MCQ COMPUTATIONAL

CHAPTER 1

1. The account balances of Boast Co. include the following:

How much is Boast Co.'s total financial liabilities?

A. 426,000 b. 438,000 c. 444,000 d. 538,000

2. Proud Co.'s records on Dec. 31, 20x1 show the following account balances:

Trade accounts payable (net of P10,000 debit balance in

supplier's account and P8,000 unreleased checks drawn) 600.000
Deferred tax liability (expected to reverse in 20x2) 10.000
10%, 4-year note payable issued on Aug. 1, 20x1 240.000
payable (maturing in 5 equal annual installments of P400.000) 2,000,000
Reserve for contingencies 50,000
Held for trading financial liabilities 100,000
Income tax payable 100,000
Accrued expenses. 10,000
Stock dividends payable 24,000
How much is the total current liabilities?

a. 1,120,000 b. 1,210,000 c. 1,220,000 d. 1,238,000

3. Keeper Co. has the following liabilities on December 31, 20x1: Trade and other
payables Note payable (issued 3 yrs ago, maturing on Dec. 31, 20x2) 6,000,000 Serial
bonds payable (next annual principal installment of 1800.000 due July 1,20x2)
5,600,000 On February 28, 20x2, Keeper Co. entered into a non-cancelable
agreement with the lender to refinance the note payable on a long term basis, on
readily determinable terms that have not yet been implemented. Keeper Co.'s 20x1
financial statements were authorized for issue on March 31, 20x2. What amount of
current liabilities should Keeper Co. report in its 20x1 statement of financial position?
a 2,000,000 b. 2,800,000 c.8,800,000 d. 13,600,000

4. Pam, Inc. has P1.000.000 notes payable due on June 15, 20x6. On December 31,
20x5, Pam signed an agreement to roll over the P1,000,000 note on a long-term
basis. Under the agreement, the amount that can be rolled-over cannot exceed 80%
of the value of the collateral Pam was providing. As of December 31, 20x5, the value
of the collateral was P1,200,000 and was not expected to fall below this amount
during 20x6. In its December 31, 20x5, balance sheet, Pam should classify the notes
payable as
Short-term Long-term
b. 40,000 960,000
5. Poof Co. has total current liabilities of P3,120,000 on Dec 31, 20x1 before possible
adjustment for the following Poof Co/s authorized capitalization was fully issued.
During the year,
 Poof Co. filed an amended Articles of Incorporation with the Securities and
Exchange Commission (SEC) increasing its authorized capitalization. Although the
SEC, approval was not yet received, Poof Co. started receiving deposits for future
subscription of its shares. A total of P480,000 were collected and credited to
"Subscribed Capital" Per agreement with the subscribers, the deposits are to be
reimbursed immediately if in case the SEC rejects Poof Co.'s application for
increased capitalization. Poof Co. expects to receive the SEC's decision in April
20x2.
 Included in the total current liabilities is a bank loan of P600,000 that is maturing
on July 1, 20x2. On February 14, 20x2, Poof Co. entered into a refinancing
agreement with the bank to extend the repayment of the loan to July 1, 20x5.
The original loan agreement provides for such renewal option, and as of Dec. 31,
20x1, Poof Co. has complied with all the conditions relating to the extension of
the loan repayment. Poof Co.'s financial statements were authorized for issue on
March 15, 20x2.
How much is the adjusted total current liabilities on Dec. 31, 20x1?
b. 3,000,000

6. Shameless Co. had the following liabilities on December 31, 20x1:

Accounts payable 750,000
Interest payable 120,000
Long-term bank loan (maturing April 1, 20x9) 4,000,000

In 20x1, Shameless Co. breached an agreement on the long-term bank loan which
rendered the loan repayable on demand. However, on February 29, 20x2, Shameless
Co. received from the bank a one-year grace period to rectify the breach and during
which the bank promises not to demand immediate repayment. Shameless Co.'s
20x1 financial statements were authorized for issue on March 31, 20x2. In its 20x1
statement of financial position, what amount should Shameless Co. report as total
current liabilities?
a. 4,870,000

7. Anger Co.'s accounts payable on December 31, 20x1 had a balance of P2,300,000
before any possible adjustment for the following:
a) Goods in transit purchased on credit for 123,000 under an FOB destination
term were recorded and included in the inventory count on December 31,
20x1 as "goods in transit."
b) Anger Co. checks, drawn for 132,000, were found in the safe box during the Dec.
31, 20x1 securities count.
c) Goods purchased under an 'FOB destination, freight collect' term were received
and recorded at the invoice cost of P60,000 on Dec. 29, 20x1. The cash payment for
the related freight of 15,000 was debited to the 'Freight-out' account..
d) Goods worth 190,000 received on consignment from Dishonor Co. were recorded
as an increase in accounts payable. The goods remain unsold as of Dec. 31, 20x1.
e) The balance of accounts payable includes 164,000 cost of goods purchased under
an FOB shipping point term that were lost in transit. Anger Co. recorded a
corresponding claim against the carrier. How much is the adjusted balance of
accounts payable?
b. 2,214,000

8. Ego Co. had the following account balances on December 31, 20x1 before
adjustments:
Inventory (per physical count on Dec. 31, 20x1) P800,000
Accounts payable 960,000

Additional information:
a Goods in transit, with an invoice cost of P80,000 and purchased FOB shipping point,
were recorded and included in the year-end physical count of inventory as "goods in
transit."
b. Goods in transit, with an invoice cost of P10,000 and purchased FOB destination,
were recorded only on January 3, 20x2 when the shipment was received.
c. Ego Co. returned damaged goods costing 120,000 on Dec. 29 20x1. However, Ego
Co. recorded the related credit memo only on January 4, 20x2.
d. On December 31, 20x1, Ego Co. recorded a 160,000 check payable to a supplier.
The check was dated January 7, 20x2.
How much are the adjusted balances of (1) Inventory and (2) Accounts payable on
December 31, 20x1?
c. 800,000; 1,000,000

9. Wooten Co. sells subscriptions for access to an online file sharing site Subscriptions
are collected in advance and credited to sales. An analysis of the recorded sales
activity revealed the following:
20x1 20x2
Sales 840,000 1,000,000
Less cancellations 40,000 60,000
Net sales 800,000 940,000
Subscriptions expirations:
20x1 240,000
20x2 310,000 260,000
20x3 250,000 400,000
20x4 280,000
800,000 940,000

In Wooten's December 31, 20x2 statement of financial position, the balance of

unearned subscription revenue should be
a. 930,000.

10. Jim 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:
Jim received all the 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 Jim report as deferred revenue?
c. 6,600

11. Motor Co. sells service contracts that cover a 2-year period. The sale price of
each contract is P2,000. Motor Co. sold 1,000 contracts evenly throughout 20x1.
Based on Motor Co.'s past experience, 40% of contracts sold are earned in the first
year of the contract and 60% in the second year. Approximately, how much are the
current and noncurrent portions of the deferred revenue on December 31, 20x1?
d. 1,000,000; 600,000

12. Cow Co. sells gift certificates that expire within a year. During 20x1, Cow Co. sold
gift certificates worth P200,000, of which P108,000 were redeemed. Cow Co. expects
that 10% of the gift certificates sold will not be redeemed, Under PFRS 15, what
amounts of (1) total revenue and (2) liability should be reported in Cow Co.'s 20x1
financial statements?
d. 120,000; 80,000

13. Mimi Co. sells gift certificates that expire one year after issuance, Information on
gift certificates is shown below:
Gift card liability, Jan. 1, 20x1 120,000
Gift certificates sold during 20x1 1,000,000
Prior year gift certificates redeemed in 20x1 112,000
Gift certificates sold and redeemed in 20x1 760,000

Mimi's past experience indicates that 5% of gift certificates sold are never redeemed.
Under PFRS 15, what amounts of (1) total revenue and (2) liability should be
reported in Mimi Co.'s 20x1 financial statements?
C. 920,000; 200,000

14. An entity received cash of P24,000 on August 1 for one-year's rent in advance and
recorded the transaction on that day as a credit to unearned rent revenue for the full
amount. The December 31 adjusting entry is:
D. Unearned rent revenue 10,000
Rent revenue 10,000

15. Entity D acquired a piece of land on April 1, 20x1. The purchase price was
reduced by a credit for the real property taxes accrued during the year. Entity D
records real property taxes at each month-end by adjusting the prepaid tax or tax
payable account as appropriate. On May 1, 20x1 Entity D paid the first of two equal
installments of P72,000 for the annua real property taxes. The entry to record the
payment of taxes on May 1, 20x1 includes
B. a debit to real property tax payable of P48,000.
CHAPTER 2
 1. On March 1, 20X4, Fine Co. borrowed P10,000 and signed a two-year note
bearing interest at 12% per annum compounded annually. Interest is payable
in full at maturity on February 28, 20X6. What amount should Fine report as a
liability for accrued interest at December 31, 20X5?
d. 2,320

2. On January 1, 20x1, Sunset Co. issues a P5,000,000 noninterest bearing note due
on December 31, 20x4. The effective interest rate is 15%. How much is the
unamortized balance of the discount on notes payable account on January 1, 20x3?
b. 1,219,282

The next two items are based on the following information: House Publishers offered
a contest in which the winner would receive P1,000,000, payable over 20 years. On
December 31, 2000, House announced the winner of the contest and signed a note
payable to the winner for P1,000,000, payable in P50,000 installments every January
2. Also on December 31, 2000, House purchased an annuity for P418,250 to provide
the P950,000 prize monies remaining after the first P50,000 installment, which was
paid on January 2, 2001.

3. In its December 31, 2000, balance sheet, what amount should House report as
note payable-contest winner, net of current portion?
b. 418,250

4. In its 2000 income statement, what should House report as contest prize
expense?
c. 468,250

5. On January 1, 20x1, RELISH TASTE Co. acquired a machine by issuing a 3%,

P4,000,000 note due on January 1, 20x4. Interest is payable semiannually. The
effective interest rate is 12%. How much is the carrying amount of the note on initial
recognition?
A. 3,114,884

5. On December 30, 20X6, Bart, Inc., purchased a machine from Fell Corp. in
exchange for a noninterest bearing note requiring eight payments of P20,000. The
first payment was made on December 30, 20X6, and the others are due annually on
December 30. At the date of issuance, the prevailing rate of interest for this type of
note was 11%. On Bart's December 31, 20X6 balance sheet, the note payable to Fell
was
a. 94,240

Use the following information for the next two questions: You finished your studies,
passed the CPA board exams, and now an accountant. A real estate company offered
to sell you a house with a cash selling price of P14,000,000 under an in-house
financing agreement. The amortization will be on a monthly basis over a period of 25
years and the effective interest rate is 12%. You are wondering if you can afford to
purchase the house. You estimated your monthly expenditure to be P36,600, which
included a risk adjustment allowance.
7. What should be the minimum balance of your monthly take home salary so that
you will be able to afford to purchase the house?
a. 147,451.38

8. How much is the total interest expense on the financing agreement?

a. 30,235,414

9. On January 1, 20x1, Next Co. obtains a P4,000,000 bank loan due on December 31,
20x4. Interest of 12% is due annually. The bank charges Next Co. an 11.19%
nonrefundable loan origination fee. The effective interest rate on the loan is
approximately equal to
C. 16%

10. On December 1, 20x5, Money Co. gave Home Co. a P200,000, 11% loan. Money
paid proceeds of P194,000 after the deduction of a P6,000 nonrefundable loan
origination fee. Principal and interest are due in 60 monthly installments of P4,310
beginning January 1, 20x6. The repayments yield an effective interest rate of 11% at a
present value of P200,000 and 12.4% at a present value of P194,000. What amount
of expense from this loan should Home report in its 20x5 profit or loss?
c. 2,005
CHAPTER 3
1. Blue Corp.'s December 31, 1991, balance sheet contained the following items
in the long-term liabilities section: 9% registered debentures, callable in 2002,
due in 2007 700,000 94% collateral trust bonds, convertible into common
stock beginning in 2000, due in 2010 10% subordinated debentures (P30,000
maturing annually beginning in 1997) What is the total amount of Blue's term
bonds?
d. 1,300,000

2. On January 2, 2001, West Co. issued 9% bonds in the amount of P500.000, which
mature on January 2, 2011. The bonds were issued for P469,500 to yield 10%.
Interest is payable annually on December 31. West uses the effective interest method
of amortizing bond discount. In its June 30, 2001, balance sheet, what amount
should West report as bonds payable?
b. 470,475

3. On January 1, 20x1, Yoga Co. issued 1,000, P4,000 face amount bonds for
P3,807,852. The bonds mature on December 31, 20x3 Interest of 10% is due annually
every year-end. The effective interest rate is 12%. How much is the unamortized
discount on bonds payable on December 31, 20x1?
b. 135,206

4. On January 1, 20x1, Silent Co. issued 1,000 bonds with face" amount of P4,000
each for a total of P3,807,852. Silent Co. paid transaction costs of P179,316 on the
issuance. The bonds mature on December 31, 20x3 but 10% interest is due every
year-end. The effective interest rate adjusted for the transaction costs is 14%. How
much is the carrying amount of the bonds on December 31, 20x1?
d. 3,736,531

5. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value, bonds at 101 plus
accrued interest. The bonds were dated November 1, 20x8, and bear interest at an
annual rate of 9% payable semiannually on November 1 and May 1. What amount
did Hill receive from the bond issuance?
d. 209,500

6. Tuck Co. plans on issuing three-year, 12% term bonds with face amount of
P2,000,000. If the current rate on issuance date is 10%, the estimated issue price of
the bonds would be
a. 2,099,474.

7. On June 30, 20x9, King Co. had outstanding 9%, P5,000,000 face value bonds
maturing on June 30, 2x14. Interest was payable semiannually every June 30 and
December 31. On June 30, 20x9, after amortization was recorded for the period, the
unamortized bond premium and bond issue costs were P30,000 and P50,000,
respectively. On that date, King acquired all its outstanding bonds on the open
market at 98 and retired them. At June 30, 20x9, what amount should King recognize
as gain on redemption of bonds? b. 80,000
8. On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial bonds, to be
repaid in the amount of P40,000 each year. Interest is payable annually on December
31. The bonds were issued to yield 10% a year. The bond proceeds were P190,280
based on the present values at December 31, 20x0, of the five annual payments as
follows:
Amold amortizes the bond discount by the effective interest method. In its December
31, 20x1, balance sheet, at what amount should Arnold report the carrying value of
the bonds?
d. 153,308

9. On January 1, 20x1, NESCIENCE IGNORANCE Co. issued 10%, P6,000,000 zero-

coupon bonds at a price that reflects a yield to maturity rate of 18%. Both the
principal and accrued interests are due on December 31, 20x3. What amounts are
reported in NESCIENCE Co.'s December 31, 20x1 financial statements for the
following?
Bonds Payable Interest Payable
A. 5,135,421 600,000

10. Ray Corp. issued bonds with a face amount of P200,000. Each P1,000 bond
contained detachable stock warrants for 100 shares of Ray's common stock. Total
proceeds from the issue amounted to P240,000. The fair value of each warrant was 2
and the fair value of the bonds without the warrants was P196,000. The bonds were
issued at a discount of
c. 4,000.

11. On July 1, 2003, after recording interest and amortization York Co. converted
P1,000,000 of its 12% convertible bonds into 50,000 shares of P1 par value ordinary
share. On the conversion date the carrying amount of the bonds was P1,300,000, the
fair value of the bonds was P1,400,000, and York's ordinary share was publicly
trading at P30 per share. What amount of share premium should York record as a -
result of the conversion?
b. 1,250,000

12. On January 1, 20x1, Melancholic Co. issued 10%, P2,000,000 convertible bonds
for P2,200,000. The bonds, which are due on December 31, 20x3, are convertible
into 10,000 ordinary shares with par value of P100. The annual interest payments are
due at each year-end. The prevailing market rate of interest for similar debt without
conversion feature on January 1, 20x1 was 12%. On December 31, 20x2, half of the
bonds were retired for P1,000,000. The prevailing interest rate for similar debt
without conversion feature on December 31, 20x2 was 11%. How much are the (1)
gain (loss) on the retirement and (2) net amount of "share premium conversion
feature" reclassified within equity on December 31, 20x2?
c. (8,849); 139,028

13. During 20x4 Peterson Company experienced financial difficulties and is likely to
default on a P500,000, 15%, three year note dated January 1, 20X2, payable to Forest
National Bank. On December 31, 20X4, the bank agreed to settle the note and
unpaid interest of P75,000 for 20X4 for P50,000 cash and marketable securities with
carrying amount of P375,000. Peterson's acquisition cost of the securities is
P385,000. What amount should Peterson report as a gain from the debt restructuring
in its 20x4 income statement?
d. 150,000

14. Wood Corp., a debtor undergoing financial difficulties granted an equity interest
to a creditor in full settlement of a P28,000 debt owed to the creditor. At the date of
this transaction, the equity interest had a fair value of P25,000 and par value of
P20,000. What amount should Wood recognize as gain on restructuring of debt?
b. 3,000

15. In 20X2, May Corp. acquired land by paying P75,000 down and signing a note
with a maturity value of P1,000,000. On the note's due date, December 31, 20X7,
May owed P40,000 of accrued interest and P1,000,000 principal on the note. May
was in financial difficulty and was unable to make any payments. May and the bank
agreed to amend the note as follows:
 The P40,000 of interest due on December 31, 20X7, was forgiven.
 The principal of the note was reduced from P1,000,000 to P950,000 and the
maturity date extended 1 year to December 31, 20X8.
 May would be required to make one interest payment totaling P30,000 on
December 31, 20X8.
 The original effective interest rate is 10% while the current market rate on
December 31, 20X7 is 12%.
As a result of the troubled debt restructuring, May should report a gain, before taxes,
in its 20X7 income statement of
d. 149,092
CHAPTER 4
1. In May 20x6, Caso Co. filed suit against Wayne, Inc. seeking P1,900,000
damages for patent infringement. A court verdict in November 20x9 awarded
Caso P1,5000,000 in damages, but Wayne's appeal is not expected to be
decided before 2x10. Caso's counsel believes it is probable that Caso will be
successful against Wayne for an estimated amount in the range between
P800,000 and P1,100,000, with P1,000,000 considered the most likely
amount. What amount should Caso record as income from the lawsuit in the
year ended December 31, 20x9?
a. 0

2. During 20x1, Haft Co. became involved in a tax dispute with the BIR At December
31, 20x1, Haft's tax advisor believed that an unfavorable outcome was probable. A
reasonable estimate of additional taxes was P200,000 but could be as much as
P300,000. After the 20x1 financial statements were issued, Haft received and
accepted a BIR settlement offer of P275,000. What amount of accrued liability should
Haft have reported in its December 31, 20x1 balance sheet?
a. 200,000

3. In 20x1, Tucky Co. guaranteed a bank loan of Auto Co. Auto Co. has made all the
required loan payments during the year and, as at December 31, 20x1, the bank loan
has a balance of P4,000,000. What amount of provision should Tucky Co recognize on
December 31, 20x1?
d. 0

4. American Co. operates an offshore oilfield where its licensing agreement

requires it to remove the oil rig at the end of production and restore the
seabed. Eighty percent of the eventual costs relate to the removal of the oil
rig and restoration of the damages caused by building it, and twenty percent
arise from the extraction of oil. By December 31, 20x1, the rig has been
constructed but no oil has been extracted. American Co. estimates that the
total cost of decommissioning the equipment and restoring the site is P100M.
What amount of provision should American Co. recognize on December 31,
20x1?
c. 80M

5. Calm Co. provides warranty for its products. Experience shows that 10% of
products sold require warranty repairs and that 70% of the warranty costs are
expended in the year of sale and 30% in the following year. Half of the defective
products require minor repairs that cost 20% of the sale price, while the other half
require major repairs that cost 70% of the sale price. A 3% risk adjustment factor is
considered appropriate reflect the uncertainties in the cash flow estimates. Sales of
P4,000,000 were made evenly throughout 20x1. The outflows for repairs in 20x2 (for
the products sold in 20x1) are expected to to take place on June 30, 20x2. The
appropriate discount factor is 0.95238. How much is the warranty provision at
December 31, 20x1?
D. 52,971
6 In 20x1, Checkpoint Co. recognized a P100,000 provision for estimated losses on a
pending lawsuit. In 20x2, the Checkpoint wins the lawsuit and pays nothing. Which of
the following statements is correct?
B. Checkpoint Co. shall recognize a gain of P100,000 in 20x2.

7. National Appliance Center sells washing machines that carry a three-year warranty
against manufacturer's defects. Based on company experience, warranty costs are
estimated at P60 per machine. During the year, National sold 48,000 washing
machines and paid warranty costs of P340,000. In its income statement for the year
ended December 31, National should report warranty expense of
d. 2,880,000

8. During 20x7, Gum Co. introduced a new product carrying a two-year warranty
against defects: The estimated warranty costs related to peso sales are 2% within 12
months following the sale and 4% in the second 12 months following the sale. Sales
and actual warranty expenditures for the years ended December 31, 20x7 and 20x8
are as follows: What amount should Gum report as estimated warranty liability in its
December 31, 20x8 statement of financial position?
D.14,250

9. In December 20x1, Mill Co. began including one coupon in each package of candy
that it sells and offering a toy in exchange for 50 centavos and five coupons. The toys
cost Mill SO centavos each. Eventually, 60% of the coupons will be redeemed. During
December, Mill sold 110,000 packages of candy and no coupons were redeemed. In
its December 31, 20x1 balance sheet, what amount should Mill report a premium
expense?
a.3.960

10. Run Co. offers premiums as part of its sales promotion. Run's past experience
indicates that only 80% of its sales are redeemed for premiums. Run Co.'s liability for
premiums on December 31, 20x0 was P6,000,000. Run made total sales of
P4,000,000 in 20x1 and distributed premiums costing P2,750,000. If all the sales in
20x1 were redeemed, the total cost of premiums would be P2,250,000. What
amount should Run report as a liability for premiums on December 31, 20x1?
C. 5,050,000
CHAPTER 5
1. Mr. Juan, an employee, has a pay rate of P125 per hour, with time and a half
for hours worked in excess of 40 during a week. If Mr. Juan works 60 hours
during a week and has weekly deductions for SSS at a rate of 6%, PhilHealth
at a rate of 1.5%, Pag-IBIG at P25, and withholding tax of 15% on salary after
deductions of the required contributions, how much is Mr. Juan's net pay for
the week?
c. c. 6,858

2. The following information to Rik Co.'s two employees: Neither Ryan nor Todd
took the usual two-week vacation in 20X6. In Rik's December 31, 20X6
financial statements, what amount of vacation expense and liability should be
reported?
b. 1,600

3. North Corp. has an employee benefit plan for compensated absences that gives
employees 10 paid vacation days and 10 paid sick days. The vacation days can be
carried over indefinitely. Employees can elect to receive payment in lieu of vacation
days; however, no payment is given for sick days not taken. At December 31, 20X5,
North's unadjusted balance of liability for compensated absences was P21,000.
North estimated that there were 150 vacation days and 75 sick days available at
December 31, 20X5. North's employees earn an average of P100 per day. In its
December 31, 20X5, balance sheet, what amount of liability for compensated
absences is North required to report?
D.15,000

4. Wright, Inc. has an incentive compensation plan under which the sales manager
receives a bonus equal to 10 percent of the company's income after deductions for
bonus and income taxes. Income before bonus and income taxes is P400,000. The
income tax rate is 30%. How much is the bonus?
D. 26,168

5. Porgy Co.'s retirement plan requires a P250,000 annual contribution to a fund held
by a third party trustee. The fund is legally separate from Porgy Co. and is available
solely for the payment of the retirement benefits of Porgy's employees. At the
beginning 20x1, the fund balance is P2,800,000. In its December 31, 20x0 and
December 31, 20x1 statements of financial position, Porgy reported accrued payable
for retirement benefits of P30,000 and P80,000, respectively. Payments to retiring
employees during 20x1 totaled P750,000. How much is the retirement benefits
expense in 20x1?
A. 250,000
CHAPTER 6
1. Information on an entity's plan assets is as follows:
Fair value of plan assets, Jan. 1 ` 360,000
Return on plan assets 80,000
Contributions to the retirement fund during the year 480,000
Benefits paid to retirees 120,000
Actuarial gain 60,000
How much is the fair value of plan assets as of year-end?
c. 800,000

2. Information on an entity's plan assets is as follows:

Fair value of plan assets, Jan. 1 234,000
Fair value of plan assets, Jan. 1 299,000
Contributions to the retirement fund during the year 120,000
Benefits paid to retirees 79,000
Actuarial loss 12,000
Discount rate 10%
How much is the return on plan assets during the year?
b. 24,000

3. The actuarial valuation report of an entity shows the following information:

Present value of defined benefit obligation
(PV of DBO), Jan. 1 280,000
Current service cost 50,000
Discount rate 11%
Benefits paid to retirees 120,000
Decrease in PV of DBO during the year due to changes in
actuarial assumptions 50,000
How much is the present value of the defined benefit obligation as of year-end?
c. 190,800

4. Information on an entity's defined benefit obligation is as follows:

Present value of defined benefit obligation, Jan. 1 130,000
Present value of defined benefit obligation, Jan. 1 110,600
Discount rate 12%
Benefits paid to retirees 110,000
Actuarial loss 50,000
How much is the current service cost?
a. 25,000

5. Information on Bass Inc.'s defined benefit plan is as follows:

PV of DBO - Jan. 1, 20x1 1,200,000
FVPA-Jan.1, 20x1 960,000
Current service cost 260,000
Contributions to the fund 360,000
Benefits paid 290,000
Actuarial gain 28,000
Return on plan assets 70,000
Discount rate 9%
What amounts are reported in Bass Inc.'s 20x1 financial statements in relation to the
defined benefit plan?
Statement of financial position Statement Comprehensive income
P/L OCI
A. 150,000 liability 281,600 (11,600)

6. Information on Bach Inc.'s defined benefit plan is as follows:

Fair value of plan assets, Jan. 1 1,620,000
Present value of defined benefit obligation, Jan. 1 1,800,000
Vested past service cost 180,000
Unvested past service cost (vesting period is 5 yrs.) 270,000
Current service cost 540,000
Benefits paid to retirees during the year 360,000
Net loss on settlement of plan during the year 45,000
Actuarial gains during the period 18,000
Return on plan assets during the period 108,000
Discount rate 11%
How much is the defined benefit cost for the period?
c. 1,107,000

7. Victor Co.'s retirement plan provides for a lump sum benefit, equal to the final
monthly salary multiplied by the years of service, to employees who have reached
the age of 60 and have rendered at least five years of service. The year of
employment and the year in which the employee reaches the age of 60 are counted
as full years. Mr. Wooten, who has just turned 50, was employed during the year. Mr.
Wooten's current monthly salary is P60,000 and this is expected to increase by 2%
per year. The discount rate is 10%. How much are the (1) projected lump sum benefit
to be received by Mr. Wooten on his retirement date and (2) current service cost for
the year?
B. 804,540; 28,199

8. Using the facts in the preceding problem, how much is the present value of the
defined benefit obligation after Mr. Wooten has rendered five years of service?
A. 206,428

9. Harmonics, Inc. amended its defined benefit plan on April 6, 20x1, resulting to the
remeasurement of the present value of the defined benefit obligation from
P4,000,000 to P6,000,000. The average remaining working life of the employees is 10
years. What amount should Harmonics, Inc. recognize from the event?
a. P2,000,000 positive past service cost
10. On December 31, 20x0, Slap, Inc. announces its plan to restructure its operations,
which will result to the laying-off of 30 employees on February 28, 20x1. Each of the
employees will receive P50,000. However, those who choose to stay until March 31,
20x1 to perform wrap-up procedures will receive P62,000. Slap, Inc. expects that five
employees will stay until March 31, 20x1. How much is the provision for termination
benefits on December 31, 20x0?
c.1,500,000
CHAPTER 7
On January 1, 20x1, Sunset Co. leased a machine from April, Inc as follows:
information on the lease is:
Annual rent P200,000
Lease term ` 10 years
Useful life of machine 12 years
Implicit interest rate 10%
Lessee's incremental borrowing rate 11%
Scenario 1: Rent due at beg. of year vs. Rent due at end. of year
1. How much are the carrying amounts of the right-of-use asset and lease liability
on December 31, 20x1, if the rentals are due (1) at the beginning of each
lease year and (2) at the end of each lease year?
Rent due at beginning Rent due at end
Right-of-use-asset Lease Liability Right-of-use-asset Lease Liability
C. 1,216,625 1,266,986 1,106,022 1,151,804

2. (Continuation of Scenario 1) The machine reverts back to April, Inc, at the end of
the lease term. Sunset Co. uses the straight line method of depreciation. How much
are the lease-related expenses recognized in 20x2, if the rentals are due (1) at the
beginning of each lease year and (2) at the end of each lease year?
Rent due at beginning Rent due at end
Interest Expense Depreciation Interest ExpenseDepreciation
D. 106,699 135,181 115,180 122,891

3. (Continuation of Scenario 1) How much are the current and noncurrent portions of
the lease liability on December 31, 20x1 if the rentals are due (1) at the beginning of
each lease year and (2) at the end of each lease year?
Rent due at beginning Rent due at end
Current Noncurrent Current Noncurrent
A. 200,000 1,066986 84,820 1,066,894

Scenario 2: Residual value guarantee

4. The lease payments are due at the end of each year. Sunset Co. guarantees that
April, Inc. will realize P80,000 from selling the machine to another party at the end of
the lease term. At contract inception, Sunset Co. estimates that the fair value less
disposal costs of the machine at the end of the lease term when the machine is
reverted back to April, Inc., will be P50,000. How much are the carrying amounts of
the (1) right. of-use asset and (2) lease liability on December 31, 20x1?
a. 1,116,431; 1,164,527
5. (Continuation of Scenario 2) In the first two years of the lease Sunset Co. was not
able to use the machine as much as expected, and Sunset Co. foresees this to persist
in the future Accordingly, on January 4, 20x3, Sunset Co. reassesses its obligation on
the residual value guarantee and revises its estimate of the machine's fair value less
disposal costs at the end of the lease term from P50,000 to P70,000. How much are
the carrying amounts of the (1) right-of-use asset and (2) lease liability on December
31, 20x3?
B.860,171; 978,815

Scenario 3: Purchase option

6. The lease payments are due at the beginning of each year. The lease contract
provides Sunset Co. an option to purchase the machine at the end of the lease term
for P100,000. Sunset Co. is reasonably certain to the exercise the option. What
amount of interest expense should Sunset Co. recognize on the lease in 20x1?
c. 119,036

Scenario 4: Initial direct costs

7. Additional information:
 The lease payments are due at the beginning of each year.
 Sunset Co. incurred initial direct costs of P30,000 in negotiating the lease.
 The annual rent includes P5,000 insurance cost. The insurance is intended to
protect April, Inc.'s investment in the machine; and therefore, does not transfer
any good or service to Sunset Co. Sunset Co. has the option to purchase the
machine at the end of the lease term by paying P380,000, which is expected to
be approximately
 equal to the machine's fair value on that date. At lease commencement, Sunset
Co. is reasonably certain to exercise the purchase option

How much are the carrying amounts of the (1) right-of-use asset . and (2) lease
liability on December 31, 20x1?
A. 1,400,952; 1,428,142

Scenario 5 Separating the components of a contract

8. The annual rent is due at the beginning of each year and is itemized in the contract
as follows: P156,000 for rent, P39,000 for maintenance and P5,000 of administrative
tasks. The itemized amounts reflect the relative stand-alone prices of the
components. How much are the (1) lease liability as of January 1,201 and (2) total
lease-related expenses for 20x1?
c. 921,444; 240,288

9. (Continuation of Scenario 5) In addition, the contract requires Sunset Co. to

restore the equipment to its original condition at end of the lease term. At contract
inception, Sunset Co. estimates that the fair value of its restoration obligation is
P100,000. How much are the (1) right-of-use asset and (2) lease liability as of January
1, 20x1?
A. ,181,444; 921,444

Scenario 6: Variable lease payment based on index

10. The lease payments, which are due at the start of each year, are linked to the
Consumer Price Index (CPI) and will be updated after every two years. The CPIs are:
100 on Jan. 1, 20x1; 105 on Dec. 31, 20x1; and 108 on Dec. 31, 20x2. How much are
the (1) lease liability and (2) right-of-use asset on Dec. 31, 20x3?
d. 1,156,736; 1,028,420

Scenario 7: Recognition exemption/Lease bonus/Contingent rent

11. Use the fact pattern above except that the lease term is only three (3) years (ie.,
20x1 to 20x3). Additional information is as follows:
 Lease payments are due at the end of each year.
 The P200,000 annual rent increases by P30,000 every year starting in 20x2.
 April, Inc. grants the first three months in the lease as rent free. This will reduce
the payment due for 20x1.
 Sunset Co. pays April, Inc. a lease bonus of P20,000 at contract inception.
 Sunset Co. agrees to pay an additional rent equal to 5% of its excess sales over
P8,000,000. Sunset Co.'s sales for 20x1 and 20x2 are 19,000,000 and
P10,000,000, respectively. The additional rents for 20x1 and 20x2 were paid on
Dec. 31 of those years.
Under the general recognition, how much are the (1) lease liability on Dec. 31, 20x1
and (2) total lease-related expenses for 20x1?
a. 423,968; 282,775

12. (Continuation of Scenario 7) Under the recognition exemption for low-value

assets, what amounts should Sunset Co. report in its December 31, 20x2
financial statements in respect of the lease?
d. P40,000 rent payable and P320,000 rent expense

Scenario 8: Depreciation of Right-of-use asset

13. The lease payments are due at the beginning of each year.
Scenario 8.1: Sunset Co. guarantees that the residual value of the underlying asset
will be at least P100,000 at the end of the 10-year lease.
Scenario 8.2: Sunset Co. has the option to purchase the underlying asset for
P100,000 at the end of the 10-year lea Sunset Co. is reasonably certain to exercise
the option.

At contract inception, Sunset Co. estimates the following values: P80,000 at the end
of the 10th year and P60,000 at the end of the 12 year. What amount of depreciation
will Sunset C recognize under each of the foregoing scenarios?
Scenario 8.1 Scenario 8.2
B. 135,952 110,863

Scenario 9: Lease modification

14. At the end of the third year, Sunset Co. and April, Inc amended the lease contract
to include the lease of an additional machine for the remaining 7-year term of the
lease at an additional rent of P200,000 per year. The additional rent reflects the
market rate for the lease of the additional machine. How should Sunset Co. account
for the lease modification?
a. as a separate lease
Reconstruction of information
15. The noncurrent liabilities section of Calm Co.'s statement of financial position as
of December 31, 20x1 reported a lease liability of P1,066,986, net of current portion.
Lease payments of P200,000 are due every January 1st of the year. Calm Co.'s
incremental borrowing rate is 11% and the lessor's implicit rate, which is known to
Calm Co., is 10%. What amount of lease liability, net of current portion, should Calm
Co. report on December 31, 20x2?
b. 973,685
CHAPTER 8

1. Seek, Inc. leases out a brand new asset to Found Co. Information on the lease is as
follows:
Annual rental payable at the end of each year P80,000
Lease term 4 years
Useful life of the asset 7 years
Purchase cost of the asset (equal to current price) P600,000
Discount rate10%
The lease does not provide a transfer of ownership or a purchase option. The asset is
not specialized in nature. What amount of asset resulting from the lease should Seek,
Inc. recognize at the lease commencement date?
a. 253,589
b. 276,272
c. 313,098
d.0

2. On January 1, 20x1, Inverse Co. leased a piece of equipment to Reimburse, Inc.

Information on the lease is as follows:
Cost of equipment 600,000
Useful life of equipment 5 years
Lease term 4 years
Annual rental payable at the end of each year P220,000
The annual lease payment includes P18,098 pertaining to non-lease component. This
amount reflects the stand alone selling price of the service. Inverse Co. incurred
P40,000 initial direct costs in negotiating the lease. The interest rate implicit in the
lease is 10%. How much are (1) the total interest revenue that Inverse Co. will
recognize over the lease term and (2) the carrying amount of the net investment in
the lease on December 31, 20x1?
a. 172,342; 462,098
b. 167,608; 502,098
c. 176,904; 542,098
d. 167,608; 643,224

3. Glade Co. leases computer equipment to customers under direct-financing leases.

The equipment has no residual value at the end of the lease and the leases do not
contain bargain purchase options. Glade wishes to earn 8% interest on a five year
lease of equipment with a fair value of P323,400. The first rental payment is due at
the lease commencement. What is the total amount of interest revenue that Glade
will earn over the life of the lease?
a. 51,600
b. 75,000
c. 129,360
d. 139,450

4. On January 1, 20x1, Chirp Co. leased out to Tweet, Inc. a machine, which Chirp Co.
has recently acquired for P394,833. The machine has an estimated useful life of 5
years. The lease contract states an annual rent of P120,000 due at the beginning of
each year over a lease term of 4 years. Chirp Co. incurred initial direct costs of
P25,000 in negotiating the lease. The machine reverts back to Chirp Co. at the end of
the lease, at which time the residual value of the machine is expected to be P10,000.
What is the interest rate implicit in the lease and how much is the carrying amount of
the net investment in the lease on December 31, 20x1?
a. 10%; P212,815
b. 11%; P332,815
c. 11%; P212,815
d. 12%; P298,564

5. Legato Co. leased out to Staccato, Inc. a machine with a carrying amount of
P593,685 and a remaining useful life of 5 years. Legato Co. incurred initial direct costs
of P25,000 in negotiating the lease. The machine reverts back to Legato Co. at the
end of the lease, at which time the residual value of the machine is expected to be
P10,000. The lease term is 4 years and annual rentals are due at the beginning of
each year. If Legato Co. wants to earn a fair return on its net investment based on the
current market rate of 12%, what amount of annual rental should Legato Co. charge
Staccato, Inc.?
a. 180,000
b. 170,000
c. 120,000
d. 100,000

6. Peg Co. leased equipment from Howe Corp. on July 1, 20x5, for an eight-year
period expiring June 30, 2x03. Equal payments under the lease are P600,000 and are
due on July 1 of each year. The first payment was made on July 1, 20x5. The rate of
interest contemplated by Peg and Howe is 10%. The cash selling price of the
equipment is P3,520,000, and the cost of the equipment on Howe's accounting
records is P2,800,000. The lease is appropriately recorded as a sales-type lease. What
are the amounts of profit on the sale and interest revenue that Howe should record
for the year ended December 31, 20x5?
Profit on sale Interest revenue Profit on sale Interest revenue
b. 720,000 146,000

7. Howe Co. leased equipment to Kew Corp. on January 2, 20x9, for an eight-year
period expiring December 31, 2x16. Equal payments under the lease are P600,000
and are due on January 2 of each year. The first payment was made on January 2,
20x9. The list selling price of the equipment is P3,520,000 and its carrying cost on
Howe's books is P2,800,000. The lease is appropriately accounted for as a sales-type
lease. The present value of the lease payments at an imputed interest rate of 12%
(the market rate) is P3,300,000. What amount of profit on the sale should Howe
report for the year ended December 31, 20x9?
a. 720,000
b. 500,000
c. 90,000
d. 0

8. Farm Co. leased equipment to Union Co. on July 1, 20x1, and properly recorded
the sales-type lease at P135,000, the present value of the lease payments discounted
at 10%. The first of eight annual lease payments of P20,000 due at the beginning of
each year was received and recorded on July 3, 20x1. Farm had purchased the
equipment for P110,000. What amount of interest revenue from the lease should
Farm report in its 20x1 income statement?
a. 0
b. 5,500
c. 5,750
d. 6,750

9. Winn Co. manufactures equipment that is sold or leased. On December 31, 20x6,
Winn leased equipment to Bart for a five-year period ending December 31, 2x11, at
which date ownership of the leased asset will be transferred to Bart. Equal payments
under the lease are P22,000 (including P2,000 payment for non-lease components of
the contract) and are due on December 31 of each year. The first payment was made
on December 31, 20x6. Collectability of the remaining lease payments is reasonably
assured, and Winn has no material cost uncertainties. The normal sales price of the
equipment is P77,000, and the cost is P60,000. For the year ended December 31,
20x6, what amount of income should Winn realize from the lease transaction?
a. 17,000
b. 22,000
c. 23,000
d. 33,000

Use the following information for the next two questions: Pizzicato Co., a dealer,
leases a brand new machine to Prestissimo, Inc. The machine is classified as
inventory in Pizzicato's books and has a carrying amount of P1,500,000. The useful
life of the machine is 5 years. The lease term is 4 years and the annual rent, due at
the beginning of each year, is P600,000. Pizzicato Co. incurred direct costs of P20,000
in negotiating the lease. The market rate of interest is 10%. The machine reverts back
to Pizzicato at the end of the lease term, at which time the machine is expected to
have a residual value of P180,000. Pizzcato accounts for the lease as a sales type
lease.

10. What amounts for the following should Pizzicato Co. report in Year 1 of the lease
assuming the residual value is guaranteed?
a. 2,215,053 1,500,000 695,053 161,505 1,776,558
11. What amounts for the following should Pizzicato Co. report in Year 1 of the lease
assuming the residual value is unguaranteed?
d. 2,092,111 1,377,058 161,505 1,776,558

12. An office equipment representative has a machine for sale or lease. If you buy the
machine, the cost is P7,596. If you lease the machine, you will have to sign a non-
cancelable lease and make 5 payments of P2,000 each. At the time of the last
payment you will receive title to the machine. The first payment will be made on the
first day of the lease. The interest rate implicit in this lease is approximately
a. 10%
b. 12%
c. Between 10% and 12%
d. 16%

13. Flight Co., a manufacturer, offers brand new machines either for sale or for lease.
Flight Co. enters into a lease with Bumblebee, Inc. for a particular machine with cash
selling price of P2,738,081 and a manufacturing cost of P1,500,000. The lease term is
4 years and annual rentals are due at the beginning of each year. The machine has a
useful life of 5 years and will revert back to Flight Co. at the end of the lease, at
which time the machine's residual value is expected to be P180,000. Flight Co.
accounts for the lease as a sales type lease. Flight Co.'s internal rate of return is 10%.
What amount of annual rental should Flight Co. charge Bumblebee, Inc. if the
residual value is (a) guaranteed and (b) unguaranteed?
a. 750,000; 785,259
b. 750,000; 750,000
c. 600,000; 600,000
d. 600,000; 678,250

14. On July 1, 20x6, Gee, Inc., leased a delivery truck from Marr Corp. under a 3-year
operating lease. Total rent for the term of the lease will be P36,000, payable as
follows:
12 months at P500-$6,000
12 months at P750-P9,000
12 months at P1,750-P21,000
All payments were made when due. In Marr's June 30, 20x8, balance sheet, the
accrued rent receivable should be reported as
a. 0
b. 9,000
c. 12,000
d. 21,000

15. Cello Co. sells a building, with carrying amount of P1,000,000, to Violin Co. for
cash of P1,800,000, which is equal to the building's fair value at that date. At the
same time, Cello Co. leases the building from Violin Co. for an annual payment of
P120,000 (due at the end of each year) over a lease term of 18 years. The interest
rate implicit in the lease is 4.5%. The transfer qualifies as a sale under PFRS 15. What
amount of gain should Cello Co. recognize on the transaction?
d. 0
c. 151,467
b. 298,336
a. 800,000

CHAPTER 9
Use the following information for the next two questions:
Truck Co. has the following information for the year 20x1:
Pretax income 324,000
Impairment loss on goodwill 40,000
Fines and penalties on violation of law 16,000
Interest income on bank deposits 5,000
Excess of tax depreciation over book depreciation 28,000
Excess of premium expense over allowed tax deduction 25,000
Advances from customers (taxable upon receipt) 18,000
Quarterly income tax payments (1st quarter to 3rd quarter) 29,000
Income tax rate 30%
Beginning balance of taxable temporary difference 20,000
Beginning balance of deductible temporary difference 15,000

1. How much are the following?

Income tax expense Current tax expense Deferred tax expense (benefit)
a. 112,500 117,000 4,500
b. 97,500 103,200 3,400
C. 112,500 117,000 (4,500)
d. 97,500 84,700 (4,300)

2. How much are year-end balances of the following?

Current tax liability Deferred tax liability Deferred tax asset
a. 117,000 8,400 12,900
b. 108,000 11,800 16,900
c. 92,000 12,200 15,600
d. 88,000 14,400 17,400

3. The following information pertains to Pechay Co.:

Income statement Income tax return
Sales revenue 1,900,000 1,250,000
Rent income 320,000 540,000
Interest income on bank deposits 7,000
Depreciation expense 280,000 600,000
Insurance expense (non-deductible) 50,000
Warranty expense 280,000 120,000
Impairment loss (non-deductible) 20,000
Profit for the year, before tax 2,700,000
Income tax rate 30%
How much are the (1) current tax expense and (2) profit for the year, after tax?
a. 651,900; 1,934,100
b. 651,900; 1,871,100
c. 651,900; 2,111,100
d. 828,900; 1,934,100

4. For the year ended December 31, 20x1, Mont Co.'s books showed income of
P600,000 before provision for income tax expense. To compute taxable income for
taxation purposes, the following items should be noted:
Income from exempt municipal bonds 60,000
Depreciation deducted for tax purposes in excess of depreciation recorded on the
books 120,000
Proceeds received from life insurance on death of officer 100,000
Estimated tax payments
Enacted corporate tax rate 30%

What amount should Mont report at December 31, 20x1, as its income tax liability?
a. 96,000
b. 114,000
c. 156,000
d. 162,000

5. Workout Co.'s 20x1 comparative financial statements reported the following:

20x1 20x0
Deferred tax asset 9,600 2,700
Deferred tax liability 6,600 3,600
Income tax expense 40,800
What amount of current tax expense would have been reported in Workout Co.'s
20x1 income tax return?
a. 36,900
b. 42,500
c. 44,700
d. 47,300

6. Shred Co.'s 20x1 financial statements reported the following:

20x1 20x0
Income tax payable 12,880 8,960
Deferred tax asset 15,360 4,320
Deferred tax liability 10,560 5,760
Payments for income tax 67,600 63,800
What amount of income tax expense would have been reported in Shred Co.'s 20x1
income statement?
a. 71,520
b. 69,040
c. 65,280
d. 59,040
7. Gloomy Summer Afternoon Co. has the following information for the year:
Taxable income 180,000
Political contributions (not tax-deductible) 20,000
Interest income already subjected to final tax 10,000
Excess revenue recognized over taxable amount 60,000
Excess of warranty expense over allowed tax deduction 9,000
Excess of book depreciation over tax depreciation 12,000

How much was Gloomy's pretax income for the year?

a. 191,000
b. 198,000
c. 207,000
d. 209,000

8. Soil Co. reported a pretax profit of P4,000,000 for the current year. Soil Co. is
subject to an income tax rate of 30%. Soil Co. had no temporary differences at the
beginning of the year. The only temporary differences at year-end relate to the
following:
Carrying amount Tax base
Trade notes receivable 2,000,000
Building, net 4,000,000 2,400,000
Provision for premium liability 800,000

How much are the following?

Current tax expense Deferred tax liability Deferred tax asset
a. 360,000 1,080,000 240,000
b. 320,000 980,000 180,000
c. 280,000 880,000 160,000
d. 270,000 860,000 120,000

9. Baby Boy Co. reported a pretax income of P2,600,000 for the current year. Baby
Boy Co.'s income tax rate is 30%. Baby Boy Co.'s deferred tax asset and deferred tax
liability accounts had opening balances of P64,000 and P270,000, respectively.
Information at year-end is as follows:
Equipment, acquired two years ago, has a carrying amount of P800,000. A straight-
line depreciation rate of 10% is used for financial reporting. However, the sum-of-
the-years' digits method is used for taxation purposes. The equipment has no
residual value.
Trade notes receivable has a carrying amount of P1,000,000. The related revenue will
be taxed when collected.
Unearned rent income has a carrying amount of P540,000. The related rent income
was taxed on a cash basis.
Interest payable has a carrying amount of P60,000. The related interest expense was
accrued during the year; however, both the recognition and future repayment of the
interest do not have a tax consequence.
Dividends payable has a carrying amount of P280,000. The related dividends are tax-
exempt, and are not recognized as expense under financial reporting.
How much are the following?
Current tax expense Deferred tax asset, end. Deferred tax liability, end.
a. 822,363 343,637 162,000
b. 804,926 333,732 168,000
c. 792,763 343,637 162,000
d. 792,763 343,637 168,000
10. Information on Bark Co.'s operations during the year is as follows:
Income statement Income tax return
Revenue 1,800,000 900,000
Gain on involuntary conversion 20,000
Unrealized gain 12,000
Impairment loss on note receivable 100,000 100,000
Bad debts expense 60,000
Retirement benefits expense 280,000 420,000
R&D expense 60,000 20,000
Profit for the year, before tax 400,000
Income tax rate 30%
An involuntary conversion occurs when an insured property is destroyed and is
replaced with a similar property or is converted into cash. The gain (excess of the
replacement asset's fair value or insurance proceeds over the replaced asset's
carrying amount) is non-taxable.
The unrealized gain pertains to the change in the fair value of held for trading
securities. Realized gains and losses from disposals of the securities have tax
consequences. There were no temporary differences at the start of the year.
Bark Co. expects to realize the economic benefits of any operating loss carryforward.
How much are the year-end balances of deferred tax deferred tax asset, respectively?
liability and
a. 1,052,000; 100,000
b. 1,052,000; 30,000
c. 315,600; 30,000
d. 315,600; 201,600

11. Leer Corp.'s pretax income in 20x7 was P100,000. The temporary differences
between amounts reported in the financial statements and the tax return are as
follows:
Depreciation in the financial statements was P8,000 more than tax depreciation.
The equity method of accounting resulting in financial statement income of P35,000.
A P25,000 dividend was received during the year, which is eligible for the 80%
dividends received deduction.
Leer's effective income tax rate was 30% in 20x7. In its 20x7 income statement, Leer
should report a current provision for income taxes of
a. 26,400
b. 23,400
c. 21,900
d. 18,600
12. Bike Co.'s pretax profit in 20x2 is P420,000. Bike's income tax rate is 30%. The
only temporary differences on December 31, 20x2 relate to the following:
Revenue of P920,000 recognized in 20x1 was collected and taxed in 20x2.
Warranty expense of P140,000 recognized in 20x1 was settled and deducted for tax
purposes in 20x2.
How much is Bike Co.'s current tax expense in 20x2?
a. 360,000
b. 280,000
c. 192,000
d. 108,000

13. Crave Co. had year-end balances of P190,000 for income tax payable and
P304,000 for deferred determining the need for a valuation account. Crave Co.
determined that it is more likely than not that 30% of tax asset before deductible
temporary differences will not be realized. Crave Co. reported a deferred tax asset of
P197,600 in the preceding year, and no deferred tax liability in both the preceding
and current years. There were no payments for income tax during the year. What
amount of income tax expense should Crave Co. report for the year?
a. 174,800
b. 185,500
c. 190,000
d. 205,200

14. An entity accrued warranty expense of P300,000 in 20x1. Warranty costs are tax-
deductible only when paid. Warranty costs of P125,000 were paid in 20x1. It is
expected that the remaining accrued warranty costs will be paid as follows: P100,000
in 20x2 and P75,000 in 20x3. The income tax rate in 20x1 is 30%. A new tax law was
enacted late in 20x1 which revises the tax rate to 32% for 20x2 and 35% for 20x3 and
years thereafter. What amount of deferred tax asset is recognized from the warranty
as of December 31, 20x1?
a. 58,250
b. 62,950
c. 88,550
d. 95,750

15. Chirp Co.'s information for 20x1 is as follows:

Profit before tax 1,000,000
Investment income from tax-exempt securities 60,000
Proceeds from life insurance of key employee 120,000
Excess of tax depreciation over book depreciation 150,000
Share in profit of associate 580,000
Accrued expenses (tax-deductible only when paid) 80,000
Estimated tax payments during 20x1
27,000
The insurance proceeds are non-taxable.
The share in equity method. This is non-taxable, as well as dividends profit of
associate was recognized using the received from the associate.
There were no temporary differences as of January 1, 20x1.
The income tax rates are 30% in 20x1 and 35% in 20x2 and in succeeding years.
How much is the income tax expense for 20x1?
a. 51,000
b. 57,500
c. 72,000
d. 75,500
CHAPTER 10
1. Thunder Co.'s adjusted trial balance on December 31, 20x1, includes the following
account balances:
Ordinary shares, 15 par
Subscribed share capital
Share premium 1,120,000
Subscription receivable 80,000
Cumulative losses on translation of foreign operation 60,000
Retained earnings – appropriated 320,000
Retained earnings- unappropriated 700,000
Treasury shares, at cost 200,000
What amount should Thunder report as total shareholders' equity in its December
31, 20x1 statement of financial position?
a. 2,700,000
b. 2,760,000
c. 2,860,000
d. 3,380,000

2. Morning Co. was incorporated on January 1, 20x1 with an authorized capitalization

is P1,000,000 divided into 100,000 shares with par value of P10 per share. The
following were the share-related transactions of Morning Co. during the year:
Cash subscriptions of 30,000 shares at P12 per share.
Subscriptions of 40,000 shares at P18 per share. Seventy-five the percent of the
subscription price was collected during year.
How much are the (1) share premium and (2) total equity after recording the
transactions above?
a. 380,000; 900,000
c. 60,000; 1,080,000
b. 380,000; 1,080,000
d. 60,000; 1,260,000

3. Entity A's total shareholders' equity was 900,000 before recording the following
share transactions:
Received cash subscriptions for 10,000 shares with par value of 1 at P14 per share.
Share issuance costs amounted to P2,000.
Received subscriptions for 20,000 shares at P20 per share. Twenty-five percent down
payment was collected on subscription date.
Collected the remaining unpaid subscription price of 15,000 out of the 20,000
subscribed shares and issued the related share certificates. Share issuance costs
amounted to $3,000.
How much is the balance of Entity A's total shareholders' equity after recording the
transactions above?
a. 1,490,000
b. 1,510,000
c. 1,360,000
d. 1,610,000

4. Peace Co. had the following equity transactions during 20x1:

Jan. 3 Received approval of authorized capitalization of 10,000 preference shares
with P50 par value per share and 200,000 ordinary shares with P10 par value per
share.
Jan. 5 5,000 preference shares (PS) were issued for P52 per share and 60,000
ordinary shares were issued for P14 per share.
Jan. 24 2,000 ordinary shares (OS) were issued to Peace Co.'s lawyer. The fair value of
the shares was P16 per share. Peace Co. charged the amount to the "Organization
costs" account.
Feb. 3 80,000 ordinary shares were issued in exchange for land and building that
have fair values of P250,000 and P1,000,000, respectively.
Sept. 12 Received subscription for 3,000 shares of preference shares at 153 per
share. A 40% down payment was collected.
Oct. 1 Collected P15,900 from the Sept. 12 subscription.

How much are the following on December 31, 20x1?

Share premium-OS Share premium-PS Total contributed capital
a. 19,000 702,000 2,541,000
b. 10,000 690,000 2,429,500
c. 19,000 702,000 2,461,500
d. 10,000 690,000 2,509,000

5. Frog Co.'s equity consists of the following:

Ordinary share capital 1,600,000
Subscribed share capital 200,000
Share premium 600,000
Subscription receivable (100,000)
Retained earnings 800,000
How much is Frog's legal capital assuming the ordinary shares are (1) par value
shares and (2) no-par value shares?
a. 1,500,000; 2,100,000
c. 1,700,000; 2,300,000
b. 1,600,000; 2,200,000
d. 1,800,000; 2,400,000

6. Lightning Co. was organized on January 2, 20x1, with 50,000, P10 par value,
authorized ordinary share capitalization. Information on transactions during the year
is as follows:
Jan. 2 25,000 shares were subscribed at P15 per share. A 50% down
Jan. 2 820,000 of the share subscription on Jan. 2 were fully paid and the related
share certificates were issued.
payment was received.
June 30 Reported semi-annual profit of $2,000,000.
July 14 Reacquired 5,000 from the issued shares at P17 per share.
Dec. 27 Reissued half of the treasury shares at 120 per share.
What amounts of (1) ordinary share capital and (2) total share premium should
Lightning Co. report on December 31, 20x1?
a. 250,000; 132,500
b. 200,000; 132,500
c. 250,000; 117,500
d. 200,000; 125,000

7. Entity A reacquired 10,000 of its own shares for P50. The shares have par value of
P10 and were originally issued at P15 per share. This was Entity A's first treasury
share transaction. Subsequently, Entity A reissued the 10,000 shares at 48 per share.
The entry for the reissuance includes a
a. debit to Retained earnings for P20,000.
b. credit to Cash for $480,000.
c. debit to Share premium for P50,000.
d. debit to Treasury shares for $500,000.

8. Night Co. was organized during the year. Upon incorporation, Night Co. issued
300,000 shares with par value per share of P10 for $15 per share. After three months
of successful initial operations, Night Co. reacquired 10,000 of its own shares for $50.
Night Co. subsequently reissued half of the reacquired shares at $58 per share and,
before year-end, retired the other half. The journal entry to record the retirement of
the shares includes which of the following? (Hint: Provide the entries for both the
reissuance and the retirement)
a. Debit to Retained earnings for $175,000
b. Credit to Share premium - retirement for P40,000
c. Debit to Share premium for $50,000
d. Debit to Retained earnings for P135,000

9. Storm Co.'s equity as of December 31, 20x1 was as follows:

Ordinary shares (P2 par value; 1,000,000 shares authorized) 1,700,000
Share premium 2,550,000
Retained earnings 6,700,000
On January 2, 20x2, Storm Co. purchased and retired 150,000 of its shares for
P1,200,000. Immediately after the retirement, how much are the balances of (1)
share premium and (2) total shareholders' equity?
a. 2,100,000; 9,750,000
b. 2,550,000; 9,750,000
c. 2,100,000; 10,950,000
d. 2,550,000; 10,650,000
10. Clouds Co. reacquires 1,000 of its own shares for P25 per share and immediately
retires them. The shares have a par value of $10 per share and were originally issued
at $30 per share. The journal entry to record the retirement of the shares includes
which of the following?
a. Debit to Retained earnings for $5,000
b. Credit to Treasury shares for P30,000
C. Credit to Share capital for $10,000
d. Credit to Share premium - retirement for $5,000

11. Crawler Co. issued 200 preference shares (P130 par) and 1,000 ordinary shares
(P100 par) for P200,000. What amount of share premium is attributed to the
preference shares assuming (1) the fair values per share are P150 for the preference
shares and P120 for the ordinary shares (proportional method), and (2) only the
P120 fair value of the ordinary shares is determinable (incremental method)?
Proportional Incremental
a. 60,000 20,000
b. 160,000 80,000
c. 14,000 54,000
d. 40,000 80,000

12. On September 21, 20x1, West Corp. distributed one right for each of its 120,000
outstanding ordinary shares. Each right was exercisable for the purchase of 1/100 of
a share of West's P50 variable rate preference share at an exercise price of P80 per
share. On March 20, 20x2, none of the rights had been exercised, and West
redeemed them by paying each stockholder P0.10 per right. As a result of this
redemption, West's stockholders' equity was reduced by
a. 120
b. 2,400
c. 12,000
d. 36,000

13. Calm Co. reported share premium of P280,000 on December 31, 20x0, Calm Co.
had the following transactions during 20x1:
Issued 3,000 (P10 par) callable preference shares for P18 per share.
Issued 2,000 (P20 par) convertible preference shares for P25
per share.
Called-in 2,000 of the callable preference shares at P17 per share.
Converted 1,000 of the convertible preference shares into 1,000 ordinary shares with
a par value of P25 per share.
What total amount of share premium should Calm Co. report in its December 31,
20x1 statement of financial position?
a. 331,000
b. 295,000
c. 286,000
d. 274,000
14. Free Co. issued 4,000 (P80 par) preference shares for P124 per share. One
detachable warrant is attached to each of the preference shares. Two warrants
enable the holder to purchase one ordinary share for P10 per share. What amount of
share premium is attributed to the preference shares assuming (1) the preference
shares and the warrants have stand-alone fair values of P100 and P25, respectively,
and (2) the fair values of the preference shares and warrants are not determinable;
however, the ordinary shares have a fair value of P58 per share?
a. 72,600; 82,000
b. 82,000; 72,600
c. 76,800; 96,000
d. 78,600; 92,000

15. Entity A receives 20,000 shares with par value of P100 and fair value of P210 on
November 2, 20x1. The shares have fair value of P220 per share on December 31,
20x1. How much additional capital is recognized in Entity A's December 31, 20x1
balance sheet as having resulted from the receipt of the donated shares?
a. 2,000,000
b. 4,200,000
c. 4,400,000
d. 0
CHAPTER 11
1. Bliss Co. has 260,000 outstanding (P10 par) ordinary shares and retained earnings
balance of P1,780,000 on January 1, 20x1. During the year, Bliss Co. acquired 2,000
treasury shares at P18 per share and reissued them at P22 before year-end. Bliss Co.
earned profit of P2,260,000 in 20x1. On December 31, 20x1, Bliss Co. declared P8
cash dividends per share and "1 for-20" stock dividends, both to be distributed on
February 1, 20x2. The fair value per share on Dec. 31, 20x1 was P22. What amount of
retained earnings should Bliss Co. report on December 31, 20x1?
a. 1,582,000
d. 1,642,000
c. 1,674,000
d. 1,682,000

2. On Jan. 1, 20x1, Expertise Co. had 100,000 outstanding (P10 par) ordinary shares.
The following transactions occurred during 20x1:
May. 21, 20x1 Reacquired 2,000 treasury shares at P16 per share
July 20, 20x1 Issued 30,000 new shares at P17 per share.
Sept. 21, 20x1 Declared a "2-for-1" stock split
Oct. 5, 20x1 Reissued 1,000 treasury shares at P9 per share.
Dec. 19, 20x1 Declared cash dividends of P3 per share and "2-for-5" stock dividends.
The fair value per share was P8.
What total amount is debited to retained earnings on Dec. 19,20x1?
a. 1,285,000
b. 1,378,000
c. 1,593,400
d. 1,799,000

3. On April 1, 20x1, Heritage Co. declared 50% scrip dividends to its 18,000
outstanding (P100 par) ordinary shares. The scrip dividends bear a 10% per annum
interest rate and are payable on August 31, 20x1. What total amount of cash is paid
to the shareholders on August 31, 20x1?
a. 945,000
b. 937,500
c. 900,000
d. 875,000

4. Hard Co. declared as property dividends inventories with carrying amount of

P2,000,000. The inventories have fair values of P2,200,000 on declaration date and
P2,400,000 on distribution date. The fair values approximate the net realizable
values. How much is the gain (loss) recognized in profit or loss on distribution date?
a. 400,000
b. 200,000
c. (200,000)
d. 0

Use the following information for the next four questions:

On December 1, 20x1, Love Co. declared the distribution of its investment in
associate, consisting of 100,000 shares of Happy Co., as property dividends. The
investment has a carrying amount of P1,800,000. The date of distribution is on
January 15, 20x2. The investment has the following fair values: P1,650,000 on
December 1,20x1; P1,950,000 on Dec. 31, 20x1, and P2,050,000 on Jan. 15, 20x2.
The investment qualifies for accounting under PFRS 5. The costs to distribute are
negligible.

5. What amount is debited to retained earnings on Dec. 1, 20x1?

a. 1,800,000
b. 1,650,000
c. 150,000
d. 0

6. What amount of gain (loss) is recognized in profit or loss on Dec. 31, 20x1?
a. 300,000
b. 200,000
c. 150,000
d. 0

7. How much is the gain (loss) on the distribution of dividends?

a. 300,000
b. 250,000
c. 100,000
d. 0

8. What is the net effect of the dividend declaration and distribution to Love Co.'s
retained earnings?
a. 1,800,000 Dr.
b. 1,650,000 Dr.
c. 250,000 Cr.
d.0

9. Circulation Co. has 10,000 (P100 par) outstanding shares at the beginning of the
year. Circulation Co. declared two stock dividends during the year - a "2-for-10" on
July 1 and a "1. for-20" on Dec. 31. The stock dividends were distributed thirty days
after their declaration. The fair values per share were P150 on July 1 and P120 on
Dec. 31. What total amount was debited to retained earnings for the share
dividends?
a. 302,000
b. 272,000
c. 260,000
d. 200,000

10. Wet Co. has total shareholders' equity of P3,670,000 as of Jan. 1, 20x1. Wet Co.
has never declared dividends since it started operations two years ago. Information
for 20x1 is as follows:
Jan. 7 Acquired 3,000 ordinary shares, originally issued at the par value of P5 per
share, for P10 per share and immediately retired them.
June 30 Reported semi-annual profit of P2,080,000. July 20 Declared a 1-for-2
reverse stock split on the 180,000 outstanding ordinary shares (P5 par).
Sept. 21 Acquired 500 ordinary shares (P10 par) for P25 per share to be held in
treasury.
Oct. 20 Reissued 300 treasury shares for P30 per share.
Nov. 23 Issued 1,000 new ordinary shares for P32 per share.
Dec. 31 Reported an annual profit of P4,260,000.
Dec, 31 Declared and paid all accruing dividends to its 50,000 outstanding, 10%,
noncumulative preference shares (P8 par) and P40 cash dividends per share to its
ordinary shares.
How much is Wet Co.'s total shareholders' equity on Dec. 31, 20x1?
a. 3,864,500
b. 4,180,500
c. 4,256,500
d. 6,336,500

11. Headache Co. has outstanding 100,000 shares of P100 par value 6% cumulative
preferred stock and 200,000 shares of P10 par value common stock. Dividends are in
arrears for two years, including the current year. If Headache Co. declares a total of
P1,000,000 cash dividends, how much would each common stock receive?
a. 200,000
b. 1
c. 60
d. 0

12. Water Co. has 100,000 (P10 par), 5% cumulative preference shares and 300,000
(P5 par) ordinary shares outstanding on Dec. 31, 20x2. There were no unpaid
dividends as of January 1, 20x0. Water Co. declared dividends of P40,000 in 20x0 and
P50,000 in 20x1. If Water Co. declares total cash dividends of P75,000 on Dec. 31,
20x2, how much would each ordinary share receive?
a. 15,000
b. 0.05
c. 20
d. 0

13. Fast Co. has 100,000 (P50 par) 10% preference shares and 500,000 (P40 par)
ordinary shares outstanding. Dividends are in arrears for two years. If Fast Co.
declares P3,500,000 cash dividends, what total amount would the ordinary
shareholders receive if the preference shares are: (1) Noncumulative; (2) Cumulative;
(3) Noncumulative and participating; and (4) Cumulative and participating?
a. (1) 3,000,000; (2) 2,500,000; (3) 2,800,000; and (4) 2,200,000
b. (1) 2,300,000; (2) 2,000,000; (3) 2,400,000; and (4) 2,400,000
c. (1) 2,800,000; (2) 2,800,000; (3) 2,200,000; and (4) 2,000,000
d. (1) 3,000,000; (2) 2,500,000; (3) 2,800,000; and (4) 2,400,000

14. Late Co. has 100,000 (P50 par, cumulative and participating) 10% preference
shares, 50,000 (P60 par, noncumulative and participating) 5% preference shares and
250,000 (P40 par) ordinary shares. Dividends are in arrears for 3 years, inclusive of
the current year. If Late Co. declares P4,000,000 cash dividends in the current year,
how much dividends would be paid to the ordinary shareholders?
a. 1,433,228
b. 1,527,778
c. 1,620,000
d. 1,756,778

15. Sigh Co. has outstanding 20,000, P200 par, 10% cumulative and participating
preference shares and 160,000, P100 par, ordinary shares. Dividends are in arrears
for three years, including the current year. If Sigh Co. pays P14 cash dividends per
share to its ordinary shareholders, what amount per share would the preference
shareholders receive?
a. 180
b. 68
c. 54
c. 28

16. Signal Co. declared one-year cash dividends on its 100,000 outstanding, P10 par
value, 6% redeemable preference shares. The fair value per share was P12. What
amount is debited to the retained earnings account on date of declaration?
a. 1,200,000
b. 72,000
c. 60,000
d. 0

17. Slippery Co. declared P800,000 cash dividends, 20% of which represented
liquidating dividends. The entry on the date of declaration includes a
a. debit to retained earnings for P160,000.
b. credit to retained earnings for P160,000.
c. debit to capital liquidated account for P160,000.
d. credit to capital liquidated account for P160,000.

18. Pain Co. has 100,000 (P50 par) 6% cumulative preference shares and 250,000
(P40 par) ordinary shares outstanding. On January 15, 20x2, Pain Co. declared
P200,000 cash dividends from 20x1 profit. Pain Co.'s 20x1 financial statements were
authorized for issue on March 1, 20x2. What amount of dividends to preference
shareholders should Pain Co. report as a liability in its December 31, 20x1 statement
of financial position?
a. 300,000
b. 200,000
c. 100,000
d.0

19. An entity's equity before undergoing quasi-reorganization is as follows:

Ordinary share capital, P20 par 2,600,000
Retained earnings (deficit) (1,670,000)
Total shareholders' equity 930,000
Fixed assets with carrying amount of P400,000 shall be revalued to a fair value of
P770,000.
The par value per share shall be reduced to P10.
The deficit shall be offset to any resulting share premium and revaluation surplus.
How much is the total shareholders' equity after implementing the quasi-
reorganization?
a. 900,000
b. 1,300,000
c. 1,670,000
d. 0

20. Poof Co.'s equity as of June 30, 20x1 is as follows:

10% Preference shares, P400 par, cumulative 4,000,000
Ordinary shares, P400 par 8,000,000
Retained earnings (deficit) (2,000,000)

Total shareholders' equity 10,000,000

The following transactions occurred during the rest of the year:
July 1, 20x1 All the ordinary shares were recalled and replaced in the ratio of "1 new
share for every 2 old shares." The par value was not changed. Share dividends of "1
new ordinary share per 2 preference shares held" were issued to the preference
shareholders as payment for dividends in arrears. The deficit was wiped out using the
resulting share premium.
Sept. 30, 20x1 5,000 preference shares were retired at a premium of P40. Dividends
for 3 months were paid on the retired shares.
Oct. 31. 20x1 3,000 new ordinary shares were sold at 1600.
Dec. 31, 20x1 Profit for the second half of the year amounted to P4,400,000.
Dec. 31, 20x1 A semi-annual cash dividend was declared on the preference shares
and a P2 cash dividend was declared on the ordinary shares.
How much is the total shareholders' equity on December 31, 20x1?
a. 13,453,500
b. 13,516,500
c. 13,814,000
d. 14,041,500
CHAPTER 12
1. On January 1, 20x1, an entity grants 1,000 share options to each of its five
employees as compensation for their commendable past performance. The share
options exercisable immediately at an exercise price of P70, and expire after 3 years.
The fair value per option on grant date is P60. What amount of salaries expense is
recognized in 20x1 and on what date is the salaries expense recognized?
a. 100,000, Jan. 1, 20x1
b. 100,000, Dec. 31, 20x1
c. 300,000, Jan. 1, 20x1
d. 20,000, Dec. 31, 20x1

2. On January 1, 20x1, an entity grants each of its ten employees 500 share options
on condition that the employee remains in the entity's employ until December 31,
20x2. The share options are exercisable within three years after December 31, 20x2.
The fair value per share option on grant date is P60. In 20x1, 1 employee resigned.
The entity expects that an additional 1 employee will resign in 20x2. No employees
resigned in 20x2. What amount of salaries expense is recognized in 20x2?
a. 80,000
b. 120,000
c. 150,000
d. 0

3. On January 1, 20x1, an entity grants its employees share options with a total fair
value of P3,200,000. The options vest in three years' time. On December 31, 20x1,
the entity expects that only 90% of the share options will vest. On December 31,
20x2, the entity revises its estimate of the number of share options that will vest to
96%. On December 31, 20x3, 100% of the share options vest. What cumulative
amount of share premium is recognized as of Dec. 31, 20x2 and how much is the
salaries expense for 20x3, respectively?
a. 2,048,000; 1,152,000
b. 2,048,000; 1,088,000
c. 1,088,000; 960,000
d. 960,000; 1,088,000

4. On January 1, 20x1, an entity granted 1,000 share options to each of its 100
employees. On January 1, 20x1, the fair values were P80 per share and P12 per share
option. The share options will vest after three years. On January 1, 20x1, the entity
expected that 7 employees will resign before the vesting date.
In 20x1, 6 employees resigned. Three more employees are expected to leave before
the vesting date.
In 20x2, 1 employee resigned. The entity revised its estimate of employee departures
to a total of eight. In 20x3, 2 employees resigned.
How much is the salaries expense in 20x3?
a. 348,000
b. 356,000
c. 364,000
d. 372,000

5. On January 1, 20x1, Water Co. granted 1,000 share options to each of its 100 key
employees conditional upon each employee completing a three-year service period.
Under the terms of the grant, the shares will vest:
d. at the end of 20x1 if the profit increases by more than 20%;
e. at the end of 20x2 if the profit increases by more than an average of 15% per year
over the two-year period; or
f. at the end of 20x3 if the profit increases by more than an average of 10% per year
over the three-year period.
The fair value per share option on Jan. 1, 20x1 was P45.
In 20x1, Water's profit increased by 18% and 5 employees left. Water expects that
profit will continue to increase at a similar rate and 6 more employees will leave in
20x2.
In 20x2, Water's profit increased by 14% and 3 employees left. In 20x3, Water's profit
increased by 8% and 3 employees left.
How much is the salaries expense in 20x3?
a. 348,000
b. 356,000
c. 364,000
d. 0

6. On January 1, 20x1, Headache Co. granted share options to each of its 100 key
employees conditional upon each employee remaining in Headache's employ over
the next 3 years and the I volume of sales increasing by at least an average of 10%
per year. Under the terms of the grant, each employee will receive:
i. 1,000 shares if the volume of sales increases by an average of
10% to 15% during the 3-year vesting period;
ii. 1,200 shares if the volume of sales increases by an average of more than 15% to
20% during the 3-year vesting period; and
iii. 1,400 shares if the volume of sales increases by an average of more than 20%
during the 3-year vesting period.
The fair value per share option on January 1, 20x1 was P45.
In 20x1, sales increased by 21% and 8 employees left. Sales are expected to continue
to increase at a similar rate in the next 2 years. Ten more employees are expected to
leave before the end of 20x3.
In 20x2, sales increased by 18% and 5 employees left. Headache Co. expects that
sales will continue to increase at a similar rate and that the total employee
departures by the end of 20x3 will be 15.
In 20x3, sales increased by 6% and 2 employees left.
How much is the salaries expense in 20x3?
a. 765,000
b. 846,000
c. 964,000
d. 0

7. On January 1, 20x1, Driver Co. granted 1,000 share options to each of its 100 key
employees conditional upon each employee remaining in Driver's employ until the
end of 20x3 and Driver's share price increasing to at least P80 at the end of 20x3. The
fair value per option on January 1, 20x1, adjusted for the possibilities that the share
price will and will not be achieved, was P45. In 20x1 and 20x2, Driver Co. expected
that 20 employees will leave by the end of 20x3. However, by December 31, 20x3, 82
employees remained. The share price fell short of the target and Driver Co. forfeited
the grant on Dec. 31, 20x3. How much total share premium will have been
recognized from the grant as of January 1, 20x4?
a. 0
b. 560,000
c. 3,600,000
d. 3,690,000

8. On January 1, 20x1, Mangoes Co. granted 1,000 share options to each of its 100
employees. The share options have a five-year life but will vest and become
exercisable immediately if and when Mangoes' share price increases to at least P80,
provided that the employee remains in service until the share price target is
achieved. The fair value per share option on Jan. 1, 20x1, adjusted for the market
condition, was P24. In estimating the fair value, Mangoes determined that it is most
likely that the share price target will be achieved by the end of 20x3.
In 20x1, 5 employees left and the year-end share price increased to P75. Mangoes
estimated that 92% of the share options will vest by the end of 20x3.
In 20x2, 3 employees left and the year-end share price decreased to P72. Mangoes
expected that, in total, 10 employees will have left by the end of 20x3.
In 20x3, 1 employee left and the year-end share price further decreased to P70.
In 20x4, 1 employee left and the year-end share price increased to P81.
How much salaries expense is recognized in 20x3?
a. 744,000
b. 736,000
c. (1,440,000)
d.0

9. On January 1, 20x1, an entity granted 1,000 share options to each of its 100
employees. On January 1, 20x1, the fair values were P80 per share and P12 per share
option. The share options will vest after three years.
In 20x1, 6 employees resigned. Three more employees are expected to leave before
the vesting date.
In 20x2, 1 employee resigned. The entity decided to issue the share options to the
remaining employees without any further condition.
How much is the salaries expense in 20x2?
a. 740,000
b. 752,000
c. 764,000
d. 0

10. On January 1, 20x1, Rainy Co. granted 1,000 share options to each of its 100
employees. Each grant is conditional upon the employee remaining in service over
the next 3 years. The fair value per share option on January 1, 20x1 was P24.
In 20x1, 17 employees left, way beyond what Rainy originally expected. Thus, on Dec.
31, 20x1, Rainy decreased the exercise price of the share option hoping this would
encourage the remaining employees to stay until the end of 20x3. The repricing
resulted to an increase in the fair value of the share options on Dec. 31, 20x1 from
P22 to P36. Rainy estimated that only three more employees will leave before the
end of 20x3.
In 20x2, 1 employee left. Rainy Co. did not revise its previous estimate of employee
departure.
In 20x3, 1 employee left.
How much is the salaries expense in 20x2 and the cumulative balance of share
premium from the grant as of Dec. 31, 20x3, respectively?
a. 980,000; 1,280,000
b. 980,000; 2,180,000
c. 1,200,000; 3,054,000
d. 1,200,000; 3,078,000

Fact pattern for the next three independent cases: On January 1, 20x1, Jeep Co.
granted 1,000 share options to each of its 100 rank-and-file employees conditional
upon the employee completing a 5-year service period. The fair value per share
option on Jan. 1, 20x1 was P9.
11. Case A: In 20x1, 30 employees resigned. This shocked the management as they
did not expect so many will resign. Thus, on Dec. 31, 20x1, in its attempt to persuade
the remaining employees to stay, the management changed the vesting date from
Dec. 31, 20x5 to Dec. 31, 20x3. After the modification, the management expected
that there will be no more resignations. In 20x2, 40 employees resigned. The
ultimate bosses got mad and fired the management, who were left in tears. No
employees resigned thereafter. The share options were issued to the remaining
employees on Dec. 31, 20x3, and they lived happily ever after for one year. How
much is the salaries expense in 20x3?
a. 49,000
b. 54,000
c. 90,000
d. 0
Hint: The effect of a beneficial modification is recognized over the period from the
modification date until vesting date. (PFRS 2. B43)

12. Case B: In addition to the service condition, the grant also requires that the total
production of the employees exceed 1,000,000 units of a particular product over the
5-year period.
In 20x1, the employees produced 500,000 units. No employee resigned.
In 20x2, the employees produced 450,000 units. Seeing this as an opportunity, the
evil management increased the production target from 1M to 2.5M units. Forty
employees resigned right after the modification. Jeep Co. expects the remaining sixty
employees to be loyal until the end of 20x5.
In 20x3, only 100 units were produced because all the employees resigned.
How much are the salaries expenses in 20x2 and 20x3, respectively?
a. 60,000; 0
b. 36,000; (216,000)
c. 0; (300,000)
d. 0; 0

13. Case C: In 20x1, the employees rallied and demanded a triple increase in salary or
else they will resign. Jeep Co. found the demand to be ridiculous and impossible to
meet. To appease the employees, and hopefully to discourage them from mindlessly
following their finicky leader who enjoys creating chaos, Jeep Co. doubled the share
options from 1,000 to 2,000 per employee on Dec. 31, 20x1. The fair value per share
option on Dec. 31, 20x1 was P10. No employee left in 20x1. On Dec. 31, 20x1, Jeep
Co. estimated that 5 employees will leave before the end of 20x5. In 20x2, 1
employee (the 'leader') left. On Dec. 31, 20x2, Jeep Co. estimated that there will be
no further employee resignations. How much is the salaries expense in 20x2?
a. 362,700
b. 402,400
c. 432,900
d. 504,600

14. On January 1, 20x1, November Rain Co. granted 1,000 share options to each of its
20 key employees conditional upon the employee completing a 3-year service
period. The fair value per share option on Jan. 1, 20x1 was P12. In 20x2, November
extended the vesting period from 3 years to 10 years. Two executives left right after
the modification. There were no employee departures in 20x1. As at December 31,
20x2, November expects 8 more employees will leave before the vesting date. How
much is the cumulative amount of equity recognized from the grant as at December
31, 20x2?
a. 24,000
b. 36,000
c. 54,000
d. 80,000

15. On January 1, 20x1, Peace Co. granted 1,000 share options to each of its 10
executives conditional upon the completion of a 3-year service period. The fair value
per share option was P30. No employees left in 20x1. Two executives left in 20x2. On
Dec. 31, 20x2, Peace Co. decided to issue the shares to the 8 executives with no
further condition. How much is the salaries expense in 20x2?
a. 60,000
b. 100,000
c. 140,000
d. 240,000
CHAPTER 13
1. On January 2, 20X6, Morey Corp. granted Dean, its president, 20,000 stock
appreciation rights. On exercise, Dean is entitled to receive cash for the excess of the
stock's market price on the exercise date over the market price on the grant date.
The rights are exercisable beginning on January 2, 20X8 and expire on December 31,
20X8. The market price of Morey's stock was P30 on January 2, 20X6 and P45 on
December 31, 20X6. Morey used the Black-Sholes-Merton pricing model and
estimated the values of each right at P16 each. As a result of the stock appreciation
rights, the company should recognize compensation expense for 20X6 of
a. 300,000.
b. 320,000.
c. 150,000.
d. 160,000.

Use the following information for the next two questions: On Jan. 1, 20x1,
Mindfulness Co. granted 10,000 share appreciation rights to each of its ten key
employees on condition that the employee remains in service within the next three
years. Mindfulness Co. expected no employee departures during the vesting period.
By applying an option pricing model, Mindfulness Co. estimated the following fair
values per SAR:
Jan. 1, 20x1 P12
Dec. 31, 20x1 15
Dec. 31, 20x2 18
Dec. 31, 20x3 20

2. What amount of salaries payable is recognized on the following dates?

Jan. 1, 20x1 Dec. 31, 20x2 Dec. 31, 20x3
a. 400,000 300,000 800,000
b. 400,000 500,000 1,800,000
C. 0 1,800,000 2,000,000
d. 0 1,200,000 2,000,000

3. What amount of salaries expenses is recognized in the

following years?
20x2 20x3
a. 500,000 700,000
b. 500,000 800,000
c. 700,000 800,000
d. 800,000 700,000

4. On Jan. 1, 20x1, Little Circle Co. has granted 10,000 share appreciation rights to
each of its 10 employees. The rights will vest in three years' time. The fair values per
right are as follows: P7 on Jan. 1, 20x1, P8.50 on Dec. 31, 20x1, and P10 on Dec. 31,
20x2. Little Circle estimated on Dec. 31, 20x1 and Dec. 31, 20x2 that a total of two
employees will leave before the rights vest. One employee left in 20x1. What amount
of liability should Little Circle report in its financial statements for the year ended
December 31, 20x2?
a. 700,000
b. 533,333
c. 466,667
d. 233,000

5. On January 1, 20x1, Faststrings Co. granted 10,000 share appreciation rights (SARS)
to each of its three executives, conditional upon the employee remaining in service
over the next three years. Under the grant, the employee shall receive cash equal to
the excess of the market price of the share on the date each right is exercised over
P20. The rights are exercisable starting December 31, 20x3 and expire after one year.
At grant date, Faststrings Co. could not determine reliably the fair value of the SARS,
and concluded that this will persist in the subsequent periods. The share prices were
P20, P25, P28 and P27 on January 1, 20x1, December 31, 20x1, December 31, 20x2,
and December 31, 20x3, respectively. What amounts for the following should
Fastrings Co. report in its December 31, 20x2 financial statements?
Salaries expense Salaries payable
a. 50,000 50,000
b. 110,000 160,000
c. 160,000 240,000
d. 90,000 140,000

Use the following information for the next three questions: On Jan. 1, 20x1, Fender
Co. acquired inventory with a total fair value of P960,000 from Ibanez Co, on
account. As consideration, Ibanez Co. can choose to receive on December 31, 20x1
10,000 shares of Fender Co. with par value per share of P40 or cash equal to the
market value of 10,000 Fender Co. shares on December 31, 20x1. Fender Co.'s shares
were quoted at P88 per share on January 1,20x1 and P112 per share on December
31, 20x1.

6. The entry on the date of purchase includes recording on which of the following?
a. Inventory P880,000, liability P880,000.
b. Inventory P960,000, equity P960,000.
c. Inventory P960,000, liability P880,000, equity P80,000.
d. No entry

7. The entry(ies) on December 31, 20x1 if Ibanez Co. chooses the share alternative
include(s)
a. a debit to 'Accounts payable' of P880,000.
b. a total credit to 'Share premium' of P800,000.
C. a credit to 'Cash' of P960,000.
d. a credit to 'Share premium - options outstanding’ of P80,000.
8. How much would Ibanez Co. receive on December 31, 20x1 if it chooses the cash
alternative?
a. 800,000
b. 880,000
c. 960,000
d. 1,120,000

Use the following information for the next two questions:

On Jan. 1, 20x1, Elegee Co. granted an employee the right to choose between 3,000
shares of Elegee or cash equal to the value of 2,500 Elegee shares, as an additional
compensation. The grant is conditional upon the completion of a three-year service.
If the employee chooses the shares, he must hold the shares for at least three years
from the exercise date. After taking into account the post-vesting condition, Elegee
estimated that the grant date fair value of the share alternative is P28 per share.
Elegee's share has a par value per share of P10. The market prices per share are as
follows:
January 1, 20x1 P 30
December 31, 20x1 36
December 31, 20x2 39
December 31, 20x3 40

9. What value is assigned to the equity component of the compound financial

instrument?
a. 9,000
b. 14,400
c. 36,000
d. 0

10. In relation to the grant, what amount of liability is reported in Elegee's December
31, 20x2 statement of financial position?
a. 65,000
b. 73,000
c. 104,000
d. 0

11. In relation to the grant, what amount of expense is recognized in 20x3?

a. 33,000
b. 35,000
c. 38,000
d. 40,000

12. On Jan. 1, 20x1, Six-string Bass Co. granted an employee the right to choose
to receive either P800,000 cash or 50,000 of Six-string Bass Co.'s shares with
par value of P10 per share. The grant was given as a bonus for the employee's
past services. The share alternative is exercisable immediately starting on the
grant date and expires after three years. However, the cash alternative is
exercisable only on Dec. 31, 20x3 and expires within a year. The grant date
 fair value of the share alternative is P8,000. The quoted prices of the shares
are as follows: P20 on Jan. 1, 20x1, P19 on Dec. 31, 20x1, P28 on Dec. 31,
20x2, and P29 on Dec. 31, 20x3. The appropriate discount rate is 10%. What
amounts for the following are reported in Six-string Bass Co.'s 20x2 financial
statements?

Salaries payable Share premium-options Salaries expense

c. 727,273 8,000 0

13. On January 1, 20x1, Sultan Co. grants 2,000 shares with fair value of P165 per
share to an employee, conditional upon the completion of three years' service. On
December 31, 20x2, the share price drops to P125 per share and Sultan Co. adds a
cash alternative to the grant. The employee can now choose to receive either 2,000
shares or cash equal to the value of 2,000 shares on the vesting date. On December
31, 20x3, the share price is P110. How much are the salaries expenses in 20x1, 20x2
and 20x3, respectively?
a. 110,000; 110,000; 80,000
b. 110,000; 166,667; 53,333
c. 110,000; 166,667; 26,667
b. 108,000; 80,000; 24,000

Use the following information for the next two questions:

Spinner Co. grants 500 share options to each of its 100 employees on January 1,
20x1. The fair value per option on this date is P30. The options vest on December 31,
20x3. Spinner Co. expects that only 90% of the share options will vest. The tax laws
applicable to Spinner Co. allow only the intrinsic value of the share options for tax
deduction. Spinner Co.'s tax rate is 30%.

14. If the intrinsic value of the share options on December 31, 20x1 is P1,200,000,
how should Spinner Co. account for the tax effect of the share options?
a. recognize income tax benefit of P120,000 in equity
b. recognize income tax benefit of P120,000 in profit or loss
c. recognize income tax benefit of P15,000 in equity
d. recognize income tax benefit of P15,000 in profit or loss

15. If the intrinsic value of the share options on December 31, 20x1 is P1,500,000,
how should Spinner Co. account for the tax effect of the share options?
a. recognize income tax benefit of P120,000 in equity
b. recognize income tax benefit of P120,000 in profit or loss
c. recognize income tax benefit of P15,000 in equity
d. recognize income tax benefit of P15,000 in profit or loss
CHAPTER 14
1. CORPULENT FAT Co.'s shareholders' equity at year-end consisted of the following:
Share capital, P40 par, 100,000 shares issued 4,000,000
Subscribed share capital 2,000,000
Share premium 1,480,000
Subscription receivable (800,000)
Retained earnings 2,640,000
Revaluation surplus 560,000
Cumulative translation losses on foreign operation (400,000)
Treasury shares, at cost, 10,000 shares (280,000)
Total shareholders' equity 9,200,000

How much is the book value per share?

a. 71.43
b. 76.44
c. 81.94
d. 84.62

2. The shareholders' equity of STATUTE LAW Co. as of year-end consisted of the

following:
Preference share, 10% cumulative, P400 par, 20,000 sh. 8,000,000
Ordinary share, P40 par, 100,000 shares issued 4,000,000
Retained earnings 3,280,000
Total shareholders' equity 15,280,000
Dividends are in arrears for three years. How much are the book values per
preference share (PS) and ordinary share (OS)?
a. (PS) 524.00; (OS) 42.99
b. (PS) 520.00; (OS) 48.80
c. (PS) 512.00; (OS) 46.00
d. (PS) 541.00; (OS) 42.99

3. Manouche Co.'s shareholders' equity on December 31, 20x1 was as follows:

6% noncumulative preference shares, P100 par (liquidation value P105 per share)
2,000,000
Ordinary shares, P100 par 6,000,000
Retained earnings 1,900,000
Preferred dividends have been paid up to December 31, 20x1.
At December 31, 20x1, Manouche Co.'s book value per ordinary
share was
a.130.00.
b.132.40.
c.134.98.
d.260.00.

Use the following information for the next three questions:

Fraulein Co.'s equity structure on Dec. 31, 20x1 is as follows: (liquidation value P250
per share)
8% Preference sh., P200 par 1,200,000
Ordinary shares, P100 par 3,600,000
Subscribed share capital - ordinary shares 400,000
Subscription receivable (80,000)
Retained earnings 1,080,000
Treasury shares (P80 cost per share) (300,000)
Total shareholders' equity 5,900,000

4. The preference shares are cumulative and dividends are in arrears for four years.
How much are the book values per preference share (PS) and ordinary share (OS)?
a. (PS) 314.00; (OS) 112.99
b. (PS) 316.28; (OS) 102.89
c. (PS) 312.80; (OS) 116.00
d. (PS) 341.00; (OS) 121.99

5. The preference shares are noncumulative. Dividends are in arrears for four years.
How much are the book values per preference share (PS) and ordinary share (OS)?
a. (PS) 216.00; (OS) 121.99
b. (PS) 266.00; (OS) 120.94
c. (PS) 212.80; (OS) 121.99
d. (PS) 264.00; (OS) 120.94

6. The preference shares are cumulative. All dividends are paid up to end of the
current year. How much are the book values per preference share (PS) and ordinary
share (OS)?
a. (PS) 260.00; (OS) 123.99
b. (PS) 266.00; (OS) 120.94
c. (PS) 252.80; (OS) 121.49
d. (PS) 250.00; (OS) 123.59

7. The stockholders' equity of Retro Company on December 31, 2008 includes the
following:
12% Preferred stock, 20,000 shares, P100 par value 2,000,000
14% Preferred stock, 10,000 shares, P300 par value 3,000,000
Common stock (Ordinary sh.), 50,000 shares, P100 par value 5,000,000
Retained earnings 2,240,000
Additional paid in capital (Share premium) 1,500,000
The 12% stock is cumulative and fully participating. The 14% 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. 128
b. 130
c. 132
d. 145

Use the following information for the next three questions: The shareholders' equity
of QUALM MISGIVING Co. as of year-end consisted of the following:
10% Preference share, cumulative, fully participating, P400 par, 20,000 shares
8% Preference share, noncumulative, fully participating P320 par, 2,500 shares
Ordinary share, P40 par, 100,000 shares issued and outstanding
Retained earnings 3,280,000
Total shareholders' equity 16,080,000
Dividends are in arrears for three years.

8. How much is the book value per 10% preference share?

a. 525.22
b. 535.50
c. 522.52
d. 432.56

9. How much is the book value per 8% preference share?

a. 358
b. 336
c. 422
d. 432

10. How much is the book value per ordinary share?

a. 52.6
b. 48.23
c. 44.75
d. 42.64
CHAPTER 15
PROBLEM 3: MULTIPLE CHOICE-COMPUTATIONAL
1. At December 31, 20x2 and 20x1, Gow Corp. had 100,000 ordinary shares and
10,000, 5%, P100 par value cumulative preference shares outstanding. No dividends
were declared on either the preference or ordinary shares in 20x2 or 20x1. Profit for
20x2 was P1,000,000. For 20x2, basic earnings per share amounted to
a. 10.00
b. 9.50
c. 9.00
d. 5.00

2. Fay Corporation's capital structure at December 31, 20x6, was as follows:

Shares issued and outstanding
Ordinary shares 200,000
Nonconvertible, noncumulative preference shares 50,000
On October 1, 20x7, Fay issued a 10% share dividend on its ordinary shares, and paid
P100,000 cash dividends on the preference shares. Profit for the year ended
December 31, 20x7 was P960,000. Fay's 20x7 basic earnings per share should be
a. 3.91
b. 4.10
c. 4.36
d. 4.68

3. The following information pertains to Jet Corp.'s outstanding stock for 20x1:
Ordinary shares, P5 par value, shares outstanding, 1/1/x1 20,000
2-for-1 stock split, 4/1/x1 20,000
Shares issued, 7/1/x1 10,000
Preference shares, P10 par value, 5% cumulative shares outstanding, 1/1/x1 4,000
What is the number of shares Jet should use to calculate 20x1 basic earnings per
share?
a. 40,000
b. 45,000
c. 50,000
d. 54,000

4. Timp, Inc., had the following ordinary share balances and transactions during
20x8:
1/1/x8 Ordinary shares outstanding 30,000
2/1/x8 Issued a 10% ordinary share dividend 3,000
3/1/x8 Issued ordinary shares in a business combination 9,000
7/1/x8 Issued ordinary shares for cash 8,000
12/31/x8 Ordinary shares outstanding 50,000
What was Timp's 20x8 weighted average shares outstanding?
a. 40,000
b. 44,250
c. 44,500
d. 46,000

5. Rand, Inc., had 20,000 ordinary shares outstanding at January 1, 20x3. On May 1,
20x3, it issued 10,500 ordinary shares. Outstanding all year were 10,000 shares of
nonconvertible, noncumulative preference shares on which a dividend of P4 per
share was paid in December 20x3. Profit for 20x3 was P96,700. Rand's basic earnings
per share for 20x3 are
a. 1.86
b. 2.10
c. 2.84
d. 3.58

6. On December 31, 20x2, Preacher, Inc. had 500,000 ordinary shares outstanding.
The following transactions occurred during 20x3:
Issued 180,000 shares to key employees as compensation for their past services to
the company on February 28, 20x3.
Issued a 10% dividend on March 31, 20x3. Issued 200,000 ordinary shares for cash on
June 30, 20x3.
Declared a 2-for-1 stock split on October 1, 20x3. Declared cash dividends of P5 per
share on November 1, 20x3.

Reacquired 60,000 treasury shares on December 1, 20x3.

Preacher reported profit of P10,075,000 in 20x3. Preacher's income tax rate is 30%.
What amount of basic earnings per share should be reported on the face of
Preacher's 20x3 statement of profit or loss?
a. 5.42
b. 5.78
c. 6.20
d. 7.40

7. Sounds Co. had 200,000 shares outstanding during 20x1. On April 1, 20x2, Sounds
acquired 30,000 shares, and on September 1, 20x2, Sounds issued a 3-for-1 share
split. Profits in 20x1 and 20x2 were P410,000 and P350,000, respectively. What
amounts should Sounds report as basic earnings per share in its 20x2 and 20x1
comparative statements of profit or loss?
20x2 20x1
a. 0.68 0.66
b. 0.76 0.78
c. 0.72 0.64
d. 0.66 0.68
8. In February 2016, a company makes a 1 for 10 rights issue at an exercise price of
P0.70 per share. The market value of the company's shares just before this rights
issue was P1.25 per share. The "adjustment factor" in the calculation of earnings per
share is
a. 1.11705
b. 1.04167
c. 1.01673
d. 0.96

9. A company's profit after tax for the year to 31 December 2015 was P275,000. The
company's issued share capital on 1 January 2015 consisted of 350,000 ordinary
shares. On 1 April 2015, the company made a 1 for 7 rights issue at P1 per share. The
market value of the company's shares just before this rights issue was P1.40 per
share. Basic EPS for 2015 is:
a. 0.704
b. 0.743
c. 1.007
d. 1.034

10. On January 1, 2005, Michael Co. had 300,000 common (ordinary) shares
outstanding, P100 par or a total par value of P30,000,000. During 2005, Michael
issued rights to acquire one common share at P100 in the ratio of one share for every
5 shares held. The rights are exercised on March 31, 2005. The market value of each
common share immediately prior to March 31, 2005 was P160. The net income
(profit) for 2005 was P6,000,000. How much is the basic earnings per share in 2005.
a. 6.02
b. 6.18
c. 17.08
d. 17.14

11. During 20x4, Moore Corp. had the following two classes of stock issued and
outstanding for the entire year.
100,000 ordinary shares, P1 par.
1,000, 4% preference shares, P100 par. Each convertible into one ordinary share.
Moore's 20x4 profit was P900,000. The income tax rate was 30%. In the computation
of diluted earnings per share, the amount to be used in the numerator is
a. 896,000.
b. 898,800.
c. 900,000.
d. 901,200.

12. At December 31, 20x2, Lex, Inc. had 600,000 ordinary shares outstanding. On
April 1, 20x3, an additional 180,000 ordinary shares were issued for cash. Lex also
had P5,000,000 of 8% convertible bonds outstanding throughout the year, which are
convertible into 150,000 ordinary shares. No bonds were issued or converted during
20x3. What is the number of shares that should be used in computing diluted
earnings per share for 20x3?
a. 735,000
b. 780,000
c. 885,000
d. 930,000

13. STATUTE LAW Co. had the following capital structure during 20x1 and 20x2:
Convertible preference shares, 120 par, 6% cumulative, 50,000 shares issued and
outstanding P1,000,000
Ordinary shares, P20 par, 200,000 shares issued and outstanding 4,000,000

STATUTE reported profit after tax of P2,400,000 for the ended December 31, 20x2.
STATUTE paid P30,000 preferred dividends in 20x2; no preferred dividends were paid
in 20x1. Each preference share is convertible into two ordinary shares. In its
December 31, 20x2 statement of profit or loss, what amount should STATUTE report
for the following?
a. Basic EPS Diluted EPS
a. 8.00 0
b. 11.70 0
c. 10.80 7.70
d. 11.70 8.00

14. Dunn, Inc., had 200,000 shares of P20 par common stock (ordinary share) and
20,000 shares of P100 par, 6%, cumulative, convertible preferred stock (preference
share) outstanding for the entire year ended December 31, 20x1. Each share is
convertible into five shares of common stock. Dunn's net income (profit) for 20x1
was P840,000. For the year ended December 31, 20x1, the diluted earnings per share
is
a. 2.40.
b. 2.80.
c. 3.60.
d. 4.20.

15. On January 2, 20x1, Lang Co. issued at par P10,000 of 4% bonds convertible in
total into 1,000 ordinary shares. No bonds were converted during 20x1. Throughout
20x1, Lang had 1,000 ordinary shares outstanding. Lang's 20x1 profit was P1,000.
Lang's income tax rate is 50%. No potentially dilutive securities other than the
convertible bonds were outstanding during 20x1. Lang's diluted earnings per share
for 20x1 would be
a. 1.00
b. 0.50
c. 0.70
d. 0.60

16. On June 30, 20x7, Lomond, Inc., issued twenty, P10,000, 7% bonds at par. Each
bond was convertible into 200 ordinary shares. On January 1, 20x8, 10,000 ordinary
shares were outstanding. The bondholders converted all the bonds on July 1, 20x8.
On the bonds' issuance date, the average Aa corporate bond yield was 12%. During
20x8, the average Aa corporate bond yield was 9%. The following amounts were
reported in Lomond's income statement for the year ended December 31, 20x8:
Revenues 977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Profit 35,000
What amount should Lomond report as its 20x8 diluted earnings per share?
a. 2.50
b. 2.85
c. 2.92
d. 3.50

17. Rainy Saturday Co. has profit after tax of P3,600,000, weighted average
outstanding ordinary shares of 280,000, and the following employee stock options
outstanding the entire year:
Option shares 50,000
Exercise price P80
Fair value of each share option P10
Average market price P120
Ending market price at year-end P125
What amounts of the following should Rainy report for the year?
Basic EPS Diluted EPS
a. 12.86 12.31
b. 11.92 10.32
c. 12.68 12.13
d. 12.00 11.73

18. On December 31, 2003, Masters Inc. had outstanding 180,000 shares of common
(ordinary) stock. Net income (Profit) for
2003 was P285,000. Outstanding options (granted July 1, 2003) to purchase 15,000
shares of common stock at P20 per share had not been exercised by December 31,
2003. During 2003, market prices for the common stock were:
July 1, 2003 P18 per share
December 31, 2003 P32 per share
Average P25 per share
What amounts for the following should Masters Inc. report in 2003?
Basic EPS Diluted EPS
a. 1.58 1.56
b. 1.62 1.55
c. 1.68 1.55
d. 1.58 1.57

19. Party, Inc. had the following capital structure during 20x1:
Convertible preference shares, 10 par, 6% cumulative, 50,000 shares issued and
outstanding 500,000
Ordinary shares, #10 par, 200,000 shares issued and outstanding 2,000,000
Each preference share is convertible into two ordinary shares. Party, Inc. reported
loss of P900,000 in 20x1. What amounts of the following should Party, Inc. report in
20x1?
Basic EPS Diluted EPS
a. (4.35) (3.00)
b. (4.65) (3.00)
c. (4.35) 0
d. (4.65) 0

20. Funnyzal Co. reported profit of P6,000,000 in 20x1 (net of 30% income tax).
Funnyzal's capital structure all throughout 20x1 was as follows:
Ordinary shares, 500,000
Options, 40,000, with an exercise price of P100. The average market price during the
year was P125.
10% convertible bonds with face amount of P2,000,000 and carrying amount of
P1,903,927 on January 1, 20x1. The Earnings per Share effective interest rate is 12%.
Each P1,000 bond is convertible into 5 ordinary shares.
8% convertible, cumulative, preference shares, P100 par value, 100,000. Each
preference share is convertible into 2 ordinary shares.
What amounts of basic and diluted EPS should Funnyzal report in its 20x1 statement
of profit or loss?
Basic EPS Diluted EPS
a. 12.80 8.58
b. 10.40 8.58
c. 10.40 8.47
d. 9.80 7.76