1

REVIEW - LIABILITIES

Problem

1. Head Company prepared a draft of its 2023 statement of financial position. The draft statement
reported current liabilities totaling P2,000,000. However, none of the following items were included in
this preliminary total at December 31, 2023.

Accounts payable P300,000

Bonds payable, due 2024 500,000
Unamortized Discounts on Bonds Payable 60,000
Dividends payable – January 31, 2024 160,000
Notes payable, due 2025 400,000
Unamortized bonds issue costs 20,000

At which amount should Head’s current liabilities be correctly reported in the December 31, 2023
statement of financial position?
a. 2,880,000
b. 2,900,000
c. 2,960,000
d. 3,020,000

2. Soulwinning Company have the following information at year-end:

Accounts payable net of debit balances in

supplier’s accounts of 120,000 and includes cost
of goods received on consignment of 90,000 3,910,000
Accrued Rent expense 25,000
Credit balances of customer’s accounts 100,000
Claims for increase in wages by employees of the
business, covered in a pending lawsuit 420,000
Estimated expenses in redeeming coupons
presented by customers 180,000
Soulwinning Company as guarantor 200,000
Reserve for contingencies 90,000

What amount should be presented as short-term debt at year-end?

a. 4,455,000
b. 4,735,000
c. 4,005,000
d. 4,245,000
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3. Valencia Corporation has the following liabilities at December 31, 2023:

8.9% note payable issued November 1, 2023, maturing
October 31, 2024 1,150,000
7.25% note payable issued August 1, 2023, payable in twelve equal
annual installments of 90,000 beginning August 1, 2024 1,080,000
Valencia’s December 31, 2023 financial statements were issued on March 19, 2024. On January 23,
2024, the entire 1,150,000 balance of the 8.9% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on December 29, 2023, Valencia consummated a non-
cancelable agreement with the lender to refinance the 7.25%, 1,080,000 note on a long-term basis.
On the December 31, 2023 statement of financial position, the amount of these notes payable that
Valencia should classify as short-term obligations is
a. 0.
b. 1,080,000.
c. 1,150,000.
d. 2,230,000.

4. Fuller Food Company distributes to consumers coupons which may be presented (on or before a stated
expiration date) to grocers for discounts on certain products of Fuller. The grocers are reimbursed
when they send the coupons to Fuller. In Fuller's experience, 50% of such coupons are redeemed,
and generally one-month elapses between the date a grocer receives a coupon from a consumer and
the date Fuller receives it. During 2023 Fuller issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/2023
1/1/2023 375,000 6/30/2023 177,000
7/1/2023 540,000 12/31/2023 225,000
The only journal entries to date recorded debits to coupon expense and credits to cash of 536,000.
The December 31, 2023 statement of financial position should include a liability for unredeemed
coupons of
a. 0.
b. 45,000.
c. 93,000.
d. 270,000.
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5. Jenkins Corporation has 2,500,000 of short-term debt it expects to retire with proceeds from the sale
of 75,000 ordinary shares. If the shares are sold for 20 per share subsequent to the statement of
financial position date, but before the statement of financial position is issued, what amount of short-
term debt could be excluded from current liabilities?
a. 1,500,000
b. 2,500,000
c. 1,000,000
d. 0

6. Warranty4U provides extended service contracts on electronic equipment sold through major retailers.
The standard contract is for three years. During the current year, Warranty4U provided 21,000 such
warranty contracts at an average price of 81 each. Related to these contracts, the company spent
200,000 servicing the contracts during the current year and expects to spend 1,050,000 more in the
future. What is the net profit that the company will recognize in the current year related to these
contracts?
a. 451,000.
b. 1,501,000.
c. 150,333.
d. 367,000.

7. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company
has consulted with its attorney and determined that it is possible that they may lose the case. The
attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated
that the amount of any payment would be 500,000. What is the required journal entry as a result of
this litigation?
a.Debit Litigation Expense for 500,000 and credit Litigation liability for 500,000.
b.No journal entry is required.
c.Debit Litigation Expense for 200,000 and credit Litigation Liability for 200,000.
d.Debit Litigation Expense for 300,000 and credit Litigation Liability for 300,000.
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8. LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 box tops
from LeMay Frosted Flakes boxes and 1.00. The company estimates that 60% of the box tops will be
redeemed. In 2023, the company sold 500,000 boxes of Frosted Flakes and customers redeemed
220,000 box tops receiving 55,000 bowls. If the bowls cost LeMay Company 2.50 each, how much
liability for outstanding premiums should be recorded at the end of 2023?
a. 20,000
b. 30,000
c. 50,000
d. 70,000

9. Vista newspapers sold 4,000 of annual subscriptions at 125 each on September 1. How much
unearned revenue will exist as of December 31?
a. 0.
b. 333,333.
c. 166,667.
d. 500,000.

10. During 2021, Stabler Co. introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in
the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual
warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2021 400,000 6,000
2022 1,000,000 30,000
2023 1,400,000 90,000
2,800,000 126,000
What amount should Stabler report as a liability at December 31, 2023?
a. 0
b. 10,000
c. 136,000
d. 210,000
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11. Ayumi Company owns a car dealership that it uses for servicing cars under warranty. The entity sold
500 cars during the year.

The entity’s experience with warranty claims is that 60% of all cars sold in a year have zero defect,
25% of all cars sold in a year have normal defect, and 15% of all cars sold in a year have significant
defect.

The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect”
in a car is P30,000.

What is the “expected value” of the provision for warranty for the current year?
a. 4,000,000
b. 3,500,000.
c. 1,750,000
d. 1,400,000

12. Donald Company has an incentive compensation under which a branch manager received 10% of the
branch income after deduction of the bonus but before deduction of income tax. Branch income for the
current year before the bonus and income tax was P1,650,000. The tax rate is 30%. What is the bonus
for the current year?
a. 126,000
b. 150 000
c. 165,000
d. 180,000

13. The Kingston Company launched a new sales promotional program. For every 10 chewing gum box
tops returned to Kingston, customers receive an attractive prize. Kingston estimates that 40% of the
chewing gum box tops reaching the consumer market will not be redeemed. Additional information is
as follows:
Units Amount
Sales of chewing gum (in boxes) 3,000,000 ?3,600,000
Purchase of prizes by Kingston 80,000 40,000
Prizes distributed to customers 42,000

At the end of the year, Kingston recognized a provision equal to the estimated cost of potential prizes
outstanding. What is the amount of this provision?
a. 69,000
b. 49,000
c. 39,000
d. 21,000
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14. In 2023, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate,
Halsey reported a P50,000 liability in its December 31, 2023 balance sheet. In November 2024,
Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of
P30,000. The plaintiff has appealed the decision, and Halsey’s counsel is unable to predict the
outcome of the appeal. In its December 31, 2024 balance sheet, Halsey should report what amounts
of asset and liability related to these legal actions?
Asset Liability
a. 30,000 50,000
b. 30,000 0
c. 0 20,000
d. 0 0

15. Olson uses the accrual method to account for the warranty and premium costs for financial reporting
purposes. Warranty is estimated to be 2% of sales from the instrument and equipment. Olson’s sales
for 2023 totaled P54,000,000 from musical instruments and sound reproduction equipment and
P18,000,000 from recorded music and sheet music. Actual warranty claims is 1,640,000. The
balances in the accounts related to warranties and premiums on January 1, 2023, were as shown
below: (missing data)
Inventory of premium CD players P399, 500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

Based on the preceding information, determine the amounts that will be shown on the 2023 financial
statements for the following:
1. Warranty Expense
a. P1,640,000
b. P1,080,000
c. P800,000
d. P360,000

2. Estimated liability from warranties

a. P1,920,000
b. P1,080,000
c. P240,000
d. P800,000

3. Inventory of premium CD players

a. P399,500
b. P569,5000
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c. P2,210,00
d. P739, 500

16. On April 1, 2023, Jostin Company issued at 99 plus accrued interest, 2,000 of its 8% P1,000 face
value bonds. The bonds are dated January 1, 2023, mature on January 1, 2033, and pay interest on
July 1 and January 1. Jostin paid bond issue cost of P70,000. From the bond issuance, Jostin
received net cash of
a. 2,020,000 c. 1,950,000
b. 1,980,000 d. 1,910,000

17. On January 2, 2024, Cherry Co. issued 9% bonds in the amount of P1,000,000, which mature on
January 2, 2034. The bonds were issued for P939,000 to yield 10%. Interest is payable annually on
December 31. Cherry uses the interest method of amortizing bond discount.

In its December 31, 2024 balance sheet, what amount should Cherry report as bonds payable?
a. 939,000
b. 942,900
c. 947,190
d. 1,000,000

18. On January 2, 2024, Cherry Company issued its 9% bonds in the face amount of P4,000,000 which
mature on January 1, 2034. The bonds were issued for P3,756,000 to yield 10%. Cherry uses the
interest method of amortizing bond discount. Interest is payable annually on December 31.

At December 31, 2025, how much should be Cherry’s unamortized bond discount?
a. 192,364
b. 211,240
c. 228,400
d. 244,000
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19. On June 30, 2024, Relian Corporation had outstanding 10 percent, P2,000,000 face amount, 15-year
bonds maturing on June 30, 2030. Interest is paid on June 30 and December 31, and bond discount
and bond issue costs are amortized of these dates. The unamortized balances on June 30, 2024 of
bond premium and bond issue costs were P110,000 and P40,00, respectively. Relian reacquired ell
of these bonds at 96 on June 30, 2024, and retired them.

Ignoring income taxes, how much gain or loss should Relian record on the bond retirement?
a. loss of P70,000
b. Gain of P70,000
c. Loss of P150,000
d. Gain of P150,000

20. On January 1, 2024, Karla Company issued its 10%, 4-year convertible debt instrument with a face
amount of P4,000,000 for P4,400,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 35,000 ordinary shares with a par value of P100. When the debt
instruments were issued, the prevailing market rate of interest for similar debt without conversion
option is 8%. (Carry PV factors up to 3 decimal places)

1. How much of the total proceeds represents the equity component?

a. none
b. 135,200
c. 264,800
d. 400,000

2. What is the balance of the unamortized premium on debt instrument as of December 31, 2024?
a. 73,860
b. 142,463
c. 205,984
d. 264,800
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21. On January 1, 2024, Karla Company Issued its 10%, 6-yr convertible debt instrument with a face
amount of P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt instrument is
convertible into equity from the time of issue until maturity. When the debt instruments were issued,
the prevailing market rate of interest for similar debt without conversion option is 8%.
On December 31, 2025, Karla company converted all the debt instruments by issuing 30,000
ordinary shares.

What amount should be credited to the share premium account as a result of the conversion?
a. None
b. 198,176
c. 239,052
d. 421,193

22. On January 1, 2022, Edgar Company issued its 9%, 4-year convertible debt instrument with a face
amount of P4,000,000.00 for P4,100,000.00. Interest is payable every December 31 of each
year. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50.
When the debt instruments were issued, the prevailing market rate of interest for similar debt
without conversion option is 10%.

On December 31, 2023, ¼ of the convertible debt instruments were retired for P1,000,000.00.
Without the conversion option, the debt instrument can be retired at 97%.

1. On the date of issue, what amount of the proceeds represents the equity component?
a. None
b. 226,800
c. 3,873,200
d. 4,100,000
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2. What is the carrying value of the debt instrument as of December 31,2023?

a. 3,873,200
b. 3,900,520
c. 3,930,572
d. 3,963,629

3. On the date of retirement, what amount of the proceeds represents the equity component?
a. 12,643
b. 26,700
c. 30,000
d. 56,700

Q4. What amount of gain or loss should be reported in the profit or loss on the retirement of the
convertible debt instruments?
a. 12,643
b. 26,700
c. 30,000
d. 56,700

**

23. On January 2, 2024, the Kelly, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds
will mature on January 1, 2028 and interest is payable annually every January 1. The bond contract
entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each
P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the
conversion option is 10%.

On December 31, 2025, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. In addition, the company reacquired at 110, bonds with a face value of P500,000.

The balances in the capital accounts as of December 31, 2024 were:

Common stock, P100 par, authorized 50,000 shares, issued and

outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000
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Market value of the common stock and bonds were as follows:

Date Bonds Common stock

December 31, 2024 118 40
December 31, 2025 110 42

Based on the above and the result of your audit, answer the following:

1. How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
a. P634,000
b. P126,816
c. P221,664
d. P0

2. How much is the carrying value of the bonds payable as of December 31, 2024?
a. P2,000,000
b. P1,389,400
c. P1,796,170
d. P1,900,502

3. How much is the interest expense for the year 2025?

a. P160,000
b. P138,940
c. P179,617
d. P190,050

4. The entry to record the conversion on December 31, 2025 will include a credit to APIC of
a. P365,276
b. P400,000
c. P307,893
d. P428,884
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5. How much is the loss on bond reacquisition on December 31, 2025?

a. P50,000
b. P96,053
c. P67,362
d. P0

24. On July 1,2024 Kaila Corporation issued a five-year note payable with a face value of P250,000 and
a 10% interest rate. The terms of the note require Kaila to make five annual payments of P50,00 plus
accrued interest, with the first payment due on June 30, 2025.
With respect to the note, how much would be included in the current liabilities section of Kaila’s Dec.
31, 2024 Balance sheet?
a. 12,500
b. 50,000
c. 62,500
d. 75,000

25. John Paul Company is indebted to Jerome Company under a P1,000,000, 12% three-year note dated
December 31, 2021. Because of John Paul’s financial difficulties developing in 2024, John Paul owed
accrued interest of P120,000 on the note at December 31, 2024. Jerome agreed to settle the note
and accrued interest for a tract of land having a fair market value of P900,000. John Paul’s acquisition
cost of the land is P720,000.

Ignoring income taxes, in its 2024 income statement, how much should John Paul report in its income
statement as a result of the settlement?
a. none
b. 180,000
c. 220,000
d. 400,000
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26. Jerome Company owes P2,000,000 plus P180,000 of accrued interest to Scotia Bank. The debt is a
10-year, 10% note. During 2024, Jerome’s business deteriorated due to a faltering regional economy.
On December 31, 2024, Scotia Bank agrees to accept an old machine and cancel the entire debt. The
machine has a cost of P3,900,000, accumulated depreciation of P2,210,000, and a fair market value
of P1,900,000.

How much should Jerome Company report in its profit or loss as a result of the financial liability’s
derecognition?
a. 210,000
b. 210,000
c. 280,000
d. 490,000

27. Catherine Company is experiencing financial difficulty and is negotiating trouble debt restructuring with
its creditors to relieve its financial stress. Catherine has a P5,000,000 note payable to PNB. The bank
is considering acceptance of an equity interest in Catherine Company in the form of 400,000 ordinary
shares valued at P12 per share. The par value of the ordinary share is P10 per share.

What is the amount of gain to be reported by Catherine in its income statement as a result of the
restructuring?
a. 0
b. 200,000
c. 500,000
d. 1,000,000

28. Victoria Company is experiencing financial difficulty and is negotiating trouble debt restructuring with
its creditors to relieve its financial stress. Victoria has a P3,000,000 note payable to PNB. The bank
is considering acceptance of an equity interest in Victoria Company in the form of 200,000 ordinary
shares valued at P12 per share. The par value of the ordinary share is P10 per share.

What is the amount of share premium to be reported by Victoria in its balance sheet as a result of the
restructuring?
a. 600,000
b. 200,000
c. 500,000
d. 1,000,000
e. 400,000
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29. Due to adverse economic circumstances and poor management, Loot Company had negotiated a
restructuring of its 9% 7,000,000 note payable to Boot Company due on January 1, 2024. There is no
accrued interest on the note. The bank has reduced the principal obligation from 7,000,000 to
6,000,000 and extend the maturity to 3 years or on December 31, 2026. However, the new interest
rate is 13% payable annually every December 31. The present value of 1 at 9% for three periods is
.77 and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53.

What is the gain on extinguishment of debt to be recognized for 2024?

a. 0
b. 206,000
c. 406,000
d. 406,600

30. Fahrenheit Company has negotiated a restructuring of its10% P8,000,000 note payable to Duh
Company due on January 1, 2024. There’s no accrued interest on the note. Duh company reduced
the principal obligation from 8,000,000 to 6,000,000 extend the maturity to 4 years. New interest rate
is 14% payable annually every December 31.

The present value of 1 at 10% for 4 periods is 0.683 and the present value of an ordinary annuity of 1
at 10% for 4 periods is 3.17

What is gain on extinguishment to be recognized for 2024?

a. 2,800,000
b. 2,000,000
c. 1,239,200.
d. 2,039,200
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31. Down company has an overdue Notes Payable to City Bank of P8,000,000 and recorded accrued
interest expense of P640,000, based on the 8% interest rate.

As a result of a settlement on December 31, 2024, City Bank agreed to the following restructuring
agreement:
· Reduced the principal obligation to P6,000,000
· Forgave the P640,000
· Extended maturity date to December 31, 2026
· Annual interest of 10% is to be paid on 2025- and 2026-year end.

What is Down Company’s gain on debt restructuring?

a. 2,640,000
b. 2,426,220.
c. 1,440,000
d. 0

32. JP Company computed a pretax accounting income of P5,000,000 for its first year of operations
ended December 31, 2023. In preparing the income tax return for 2023, the following differences are
noted between accounting income and taxable income.
Nondeductible expenses 200,000
Nontaxable revenue 500,000
Gross income on installment sales reported in accounting
income but not in taxable income (expected to reverse in 2024) 1,000,000
Provision for doubtful accounts 100,000
Income tax rate 35%

What is the “current tax expense”?

a. 1,330,000
b. 1,645,000
c. 1,750,000
d. 1,295,000

33. Catherine company at the end of 2024, its first year of operation prepared reconciliation between
pre-tax financial Income and taxable income as follows:
Pretax financial income P 900,000
Estimation litigation expense 500,000
Installment sales ( 400,000)
Taxable income P 1,000,000
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The estimate of litigation expense of P500,000 will be deductible in 2025 when it is expected to be
paid. The gross profit from the installment sales will be realized in the amount of P200,000 in each of
the next two years. The estimated liability for litigation is classified as non-current and the installment
accounts receivable are classified as P200,000 current and P200,000 non-current. The income tax
rate is 32% in 2024 enacted tax law which will be implemented early next year. Tax rate will be 33%
for all years.

How much shall be the income tax expense?

a. 287,000
b. 288,000
c. 297,000
d. 353,000

34. Catherine Co. lease a facility and P600,000 annual rental payment on June 16, 2024. The beginning
of the lease was July 1, 2024. Rental income is taxable when received. The income tax rate is 32%.
Catherine had no other permanent or temporary differences.

What amount of deferred tax asset should Catherine report in its December 31, 2024 balance sheet?
a. 0
b. 96,000
c. 192,000
d. 204,000

35. On June 30, 2024, Catherine corporation Prepaid a P380,000 premium on an insurance policy. The
premium payment was a tax-deductible expense in Catherine 2024 cash basis tax return. The accrual
basis income statement will report a P190,000 insurance expense in 2024 and 2025.Assume the
income tax rate is 32%.

In Catherine December 31, 2024 balance sheet, what amount related to the insurance should be
reported as deferred liability?
a. 0
b. 60,800
c. 121,600
d. 182,400

36. Catherine company lease office premises to Fox Inc. for a 4-year term beginning January 2, 2024.
Under the terms of the operating lease, rent for the first year is P216,00 and rent for years 2 through
4 is P337,500 per annum. However, as an inducement to enter the lease, Fox was allowed to use the
lease asset rent-free for the first three months. Assume tax rate of 32%.

In its December 31, 2024 balance sheet of Catherine company, what amount should be reported as
deferred tax asset?
a. 0
b. 42,120
c. 51, 840
d. 93,969

37. The following differences enter into the reconciliation of financial income and taxable income of Tricia
Company for the year ended December 31, 2023, its first year of operations.

Life insurance expense P 100,000

Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
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Unamortized computer software 3,000,000

Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 400,000
Interest income from long-term certificate of deposit 200,000

Additional information:
· On July 1, 2023 Tricia paid insurance premium of P200,000 on the life of an officer with Tricia
Company as beneficiary.
· Excess tax depreciation will reverse equally over a four-year period, 2024-2027.
· The warranty liability is the estimated warranty cost that was recognized as expense in 2023 but
deductible for tax purposes when actually paid.
· It is estimated that the litigation liability will be paid in 2027.
· In January 2023, Tricia Company incurred P4,000,000 of computer software cost. Considering
the technical feasibility of the project, this cost was capitalized and amortized over 4 years for
accounting purposes. However, the total amount was expensed in 2023 for tax purposes.
· Rent revenue will be recognized during the last year of the lease, 2027.
· Interest revenue from the from long-term certificate of deposit is expected to be P200,000 each
year until their maturity at the end of 2027.
· Pretax accounting income is P10,000,000. Assume current tax rate and future enacted tax rate
of 35%.

Based on the above and the result of your audit, compute for the following:

1. Total temporary differences

a. P6,400,000
b. P6,100,000
c. P4,100,000
d. P7,100,000

2. Deferred tax liability

a. P1,050,000
b. P2,100,000
c. P1,890,000
d. P1,750,000

3. Deferred tax asset

a. P385,000
b. P245,000
c. P1,085,000
d. P210,000

4. Current income tax expense

a. P2,100,000
b. P2,800,000
c. P1,750,000
d. P1,820,000

5. Total income tax expense

a. P3,535,000
b. P3,465,000
c. P3,500,000
d. P4,830,000
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38. On January 1, 2024, Olivia Company leased a building to Banner Company for 3 years. The annual
rental is P450,000. Additionally, Banner Company paid P252,000 as a lease bonus and P125,000 as
a security deposit to be refunded upon expiration of the lease. What amount should be reported as
lease income for 2024?
a. 450,000
b. 534,000
c. 659,000
d. 702,000

39. On July 1, 2023, Angel Company entered into a twelve-month lease of a commercial space. The lease
payments are scheduled semi-annually, and amounts are as follows:

December 31, 2023 425,000

June 30, 2024 675,000

What amount of rent expense should be recognized on December 31, 2023?

a. 549,999.99
b. 91,666.67
c. 1,100,000.00
d. 0

40. On December 1, 2024, YH Corporation leased office space for 10 years at a monthly rental of
$80,000. On that date Goetz paid the landlord the following amounts:

Rent deposit P80,000

First month's rent 80,000
Last month's rent 80,000
Installation of new walls and offices 640,000
Total payment P880,000

The entire amount of P880,000 was charged to rent expense in 2024.

What amount should YH have charged to expense for the year ended December 31, 2024?
a. 80,000
b. 85,333
c. 165,333
d. 640,000

41. On July 1, 2023, Atong Company leased a delivery truck from King Company under a 3-year operating
lease. Total rent for the term of the lease will be P540,000 payable as follows:

First 12 months @ P7,500 per month 90,000

Next 12 months @ P11,250 per month 135,000
Last 12 months @ P26,250 per month 315,000

All payments are made when due.

1. What amount should be reported as lease income for the year 2023?
a. 45,000
b. 75,000
c. 90,000
d. 180,000

2. What amount should be reported as lease receivable on December 31, 2024?

a. 0
b. 112,500
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c. 202,500
d. 315,000

42. At the beginning of the current year, Angel Company leased a machinery with the following information:

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

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

1. What is the initial lease liability?

a. 3,510,000
b. 3,170,000
c. 4,010,000
d. 4,000,000

2. What is the cost of right use asset?

a. 4,200,000
b. 4,250,000
c. 3,810,000
d. 3,900,000

3. What is the depreciation for current year?

a. 462,500
b. 925,000
c. 850,000
d. 965,000

4. What is the lease liability at year-end?

a. 2,510,000
b. 3,159,000
c. 2,861,000
d. 3,620,000

43. At the beginning of current year, Tricia Company leased a building from a lessor with the following
pertinent information:

Annual rental payable at the end of each year 1,500,000

Initial direct cost paid 300,000
Lease incentive received 50,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 300,000
Lease Term 5 years
Useful Life of building 8 years
Implicit interest rate 10 %
PV of an ordinary annuity of 1 for 5 periods at 10% 3.79
Present value of 1 for 5 periods at 10% 0.62
 20

1. What is cost of the right of use asset?

a. 5,585,000
b. 5,600,000
c. 5,705,000
d. 5,821,000
e. 6,121,000

2. What is the depreciation for current year?

a. 700,625
b. 701,350
c. 775,000
d. 727,625
e. 765,125

3. What is the interest expense for the current year?

a. 582,100
b. 589,000
c. 580,000
d. 429,000
e. 587,100

4. What is the lease liability at year-end?

a. 4,903,100
b. 5,109,500
c. 4,950,000
d. 4,719,300

e. 4,958,100

44. On January 1, 2024 Gina company, lessor leased a machine to Fay Inc., lessee. The machine had an
original cost of P7,000,000. The lease term is for five years, and the implicit rate is 15%. The annual
lease payments of P1,370,145 are made at the end of each year. The leased machine will revert to
Gina at the end of the term, at which time, the guaranteed residual value is P450,000.

1. What is the balance of Gina Company’s lease receivable?

a. 1, 370,145
b. 7,000,000
c. 4,592,726
d. 4,816,376

2. What is the balance of Fay Inc.’s lease liability?

a. 1, 370,145
b. 7,000,000
c. 4,592,726
d. 4,816,376

45. On January 1, 2024, Mess Company entered to a ten-year non-cancelable lease agreement to lease
a building from Keep Company. The agreement required equal annual payments at the end of each
year. The fair value of the building at the beginning of the lease is P3,949,500, while the carrying
amount to Keep Company is P3,458,000. The building has estimated useful life of 10 years. The title
of the building will be transferred to Mess at the end of the lease. The incremental borrowing rate of
Mess Company is 12%. Keep Company set the annual rental to insure 10% rate of return. The implicit
rate of the lessor is known by the lessee. The annual lease payment includes P35,000 executory costs.
1. What is the minimum annual lease payment?
a. 642,718
 21

b. 500,000
c. 562,734
d. 480,000

2. What Is the total annual lease payment?

a. 515,000
b. 535,000
c. 597,734
d. 677,718

46. At the beginning of current year, Catherine Company sold an equipment with remaining life of 10
years and immediately leased it back for 4 years at the prevailing market rental.

Sale price at fair value 6,000,000

Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1 at 10% for
Four periods 3.17

1. What is the initial lease liability?

a. 2,536,000
b. 3,200,000
c. 3,000,000
d. 0

2. What is the cost of right of use asset?

a. 1,902,000
b. 2,598,000
c. 2,536,000
d. 0

3. What is the gain on right transferred to the buyer-lessor?

a. 866,000
b. 634,000
c. 750,000
d. 0

4. What is the annual depreciation of the right of use asset?

a. 475,500
b. 190,200
c. 634,000
d. 253,600

5. What is the net annual rental income of the buyer-lessor?

a. 800,000
b. 200,000
c. 600,000
d. 400,000

47. At the beginning of current year, Catherine Company sold a building with remaining life of 20 years
and immediately leased it back for 5 years.
 22

Sale price at above fair value 20,000,000

Fair value of building 18,000,000
Carrying amount of building 10,800,000
Annual rental payable at the end of each year 1.500,000
Implicit interest rate 12%
Present value of an ordinary annuity of 1 at 12%
For five periods 3.60

1. What is the initial lease liability?

a. 5,400,000
b. 3,400,000
c. 7,500,000
d. 7,400,000

2. What is the cost of right of use asset?

a. 2,040,000
b. 4,000,000
c. 2,000,000
d. 3,000,000

3. What is the gain on right transferred to the buyer-lessor?

a. 7,200,000
b. 1,500,000
c. 5,600,000
d. 5,840,000

4. What is the gross rental income of the buyer-lessor?

a. 1,500,000
b. 2,000,000
c. 944,444
d. 555,596

5. What is the depreciation of the building of the buyer-lessor?

a. 1,000,000
b. 1,500,000
c. 900,000
d. 500,000

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

Sale price at fair value 5,000,000

Carrying amount of machine 6,000,000
Annual rental payable at the end of the year 500,000
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at
6% for 5 periods 4.21

1. What is the initial lease liability

a. 2,500,000
b. 2,105,000
c. 3,000,000
d. 0
 23

2. What is the cost of right of use asset?

a. 2,105,000
b. 2,526,000
c. 2,895,000
d. 1,500,000

3. What is the loss on right transferred to the buyer-lessor?

a. 508,200
b. 500,000
c. 579,000
d. 0

4. What is the net annual rent income of the buyer-lessor?

a. 373,700
b. 200,000
c. 500,000
d. 250,000

49. The following information is made available involving the defined benefit pension plan of Cheska
Company for the year 2024:
Fair value of plan asset, 1/1/2024 3,500,000
PV of benefit obligation, 1/1/2024 3,750,000
Current service cost 700,000
Actual return on plan asset 420,000
Contribution to the plan 600,000
Benefits paid to retirees 750,000
Decrease in the present value of benefit obligation due
to change in actuarial assumptions 100,000
PV of defined benefit obligation settled 250,000
Settlement price of defined benefit obligation 200,000
Discount rate 10%

1. What amount employee benefit cost should be reported in the profit or loss?
a. 675,000
b.725,000
c. 1,025,000
d. 1,075,000

2. What is the net amount of remeasurements for the year 2024?

a. 50,000
b. 75,000
c. 100,000
d. 170,000

3. What is the fair value of the plan asset as of December 31, 2024?
a. 3,500,000
b. 3,570,000
c. 3,770,000
d. 4,100,000

4. What is the present value of benefit obligation as of December 31, 2024?

a. 3,725,000
b. 3,825,000
c. 3,975,000
 24

d. 4,825,000

5. What is balance of the prepaid or accrued pension as of December 31, 2024?

a. Prepaid pension P155,000
b. Accrued pension P155,000
c. Prepaid pension P325,000
d. Accrued pension P325,000

50. On January 1, 2024 Angelika Company had the following balances related to a defined benefit plan:

Fair Value of Plan Asset 8,710,500

Projected Benefit Obligation 10,500,500

Angelika provided the following data for the current year:

Current service cost 710,000

Settlement discount rate 8%
Actual Return on Plan assets 850,000
Contribution to the Plan 999,000
Benefits paid to retirees 195,500

Q1) What is the employee benefit expense?

a. 675,000
b. 600,000
c. 853,200
d. 650,000

Q2) What is the remeasurement gain on plan assets?

a. 700,000
b. 125,000
c. 575,000
d. 153,160

Q3) What is the defined benefit costs?

a. 435,960
b. 900,000
c. 298,960
d. 400,000
 25

REVIEW - LIABILITIES
Answer Section

PROBLEM

1. ANSWER: A

Balance per books ?2,000,000

Accounts payable 300,000
Bonds payable, due 2024 500,000
Discount on bonds payable ( 60,000)
Dividends payable 160,000
Bond issue costs ( 20,000)
Total current liabilities ?2,880,000 .

2. Answer: D
Accounts payable net of debit balances in
supplier’s accounts of P120,000 and includes cost
of goods received on consignment of 90,000 3,940,000
Accrued Rent expense 25,000
Credit balances of customer’s accounts 100,000
Estimated expenses in redeeming coupons
presented by customers 180,000
? 4,245,000

3. C

4. B ( 540,000 × .5) – 225,000 = 45,000.

5. D

6. D [(21,000 × 81) ¸ 3 yrs.] – 200,000 = 367,000.

7. B Likelihood of loss is only possible, not probable.

8. B {[(500,000 × .60) – 220,000] ÷ 4} × 1.50 = 30,000.

9. B (4,000 × 125) × 8/12 = 333,333.

10. D ( 2,800,000 x .12) – 126,000 = 210,000.

11. B
Normal defect (25% x 500 x P10,000) 1,250,000
Significant defect (15% x 500 x P30,000) 2,250,000
Provision for warranty 3,500,000

12. B

13. A

Estimated total number of premiums (3M x 60%) / 10 180,000

Premiums/prizes distributed 42,000
 26

Outstanding premiums 138,000

Cost per premium (40,000 / 80,000) 0.50
Estimated cost of potential prizes outstanding 69,000

14. D

At 12/31/2023, Halsey’s contingent liability of P50,000 is no longer probable due to the favorable
judgment and the inability to predict the outcome of the appeal. Therefore, no liability should be
reported in the balance sheet. Gain contingencies are not reflected in the accounts until realized,
so the P30,000 asset is not reported in the 12/31/2023 balance sheet, either.

15. 1.Answer: B
Sales of musical instruments and sound reproduction equipment
P54,000,000
Estimated warranty cost x
2%
Warranty expense for 2023 P 1,080,000
2. Answer: D
Estimated liability from warranties, Jan 1, 2023 P1,360,000
Add: 2023 warranty expense 1,080,000
Total P2,440,000
Less: Actual warranty costs during 2023 1,640,000
Estimated liability from warranties, Dec. 31, 2023 P 800,000

3. Answer: B
Inventory of premium CD players P 399,500
Add: Premium CD players purchased during 2023 (P340 x 6,500) 2,210,000
Total 2,609,500
Less: Premium CD players distributed to customers during 2023
(1,200,000/200 = 6,000 x P340) 2,040,000
Inventory of premium CD players, Dec 31, 2023 P 569,500

16. C

17. B
Carrying Value, January 2, 2022 P393,000
Add: Discount Amortization
Interest paid (P1,000,000 x 9%) P90,000
Less: interest expense (P393,000 x 10%) 93,900 3,900
Carrying value, December 31, 2022 P942,900

18. B
Face value P4,000,000
Less: carrying value, December 31, 2025 3,788,760
Unamortized bond discount P 211,240

Date Interest Interest Discount Carrying

Paid Expense Amortization Value
1/1/08 0 0 0 3,756,000
12/31/08 360,000 375,600 15,600 3,771,600
12/31/09 360,000 377,160 17,160 3,788,760

Interest Expense=Carrying value of the ability x Yield rate

19. C
 27

Retirement Price (P2,000,000 x 96%) P1,920,000

Less: carrying value of Bonds, June 3, 2024
Face value P2,000,000
Unamortized discount 110,000
Unamortized issue costs (40,000) 2,070,000
Loss on retirement P 150,000

20. Q1 : B
Total proceeds from issue of debt P4,400,000
Less: Liability component (PV of expected cash flows)
Interest (P4,000,000 x 10% x 3.312) P 1,324,800
Face (P4,000,000 x .735) 2,940,000 4,264,800
Equity Component P 135,000

Q2. : C
Carrying value of debt as of Jan. 1, 2022 P4,264,800
Less: premium amortization
Interest paid P400,000
Interest expense(4,264,800 x 8%) 341,184 58,816
Carrying value of debt as of Dec. 31,2022 P4,205,984
Less: face value of debt 4,000,000
Unamortized premium as of December 31, 2022 P 205,984

21. D
Carrying value of debt as of December 31, 2025 P3,198,176
Less: par value of ordinary shares (30,000 x 100) 3,000,000
Credit to share premium on conversion date P 198,176
Transfer of the equity component 223,100
Total credit to share premium on conversion P 421,276

22. Q1- B
Q2-C
Q3-C
Q4 -A
Total Issue Price P4,100,000
Less: Liability Component (Schedule A) 3,873,200
Equity Component P 226,800

SCHEDULE A:
Present value of future interest discounted at 10%
(4,000,000 x 9% x 3.170) P1,141,200
Present value of the principal (4,000,000 x .683) 2,732,000
Liability Component P3,873,200

Date Interest Interest Discount Carrying

Paid expense Amortization Value
1/1/06 0 0 0 3,873,200
12/31/06 360,000 387,320 27,320 3,900,520
12/31/07 360,000 390,052 30,052 3,930,572

Total retirement price P1,000,000

Less: liability Component (1,000,000 x 97%) 970,000
Retirement Price on Account of the Equity Component P 30,000
 28

Equity Component- to be cancelled (P226,800 x ¼) P56,700

Retirement Price on Account of the Equity Component 30,000
Gain on cancellation- to stockholder’s equity P26,700

Retirement price- liability Component P970,000

Less: carrying Value of debt-profit or loss 982,643
Gain on retirement of debt- profit or loss P 12,643

23. BDDAC

24. C
Current portion of notes payable P50,000
Add: Accrued interest on N/P (P250,000 x 10% x 6/12) 12,500
Total current liabilities P62,500

25. D
Book value of liability
Face value P1,000,000
Accrued interest 120,000 P1,120,000
Less: Carrying value of the land 720,000
Gain on derecognition of liability P400,000

26. D
Book value of notes payable:
Principal P2,000,000
Accrued interest 180,000 P2,180,000
Less: Book value of machine:
Cost P3,900,000
Less: Accumulated depreciation 2,210,000 1,690,000
Gain on derecognition of financial liability P470,000

27. A
Gain or loss on equity swap, debt restructuring is not required. Under SFAS 18, issuance of share
capital in full settlement of an obligation is measured by the book value of the liability settled. The
excess of the liability over the par value of the share capital issued is credited to additional paid in
capital/share premium.

28. D
Note payable P3,000,000
Less: Par value of shares (200,000 x P10) 2,000,000
Share Premium P1,000,000

29. C
C.A. of liability
F.V. P4,000,000
Accrued interest 320,000 P4,320,000
Less: P.V. of cash flows based on new terms:
Reduced principal P3,800,000
Interest 342,000 4,142,000
X PV of 8%original rate after 1 yr. .926 3,835,492
Gain on restructuring P 484,508

30. C
C.A. of liability
F.V. P8,000,000
 29

Accrued interest 800,000 P8,800,000

Less: Restructured/ modified debt discounted at 10%
New principal P7,000,000
Interest 770,000 7,770,000
X PV of 10% after 1 yr. .909 7,062,930
Gain on restructuring P1,737,070
Less: Income tax (P1,737,070x 32%) 555,862
Net P1,181,208

31. C
C.A. of receivable
F.V. P10,000,000
Accrued interest 1,200,000 P11,200,000
Less: P.V. of receivable ( discount rate of 11%)
Principal (P9M x .731) P 6,579,000
Interest (P9M x 10% x 2.444) 2,199,600 8,778,600
Loss on restructuring (P 2,421,400)

32. A

33. A
Current tax expense (P1,000,000 x 32%) P320,000
Less: net deferred tax benefits:
Deferred tax benefits (500,000 x 33%) P165,000
Deferred tax expense (400,000 x 33%) 132,000 33,000
Total tax expense P287,000

34. B
Rental income – financial (accrual) P300,000*
Rental income – tax (cash basis) 600,000
Excess income (P300,000)
Tax rate 32%
Deferred tax assets P 96,000

*Rental income from July 1,2024 to December 31,2024 (600,000 x ½)

35.
Insurance expense – financial (accrual basis) P190,000
Insurance expense – taxation (cash basis) 380,000
Timing difference P190,000
Tax rate x 32%
Deferred tax liability P 60,800

36. B
1st year cash rental (216,000 x 9/12) P 162,000
2nd year to 4th year cash rental (P337,500 x 3 yrs) 1,012,500
Total cash rental for 4 years P1,174,500
Lease term / 4 yrs
Annual rent expense (financial) P 293,625
Rent expense (taxation – amount paid in 2006) 162,000
Excess financial over taxation – rent expense P 131,625
Tax rate x 32%
Deferred tax asset P 42,120

37.
 30

Question No. 1 - B
Taxable temporary difference:
Excess tax depreciation 2,000,000
Unamortized computer software cost 3,000,000 5,000,000
Deductible temporary difference:
Warranty expense 200,000
Litigation accrual 500,000
Unearned rent revenue 400,000 1,100,000
6,100,000

Question No. 2 - D
Deferred tax liability (P5,000,000 x 35%) 1,750,000

Question No. 3 - A

Deferred tax asset (P1,100,000 x 35%) 385,000

Question No. 4- A

Pretax accounting income 10,000,000

Nondeductible expense - life insurance expense 100,000
Nontaxable income - interest on LTCD (200,000)
Accounting income subject to income tax 9,900,000
Taxable temporary difference (5,000,000)
Deductible temporary difference 1,100,000
Taxable income 6,000,000
Income tax rate 35%
Current tax expense 2,100,000

Question No. 5 - B

Current tax expense 2,100,000

Deferred tax expense 1,750,000
Deferred tax benefit (385,000)
Total income tax expense 3,465,000

Alternative computation:

Accounting income subject to income tax 9,900,000

Income tax rate 35%
Total income tax expense 3,465,000

38. B
Solution:
Rent income 450,000
Amortization of lease bonus (252,000/3) 84,000
Lease income - 2024 534,000
 31

39. A

Payments
December 31, 2023 P425,000.00
June 30, 2024 P675,000.00
Total lease payments P1,100,000.00
Divide by: Lease term in months 12
Monthly rent expense P91,666.67
Multiply by: Expired months 6
Rent expense, 12/31/2023 P549,999.99

40. B

Rent for December (the corporation entered into the contract on Dec 1 P80,000
Depreciation of the new walls and offices (640,000 / 10 years × 1/12) 5,333
Expense for 2024 85,333

The last month's rent that was paid must be allocated to the Prepaid Expenses asset account and
the deposit to Other Assets. Both are long-term assets for this company.

41. 2-1. C
2-2. B
Solution:
1. Annual lease income (540k/3) = 180,000
Lease income - 2023 (180,000 x 6/12) 90,000

2. Lease income to date, 12/31/2024 270,000

Less: Lease collected to date, 12/31/2024 (157,500)
Lease receivable, 12/31/2024 112,500

Lease income as of December 31, 2024 is computed as follows:

Lease income-2023 90,000
Lease income-2024 180,000
Lease income to date, 12/31/2024 270,000

Lease collected to date as of December 31, 2024 is computed as follows:

Lease collected, 7/1/2023-6/30/2024 (7,500/mo. x 12 mos.) 90,000
Lease collected, 7/1/2024 - 12/31/2024 (11,250/mo. x 6 mos.) 67,500
Lease collected to date, 12/31/2024 157,500

42. A,A,B,C
Solutions:

1.
Present value of annual rental ( 1,000,000 × 3.17 ) 3,170,000
Present value of residual value guarantee ( 500,000 x 0.68 ) 340,000
Initial lease liability 3,510,000

2.
Initial lease liability 3,510,000
Payment to lessor to obtain the lease 300,000
Cost of dismantling and restoring the asset 390,000
 32

Total cost of right use asset 4,200,000

3.
Cost of right use asset 4,200,000
Residual value guarantee (500,000)
Depreciable amount 3,700,000

Depreciation (3,700,000 / 4 years ) 925,000

4.
Annual rental 1,000,000
Applicable to interest ( 10% x 3,510,000 ) (351,000)
Applicable to principal 649,000

Lease liability – January 1 3,510,000

Principal payment (649,000)
Lease liability – December 31 2,861,000

43. D,D,A,A
Solutions:

1. Present value of annual rental (1,500,000 x 3.79) 5,685,000

Present value of purchase option (300,000 x 0.62) 186,000
Initial lease liability 5,871,000
Initial direct cost (50,000)
Cost of right use of assets 5,821,000

2. Depreciation (5,821,000 / 8 yrs) 727,625

3. Interest expense for current year (10% x 5,821,000) 582,100

4. Annual Rental 1,500,000

Applicable to Ineterst (582,100)
Applicable to principal 917,900

Lease Liability – January 1 5,821,000

Principal Payment (917,900)
Lease Liability – December 31 4,903,100

44. D,C

1. Gina Company
Annual rent x A1
(1, 370,145 x 3.352) 4,592,726
Residual val. x PV of 1
(450,000 x 0.497) 223,650
Lease receivable 4,816,376

2. Fay Inc.
Annual rent x A1
(1, 370,145 x 3.352) 4,592,726

45. A,D
1. Mess Company & Keep Company
Fair value 3,949,500
 33

Annuity of 1 / 6.145
Minimum annual lease payment 642,718

2. Mess Company & Keep Company

Minimum annual lease payment 642,718
Executory costs 35,000
Annual lease payment 677,718

46.
1.A
Solutions:

Initial lease liability (800,000 x 3.17) 2,536,000

2.A
Solutions:

ROUA = C.A. of asset x P.V. lease payment

F.V. of Asset

4.5 x 2,536,000 / 6m
Cost of right of use asset
(2,536,000 / 6,000,000 x 4,500,000) 1,902,000

The cost of right of use asset is equal to a fraction whose numerator is the initial lease liability
and whose denominator is the fair value of the asset multiplied by the carrying amount of the
asset.

3. A
Solutions:

Fair value or sale price 6,000,000

Carrying amount 4,500,000
Total gain on sale 1,500,000

Fair value 6,000,000

Right retained by seller-lessee equal to lease liability (2,536,000)
Right transferred to buyer-lessor 3,464,000

Recog gain = total gain x rights transferred to buyer

FV of Asset

Gain to be recognized (3,464,000 / 6,000,000 x 1,500,000) 866,000

OR: C.A. of Asset 4,500,000

ROUA retained by seller/lessee (1,902,000)
Rights transferred
to buyer/lessor 2,598,000

Recog. gain = Total gain x rights transferred to buyer/lessor

C.A of Asset
1.5 x 2,598,000/4.5
 34

The gain or loss on right transferred is equal to a fraction whose numerator is the right
transferred to the buyer-lessor and whose denominator is the fair value of the asset multiplied
by the total gain or loss on sale.

The right transferred to the buyer-lessor is equal to the fair value of the asset minus the initial
lease liability.

4. A
Solution:

Depreciation of right of use asset (1,902,000 / 4) 475,500

5. B
Solutions:
Annual rental 800,000
Depreciation of equipment purchased
(6,000,000 / 10 years) (600,000)
Net rental income of buyer-lessor 200,000

The buyer-lessor shall apply the operating lease model because the lease term of 4 years is
only 40% of the useful life of the asset.

47.
1. A
Solutions:

Initial lease liability (1,500,000 x 3.60) 5,400,000

2. A
Solutions:

Sale price 20,000,000

Fair value 18,000,000

Excess sale price – additional financing 2,000,000

Present value of rentals 5,400,000

Present value related to financing (2,000,000)

Present value related to lease liability 3,400,000

Cost of right of use asset

(3,400,000 / 18,000,000 x 10,800,000) 2,040,000
or
MLP(PV of lease payment) 5,400,000
Additional Financing (2,000,000)
MLP net of financing 3,400,000

ROUA = CA of ASSET X MLP(net)

FV of ASSET
10.8 x 3.4 /18
IFRS 16, paragraph 101, provides that if the sale price does not equal the fair value of the
underlying asset, the seller-lessee shall make adjustment to measure the sale price at fair
value.
 35

Any excess sale price over fair value shall be accounted for us additional financing provided
by the buyer-lessor to seller-lessee.

3. D
Solutions:

Fair value 18,000,000

Carrying amount (10,800,000)

Total gain on sale 7,200,000

Fair value 18,000,000

Right retained by seller-lessee equal to lease liability ( 3,400,000)

Right transferred to buyer-lessor 14,600,000

Gain to be recognized
(14,600,000 / 18,000,000 x 7,200,000) 5,840,000

or
CA of asset 10,800,000
ROU retained by seller/lessee 2,040,000
Rights transferred to buyer/lessor 8,760,000

Recog. gain = Gain x Rights transferred to buyer/lessor

CA of Asset
7.2 x 8.76/10.8 = 5,840,000

4. A
Solutions:
Gross Rental Income
Present value Fraction Allocation
Rental income 3,400,000 34/54 x 1.5 944,444
Financial Asset 2,000,000 20/54 x 1.5 555,556
Total present value(MLP) 5,400,000 1,500,000

5. C
Solutions:

Depreciation of building of buyer-lessor

(18,000,000 / 20 years) 900,000

48.
1. B
Solution:

Initial lease liability (500,000 x 4.21) 2,105,000

2. B
Solution:
ROUA = Lease liab / FV of Asset x CA of Asset
Cost of right of use asset
(2,105,000 / 5,000,000 x 6,000,000) 2,526,000
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3. C
Solution:

Sale price 5,000,000

Carrying amount 6,000,000
Total loss on sale (1,000,000)

Fair value 5,000,000

Right retained by seller-lessee equal to lease liability 2,105,000
Right transferred to buyer-lessor 2,895,000

Recog. loss = rights transferred to lessor / FV of Asset x loss

Loss to be recognized
(2,895,000 / 5,000,000 x 1,000,000) 579,000

4. D
Solution:

Depreciation of machine of buyer-lessor

(5,000,000 / 20 years) 250,000

Annual rent income 500,000

Depreciation of buyer-lessor (250,000)
Net annual rent income 250,000

49. 1. A
SOLUTION
Service costs P700,000
Interest cost (3,750,000 x 10%) 375,000
Interest income (3,500,000 x 10%) (350,000)
Loss from settlement (P250,000 – P200,000) (50,000)
Pension expense P675,000
2. D
SOLUTION
Remeasurement gain on obligation P100,000
Remeasurement gain on plan asset 70,000
Total remeasurement gain P170,000

Actual return on plan asset P420,000

Less: interest income 350,000
Remeasurement gain on plan asset P70,000
3. B
SOLUTION
Plan asset, beginning balance P3,500,000
Actual return 420,000
Actual contribution 600,000
Total funds available P4,520,000
Less: benefits paid to retirees P750,000
Settlement price 200,000 950,000
Plan asset, end balance P3,570,000
4. A
SOLUTION
Benefit obligation, beginning balance P3,570,000
Interest cost 375,000
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Service cost 700,000

Total P4,825,000
Less: benefits paid P750,000
Reduction due to settlement price 250,000
Reduction due change in estimate 100,000 1,100,000
Benefit obligation, end balance P3,725,000
5. B
SOLUTION
Benefit obligation, end balance P3,725,000
Plan asset, end balance 3,570,000
Deficit-Accrued Pension, end balance P155,000

50.
C,C,C
Solution:

Q1)
Current service cost 710,000
Interest Expense (8%x10,500,500) 840,040
Interest income (8%x8,710,500) 696,840
Employee benefit expense 853,200*

Q2)
Actual Return on Plan assets 850,000
Interest income on FVPA 696,840
Remeasurement gain on plan assets 153,160*

Q3)
Employee benefit expense 853,200
Remeasurement gain on plan assets (153,160)
Defined Benefit cost 700,040
Contribution to the plan 999,000
Overfunding-prepaid 298,960*