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JOSE RIZAL UNIVERSITY

ACCOUNTANCY asa cpa

APPENDIX EMPLOYEE BENEFITS; LEASE; AND TAXES


1. On January 1, 2014, Stinx Company had the following balances in its
memorandum records: Fair value of plan assets P3,000,000; Defined Benefit
Obligations P3,200,000.
Other data related to the retirement benefit plan for 2014 are as follows:
Current service cost P140,000
Contribution to the plan 204,000
Benefits paid 200,000
Actual return on plan assets 185,000
Discount rate 9%
Actuarial gain/loss on benefit obligation 20,000 losses
The retirement benefit expense for 2014 is
a. P140,000 b. P158,000 c. P178,000 d. P448,000
2. How much defined benefit cost shall be taken to other comprehensive income?
a. P20,000 b. P65,000 c. P85,000 d. P105,000
3. How much defined benefit asset or liability shall be shown on the statement of
financial position at December 31, 2014?
a. P 85,000 liability b. P154,000 liability c. P259,000 liability
d. P154,000 asset
4. The following information relates to the defined retirement benefit plan of
Orchids Company for the year ended December 31, 2014:
Fair value of plan assets, January 1, 2014 P2,500,000
Fair value of plan assets, December 31, 2014 3,200,000
Contributions made to the fund 800,000
Benefits paid 340,000
Discount rate 10%
How much was the actual return on plan assets?
a. P240,000 b. P250,000 c. P580,000 d. P640,000
5. How much shall be taken to other comprehensive income relating to the plan
assets?
a. P0 b. P10,000 loss c. P80,000 loss d.
P240,000 gain
6. The following information pertains to Microsoft Companys defined benefit plan
for the year 2014:
Accrued Benefit Obligation, January 1, 2014 P5,000,000
Fair value of plan assets, January 1, 2014 3,800,000
Current service cost 600,000
Past service cost, determined at 12/31/14 580,000
Interest rate 12%
Actual return on plan assets 550,000
Number of years until vesting of benefits 5 years
Contribution made during the year 750,000
Actuarial gain on plan assets ?
Actuarial gain on benefit obligation 70,000
What was the balance of the retirement benefit asset/liability at January 1,
2014?
a. P5,000,000 liability b. P1,200,000 liability c. P800,000 liability
d. P3,800,000 asset

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7. Using IAS 19 effective 2014, what is the amount of past service cost that will be
recognized as part of retirement benefit expense for 2014?
a. P580,000 b. P116,000 c. P 58,000 d. P 16,000
8. Using IAS 19, effective 2014, what amount of actuarial gain shall be recognized
in profit or loss for the year 2014?
a. P0 b. P70,000 c. P94,000 d. P164,000
9. Following IAS 19, effective 2014, how much is the retirement benefit expense for
the year 2014?
a. P1,160,000 b. P1,324,000 c. P1,488,000 d.
P1,780,000
10.How much is the fair value of the plan assets at December 31, 2014?
a. P3,800,000 b. P4,350,000 c. P5,100,000 d.
P5,006,000
11.How much is the defined benefit obligation at December 31, 2014?
a. P5,600,000 b. P6,200,000 c. P6,640,000 d.
P6,710,000
12.What is the amount of overfunding (underfunding) in the retirement cost for
2014?
a. P0 b. P(410,000) c. P(574,000) d. P570,000
13.Defined benefit liability at December 31, 2014 statement of financial position is
a. P1,160,000 b. P1,200,000 c. P1,446,000 d.
P1,610,000
14.The following relates to the defined benefit plan for the McDonald Company:
Accrued benefit obligation, January 1 P4,600,000
Accrued benefit obligation, December 31 5,629,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Net actuarial gains 32,000
Employer contributions 425,000
Benefits paid to retirees 390,000
Discount rate 10%
How much is the service cost for the year?
a. P496,500 b. P956,500 c. P1,000,000 d. P1,043,000
15.How much is the actual return on plan assets for the year?
a. P495,000 b. P503,000 c. P512,000 d. P530,000
16.What is the total retirement benefit cost for the year 2014?
a. P924,000 b. P956,500 c. P989,000 d.P1,460,000
17.On January 1, 2014, Maris Corporation adopted a defined benefit plan. The plans
service cost of P1,500,000 was fully funded at the end of 2014. Past service cost
of P600,000 was funded by a contribution of P240,000 in 2014.
What is the amount of Maris defined benefit liability at December 31, 2014?
a. P 360,000 b. P 600,000 c. P 840,000 d.
P1,860,000
18.On January 1. 2014, C Company has defined benefit obligation of P4,400,000
based on discount rate of 12%. Pension benefit paid to retirees totalled
P600,000. Service cost for 2014 amounted to P1,480,000. Actuarial gains of
P200,000 was recorded in other comprehensive income, of which P150,000
relates to remeasurement of plan assets.
How much is the defined benefit obligation at December 31, 2014?

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a. P5,280,000 b. P5,608,000 c. P5,758,000 d.


P5,808,000
19.The Mad Max Corporation adopts a retirement benefit plan in 2014. The following
are the
information related to defined benefit plan adopted:
Past service cost P2,400,000
Current service cost 300,000
Contribution made during the year 2,500,000
What amount of asset (liability) relating to retirement benefit cost will be
shown on the statement of financial position at December 31, 2014?
a. P100,000 b. P200,000 c. (P400,000) d. (P200,000)
20.Glad Myx Company has these balances relating to its defined benefit plan:
Present value of the obligation P3,300,000
Fair value of the plan assets 4,200,000
The present value of the future refunds and reductions in future contributions
is P500,000
What amount if the defined retirement asset will be shown on the statement
of financial position?
a. P7,500,000 b. P900,000 c. P500,000 d. P400,000
21.James Co. leased a new machine to Lake Co. on January 1, 2013. The lease
expires on January 1, 2018. The annual rental is 900,000. Additionally, on
January 1, 2013, Lake paid 500,000 to James as a lease bonus and 250,000 as a
security deposit to be refunded upon expiration of the lease. In James 2013
statement of comprehensive income, the amount of rental revenue should be?
22.Peter Co. leased office premises to Fox, Inc. for a five-year term beginning
January 2, 2013. Under the terms of the operating lease, rent for the first year is
80,000 and the rent for years 2 through 5 is 125,000 per annum. However, as an
inducement to enter the lease, Peter granted Fox the first six months of the
lease rent-free. In its 2013 statement of comprehensive income, what amount
should Peter report as rental revenue?
23.On July 1, 2013, Extreme Co. signed a five-year lease for equipment having a 12-
year economic life. The lease agreement provides for neither a transfer of title or
bargain purchase option. The agreement calls for annual payments of 240,000
starting July 1, 2014. Incremental borrowing rate is 14% which approximates the
rate implicit in the lease. Fair market value of equipment at the inception of the
lease is 1,480,000. Present value factors are as follows:
PV of an ordinary annuity at 14% for five periods 3.433
PV of an annuity due at 14% for five periods 3.914
How much is the interest expense for the year ended December 31, 2013?
24.What is the amount of liability relating to the lease agreement that Extreme
would report in its December 31, 2013 statement of financial position?
25.On July 1, 2012, Pat Co. leased a piece of land from Luke Corporation under a 3-
year operating lease. Total rent for the term of the lease will be 3,600,000,
payable as follows:
12 months at 50,000 = 600,000
12 months at 75,000 = 900,000
12 months at 175,000 = 2,100,000
All payments were made when due.
How much is Lukes rent revenue for the fiscal year ended June 30, 2013?

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26.On December 31, 2012, Simon Co. leased a new machine from Junction Co. with
the following pertinent information:
Lease term 6 years; Useful life of machine 6 years
Annual rental payable every December 31 500,000
Incremental Borrowing Rate 15%
Implicit Interest Rate 12%
PV of 1 in advance for 6 periods at 12% 4.61
PV of 1 in advance for 6 periods at 15% 4.35
The machine reverts to Junction at the termination of the lease. The cost of
the machine on Junctions accounting records is 3,755,000
What is the capitalized cost of the asset?
27.What is the lease liability balance at December 31, 2013?
28.Assuming that Simon uses straight-line method of depreciation, how much is the
depreciation expense for year ended December 31, 2014?
29.On December 31, 2013, Lazarus Corporation leased equipment under a finance
lease. Annual lease payments of 200,000 are due December 31 for 10 years. The
equipments useful life is 10 years, and the interest rate implicit in the lease is
10%. The finance lease obligation was recorded on December 31, 2013, at
1,350,000, and the first lease payment was made on that date.
What amount should Lazarus include in current liabilities for this finance lease in
its December 31, 2012, statement of financial position?
30.Dominic Co. leased a new machine from Isidore Co. on May 1, 2013, under a
lease with the following information:
Lease term 10 years; Useful life of machine 12 years
Annual rental payable at beginning of each year 400,000
Implicit interest rate 14%
PV of an annuity of 1 in advance for 10 periods at 14% 5.95
PV of 1 for 10 periods at 14% 0.27
Dominic has the option to purchase the machine on May 1, 2023 by paying
500,000 which approximates the expected fair value of the machine on the
option exercise date. On May 1, 2013, Dominic should record a capitalized leased
asset at?
31.On January 2, 2013, Raphael Mining Company (lessee) entered into a 5-year
lease for drilling equipment. Raphael accounted for the acquisition as a finance
lease for 2,400,000, which includes a 100,000 bargain purchase option. At the
end of the lease, Raphael expects to exercise the bargain purchase option.
Raphael estimates that the equipments fair value will be 200,000 at the end of
its 8-year life. Raphael regularly uses straight-line depreciation on similar
equipment. For the year ended December 31, 2013, what amount should
Raphael recognize as depreciation expense on the leased asset?
32.On January 1, 2013, Bello Enterprises acquired a machine signing a four-year
lease. Annual rentals of 1,742,174 are payable at the beginning of each year
starting January 1, 2013. Bello guarantees the residual value of 1,200,000 at the
end of the lease term. The assets useful life is 5 years, at the end of which, the
assets scrap value is expected to be 80,000. Bello uses straight-line method to
depreciate this asset. The lessors implicit interest rate is 10%, which is known to
Bello.
PV of 1 discounted at 10% for 4 periods is 0.68301
PV of 1 discounted at 10% for 5 periods is 0.62092
PV of annuity due of 1 for 4 periods discounted at 10% is 3.48685

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PV of ordinary annuity at 10% for 4 periods is 3.16987


At what amount should this machine be recorder by Bello on January 1, 2013?
33.How much depreciation should Bello Enterprises record on this machine for the
year 2013?
34.On January 1, 2013, Belle Enterprises acquired a machine signing a four-year
lease. Annual rentals of 1,742,174 are payable at the beginning of each year
starting January 1, 2013. Belle guarantees the residual value of 1,200,000 at the
end of the lease term. The assets useful life is 5 years, at the end of which, the
assets scrap value is expected to be 80,000. Belle uses straight-line method to
depreciate this asset. The lessors implicit interest rate is 10%, which is known to
Belle.
PV of 1 discounted at 10% for 4 periods is 0.68301
PV of 1 discounted at 10% for 5 periods is 0.62092
PV of annuity due of 1 for 4 periods discounted at 10% is 3.48685
PV of ordinary annuity at 10% for 4 periods is 3.16987
At what amount should this machine be recorded by Belle on January 1, 2013?
35.How much depreciation should Belle Enterprises record on this machine for the
year 2013?
36.On January 1, 2013, Bella Enterprises acquired a machine signing a four-year
lease. Annual rentals of 1,742,174 are payable at the beginning of each year
starting January 1, 2013. Bella is given the option to buy the machine for
250,000 at December 31, 2016, when the assets market price is expected to be
1,250,000. The assets useful life is 6 years, at the end of which the assets scrap
value is expected to be 80,000. Bella uses the straight-line method to depreciate
the asset.
With an implicit interest rate of 10%, Bella appropriately recorded the machine
and the related liability on January 1, 2013 at 6,245,450. On December 31,
2016, the end of the lease term, Bella failed to exercise the purchase option.
How much loss, if any, should Bella recognize as a result of the failure to exercise
the purchase option?
37.On August 1, 2013, Gabriel Company leased a machine to Way Company for a
six-year period requiring payments of 100,000 at the beginning of each year. The
machine cost 480,000, which is the fair value at the lease date, and has a useful
life of 8 years with no residual value. Gabriel appropriately recorded the lease as
a direct financing lease. Gabriels implicit interest rate is 10% and the present
value factors are as follows:
PV of an annuity due of 1 at 10% for 6 periods 4.800
PV of an annuity due if 1 at 10% for 8 periods 5.868
At the inception of the lease, the gross lease receivables account balance should
be?
38.How much is the interest revenue relating to the lease for the year ended
December 31, 2013?
39.Michael Company leased equipment to Hay Corporation on July 1, 2013 for an
eight-year period expiring June 30, 2021. Equal payments under the lease are
600,000 and are due oj July 1 of each year. The first payment was made on July
1, 2013. The rate of interest contemplated by Michael and Hay is 10%. The cash
selling price of the equipment is 3,520,000, and the cost of the equipment on
Michaels accounting records is 2,800,000. The lease is appropriately recorded as
a dealers lease. What is the amount of profit on the sale that Michael should
record for the year ended December 31, 2013?

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40.What is the interest revenue reported on Michaels income statement for year
ended December 31, 2013?
41.On January 1, 2013, Thelma Industries leased equipment to Trician Company for
a four-year period ending December 31, 2016. The equipment cost 300,000 and
has an expected useful life of 5 years. Annual payments are 118,951, including
10,000 executory costs. The equipments fair value is 400,000. The lessee
guarantees the residual value of 80,000. Lease payment is due every December
31 and Trician made the first payment on December 31, 2013. Tricians implicit
interest rate is 10%.
Thelma incurred 15,000 costs to consummate the lease contract.
PV of 1 discounted at 10% for 4 periods is 0.68301
PV of annuity due of 1 discounted at 10% for 4 periods is 3.48685
PV of ordinary annuity of 1 at 10% for 4 periods is 3.16987
How much profit, inclusive of interest revenue, should Thelma report from this
lease for the year ended December 31, 2013?
42.How much should Thelma report as net investment in lease on December 31,
2013 statement of financial position?
43.Glade Co. leases computer equipment to customers under direct financing lease.
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 323,400. The present value of
an annuity due of 1 at 8% for 5 years is 4.312. What is the total amount of
interest revenue that Glade will earn over the life of the lease?
44.Louis Company leased a machine from Millennium Company on January 1, 2012.
The first annual payment was made on January 1, 2013. The machine has an
economic life of 6 years. The lease agreement requires four annual payments of
33,000, including 3,000 annual payments for repairs and maintenance. The
machine will be returned to Millennium Company at the end of the lease term
and Louis Company guarantees a residual value of 5,000. Interest implicit in the
lease is 10%, which is known to Louis. For the year ended December 31, 2013,
what would Louis Company record in relation to the lease?
45.How much annual depreciation expense should Louis Company record?
46.In its notes to the financial statements at December 31, 2014, Louis Company
would disclose minimum lease payments of?
47.If Millennium Company recorded the net investment in lease higher than the
liability initially recorded by Louis Company, the variance could be due to?
48.Assume that on January 1, 2015 lease payment included an amount of 5,000 for
exceeding a limit for machine usage hours specified in the lease agreement.
Louis Company would account for this charge as
49.On December 31, 2013, Stephen, Inc. sold equipment to Noli and simultaneously
leased it back for 5 years. Pertinent information at this date is as follows:
Sales Price 550,000
Carrying Amount 400,000
Estimated Economic life 15 years
At December 31, 2013, how much should Stephen report as deferred gain from
the sale of the equipment?
50.On July 1, 2013, PC Options sold equipment to PC Madness and simultaneously
leased it back for 12 years. Pertinent information at this date is as follows:
Sales Price 4,800,000
Carrying Amount 3,600,000

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Economic Life 15 years


At July 1, 2013, how much should PC Options report as deferred gain from the sale
of the equipment?
51.Use the same information given in MC #55. How much should PC Options report
as revenue on sale-leaseback of the equipment for the year ended December 31,
2013?
52.On January 1, 2013, Hooks Oil Company sold equipment with the carrying
amount of 100,000 and a remaining useful life of 10 years to Maco Drilling
Company for 150,000. Hooks immediately leased the equipment back under a
10-year finance lease with a present value of 150,000 and will depreciate the
equipment using the straight-line method. Hooks made the first annual payment
of 24,412 in December 2013. What is the unearned gain on equipment sale in
Hooks December 31, 2013 statement of financial position?
53.To raise operating funds, National Distribution Company sold its equipment to an
insurance company on March 31, 2013 for 800,000 and immediately leased the
equipment back. The lease is for the final 12 years of the assets total 25-year
useful life. The equipment has a carrying value of 650,000. The rental payments
of 100,000 are payable each March 31, starting March 31, 2013. If the
equipments fair value on March 31, 2013 was 710,000, how much gain shall be
recognized from this sale-leaseback for the year ended December 31, 2013?
54.Use the same information given in MC #58. If the equipments fair value on
March 31, 2013 was 800,000, how much gain shall be recognized from this sale-
leaseback for the year ended December 31, 2013?
55.To raise operating funds, National Distribution Company sold its equipment on
March 31, 2013 for 470,000 and immediately leased the equipment back. The
fair value of the equipment is 700,000 and has a carrying value of 650,000. The
annual rental payment of 100,000 is significantly lower than the fair rental of
125,000 for this type of equipment. How much loss should be deferred beyond
2013 as a result of this sale lease back transaction?
56. Quick Company leased a building and received the P 3,600,000 annual
rental payment on June 15, 2013. The lease starts on July 1, 2013. Rental
income is taxable when received. Quicks tax rates are 30% for 2013 and
35% thereafter. Quick had no other permanent or temporary differences.
Quick determined that any deferred tax asset is fully realizable. What
amount of deferred tax asset should Quick report in its December 31,
2013 statement of financial position?
a. P 540,000 b. P 630,000 c. P1,080,000
d. P1,260,000
57. Carpet Company has three financial statement elements for which the
December 31, 2013 book basis is different from the December 31, 2013
tax basis:
Book Basis Tax Basis Differences
Equipment P 2,000,000 P 1,200,000 P 800,000
Prepaid officers 750,000 0 750,000
Insurance policy
Warranty liability 500,000 0 500,000
As a result of these differences, future taxable amounts are (Assume that the
insurance premium is non-deductible)

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a. P 500,000 b. P 800,000 c. P1,550,000


d. P2,050,000
58. Victory company organized on January 2, 2013, had pretax accounting
income of P 5,000,000 and taxable income of P 8,000,000 for the year
ended December 31, 2013. The only temporary difference is accrued
product warranty costs that are expected to be paid as follows
2014 P 1,000,000 2016 P 500,000
2015 P 500,000 2017 P 1,000,000
Victory has never had any net operating losses (book or tax) and does not
expect any in the future. There were no temporary differences in prior years.
The enacted income tax rates are 30% for 2013 through 2016 and 35% for
2016.
In Victorys December 31, 2013 statement of financial position, the deferred
income tax asset should be
a. P 900,000 b. P 950,000 c. P1,000,000
d. P1,050,000
59. Liberty Corporations worksheet for calculating current and deferred
income taxes for 2013 follows (000 omitted)
2013 2014 2015
Pretax income P 14,000
Temporary differences
Depreciation (8,000) (P 12,000) P 20,000
Warranty costs 4,000 ( 1,000) ( 3,000)
Taxable Income P 10,000
Enacted rate 30% 30% 35%
Liberty had no prior deferred tax balances. In its 2013 income statement,
what amount should Liberty report as current income tax expense?
a. P4,900,000 b. P4,200,000 c. P3,500,000 d.
P3,000,000
60. What amount should Liberty report as income tax expense deferred
in its 2013 statement of comprehensive income?
a. P2,050,000 b. P1,400,000 c. P1,200,000 d. P
550,000
61. In 2013, Royal Company reported for financial statement purposes the
following items, which were not included in taxable income:
Instalment gain to be collected equally in 2014 through 2016,
P1,500,000
Estimated future warranty costs to be paid equally in 2014 through
2016, P2,100,000
There were no temporary differences in prior years. Royals enacted tax
rates are 30% for 2013-2014 and 35% for 2015-2016. The company has
an enforceable right to set off deferred tax liability against deferred tax
asset.
In Royals December 31, 2013 statement of financial position, what amounts
of deferred tax asset should be classified as current and non-current?
Current Non-current
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a. 0 P190,000
b. 0 P200,000
c. P60,000 P140,000
d. P70,000 P120,000
62.Maple Company reported the following results for the year ended December 31,
2013, its first year of operation.
2013
Income per books before income taxes P 750,000
Taxable Income 1,200,000
The disparity between book income and taxable income is attributable to a
temporary difference, which will reverse in 2014.
What should Maple record as a net deferred tax asset or liability as of December 31,
2013, assuming that the enacted tax rates in effect are 30% in 2013 and 35% in
2014? Assume that the company has an enforceable right to set off deferred tax
liability against deferred tax asset.
a. P135,000 deferred tax asset c. P135,000 deferred tax liability
b. P157,500 deferred tax asset d. P157,500 deferred tax liability
63.At the end of 2013, its first year of operations, Glow Company prepared a
reconciliation between pretax financial income and taxable income as follows:
Pretax financial income P 4,500,000
Estimated litigation expenses 6,000,000
Excess depreciation for taxes (9,000,000)
Taxable income P 1,500,000
The estimated litigation expense of P6,000,000 will be deductible in 2014 when it is
expected to be paid. Use of the depreciable assets will result in taxable amounts of
P3,000,000 in each of the next three years. The income tax rate is 30% for all years.
Assuming no payment yet has been paid for income taxes, what is the income tax
payable at the end of 2013?
a. P 0 b. P 450,000 c. P 900,000 d. P
1,350,000
64.What is the amount of deferred tax asset recorded at December 31, 2013?
a. P 450,000 b. P 900,000 c. P 1,350,000 d. P
1,800,000
65.What is the amount of current and non-current deferred tax liability reported at
December 31, 2013?
a. P 900,000; P 1,800,000 b. P 0; P900,000 c. P 0; P 2,700,000 d. P0 and P
2,250,000
66.The following information is taken from Panay Corporations 2013 statement of
comprehensive income:
Profit before income taxes P 1,500,000
Income tax expense
Current P 564,000
Deferred 42,000 606,000
Profit P 894,000
Panays first year of operations was 2013. The company has a 30% tax rate and the
management decided to use accelerated depreciation for tax purposes and the
straight-line method for financial reporting purposes. The amount charged to
depreciation expense in 2013 was P 600,000. Assuming no other temporary
differences existed between book income and taxable income, what amount did
Panay deduct for depreciation on its tax return for 2013?

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a. P 460,000 b. P 570,000 c. P 600,000 d. P 740,000


67.Camiguin Company reported depreciation of P 250,000 on its 2013 tax return.
However, in its 2013 statement of comprehensive income, Camiguin reported
depreciation of P 100,000. The difference in depreciation is a temporary
difference that will reverse over time. Assuming Camiguins tax rate is constant
at 30%, what amount should be added to the deferred income tax liability in
2013?
a. P 30,000 b. P 37,500 c. P 45,000 d. P 75,000
68.In 2013, the Mindoro Company reported pretax Financial income of P5,000,000.
Included in the pretax financial income was P900,000 of non-taxable life
insurance proceeds received as a result of the death of an officer; P1,200,000 of
warranty expenses accrued but unpaid as of December 31, 2013; and P200,000
of goodwill impairment loss. Assuming that no income taxes were previously
paid during the year and an income tax rate of 30%, the amount of income taxes
payable on December 31, 2013 would be
a. P1,350,000 b. P1,500,000 c. P1,590,000 d.
P1,650,000
69.On January 1,2012, Dos Palmas Company purchased a machine for P140,000.
This machine has a five-year useful life and a residual value of 20,000. It is
depreciated using the straight-line method for financial statement purposes. For
tax purpose, depreciation expense was P50,000 for 2012 and P40,000 for 2013.
Dos Palmas' 2013 income before income taxes and depreciation expense was
P200,000 and its tax rate was 30%. If Dos Palmas has made no estimated tax
payments during 2013, what amount of current income tax liability would Dos
Palmas report in its December 31, 2013 statement of financial position?
a. P52,800 b. P51,600 c. P48,000 d. P45,000
70.The following information is taken from Palawan Corporation's 2013 financial
records:
Pretax Accounting Income P15,000,000
Excess Type Depreciation (450.000)
Taxable Income P14,550,000
Assume the excess tax depreciation was created entirely in 2013 and will result
in equal net taxable amounts in each of the next three years. If tax rates are
40% in 2013, 30% in 2014, 35% in 2015, and 30% in 2016, the total deferred tax
liability that Palawan should report on its December 31, 2013 statement of
financial position is
a. P135,000 b. P150,000 c. P157,500 d. P180,000
71.On June 30, 2013, Star Company prepaid a P190,000 premium on an annual
insurance policy. The premium payment was a tax-deductible expense in Star's
2013 cash basis tax return. The accrual basis statement of comprehensive
income will report a P95,000 insurance expense in 2013 and 2014. Star's income
tax rate is 35% in 2013 and 38% thereafter. In Star's December 31, 2013
statement of financial position, what amount related to the insurance should be
reported as deferred income tax liability?
a. P33,250 b. P36,100 c. P66,500 d. P72,200
72.For year ended December 31, 2013, general company reported pretax financial
statement income of P7,500,000. Its taxable income was P6,500,000. The
difference is due to accelerated depreciation for income tax purposes. Income
tax rate for all years is 30%, and general made estimated tax payments during

FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 10


JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

2013 of P900,000 relating to 2012 profit. What amount should general report as
income tax payable at December 31, 2013?
a. P2,250,000 b. P1,950,000 c. P1,350,000 d.
P1,050,000
73.Prudential Company began operations in 2013. Included in Prudentials 2013
financial statements were bad debt expense of P1, 400,000 and profit from an
installment sale of P2, 600,000. For tax purposes, the bad debts will be deducted
and the profit from the installment sale will be recognized in 2014. The enacted
tax rates are 35% in 2013 and 38% in 2014. In its 2013 statement of
comprehensive income, what amount should Prudential report as deferred
portion of income tax expense?
a. P1, 400,000 b. P1, 520,000 c. P 456,000
d. P 420,000
74.At December 31, 2013, the income tax effects of Olive Companys temporary
differences were recognized as follows:
Deferred Tax Related
Asset
Assets (Liabilities)
Classification

Accelerated depreciation (P750, 000) Non-current asset


Additional costs in
inventory for tax
purposes ___250,000_ Current asset
(P500, 000)
The company has no history of incurring either financial accounting loss or taxable
loss and its history of operations indicates that it is expected to report taxable
profits in future years. Olive anticipates that P100, 000 of the deferred tax liability
will reverse in 2014. In its December 31, 2013 statement of financial position, what
amount should Olive report as non-current deferred tax liability?
a. P0 b. P250,000 c. P500,000 d. P750,000
At the end of 2013, its first year of operations, Beam Company prepared a
reconciliation between pretax financial income and taxable income as follows:
Pretax financial income P2, 000,000
Estimated litigation expense 5, 000,000
Installment sales 4, 000,000)
Taxable income P3, 000,000
The estimated litigation expense of P5, 000,000 will be deductible in 2014 when
it is expected to be paid. The gross profit from the installment sales will be
realized in the amount of P2, 000,000 in each of the next two years. The
estimated liability for litigation and the installment accounts receivable are
classified as non-current. The income tax rate is 30% for all years. Based on the
given data, what is the income tax for 2013?
a. P2, 100,000 b. P1, 500,000 c. P 900,000
d. P 600,000

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JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

SHAREHOLDERS EQUITY
1. In 2013, Inna Corporation acquired 6,000 shares of its P10 par value ordinary share capital
at P36 per share. During 2013, Inna issued 3,000 of these shares at P50 per share. Inna
uses the cost method to account for its treasury share transactions. What accounts and
amounts should Inna credit in 2013 to record the issuance of the 3,000 shares?

Treasury Shares Additional Paid-in Capital Retained Earnings Ordinary


Shares
a. - P102,000 P42,000 P6,000
b. - P144,000 - P6,000
c. P108,000 P42,000 - -
d. P108,000 - P42,000
2. A holder of a redeemable preference share can
a. Purchase treasury shares any time at the shareholders option.
b. Purchase additional shares offered in order to maintain the same fraction interest in the
corporation.
c. Turn in the preference shares for a specified cash price at a specified date or during a
specified period.
d. Convert the preference shares for ordinary shares.

3. The Shareholders equity of May Co. revealed the following on June 30, 2013:
Preference Share, P100 par value P230,000
Share Premium-Preference 80,000
Ordinary Share, P15 par value 525,000
Share Premium- Ordinary 275,000
Subscribed Ordinary Share 5,000
Retained Earnings 190,000
Notes Payable 400,000
Subscription Receivable-Ordinary 40,000
How much is the legal Capital of the Company?
a. P1.3055 M b. P1.115 M c. P0.760 M d. P0.755 M

4. March 2, 2013, Nanette Corporation issued 4,000 shares of 6% cumulative P100 par value
preference share for P480,000. Each preference share carried one detachable share
warrant which the holder to acquired at P35, one share of Nanettes P10 par ordinary share
capital. On March 2,2013, the market price of the preference share without the warrants
was P110 per share and the market price of the share warrants was P10 per warrant. What

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JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

is the amount credited to Share Premium-Preference Share by Nanette on the issuance of


the securities?
a. P0 b. P40,000 c. P50,000 d. P80,000

5. Following are shown on the statement of financial position of Py Company:


Share Capital, P100 par, 1,000 shares P100,000
Share Premium 2,000
Paid-in Capital from Treasury Shares 3,000
Retained Earnings P75,000
Treasury Shares, 200 shares at cost 25,000
All the treasury shares were sold for P20,000. How would the resale of the treasury shares be
recorded?
a. Cash P20,000
Treasury Shares P20,000
b. Cash 20,000
Share Premium 2,000
Paid-in Capital from Treasury Shares 3,000
Treasury Shares 25,000
c. Cash 20,000
Retained Earnings 5,000
Treasury Shares 25,000
d. Cash 20,000
Paid-in Capital from Treasury Shares 3,000
Retained Earnings 2,000
Treasury Shares 25,000

6. DIFFICULT MC31 The Powerpoint Corporation has two classes of share capital
outstanding: 9%, P20 par Preference and P70 par Ordinary. During the fiscal year
ending December 31, 2013, the company had the following equity transactions in
chronological order:
No. of shares Price per share
Issue of preference share 10,000
P28
Issue of ordinary share 35,000
70
Reacquisition and retirement of preference 2,000 30
Purchase of treasury ordinary share 5,000 80
Share split 2-for-1
Reissue of treasury ordinary share 5,000 52
Balances of the accounts in the shareholders equity section of the
December 31, 2012 statement of financial position were:
Preference Share Capital, 50,000 shares P
1,000,000
Ordinary Share Capital, 100,000 shares 7,000,000
Share Premium Preference
400,000
Share Premium Ordinary
1,200,000
Retained Earnings 550,000
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 13
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

Dividends were paid at the end of the fiscal year on the ordinary share at P1.20 per
share and on the preference at the preference rate. Profit for the year was P 850,000.
How much should be the amount of Preference Share Capital to be shown on the
December 31, 2013 statement of financial position?
a. P1,220,000 b. P1,160,000 c. P1,140,000 d. P1,116,000

7. Use the same information given in MC31. How much should be the amount of
Ordinary Share Capital to be shown on the December 31, 2013 statement of
financial position?
a. P9,450,000 b. P9,310,000 c. P9,130,000 d. P4,725,000

8. Use the same information given in MC31. The retirement of the 2,000 preference
shares would decrease Share Premium Preference by
a. P0 b. P16,000 c. P20,000 d. P60,000

9. Use the same information given in MC31. After the split, the par value per share of
the ordinary share capital
a. Remained at P70. b. was increased by P70 c. was reduced by P35 d. was
reduced by P14

10. Use the same information given in MC31. What is the total cost of the remaining
treasury shares?
a. P0 b. P200,000 c. P260,000 d. P400,000

11. The Mike Corporations statement of financial position shows total shareholders equity of
P3, 150,000 as of December 31, 2013. What is the book value per share, assuming that the
company has only one class of share capital outstanding consisting of 50,000, P10 par
ordinary shares?
a. P10.00 b. P63.00 c. 70.20 d. 73.00

12. Use the same information given in MC56. What is the book value per ordinary share
assuming that the company has two classes of share capital outstanding consisting the
following: 5,000, P100 par value preference shares with a liquidation value of P120 per
share and 50,000, P10 par value ordinary shares?
a. P10.00 b. P51.00 c. P53.00 d. P63.00

13. The Meg Company began operations in January 2011 and reported the following results for
each of its three years of operations. 2011- P520, 000 loss; 2012- P80, 000 loss; 2013- P1,
600,000 profit; At December 31, 2013, Meg Companys capital accounts were as follows:
8% Cumulative Preference Share Capital,
P100 par; 50, 000 shares authorized,
issued and outstanding P5,000,000
Ordinary Share Capital, P10 par;
1,000,000 shares authorized;
750,000 shares and outstanding P7,500,000
Meg Company has never paid a cash or bonus issue and there has been no change in its
capital accounts since it began operations in 2011. The corporation law permits dividends
only from retained earnings. What is the book value of the ordinary share at December 31,
2013?
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 14
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

a. P9.73 b. P10.00 c. P10.80 d. P11.33

14. Use the same information given in MC58. What is the book value of the ordinary share at
December 31, 2013 assuming that the preference share has a liquidating value of P160 per
share?
a. P10.80 b. P10.00 c. P9.60 d. P9.33

15. ABC Corporations performance during the last three years had not been favorable resulting
to a deficit of P950, 000 at December 31, 2013. The company with the approval of the
shareholders, decided to eliminate the deficit through a quasi-reorganization which would be
effected as follows: The Companys 200,000, P20 par ordinary share capital originally
issued at an average price of P22 would be reissued with the par value of P15. Immediately
after the quasi-reorganization, what would be the balance of additional paid in capital?
a. P1,400,000 b. P1,000,000 c. P600,000 d. P450,000

Problem 1
On January 1, 2013 Ruby Red Company granted to each of its four executives the right
to choose either 1,000 ordinary shares or to receive cash payment equal to 900 shares.
The grant is conditional upon the completion of three years of service. The entity
estimates that the value of the share alternative on January 1, 2013 is P150 per share.
Emeralds ordinary share capital has par value of P100. The following table shows the
fair value of Ruby Reds ordinary share:

January 1, 2013 P158


December 31, 2013 160
December 31, 2014 165
December 31, 2015 168
December 31, 2016 172
On executive exercised his right to receive the cash alternative on December 31,
2015; the others chose to receive the ordinary shares on December 31, 2016.

a. Determine the amount assigned to equity on January 1, 2013.


b. Compute the amount charged to Compensation Expense during the years
2013, 2014, 2015, and 2016 as a result of the foregoing.
c. Prepare all entries relating to the above during the years 2013 through 2016,
Inclusive.

Problem 2
On October 31, 2013, Red Ball Corporation declared dividends to its 100,000 ordinary shares
payable in the form of Tivoli Company ordinary. One share of Tivoli Company ordinary is
distributable for each 10 shares of Red Ball Corporation ordinary. The dividends are
distributable on February 28, 2014. The market value of Tivoli Company ordinary was P15 on
October 31, 2013, P17 on December 31, 2013 and P20 on February 28, 2014.

Give the entries to record the foregoing, including any adjustments at December 31, 2013. The
Tivoli Company ordinary was carried in the books of Red Ball Corporation on October 31, 2013
at P14 per share. Red Ball classifies Tivoli ordinary shares as financial assets at fair value
through profit or loss.

FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 15


JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

Problem 3
Red Heart Corporation was organized at the beginning of 2011 with 300,000 authorized shares
of P100 par value ordinary share capital. At December 31, 2011, the shareholders equity
section of Red Heart was as follows:
Ordinary Share Capital, P100 par,
30,000 shares issued P3, 000,000
Share Premium 300,000
Retained Earnings 450,000
Total Shareholders Equity P3, 750,000

On June 15, 2012, Red Heart issued 50,000 ordinary shares for P6, 000,000. A 5% bonus issue
was declared on September 30, 2012 and issued on November 10, 2012 to shareholders of
record on October 31, 2012. The market value of the ordinary share was P110 each on the
declaration date. The profit of Red Heart for the year ended December 31, 2012 was P1,
175,000.

During 2013, Red Heart had the following transactions:


March 1 Red Heart acquired 3,000 of its own ordinary shares for P95 each.
May 1 Red Heart sold 1,500 shares of its treasury for P120 per share.
August 10 Issued shareholders one stock right for each share held to purchase two
additional ordinary shares for P125 per share. The rights expire on
December 31, 2013.
September 15 15,000 stock rights were exercised when the market value of ordinary
share was P130 each.
October 31 40,000 stock rights were exercised when the market value of ordinary
share was P140 each.
December 10 Red Heart declared cash dividends of P5 per share payable on January
5, 2014.
December 20 Red Heart retired 1,000 shares of its treasury and reverted them to an
unissued basis. On this day the market value of the ordinary share was
P150 each.
Profit for 2013 was P1, 200,000.

(a) Journal entries for years 2012 and 2013.


(b) Shareholders equity section of the statement of financial position at December 31,
2013.

Problem 4
The Red Fox Corporation granted 100 share options to each of its 200 employees on January 1,
2013. The option plan entitles the employees to buy a share of the entitys P200 par ordinary
share capital at P220 per share. Based on an option pricing model used by Red Fox, the fair
value of the option on January 1, 2013 was determined to be P32. The plan further provides that
the employees should be in the service of the company until at least December 31, 2015. The
options are exercisable starting January 1, 2016 and expire on December 31, 2017. At January
1, 2013, it was estimated that 15% of the employees who received the options would resign
during the next three years. During 2013, 10 employees left the company. At December 31,
2013, 15 employees were expected to leave before December 31, 2015. During 2014, 12 more
employees left, and at the end of the year, it was expected that 5 more will resign before
December 31, 2015; although 8 employees left during 2015. 140 employees exercised their
options during 2016; another 10 employees exercised their options during 2017. The rest of the
options expired.
FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 16
JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

(a) Compute the compensation expense resulting from share options for the years 2013, 2014
and 2015.
(b) Prepare the entries for the years 2016 and 2017.

Problem 5
The Red Santa company began 2013 with P13,000,000 retained earnings account balanced, of
which P4,000,000 is appropriated for plant expansion. During the year 2013, the following
events occurred:
1.) A material error was discovered in the financial statements for the year 2012, which
caused depreciation of 2012 to be understated by P200,000. The company's income tax
rate is 30%. Cash dividends of P5 per share on the 300,000 P100 par ordinary shares
outstanding were declared and distributed, after paying the required annual dividends on
its 200,000 shares of 8% P100 par preference share.
2.) 10,000 shares of preference share capital were retired at P150 per share. These shares
were originally issued at P130 per share.
3.) The company completed its plant expansion project and released the retained earnings
previously appropriated for this purpose.
4.) A bonus issue of 45,000 shares of ordinary share capital was distributed to
shareholders. The shares sell at P150 per share on date of declaration and P140 per
share on the date of distribution. There were 300,000 shares issued and outstanding
before the bonus issue.
5.) During 2013, the company issued P20,000,000 10 - year 12% bonds. The bond
indenture provides that Red Santa shall restrict P 2,000,000 of retained earnings
annually for the accumulation of enough funds for this indebtedness.
6.) Profit for the year was P 3,000,000.

REQUIRED:
(a) Compute the retained earnings balance that will be shown in the statement of financial
position at December 31,2013. How much of this balance is unavailable for further
distribution of dividends?

FINANCING CYCLE AUDIT | BASIC AUDITING PRACTICE MODULE 17