EASY ROUND

On December 31, 2019, Val Corporation has the following information:

Accounts Payable, including customer advances of P 200,000 and net of debit balance 3,000,000
of P 80,000
Advances to Employees 45,000
Trade Accounts payable, including goods on consignment of P 150,000 850,000
Serial bonds payable semiannual installment of P 500,000 6,000,000
Victoria Company as guarantor of Victory Company who did not pay his obligation 100,000
amounting to
Cash Surrender Value 60,000
Deferred Tax liability 80,000
Notes Payable, including Bank loan of P 800,000 due on December 31, 2021 2,300,000

1. The amount to be presented as current liabilities in the December 31, 2019 balance sheet is?

a. P 6,525,000 c. P 6,420,000
b. P 6,480,000 d. P 6,465,000

2. The amount to be presented as long-term liabilities in the December 31, 2019 balance sheet is?

a. P 5,985,000 c. P 5,925,000
b. P 5,940,000 d. P 5,880,000

Accounts Payable, including customer advances of 3,000,000 3M-80K+200K Current

P 200,000 and net of debit balance of P 80,000
Advances to Employees 45,000 Asset
Trade Accounts payable, including goods on 850,000 850K-150K Current
consignment of P 150,000
Serial bonds payable semiannual installment of P 6,000,000 5M Long Term
500,000 500k+ 500K Current
Val Company as guarantor of Victory Company 100,000 Contingent that become
who did not pay his obligation amounting to liability-Current
Cash Surrender Value 60,000 Asset
Deferred Tax liability 80,000 Long term
Notes Payable, including Bank loan of P 800,000 2,300,000 1.5M Current
due on December 31, 2021 800k Long term

Source: Intermediate Accounting 2 (Millan 2019 Edition Page 65)

On Jan 1, 2019, ABC. Co. acquired equipment in exchange for 200,000 cash and 4-year non-interest-
bearing, ₱ 1,500,000 note payable due in 4 equal annual installments starting December 31, 2019. The
prevailing interest is 11%. (Round Present Value Factor to 5 decimals)

3. How much is the initial carrying amount of the notes?

a.
 b. 1,163, 419 d. 1,534,417
c. 247,024 e. 1,163,417

4. How much is the interest expense on Dec. 31, 2020?

a. 1, 363,417 c. 1, 334,417
b. 447,024 d. 100,803

5. How much is the current portion of the note payable on December 31, 2019?

a. 641, 899 c. 100,744

b. 274,197 d. 375,0

Jan. 1 ,2019 1,163,419

Dec. 2019 375,000 127,976 247,024 916,395
Dec.2020 375,000 100,803 274,197 642,198
Dec. 2021 375,000 70,642 304,358 337,840
Dec. 2022 375,000 37,162 337,840 0

Future Cashflow – annual installments (1,500,000/4) 375,000

Multiply by: PV of Ordinary Annuity of ₱ 1@11%, n=4 3.10245

1,163,419
 AVERAGE ROUND

Casa Plastics Co. (CPC) issued callable bonds on January 1, 2010. LPC's accountant has projected the
following amortization schedule from issuance until maturity:

Date Cash interest Effective interest Increase in balance Outstanding balance

1/1/10 $207,020

6/30/10 $7,000 $6,211 (789) 206,230

12/31/10 $7,000 $6,187 (813) 205,417

6/30/11 $7,000 $6,163 (837) 204,580

12/31/11 $7,000 $6,137 (863) 203,717

6/30/12 $7,000 $6,112 (888) 202,829

12/31/12 $7,000 $6,085 (915) 201,913

6/30/13 $7,000 $6,057 (943) 200,971

12/31/13 $7,000 $6,029 (971) 200,000

1. CPC issued the bonds:

a.

b. At par. d. At a discount.
c. At a premium. e. Cannot be determined.

Outstanding Balance is greater than the face amount 207,020-200,000= 7,020 premium

2. What is the annual stated interest rate on the bonds?

a. 3.5% c. 7%
b. 6% d. None of the above is correct.

This is the annual cash interest paid ($14,000), divided by the maturity (face) value of $200,000

3. What is the effective interest rate on the bonds?

a. 3% c. 6%
b. 3.5% d. 7%

This is interest expense, divided by the previous outstanding liability balance x2

4. CPC calls the bonds at 103 immediately after the interest payment on 12/31/11 and retires
them. What gain or loss, if any, would LPC record on this date?
 a. No gain or loss c. $6,000 loss
b. $3,717 gain d. $2,283 loss

The cash paid by LPC was 103% of $200,000 maturity (face) value, or $206,000. The liability
removed is $203,717. The difference is the loss on the bond retirement, $2,283.
5. When bonds are sold at a premium and the effective interest method is used for amortization,
at each subsequent interest payment date, the cash paid is:

a. Less than the effective interest.

b. Equal to the effective interest.
c. Greater than the effective interest.
d. More than if the bonds had been sold at a discount.
 DIFFICULT ROUND – INCOME TAXES

On January 1, 2018, Torres Babies Company acquired an equipment for P8,000,000 with a useful life of 8
years. The equipment is depreciated using straight line with no residual value.

On January 1, 2021, after 3 years, the equipment was revalued at a replacement cost of P12,000,000
with no change in useful life.

The pretax accounting income before depreciation for 2019 is P10,000,000. The income tax rate is 30%
and there are no other temporary differences at the beginning of the year.

1. What amount should be reported as deferred tax liability on January 1, 2021 arising from the
revaluation?

a. 1,200,000 c. 750,000
b. 450,000 d. 0

2. What amount should be reported as current tax expense for the current year?

a. 2,700,000 c. 3,450,000
b. 3,000,000 d. 3,300,000

3. What amount should be reported as deferred tax liability on December 31, 2021 arising from
revaluation?

a. 750,000 c. 600,000
b. 450,000 d. 0

4. What amount should be reported as total tax expense for the current year?

a. 2,550,000 c. 2,700,000
b. 3,000,000 d. 3,750,000

5. What amount should be reported as revaluation surplus on December 31, 2021?

a. 2,500,000 c. 1,400,000
b. 1,750,000 d. 2,000,000

Source: Practical Financial Accounting Volume 2: 2019 Edition – Valix (PAS 12)

Question 1 Answer C
Cost Replacement Cost Appreciation
Equipment 8,000,000 12,000,000 4,000,000
Accumulated Depreciation
(8,000,000 x 3/8) 3,000,000
 (12,000,000 x 3/8) 4,500,000 1,500,000
CA/SV/RS 5,000,000 7,500,000 2,500,000

Equipment 4,000,000
Accumulated Depreciation 1,500,000
Revaluation Surplus 2,500,000

The revaluation surplus Is taxable temporary difference and therefore will result to a deferred tax
liability:
Revaluation Surplus 750,000
Deferred Tax Liability (30% x 2,500,000) 750,000

Question 2 Answer A (30% x 9,000,000) 2,700,000

Pretax Income before depreciation 10,000,000
Depreciation on cost (5,000,000/5) (1,000,000)
Taxable Income 9,000,000

Question 3 Answer C
Equipment at cost 12,000,000
Accumulated Depreciation:
January 1, 2019 4,500,000
Depreciation revalued amount
For 2019 (7,500,000/5) 1,500,000 6,000,000
Carrying Amount – December 31, 2019 6,000,000

Equipment at cost 8,000,000

Accumulated Depreciation:
January 1, 2019 3,000,000
Depreciation on cost for 2019 1,000,000 4,000,000
Tax Base – December 31, 2019 4,000,000

Carrying Amount – December 31, 2019 6,000,000

Tax Base – December 31, 2019 4,000,000
Taxable Temporary Difference 2,000,000

Deferred tax liability – December 31, 2019

(30% x 2,000,000) 600,000
Deferred tax liability – January 1, 2019 750,000
Decrease in deferred tax liability (150,000)

Journal Entry
Deferred tax liability 150,000
Income tax expense 150,000
Question 4 Answer A
Current tax expense 2,700,00
Decrease in deferred tax liability (150,000)
Total tax expense 2,550,000

Proof
Pretax income before depreciation 10,000,000
Depreciation on revalued amount (1,500,000)
Accounting income subject to tax 8,500,000

Total tax expense (8,500,000 x 30%) 2,550,000

Question 5 Answer C
Revaluation surplus – January 1, 2019 2,500,000
Deferred tax liability (750,000)
Adjusted balance – January 1, 2019 1,750,000
Realization in 2018 (1,750,000/5) (350,000)
Revaluation surplus – December 31, 2019 1,400,000

Journal Entry
Revaluation surplus 350,000
Retained earnings 350,000
 CLINCHER ROUND – PROVISION

Pirates’ Music Emporium carries a wide variety of music promotion techniques – warranties and
premiums – to attract customers.

Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso
spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM
radio. Pirates pays P34 for each radio and estimates that 60% of the coupons given to customers will be
redeemed.

Pirates’ total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument and sound
reproduction equipment and P1,800,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P164,000 during 2005. A total of 6,500 AM/FM radio used in the
premium program were purchased during the year and there were 1,200,000 coupons redeemed in
2005.

The accrual method is used by Pirates to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January 1,
2005, were as shown below:

Inventory of Premium AM/FM radio P 39,950

Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000

Based on the above and the result of your audit, determine the amounts that will be shown on the 2005
financial statements for the following:

1. Warranty expense
a. P108,000 c. P144,000
b. P164,000 d. P80,000
Warranty expense (P5,400,000 x 2%) 108,000

2. Estimated liability from warranties

a. P108,000 b. P136,000
 c. P164,000 d. P80,000

Estimated liability from warranties, 1/1/05 136,000

Add warranty expense for 2005 108,000
Total 244,000
Less: actual expenditures for 2005 164,000
Estimated liability from warranties, 12/31/05 80,000

3. Premium expense

a. P 75,600 c. P183,600
b. P108,000 d. P126,000

Premium expense [(1,800,000 x 60%)/200 x P14] 75,600

4. Inventory of AM/FM radio

a. P46,950 c. P39,950
b. P77,350 d. P56,950

Inventory of premium, 1/1/05 39,950

Add premium purchases (6,500 x P34) 221,000
Total premium available 260,950
Less premiums issued (1,200,000/200 x P34) 204,000
Inventory of premium, 12/31/05 56,950

5. Estimated liability for premiums

a. P75,600 c. P36,400
b. P63,450 d. P44,800
Estimated premium claims outstanding, 1/1/05 44,800
Add premium expense for 2005 75,600
Total 120,400
Less premiums issued (1,200,000/200 x P14) 84,000
Estimated premium claims outstanding, 12/31/05 36,400

Source: CPA REVIEW SCHOOL OF THE PHILIPPINES - Manila

 LEASE (REMEASUREMENT)

Lucas Jr. Company entered into a lease of building on January 1, 2021 with the following information:

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

Lease term 5 years
Useful life of the building 20 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79

The lease contained an option for the lessee to extend for a further of 5 years. At the commencement
dates, the exercise of the extension option is not reasonably certain. After 3 years on January 1, 2024
the lessee decided to extend the lease for a further 5 years.

New annual rental payable at the end of each year 600,000

New implicit interest rate 8%
PV of an ordinary annuity of 1 at 8% for 5 periods 3.99
PV of 1 at 8% for 2 periods 0.86
PV of an ordinary annuity of 1 at 8% for 2 periods 1.78

2. What amount should be reported as lease liability on December 31, 2023?

a. 1,895,000 c. 1,242,950
b. 1,584,500 d. 867,245

3. What amount should be reported as depreciation for 2021?

a. 379,000 c. 94,750
b. 100,000 d. 25,000

4. What amount should be reported as new lease liability on January 1, 2024?

 a. 2,948,840 c. 2,394,000
b. 2,058,840 d. 3,261,245

5. What is the carrying amount of right of use asset on January 1, 2024?

b. 2,081,595 d. 2,190,840
c. 2,839,595 e. 1,608,000

6. What amount should be reported as depreciation for 2024?

a. 405,656 c. 379,000
b. 297,370 d. 141,980

Source: Practical Financial Accounting Volume 2: 2019 Edition – Valix (IFRS – Extension of Lease Term)

Question 1 Answer D
Date Payment Interest Principal Present Value
1/1/2019 1,895,000
12/31/2019 500,000 189,500 310,500 1,584,500
12/31/2020 500,000 158,450 341,550 1,242,950
12/31/2021 500,000 124,295 375,705 867,245

December 31, 2019

Payment on December 31, 2019 500,000
Interest expense for 2019 (10% x 1,895,000) (189,500)
Applicable to principal 310,500

Present value – January 1, 2019 (500,000 x 3.79) 1,895,000

Principal payment on December 31, 2019 (310,500)
Lease liability – December 31, 2019 1,584,500

Question 2 Answer A
Cost of right of use asset equal to lease liability 1,895,000

Depreciation for 2019 (1,895,000 / 5) 379,000

The depreciation is based on the lease term because there is neither a transfer of title nor a purchase
option.

Journal Entries for 2019

Jan. 1 Right of use of asset 1,895,000
Lease Liability 1,895,000

Dec. 31 Interest Expense 189,500

Lease Liability 310,500
Cash 500,000
 31 Depreciation 379,000
Accumulated Depreciation 379,000

Question 3 Answer A
Remeasurement of lease liability
On January 1, 2022, the lease liability is remeasured using the new implicit interest rate of 8%.

Annual rental for remaining 2 years of old lease term 500,000

Multiply by PV of an ordinary annuity of 1 at
8% for 5 periods 1.78
Present value of old rentals – January 1, 2022 890,000

Annual rental for 5 years starting January 1, 2024 600,000

Multiply by PV of an ordinary annuity of 1 at
8% for 2 periods 3,99
Present value – January 1, 2022 2,394,000
Multiply by PV of 1 at 8% for 2 periods 0.86
Present value of new rentals – January 1, 2022 2,058,840

The present value of the new rentals on January 1, 2024 is rediscount for 2 periods on the date of
extension on January 1, 2022.

Present value of remaining rentals of old lease term 890,000

Present value of rentals of extended lease term 2,058,840
Total present value – January 1, 2022 2,948,840
Present value – December 31, 2021 (see table) (867,245)
Increase in liability on January 1, 2022 2,081,595

Question 4 Answer B
Right of use asset – January 1, 2019 1,895,000
Accumulated depreciation – December 31, 2021
(379,000 x 3 years) (1,137,000)
Carrying amount – December 31, 2021 758,000
Increase in lease liability – January 1, 2022 2,081,595
New carrying amount – January 1, 2022 2,839,595

IFRS 16, paragraph 39, provides that the increase in the remeasurement of the lease liability is an
adjustment of the carrying amount of the right of use asset.

Question 5 Answer A
Depreciation for 2022 (2,839,595 / 7 years) 405,656