Marjorie A.

Pagsinuhin AC_IACFAR
BSA 46234

LESSEE ACCOUNTING

Lessee Company leased a machinery on January 1, 2017 with the following information:

Annual rent payable at the end of each year 1,000,000

Residual value guarantee 500,000
Payment to lessor to obtain a long term lease 300,000
Cost of dismantling and restoring the asset required
by contract at present value 390,000
Annual executory cost paid by lessee 50,000
Lease term 4 years
Useful life 8 years
Implicit interest rate 10%
Present value of ordinary annuity of 1 for 4 periods 3.17
Present value of 1 at 10% for 4 periods 0.68

1. What is the initial lease liability on January 1, 2017? 3,510,000

2. What is the cost of right use asset? 4,200,000
3. What is the depreciation for 2017? 925,000
4. What is the lease liability on December 31, 2017? 2,861,000

RIGHT OF USE ASSET

On January 1, 2017 Ashe Company entered into a ten-year non-cancelable lease requiring year-end payments of
P1,000,000.
Ashe’s incremental borrowing rate is 12%, while the lessor’s implicit rate, known to Ashe is 10%.
Present value factors for an ordinary annuity for ten periods are 6.145 at 10% and 5.650 at 12%.
On same date, Ashe Company paid initial direct cost of 200,000 in negotiating and securing the leasing
arrangement.
Ownership of the property remain with the lessor at expiration of the lease. These is no purchase option.
The leased property has an estimated economic life of 12 years.

1. What amount should be capitalized initially as the cost of the right of use asset? 6,345,000
2. What amount should be recognized initially as lease liability? 6,145,000
3. What is the annual depreciation of the right of use asset? 634,500

LEASE LIABILITY

Trojan Company prepared the following lease payments schedule for the lease of a machine from another
entity. The machine had an economic life of six years. The lease agreement Trojan Company prepared the
following lease payments schedule for the lease of a machine from another entity. The machine had an
economic P33,000 and the machine will be returned to the lessor at the end of the life of six years. The lease
agreement required four annual payments of lease term.
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

July 1, 2017 98,512

July 1, 2018 30,000 9,851 20,149 78,363
July 1, 2019 30,000 7,836 22,164 56,199
July 1, 2020 30,000 5,620 24,380 31,819
July 1, 2021 35,000 3,181 31,819                     -        
125,000 26,488 98,512 -

1. What is the amount of executory cost? 3000

2. What is the residual value guarantee? 5000
3. On June 30, 2018, what would Trojan Company record in relation to the lease? Int. Exp 9,851
4. What is the annual depreciation expense? 23,378

OPERATING LEASE – LESSOR

On January 1, 2017, Simplex Company leased a machine to another entity for a four-year period. The annual
rentals will be paid by the lessee beginning December 31, 2017.

The lease agreement called for a 10% increase in annual rental per annum. The rental due on December 31,
2020 was P133,100.

1. What is the rental payment due on December 31, 2018?

2. What is the rental income for the year ended December 31, 2017?

SALES TYPE LEASE – LESSOR

On January 1, 2017, Gallant Company entered into a lease agreement with Blacksheep Company for a machine
which was Carried in the accounting records of Gallant at P2,000,000. Total payments under the lease which
expires on December 31, 2026, aggregate P3,550,800 of which P2,400,000 represents cost of the right of use
asset to Blacksheep.

Payments of P355,080 are due each January 1 of each year. The interest rate of 10% which was stipulated in the
lease is considered fair and adequate compensation to Gallant for the use of its funds. 
Blacksheep expects the machine to have a 10-year life, no residual value and be depreciated on a straight line
basis. The lease is conceived as a sales type lease.

1. What amount should be recognized by Gallant as profit from sale for the year ended December 31, 2017?
2. What is the interest income that should be recognized by Gallant for the year ended December 31, 2017?
3. What is the pretax total income derived by Gallant from the lease for the year ended December 31, 2017?

DIRECT FINANCING LEASE – LESSOR

At the beginning of current year, Lessor Company leased a machine to Lessee Company. The machine had an
original cost of P6,000,000. The lease term was five years and the implicit interest rate on the lease was 15%.

The lease is properly classified as a direct financing lease. The annual lease payments of P1,730,541 are made
each December 31. The machine reverts to Lessor at the end of the lease term, at which time the residual value
of the machine will be P400,000.
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

The residual value is unguaranteed.

The PV of 1 at 15% for 5 periods is .4972, and the PV of an ordinary annuity of 1 at 15% for 5 periods is 3.3522.

1. At the commencement of the lease, what would be the net lease receivable on the part of the lessor
2. What is the gross investment in the lease?
3. What is the total unearned interest income?
4. What is the interest income for the current year?

SALE AND LEASEBACK

At the beginning of current year, Hazel Company sold a machine and immediately leased it back. The following
data pertain to the sale and leaseback transaction:

Sale price at below fair value 4,000,000

Fair value of machine 4,500,000
Carrying amount of machine 3,600,000
Annual rental payable at the end of each year 500,000
Remaining life of machine 10 years
Lease term 3 years
Implicit interest rate 6%
Present value of an ordinary annuity of 1
at 6% for 3 periods 2.67

1. What is the initial lease liability?

2. What is the cost of right use asset?
3. What is the gain on right transferred to the buyer-lessor?
4. What is the annual rent income of the buyer-lessor?

POSTEMPLOYMENT BENEFITS

Ultimate Company provided the following

information for the current year:
Jan 1 Dec 31
Fair Value of Plan assets P 2,600,000
3,000,000
Projected Benefit Obligation 2,000,000
2,100,000
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

Prepaid/Accrued benefit cost – surplus

600,000 900,000
Asset Ceiling 200,000 300,000 .
Effect of Asset Ceiling 400,000 600,000
Current Service Cost P 100,000
Contribution to the plan 350,000
Benefits Paid 150,000
Discount rate 10%
1. What is the actual return on plan assets
for the current year? [P 200,000]
2. What is the actuarial gain due to decrease
in PBO? [P 50,000]
3. What is the employee benefit expense for
the current year? [P 80,000]
4. What is the net measurement loss for the
current year? [P 170,000
Ultimate Company provided the following
information for the current year:
Jan 1 Dec 31
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

Fair Value of Plan assets P 2,600,000

3,000,000
Projected Benefit Obligation 2,000,000
2,100,000
Prepaid/Accrued benefit cost – surplus
600,000 900,000
Asset Ceiling 200,000 300,000 .
Effect of Asset Ceiling 400,000 600,000
Current Service Cost P 100,000
Contribution to the plan 350,000
Benefits Paid 150,000
Discount rate 10%
1. What is the actual return on plan assets
for the current year? [P 200,000]
2. What is the actuarial gain due to decrease
in PBO? [P 50,000]
3. What is the employee benefit expense for
the current year? [P 80,000]
4. What is the net measurement loss for the
current year? [P 170,000
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234
Ultimate Company provided the following information for the current year:
Jan 1 Dec 31
Fair Value of Plan assets 2,600,000 3,000,000
Projected Benefit Obligation 2,000,000 2,100,000
Prepaid/Accrued benefit cost – surplus 600,000 900,000
Asset Ceiling 200,000 300,000
Effect of Asset Ceiling 400,000 600,000

Current Service Cost 100,000

Contribution to the plan 350,000
Benefits Paid 150,000
Discount rate 10%

1. What is the actual return on plan assets for the current year?
2. What is the actuarial gain due to decrease in PBO?
3. What is the employee benefit expense for the current year?
4. What is the net measurement loss for the current year?

Sandra Company provided the

following information for the
current year:
Current Current
service service
cost cost
500,000500,000
Interest Interest
expense expense
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

on on
PBO PBO
600,000600,000
Interest Interest
income income
on on
plan plan
assets assets
350,000350,000
Loss on plan settlement before
normalLoss on plan settlement
before normal
retirement dateretirement date
250,000250,000
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

Present value of benefit

obligationPresent value of
benefit obligation
settled in advancesettled in
advance
950,000950,000
Past Past
service service
cost cost
during during
the the
year year
300,000300,000
Actual Actual
return return
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

on on
plan plan
assets assets
850,000850,000
Actuarial Actuarial
loss loss
on on
PBO PBO
during during
the the
year year
200,000200,000
ContributiContributi
on on
to to
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

the the
plan plan
1,500,0001,500,000
Benefits Benefits
paid paid
to to
retirees retirees
1,000,0001,000,000
Discount Discount
or or
settlemesettleme
nt nt
rate rate
10%10%
5.5.
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

What is the employee benefit

expense for the current year?
What is the employee benefit
expense for the current year?
Sandra Company provided the following information for the current year:

Current service cost 500,000

Interest expense on PBO 600,000
Interest income on plan assets 350,000
Loss on plan settlement before normal retirement date 250,000
Present value of benefit obligation settled in advance 950,000
Past service cost during the year 300,000
Actual return on plan assets 850,000
Actuarial loss on PBO during the year 200,000
Contribution to the plan 1,500,000
Benefits paid to retirees 1,000,000
Discount rate 10%

1. What is the employee benefit expense for the current year?

2. What is the net remeasurement for the current year?
3. What amount should be reported as accrued benefit cost at year-end?
4. What is the fair value of the plan assets at year end?
5. What is the projected benefit obligation at year end?

OTHER EMPLOYEE BENEFITS

Vanessa Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2017, the
company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in
2011 may first be taken on January 1, 2018. Information relative to these employees is as follows:

Hourly Vacation Days Earned Vacation Days Used

Year Wages by Each Employee by Each Employee
2011 129.00 10 0
2012 135.00 10 8
2013 142.50 10 10

Vanessa has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.

1. What is the vacation pay expense for 2017?

2. What is the accrued liability on December 31, 2019?
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234
3. What is the accrued liability on December 31, 2019 assuming the policy is to accrue liability at the end of
each year at the wage rate for that year?

ACCOUNTING FOR INCOME TAX

Jasco Company is in its first year of operations. The entity has pretax income of P4,000,000. The entity has the
following items recorded in its records:

Premium on life insurance of key officer 100,000

Depreciation on tax return in excess of book depreciation 120,000
Interest on exempt government bonds 53,000
Warranty expense 40,000
Estimated warranty liability, beginning 115,000
Estimated warranty liability, ending 120,000
Bad debt expense 14,000
Allowance for bad debts, beginning 50,000
Allowance for bad debts, ending 47,000
Rent received in advance that will be recognized evenly
over the next three years 240,000

1. What is the taxable income for 2011?

DEFERRED TAX ASSET AND LIABILITY

West Company has the following assets and liabilities at carrying amount on December 31, 2011:
Property 1,000,000
Plant and equipment 400,000
Inventory 300,000
Trade receivables 1,000,000
Trade payables 400,000
Cash 300,000

The value for tax purposes for property and for plant and equipment was P7,000,000 and P4,000,000
respectively. The entity has made provision for inventory obsolescence of P2,000,000 which is not allowable for
tax purposes. Further an impairment charge against trade receivables of P1,000,000 has been made. This charge
will not be allowed in the current year for tax purposes. West Company showed taxable income of P9,000,000 in
its 2011 income statement. There were no temporary differences at the beginning of the current year. The tax
rate is 30%.

1. Determine the total deductible temporary differences. 3,000,000

2. Determine the total taxable temporary differences. 4,000,000
3. The total income tax expense of West for 2011 is: 3,000,000

COMPREHENSIVE INCOME TAX

Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234
On January 1, 2009, Easy Company acquired an equipment for P8,000,000. The equipment is depreciated using
straight line method based on a useful life of 8 years with no residual value. On January 1, 2011, the equipment
was revalued at a replacement cost of P12,000,000 with no change in useful life. The pretax accounting income
before depreciation for 2011 is P10,000,000. The income tax rate is 30%and there are no other temporary
differences at the beginning of the year.

1. What is the revaluation surplus on January 1, 2011? 2,100,000

2. What is the current tax expense for 2011? 2,700,000
3. What is the total income tax expense for 2011? 2,550,000
4. What is the deferred tax liability on December 31, 2011 arising from revaluation? 750,000
5. What is the revaluation surplus on December 31, 2011? 1,750,000

SHAREHOLDER’S EQUITY

Juan Company was organized on January 1, 2013 with 100,000 authorized shares of P100 par value. The
following transactions occurred during the year:

January 15 - Sold 30,000 shares at P150 per share

February 14 - Issued 2,000 shares for legal services with a fair value of P300,000. The shares on this
date are quoted at P160 per share
March 27 - Purchased 5,000 treasury shares at a cost of P12 per share
October 31 - Issued P4,000,000 convertible bonds at 110. The bonds are quoted at 97 without the
conversion feature.
November 5 - Declared a 2-for-1 share split when the market value of the share was P160
December 17 - Sold 10,000 shares at P75 per share.

1. What total amount should be recognized as share premium on December 31, 2013?

RETAINED EARNINGS

Albay Company had the following shareholders' equity on January 1, 2020:

Preference share capital, P100 par, 10% cumulative 2,000,000
Ordinary share capital, no par, P5 stated value 5,150,000
Share premium 3,500,000
Retained earnings 4,000,000
Treasury ordinary shares 400,000

*On January 15, 2020, the entity formally retired all the 30,000 treasury shares. The treasury shares were
originally issued at P10 per share.

*The entity owned 10,000 shares of Digos Company purchased for P800,000. The Digos shares were included in
noncurrent equity securities. On December 31, 2020, the entity declared a dividend in kind of one share of Digos
for every hundred ordinary shares held by a shareholder. The fair value of the Digos share is P90 on December
31, 2020. The dividend in kind was distributed on March 15, 2021 when the fair value of Digos share is P100.

*On December 31, 2020, the entity declared the yearly cash dividend on preference share, payable on January
15, 2021.
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234
*On January 15, 2021, before the accounting records were closed for 2020, the entity became aware that rent
income for the year ended December 31, 2019 was overstated by P1,000,000. The after-tax effect on 2019 net
income was P700,000. After correcting the rent income, net income for 2020 was P3,000,000.

1. What amount should be reported as retained earnings on December 31, 2020?

APPROPRIATION AND QUASI-REORGANIZATION

Adverse financial and operating circumstances warrant that Solid company undergo a quasi-reorganization on
December 31, 2012. The following information may be relevant in accounting for the quasi reorganization:

*Inventory with a fair value of P2,000,000 is currently recorded in the accounts at its cost of P2,500,000.
*Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated
depreciation.
*Individual shareholders contribute P4,000,000 to create additional capital to facilitate the
reorganization. No new shares are issued.
*The par value of the share is reduced from P25 to P5.

Immediately before these events, the shareholders’ equity appears as follows:

Share Capital, P25 par value, 100,000 shares 10,000,000
authorized and outstanding
Share Premium 7,000,000
Retained Earnings (Deficit) (12,000,000)

1. After the quasi-reorganization, what is the balance of the share premium?

SHARE-BASED COMPENSATION Share Options

On January 1, 2020, Easy Company granted 30,000 share options to employees. The share options will vest at
the end of three years provided the employees remain in service until then. The option price is P60 and the
entity's share price is also P60 at the date of grant. The par value of the share is P50. At the date of grant, the
entity concluded that the fair value of the share options cannot be estimated reliably. The share options have a
life of 6 years. This means that the options can be exercised within three years after vesting. All share options
vested at the end of three years and no employees left during the three-year period. The share prices and the
number of share options exercised are set out below.

Share price Share options exercised

at year-end
2020 63
2021 66
2022 75
2023 88 10,000
2024 100 15,000
2025 90 5,000

1. Determine the compensation expense for each year from 2020 to 2025 using the intrinsic value method.
2. Prepare journal entries to record the compensation each year and the exercise of the share options.
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234

SHARE-BASED COMPENSATION Share Rights

On January 1, 2017, ZEUS Co. granted to an employee the right to choose either shares or payment. The choices
are as follows:

a. 12,000 shares (share or equity alternative)

b. Cash payment equal to market value of 10,000 shares (cash alternative)

The grant is conditional upon the completion of three years of service. If the employee chooses the share
alternative, the shares must be held for three years after vesting date.
The par value of the shares is P25 and at grant date on January 1, 2017, the share price is P51.
The share prices for the three-year vesting period are P54 on December 31, 2017, P60 on December 31, 2018
and P65 on December 31, 2019.

After taking into account the effects of post-vesting restrictions, the entity has estimated that the fair value of
the share or equity alternatives is P48 per share.

1. Based on the result of your audit, determine the following:

a. Compensation expense for year 2015
b. Compensation expense for year 2016
c. Compensation expense for year 2017
d. Credit to share premium from issuance of shares if the employee chooses share alternative
e. Credit to share premium if the employee chooses cash alternative

BOOK VALUE PER SHARE

Simplex Company reported the following shareholders’ equity on December 31, 2019:

Preference share capital, 10% cumulative and

nonparticipating, P100, 20,000 shares 2,000,000
Ordinary share capital, P100 par, 40,000 shares 4,000,000
Subscribed ordinary share capital, 20,000 shares 2,000,000
Subscription receivable 500,000
Share premium 1,000,000
Retained earnings 2,400,000
Treasury ordinary shares, 10,000 at cost 800,000.

Dividends are in arrears for 3 years.

1. What is the book value per ordinary share?

BASIC EARNINGS PER SHARE

Wisconsin Company had 250,000 ordinary shares outstanding on January 1, 2019.

During 2019 and 2020, the ff. transactions took place:
Marjorie A. Pagsinuhin AC_IACFAR
BSA 46234
2019 March 1 Sold 24,000 shares
July 1 Issued a 20% share dividend
October 1 Sold 16,000 shares
December 1 Purchased 15,000 shares to be held in treasury

2020 June 1 3 for 1 share split

September 1 Sold 60,000 shares

1. What is the weighted average number of shares for 2019 to be used in the earnings per share computation
for comparative financial statements of 2020?
2. What is the weighted average number of shares for 2020 to be used in the earnings per share computation
for comparative financial statements of 2020?

DILUTED EARNINGS PER SHARE

Camiguin company reported the following capital structure on December 31, 2018:

Ordinary share capital 110,000 shares

Convertible noncumulative preference share capital 20,000 shares
10% convertible bonds payable 2,000,000

Share options to purchase 20,000 shares at P15 were outstanding. Market price of Camiguin share was P22 at
December 31, 2018 and averaged P20 during the year. No value was assigned to the share options. the entity
paid the annual dividend of P5 on the preference share. The preference shares are convertible into 20,000
ordinary shares. The 10% bonds are convertible into 30 000 ordinary shares. The net income for 2018 is P650
000. The income tax rate is 30%.

1. What amount should be reported as diluted earnings per share?