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FAR OCAMPO/OCAMPO
FAR.3530-Share-based Payment OCTOBER 2023

DISCUSSION PROBLEMS
1. Share-based payment transaction is a transaction in 6. In accordance with PFRS 2, fair value is
which the entity a. The price that would be received to sell an asset or
a. Receives goods or services from the supplier of paid to transfer a liability in an orderly transaction
those goods or services in a share-based payment between market participants at the measurement
arrangement. date.
b. Incurs an obligation to settle the transaction with b. The amount for which an asset could be
the supplier in a share-based payment exchanged, or a liability settled, between
arrangement when another group entity receives knowledgeable, willing parties in an arm’s length
those goods or services. transaction.
c. Either a or b. c. The amount for which an asset could be
d. Neither a nor b. exchanged, a liability settled, or an equity
instrument granted could be exchanged, between
2. Provided the specified vesting conditions, if any, are knowledgeable, willing parties in an arm’s length
met, share-based payment arrangement is an transaction.
agreement between the entity and another party that d. The estimated selling price in the ordinary course
entitles the other party to receive of business less the estimated costs of completion
a. Cash or other assets of the entity for amounts that and the estimated costs necessary to make the
are based on the price (or value) of equity sale.
instruments of the entity.
b. Equity instruments of the entity. 7. The fair value of an equity-settled share-based
c. Either a or b. payment transaction is determined at the date of
d. Neither a nor b. a. Grant c. Settlement
b. Exercise d. Expiration
3. Cash-settled share- based payment transaction is a
share-based payment transaction in which the entity 8. In relation to share-based payment transactions, grant
a. Acquires goods or services by incurring a liability to date is
transfer cash or other assets to the supplier of a. The date at which the entity and another party
those goods or services for amounts that are based (including an employee) agree to a share-based
on the price (or value) of equity instruments of the payment arrangement, being when the entity and
entity. the counterparty have a shared understanding of
b. Receives goods or services as consideration for its the terms and conditions of the arrangement.
own equity instruments. b. The date when the entity confers on the
c. Receives goods or services but has no obligation to counterparty the right to cash, other assets, or
settle the transaction with the supplier. equity instruments of the entity, provided the
d. All of the above. specified vesting conditions, if any, are met.
c. The date when approval is obtained if the
4. Which statement is incorrect regarding measurement agreement is subject to an approval process (for
of equity-settled share-based payment transactions? example, by shareholders).
a. The entity shall measure the goods or services d. All of the above.
received, and the corresponding increase in equity,
directly, at the fair value of the goods or services
received, unless that fair value cannot be Use the following information for the next two questions.
estimated reliably.
On Jan. 1, 2022, Madelle Corp. granted an employee an
b. If the entity cannot estimate reliably the fair value
option to purchase 3,000 shares of Madelle's P5 par value
of the goods or services received, the entity shall
ordinary shares at P20 per share. The option became
measure their value, and the corresponding
exercisable on Dec. 31, 2023, after the employee
increase in equity, indirectly, by reference to the
completed two years of service. The market prices of
fair value of the equity instruments granted.
Madelle's shares and share options were as follows:
c. For transactions with employees and others
Market price Market price of
providing similar services, the entity shall measure
Date of share similar share option
the fair value of the services received by reference
Jan. 1, 2022 P30 P8
to the fair value of the equity instruments granted,
Dec. 31, 2022 50 9
because typically it is not possible to estimate
Dec. 31, 2023 45 11
reliably the fair value of the services received.
d. The fair value of equity instruments shall be re-
9. Madelle should recognize compensation expense in
measured every period end until settlement.
2023 profit or loss of
a. P45,000 c. P15,000
5. When applying PFRS 2, an entity measures fair value
b. P30,000 d. P12,000
in accordance with
a. PFRS 2 c. PAS 32
b. PFRS 13 d. PAS 2

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10. Assuming the fair value of the share options cannot be • Grant date (Jan. 1, 2021): estimates of employees
reliably measured, Madelle should recognize leaving the entity during the vesting period - 4%.
compensation expense in 2023 profit or loss of • Jan. 1, 2022: revision of estimate of employees
a. P45,000 c. P15,000 leaving to 6% before vesting date.
b. P30,000 d. P12,000 • Dec. 31, 2023: actual employees leaving 5%.
What would be the expense charged in the income
11. Many shares and most share options are not traded in
statement in 2023?
an active market. Therefore, it is often difficult to
a. P1,860,000 c. P1,940,000
arrive at a fair value of the equity instruments being
b. P1,900,000 d. P2,000,000
issued. Which of the following option valuation
techniques should not be used as a measure of fair
17. Which statement is incorrect if a grant of equity
value in the first instance?
instruments is cancelled or settled during the vesting
a. Black-Scholes model. c. Monte Carlo model.
period?
b. Binomial model. d. Intrinsic value.
a. The entity shall account for the cancellation or
settlement as an acceleration of vesting, and shall
12. Option pricing models take into account which of the
therefore recognize immediately the amount that
following factors
otherwise would have been recognized for services
a. The current price of the underlying shares
received over the remainder of the vesting period.
b. The expected volatility of the share price
b. Any payment made to the employee on the
c. The risk-free interest rate for the life of the option
cancellation or settlement of the grant shall be
d. All of the above
accounted for as the repurchase of an equity
interest.
13. On Jan. 1, 2021, Windom Corp. granted share options
c. Any payment made to the employee on the
for 100,000 shares of its P10 par value ordinary shares
cancellation or settlement of the grant that
to its key employees. The market price of the ordinary
exceeds the fair value of the equity instruments
share on that date was P23 per share and the option
granted, measured at the repurchase date shall be
price was P20. The Black-Scholes option pricing model
recognized as an expense.
determines total compensation expense to be P600,000.
d. If the share-based payment arrangement included
The options are exercisable beginning Jan. 1, 2024,
liability components, the entity shall re-measure
provided those key employees are still in Windom’s
the fair value of the liability and equity
employ at the time the options are exercised. The
components at the date of cancellation or
options expire on Jan. 1, 2025.
settlement.
The amount of compensation expense Windom should
record for 2023 is 18. An entity has granted share options to its employees.
a. P100,000 c. P150,000 The total expense to the vesting date of Dec. 31,
b. P200,000 d. P700,000 2024, has been calculated as P8 million. The entity has
decided to settle the award early, on Dec. 31, 2023.
14. In what circumstances is compensation expense The expense charged in the income statement since
immediately recognized under PFRS 2? the grant date of Jan. 1, 2021, had been year to Dec.
a. In all circumstances. 31, 2021, P2 million, and year to Dec. 31, 2022, P2.1
b. In no circumstances is compensation expense million. The expense that would have been charged in
immediately recognized. the year to Dec. 31, 2023, was P2.2 million. What
c. In circumstances when options are exercisable would be the expense charged in the income
within 2 years for services rendered over the next statement for the year ended Dec. 31, 2023?
2 years. a. P2.0 million c. P3.9 million
d. In circumstances when options are granted for b. P2.2 million d. P8.0 million
prior service and the options are immediately
exercisable.
19. Which statement is incorrect if a grant of equity
15. On Jan. 2, 2023, Kine Corp. granted Morgan, its instruments is modified?
president, compensatory share options to buy 1,000 a. The determination of whether a change in terms
shares of Kine's P10 par ordinary shares. The options and conditions has an effect on the amount
call for a price of P20 per share and are exercisable for recognized depends on whether the fair value of
three years following the grant date. Morgan exercised the new instruments is greater than the fair value
the options on Dec. 31, 2023. The market price of the of the original instruments (both determined at the
share was P50 on Jan. 2, 2023, and P70 on Dec. 31, modification date).
2023. The fair value of a similar share option with the b. If the fair value of the new instruments is more
same terms was P28 on the grant date. What is than the fair value of the old instruments (e.g. by
compensation expense for 2023 for the share-based reduction of the exercise price or issuance of
payments? additional instruments), the incremental amount is
a. P 9,333 c. P20,000 recognized over the remaining vesting period in a
b. P10,000 d. P28,000 manner similar to the original amount. If the
modification occurs after the vesting period, the
16. Ashleigh Corp. has granted share options to its incremental amount is recognized immediately.
employees with a fair value of P6,000,000. The options c. If the fair value of the new instruments is less than
vest in three years’ time. The Monte-Carlo model was the fair value of the old instruments, the original
used to value the options, and these estimates had fair value of the equity instruments granted should
been made: be expensed as if the modification never occurred.
d. None of the above.

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20. At the beginning of year 1, an entity grants 100 share Compute for the amount to be recognized as
options to each of its 200 employees. Each grant is compensation expense in year 3.
conditional upon the employee remaining in service a. P55,000 c. P75,000
over the next three years. The entity estimates that b. P45,000 d. P 0
the fair value of each option is P21. On the basis of a
weighted average probability, the entity estimates that 25. Entity A has entered into a contract with Entity B. B will
60 employees will leave during the three-year period supply A with a range of services. The payment for
and therefore forfeit their rights to the share options. those services will be in cash and based upon the price
of A's ordinary shares on completion of the contract.
Suppose that 15 employees leave during year 1. Also
This share-based payment transaction is
suppose that by the end of year 1, the entity’s share
a. Asset-settled share-based payment transaction
price has dropped, and the entity reprices its share
b. Liability-settled share-based payment transaction
options, and that the repriced share options vest at the
c. Cash-settled share-based payment transaction
end of year 3. The entity estimates that a further 35
d. Equity-settled share-based payment transaction
employees will leave during years 2 and 3. During
year 2, a further 10 employees leave, and the entity
26. Which statement is false regarding cash-settled share-
estimates that a further 10 employees will leave during
based payment transactions?
year 3. During year 3, a total of 8 employees leave.
a. The entity shall measure the goods or services
The entity estimates that, at the date of repricing, the acquired and the liability incurred at the fair value
fair value of each of the original share options granted of the liability.
(ie before taking into account the repricing) is P10 and b. Until the liability is settled, the entity is required to
that the fair value of each repriced share option is P13. remeasure the fair value of the liability at the end
of each reporting period and at the date of
The amount to be recognized as expense in year 2 is settlement.
a. P159,000 c. P150,750 c. Changes in fair value of the liability are recognized
b. P105,000 d. P135,750 in profit or loss for the period.
d. The entity shall recognize a corresponding increase
21. A condition upon which the exercise price, vesting or in equity.
exercisability of an equity instrument depends that is
related to the market price of the entity’s equity 27. On Jan. 1, 2021, Fulgoso, Inc. established a share
instruments, such as attaining a specified share price appreciation rights plan for its executives conditional
or a specified amount of intrinsic value of a share upon the executives’ remaining in the entity’s employ
option, or achieving a specified target that is based on for four years. It entitled them to receive cash at any
the market price of the entity’s equity instruments time after four years for the difference between the
relative to an index of market prices of equity market price of its ordinary share and a pre-
instruments of other entities. established price of P20 on 100,000 SARs. Current
a. Service c. Market market prices of the share are as follows:
b. Performance d. Vesting Jan. 1, 2021 P25 per share
Dec. 31, 2021 38 per share
22. Which of the following conditions must be taken into Dec. 31, 2022 30 per share
account when estimating fair value of equity Dec. 31, 2023 33 per share
instruments at the measurement date?
a. Service c. Market What amount of compensation expense should Fulgoso
b. Performance d. None of these recognize for the year ended Dec. 31, 2023?
a. P475,000 c. P550,000
23. An entity shall recognize the goods or services b. P975,000 d. P150,000
received from a counterparty irrespective of whether
which condition is satisfied Use the following information for the next two questions.
a. Service c. Market
Jay Corp. has granted 20 share appreciation rights to each
b. Performance d. None of these
of its 500 employees on Jan. 1, 2020. The rights are due
to vest on Dec. 31, 2023 with payment being made on
24. At the beginning of year 1, the entity grants 1,000
Dec. 31, 2024. Assume that 80% of the awards vest.
share options to each of its 20 employees working in
Share prices are:
the sales department, conditional upon the employee’s
Jan. 1, 2020 P15
remaining in the entity’s employ for three years, and
Dec. 31, 2020 18
the sales team selling more than 50,000 units of a
Dec. 31, 2023 21
particular product over the three-year period.
Dec. 31, 2024 19
However, the share options cannot be exercised unless
the share price has increased at the end of year 3 by 28. What amount of liability will be recognized on Dec. 31,
at least 20%. The fair value of the share options is 2023 for the share appreciation rights?
P15 per option at the date of grant. a. P 60,000 c. P 48,000
b. P210,000 d. P150,000
By the end of year 1, two employees have left and the
entity expects that a total of 5 employees will leave by 29. How should the settlement of the transaction be
the end of year 3. During year 2, the entity increases accounted for on Dec. 31, 2024?
the sales target to 100,000 units. By the end of year a. Payment to employees of P32,000, no gain
2, a further four employees have left. The entity now recorded
expects two more employees will leave during year 3. b. Payment to employees of P16,000, gain of P32,000
By the end of year 3, the entity has sold 55,000 units, is recorded
and the share options are forfeited. The share price c. Payment to employees of P48,000, no gain
has increased by only 10%. By the end of year 3, a recorded
further three employees have left. d. Payment to employees of P32,000, gain of P16,000
is recorded

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30. An entity grants to an employee the right to choose 31. At the beginning of year 1, the entity grants 10,000
either 1,000 phantom shares, ie a right to a cash shares with a fair value of P27 per share to a senior
payment equal to the value of 1,000 shares, or 1,200 executive, conditional upon the completion of three
shares. The grant is conditional upon the completion years’ service. By the end of year 2, the share price
of three years’ service. If the employee chooses the has dropped to P21 per share. At that date, the entity
share alternative, the shares must be held for three adds a cash alternative to the grant, whereby the
years after vesting date. executive can choose whether to receive 10,000
shares or cash equal to the value of 10,000 shares on
At grant date, the entity’s share price is P50 per share.
vesting date. The share price is P18 on vesting date.
At the end of years 1, 2 and 3, the share price is P52,
P55 and P60 respectively. The entity does not expect The net expense to be recognized in year 3 is
to pay dividends in the next three years. After taking a. P90,000 c. P70,000
into account the effects of the post-vesting transfer b. P60,000 d. P40,000
restrictions, the entity estimates that the grant date
fair value of the share alternative is P48 per share. 32. PFRS 2 requires disclosure of
a. The nature and extent of share-based payment
Compute for the amount to be recognized as
arrangements that existed during the period.
compensation expense in year 2.
b. How the fair value of the goods or services
a. P21,868 c. P19,334
received, or the fair value of the equity
b. P36,667 d. P19,200
instruments granted, during the period was
determined.
c. The effect of share-based payment transactions on
the entity's profit or loss for the period and on its
financial position.
d. All of the above.

- done -

ILLUSTRATIVE PROBLEMS
PROBLEM NO. 1 - Grant conditional upon completing a specified service period
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee working
for the entity over the next three years. The entity estimates that the fair value of each share option is P15.

On the basis of a weighted average probability, the entity estimates that 20 per cent of employees will leave during the
three-year period and therefore forfeit their rights to the share options.

During year 1, 20 employees leave. The entity revises its estimate of total employee departures over the three-year
period from 20 per cent (100 employees) to 15 per cent (75 employees). During year 2, a further 22 employees leave.
The entity revises its estimate of total employee departures over the three-year period from 15 per cent to 12 per cent
(60 employees). During year 3, a further 15 employees leave. Hence, a total of 57 employees forfeited their rights to
the share options during the three-year period, and a total of 44,300 share options (443 employees × 100 options per
employee) vested at the end of year 3.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.

SOLUTION:
Cumulative
Compensation compensation
Year Computation expense expense
1 50,000 options × 85% × P15 × 1/3 years 212,500 212,500
2 (50,000 options × 88% × P15 × 2/3 years) – P212,500 227,500 440,000
3 (44,300 options × P15) – P440,000 224,500 664,500

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PROBLEM NO. 2 - Grant with a performance condition, in which the length of the vesting period varies
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the employees’
remaining in the entity’s employ during the vesting period. The shares will vest at the end of year 1 if the entity’s
earnings increase by more than 18 per cent; at the end of year 2 if the entity’s earnings increase by more than an
average of 13 per cent per year over the two-year period; and at the end of year 3 if the entity’s earnings increase by
more than an average of 10 per cent per year over the three-year period. The shares have a fair value of P30 per share
at the start of year 1, which equals the share price at grant date. No dividends are expected to be paid over the three-
year period.

By the end of year 1, the entity’s earnings have increased by 14 per cent, and 30 employees have left. The entity
expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares will vest
at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further 30 employees will
leave during year 2, and therefore expects that 440 employees will vest in 100 shares each at the end of year 2.

By the end of year 2, the entity’s earnings have increased by only 10 per cent and therefore the shares do not vest at the
end of year 2. 28 employees have left during the year. The entity expects that a further 25 employees will leave during
year 3, and that the entity’s earnings will increase by at least 6 per cent, thereby achieving the average of 10 per cent
per year.

By the end of year 3, 23 employees have left and the entity’s earnings had increased by 8 per cent, resulting in an
average increase of 10.67 per cent per year. Therefore, 419 employees received 100 shares at the end of year 3.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.

SOLUTION:
Cumulative
Compensation compensation
Year Computation expense expense
1 440 employees × 100 shares × P30 × 1/2 660,000 660,000
2 (417 employees × 100 shares × P30 × 2/3) – P660,000 174,000 834,000
3 (419 employees × 100 shares × P30 × 3/3) – P834,000 423,000 1,257,000

PROBLEM NO. 3 - Grant with a performance condition, in which the number of equity instruments varies
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales department.
The share options will vest at the end of year 3, provided that the employees remain in the entity’s employ, and provided
that the volume of sales of a particular product increases by at least an average of 5 per cent per year. If the volume of
sales of the product increases by an average of between 5 per cent and 10 per cent per year, each employee will receive
100 share options. If the volume of sales increases by an average of between 10 per cent and 15 per cent each year,
each employee will receive 200 share options. If the volume of sales increases by an average of 15 per cent or more,
each employee will receive 300 share options.

On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity A also estimates that
the volume of sales of the product will increase by an average of between 10 per cent and 15 per cent per year, and
therefore expects that, for each employee who remains in service until the end of year 3, 200 share options will vest.
The entity also estimates, on the basis of a weighted average probability, that 20 per cent of employees will leave before
the end of year 3.

By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by the
end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-year period. Product
sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2 years.

By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects only
three more employees will leave during year 3, and therefore expects a total of 15 employees will have left during the
three-year period, and hence 85 employees are expected to remain. Product sales have increased by 18 per cent,
resulting in an average of 15 per cent over the two years to date. The entity now expects that sales will average 15 per
cent or more over the three-year period, and hence expects each sales employee to receive 300 share options at the end
of year 3.

By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year period,
and 86 employees remain. The entity’s sales have increased by an average of 16 per cent over the three years.
Therefore, each of the 86 employees receive 300 share options.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.

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SOLUTION:
Compensation Cumulative
Year Computation expense expense
1 80 employees × 200 options × P20 × 1/3 106,667 106,667
2 (85 employees × 300 options × P20 × 2/3) – P106,667 233,333 340,000
3 (86 employees × 300 options × P20 × 3/3) – P340,000 176,000 516,000

PROBLEM NO. 4 - Grant with a performance condition, in which the exercise price varies
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the executive’s
remaining in the entity’s employ until the end of year 3. The exercise price is P40. However, the exercise price drops to
P30 if the entity’s earnings increase by at least an average of 10 per cent per year over the three-year period.
On grant date, the entity estimates that the fair value of the share options, with an exercise price of P30, is P16 per
option. If the exercise price is P40, the entity estimates that the share options have a fair value of P12 per option.

During year 1, the entity’s earnings increased by 12 per cent, and the entity expects that earnings will continue to
increase at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and
hence the share options will have an exercise price of P30.

During year 2, the entity’s earnings increased by 13 per cent, and the entity continues to expect that the earnings target
will be achieved.

During year 3, the entity’s earnings increased by only 3 per cent, and therefore the earnings target was not achieved.
The executive completes three years’ service, and therefore satisfies the service condition. Because the earnings target
was not achieved, the 10,000 vested share options have an exercise price of P40.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.

SOLUTION:
Compensation Cumulative
Year Computation expense compensation expense
1 10,000 options × P16 × 1/3 53,333 53,333
2 (10,000 options × P16 × 2/3) – P53,333 53,334 106,667
3 (10,000 options × P12 × 3/3) – P106,667 13,333 120,000

PROBLEM NO. 5 - Grant with a market condition

At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the executive
remaining in the entity’s employ until the end of year 3. However, the share options cannot be exercised unless the
share price has increased from P50 at the beginning of year 1 to above P65 at the end of year 3. If the share price is
above P65 at the end of year 3, the share options can be exercised at any time during the next seven years, ie by the
end of year 10.

The entity applies a binomial option pricing model, which takes into account the possibility that the share price will
exceed P65 at the end of year 3 (and hence the share options become exercisable) and the possibility that the share
price will not exceed P65 at the end of year 3 (and hence the options will be forfeited). It estimates the fair value of the
share options with this market condition to be P24 per option.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 3.

SOLUTION:
Cumulative
Compensation compensation
Year Computation expense expense
1 10,000 options × P24 × 1/3 80,000 80,000
2 (10,000 options × P24 × 2/3) – P80,000 80,000 160,000
3 (10,000 options × P24) – P160,000 80,000 240,000

As noted above, these amounts are recognized irrespective of the outcome of the market condition. However, if the
executive left during year 2 (or year 3), the amount recognized during year 1 (and year 2) would be reversed in year 2
(or year 3). This is because the service condition, in contrast to the market condition, was not taken into account when
estimating the fair value of the share options at grant date. Instead, the service condition is taken into account by
adjusting the transaction amount to be based on the number of equity instruments that ultimately vest, in accordance
with paragraphs 19 and 20 of PFRS 2.

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PROBLEM NO. 6 - Grant with a market condition, in which the length of the vesting period varies
At the beginning of year 1, an entity grants 10,000 share options with a ten-year life to each of ten senior executives.
The share options will vest and become exercisable immediately if and when the entity’s share price increases from P50
to P70, provided that the executive remains in service until the share price target is achieved.

The entity applies a binomial option pricing model, which takes into account the possibility that the share price target will
be achieved during the ten-year life of the options, and the possibility that the target will not be achieved. The entity
estimates that the fair value of the share options at grant date is P25 per option. From the option pricing model, the
entity determines that the mode of the distribution of possible vesting dates is five years. In other words, of all the
possible outcomes, the most likely outcome of the market condition is that the share price target will be achieved at the
end of year 5. Therefore, the entity estimates that the expected vesting period is five years. The entity also estimates
that two executives will have left by the end of year 5, and therefore expects that 80,000 share options (10,000 share
options x 8 executives) will vest at the end of year 5.

Throughout years 1–4, the entity continues to estimate that a total of two executives will leave by the end of year 5.
However, in total three executives leave, one in each of years 3, 4 and 5. The share price target is achieved at the end
of year 6. Another executive leaves during year 6, before the share price target is achieved.

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 5.

SOLUTION:
Paragraph 15 of PFRS 2 requires the entity to recognize the services received over the expected vesting period, as
estimated at grant date, and also requires the entity not to revise that estimate. Therefore, the entity recognizes the
services received from the executives over years 1–5. Hence, the transaction amount is ultimately based on 70,000
share options (10,000 share options × 7 executives who remain in service at the end of year 5). Although another
executive left during year 6, no adjustment is made, because the executive had already completed the expected vesting
period of 5 years. Therefore, the entity recognizes the following amounts in years 1–5:
Compensation Cumulative
Year Computation expense compensation expense
1 80,000 options × P25 × 1/5 400,000 400,000
2 (80,000 options × P25 × 2/5) – P400,000 400,000 800,000
3 (80,000 options × P25 × 3/5) – P800,000 400,000 1,200,000
4 (80,000 options × P25 × 4/5) – P1,200,000 400,000 1,600,000
5 (70,000 options × P25) – P1,600,000 150,000 1,750,000

PROBLEM NO. 7 - Grant of share options that is accounted for by applying the intrinsic value method
At the beginning of year 1, an entity grants 1,000 share options to 50 employees. The share options will vest at the end
of year 3, provided the employees remain in service until then. The share options have a life of 10 years. The exercise
price is P60 and the entity’s share price is also P60 at the date of grant.

At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options granted.

At the end of year 1, three employees have ceased employment and the entity estimates that a further seven employees
will leave during years 2 and 3. Hence, the entity estimates that 80 per cent of the share options will vest.

Two employees leave during year 2, and the entity revises its estimate of the number of share options that it expects will
vest to 86 per cent.

Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.

The entity’s share price during years 1-10, and the number of share options exercised during years 4-10, are set out
below. Share options that were exercised during a particular year were all exercised at the end of that year.
Number of share options
Year Share price at year-end exercised at year-end
1 P63 0
2 65 0
3 75 0
4 88 6,000
5 85 8,000

REQUIRED:
Compute for the amounts to be recognized as compensation expense in year 1 to 5.

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SOLUTION:

Expense for Cumulative

Year Computation period expense
1 50,000 options × 80% × (P63 –P60) × 1/3 years 40,000 40,000
2 50,000 options × 86% × (P65 –P60) × 2/3 years – 103,333 143,333
P40,000
3 43,000 options × (P75 – P60) – P143,333 501,667 645,000
4 37,000 outstanding options × (P88 – P75) + 6,000
exercised options × (P88 – P75) 559,000 1,204,000
5 29,000 outstanding options × (P85 – P88) + 8,000
exercised options × (P85 – P88) (111,000) 1,093,000

PROBLEM NO. 8 – Cash-settled share-based payment transaction

An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the employees
remain in its employ for the next three years.

During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3. During year
2, 40 employees leave and the entity estimates that a further 25 will leave during year 3. During year 3, 22 employees
leave. At the end of year 3, 150 employees exercise their SARs, another 140 employees exercise their SARs at the end
of year 4 and the remaining 113 employees exercise their SARs at the end of year 5.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the
end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise
(which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
Year Fair value Intrinsic value
1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00

REQUIRED:
Compute for the amounts to be recognized as compensation expense and liability in year 1 to 5.

SOLUTION:
Year Computation Expense Liability
1 (500 – 95) employees × 100 SARs × P14.40 × 1/3 194,400 194,400
2 (500 – 100) employees × 100 SARs × 218,933 413,333
P15.50 × 2/3 – P194,400
3 (500 – 97 – 150) employees × 100 SARs 47,127 460,460
× P18.20 – P413,333
+ 150 employees × 100 SARs × P15.00 225,000
Total 272,127
4 (253 – 140) employees × 100 SARs × (218,640) 241,820
P21.40 – P460,460
+ 140 employees × 100 SARs × P20.00 280,000
Total 61,360
5 P0 – P241,820 (241,820) 0
+ 113 employees × 100 SARs × P25.00 282,500
Total 40,680
Total 787,500

J - end of FAR.3530 - J

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

FAR OCAMPO/OCAMPO
FAR.3531-Provisions and Contingencies OCTOBER 2023

DISCUSSION PROBLEMS
1. As defined in PAS 37, a ‘provision’ is c. A reliable estimate can be made of the amount of
a. A liability of uncertain timing or amount. obligation.
b. A possible obligation depending on whether some d. All of these.
uncertain future event occurs.
c. A present obligation but payment is not probable 7. An entity has no realistic alternative to settling the
or the amount cannot be measured reliably. obligation created by a past event in which of the
d. A possible asset that arises from past events and following?
whose existence will be confirmed only by the a. Where the settlement of the obligation can be
occurrence or non-occurrence of one or more enforced by law.
uncertain future events not wholly within the b. Where the event (which may be an action of the
control of the entity. entity) creates valid expectations in other parties
that the entity will discharge the obligation.
2. PAS 37 shall be applied by all entities in accounting for c. Either a or b.
provisions, contingent liabilities and contingent assets d. Neither a nor b.
including
a. Those covered by another Standard. 8. The amount recognized as a provision should be the
b. Financial guarantees that are within the scope of best estimate of the expenditure required to settle the
PFRS 9 Financial Instruments. present obligation at the end of the reporting period,
c. Those resulting from executory contracts. that is, the amount that an enterprise would rationally
d. Those resulting from onerous contracts. pay to settle the obligation at the end of the reporting
period or to transfer it to a third party. Which of the
3. Which of the following does PAS 37 address? following is an incorrect application of this principle?
a. Provision for depreciation a. Provisions for one-off events (restructuring,
b. Provision for impairment of assets environmental clean-up, settlement of a lawsuit)
c. Provision for doubtful debts are measured at the most likely amount.
d. Provision for restructuring b. Provisions for large populations of events
(warranties, customer refunds) are measured at a
4. A restructuring is a program that is planned and probability-weighted expected value.
controlled by management, and materially changes c. Where there is a continuous range of possible
either the scope of a business undertaken by an entity outcomes, and each point in that range is as likely
or the manner in which that business is conducted. as any other, the mid-point of the range is used.
Examples of events that may fall under the definition d. The provision is measured after tax.
of restructuring include:
I. Sale or termination of a line of business. 9. Which of the following is not taken into account when
II. The closure of business locations in a country or measuring provisions?
region or the relocation of business activities a. Risks and uncertainties
from one country or region to another. b. Time value of money
III. Changes in management structure, for example, c. Future events that are likely to occur
eliminating a layer of management. d. Gains from expected disposal of assets
IV. Fundamental reorganizations that have a material
effect on the nature and focus of the entity’s 10. Which statement is incorrect regarding
operations. reimbursements for settlement of provisions?
a. Where some or all of the expenditure required to
a. I, II, III and IV c. I, II and III only
settle a provision is expected to be reimbursed by
b. I, II and IV only d. II, III and IV only
another party, the reimbursement shall be
recognized when, and only when, it is virtually
5. Which of the following liabilities are reported as
certain that reimbursement will be received if the
provisions?
entity settles the obligation.
a. Liabilities to pay for goods or services that have
b. The amount recognized for the reimbursement
been received or supplied and have been invoiced
shall not exceed the amount of the provision.
or formally agreed with the supplier.
c. In the statement of comprehensive income, the
b. Liabilities to pay for goods or services that have
expense relating to a provision may be presented
been received or supplied but have not been paid,
net of the amount recognized for a reimbursement.
invoiced or formally agreed with the supplier,
d. In the statement of financial position, the
including amounts due to employees.
reimbursement may be presented as an offset to
c. Both a and b.
the related provision.
d. Neither a nor b.
11. Maybe Corp. is evaluating whether each of the
6. In accordance with PAS 37, an entity must recognize a
following would be a liability, a provision or a
‘provision’ if, and only if
contingent liability, or none of these, in the financial
a. A present obligation has arisen as a result of a past
statements of Maybe as of June 30, 2023. Assume that
event.
Maybe’s financial statements are authorized for issue
b. It is probable that an outflow of resources
on Aug. 20, 2023:
embodying economic benefits will be required to
settle the obligation.

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a) Maybe expects it will incur operating losses of Use the following information for the next three questions.
between P10 million and P20 million in the next
Emong Candy Corp. offers a coffee mug as a premium for
accounting period.
every ten 50-cent candy bar wrappers presented by
b) Maybe entered into a commitment to purchase
customers together with P1.00. The purchase price of each
10,000 units of a certain raw material for P100 per
mug to the company is 90 cents; in addition, it costs 60
unit to be delivered on Aug. 30, 2023. The contract
cents to mail each mug. The results of the premium plan
can be cancelled. The purchase price of this
for the years 2022 and 2023 are as follows:
material had fallen to P90 per unit at June 30,
2023. 2022 2023
c) An amount of P350,000 owing to Perhaps Corp. for Coffee mugs purchased 480,000 400,000
services rendered during May 2023. Candy bars sold 3,750,000 4,500,000
d) Long-service leave, estimated to be P5,000,000, Wrappers redeemed 1,900,000 2,800,000
owing to employees in respect of past services. 2022 wrappers expected to
e) Costs of P260,000 estimated to be incurred for be redeemed in 2023 1,300,000
relocating employee D from Maybe’s head office 2023 wrappers expected to
location to another city. The staff member will be redeemed in 2024 1,800,000
physically relocate during July 2023.
f) Provision of P500,000 for the overhaul of a 14. The premium expense for the year ended Dec. 31,
machine. The overhaul is needed every 5 years 2023 is
and the machine was 5 years old as at June 30, a. P165,000 c. P495,000
2023. b. P230,000 d. P690,000
g) Damages awarded against Maybe resulting from a
15. The inventory of premium mugs as of Dec. 31, 2023 is
court case decided on June 26, 2023. The judge
a. P369,000 c. P423,000
has announced that the amount of damages will be
b. P410,000 d. P540,000
set at a future date, expected to be in Sept. 2023.
Maybe has received advice from its lawyers that 16. The estimated liability for premiums as of Dec. 31,
the amount of the damages could be anything 2023 is
between P50,000 and P8,000,000. a. P 90,000 c. P165,000
b. P162,000 d. P270,000
The total amount to be recognized as provisions in
Maybe’s statement of financial position as of June 30,
17. In accordance with PFRS 15, customer options to
2023?
acquire additional goods or services for free or at a
a. P9,125,000 c. P5,500,000
discount come in many forms, including
b. P5,600,000 d. P5,000,000
a. Sales incentives
b. Customer award credits (or points)
12. Which of the following uncertainties should be
c. Other discounts on future goods or services
recognized in the statement of financial position?
d. All of the above
a. A customer has taken legal action for damages of
P500,000 against the company. The customer has
18. In accordance with PFRS 15, if, in a contract, an entity
a 25% chance of success.
grants a customer the option to acquire additional
b. The company has sued one of its competitors for
goods or services, that option gives rise to a
P600,000. The company has a 75% chance of
performance obligation in the contract
success.
a. If the option provides a material right to the
c. Both a and b.
customer that it would not receive without entering
d. Neither a nor b.
into that contract.
b. If a customer has the option to acquire an
LECTURE NOTES:
additional good or service at a price that would
Uncertain OUTFLOW of Economic Benefits: reflect the stand-alone selling price for that good
• Remote (<5%) – Do nothing or service.
• Reasonably possible (5% - 50%) – Disclose c. Either a or b
• Probable (>50% - 95%): d. Neither a nor b
- Not measurable - Disclose
- Measurable - Accrue and Disclose 19. Which statement is incorrect if the option to acquire
additional goods or services for free or at a discount
Uncertain INFLOW of Economic Benefits: provides a material right to the customer?
• Remote – Do nothing a. The customer in effect pays the entity in advance
• Reasonably possible – Do nothing for future goods or services.
• Probable – Disclose b. The entity recognizes revenue when those future
• Virtually certain (>95%) – Accrue and Disclose goods or services are transferred or when the
option expires.
c. Both a and b.
13. During current year, Win Company won a litigation d. Neither a nor b.
award for P2,000,000 which was tripled to P6,000,000
to include punitive damages. The defendant, who is
financially stable, has appealed only the P4,000,000 Use the following information for the next three questions.
punitive damages. Win was awarded P1,000,000 in an
unrelated suit it filed, which is being appealed by the Esem Corporation, operates a customer loyalty program.
defendant. Counsel is unable to estimate the outcome The entity grants program members loyalty points when
of the appeals. In its current year income statement, they spend a specified amount on the entity’s products.
Win should report what amount of pretax gain? Program members can redeem the points for additional
a. P6,000,000 c. P2,000,000 products of the entity. The points have no expiry date.
b. P4,000,000 d. P3,000,000

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TEAM PRTC

During 2021, the entity received P9,500,000 from sales of c. Both a and b.
its products and granted 10,000 points. Management d. Neither a nor b.
expects that 80% or 8,000 of these points will be
redeemed. The stand-alone selling price of each loyalty 25. Which of the following warranties shall be accounted
point is estimated at P50. On Dec. 31, 2021, 4,000 points for in accordance with PAS 37?
have been redeemed. a. If a customer has the option to purchase a
warranty separately.
In 2022, the management revised its expectations and
b. If a customer does not have the option to purchase
now expects that 90% or 9,000 points will be redeemed in
a warranty and the promised warranty provides
total. During 2022, the entity redeemed 4,100 points.
the customer with a service in addition to the
In 2023, a further 900 points are redeemed. Management assurance that the product complies with agreed-
continues to expect that only 9,000 points will ever be upon specifications.
redeemed, meaning, no more points will be redeemed c. If a customer does not have the option to purchase
after 2023. a warranty separately and the promised warranty
does not provide the customer with a service in
Based on the given information, determine the amount to addition to the assurance that the product
be recognized as revenue from the customer loyalty complies with agreed-upon specifications.
program for the following years: d. All of these.
20. 2021
a. P190,000 c. P250,000 26. In assessing whether a warranty provides a customer
b. P237,500 d. P475,000 with a service in addition to the assurance that the
product complies with agreed-upon specifications, an
21. 2022 entity shall consider factors such as:
a. Nil c. P194,750 a. Whether the warranty is required by law.
b. P190,000 d. P237,500 b. The length of the warranty coverage period.
22. 2023 c. The nature of the tasks that the entity promises to
a. Nil c. P45,000 perform.
b. P42,750 d. P47,500 d. All of these.

23. Which statement is incorrect regarding customers’ 27. Which of the following is accounted for as a
unexercised rights? performance obligation in accordance with PFRS 15?
a. Upon receipt of a prepayment from a customer, an a. A manufacturer sells products in a jurisdiction in
entity shall recognize a contract liability in the which the law holds the manufacturer liable for any
amount of the prepayment for its performance damages (for example, to personal property) that
obligation to transfer, or to stand ready to transfer, might be caused by a consumer using a product for
goods or services in the future. its intended purpose.
b. An entity shall derecognize that contract liability b. An entity’s promise to indemnify the customer for
(and recognize revenue) when it transfers those liabilities and damages arising from claims of
goods or services and, therefore, satisfies its patent, copyright, trademark or other infringement
performance obligation. by the entity’s products.
c. If an entity expects to be entitled to a breakage c. Both a and b.
(unexercised rights) amount in a contract liability, d. Neither a nor b.
the entity shall recognize the expected breakage
amount as revenue in proportion to the pattern of 28. In 2022, Slimon Corporation began selling a new line
rights exercised by the customer. of products that carry a two-year warranty against
d. If an entity does not expect to be entitled to a defects. Based upon past experience with other
breakage amount, the entity shall recognize the products, the estimated warranty costs related to peso
expected breakage amount as revenue when the sales are as follows:
likelihood of the customer exercising its remaining First year of warranty 2%
rights becomes probable. Second year of warranty 5%
Sales and actual warranty expenditures for 2022 and
24. An entity, a retailer of bags and shoes, participates in
2023 are presented below:
a customer loyalty program operated by an airline.
The entity grants program members loyalty points 2022 2023
when they spend a specified amount on the entity’s Sales P450,000 P600,000
products. Program members can redeem the points for Actual warranty expenditures 15,000 30,000
travel with the airline subject to availability. The entity
What is the estimated warranty liability at the end of
pays the airline P80 for each point.
2023?
During the year, the entity received P4,500,000 from a. P28,500 c. P43,500
sales of its products and granted 5,000 points. The b. P42,000 d. P73,500
stand-alone selling price of each loyalty point is
estimated at P100. 29. Hosea Corporation gives warranties at the time of sale
to purchasers of its product. Under the terms of the
Which statement is correct? contract for sale the manufacturer undertakes to make
a. If the entity collected the consideration to the good, by repair or replacement, manufacturing defects
points on its own account, the entity should that become apparent within one year from the date of
recognize P450,000 as revenue from the customer sale. On the basis of experience, it is probable (i.e.,
loyalty program for the year. more likely than not) that there will be some claims
b. If the entity collected the consideration to the under the warranties.
points on behalf of the airline, the entity should
recognize P50,000 as revenue from the customer Sales of P10,000,000 were made evenly throughout
loyalty program for the year. 2023.

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At Dec. 31, 2023, the expenditures for warranty On Dec. 31, 2022, the discount rate has not changed.
repairs and replacements for the product sold in 2023 However, the entity estimates that, as a result of
are expected to be made 50 per cent in 2023 and 50 technological advances, the net present value of the
per cent in 2024. Assume for simplicity that all the decommissioning liability has decreased by P8 million.
2024 outflows of economic benefits related to the
The depreciation amount to be reported for the year
warranty repairs and replacements take place on June
ended Dec. 31, 2023 is
30, 2024.
a. P4.483 million c. P2.767 million
Experience indicates that 95 per cent of products sold b. P2.834 million d. P2.750 million
require no warranty repairs; 3 per cent of products
sold require minor repairs costing 10 per cent of the 32. IFRIC 1 addresses how the effect of the events that
sale price; and 2 per cent of products sold require change the measurement of an existing
major repairs or replacement costing 90 per cent of decommissioning, restoration or similar liability should
sale price. be accounted for. These events include
a. A change in the estimated outflow of resources
The entity has no reason to believe future warranty
embodying economic benefits required to settle the
claims will be different from its experience.
obligation.
At Dec. 31, 2023, the appropriate discount factor for b. A change in the current market-based discount
cash flows expected to occur on June 30, 2024 is rate.
0.95238. Furthermore, an appropriate risk adjustment c. An increase that reflects the passage of time.
factor to reflect the uncertainties in the cash flow d. All of these.
estimates is an increment of 6 per cent to the
probability-weighted expected cash flows. 33. Which statement is incorrect regarding changes in the
measurement of an existing decommissioning and
At Dec. 31, 2023 the entity recognizes a warranty similar liability that result from changes in the
provision measured at: estimated timing or amount of the outflow of resources
a. P210,000 c. P113,300 embodying economic benefits required to settle the
b. P222,600 d. P106,000 obligation, or a change in the discount rate, if the
related asset is measured using the cost model?
30. Burns Company has purchased land that will serve as a a. Changes in the liability shall be added to, or
temporary repository for nuclear waste. The site will deducted from, the cost of the related asset in the
function for 30 years, at which time Burns will be current period.
required to completely decontaminate the land. The b. The amount deducted from the cost of the asset
purchase price for the land is P500,000. Burns knows shall not exceed its carrying amount.
that the land will have to be decontaminated but isn't c. If a decrease in the liability exceeds the carrying
sure which of several possible approaches will be amount of the asset, the excess shall be
sufficient to reach the level of decontamination recognized immediately in profit or loss.
necessary by law. The costs of each approach, and the d. If the adjustment results in an addition to the cost
estimated probability that the approach will be the one of an asset, the entity shall test the asset for
used, follow: impairment by estimating its recoverable amount,
Approach 1 - 10% probability of total decontamination and shall account for any impairment loss, in
cost of P5,000 at the end of 30 years. accordance with PAS 36.
Approach 2 - 20% probability of total decontamination
cost of P100,000 at the end of 30 years. 34. Which statement is incorrect regarding changes in the
Approach 3 - 70% probability of total decontamination measurement of an existing decommissioning and
cost of P1,500,000 at the end of 30 years. similar liability that result from changes in the
estimated timing or amount of the outflow of resources
Assuming that the appropriate interest rate is 8%, the
embodying economic benefits required to settle the
cost of the nuclear waste repository site is
obligation, or a change in the discount rate, if the
a. P606,384 c. P659,500
related asset is measured using the revaluation model?
b. P156,072 d. P500,000
a. Changes in the liability alter the revaluation
surplus or deficit previously recognized on that
SOLUTION GUIDE:
asset.
Probability b. A decrease in the liability shall be recognized in
Approach Present value Prob. weighted PV other comprehensive income and increase the
1 P 497 .1 P 50 revaluation surplus within equity, except that it
2 9,938 .2 1,988 shall be recognized in profit or loss to the extent
3 149,066 .7 104,346 that it reverses a revaluation deficit on the asset
Total P106,384 that was previously recognized in profit or loss.
c. An increase in the liability shall be recognized in
profit or loss, except that it shall be recognized in
31. Zomboss Corp. constructed a nuclear power plant at a other comprehensive income and reduce the
cost of P110 million and started operating it on Jan. 1, revaluation surplus within equity to the extent of
2013. The plant has a useful life of 40 years. The any credit balance existing in the revaluation
entity is required to decommission the plant at the end surplus in respect of that asset.
of its useful life at an estimated amount of P80 million. d. In the event that a decrease in the liability exceeds
The risk-adjusted rate is 5 per cent. The entity’s the carrying amount that would have been
financial year ends on Dec. 31. recognized had the asset been carried under the
cost model, the excess shall be recognized
immediately in other comprehensive income.

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35. Once the related asset has reached the end of its 39. In accordance with IFRIC 5, if a contributor does not
useful life, all subsequent changes in the have control or joint control of, or significant influence
decommissioning liability shall be recognized in over, the fund, the contributor shall recognize the right
a. Profit or loss as they occur if the entity applies the to receive reimbursement from the fund as a
cost model. reimbursement in accordance with PAS 37. This
b. Other comprehensive income as they occur if the reimbursement shall be measured at
entity applies the revaluation model. a. The amount of the decommissioning obligation
c. Profit or loss as they occur regardless of the recognized.
measurement model used by the entity. b. The contributor’s share of the fair value of the net
d. Other comprehensive income as they occur assets of the fund attributable to contributors.
regardless of the measurement model used by the c. The lower of a and b.
entity. d. The higher of a and b.

36. Which statement is incorrect regarding

‘decommissioning funds’ in accordance with IFRIC 5? 40. For each class of provision, an entity shall disclose:
a. The purpose of ‘decommissioning funds’ is to I. The carrying amount at the beginning and end of
segregate assets to fund some or all of the costs of the period.
decommissioning plant or certain equipment, or in II. Additional provisions made in the period,
undertaking environmental rehabilitation. including increases to existing provisions.
b. Contributions to these funds may be voluntary or III. Amounts used (ie incurred and charged against
required by regulation or law. the provision) during the period.
c. Generally, such funds are separately administered IV. Unused amounts reversed during the period.
by independent trustees. V. The increase during the period in the discounted
d. A residual interest in such a fund that extends amount arising from the passage of time and the
beyond a right to reimbursement, such as a effect of any change in the discount rate.
contractual right to distributions once all the
a. I, II, III, IV and V c. I, II and III only
decommissioning has been completed or on
b. I, II, III and IV only d. II, III, IV and V only
winding up the fund is within the scope IFRIC 5.

37. IFRIC 5 Rights to Interests arising from

41. For each class of provision, an entity shall disclose:
Decommissioning, Restoration and Environmental
a. A brief description of the nature of the obligation
Rehabilitation Funds applies to accounting in the
and the expected timing of any resulting outflows
financial statements of a contributor for interests
of economic benefits.
arising from decommissioning funds that have which of
b. An indication of the uncertainties about the
the following features?
amount or timing of those outflows.
a. The assets are administered separately (either by
c. The amount of any expected reimbursement,
being held in a separate legal entity or as
stating the amount of any asset that has been
segregated assets within another entity).
recognized for that expected reimbursement.
b. A contributor’s right to access the assets is
d. All of the above.
restricted.
c. Both a and b.
J - end of FAR.3531 - J
d. Neither a nor b.

38. Which statement is incorrect regarding accounting for

‘decommissioning funds’ in accordance with IFRIC 5?
a. The contributor shall determine whether it has
control or joint control of, or significant influence
over, the fund by reference to PFRS 10, PFRS 11
and PAS 28.
b. When a contributor has an obligation to make
potential additional contributions, for example, in
the event of the bankruptcy of another contributor
or if the value of the investment assets held by the
fund decreases to an extent that they are
insufficient to fulfil the fund’s reimbursement
obligations, this obligation is a contingent liability
that is within the scope of PAS 37.
c. A contributor shall disclose the nature of its
interest in a fund and any restrictions on access to
the assets in the fund.
d. The contributor shall offset its obligation to pay
decommissioning costs and its interest in the fund.

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

FAR OCAMPO/OCAMPO
FAR.3532-Income Taxes OCTOBER 2023

DISCUSSION PROBLEMS
1. Tax expense is 4. A future taxable amount is exemplified by:
a. The aggregate amount included in the a. Revenue that is included in the tax return before it
determination of profit or loss for the period in is included in accounting profit.
respect of current tax and deferred tax. b. Gain that is included in the tax return before it is
b. The amount of income taxes payable in respect of included in accounting profit.
the taxable profit for a period. c. Expense that is included in the tax return after it is
c. The profit for a period before deducting tax included in accounting profit.
expense. d. Expense that is included in the tax return before it
d. The profit for a period, determined in accordance is included in accounting profit.
with the rules established by the taxation
authorities, upon which income taxes are payable. 5. Which of the following is an example of a temporary
difference that could result in a deferred tax asset?
LECTURE NOTES: a. Prepayments of expenses in year of payment;
recognition of expense for accounting purposes in
Computation of tax expense:
a later year.
Current tax expense b. Use of straight-line depreciation for accounting
(Taxable profit x tax rate) P xx purposes and an accelerated rate for income tax
Change in DTL (Ending – Beginning): purposes.
Increase xx c. Gross margin on installment sales is recognized for
Decrease ( xx) accounting purposes before it is included in taxable
Change in DTA (Ending – Beginning): income in the income tax return.
Increase ( xx) d. Gain on disposal of an asset when included in
Decrease xx taxable profit before it is included in accounting
Total tax expense P xx profit.

2. In accordance with PAS 12, temporary differences are 6. Tax base is the amount attributed to asset or liability
a. Differences between the carrying amount of an for tax purposes. Which statement is incorrect
asset or liability in the statement of financial regarding tax base of an asset or liability?
position and its tax base. a. Tax base of liability is its carrying amount, less any
b. Differences between taxable profit and accounting amount that will be deductible for tax purposes in
profit that originate in one period and reverse in respect of that liability in future periods.
one or more subsequent periods. b. Tax base of an asset is the amount that will be
c. Differences between the tax expense and tax deductible for tax purposes against any taxable
payable caused by items that do not reverse over economic benefits that will flow to an entity when
time. it recovers the carrying amount of the asset.
d. Differences that can be resolved by giving space to c. If the economic benefits embodied in an asset will
your significant other. not be taxable, the tax base of the asset is equal
to its carrying amount.
3. Taxable temporary differences are d. None of the above.
a. Temporary differences that will result in taxable
amounts in determining taxable profit of future 7. D’Silva Corp. has a product warranty liability
periods when the carrying amount of the asset or amounting to P10,000. The product warranty costs
liability is recovered or settled. are not tax deductible until paid out to customers. The
b. Temporary differences that will result in amounts company tax rate is 25%. The company has:
that are deductible in determining taxable profit of a. a deductible temporary difference of P10,000
future periods when the carrying amount of the b. an assessable temporary difference of P10,000
asset or liability is recovered or settled. c. a tax base of P10,000
c. The carryforward of unused tax losses. d. a future deductible amount of P0
d. The carryforward of unused tax credits.
8. The current liabilities of an entity include fines and
penalties for environmental damage. The fines and
penalties are stated at P10 million. The fines and
penalties are not deductible for tax purposes. What is
the tax base of the fines and penalties?
a. P10 million c. P13 million
b. P 3 million d. P 0

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9. An entity has spent P1,000,000 in developing a new 14. Salisbury Corp. made an accounting profit before tax
product. These costs meet the definition of an of P40,000 for the current year. Included in the
intangible asset under PAS 38 and have been accounting profit were the following items of income
recognized in the statement of financial position. and expense.
These costs have been recognized as an expense for Donations to political parties
tax purposes. At the year-end the intangible asset is (non-deductible) P 5,000
deemed to be impaired by P100,000. Depreciation - machinery (20%) 15,000
Assuming tax rate is 25%, which statement is correct? Annual leave expense 5,600
a. The tax base of the intangible asset at year-end is Rent income 12,000
P900,000. For tax purposes the following applied:
b. The entity has a deductible temporary difference at
year-end of P900,000. Annual leave paid P 6,500
c. The entity should recognize deferred tax liability of Rent received 10,000
P250,000 at year-end. Depreciation rate for machinery 25%
d. The entity should recognize deferred tax liability of Income tax rate 30%
P225,000 at year-end. If the income tax paid during the year is P10,000, the
current tax liability at the end of the year is
a. P11,505 c. P3,005
Use the following information for the next two questions. b. P 6,080 d. P1,505
The following facts relate to Whammy Corp. for the current
year: 15. The following information was extracted from the
• Taxable profit, P430,000. records of an entity at the end of the current year:
• Deferred tax liability, Jan. 1, P48,000. Carrying
• Deferred tax asset, Jan. 1, P16,000. Asset (liability) amount Tax base
• Cumulative temporary difference at Dec. 31, giving Accounts receivable P 150,000 P175,000
rise to future taxable amounts, P230,000. Motor vehicles 165,000 125,000
• Cumulative temporary difference at Dec. 31, giving Provision for warranty (12,000) 0
rise to the future deductible amounts, P95,000. Deposits received in
• Tax rate for all years, 35%. advance (15,000) 0
The depreciation rates for accounting and taxation are
10. What is the deferred tax expense?
15% and 25% respectively. Deposits are taxable when
a. P15,250 c. P 32,500
received, and warranty costs are deductible when paid.
b. P17,250 d. P165,750
An allowance for doubtful debts of P25,000 has been
raised against accounts receivable for accounting
11. What is the total tax expense?
purposes, but such debts are deductible only when
a. P17,250 c. P150,500
written off as uncollectible. Tax rate is 30%.
b. P32,500 d. P165,750
The net journal entry to record deferred tax for the
year, assuming no deferred items had been raised in
Use the following information for the next two questions. prior years, will increase (decrease) profit by
a. P3,600 increase c. P12,000 increase
The following differences enter into the reconciliation of
b. P3,600 decrease d. P15,600 decrease
accounting profit and taxable profit of Celtics corp. for the
current year, its first year of operations.
16. A deferred tax liability shall be recognized for all
Accounting profit P4,500,000 taxable temporary differences, except to the extent
Excess tax depreciation 3,000,000 that the deferred tax liability arises from:
Litigation accrual 450,000 a. The initial recognition of goodwill.
Unearned rent income deferred on the b. The initial recognition of an asset or liability in a
books but appropriately recognized transaction which is not a business combination, at
in taxable income 250,000 the time of the transaction, affects neither
Interest income from long-term accounting profit nor taxable profit, and at the
certificate of deposit 100,000 time of the transaction, does not give rise to equal
Additional information: taxable and deductible temporary differences.
• Excess tax depreciation will reverse equally over a c. Both a and b.
four-year period. d. Neither a nor b.
• It is estimated that the litigation liability will be paid
after two years. 17. A deferred tax asset shall be recognized for all
• Rent income will be recognized during the last year of deductible temporary differences to the extent that it
the lease, three years from the end of the current is probable that taxable profit will be available against
year. which the deductible temporary difference can be
• Interest income from long-term certificate of deposit utilized, unless the deferred tax asset arises from the
is tax exempt. initial recognition of an asset or liability in a
• Tax rate is 30%. transaction that:
a. Is not a business combination
12. Compute for the current tax expense. b. At the time of the transaction, affects neither
a. P660,000 c. P510,000 accounting profit nor taxable profit.
b. P630,000 d. P480,000 c. At the time of the transaction, does not give rise to
equal taxable and deductible temporary
13. Compute for the deferred tax expense. differences.
a. P900,000 c. P630,000 d. All of these
b. P690,000 d. P210,000

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18. Deferred tax assets do not arise from 22. Black Corp., organized on Jan. 2, 2023, had accounting
a. Taxable temporary differences profit of P500,000 and taxable profit of P800,000 for
b. Deductible temporary differences the year ended Dec. 31, 2023. The only temporary
c. The carryforward of unused tax losses difference is accrued product warranty costs that are
d. The carryforward of unused tax credits expected to be paid as follows:
Year Amount
19. Entity Y sells equipment on installment basis. Entity Y 2024 P100,000
recognizes revenue when equipment is sold for 2025 50,000
accounting purposes, and when installment payments 2026 50,000
are received for tax purposes. In the current year, 2027 100,000
Entity Y recognized gross profit of P6,000,000 for
accounting purposes, and P1,500,000 for tax purposes. Black has never had any net operating losses (book or
The amounts of gross profit expected to be recognized tax) and does not expect any in the future. There were
for tax purposes in the next two years are P2,500,000 no temporary differences. The enacted income tax
and P2,000,000, respectively. Entity Y guarantees the rates are 35% for 2023, 30% for 2024 through 2026,
equipment for two years. Warranty costs are and 25% for 2027. In Black’s Dec. 31, 2023 statement
recognized on the accrual basis for accounting of financial position, the deferred income tax asset
purposes and when paid for tax purposes. Warranty should be
expense accrued for the current year is P2,500,000, a. P105,000 c. P70,000
but only P500,000 of warranty cost was paid. It is b. P 85,000 d. P60,000
expected that in the next two years, P1,000,000 and
P1,000,000, respectively, of warranty costs will be 23. D Company had the following deferred tax balances at
paid. In addition, during the year, P500,000 interest, reporting date - Deferred tax assets, P1,200,000;
net of 20% final income tax, was received and earned, Deferred tax liabilities, P3,000,000. Effective from the
and P200,000 insurance premium on life insurance first day of the next financial period, the company rate
policies that covered the life of Entity Y’s president was of income tax was reduced from 40% to 30%. The
paid. Entity Y is the beneficiary for this policy. The tax adjustment to income tax expense to recognize the
rate is 35%. Accounting profit was P2,000,000. impact of the tax rate change is:
a. DR P600,000 c. DR P450,000
Assuming any current year net loss will be carried to b. CR P600,000 d. CR P450,000
the following year, how much is the deferred tax asset
to be recognized at the end of the current year?
a. P700,000 c. P 980,000 Use the following information for the next two questions.
b. P770,000 d. P1,575,000
An entity, which started operations in 2022, has the
20. Which statement is incorrect regarding measurement of following information related to tax expense computation:
income taxes? 12/31/22 12/31/23
a. Current tax liabilities shall be measured at the Taxable profit P600,000 P800,000
amount expected to be paid to the taxation Cumulative temporary
authorities, using the tax rates that have been difference giving rise to
enacted or substantively enacted by the end of the future taxable amounts 200,000 350,000
reporting period. Cumulative temporary
b. Deferred tax assets and liabilities shall be difference giving rise to the
measured at the tax rates that are expected to future deductible amounts 100,000 220,000
apply to the period when the asset is realized or
the liability is settled, based on tax rates that have The entity is subject to 30% corporate income tax under
been enacted or substantively enacted by the end existing tax laws as of Dec. 31, 2022.
of the reporting period.
c. The measurement of deferred tax liabilities and On Nov. 26, 2022, a proposed law was announced
deferred tax assets shall reflect the tax lowering corporate income tax to 20% with retroactive
consequences that would follow from the manner effectivity to July 1, 2022. This proposed law is not
in which the entity expects, at the end of the considered substantively enacted as of Dec. 31, 2022 but
reporting period, to recover or settle the carrying was eventually signed into law before the 2022 financial
amount of its assets and liabilities. statements are authorized for issue.
d. Deferred tax assets and liabilities shall be
discounted. The entity paid the 2022 income tax due of P150,000
(computed based on the new law) in 2023.
21. The Waloneke Corp. has a policy of using non-current
assets until they can no longer be operated and are 24. The total tax expense for 2022 is
worthless. On Jan. 1 of the current year, it acquired an a. P210,000 c. P170,000
item of plant and machinery for P100,000. It is being b. P200,000 d. P140,000
depreciated over 10 years on a straight-line basis. For
tax purposes there is an allowance of 20% per annum 25. The total tax expense for 2023 is
on a reducing balance basis. There are two rates of tax: a. P176,000 c. P156,000
15% on trading profits and 25% on gains on disposals. b. P166,000 d. P126,000
What deferred tax balance should Waloneke recognize at
Dec. 31 of the current year?
a. Deferred tax asset of P2,500
b. Deferred tax asset of P1,500
c. Deferred tax liability of P2,500
d. Deferred tax liability of P1,500

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LECTURE NOTES: 27. How are the current and deferred tax consequences of
a change in the tax status of an entity or its
Components of tax expense (income):
shareholders accounted for in accordance with SIC 25?
(a) Current tax expense (income);
a. Recognized in profit or loss.
(b) Any adjustments recognized in the period for current
b. Credited or charged directly to equity.
tax of prior periods;
c. Recognized in other comprehensive income.
(c) The amount of deferred tax expense (income) relating
d. Any of these depending on where the transactions
to the origination and reversal of temporary
and events were recognized.
differences;
(d) The amount of deferred tax expense (income) relating
to changes in tax rates or the imposition of new
28. Jenkins Limited acquired an item of Property at a cost
taxes;
of P50,000. At reporting date accumulated
(e) The amount of the benefit arising from a previously
depreciation amounted to P15,000. The asset was
unrecognized tax loss, tax credit or temporary
revalued on reporting date to P45,000. If the
difference of a prior period that is used to reduce
company rate of tax is 25%, the deferred tax item that
current tax expense;
must be recognized at reporting date is:
(f) The amount of the benefit from a previously
a. deferred tax asset P1,250
unrecognized tax loss, tax credit or temporary
b. deferred tax liability P1,250
difference of a prior period that is used to reduce
c. deferred tax asset P2,500
deferred tax expense;
d. deferred tax liability P2,500
(g) Deferred tax expense arising from the write-down, or
reversal of a previous write-down, of a deferred tax
asset; and
29. Which statement is incorrect regarding presentation of
(h) The amount of tax expense (income) relating to those
income taxes?
changes in accounting policies and errors that are
a. Current and deferred tax shall be recognized
included in profit or loss in accordance with PAS 8,
outside profit or loss if the tax relates to items that
because they cannot be accounted for retrospectively.
are recognized, outside profit or loss.
b. Current and deferred tax that relates to items that
26. Which statement is incorrect regarding IFRIC 23 are recognized, in other comprehensive income,
Uncertainty over Income Tax Treatments? shall be recognized in other comprehensive
a. An uncertain tax treatment is any tax treatment income.
applied by an entity where there is uncertainty c. Current and deferred tax that relates to items that
over whether that treatment will be accepted by are recognized, directly in equity, shall be
the tax authority. recognized directly in equity.
b. Each uncertain tax treatment is considered d. Deferred tax assets and liabilities are classified in
separately or together as a group, depending on the statement of financial position as either current
which approach better predicts the resolution of or noncurrent depending on the related asset and
the uncertainty. expected timing or reversal.
c. If an entity concludes that it is not probable that
the treatment will be accepted, it should reflect the J - end of FAR.3532 - J
effect of the uncertainty in its income tax
accounting in the period in which that
determination is made.
d. Detection risk is considered in the recognition and
measurement of uncertain tax treatments.

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11/13/23, 8:59 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.30 Shared-based Payments (Drill) -
Home

*[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice

FAR.30 Share-based payments

FAR.30 Shared-based Payments (Drill)

Submissions
Here are your latest answers:

Question 1
The exercise price and market price of stock under a fixed compensatory stock option plan are equal on the grant date. The fair value of the options is
greater than the option price. In accordance with PFRS2,

Response: No compensation expense will be recognized in connection with the option plan.

Correct answer: Compensation expense will be recognized in connection with the option plan.

Score: 0 out of 1 No

Question 2
Which of the following transactions involving the issuance of shares does not come within the definition of a "share-based" payment under PFRS 2?

Response: Share-based payment relating to an acquisition of a subsidiary.

Correct answer: Share-based payment relating to an acquisition of a subsidiary.

Score: 1 out of 1 Yes

Question 3
An entity issues fully paid shares to 200 employees on Dec. 31, 2023. Normally shares issued to employees vest over a two-year
period, but these shares have been given as a bonus to the employees because of their exceptional performance during the year. The
shares have a market value of P500,000 on Dec. 31, 2023, and an average fair value for the year of P600,000. What amount would be
expensed in the income statement for the above share-based payment transaction?

Response: P500,000

Feedback:

Expense - 2023 (Fair value of shares on date of grant) 500,000

Correct answer: P500,000

Score: 1 out of 1 Yes

Question 4
Which statement is incorrect regarding recognition of share-based payment transactions?

Response: When the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they shall
be recognized as expenses.

Correct answer: The entity shall recognize a corresponding increase in equity regardless of the nature of the share-based payment transaction.

Score: 0 out of 1 No

Question 5
Doc Corp. has purchased inventory of P100,000. The company has offered the supplier a choice of settlement alternatives. The
alternatives are either receiving 1,000 shares of Doc six months after the purchase date (valued at P110,000 at the date of purchase) or
receiving a cash payment equal to the fair value of 800 shares as of Dec. 31, 2023 (estimated value P90,000 at the date of purchase).
What should be the accounting entry at the date of purchase of the inventory?

Response: Inventory P100,000, liability P110,000, intangible assets P10,000

Feedback:

Journal entry on the date of purchase:

Inventory 100,000
Liability (FV of cash alternative) 90,000
Equity (residual amount) 10,000

Correct answer: Inventory P100,000, liability P90,000, equity P10,000

Score: 0 out of 1 No

Question 6

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11/13/23, 8:59 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.30 Shared-based Payments (Drill) -
An entity grants 1,000 share options to each of its five directors on July 1, 2022. The options vest on June 30, 2026. The fair value of
each option on July 1, 2022, is P5, and it is anticipated that all of the share options will vest on June 30, 2026. What will be the
accounting entry in the financial statements for the year ended June 30, 2023?

Response: Increase equity P25,000, increase in expense income statement P25,000

Feedback:

Journal entry on June 30, 2023:

Compensation expense [(1,000 x 5 x P5)/4] 6,250

Share premium - options 6,250

Correct answer: Increase equity P6,250, increase in expense income statement P6,250

Score: 0 out of 1 No

Question 7
Elizabeth Corp. has granted 100 share appreciation rights to each of its 1,000 employees in Jan. 2023. The management feels that as
of Dec. 31, 2023, 90% of the awards will vest on Dec. 31, 2025. The fair value of each share appreciation right on Dec. 31, 2023, is
P10. What is the fair value of the liability to be recorded in the financial statements for the year ended Dec. 31, 2023?

Response: P 100,000

Feedback:

Liability, 12/31/23 [(1,000 x 100 x P10 x .9) x 1/3] 300,000

Correct answer: P 300,000

Score: 0 out of 1 No

Question 8
Entity S is an unlisted entity, and its shares are owned by two directors. The directors have decided to issue 100 share options to an
employee in lieu of many years’ service. However, the fair value of the share options cannot be reliably measured as the entity operates
in a highly specialized market where there are no comparable companies. The exercise price is P10 per share, and the options were
granted on Jan. 1, 2023, when the value of the shares was also estimated at P10 per share. At the end of the financial year, Dec. 31,
2023, the value of the shares was estimated at P15 per share and the options vested on that date. What value should be placed on the
share options issued to the employee for the year ended Dec. 31, 2023?

Response: P 250

Feedback:

Intrinsic value, 12/31/23 [(P15 - P10) x 100] 500

Correct answer: P 500

Score: 0 out of 1 No

Question 9
On Jan. 2, 2023, Maria Corp. granted Dean, its president, 20,000 share appreciation rights for past services. Those rights are
exercisable immediately and expire on January 1, 2024. On exercise, Dean is entitled to receive cash for the excess of the share's
market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during 2023. The
market price of Maria's share was P30 on Jan. 2, 2023, and P45 on Dec. 31, 2023. As a result of the share appreciation rights, Maria
should recognize compensation expense for 2023 of

Response: P300,000

Feedback:

Expense - 2023 [(P45 - P30) x 20,000] 300,000

Correct answer: P300,000

Score: 1 out of 1 Yes

Question 10
Which statement is incorrect regarding equity-settled share-based payment transactions?

Response: The issuance of shares to employees with, say, a two-year vesting period is considered to relate to services over the vesting period.

Correct answer: The fair value of a share-based payment transaction is determined at the date of exercise.

Score: 0 out of 1 No

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11/13/23, 9:44 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.31 Provisions and Contingencies (Drill) -
Home

*[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice

FAR.31 Provisions and contingencies

FAR.31 Provisions and Contingencies (Drill)

Submissions
Here are your latest answers:

Question 1
Which of the following is the proper way to report a contingent asset, receipt of which is virtually certain?

Response: As a disclosure only.

Correct answer: As an asset.

Score: 0 out of 1 No

Question 2
During 2023, Oyob Company guaranteed a supplier’s P750,000 loan from a bank. On Oct. 1, 2023, Oyob was notified that the supplier
had defaulted on the loan and filed for bankruptcy protection. Counsel believes Oyob will probably have to pay between P375,000 and
P675,000 under its guarantee. As a result of the supplier’s bankruptcy, Oyob entered into a contract in Dec. 2023 to retool its machines
so that Oyob could accept parts from other suppliers. Retooling costs are estimated to be P450,000. What amount should Oyob report
as a liability in its Dec. 31, 2023 statement of financial position?

Response: P525,000

Feedback:

Liability for financial guarantee [(P375,000 + P675,000)/2] 525,000

Notes:
1. Use 'mid-point' of the range
2. The contract to retool the machine is an executory contract.

Correct answer: P525,000

Score: 1 out of 1 Yes

Question 3
On Jan. 3, 2023, Sun Corp. owned a machine that had cost P300,000. The accumulated depreciation was P180,000, estimated
salvage value was P18,000, and fair market value was P480,000. On Jan. 4, 2023, this machine was irreparably damaged by Light
Corp. and became worthless. In Oct. 2023, a court awarded damages of P480,000 against Light in favor of Sun. At Dec. 31, 2023, the
final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Sun’s attorney, Light’s appeal
will be denied. At Dec. 31, 2023, what amount should Sun accrue for this gain contingency?

Response: P480,000

Feedback: The court awarded damages of P480,000 is a contingent asset.

Correct answer: P 0

Score: 0 out of 1 No

Question 4
To record an environmental liability, the cost associated with the liability is

Response: Expensed.

Correct answer: Included in the carrying amount of the related long-lived asset.

Score: 0 out of 1 No

Question 5
On Dec. 31, 2023, Seal Corp. was involved in a tax dispute with BIR. Seal's tax counsel believed that an unfavorable outcome was
probable and a reasonable estimate of additional taxes was P275,000, with a chance that the additional taxes could be as much as
P425,000. After the 2023 financial statements were issued, Seal accepted the BIR settlement offer of P325,000. What amount of
additional taxes should have been accrued in 2023?

Response: P275,000

Feedback:

Additional provision for income tax 275,000

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11/13/23, 9:44 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.31 Provisions and Contingencies (Drill) -

Notes:
1. Use 'best estimate' of the additional taxes to be paid.
2. Seal's acceptance of the BIR settlement offer of P325,000 is
irrelevant since 2023 FS were issued already.

Correct answer: P275,000

Score: 1 out of 1 Yes

Question 6
PAS 37 applies to

Response: Provisions for depreciation, impairment of assets and doubtful debts.

Correct answer: Provisions for restructurings.

Score: 0 out of 1 No

Question 7
On Jan. 2, 2021, Pylon Company introduced a new line of products that carry a three-year warranty against factory defects. Estimated
warranty costs related to peso sales are as follows: 1% of sales in the year of sale, 2% in the year after sales and 3% in the second
year after sale.

Sales and actual warranty expenditures for the period 2021 to 2023 were as follows:

Actual Warranty Expenditures

Sales

2021 P 200,000 P 1,500

2022 500,000 7,500

2023 700,000 22,500

P1,400,000 P31,500

The warranty expense for 2023 is

Response: P23,000

Feedback:

Waranty expense - 2023 (P700,000 x .06) 42,000

Correct answer: P42,000

Score: 0 out of 1 No

Question 8
Beginning 2023, Dudong Company began marketing a new beer called “Virgin Coke.” To help promote the product, the management is
offering a special Virgin mug to each customer for every 20 specially marked bottle caps of Virgin Coke. Dudong estimates that out of
the 300,000 bottles of Virgin Coke sold during 2023, only 50% of the marked bottle caps will be redeemed. For the year 2023, 8,000
mugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs were already distributed to customers. What is
the amount of the liability that Dudong Company should report on its Dec. 31, 2023 statement of financial position?

Response: P360,000

Feedback:

Total estimated bottle caps to be redeemed (300,000 x .5) 150,000

Bottle caps redeemed in 2023 (4,500 x 20) (90,000)
Remaining bottle caps to be redeemed, 12/31/23 60,000

Liability, 12/31/23 [(60,000/20) x (P360,000/8,000)] 135,000

Correct answer: P135,000

Score: 0 out of 1 No

Question 9
Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:

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11/13/23, 9:44 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.31 Provisions and Contingencies (Drill) -
Response: Even if the amount is not reasonably estimable.

Correct answer: Even if the amount is not reasonably estimable.

Score: 1 out of 1 Yes

Question 10
In an effort to increase sales, Blue Razor Blade Company inaugurated a sales promotion campaign on June 30, 2023, whereby Blue
placed a coupon in each package of razor blades sold, the coupons being redeemable for a premium. Each premium costs Blue P.50,
and five coupons must be presented by a customer to receive a premium. Blue estimated that only 60 percent of the coupons issued
will be redeemed. For the six months ended Dec. 31, 2023, the following information is available:

Packages of razor blades sold 40

Premiums purchased 3

Coupons redeemed 10

What is the estimated liability for premium claims outstanding at Dec. 31, 2023?

Response: P14,000

Feedback:

Total estimated coupons to be redeemed (400,000 x .6) 240,000

Coupons redeemed in 2023 (100,000)
Remaining coupons to be redeemed, 12/31/23 140,000

Liability, 12/31/23 [(140,000/5) x P.5] 14,000

Correct answer: P14,000

Score: 1 out of 1 Yes

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11/13/23, 10:28 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.32 Income Taxes (Drill) -
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*[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice

FAR.32 Income taxes

FAR.32 Income Taxes (Drill)

Submissions
Here are your latest answers:

Question 1
On Jan. 2, 2022, Midland Corp. purchased a machine for P1,400,000. This machine has a 5-year useful life, a residual value of
P200,000, and is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation expense
was P500,000 for 2022 and P400,000 for 2023. Midland’s 2023 income before tax and depreciation expense was P2,000,000 and its
tax rate was 35%. If Midland has made no estimated tax payments during 2023, what amount of current income tax liability would
Midland report in its Dec. 31, 2023 statement of financial position?

Response: P525,000

Feedback:

Income before tax and depreciation expense 2,000,000

Depreciation - 2023 for tax purposes (400,000)
Taxable profit 1,600,000
x Tax rate 0.35
Current tax expense/payable 560,000

Correct answer: P560,000

Score: 0 out of 1 No

Question 2
Which of the following statements is correct regarding deferred taxes under PAS 12?

Response: All of the choices are correct.

Correct answer: Income tax payable plus or minus the change in deferred income taxes equals income tax expense.

Score: 0 out of 1 No

Question 3
The tax return of La Carlota Corp. indicates taxable profit of P15,000,000 on which a tax liability of P5,250,000 has been recognized.
Following is a list of items that may be required to determine accounting profit from the amount of taxable profit.

Accelerated depreciation for income tax purposes was P2,000,000 and straight-line financial depreciation is P1,500,000.

Insurance premium of P100,000 on the life of an officer with La Carlota Corp. as beneficiary was not included as a deduction in the tax
return.

Interest on treasury bills was not included in the tax return. During the year, La Carlota received P2,500,000 on these investments.

What was La Carlota Corp.’s accounting profit?

Response: P17,900,000

Feedback:

Taxable profit 15,000,000

Add (deduct) reconciling items:
Excess depreciation for tax purposes (P2,000,000 - P1,500,000) 500,000
Nondeductible expense (insurance premium) (100,000)
Nontaxable income (interest on treasury bills) 2,500,000
Accounting profit 17,900,000

Correct answer: P17,900,000

Score: 1 out of 1 Yes

Question 4
The Huang Corp. has a non-current asset which had a carrying amount in the financial statements of P18,000 at Dec. 31, 2023. Its tax
written down value (the tax base) at that date was P9,000. The tax rate is 30%. In accordance with PAS 12 Income Taxes, what is the
deferred tax balance in respect of this asset at Dec. 31, 2023?

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11/13/23, 10:28 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.32 Income Taxes (Drill) -
Response: P2,700 liability

Feedback:

Carrying amount 18,000

Tax base (9,000)
Taxable (deductible) temporary difference 9,000
x Tax rate 0.30
Deferred tax liability (asset) 2,700

Correct answer: P2,700 liability

Score: 1 out of 1 Yes

Question 5
An entity reported a tax loss in its first year of operations. The entity’s management believes it is more likely than not that the tax loss will be utilized
in the future. There were no temporary differences during the year. Which of the following best describes the impact of the tax loss on the financial
statements?

Response: Deferred tax asset (loss carryforward) is recognized; net loss is reduced; retained earnings increases.

Correct answer: Deferred tax asset (loss carryforward) is recognized; net loss is reduced; retained earnings increases.

Score: 1 out of 1 Yes

Question 6
On its Dec. 31. 2023 statement of financial position, Rexa Corp. had income tax payable of P260,000 and a deferred tax asset of
P400,000.

Rexa had reported a deferred tax asset of P300,000 at Dec. 31, 2022. No estimated tax payments were made during 2023. At Dec. 31,
2023, Rexa determined that it was probable that the deferred tax asset would be realized.

In its 2023 income statement, what amount should Rexa report as total income tax expense?

Response: P160,000

Feedback:

Current tax expense (income tax payable) 260,000

Deferred tax expense (benefit):
Decrease (increase) in DTA (P400,000 - P300,000) (100,000)
Increase (decrease) in DTL - (100,000)
Total tax expense 160,000

Correct answer: P160,000

Score: 1 out of 1 Yes

Question 7
Porter Corp. owns Land that had been previously revalued upward by P600,000. The Land will be revalued downwards at the current
reporting date by P200,000. If the entity’s rate of tax is 30%, the impact of this revaluation on the ‘asset revaluation surplus’ account is:

Response: DR P140,000

Feedback:

Journal entry to record revaluation decrease:

Revaluation surplus (P200,000 x .7) 140,000
Deferred tax liability (P200,000 x .3) 60,000
Land 200,000

Correct answer: DR P140,000

Score: 1 out of 1 Yes

Question 8
In arriving at its profit before tax for the year ended Dec. 31, 2023, Ryan Corp. has accrued royalties receivable of P200,000 and interest
payable of P250,000. Both royalties and interest are dealt with on a cash basis in tax computations. What are Ryan's net temporary
differences at Dec. 31, 2023 according to PAS 12 Income Taxes?

Response: Taxable temporary differences of P50,000

Feedback:

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11/13/23, 10:28 AM Submissions - *[Oct 2023] 03-Financial Accounting and Reporting/Auditing Practice - FAR.32 Income Taxes (Drill) -

Royalties receivable (taxable TD) 200,000

Interest payable (deductible TD) (250,000)
Net taxable (deductible) temporary differences (50,000)

Correct answer: Deductible temporary differences of P50,00

Score: 0 out of 1 No

Question 9
At Dec. 31, 2023 Mindoro Corporation’s taxable profit is P5,000,000. The following items are the temporary differences that caused
Mindoro’s income in the income tax return to differ from the amount reported in the income statement: Future deductible amounts
expected to reverse in 2024 of P400,000 and future taxable amounts expected to reverse in 2024 and 2025 of P500,000 and P900,000,
respectively. Mindoro’s income tax rate is 35%. The income tax expense reported by Mindoro in its income statement for the year
ended Dec. 31, 2023 is

Response: P2,100,000

Feedback:

Current tax expense (P5,000,000 x .35) 1,750,000

Deferred tax expense (benefit):
Increase in DTA (P400,000 x .35) (140,000)
Increase in DTL (P1,400,000 x .35) 490,000 350,000
Total tax expense 2,100,000

Correct answer: P2,100,000

Score: 1 out of 1 Yes

Question 10
For the year ended Dec. 31, 2023, Talisay Corp. reported accounting profit of P9,500,000. Its taxable profit was P9,000,000. The
difference is due to accelerated depreciation for income tax purposes. The income tax rate is 35% and Talisay made estimated tax
payment during 2023 of P1,000,000. What should Talisay report as current tax payable as of Dec. 31, 2023?

Response: P3,325,000

Feedback:

Current tax expense (P9,000,000 x .35) 3,150,000

Tax paid (1,000,000)
Current tax payable 2,150,000

Correct answer: P2,150,000

Score: 0 out of 1 No

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