1,400,000 a. ₱0 c. ₱5,000
1m+(1.1m-750k)+[(7.5m*10%)-(7.5m*8%)-200k] b. ₱50,000 d. ₱60,000
26. How much is the fair value of plan assets at year-end?
a. ₱7,500,000 c. ₱7,800,000, 30. Perp Co. plans to close one of its branches in three
b. ₱8,100,000 d. ₱9,300,000 month’s time. There are 20 employees in the branch.
7.5m+750-150+1.2m-1.5 Because Perp Co. wants to fill in some pending
27. How much is the present value of defined benefit customer orders, Perp Co. offers its employees the
obligation at year-end? following:
a. ₱11,000,000 c. ₱11,400,000 a) Each employee who stays and renders service until
b. ₱11,800,000 d. ₱12,900,000 the closure of the branch will receive on the
11m+1m+1.1m-200-1.5m termination date a cash payment of ₱130,000.
28. How much is the defined benefit liability (asset) at the b) Employees leaving before closure of the branch will
end of the year? receive ₱40,000.
a. ₱0 c. ₱100,000
b. ₱3,600,000 d. (₱3,600,000) Perp Co. expects that half of the employees will leave
(3.5m)+1.3m-1.2m before closure.
29. Sciss Co. has a defined benefit retirement plan. During
2014 and 2015, Sciss’s contributions fully funded the How much is the liability for termination benefits?
plan. Information on the plan as of December 31, 2016 a. ₱800,000 c. ₱900,000
is shown below: b. ₱2,600,000 d. ₱3,400,000
short-term (20*1/2)*(130T-40T)

FAR 6.1MC: CURRENT LIABILITIES Page 31 of

31