Prelim-Midterm Output in Monetary Policy and Central Banking

Monetary Policy and Central Banking

Evangelene C. Aying

Ronadel B. Bacayo

Angel Rose C. Condes

Juliana E. Waniwan

OAT-2A

Monday & Thursday 9:30 A.M. – 10:30 A.M.

 I. FINANCIAL ACCOUNTING AND REPORTING THOERIES

Accounting Income and Taxable Income

1. It is the income for a period determined in accordance with the rules established by tax authorities upon which
income taxes are payable or recoverable.
A. Accounting income.
B. Accounting income subject to tax.
C. Taxable income.
D. Net income.
2. It is the income for a period before deducting tax expense.
A. Accounting income.
B. Taxable income.
C. Gross income.
D. Net income.
3. Taxable income of a corporation differs from pretax financial income because of
Permanent Temporary
Differences differences
A. No No
B. No Yes
C. Yes Yes
D. Yes No
4. In accordance with PAS 12, it is the total amount included in the determination of profit or loss for the period.
A. Current tax expense.
B. Deferred tax expense.
C. Income tax expense.
D. Deferred tax benefit.
5. In accordance with PAS 12 paragraph 5, this is the amount of income taxes payable/recoverable in respect of the
taxable profit/loss for a period.
A. Current tax expense.
B. Deferred tax expense.
C. Income tax expense.
D. Deferred tax benefit
6. It is the amount of income tax payable in respect of taxable income.
A. Current tax expense.
B. Total income tax expense.
C. Deferred tax expense.
D. Deferred tax benefit.

Differences Between Accounting Income and Taxable Income

7. Which of the following items do not have future tax consequences

A. Life insurance premium paid and the entity is the beneficiary of the insurance policy.
B. Life insurance premium paid and the entity is not the beneficiary of the insurance policy.
C. Fines, penalties, and/or surcharges for violations of laws.
D. Charitable contributions in excess of tax limitation.
E. Choices A, C, and D.
8. These are differences that will result in future taxable amount in determining taxable income of future periods.
A. Temporary differences.
B. Taxable temporary differences.
C. Deductible temporary differences
D. Permanent differences
9. These are differences that result in future deductible amount in determining taxable income in future periods.
A. Taxable temporary differences
B. Deductible temporary differences
C. Taxable temporary and permanent differences
D. Deductible temporary and permanent differences
10. A temporary difference occurs when a revenue item is reported for tax purposes in a period.
After it is reported in Before it is reported
financial income in financial income
A. Yes Yes
B. Yes No
C. No Yes
D. No No

11. Which of the following will not result in a temporary difference?

A. Product warranty liability.
B. Advance rental receipts.
C. Installment sales.
D. All of these will result in a temporary difference.
12. Which of the following differences would result in future taxable amount?
I. Expenses or losses that are deductible before they are recognized in accounting income.
II. Expenses or losses that are deductible after they are recognized in accounting income.
III. Revenues or gains that are taxable before they are recognized in accounting income.
IV. Revenues or gains that are taxable after they are recognized in accounting income.
A. I and III.
B. II. and IV
C. II and III.
D. II and IV
13. Which of the following differences would result in future deductible amount?
I. Expenses or losses that are deductible before they are recognized in accounting income.
II. Expenses or losses that are deductible after they are recognized in accounting income.
III. Revenues or gains that are taxable before they are recognized in accounting income.
IV. Revenues or gains that are taxable after they are recognized in accounting income.
A. I and III.
B. I and IV.
C. II and III.
D. II and IV.
14. Which of the following would result in reporting a deferred tax liability?
A. Interest income on government bonds.
B. Accrual of warranty expense.
C. Excess of accounting depreciation over tax depreciation.
D. Excess of tax depreciation over accounting depreciation.
E. Subscription received in advance.
15. Which of the following would result in reporting a deferred tax asset?
A. Tax, penalty or surcharge for a violation of law.
B. Dividend received on equity investment.
C. Excess tax depreciation over accounting depreciation.
D. Rent paid in advance.
E. Rent received in advance
16. Statement I: Examples of taxable temporary differences are subscriptions received in advance and advance rental
receipts.
Statement II: Taxable temporary differences will result in taxable amounts in future years when the related assets
are recovered.
A. Statement I is true and Statement II is false.
B. Statement I is false and Statement II is true.
C. Both statements are true.
D. Both statements are false.
17. Statement I: Permanent differences do not give rise to future taxable or deductible amounts
Statement II: Companies must consider presently enacted changes in the tax rate that become effective in future
years when determining the tax rate to apply to existing temporary differences.
A. Statement I is true and Statement II is false.
B. Statement I is false and Statement II is true.
C. Both statements are true.
 D. Both statements are false

Deferred Taxes

18. It is the deferred tax consequence attributable to a taxable temporary difference.

A. Current tax liability
B. Current tax asset
C. Deferred tax liability
D. Deferred tax asset
19. It is the deferred tax consequence attributable to a deductible temporary difference and operating loss carry
forward.
A. Current tax liability
B. Current tax asset
C. Deferred tax liability
D. Deferred tax asset
20. A deferred tax asset is recognized for deductible temporary differences and operating loss carry forward when
A. It is probable that taxable income will be against which the deferred tax asset can be used.
B. It is probable that accounting income will be available against which the deferred tax asset can used.
C. It is possible that taxable income will be available against which the deferred tax asset can be used.
D. It is possible that accounting income will be available against which the deferred tax asset can be used.
21. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance
sheet if
A. It is probable that a future tax rate change will occur.
B. it appears likely that a future tax rate will be greater than the current tax rate.
C. the future tax rates have been enacted into law.
D. It appears likely that a future tax rate will be less than the current tax rate.
22. The deferred tax expense will be the
A. increase in balance of deferred tax asset minus the increase balance of deferred tax liability.
B. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
C. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
D. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.
23. Recognition of tax benefits in the loss year due to a loss carryforward requires
A. the establishment of a deferred tax liability.
B. the establishment of a deferred tax asset.
C. the establishment of an income tax refund receivable.
D. only a note to the financial statements.
24. Statement I: A deferred tax asset represents the increase in taxes refundable in future years as a result of
deductible temporary differences existing at the end of the current year.
Statement II: A company should add a decrease in a deferred tax liability to income tax payable in computing
income tax expense.
A. Statement I is true and Statement II is false.
B. Statement I is false and Statement II is true.
C. Both statements are true.
D. Both statements are false.

Financial Statement Presentation

25. Which statement is/are correct concerning tax assets and liabilities?
A. Deferred tax assets and liabilities shall not be discounted.
B. Tax assets and liabilities shall present separately from other assets and liabilities in the statement of financial
position.
C. When an entity makes a distinction between current and noncurrent assets and liabilities, it shall classify
deferred tax assets and liabilities as noncurrent.
D. All of these statements are correct.
26. At year-end, Mohawk Co. had a deferred tax liability, which exceeded the deferred tax asset, that is expected to
reverse in the subsequent year. Which of the following should be reported in the statement of financial position at
year-end?
A. The deferred tax liability as a noncurrent liability
 B. The deferred tax liability as a current liability
C. The excess of the deferred tax liability over the deferred tax asset as a current liability.
D. The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability.

Interperiod and Intraperiod Tax Allocation

27. It relates to the allocation of income tax expense during the period to various items of income or other sources
that brought about the tax.
A. Retained earnings.
B. Interperiod tax allocation.
C. Intraperiod tax allocation.
D. Income tax payable.
28. Interperiod tax allocation results in a deferred tax liability from
A. an income item partially recognized for financial purposes but fully recognized for tax purposes in any one
year.
B. the amount of deferred tax consequences attributed to temporary differences that result in net deductible
amounts in future years.
C. an income item fully recognized for tax and financial purposes in one year.
D. the amount of deferred tax consequences attributed to temporary differences that result in net taxable
amounts in future years.

29. Interperiod income tax allocation procedures are appropriate when

A. an extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net
income.
B. an extraordinary gain will cause the amount of income tax expense greater than the tax on ordinary net
income
C. differences between net income for tax purposes and financial reporting occur because tax laws and financial
accounting principles do not occur on the items to be recognized as revenue and expense.
D. differences between net income for tax purposes and financial reporting occur because, even though
financial accounting principles and tax laws concur on the item to be recognized as revenues and expenses,
they don’t concur on the training of the recognition.

Rules on offsetting

30. Statement I: PAS 12 permits offsetting of current tax assets and current tax liabilities only if the entity has a legally
enforceable right and intention to settle/realize the recognized the amounts.

Statement II: PAS 12 permits offsetting of deferred tax assets and liabilities only if the entity has a legally
enforceable right to offset current tax asset against current tax liabilities and the deferred tax asset and liabilities relate
to income taxes levied by the same taxation authority.

A. Statement I is true and statement II is false.

B. Statement I is false and statement II is true
C. Both statements are true.
D. Both statements are false.

Long-Term Noninterest-bearing notes

Refer to the following four independent situations:

Situation no. 1:

On January 1, 2022, Seamus Company purchased equipment by issuing a four year, non-interest bearing note with
face amount of P1,600,000. The note matures on December 31, 2025.

There was no equivalent cash price for the equipment and the note had no ready market. The prevailing interest rate
for a note of this type is 9%.
Round off present value factors to four decimal places.
1. At what amount should the note be recorded on January 1, 2022?
A. 1,024,000
B. 1,133,440
C. 1,295,880
D. 1,600,000

2. Prepare the journal entry on January 1, 2022.

3. Prepare the amortization schedule.

4. How much is the interest expense to be reported for 2022?

A. 102,010
B. 111,190
C. 121,198
D. 144,000

5. How much is the interest expense to be reported for 2023?

A. 102,010
B. 111,190
C. 121,198
D. 144,000

6. How much is the interest expense to be reported for 2024?

A. 102,010
B. 111,190
C. 121,198
D. 144,000

7. How much is the interest expense to be reported for 2025?

A. 102,010
B. 111,190
C. 132,162
D. 144,000

8. What is the carrying value of the note on December 31, 2022?

A. 1,133,440
B. 1,235,450
C. 1,346,640
D. 1,600,000

9. What is the carrying value of the note on December 31, 2023?

A. 1,133,440
B. 1,235,450
C. 1,346,640
D. 1,600,000

10. What is the carrying value of the note on December 31, 2024?
A. 1,133,440
B. 1,235,450
C. 1,467,838
D. 1,600,000
Situation no. 2:

On April 1, 2022, Seamus Company purchased equipment by issuing a four-year, noninterest bearing note with face
amount of P1,600,000. The note matures on March 31, 2026.

There was no equivalent cash price for the equipment and the note had no ready market. The prevailing interest rate
for a note of this type is 9%.

Round off present value factors to four decimal places.

1. At what amount should the note be recorded on January 1, 2022?

2. Prepare the journal entry on April 1, 2022.

3. Prepare the amortization schedule.

4. What is the carrying value of the note on December 31, 2022?

5. How much is the interest expense to be reported for 2023?

6. What is the carrying value of the note on December 31, 2023?

7. How much is the interest expense to be reported for 2024?

Situation no. 3:

On January 1, 2022, Seamus Company purchased equipment by issuing a four- year, noninterest bearing note with
face amount of P1,600,000. The note is payable in annual installments of P400,000. The first installment is due on
December 31, 2022.

There was no equivalent cash price for the equipment and the note had no ready market. The prevailing interest rate
for a note of this type is 9%.

Round off present value factors to four decimal places.

1. At what amount should the note be recorded on January 2022?
A. 1,024,000
B. 1,133,440
C. 1,295,880
D. 1,600,000

2. How much is the interest expense for the year 2022?

A. 33,038
B. 63,327
C. 91,126
D. 116,629

3. How much is the interest expense for the year 2023?

 A 33,038
B. 63,327
C. 91,126
D. 116,629

4. How much is the interest expense for the year 2024?

A 33,038
B. 63,327
C.91,126
D. 116,629

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

A. 33,038
B. 63,327
C. 91,126
D. 116,629

6. What is the carrying value of the note on December 31, 2022?

A. Zero
B. 366,962
C. 703,635
D. 1,012,509

7. What is the carrying value of the note on December 31, 2023?

A. Zero
B. 366,962
C. 703,635
D. 1,012,509

8. What is the carrying value of the note on December 31, 2024?

A. Zero
B. 366,962
C. 703,635
D. 1,012,509

9. What amount in relation to the note shall be classified as currentliability on December 31, 2022?
A. 283,371
B. 308,874
C. 703,635
D. 1,012,509

10. What amount in relation to the note shall be classified as non- current liability on December 31, 2022?
A. 283,371
B. 308,874
C. 703,635
D. 1,012,509

11. What amount in relation to the note shall be classified as current liability on December 31, 2023?
A. Zero
B. 336,673
C. 366,962
D. 703,635

12. What amount in relation to the note shall be classified as non- current liability on December 31, 2023?
A. Zero
B. 336,673
C. 366,962
 D. 703,635

Situation no. 4:

On April 1, 2022, Seamus Company purchased equipment by issuing a four-year, noninterest bearing note with face
amount of P1,600,000. The note is payable in annual installments of P400,000. The first installment is due on March
31, 2023.

There was no equivalent cash price for the equipment and the note had no ready market. The prevailing interest rate
for a note of this type is 9%.

Round off present value factors to four decimal places .

1. At what amount should the note be recorded on January 1,2022?

2. What is the carrying value of the note on December 31, 2022?

3. How much is the interest expense for the year 2023?

4. What is the carrying value of the note on December 31, 2023?

5. How much is the interest expense for the year 2024?

Various Notes Payable Transactions

On January 1, 2022, Christmas Company had a note payable to BPI in the amount of P1,400,000.

Transactions during 2022 and other information relating to notes are:

(a) Principal amount of the note payable to BPI is P1,400,000 and bears a 12% interest. The note is dated
April 1, 2021 and is payable in four equal annual installments beginning April 1, 2022. The first principal and interest
payment was made on April 1, 2022.

(b) On July 1, 2022, the company issued for P887,000 a P1,000,000 face amount note to one of its
shareholder. The note was dated on July 1, 2022 and matures on June 30, 2023. The note bears no interest and the
entire amount of the note is payable at maturity.

1. How much interest expense shall be reported for 2022?

A. 126,000
B. 136,500
C. 182,500
D. 193,000

2. What amount shall be reported as accrued interest on December 31, 2022?

A. Zero
B. 94,500
C. 136,500
D. 193,000
Bank Loan Transactions

Marsh Company frequently borrowed from the bank in order to maintain sufficient cash balance. The loans were at a
12% interest rate, with interest payable at maturity.

The company records interest when the loans are repaid. As a result, interest expense of P300,000 was recorded in
2022. The entity repaid each loan on the scheduled maturity date as follows:

Date Amount Maturity date Term

1 11/1/2021 P1,000,000 10/31/2022 12 months

2 2/1/2022 3,000,000 7/31/2022 6 months

3 5/1/2022 1,600,000 1/31/2023 9 months

1. What is the correct interest expense for 2022?

A. 280,000
B. 300,000
C. 308,000
D. 408,000

2. Which of the following statements is correct?

A. The recorded interest expense for 2022 is understated by P108,000
B. The recorded interest expense for 2022 is overstated by P108,000
C. The net income for 2022 is understated by P108,000.
D. Both Choices A and D are correct
E. Both Choices B and D are correct.

Answers & Solutions Guide

Long-Term Noninterest-bearing notes

Situation no. 1

1. ANSWER: B

Face amount 1,600,000

X: PV of 1 @ 9% for four periods 0.7084

Note Payable, 1/1/2022 1,133,440

2. ANSWER

1/1/2022 Equipment 1,133,440

Discount on note payable 466,550

Note payable 1,600,000

The discount on note payable is computed as follows:

Face amount of the note

Less: Present value of the note, 1/1/2022 (1,133,440) Discount on note payable
3. ANSWER

Interest Carrying

Date Expense Value

1/1/2022 1, 133, 440

12/31/2022 102, 010 1, 235, 450

12/31/2023 111, 190 1, 346, 640

12/31/2024 121, 198 1, 467, 838

12/31/2025 132, 162* 1, 600, 000

*Adjusted

Comment:

The interest expense is computed as:

Beginning carrying value x Effective interest rate

4. ANSWER: A

1,133,440 x 9% x 12/12 = 102,010

You may also refer to the amortization schedule above to answer this requirement.

Journal entry:

12/31/2022 Interest expense 102,010

Discount on note payable 102,010

Comments:

 The same journal entry above will be made every December 31 until maturity.
 At maturity, the discount is fully amortized, thus, the journal entry to record the settlement of the
note is:
12/31/2025 Note payable 1,600,000
Cash 1,600,000.

5. ANSWER: B

1,235,450 x 9% x 12/12 = 111,190

You may also refer to the amortization schedule above to answer the requirements.
6. ANSWER: C

1,346,640 x 9% x 12/12 = 121,198

You may also refer to the amortization schedule above to answer the requirements.

7. ANSWER: C

You may also refer to the amortization schedule above to answer the requirements.

8. ANSWER: B

Face amount of the note 1,600,000

Less: Discount on note payable, 12/31/2022

(466,650 – 102,010) (364,550)

Note payable, 12/31/2022 1,235,450

You may also refer to the amortization schedule above to answer the requirements.

9. ANSWER: C

Face amount of the note 1,600,000

Less Discount on note payable, 12/31/2023

(364,550 – 111,190) (253,360)

Note payable, 12/31/2023 1,346,640

You may also refer to the amortization schedule above to answer the requirements.

10. ANSWER: C

Face amount of the note 1,600,000

Less Discount on note payable, 12/31/2024

(253,360 – 121,198) (132,162)

Note payable, 12/31/2024 1,467,838

You may also refer to the amortization schedule above to answer the requirements.

Situation no.2

1. ANSWER: 1,333,440

Face Amount 1,600,000

X: PV of 1 @ 9% for four periods 0.7084

Note payable, 4/1/2022 1,133,440

2. ANSWER

4/1/2022 Equipment 1,133,440

Discount on note payable 466,560

Note payable 1,600,000

The discount on note payable is computed as follows:

Face amount of the note 1,600,000

Less: Present value of the note, 4/1/2022 (1,133,440)

Discount on note payable 466,560

3. ANSWER

Date Interest Expense Carrying Value

4/1/2022 1,133,440

3/31/2023 102,010 1,235,450

3/31/2024 111,190 1,346,640

3/31/2025 121,198 1,467,838

3/31/2026 132,162* 1,600,000

*Adjusted
Comment:

The interest expense is computed as:

Beginning carrying value x Effective interest rate

4. ANSWER: 1,208,947

Step 1: Compute the interest expense for 2022.

1,133,440 x 9% x 9/12 = 76,507

Step 2: Compute the remaining balance of the discount on note payable on December 31, 2022.

Discount on note payable, 4/1/2022 466,650

Less: Amortization – 2022 (76,507)

Discount on note payable, 12/31/2022 390,053

Step 3: Compute for the carrying value of the note on December 31, 2022.

Face amount of the note 1,600,000

Less: Discount on note payable, 12/31/2022 (83,393)

Note payable, 12/31/2023 1,209,947

5. ANSWER: 108,895

Interest expense: 1/1/2023 - 3/31/2023 (1,133,440 x 9% x 3/12) 25,502

Add: Interest expense: 4/1/2023 - 12/31/2023 (1,235,450 x 9% x 9/12) 83,393

Interest expense – 2023 108,895

6. ANSWER: 1,318,843

Note payable, 4/1/2023 1,235,450

Add: Interest, 4/1/2023 - 12/31/2023 (111,190 x 9/12) 83,393

Note payable, 12/31/2023 1,318,843

7. ANSWER: 118,697

Interest expense: 1/1/2024-3/31/2024 (111,190 x 3/12) 27,798

Add: Interest expense: 4/1/2024 - 12/31/2024 (121,198 x 9/12) 90,899

Interest expense – 2024 118,697

Situation no. 3

1. ANSWER: C
Annual installment 400,000
X: PV of an ordinary annuity of 1 @ 9% for 4 periods 3.2397
Note payable, 1/1/2022 1,295,880

Journal entry:

Equipment 1,295,880

Discount on note payable 304,120

Note payable, 1/1/2022 1,295,880

The discount on note payable is computed as follows:

Face amount of the note payable 1,600,000

Less: present value of the note, 1/1/2022 (1,295,880)

Discount on note payable 304,120

Amortization Schedule:

Date Payment Interest Payment applied Carrying Value

Expense
to the principal
1/1/2022 1,295,880

12/31/2022 400,000 116,629 283,371 1,012,509

12/31/2023 400,000 91,126 308,874 703,635

12/31/2024 400,000 63,327 336,673 366,962

12/31/2025 400,000 33,038 366,692 -

2. ANSWER: D

1,295,880 x 9% x 12/12 = 116,629

3. ANSWER: C

1,012,509 x 9% x 12/12 = 91,126

4. ANSWER: B

703,635 x 9% x 12/12 = 63,327

5. ANSWER: A

Refer to the amortization schedule above.

6. ANSWER: D

7. ANSWER: C

8. ANSWER: B

Refer to the amortization schedule above.

9. ANSWER: B

The current portion is simply equal to the payment to be applied to the principal the next period.

Alternative solution:
Note payable, 12/31/2022 1,012,509

Less: Note payable, 12/31/2023 (703,635)

Current liability, 12/31/2022 308,874

10. ANSWER: C

The noncurrent portion is simply equal to the carrying value of the note next period.

Note payable, 12/31/2023 = 703,635

11. ANSWER: B

The current portion is simply equal to the payment to be applied to the principal the next period.

Alternative solution:

Note payable, 12/31/2023