INTERMEDIATE ACCOUNTING 2

FINAL GRADING EXAMINATION

Chapter 23 – Current Liabilities

1. Alhambra Company offers three payment plans on its 12-month contracts. Information on the
three plans and the number of children enrolled in each plan for September 1, 2005 through
August 31, 2006 contract year follows:

Initial payment Monthly fees Number of

Plan per child per child children
#1 P500 P0 15
#2 200 30 12
#3 50 9
36

Alhambra received all initial payments on September 1, 2005, and P3,240 of monthly fees during the
period September 1 through December 31, 2005. In its December 31, 2005 balance sheet, what
amount should Alhambra report as deferred revenue?
a. 9,900
b. 3,300
c. 6,600
d. 4,380

2. The following are taken from the records of ABC Co. as of year-end.

Accounts payable 2,000 SSS contributions payable 6,000

Utilities payable 7,000 Cash dividends payable 4,000 Accrued interest expense 6,000 Property dividends
payable 7,000
Advances from customers 1,000 Share dividends payable 3,000
Unearned rent 9,000 Lease liability 35,000
Warranty obligations 5,000 Bonds payable 120,000
Income taxes payable 2,000 Discount on bonds payable (15,000) Preference shares issued 10,000 Security
deposit 2,000
Constructive obligation 11,000 Redeemable preferences
shares issued 14,000
a. Obligation to deliver a variable Unearned interest on
number of own shares worth a receivables 3,000 fixed amount of cash 10,000

How much is the total financial liabilities to be disclosed in the notes?

a. 172,000
b. 185,000
c. 192,000
d. 225,000
3. Entity A purchases a TV set on a 6-month installment basis. The installment price is ₱120,000.
However, if the TV set is purchased outright in cash, the cash price would have been ₱100,000.
The payable will be initially recognized at
a. 100,000
b. 120,000
c. Present value of 120,000 discounted at the current market rate using 6 periods
d. None of these

4. Entity A purchases goods for ₱250,000 under a special credit period of 1 year. The seller
normally sells the goods for ₱220,000 with a credit period of one month or with a ₱5,000
discount for cash basis (i.e., outright payment in cash). The initial measurement of the payable is
a. 250,000
b. 220,000
c. 215,000
d. 200,000
5. On January 1, 20x1, ABC Co. acquired transportation equipment in exchange for ₱100,000 cash
and ₱1,000,000, noninterest-bearing note payable due in 4 equal annual installments. The first
installment is due on January 1, 20x1. The succeeding installment payments are due every
December 31. The prevailing rate of interest for this type of note is 12%. How much is the
interest income in 20x1?
a. 120,000
b. 102,055
c. 72,055
d. 50,702

6. On January 1, 20x1, ABC Co. acquired machinery by issuing a 3-year, ₱1,200,000 noninterest
bearing note payable due as follows:
Date Amount of
installment
December 31, 20x1 600,000
December 31, 20x2 400,000
December 31, 20x3 200,000
Total 1,200,000
The prevailing rate of interest for this type of note is 10%.How much is the carrying amount of the
note on December 31, 20x1?

a. 1,026,296
b. 867,312
c. 528,926
d. 489,762
7. On January 1, 20x1, ABC Co. issued a ₱1,200,000 noninterest-bearing note due on December 31,
20x1 in exchange for inventory with a list price of ₱1,100,000 and a cash price of ₱1,000,000. How
much is the carrying amount of the note on December 31, 20x1?
a. 987,234
b. 1,000,000
c. 1,062,695
d. 1,129,321

8. On January 1, 20x1, ABC Co. issued a 3-year, ₱1,000,000 noninterest-bearing note payable to
XYZ, Inc., a related party. The prevailing interest for similar type of obligation is 12%.The
proceeds received from the note is ₱1,000,000, equal to the face amount. How much is the “Day
1” difference? Gain (Loss)
a. 288,220
b. (288,220)
c. 222,880
d. (222,880)
9. On January 1, 20x1, ABC Co. issued a 3-year, 3%, ₱1,000,000 note payable in exchange for a
machine. Principal is due on January 1, 20x4 but interest is due annually every January 1. The

prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note
on December 31, 20x1?
a. 783,835
b. 883,664
c. 847,895
d. 919,643
10. On December 1 a company borrowed ₱100,000 at 12% per year. The interest will be paid
quarterly, with the first payment due on March 1. What should the company report on its
income statement for December? a. Interest expense of ₱12,000
b. Interest expense of ₱10,000
c. Interest expense of₱1,000
d. Nothing

11. On May 1, year 1, a company borrowed ₱3,000 cash and signed a 13 percent note payable due
April 30, year 3. Interest is paid each April 30. The accounting period ends December 31.the
adjusting entry at December 31,year 1 would include: a. debit notes payable,₱390
b. credit interest payable ₱130
c. debit interest expense ₱390
d. credit interest payable ₱260
12. Unamortized bond discount should be reported on the financial statements of the issuer as a
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
 d. Part of the issue costs

13. For a bond issue which sells for less than its face amount, the market rate of interest is
a. Dependent on the rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond.
d. Higher than rate stated on the
bond.
14. The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the
bond.
c. Plus the present value of all future interest payments at the market (effective) rate of
interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
15. Which of the following is not a relevant consideration when evaluating whether to derecognize
a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of the obligation have been
transferred.
16. What is the effective interest rate of a bond or other debt instrument measured at amortized
cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments
(i.e., similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and
interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through
the expected life of the debt instrument or, when appropriate, a shorter period to the net
carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.

17. Which of the following statements is false?

a. Bonds carry no corporate ownership privileges.
b. A bond is a financial contract.
c. Bond prices remain fixed over time.
d. A bond issuer must pay periodic interest.

18. Most bonds:

a. are money market securities.
b. are floating-rate securities.
 c. give bondholders a voice in the affairs of the corporation.
d. are interest-bearing obligations of governments or
corporations.
19. In an “asset swap,” where a liability is settled through the transfer of noncash asset,
a. the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the fair value of the noncash asset transferred.
b. the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the carrying amount of the noncash asset transferred.
c. the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the more clearly determinable between the fair value of the
liability extinguished and the carrying amount of the noncash asset transferred.
d. no gain or loss is recognized

20. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000
bond is convertible into 10 shares with par value of ₱60 per share. On issuance date, the bonds
are selling at 102 without the conversion option. What is value allocated to the equity
component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000

21. An entity is the defendant in a patent infringement lawsuit. The entity’s lawyers believe there is a
30% chance that the court will dismiss the case and the entity will incur no outflow of economic
benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a
20% chance that the entity will be required to pay damages of ₱800,000 (the amount sought by
the claimant) and an 80% chance that the entity will be required to pay damages of ₱400,000 (the
amount that was recently awarded by the same judge in a similar case). Other outcomes are
unlikely.

The court is expected to rule in late December 20x2. There is no indication that the claimant will
settle out of court. A 7% risk adjustment factor to the probability-weighted expected cash flows is
considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate
discount rate is 10% per year. How much is the provision for lawsuit at December 31, 20x1?
a. 436,360
b. 446,908
c. 326,836
d. 0
22. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract of sale, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis
of experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold
in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x2
outflows of economic benefits related to the warranty repairs and replacements take place on June
30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or
replacement costing 90% of sale price. The entity has no reason to believe future warranty claims
will be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30,
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the
cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

a. 424,000
b. 840,000
c. 800,000
d. 752,000
23. As of December 31, 20x1, ROUSE AWAKEN Co. has adopted a detailed formal plan to close one
of its toys divisions and put up a new division to manufacture warfare weapons. The plan was
communicated through a public announcement and all of those affected by the closure were
informed. ROUSE estimates the following costs in relation to the closure of the division:

Termination benefits of employees terminated as a result of the closure 4,000,000

Costs of retraining and relocating retained employees 8,000,000
Payment for unpaid purchases made by the division 16,000,000
New systems and distribution networks for the weapons division 80,000,000
Marketing costs for the weapons to be manufactured by the new division 24,000,000
Expected losses during the first year of operations of the weapons division 80,000,000
How much is the provision to be recognized?
a. 4,000,000
b. 12,000,000
c. 84,000,000
d. 20,000,000
 Use the following information for the next two questions:
RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that
warranty costs ₱400 per unit sold. As of January 1, 20x1, the liability for warranty has a balance of
₱800,000 for units sold in 20x0. During the year RISIBLE sold 5,000 units and actual warranty costs
incurred were ₱1,240,000.

24. How much is the warranty expense to be recognized in 20x1?

a. 2,000,000
b. 1,240,000
c. 3,240,000
d. 4,240,000
25. How much is the balance of the warranty obligation as of December 31, 20x1?
a. 1,560,000
b. 2,000,000
c. 3,240,000
d. 4,240,000
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?

a. 8,000,000
b. 12,000,000
c. 14,000,000
d. 16,000,000

25. PROFUSE EXTRAVAGANT Co. launched a sales promotion in 20x1. For every ten empty
packs returned to PROFUSE plus ₱200, customers will receive a set of kitchen knives. PROFUSE
estimates that 40% of the packs sold will be redeemed. Information on transactions during the
26. On January 1, 20x1, CONFOUND Co. guaranteed a ₱4,000,000 loan obtained by CONFUSE, Inc.
from a bank. On December 31, 20x1, CONFUSE defaulted on its loan and it became probable
that CONFOUND will be held liable to the bank for the ₱4,000,000 loan taken by CONFUSE.
How much is the provision to be recognized?
a. 4,000,000
b. 2,000,000
c. 1,000,000
d. 0
28. OBTUSE DULL Co. is involved in a tax dispute. OBTUSE has wrongfully paid taxes and is
claiming for refund of the taxes it has previously paid. As of December 31, 20x1, OBTUSE’s legal
counsel was very confident that OBTUSE will be able to recover the tax refund amounting to
₱40M in the coming year. The entry to recognize the probable receipt of the tax refund includes
a. a debit to receivable
b. a and b
`````c. a credit to gain
 d. none of these
e. debit to prepaid asset
29. On December 1, 20x1, ABC Co. hired Juanita Perez to begin working on January 2, 20x2 at a
monthly salary of ₱4,000. ABC's balance sheet on December 31, 20x1 will show a liability of
a. ₱4,000.
b. ₱48,000.
c. ₱480,000.
d. No
Liability
30. Entity A has 20 employees who are each entitled to one day paid vacation leave for each month
of service rendered. Unused vacation leaves are carried forward and can be used in future
periods if the current period’s entitlement is not used in full. Moreover, employees are entitled
to a cash payment for unused entitlement when they leave the entity. All the employees have
rendered service throughout the current year and have taken a total of 150 days of vacation
leaves. The average daily rate of the employees in the current period is ₱1,000. However, a 5%
increase in the rate is expected to take into effect in the following year. Based on Entity A’s past
experience, the average annual employee turnover rate is 20%. How much will Entity A accrue
at the end of the current year for unused entitlements?
a. 0 c. 90,000
b. 75,600 d. 94,500

31. Under its post-employment benefit plan, Entity A agrees to make annual contributions of
₱500,000 to a retirement fund. When an employee retires, he or she is entitled to a lump sum
payment and monthly pension payments to be determined based on the level of contributions
and the investment performance of the fund.

In 20x1, due to cash flow problems, Entity A was only able to contribute half of the agreed
contributions. In 20x2, Entity A contributed ₱900,000 to the fund. How much retirement benefit
expenses should Entity A recognize in 20x1 and 20x2, respectively?
20x1 20x2
a. 200,000 900,000
b. 200,000 500,000
c. 500,000 600,000
d. 500,000 500,000
32. Entity A has 20 employees who are each entitled to one day paid vacation leave for each month
of service rendered. Unused vacation leaves are carried forward and can be used in future
periods if the current period’s entitlement is not used in full. However, unutilized entitlements
are forfeited when employees leave the entity. All the employees have rendered service
throughout the current year and have taken a total of 150 days of vacation leaves. The average
daily rate of the employees in the current period is ₱1,000. However, a 5% increase in the rate is
expected to take into effect in the following year. Based on Entity A’s past experience, the
average annual employee turnover rate is 20%. How much will Entity A accrue at the end of the
current year for unused entitlements?
a. 0
 b. 90,000
c. 75,600
d. 94,500

33. Under a profit-sharing plan, Entity A agrees to pay its employees 5% of its annual profit. The
bonus shall be divided among the employees currently employed as at year-end. Relevant
information follows:
Profit for the year ₱8,000,000
Employees at the beginning of the year 8
Average employees during the year 7
Employees at the end of the year 6
If you are an alumnus of Entity A, how much bonus do you expect to receive?
a. 66,667
b. 50,000
c. 57,143
d. 0
34. The computation of employee retirement benefits expense is addressed in this standard.
a. .PAS 17
b. PRFS 7
c. PRFS 9
d. PRFS 19
Use the following information for the next three questions:
Information on Entity A’s defined benefit plan is as follows:
PV of DBO – Jan. 1, 20x1 2,000,000
FVPA – Jan.1, 20x1 1,800,000
PV of DBO – Dec. 31, 20x1 2,900,000
FVPA, end. – Dec. 31, 20x1 2,600,000
Current service cost 400,000
Actuarial loss 200,000
Return on plan assets 120,000
Discount rate 10%

35. How much is the net defined benefit liability (asset) to be presented in Entity A’s December 31,
20x1 statement of financial position?
a. (300,000)
b. (200,000)
c. 300,000
d. 200,,000
36. How much is the component of the 20x1 defined benefit cost to be recognized in profit or loss?
a. 400,000
b. 420,000
c. 520,000
d. 30,000
37. How much is the component of the 20x1 defined benefit cost to be recognized in other
comprehensive income – (income)/ loss?
a. (140,000)
b. 140,000
c. 260,000
d. (260,000)
38. You are the General Manager of Entity A. You have received the actuarial report for your
company’s defined benefit plan. The report shows the following information:
PV of DBO – Jan. 1, 20x1 1,500,000
FVPA – Jan. 1, 20x1 1,200,000
PV of DBO – Dec. 31, 20x1 1,800,000
FVPA, end. – Dec. 31, 20x1 1,310,000
Actuarial gain 100,000
Return on plan assets 110,000
Discount rate 5%
When reporting on your company’s year-end highlights of financial summary, which of the
following will you report to the Board of Directors (the ‘big bosses’)?
a. Your company’s net liability for retirement benefits has increased by ₱490,000.
b. Your company’s net liability for retirement benefits has decreased by ₱300,000.
c. Your company’s net liability for retirement benefits has increased by₱190,000.
d. I will tell them nothing.

39. Entity A (customer) enters into a contract with Entity B (supplier) for the use of a data
processing equipment. According to the contract, Entity A shall operate the equipment only in
accordance with the standard operating procedures stated in the accompanying user’s manual.
In assessing the existence of a lease, does Entity A have the right to direct the use of the asset?
a. No, because the asset’s use is restricted.
b. Yes, because the asset’s use is predetermined and Entity B is precluded the asset use
c. Yes, because Entity A has the right to direct how and for what purpose the asset is used
d. Maybe yes, maybe no, but exactly I don’t know.
40. Which of the following is not one of the criteria when determining whether a contract is or
contains a lease?
a. Identified asset
b. Identified
liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use
41. Which of the following statements is correct regarding the accounting for leases?
a. The lessor depreciates the leased asset under a finance lease.
b. The lessee depreciates the leased asset under a “short-term” or a “low-valued asset” lease.
c. When discounting lease payments the lessor and the lessee use the interest rate implicit in
the lease.
d. An entity can never be both a lessor and a lessee of a same leased asset.
42. According to PFRS 16, lease liabilities are presented in the lessee’s statement of financial position
a. separately from the other liabilities of the lessee.
b. together with other liabilities, with disclosure of the line items that include the lease
liabilities.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial statements

43. According to PFRS 16, right-of-use assets are presented in the lessee’s statement of financial
position
a. separately from the other assets of the lessee.
b. together with other assets as if they were owned, with disclosure of the line items that
include the right-of-use assets.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial statements

44. On December 30, 20x5, Haber Co. leased a new machine from Gregg Corp. The following data
relate to the lease transaction at the inception of the lease:
Lease term 10 years
Annual rental payable at the end of each lease year ₱100,000
Useful life of machine 12 years
Implicit interest rate 10%

The lease has no renewal option, and the possession of the machine reverts to Gregg when the lease
terminates. At the inception of the lease, Haber should record a lease liability of
a. 0 b. 615,000 c. 630,000 d. 676,000

45. On January 2, 20x6, Ashe Company entered into a ten-year no cancellable lease requiring
yearend payments of ₱100,000. Ashe's incremental borrowing rate is 12% while the lessor's
implicit interest rate, known to Ashe, is 10%. 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 for this leased
property on January 2, 20x6?
a. 1,000,000 b. 614,500 c. 565,000 d. 0
46. Neal Corp. entered into a nine-year lease on a warehouse on December 31, 20x1. Lease payments
of ₱52,000, which includes payment for non-lease component of ₱2,000 (at stand-alone selling
price), are due annually, beginning on December 31, 20x1, and every December 31 thereafter.
Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is
9%. What amount should Neal report as lease liability at December 31, 20x1?
a.280,000 b. 291,200 c. 450,000 d. 468,000

47. Robbins, Inc., leased a machine from Ready Leasing Co. The lease requires 10 annual payments
of ₱10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase
option of ₱10,000 at the end of the tenth year, even though the machine's estimated value on that
date is ₱20,000. It is reasonably certain that Robbins will exercise the purchase option. Robbins'
 incremental borrowing rate is 14%. What amount should Robbins record the right-of-use asset at
the beginning of the lease term?
62,160 b. 64,860 c. 66,500 d. 69,720
48. On January 1, 20x7, Babson, Inc., leased two automobiles for executive use. The lease requires
Babson to make five annual payments of ₱13,000 beginning January 1, 20x7. At the end of the
lease term, Babson guarantees the residual value of the automobiles will total ₱10,000. The
Interest rate implicit in the lease is 9%. Babson's recorded lease liability on initial recognition is
a. 48,620
b. 44,070
c. 35,630
d. 31,070
49. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The rent in 20x1 is
₱10,000 and shall increase by 10% annually starting on January 1, 20x2. Rentals are payable at
the end of each year. ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC
Co. opts to use the practical expedient allowed under PFRS 16 for leases of low value assets.
How much is the lease expense in 20x1?
a. 10,000
b. 11,000
c. 11,603
d. 12,853

Use the following information for the next three questions:

On January 1, 20x1, Entity Y leases out an equipment to Entity X. Information on the lease is as
follows:
Lease term 3 years
Annual rent payable at the end of each year 100,000
Interest rate implicit in the lease 10%
The lease provides for the transfer of ownership of the equipment to the lessee at the end of the lease
term. The relevant present value factor is as follows:

50. How much is the gross investment on January 1, 20x1?

a. 500,000
b. 400,000
c. 300,000
d. 200,000
51. How much is the net investment on January 1, 20x1?
a. 238,664
b. 242,883
c. 248,685
d. 252,086
52. How much is the unearned interest on January 1, 20x1?
a. 51,315
b. 52, 313
 c. 48,992
d. 47,652
53. If the current tax expense is less than the income tax expense during the period, there must be a
a. deferred tax benefit c. income tax payable
b. deferred tax expense d. prepaid income tax

54. Trade receivables have a carrying amount of P4,000. The related revenue has already been
included in taxable profit (tax loss). How much is the tax base of the asset?
a. 4,000 b. 2,400 c. 1,600 d. 0

55. Dividends receivable from a subsidiary have a carrying amount of P4,000. The dividends are not
taxable. How much is the tax base of the asset?
a. 4,000 b. 2,400 c. 1,600 d. 0

56. Current liabilities include accrued fines and penalties with a carrying amount of P4,000. Fines
and penalties are not deductible for tax purposes. How much is the tax base of the liability?
a. 4,000 b. 2,400 c. 1,600 d. 0

57. A loan payable has a carrying amount of P4,000. The repayment of the loan will have no tax
consequences. How much is the tax base of the liability?
a. 4,000 b. 2,400 c. 1,600 d. 0

Use the following information for the next four questions:

Taken from the records of ABC Co. as of December 31, 20x1 is the following information:
Carrying amount Tax base
Difference
Computer software cost 500,000 - 500,000
Machinery 1,000,000 600,000 400,000
Accrued liability - health care 200,000 - 200,000
Additional information:
• Software development costs after technological feasibility was established were capitalized for
financial reporting. The costs were recognized as outright deductions for tax purposes.
• Straight line method is used in depreciating the machinery while sum-of-the-years’ digits method
is used for tax purposes.
• Health care benefits are accrued as incurred but are tax deductible only when cash is actually
paid.
• Pretax profit for 20x1 is ₱1,000,000. Income tax rate is 30%.
• There were no temporary differences as of January 1, 20x1.

58. How much is the deferred tax liability on December 31, 20x1?
a. 400,000
 b. 900,000
c. 320,000
d. 270,000
59. How much is the deferred tax asset on December 31, 20x1?
a. 270,000
b. 120,000
c. 90,000
d. 60,000
60. How much is the deferred tax expense/benefit in 20x1?
a. 210,000 expense
b. 210,000 benefit
c. 270,000 expense
d. 270,000 benefit
61. How much is the current tax expense in 20x1?
a. 300,000
b. 160,000
c. 90,000
d. 64,000
62. ABC Co. is determining the amount of its pretax accounting income for the year by making
adjustment to taxable income from the company's year-end income tax return. The tax return
indicates taxable income of ₱100,000, on which a tax liability of ₱30,000 has been recognized
(₱100,000 x 30% = ₱30,000). Additional information is shown below:
Goodwill impairment loss not included as a deduction in
the tax return but may be deducted for financial
Reporting. 35,000
Interest income on savings and time deposits with
private banks 6,000
Revenues from installment sales are recognized as
goods are sold but are taxed only when installment
Payments are collected. 40,000
Excess of depreciation recognized for financial reporting
over depreciation recognized for taxation purposes due
to shorter depreciation period used for financial 10,000
reporting
Bad debt expense recognized using the allowance
method 15,000
How much is the pretax income?
a. 115,000
b. 100,000
c. 96,000
d. 86,000
63. Legal capital is the portion of contributed capital that cannot be distributed to the owners during
the lifetime of the corporation unless the corporation is dissolved and all of its liabilities are
settled first. For no-par value shares, legal capital is
a. the aggregate par value of shares issued and subscribed.
b. the total consideration received or receivable from shares issued or
subscribed.
c. the aggregate stated value of shares issued and subscribed.
d. the aggregate market value of shares issued and subscribed.

64. Which of the following is not one of the basic shareholders rights?
a. The right to participate in earnings.
b. The right to maintain one's proportional interest in the corporation.
c. The right to participate in the proceeds of the sale of corporate assets upon liquidation of the
corporation.
d. The right to inspect the accounting records of the
corporation.
65. On February 1, authorized ordinary share was sold on a subscription basis at a price in excess of
par value, and 20 percent of the subscription price was collected. On May 1, the remaining 80
percent of the subscription price was collected. Share premium would increase on
February 1 May 1
a. No Yes
No No
c. Yes No
d. Yes Yes

66. The entry to record the issuance of ordinary shares for fully paid share subscriptions is
a. a memorandum entry.
b. Dr. Common Stock Subscribed; Cr. Common Stock; Cr. Additional Paid-In
c. Dr. Subscribed Share Capital; Cr. Subsidiary Receivable
d. Dr. Subscribed Share Capital’ Cr. Share Capital

67. The issuance of shares of preferred stock to shareholders

a. increases preferred stock
outstanding.
b. has no effect on preferred stock outstanding.
c. increases preferred stock authorized.
d. decreases preferred stock authorized.

68. Which of the following is an appropriate presentation of treasury stock?

a. As a marketable security
b. As a deduction at cost from total stockholders'
equity
c. As a deduction at cost from total contingent liabilities
 d. As a deduction at par from total stockholders' equity

69. Gains and losses on the purchase and resale of treasury stock may be reflected only in
a. share premium account.
b. share premium and retained earnings
accounts.
c. income, paid-in capital, and retaining earnings accounts.
d. income and paid-in capital accounts.

70. The stockholders' equity section of Peter Corporation's balance sheet at December 31, 20X2, was
as follows:
Ordinary shares (₱10 par value, authorized 1,000,000
shares, issued and outstanding 900,000 shares) ₱ 9,000,000
Share premium 2,700,000
Retained earnings 1,300,000

On January 2, 20X3, Peter purchased and retired 100,000 shares of its stock for ₱1,800,000.
Immediately after retirement of these 100,000 shares, the balances in the share premium and
retained earnings accounts should be
Share premium Retained earnings
a. ₱ 900,000 ₱1,300,000
b. ₱1,400,000 ₱ 800,000
c. ₱1,900,000 ₱1,300,000
71. Asp Co. was organized on January 2, 20x1, with 30,000 authorized shares of ₱10 par
ordinary shares. During 20x1 the corporation had the following capital transactions:
Jan. 5 Issued 20,000 shares at ₱15 per share.
July 14 Purchased 5,000 shares at ₱17 per share.
Dec. 27 reissued the 5,000 shares held in treasury at ₱20 per share.

Asp used the cost method to record the purchase and reissuance of the treasury shares. In its
December 31, 20x1, balance sheet, what amount should Asp report as share premium in excess of
par?
a. 100,000
b. 125,000
c. 140,000
d. 115,000
72. In 20x0, Newt Corp. acquired 6,000 shares of its own ₱1 par value ordinary share at ₱18 per
share. In 20x1, Newt issued 3,000 of these shares at ₱25 per share. Newt uses the cost method to
account for its treasury stock transactions. What accounts and amounts should Newt credit in
20x1 to record the issuance of the 3,000 shares?
Treasury sh. Sh. premium Retained earnings Ordinary
sh.
a. ₱54,000 ₱21,000
b. ₱54,000 ₱21,000
 c. ₱72,000 ₱3,000

d. ₱51,000 ₱21,000 ₱3,000

73. On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its ₱5 par value ordinary
shares from a shareholder. On that date, the stock’s market value was ₱35 per share. The stock
was originally issued for ₱25 per share. By what amount would this donation cause total
stockholders’ equity to decrease?
a. 70,000
b. 50,000
c. 20,000
d. 0
74. An enterprise has made all necessary adjusting entries and is now closing its accounts for the
period. Dividends of ₱30,000 were declared and distributed during the year. The entry to close
the dividends account would be
a. Retained earnings 30,000
Dividends 30,000
b. Dividends 30,000
Retained earnings 30,000
c. Income summary 30,000
Dividends 30,000

75. Nest Co. issued 100,000 shares of common stock (i.e., ordinary shares). Of these, 5,000 were held
as treasury stock at December 31, 20x1. During 20x2, transactions involving Nest's common
stock were as follows:
• May 3 - 1,000 shares of treasury stock were sold.
• August 6 - 10,000 shares of previously unissued stock were sold.
• November 18 - a 2-for-1 stock split took effect.

Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, 20x2,
how many shares of Nest's common stock were issued and outstanding?
Shares Issued Outstanding
a. 220,000 216,000
b. 222,000 214,000
c. 222,000 218,000
d. 220,000 212,000
76. At December 31, 20x0 and 20x1, Carr Corp. had outstanding 4,000 shares of ₱100 par value 6%
cumulative preferred stock and 20,000 shares of ₱10 par value common stock (i.e., ordinary
shares). At December 31, 20x0, dividends in arrears on the preferred stock were ₱12,000. Cash
dividends declared in 20x1 totaled ₱44,000. Of the ₱44,000, what amounts were payable on each
class of stock?
Preference shares Ordinary shares
a. ₱44,000 0
b. ₱36,000 8,000
c. ₱32,000 12,000
 d. ₱24,000 20,000

77. Arp Corp.’s outstanding capital stock at December 15, 20x1, consisted of the following:
• 30,000, 5% cumulative preference shares, par value ₱10 per share, fully participating as to
dividends. No dividends were in arrears.
• 200,000 ordinary shares, par value ₱1 per share.

On December 15, 20x1, Arp declared dividends of ₱100,000. What was the amount of dividends
payable to Arp’s ordinary stockholders?
a. 10,000
b. 34,000
c. 40,000
d. 47,500

78. The following stock dividends were declared and distributed by Sol Corp.: Percentage of ordinary
shares
outstanding at declaration date Fair value Par
value
10 ₱15,000 ₱10,000
28 40,000 30,800
What aggregate amount should be debited to retained earnings for these stock dividends?
a. 40,800
b. 45,800
c. 50,000
d. 55,000
79. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of ₱2 par
value common stock, which had a fair value of ₱5 per share before the stock dividend was
declared. This stock dividend was distributed 60 days after the declaration date. By what
amount did Ray’s current liabilities increase as a result of the stock dividend declaration?
a. 0
b. 500
c. 1,000
d. 2,500

80. A share-based payment transaction is one in which an entity receives goods or services and pays
for them
a. by issuing its own equity instruments.
b. through cash, but the amount is based on the fair value of the entity’s equity instruments.
c. either a or b, as a choice given to either the entity or the supplier of the goods or services
d. any of these
81. Which of the following is excluded from the scope of PFRS 2?
a. Employee share option plans
 b. Employee share appreciation rights
c. Purchase of goods from an unrelated party in exchange for an entity’s own shares of stocks
d. Transfer of equity instruments as consideration for a business combination
82. On February 1, 20x1, Entity A offered its employees share options subject to the offer being
ratified in the shareholders’ general meeting. The share option offer was approved in the
shareholders’ general meeting held on March 1, 20x1. Entity A issued the share options on April
1, 20x1. The fair value of the share options vary between these dates. For purposes of PFRS 2, the
share options should be valued at the fair value determined on
a. February 1, 20x1
b. March 1, 20x1
c. April 1, 20x1
d. Any of these
83. On January 1, 20x4, Entity A has granted 600 share options to each of its 100 employees. The
options vest in three years’ time. Each share option has a fair value of ₱100 on grant date.
Information on employee departure is as follows:
• January 1, 20x4: estimate of employees leaving the entity during the vesting period – 4%
• December 31, 20x4: revision of estimate of employees leaving to 5% before vesting date
• December 31, 20x5: revision of estimate of employees leaving to 6% before vesting date
• December 31, 20x6: actual employees leaving 5%

How much is the salaries expense in 20x5?

a. 2,000,000
b. 1,900,000
c. 1,860,000
d. 1,840,000

Use the following information for the next two questions:

On January 1, 20x1, Entity A grants 100 share options to each of its 100 key employees conditional
upon each employee remaining in Entity A’s employ over the next 3 years. The fair value of each
share option is ₱15.

On the basis of a weighted average probability, Entity A estimates on January 1, 20x1 that about 20
employees (i.e., 20% or 20 out of the 100 employees) will leave during the three-year period and
therefore forfeit their rights to the share options.

During 20x1, 7 employees left. Entity A revises its estimate to a total of 25% employee departure
over the vesting period.

During 20x2, 9 employees left. Entity A revises its estimate to a total of 28% employee departure
over the vesting period.

During 20x3, 8 employees left. Therefore, the actual employee departure over the past three years is
24% [(7 + 9 + 8) ÷ 100].

84. How much is the salaries expense in 20x2?

 a. 33,700
b. 37,500
c. 34,500
d. 42,000
85. How much is the salaries expense in 20x3?
a. 33,700
b. 37,500
c. 34,500
d. 42,000

Use the following information for the next two questions:

On January 1, 20x1, Entity A grants 1,000 share appreciation rights (SARs) to employees with the
condition that the employees remain in service within the next 3 years. Information on the SARs is
shown below:
Date No. of SARs expected to vest Fair value of each SAR

Jan. 1. 20x1 1,000 10

Dec. 31, 20x1 900 12

Dec. 31, 20x2 800 15

Dec. 31, 20x3 750 16

86. How much is the salaries expense in 20x3?

a. 3,700
b. 4,500
c. 4,000
d. 4,400
87. How much is the accrued salaries payable on December 31, 20x2?
a. 4,400
b. 7,500
c. 8,000
d. 8,400

Use the following information for the next three questions:

Caroline Co.’s equity structure at December 31, 20x1 is shown below:
10% Preference sh., ₱100 par (liquidation value ₱120 per share) 1,000,000
Ordinary shares, ₱100 par 3,000,000
Subscribed share capital - ordinary shares 100,000
Subscription receivable (60,000)
Retained earnings 900,000
Treasury shares (at cost) - 2,000 ordinary shares. (260,000)
Total shareholders' equity 4,680,000
88. The preference shares are cumulative. Dividends are in arrears for three years. How much is the
book value per ordinary share?
a. 150
b. 111.72
c. 112.37
d. 141.38

89. The preference shares are noncumulative. Dividends are in arrears for three years. How much is
the book value per ordinary share?
a. 118.62
b. 112.62
c. 98.87
d. 122.39

90. The preference shares are cumulative. All dividends are paid up to end of the current year. How
much is the book value per ordinary share? a. 120.00
b. 119.82
c. 118.62
d. 122.07
91. The shareholders' equity of ABC Construction, Inc. on December 31, 20x1 includes the following:
8% Preference shares, 20,000 shares, ₱100 par value 3,000,000
10% Preference shares, 10,000 shares, ₱300 par value 4,500,000
Ordinary shares, 50,000 shares, ₱100 par value 7,500,000
Share premium in excess of par 2,250,000
Retained earnings 3,350,000
Total shareholders' equity 20,600,000
The 8% stock is cumulative and fully participating. The 10% stock is noncumulative and fully
participating. Dividends have not yet been paid for 3 years.
How much is the book value per ordinary share?
a. 192.30
b. 200.30
c. 202.30
d. 205.30

92. The computation of earnings per share is addressed by

a. PAS 36
b. PFRS 3
c. PAS 33
d. PFRS 11

93. Entity A had 100,000, ₱10 par, 10% cumulative preference shares outstanding all throughout
20x1. Entity A reported profit after tax of ₱2,800,000 for the year ended December 31, 20x1. The
movements in the number of ordinary shares are as follows:
 1/1/20x1 Ordinary shares outstanding 120,000
3/1/20x1 Shares issued for cash 42,000
9/30/20x1 Subscribed shares 20,000
11/1/20x1 Reacquisition of treasury shares (12,000)
Outstanding shares at the end of period 170,000
What is the basic earnings per share?
a. 18.92
b. 17.09
c. 18.07
d. 16.98

94. Entity A had the following instruments outstanding all throughout 20x1:

12% convertible bonds payable issued at face amount, each

₱1,000 bond is convertible into 30 ordinary shares ₱2,000,000
Ordinary shares, ₱10 par, 100,000 shares issued and
outstanding 1,000,000

Profit for the year is ₱800,000. Entity A’s income tax rate is 30%.

What is the diluted earnings per share in 20x1?

a. 6.28
b. 6.05
c. 6.15
d. 5.98

95. PAS 33 is intended to apply to which of the following?

a. Publicly-listed entities
b. Non-publicly listed entities
c. Financial institutions
d. All entities using the PFRSs

96. Which of the following does not result to a retrospective adjustment of prior-period EPS
information?
a. Share dividends
b. Share split
c. Issuance of shares for cash
d. Issuance of stock rights
97. Earnings per share is not required to be computed on
a. profit or loss from continuing operations.
b. results of discontinued operations.
c. profit or loss for the year.
d. other comprehensive income.
98. Entity A is computing for its basic earnings per share and has gathered the following
information:
Loss for the year (1,000,000)
Preferred dividends 50,000
Outstanding ordinary shares 100,000
There have been no changes in the number of outstanding ordinary shares during the period. What
is the basic earnings (loss) per share?
a. -10.50
b. 10.50
c. -9.50
d. 9.50
99. Entity A had 200,000 ordinary shares outstanding all throughout 20x1. In 20x2, the following
share issuances occurred:
• On April 1, 20,000 shares were issued for cash.
• On September 30, a 10% bonus issue (share dividend) was declared.
• On November 1, a 2-for-1 share split was issued.

Entity A had the following profits: ₱2,200,000 in 20x2 and ₱1,800,000 in 20x1. What are the earnings
per share to be disclosed in Entity A’s 20x2 comparative financial statements?
20x2 20x1
a. 4.22 4.02
b. 4.37 4.07
c. 4.65 4.09
d. 4.78 4.12

100. Entity A has 200,000 ordinary shares outstanding on January 1, 20x1. Entity A offers rights issue
to its existing shareholders that enable them to acquire 1 ordinary share at a subscription price of
₱120 for every 5 rights held. The rights are exercised on May 1, 20x1. The market price of one
ordinary share immediately before exercise is ₱180. Entity A reported profit after tax of
₱2,900,000 in 20x1. What is the basic earnings per share in 20x1?
a. 12.58
b. 12.67
c. 11.92
d. 17.67

“Do not be deceived: God cannot be mocked. A man reaps what he sows.” - Galatians 6:7

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