FINANCIAL ACCOUNTING & REPORTING

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1) Abalos Company, a calendar-year corporation, leases some of its equipment under an operating lease, in one of its
lease contracts that took effect on May 1, 2016, Abalos Company is required to pay rentals in advance as follows:
May 1, 2016 P1,000,000 May 1, 2019 P1,700,000
May 1, 2017 P1,200,000 May 1, 2020 P1,900,000
May 1, 2018 P1,400,000

What are the amounts of accrual or deferral relating to the lease on December 31, 2016 and December 31, 2017,
respectively by the lessor?
A. P440,000 accrued rent receivable and P680,000 accrued rent receivable
B. P40,000 unearned rent and P200,000 accrued rent receivable
C. P40,000 accrued rent receivable and P200,000 unearned rent
D. P40,000 unearned rent and P240,000 accrued rent receivable

ANSWER: B
Total rent over the lease term 1,000,000 + 1,200,000 + 1,400,000 + 1,700,000 + 1,900,000 7,200,000
Lease term 5
Straight line rent revenue per year 1,440,000
Per months 12
Straight line rent per month 120,000

Cumulative rent revenue (120,000 x 8 months) 960,000

Cumulative cash received (1,000,000)
Unearned rent as of December 31, 2016 40,000

Cumulative rent revenue (120,000 x 20 months) May 1, 2016 – December 31, 2017 2,400,000
Cumulative cash received 1,000,000 + 1,200,000 2,200,000
Rent receivable 200,000

2) On January 1, 2016 Aguila Corporation signed a ten-year operating lease for an office space at P960,000 per year. The
lease included a provision for additional rental payment of 5% of annual company sales in excess of P5,000,000. Aguila
Corporation’s sales for the year ended December 31, 2016 were P6,000,000. Upon execution of the lease, Aguila
Corporation paid P240,000 as a bonus for the lease.
A. 1,284,000 B. 1,034,000 C. 984,000 D. 960,000

ANSWER: B
Rent revenue
1. Straight line rent revenue 960,000
2. Amortization of lease bonus 240,000/10 years 24,000
3. Contingent rent (6,000,000 – 5,000,000) x 5% 50,000
Total rent revenue 1,034,000

3) Flames Company leased machinery to Talon Company on July 1, 2022, for a ten-year period expiring June 30, 2032.
Equal annual payments under the lease are P75,000 and are due on July 1 of each year. The first payment was made
on July 1, 2022. The rate of interest used by Flames and Talon is 9%. The cash selling price of the machinery is
P525,000 and the cost of the machinery on Flames’ accounting records was P465,000.

Assuming that the lease is appropriately recorded as a sale for accounting purposes by Flames, what amount of
interest revenue would Flames record for the year ended December 31, 2022? (Present value factor round 2 decimal)
A. 47,250 B. 40,500 C. 20,250 D. 23,625

ANSWER: C
Net investment PV of rental or cash selling price 525,000
First payment (75,000)
Carrying amount after first payment on July 1, 2022 450,000
Interest rate 9%
July 1 – December 31 6/12
Interest revenue 20,250

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 1 OF 13 •
 Use the following information for the next four (4) questions:
Chelu Company used leases as a method of selling products. During the current year, the entity completed construction of
a passenger ferry. At the beginning of current year, the ferry was leased on a contract specifying that ownership of the ferry
will transfer to the lessee at the end of the lease period.
Original cost of the ferry 8,000,000
Fair value of ferry at the inception of lease 13,000,000
Residual value 2,000,000
Annual rental payable in advance at the beginning of each year 1,500,000
Implicit interest rate 12%
Lease term 20 years
Present value of an annuity due of 1 at 12% for 20 periods 8.37
Present value of an ordinary annuity of 1 at 12% for 20 periods 7.47
Present value of 1 at 12% for 20 periods 0.10

4) What is the gross investment in the lease?

A. 30,000,000 B. 32,000,000 C. 38,000,000 D. 10,000,000

5) What is the net investment in the lease?

A. 12,555,000 B. 13,000,000 C. 12,755,000 D. 11,205,000

6) What is the gross profit on sale for the current year?

A. 6,555,000 B. 4,555,000 C. 5,000,000 D. 3,205,000

7) What is the unearned interest income in the lease?

A. 17,445,000 B. 19,245,000 C. 19,445,000 D. 22,000,000

8) What is the interest income for the current year?

A. 1,506,000 B. 1,560,000 C. 1,326,600 D. 1,380,000

ANSWER: A, A, B, A, C
Amount Lease term Total amount
Periodic rent 1,500,000 20 30,000,000
GRV or URV* 0
Gross investment 30,000,000

Amount Present value factor Present value

Periodic rent 1,500,000 8.37 12,555,000
GRV or URV 0
Net investment 12,555,000

Gross investment 30,000,000

Net investment 12,555,000
Unearned rent 17,445,000

Net investment / CA of lease receivable after first payment 12,555,000 – 1,500,000 11,055,000
Interest rate 12%
Interest income 1,326,600

Sales (PV of periodic rent + PV of GRV) 5,400,000 + 285,000 12,555,000

Cost of sale (Cost + Initial direct cost) 4,000,000 + 200,000 8,000,000
Gross profit 4,555,000
Residual value in this problem should be completely ignored since there is a TRANSFER OF OWNERSHIP.

Use the following information for the next two (2) questions:
Babe Time Company manufactures an X-ray machine and leases it to Take Time Hospital. The entity provided the following
information pertaining to the finance lease agreement:
Commencement of the lease January 1, 2018
Annual rental payable in advance every January 1 600,000
Lease term 10 years
Useful life of machine 12 years
Cost of the machine 3,000,000
Fair value of the machine on January 1, 2018 4,950,000
Legal fees in directly signing the lease 140,000
Guaranteed residual value 150,000


• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 2 OF 13 •
 Implicit rate in the lease 10%

The machine will revert back to Babe Time on January 1, 2018. The present value of an ordinary annuity and annuity due
for 10 periods at 10% are 6.14 and 6.76. The present value of 1 for 10 periods at 10% is 0.39.

9) What amount of sales revenue should be recognized by Babe Time?

A. 4,956,780 B. 4,056,000 C. 3,742,500 D. 4,114,500

10) What amount of interest income should recognized for 2018?

A. 405,600 B. 345,600 C. 411,450 D. 351,450

ANSWER: D, D
Sales PV of rentals + PV of GRV (600,000 x 6.76) + (150,000 x 0.39) 4,114,500
First payment (600,000)
CA of lease receivable after first payment 3,514,500
Interest rate 10%
Interest income 351,450

Use the following information for the next one (1) questions:
Glamorous Company, the lessor, leased to Fergie Company, the lessee, a machine for 5 years. The machine has an
economic life of 20 years. The lease is non-cancellable over the lease term. Details of the lease contract are as follows:
• Fair value of the machine = P10,000.
• Five annual rentals payable in advance of P2,100.
• Lessor’s unguaranteed estimated residual value at end of five years = P1,000.
• The lessee’s incremental borrowing rate for a similar type of lease and risk = 8.53%.

11) What is the rate that should be used by the lessor?

A. 6.62% B. 7.53% C. 8.53% D. Not determinable

ANSWER: A
Amount Present value factor Present value
Periodic rent 2,100 4.41647266 9,278.59
GRV or URV 1,000 0.72578279 725.79
Net investment FV 10,004.4
Trial and error each choices. Difference due to rounding

12) Jayree-bb Company leased equipment to unrelated party on July 1, 2020 for an eight-year period expiring June 30,
2028. Equal payments under the lease are P600,000 and are due on July 1 of each year. The first payment was made
on July 1, 2020. The implicit rate of interest contemplated is 10%. The cash selling price of the equipment is
P3,500,000 and the carrying amount is P2,800,000. The lease is appropriately recorded as a sales-type lease. What
total amount of income should be recorded for the year ended December 31, 2020?
A. 525,000 B. 990,000 C. 700,000 D. 845,000

ANSWER: D
Sales (also equal to the present value of P600,000 payments diff due to rounding) 3,500,000
Cost of sales (2,800,000)
Gross profit 700,000
Interest income (3,500,000 – 600,000) x 10% x 6/12 145,000
Total income 845,000

13) Gilianne Company leases computer equipment to customers under a direct financing lease. The equipment has no
residual value at the end of the lease and the lease does not contain bargain purchase option. The entity wishes to earn
8% interest on a 5-year lease on equipment with a cost of P3,234,000. At the beginning of the current year, the entity
leased the equipment to another entity and the first rental payment was made. What is the total interest revenue to be
earned over the lease term? (Present value factor round off to three decimal places)
A. 1,293,600 B. 1,394,500 C. 516,000 D. 750,000

ANSWER: C
Amount Present value factor Present value
Periodic rent 750,000 4.312 3,234,000
GRV or URV -- -- --

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 3 OF 13 •
 Net investment 3,234,000

Amount Lease term Total

Periodic rent 750,000 5 3,750,000
GRV or URV -- -- --
Gross investment 3,750,000
Net invesmtnet 3,234,000
Unearned interest 516,000

14) Jenna Company was organized on January 1, 2020. The entity had pretax accounting income of P5,000,000 and
taxable income of P7,000,000 for the current year. The only temporary difference is accrued product warranty cost that
is expected to be paid in 2021. The enacted tax rates are 30% for 2020 and 25% for 2021 and thereafter. What
amount should be reported as total income tax expense in the income statement for 2020?
A. 1,500,000 B. 2,100,000 C. 1,250,000 D. 1,600,000

ANSWER: D
Current tax expense 7,000,000 x 30% 2,100,000 E
Deferred tax benefit (2,000,000 x 25%) 500,000 B
Total tax expense 1,600,000 E

15) Airah Company reported pretax financial income of P200,000 and taxable income of P150,000. The income tax rate is
30%. The difference is due to the following:
Interest on tax-exempt municipal bonds 70,000
Premium expense on keyman life insurance (20,000)
Total 50,000

What amount should be reported as current provision for income tax expense?
A. 45,000 B. 51,000 C. 60,000 D. 66,000

ANSWER: A
Taxable income 150,000
Current tax rate 30%
Current tax expense 45,000

16) Stronger Corporation leased a building and received the P36,000 annual rental payment on June 15, 2021. The
beginning of the lease was July 1, 2021. Rental income is taxable when received. Stronger’s tax rates are 30% for 2021
and 40% thereafter. Stronger had no other permanent or temporary differences. Stronger determined that no valuation
allowance was needed. What amount of deferred tax asset should Stronger report in its December 31, 2021 statement
of financial position?
A. 5,400 B. 7,200 C. 10,800 D. 14,400

ANSWER: B
Rent income recognized 36,000 x 6/12 18,000
Rent taxable 36,000
Deductible temporary 18,000
Future tax rate 40%
Deferred tax asset 7,200

17) Margaret Alarcio Company reported P9,000,000 income before provision for income tax. To compute provision for
income tax, the following data are provided for 2018:
Rent received in advance 1,600,000
Income from exempt municipal bonds 2,000,000
Depreciation deduction for income tax purposes in excess of depreciation reported for financial
accounting purposes 1,000,000
Estimated tax payment for 2018 500,000
Enacted corporate income tax rate 30%

What amount of current tax liability should be reported on December 31, 2018?
A. 1,780,000 B. 2,280,000 C. 2,580,000 D. 2,880,000

ANSWER: A
Permanent differences: 9,000,000
Non Taxable Income (2,000,000)


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 Non Deductible Expense --- (2,000,000)
Accounting Income subject to tax 7,000,000
Temporary Differences (current year):
Deductible Temporary ( + ) 1,600,000
Taxable Temporary ( – ) (1,000,000)
Reversal of Differences:
Deductible Temporary ( – )
Taxable Temporary ( + )
Total --- 600,000
Taxable Income 7,600,000 30% 2,280,000 Current Tax Expense
Estimated tax payment made (500,000)
Income tax payable 1,780,000

18) Neil Justine Company reported that in the first year of operations the pretax financial income was P6,000,000. In
addition, the following differences existed:
Tax Return Accounting Records
Uncollectible accounts expense 200,000 250,000
Depreciation expense 800,000 500,000
Tax exempt interest revenue 0 150,000

The current year tax rate is 30% and the enacted rate for future year is 40%. What amount should be reported as total
expense in the income statement for the year?
A. 1,755,000 B. 1,680,000 C. 1,800,000 D. 1,780,000

ANSWER: D
Accounting Income 6,000,000
Permanent differences:
Non Taxable Income (150,000)
Non Deductible Expense --- (150,000)
Accounting Income subject to tax 5,850,000 % --- Total Tax Expense
Temporary Differences (current year):
Deductible Temporary ( + ) 50,000 40% 20,000 Increase in DTA ( benefit )
Taxable Temporary ( – ) (300,000) 40% 120,000 Increase in DTL ( expense )
Total --- (250,000) % --- --- Deferred Tax Expense (Benefit)
Taxable Income 5,600,000 30% 1,680,000 Current Tax Expense

(Increase in DTA = benefit) (Decrease in DTA = expense) 20,000 B

(Increase in DTL = expense) (Decrease in DTL = benefit) 120,000 E
Deferred tax expense/benefit 100,000 E
Current tax expense 1,680,000 E
Total tax expense 1,780,000 E

19) Francis Company began operations on January 1, 2020. For financial reporting, the entity recognized revenue from all
sales under the accrual method. However, in the income tax return, the entity reported under installment method. The
gross profit on these installments sales under each method was as follows:
Accrual method Installment method
2020 1,600,000 600,000
2021 2,600,000 1,400,000

The income tax rate is 30% for 2020 and future years. There are no other temporary or permanent differences. On
December 31, 2021, what amount should be reported as deferred tax liability?
A. 840,000 B. 660,000 C. 600,000 D. 360,000

ANSWER: B
Accrual method Installment method
2020 1,600,000 600,000
2021 2,600,000 1,400,000
Total 4,200,000 2,000,000

Cumulative balance of taxable temporary 4.2M – 2M 2,200,000

Tax rate 30%
DTL 660,000

Use the following information for the next four (4) questions:
Rosario Company reported the following information during the first year of operations:
Pretax financial income 8,000,000

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 5 OF 13 •
 Nontaxable interest received 250,000
Long term loss accrual in excess of deductible amount 500,000
Tax depreciation in excess of financial depreciation 1,250,000
Income tax rate 30%

ANSWER: B, B, C, A
20) What is the current tax expense?
A. 2,325,000 B. 2,100,000 C. 2,400,000 D. 1,950,000

21) What is the total tax expense?

A. 2,400,000 B. 2,325,000 C. 2,100,000 D. 2,175,000

22) What is the deferred tax liability at year end?

A. 150,000 B. 225,000 C. 375,000 D. 525,000

23) What is the deferred tax asset at year end?

A. 150,000 B. 375,000 C. 225,000 D. 350,000

ANSWER: B, B, C, A
Accounting Income 8,000,000
Permanent differences:
Non Taxable Income (250,000)
Non Deductible Expense --- (250,000)
Accounting Income subject to tax 7,750,000 30% 2,325,000 Total Tax Expense
Temporary Differences (current year):
Deductible Temporary ( + ) 500,000 30% 150,000 B Increase in DTA ( benefit )
Taxable Temporary ( – ) (1,250,000) 30% 375,000 E Increase in DTL ( expense )
Total --- (750,000) % --- 225,000 E Deferred Tax Expense (Benefit)
Taxable Income 7,000,000 30% 2,100,000 Current Tax Expense

Use the following information for the next two (2) questions:
Friday Company, in its first year of operations, had the following differences between carrying amount and tax base of
assets and liabilities at December 31, 2018:
Carrying amount Tax base
Equipment 4,000,000 3,500,000
Warranty liability 1,500,000 0

The warranty liability will be settled in 2019. The difference in equipment will reverse in amounts of P200,000, P200,000 and
P100,000 for years 2019, 2020 and 2021 respectively. The financial income for 2018 is P5,500,000 and the tax rate is 30%
for the years 2018-2020 and 25% for 2021. It is probable that the entity will report taxable income in the future periods.

24) What is the current tax expense for 2018?

A. 1,950,000 B. 1,625,000 C. 1,350,000 D. 1,500,000

25) What is the total tax expense for 2018?

A. 1,645,000 B. 1,650,000 C. 1,625,000 D. 2,200,000

ANSWER: A, A
Accounting Income 5,500,000
Permanent differences:
Non Taxable Income ---
Non Deductible Expense --- ---
Accounting Income subject to tax 5,500,000 x% 1,645,000 E Total Tax Expense
Temporary Differences (current year):
Deductible Temporary ( + ) 1,500,000 30% 450,000 B Increase in DTA ( benefit )
Taxable Temporary ( - ) (200,000) 30% 60,000 E Increase in DTA ( benefit )
Taxable Temporary ( - ) (200,000) 30% 60,000 E Increase in DTA ( benefit )
Taxable Temporary ( - ) (100,000) 25% 25,000 E Increase in DTL ( expense )
Total --- 1,000,000 % 305,000 B 305,000 B Deferred Tax Expense (Benefit)
Taxable Income 6,500,000 30% 1,950,000 E Current Tax Expense

Use the following information for the next two (2) questions:
Usher Company had a defined benefit plan for the employees. On January 1, 2018, the entity provided the following
balances related to this plan:
Fair value of the plan assets 2,700,000

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 6 OF 13 •
 Projected benefit obligation 3,400,000

During 2018, the actuary provided the following information:

Service cost 450,000
Actual return on plan assets 270,000
Benefits paid to retirees 410,000
Discount rate 7%
Contribution to the plan ?

Usher reported a net pension liability of P468,000 on December 31, 2018.

26) What amount of employee benefit expense should be reported for 2018?
A. 499,000 B. 450,000 C. 418,000 D. 459,000

27) What is the cash contribution to the plan asset for 2018?
A. 418,000 B. 731,000 C. 232,000 D. 650,000

ANSWER: A, D
Current service cost (+) 450,000
Past service cost (+) --
Loss on settlement of PBO paid in advance (+) --
Gain on settlement of PBO paid in advance (–) --
Total service cost 450,000

Fair value of plan asset (2,700,000 x 7%) 189,000

Projected benefit obligation (3,400,000 x 7%) 238,000
Prepaid benefit cost / accrued benefit cost 49,000

Prepaid benefit cost / accrued benefit cost 49,000

Total service cost 450,000
Total benefit expense 499,000

Fair value of plan asset SQUEEZE 3,210,000

Projected benefit obligation (3,678,000)
Prepaid benefit cost / accrued benefit cost (468,000)

Fair Value of Plan Asset

Plan asset, Beginning 2,700,000 410,000 Settlement price of PBO settled in advance
Contribution SQUEEZE 650,000 Payment to retirees
Actual return on plan asset 270,000
Plan asset, Ending 3,210,000

Present Value of Benefit Obligation

CA of PBO settled in advance 0 3,400,000 PBO, Beginning
Actuarial gain on PBO 0 450,000 Current service cost
Benefits paid to retirees 410,000 0 Past service cost
0 Actuarial loss on PBO
238,000 Interest expense
3,678,000 Plan asset, Ending

Use the following information for the next two (2) questions:
The following information pertains to Hoot Corporation defined benefit plan for the year 2022:
Defined benefit obligation, January 1, 2022 2,500,000
Fair value of plan assets, January 1, 2022 2,000,000
Actual return on plan assets 300,000
Fair value of plan assets, December 31, 2022 2,100,000
Present value of additional defined benefit obligation settled 175,000
Defined benefit obligation, December 31, 2022 2,400,000
Current service cost 500,000
Discount rate 10%
Benefit paid to retirees (at scheduled retirement) 620,000
Contribution made during the year 600,000

28) What amount of defined benefit cost should be reported in 2022 profit or loss?

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 7 OF 13 •
 A. 550,000 B. 555,000 C. 545,000 D. 450,000

29) What amount of net measurement gain/loss should be reported in 2022 other comprehensive income?
A. 155,000 B. 45,000 C. 150,000 D. 50,000

ANSWER: B, A
Current service cost (+) 500,000
Past service cost (+) 0
Loss on settlement of PBO paid in advance (+) 5,000
Gain on settlement of PBO paid in advance (–) 0
Total service cost 505,000

Carrying amount / present value of benefits settled in advance 175,000 G

Settlement price of benefit paid in advance **180,000 L
Gain (loss) on settlement of PBO paid in advance 5,000 L

Interest expense (beginning PBO x interest rate) 2,500,000 x 10% 250,000 L

Interest income (beginning FVPA x interest rate) 2,000,000 x 10% 200,000 G
Net interest expense / income 50,000 L

Gain or loss on the actual return on plan asset 300,000 – 200,000 100,000 G
Gain or loss on actuarial assumption on the benefit obligation *55,000 G
Change in effect after the interest 0
Total remeasurement 155,000 G
Fair Value of Plan Asset
Plan asset, Beginning 2,000,000 620,000 Settlement price of PBO settled in advance
Contribution 600,000 **180,000 SQUEEZE Payment to retirees
Actual return on plan asset 300,000
Plan asset, Ending 2,100,000

Present Value of Benefit Obligation

CA of PBO settled in advance 175,000 2,500,000 PBO, Beginning
Actuarial gain on PBO SQUEEZE* 55,000 500,000 Current service cost
Benefits paid to retirees 620,000 0 Past service cost
0 Actuarial loss on PBO
250,000 Interest expense
2,400,000 Plan asset, Ending

Total service cost 505,000 E

Net interest 50,000 E
Total benefit expense 555,000 E

30) A director of an entity receives a retirement benefit of 10% of his final salary per annum for his contractual period of
three years. The director does not contribute to the scheme. His anticipated salary over the three years is Year 1,
P100,000; Year 2, P120,000; Year 3, P144,000. Assume a discount rate of 5%. The pension liability at the end of the
second year is
A. 29,250 B. 22,520 C. 27,429 D. 26,775

ANSWER: C
Service cost year 1 144,000 x 10% 14,400
Service cost year 2 144,000 x 10% 14,400
Total unpaid service cost 28,800
Present value one period 0.9524
Present value of obligation 27,429

Use the following information for the next three (3) questions:
Jeff Irvin Company provided the following information for the current year:
Current service cost 500,000
Interest on PBO 600,000
Interest income on plan asset 350,000
Loss on settlement 250,000
Past service cost during the year 300,000
Actual return on plan asset 850,000

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 8 OF 13 •
 Actuarial loss during the year 200,000
Contribution to the plan 1,500,000

31) What is the employee benefit expense for the current year?
A. 1,300,000 B. 1,050,000 C. 1,500,000 D. 1,100,000

32) What is the total defined benefit cost?

A. 1,000,000 B. 1,500,000 C. 1,700,000 D. 800,000

ANSWER: A, A
Current service cost (+) 500,000
Past service cost (+) 0
Loss on settlement of PBO paid in advance (+) 250,000
Gain on settlement of PBO paid in advance (–)
Total service cost 750,000

Interest expense (beginning PBO x interest rate) 600,000 L

Interest income (beginning FVPA x interest rate) 350,000 G
Net interest expense / income 250,000 L

Gain or loss on the actual return on plan asset 850,000 – 350,000 500,000 G
Gain or loss on actuarial assumption on the benefit obligation 200,000 L
Change in effect after the interest
Total remeasurement 300,000 G

Total service cost 750,000 L
Net interest 250,000 L
Total benefit expense 1,300,000 L

Total service cost 750,000 L

Net interest 250,000 L
Total remeasurement 300,000 G
Total benefit cost 1,000,000 L

Use the following information for the next six (6) questions:
On January 1, 2020, Grachel Company provided the following information in connection with a defined benefit plan:
Fair value of plan assets 10,000,000
Unamortized past service cost 1,500,000
Projected benefit obligation (13,000,000)
Unrecognized actuarial gain (1,000,000)
Prepaid/accrued benefit cost (2,500,000)

On January 1, 2020, the entity adopted PAS 19R. the entity revealed the following transactions affecting the plan for the
current year:
Current service cost 2,500,000
Past service cost – remaining vesting period of covered employees is 5 years 1,000,000
Contribution to the plan 3,500,000
Benefits paid to retirees 3,000,000
Actual return on plan assets 1,500,000
Decrease in projected benefit obligation due to change in actuarial assumption 400,000
Discount rate 10%
Expected return on plan assets 12%

33) What is the transitional balance of the accrued or prepaid benefit cost on January 1, 2020?
A. 3,000,000 accrued B. 2,500,000 accrued C. 3,000,000 prepaid D. 2,500,000 prepaid

34) What is the employee benefit expense for the current year?
A. 3,800,000 B. 3,000,000 C. 4,800,000 D. 3,600,000

35) What is the net remeasurement gain for the current year?
A. 500,000 B. 400,000 C. 900,000 D. 0

36) What is the fair value of plan assets on December 31, 2020?


• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 9 OF 13 •
 A. 15,000,000 B. 12,000,000 C. 11,700,000 D. 10,500,000

37) What is the projected benefit obligation on December 31, 2020?

A. 14,400,000 B. 17,800,000 C. 13,400,000 D. 15,200,000

38) What amount should be reported as accrued or prepaid benefit cost on December 31, 2020?
A. 3,300,000 accrued B. 3,300,000 prepaid C. 2,400,000 accrued D. 2,400,000 prepaid

ANSWER: A, A, C, B, A, C
Fair value of plan asset, January 1 10,000,000
Projected benefit obligation, January 1 (13,000,000)
Prepaid benefit cost / accrued benefit cost (3,000,000)

Current service cost (+) 2,500,000
Past service cost (+) 1,000,000
Loss on settlement of PBO paid in advance (+) 0
Gain on settlement of PBO paid in advance (–) 0
Total service cost 3,500,000

Interest expense (beginning PBO x interest rate) 10,000,000 x 10% 1,000,000 G

Interest income (beginning FVPA x interest rate) 13,000,000 x 10% 1,300,000 L
Net interest expense / income 300,000 L

Gain or loss on the actual return on plan asset 1,500,000 – 1,000,000 500,000 G
Gain or loss on actuarial assumption on the benefit obligation 400,000 G
Change in effect after the interest 0
Total remeasurement 900,000 G

Total service cost 3,500,000 L

Net interest 300,000 L
Total benefit expense 3,800,000 L

Fair Value of Plan Asset

Plan asset, Beginning 10,000,000 0 Settlement price of PBO settled in advance
Contribution 3,500,000 3,000,000 Payment to retirees
Actual return on plan asset 1,500,000
Plan asset, Ending 12,000,000

Present Value of Benefit Obligation

CA of PBO settled in advance 0 13,000,000 PBO, Beginning
Actuarial gain on PBO 400,000 2,500,000 Current service cost
Benefits paid to retirees 3,000,000 1,000,000 Past service cost
0 Actuarial loss on PBO
1,300,000 Interest expense
14,400,000 Plan asset, Ending

Fair value of plan asset 12,000,000
Projected benefit obligation (14,400,000)
Prepaid benefit cost / accrued benefit cost (2,400,000)

39) Geraldine Company granted 30,000 share appreciation rights that enabled key employees to receive cash equal to the
difference between P50 and the market price of the share on the date each right is exercised. The service period is
2020 through 2022, and the rights are exercisable in 2023. The market price of the share is P60 and P80 on December
31, 2020 and 2021, respectively. What amount should be reported as accrued liability on December 31, 2021?
A. 600,000 B. 500,000 C. 100,000 D. 450,000

ANSWER: A
Year 1 Year 2
Fair value / intrinsic value 10 30
Total number of SARs 30,000 30,000
Vesting period ratio 1/3 2/3
Cumulative expense 100,000 600,000
Expense already recorded -- (100,000)


• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 10 OF 13 •
 Compensation expense 100,000 500,000

40) On January 1, 2020, Noelle Company granted to employees 10,000 share options. On January 1, 2021, the entity
granted to employees an additional 20,000 share options.
Date Fair value of share
January 1, 2020 20
December 31, 2020 22
January 1, 2021 25
December 31, 2021 30

The shares vest at the end of a four-year period. There are no forfeitures. What amount should be recorded as
compensation expense for 2021?
A. 175,000 B. 205,000 C. 225,000 D. 500,000

ANSWER: A
Year 1 Old Year 2 New Year 2 Total Year 2
Fair value / intrinsic value 20 20 25
Number of options per employee 10,000 10,000 20,000
Number of employees expected to receive 1 1 1
Vesting period ratio 1/ 4 2/4 1/4
Cumulative expense 50,000 100,000 125,000
Expense already recorded -- (50,000) --
Compensation expense 50,000 50,000 125,000 175,000

Use the following information for the next four (4) questions:
On January 1, 2021, an entity granted the employee option to buy 200,000 shares with P20 par for P30 per share. The
employees exercised the options on January 1, 2024. Quoted market prices of shares are as follows:
2021 – P34 2023 – P42
2022 – P39 2024 – P44

The service period is for two years beginning January 1, 2021. The fair value of the share options cannot be measured
reliably.

41) What is the compensation expense for 2021?

A. 400,000 B. 200,000 C. 300,000 D. 800,000

42) What is the compensation expense for 2022?

A. 1,800,000 B. 1,000,000 C. 1,400,000 D. 400,000

43) What is the compensation expense for 2023?

A. 200,000 B. 600,000 C. 400,000 D. 0

44) What amount should be credited to share premium upon exercise of the share options on January 1, 2024?
A. 3,800,000 B. 4,400,000 C. 4,800,000 D. 0

ANSWER: A, C, B, B
Year 1 Year 2 Year 3
Fair value / intrinsic value 4 9 12
Total number of options 200,000 200,000 200,000
Vesting period ratio 1/ 2 2/2 2/2
Cumulative expense 400,000 1,800,000 2,400,000
Expense already recorded -- (400,000) (1,800,000)
Compensation expense 400,000 1,400,000 600,000

Cash received (200,000 x 30) 6,000,000
Value of options returned 200,000 x 12 2,400,000
Total consideration 8,400,000
Par value of shares issued (200,000 x 20) (4,000,000)
Share premium – excess 4,400,000

Use the following information for the next two (2) questions:

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 11 OF 13 •
 On January 1, 2018, Nozoto Corp. granted an employee an option to purchase 3,000 shares of Nozoto’s P5 par value
ordinary shares at P20 per share. the option became exercisable on December 31, 2019, after the employee completed
two years of service. The market prices of Nozoto’s shares and share options were as follows:
Date Market price of share Market price of similar share option
January 1, 2018 30 8
December 31, 2018 50 9
December 31, 2019 45 11

45) Nozoto should recognized compensation expense in 2018 profit or loss of:
A. 45,000 B. 30,000 C. 15,000 D. 12,000

46) Assuming the fair value of the share options cannot be reliably measured, Nozoto should recognized compensation
expense in 2018 profit or loss of:
A. 45,000 B. 30,000 C. 15,000 D. 12,000

ANSWER: D, A
Year 1
Fair value / intrinsic value 8
Number of options per employee 3,000
Number of employees expected to receive 1
Vesting period ratio 1/2
Cumulative expense 12,000
Expense already recorded --
Compensation expense 12,000

Year 1
Fair value / intrinsic value (50 – 20) 30
Number of options per employee 3,000
Number of employees expected to receive 1
Vesting period ratio ½
Cumulative expense 45,000
Expense already recorded --
Compensation expense 45,000

47) On January 1, 2021, Fulgoso, Inc. established a share appreciation rights plan for its executives conditional upon the
executives remaining in the entity’s employ for four years. It entitled them to receive cash at any time after four years for
the difference between the market price of its ordinary share and a pre-established price of P20 on 100,000 SARs.
Current market prices of the share are as follows:
January 1, 2021 25 per share
December 31, 2021 38 per share
December 31, 2022 30 per share
December 31, 2023 33 per share

What amount of compensation expense should Fulgoso recognize for the year ended December 31, 2023?
A. 475,000 B. 975,000 C. 550,000 D. 150,000

ANSWER: A
Year 1 Year 2 Year 3
Fair value / intrinsic value 18 10 13
Total number of SARs 100,000 100,000 100,000
Vesting period ratio 1/ 4 2/4 3/ 4
Cumulative expense 450,000 500,000 975,000
Expense already recorded -- (450,000) (500,000)
Compensation expense 450,000 50,000 475,000

48) On January 1, 2020, Paula Company granted the president, 20,000 share appreciation rights for past services. Those
rights are exercisable immediately and expire on January 1, 2023. On exercise, the grantee is entitled to receive cash
for the excess of the market price on the exercise date over the market price on the grant date. The grantee did not
exercise any of the rights during 2020. The market price of share was P30 on January 1, 2020 and P45 on December
31, 2020. What amount should be recognized as compensation expense for 2020?
A. 600,000 B. 100,000 C. 300,000 D. 0

ANSWER: C


• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 12 OF 13 •
 Year 1
Fair value / intrinsic value (45-30) 15
Number of SARs per employee 20,000
Number of employees expected to receive 1
Compensation expense 300,000

49) On January 1, 2020, Malang Company established a share appreciation rights plan for the executives. The plan entitled
them to receive cash at any time after the four year vesting period for the difference between the market price of
ordinary share and a pre-established price of P20 on 60,000 rights. Current market prices of shares are P20, P38, P30,
P33 and P28 on January 1, 2020, December 31, 2020, December 31, 2021, December 31, 2022 and December 31,
2023, respectively. What amount of accrued liability should be recognized on December 31, 2022?
A. 780,000 B. 270,000 C. 285,000 D. 585,000

ANSWER: D
Year 2
Fair value / intrinsic value 13
Number of employees expected to receive 60,000
Vesting period ratio 3/ 4
Cumulative expense 585,000

50) On January 1, 2020, Lyne Company granted share option to employees with a fair value of P9,000,000. The vesting
period is 3 years. On December 31, 2020, the number of employees leaving is estimated at 4%. On December 31,
2021, the estimate of employees leaving is revised to 6%. On December 31, 2022, no employees actually left. What is
the compensation expense for 2022?
A. 9,000,000 B. 5,640,000 C. 2,880,000 D. 3,360,000

ANSWER: D
Year 1 Year 2 Year 3
Fair value / intrinsic value 9,000,000 9,000,000 9,000,000
Number of employees expected to receive 96% 94% 100%
Vesting period ratio 1/3 2/3 3/3
Cumulative expense 2,880,000 5,640,000 9,000,000
Expense already recorded -- (2,880,000) (5,640,000)
Compensation expense 2,880,000 2,760,000 3,360,000

J ËÑD ÖF ðÖŃG QÜÏZ ŠËT – N J

• J.S. CAYETANO ♣ • • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 13 OF 13 •