CURRENT LIABILITIES/PROVISIIONS/ESTIMATED

PROBLEM SOLVING
LIABILTIES/CONTINGENT LIABILITIES – MODULE 12

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

Trade account payable net of debit balance in supplier’s account of ₱20,000,net of 1,200,000
unreleased checks of ₱16,000, and net of post-dated checks ₱8,000.
Credit balance in customer’s accounts 8,000
Financial liability at FVPL 200,000
Bonds payable maturing in 10 equal annual instalments of P400,000 4,000,000
12%, 5-year note payable issued on 01 October 20x1 400,000
Deferred tax liability 20,000
Unearned Rent 16,000
Contingent liability 40,000
Reserve for contingencies 100,000

How much is the total current liabilities?

Refinancing agreement – no discretion
2. PE Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2. On
February 1, 20x2, PE Co. entered into a refinancing agreement with a bank to refinance the loan on a
long-term basis. Both parties are financially capable of honoring the agreement’s provisions. PE’s
financial statements were authorized for issue on March 12, 20x2. How much is presented as current
liability in relation to the loan in PE 20X1 year-end financial statements?
Refinancing agreement – with discretion
3. QE Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2. On
February 1, 20x2, QE Co. entered into a refinancing agreement with a bank to refinance the loan on a
long-term basis. Both parties are financially capable of honoring the agreements provisions. QE has
the discretion to refinance or roll over the loan for at least twelve months from December 31, 20x1
under an existing loan facility. QE’s financial statements were authorized for issue on March 15, 20x2.
How much is presented as current liability in relation to the loan in QE’s 20x1 year-end financial
statements?
Refinancing agreement-completed as of end reporting period
4. RC Co. has a ₱4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2. On
December 1, 20x1, RC Co. entered into a refinancing agreement with a bank to refinance the loan on
long-term basis. The refinancing and roll over transaction was completed on December 31, 20x1. How
much is presented as current liability in relation to the loan in RC’s 20x1 year-end financial statements?
Refinancing agreement-with interest payable
5. SO Co. has a 10%, ₱4,000,000 loan payable as of December 31, 20x1 that is maturing on July 1, 20x2.
The loan is dated July 1, 19x1 and pays annual interest every July1. On February 1, 20x2, SO Co.
entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both
parties are financially capable of honoring the agreement’s provisions. SO has the discretion to
refinance or roll over the loan for at least twelve months from December 31, 20x1 under an existing
loan facility. SO’s financial statements were authorized for issue on March 15, 20x2. How much is
presented as current liability in SO’s 20x1 year-end financial statements?
Breach of loan agreement-grace period received after year-end
6. On January 1, 20x1, TS Co. took a 3-year, ₱4,000,000 loan from a bank. The loan agreement requires
TS to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on
demand. As of December 31, 20x1, TS’s current ratio is 1.8:1. On January 5, 20x2, the bank agrees
not to collect the loan in 20x2 and gave TS 12 months to rectify the breach of loan agreement. How
much is presented as current liability in relation to the loan of TS in 20x1 year-end financial statements?
Breach of loan agreement-grace period received after year-end
7. On January 1, 20x1, DS Co. took a 3-year, ₱4,000,000 loan from a bank. The loan agreement requires
DS to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on
demand. As of December 31, 20x1, DS’s current ratio resulted to 1.8:1 and the bank agreed not to
collect the loan in 20x2 and gave DS 12 months to rectify the breach of loan agreement. How much is
presented as current liability in relation to the loan of DS in 20x1 year-end financial statements?
Obligation payable on demand
8. On December 31, 20x1, SR Co. has a ₱4,000,000 note payable on demand. However on December
31, 20x1, there is no indication that the payee on the note will demand payment over the next 12
months. How much is the current liability in relation to the note in SR’s 20x1 year-end financial
statements?
Unearned revenue-sale of goods
UN Co. requires advance payment for custom-built guitar effects, gadgets, and racks. The records of UN
Co. show the following:

Unearned revenue, January 1, 20x1 ₱4,000,000

Advances received during 20x1 40,000,000
Advances applied to orders shipped in 20x1 32,000,000
Advance pertaining to orders to orders cancelled in 20x1 1,200,000

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 4

 CURRENT LIABILITIES/PROVISIIONS/ESTIMATED
PROBLEM SOLVING
LIABILTIES/CONTINGENT LIABILITIES – MODULE 12

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

Unearned subscription – monthly

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

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

Receipts from subscriptions during 20x1 96,0000,000

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

Unearned subscription- semi-annual

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

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

Receipts from subscriptions during 20x1 96,000,000

13. How much is the unearned revenue balance on December 31, 20x1?

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

Unearned revenue – gift certificates. Jan 1, 20x1 ₱2,400,000

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

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

Deposits for returnable containers

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

Information for 20x3 is as follows:

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

How much is the liability for deposits on returnable containers on December 31, 20x3?

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

Expected value
17. In 20x1, CABU Co. recalled a product due to a possible defect caused by a manufacturing factory
equipment. The products recalled will be repaired free of charge. CABU is uncertain whether all
products recalled will have possible defect. However, the following estimate was made by estimate was
made by CABU’s engineers and managerial and approved by the board of directors.
Repair cost Probability
80,000,000 5%
60,000,000 20%
40,000,000 35%
20,000,000 40%
“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 2 OF 4

 CURRENT LIABILITIES/PROVISIIONS/ESTIMATED
PROBLEM SOLVING
LIABILTIES/CONTINGENT LIABILITIES – MODULE 12

How much is the provision to be recognized?

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

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

Onerous contract – purchase commitment

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

Warranty Expense – PAS 37

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

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

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

Year Sale Actual Warranty Costs

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

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

Premium expense – PAS 37

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

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

How much is the premium expense in 20x1?

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

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

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 3 OF 4

 CURRENT LIABILITIES/PROVISIIONS/ESTIMATED
PROBLEM SOLVING
LIABILTIES/CONTINGENT LIABILITIES – MODULE 12

Liability for refunds

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

Guarantee for indebtedness of others

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 4 OF 4

 CASH TO ACCRUAL BASIS – MODULE 13 PROBLEM SOLVING

Cash/Accrual Basis - Sales

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

1. How much is the net sales under cash basis of accounting?

2. How much is the net sales under accrual basis of accounting?

Purchases and cost of goods sold

The following information was taken from the records of Lagasca Company
Cash purchases – gross 1,200,000
Trade accounts payable – beg. 2,000,000,
Trade accounts payable – end 1,600,000
Trade notes payable decreased by 800,000
Cash payments on payables 4,000,000
Purchase returns and discounts (inclusive of 60,000 receipts from suppliers) 80,000
Inventory increased by 400,000
3. How much is the net purchases under cash basis of accounting?
4. How much is the cost goods sold under cash basis of accounting?
5. How much is the net purchases under accrual basis of accounting?
6. How much is the goods sold under accrual basis of accounting?

Other items of income

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

7. How much is the rent income under cash basis accounting?

8. How much is the rent income under accrual basis of accounting?

Other items of income

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

How much is then rent income under cash basis?

Other items of expense

10. Correa Co. has the following information:
Prepaid insurance –January 1 1,600,000
Prepaid insurance –December 31 800,000
Insurance payable – Decreased by 1,200,000
Insurance payments 4,000,000

How much is the rent expense under accrual basis?

Other items of expense
11. The following information was taken from the records of Alvarez Co.
Prepaid insurance – January 1 1,600,000
Prepaid insurance - Dec 31 800,000
Insurance payable decreased by 1,200,000
Rent expense under accrual basis 3,600,000

How much is the rent expense under cash basis?

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 4

 CASHFLOW STATEMENT – MODULE 14 PROBLEM SOLVING

CASH FLOW STATEMENT

Analysis of Cash account Method
The movements in the cash account of Austin Co. during 20x2 are shown below.
Cash
Beg 400 7,600 Purchases
Sales 12,000 2,400 Operating expenses
Interest income 40 60 Interest expenses
Rent income 540 140 Income taxes
Divided income 80
200 Investment in FVOCI
Sale of held for trading securities 1,600 2,200 Purchase of equipment
Sale of old building 1,040 Loan granted to
260 employee
Collection of non-trade note 120 Payment of loan
480 borrowed
Proceeds from Bank loan 3,200 400 Reacquisition of shares
Issuance of shares 1,940 180 Dividends
7,040 end

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

2. How much is the cash flows from investing activities?
3. How much is the cash flows from financing activities?

T-Account Method
ALANIS had the following information during 20x2:
Accounts receivables, January 1, 20x2 2,400
Accounts receivables, December 31, 20x2 1,600
Sales on account and cash sales 32,000
Accounts payable, January 1, 20x2 1,400
Accounts payable, December 31, 20x2 800
Cost of sales 16,000
Increase in inventory 3,600
Operating expenses on accrual basis 4,880
Increase in accrued payables for operating expenses 1,640
Decrease in prepaid operating expenses 1,560
Property, plant, and equipment, January 1, 20x2 7,200
Property, plant, and equipment, December 31, 20x2 10,800

Additional information
 There were no write-offs of accounts receivables during the year.
 Equipment with an accumulated depreciation of ₱800 was sold during the year for ₱480 resulting
to a gain on sale of ₱60.

4. How much is the cash receipts from customers?

5. How much is the cash payments to suppliers?
6. How much is the cash payments for operating expenses?
7. How much is the cash payment for acquisition of property, plant, and equipment?

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

8. Kirsten Co. has the following information as of December 31, 20x1:

Jan. 1 Dec. 31
Accounts receivables 100,000 250,000
Allowance for bad debts 15,000 20,000
Net credit sales 850,000
Bad debt expense 60,000
Recoveries 20,000

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

Cash flow from operating activities – Indirect method

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

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 4

 CASHFLOW STATEMENT – MODULE 14 PROBLEM SOLVING

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

How much is the cash flows from operating activities?

Cash flow from investing and financing activities

Karen Co. had the following information for 20x2:
 Acquired 3-month treasury bills for ₱200,000
 Acquired equipment with a purchase price of ₱4,000,000 by paying 20% in cash and issuing a note
payable for the balance. There were no payments made on the note during the year.
 Acquired land with fair value of ₱3,200,000 by issuing shares with aggregate par value of
₱2,400,000. The excess is credited to share premium.
 Extended a ₱1,600,000 loan to a director.
 Borrowed ₱1,280,000 from a bank. Used the cash proceeds as follows:₱800,000 for additional
working capital and ₱480,000 to settle scrip dividends declared in 20x1
 Settled an outstanding note payable by issuing shares with aggregate par value of ₱800,000. Share
premium resulted from the transaction amounted to ₱280,000.

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 2 OF 4

 OPERATING SEGMENT – MODULE 15 PROBLEM SOLVING

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

Segments Revenues Profit (loss) Assets

A 4,000,000 800,000 56,000,000
B 4,800,000 560,000 72,000,000
C 1,080,000 (280,000) 48,000,000
D 960,000 (2,800,000) 4,000,000
E 1,160,000 200,000 5,600,000
Totals 12,000,000 (1,520,000) 185,600,000

What are the reportable segments?

Management approach and Aggregation

2. AIR Co. engages in five diversified operations namely, operations A,B, C, D and E Information on
these segments are shown below:

Segments Revenues Profit (loss) Assets

A 3,200 800 40,000
B 3,200 400 8000
C 200 40 4,000
D 600 80 8,000
E 800 280 24,000
Totals 8,000 1,600 84,000

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

What are the reportable segments?

Limit on external revenue

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

External Inter-segment Total

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

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

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

External Inter-segment Total

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

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 4

 INTERIM REPORTING – MODULE 16 PROBLEM SOLVING

Recognition and measurement in interim periods

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

Cost incurred unevenly

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

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

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 2

 INTERIM REPORTING – MODULE 16 PROBLEM SOLVING

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

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

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

10. How much is the income tax expense recognized in the first quarter interim financial statements?
11. How much is the income tax expense recognized in the third quarter interim financial statements?
Net operating loss carry forward
AIR Co. reports quarterly and has operating loss carry forward of ₱40,000 for income tax purposes at the
start of the current financial year for which a deferred tax asset has not been recognized. AIR earns ₱40,000
in the first quarter of the current year and expects to earn ₱40,000 in each of three remaining quarters.
Excluding the carry forward, the estimated average annual income tax rate is expected to be 40%.

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

Net operating loss carry forward

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

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

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 2 OF 2

 ACCOUNTING FOR INCOME TAX
PROBLEM SOLVING
MODULE 17

ACCOUNTING FOR INCOME TAX

1. CC company reported the following difference between the book basis and tax basis of assets and
liabilities on 31 December 2017 which is the end of the 1st year of operations:

Carrying Tax base

Amount
Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0

It is expected that the litigation liability will be settled in 2018. The difference in accounts receivable will
result in taxable amounts of P600,000 in 2018 and P400,000 in 2019.

The entity has a taxable income of P7,000,000 in 2017 and is expected to have taxable income in each
of the following in each of the following 2 years. The income tax rate is 30%.

Required:
a. What is the current tax expense?
b. What is the deferred tax expense?
c. What is the total tax expense?

2. ZC prepared for the following reconciliation of pretax financial statement income to taxable income for
the 1st year of operations:

Pretax financial income 1,600,000

Nontaxable interest received (50,000)
Long-term loss accrual in excess of deductible 100,000
amount
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000

Required:
a. If the income tax is 30%, what amount should be reported as income tax expense – current portion
in the income statement?
b. What amount should be reported as deferred tax liability at year-end?
c. What amount should be reported as deferred tax asset at year-end?
d. What amount should be reported as total tax expense for the 1st year?

3. SC reported taxable income of P8,000,000 in the income tax return for the first year of operations. The
entity revealed the following temporary differences between financial income and taxable income for
the year:

Tax depreciation in excess of book depreciation 800,000

Accrual for product liability claim in excess of actual 1,200,000
claim
Reported installment sales income in excess of 2,600,000
taxable installment sales income
Income tax rate 30%

Required:
a. Deferred tax asset at year-end
b. Deferred tax liability at year-end
c. Deferred tax expense for the 1st year
d. Total tax expense for the 1st year

4. On 31 December 2017, the accounts of SC have the same basis for accounting and tax purposes,
except for the following:
Carrying Tax base
Amount
Computer software cost 4,000,000 0
Equipment 15,000,000 12,000,0000
Accrued liability-health care 2,000,000 0

In January 2017, the entity incurred cost of P6,000,000 in relation to the development of a computer
software product. The software cost was appropriately capitalized and amortized over 3 years for
accounting purposes using straight line. However, the total amount was expensed in 2017 for tax
purposes.

The equipment was acquired on 1 January 2017 for P20,000,000. The useful life is 4 years with no
residual value. The equipment is depreciated using the straight line for accounting purposes and SYD
for tax purposes.

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 1 OF 2

 ACCOUNTING FOR INCOME TAX
PROBLEM SOLVING
MODULE 17

In January 2017, the entity entered into an agreement with the employees to provide health care
benefits. The cost of such plan for 2017 was P2,000,000. The amount of P2,000,000 was accrued as
expense in 2017 for accounting purposes. However, health care benefits are deductible for tax
purposes only when actually paid.

The pretax accounting income for 2017 is P13,000,000. The tax rate is 30% and there are no deferred
taxes on 1 January 2017.

Required:
a. Current tax expense for the current year
b. Deferred tax liability on 31 December 2017
c. Deferred tax asset on 31 December 2017
d. Deferred tax expense for current year
e. Total tax expense for current year

5. BC started to manufacture in 2017 copy machines that are sold on installment basis. The entity
recognized revenue when equipment is sold for financial reporting purposes and when installment
payments are received for tax purposes. In 2017, the entity recognized revenues of P6,000,000 for
financial reporting purposes and P1,500,000 for tax purposes.

The entity guaranteed the copy machines for 2 years. Warranty costs are recognized on the accrual
basis for financial accounting purposes and when paid for tax purposes. Warranty expense accrued in
2017 if P2,500,000, but only P500,000 of warranty is paid in 2017.

In addition during 2017, P500,000 interest, net of 20% final income tax, was received and earned and
P100,000 insurance premium on life insurance policy that covered the life of the president was paid.
The entity is the beneficiary.

Pretax accounting income in 2017 was P2,000,000. Any operating loss for 2017 will be carried to 2018.
The tax rate is 30%.

Required:
a. Deferred tax asset on 31 December 2017
b. Deferred tax liability on 31 December 2017
c. Total tax expense for the current year

6. AIR Co. has pretax income of P100,000. The following information was gathered:

Loss on expropriation of property 35,000

Non-deductible premium of life insurance of key employees 6,000
Interest income received on government securities subjected to final tax 5,000
Excess of accelerated depreciation used in taxation over straight line 10,000
depreciation used in financial reporting
Warranty expense accrued for financial reporting purposes but is tax 15,000
deductible only when paid
Rent received in advance 8,000
Quarterly income tax payments(1st to 3rd quarter) 20,000
Tax Rate 30%
Beginning balance of taxable temporary difference 12,000
Beginning balance of deductible temporary difference 9,000

Compute for the following:

a. Income tax expense;
b. Current tax expense;
c. Deferred tax expense/benefit –
d. Current tax payable;
e. Deferred tax liability to be presented in the statement of financial position;
f. Deferred tax asset to be presented in the statement of financial position;

“AN ARROW CAN ONLY BE SHOT BY PULLING IT BACKWARD. IF LIFE IS DRAGGING YOU BACK WITH DIFFICULTIES, IT MEANS THAT IT’S GOING TO LAUNCH YOU INTO SOMETHING GREAT. SO JUST FOCUS AND KEEP ON AIMING”

ALBERT I. RIVERA, CPA, MBA, CRA PAGE 2 OF 2