Special Liabilities San Carlos College

SAN CARLOS COLLEGE
COLLEGE OF ACCOUNTANCY
ACCOUNTING ENHNACEMENT
CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS
9.1 Leases ‒ Lessor’s Point of View
N1
Operating lease
 Lessor will record the lease asset in its balance sheet
 Lessor will record the depreciation of lease asset 
Lessor will record the rent income periodically
N2
How to compute “rent revenue”?
 Rent revenue is composed of the following:
a. Straight line rent revenue from periodic payment;
b. Amortization of lease bonus received; and
c. Contingent rent revenue.
Lease bonus received from lessee XXXX

Lease term ÷ X
Amortization of lease bonus XXXX
1) Marie Company grants Lyn Company first three months rent-free under a three-year operating lease. The lease is
effective April 1, 2021 and provides for a monthly rental of P12,000, payment of which will begin on July 1, 2021. How
much is the rent income reported in Marie Company’s profit or loss for the year ended December 31, 2021?
A. 132,000 B. 108,000 C. 99,000 D. 72,000
Use the following information for the next two (2) questions:
On January 1, 2019, Inside Company purchased equipment at a cost of P5,000,000 with a useful life of 10 years. On the
same date, Inside Company leased the equipment to another entity under an operating lease. The lease term is for 5
years with the following rental payments in advance:
January 1, 2019.................. .................. .................. .................. .................. .................. ................ 1,000,000
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January 1, 2020.................. .................. .................. .................. .................. .................. ................ 1,000,000
January 1, 2021.................. .................. .................. .................. .................. .................. ................ 1,400,000
January 1, 2022.................. .................. .................. .................. .................. .................. ................ 1,700,000
January 1, 2023.................. .................. .................. .................. .................. .................. ................ 1,900,000
The entity also incurred maintenance cost of the P150,000 for the year 2019.
2) What is the rental income for the year ended December 31, 2019?
A. 1,400,000 B. 1,150,000 C. 350,000 D. 750,000
3) What amount of rent receivable is recognized on December 31, 2021?

A. 4,200,000 B. 2,800,000 C. 800,000 D. 0
Rivera Company leased office premises to another entity for a five-year term beginning January 1, 2023. Under the terms
of the operating lease, rent for the first year is P600,000 and rent for years 2 through 5 is P900,000. However, as an
inducement to enter the lease, Rivera granted the lessee the first six months of the lease rent-free.
4) What amount of rent income should be reported for 2023?

A. 300,000 B. 780,000 C. 600,000 D. 900,000
5) On December 31, 2025, what amount should be reported as rent receivable?

A. 780,000 B. 300,000 C. 360,000 D. 240,000
6) On January 1, 2016 Aguila Corporation signed a ten-year operating lease for an office space at P960,000 per year.
The lease included a provision for additional rental payment of 5% of annual company sales in excess of P5,000,000.
Lessee’s sales for the year ended December 31, 2016 were P6,000,000. Upon execution of the lease, Aguila
Corporation received P240,000 as a bonus for the lease. How much rent revenue should Aguila recognize in profit or
loss?
7) On January 1, 2022, Cthulhuphant Company leased out a building to Dog Company under an operating lease for ten
years at P500,000 per year, payable the first day of each lease year. Cthulhuphant paid P150,000 to real estate broker
CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 2 of 23

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as a finder’s fee. The building is depreciated P120,000 per year. For 2022, Cthulhuphant incurred insurance and
property tax expense totaling P90,000. The net income to be reported by Cthulhuphant is
A. 356,000 B. 290,000 C. 275,000 D. 140,000
N7
What is the carrying amount of the leased asset?
Cost of the leased asset (see chapter 5) X

Accumulated depreciation [(cost / useful life) x age] (X) X
Add: Unamortized cost of Initial direct cost (IDC)

Initial direct cost X
Cumulative amortization of IDC [(IDC / lease term) x lease term lapsed] (X) X
Carrying amount of lease asset X
On January 1, 2021, Pugna, Inc. purchased equipment for P4,000,000. The equipment shall be leased out under operating
lease. The estimated useful life is 10 years and the estimated residual value is P480,000.
On July 1, 2021, the equipment was leased to Oblivion Co. under a 5-year operating lease. Annual rent is P800,000. The
first annual rent was made on that date. Initial direct cost incurred on negotiating the lease amounted to P80,000.
Insurance cost incurrent by Pugna in 2021, not reimbursable from lessee, amounted to P4,000.
8) How much is the rental income net of lease related expense in 2021?
A. 36,000 B. 32,000 C. 28,000 D. 24,000
9) How much is the carrying amount of the leased asset at December 31, 2021?
A. 3,720,000 B. 3,712,000 C. 3,648,000 D. 3,684,000
N8
Finance Lease
 Transfer of title T
 Option to purchase below market O
 Lease term is major part of useful life L
 PV of lease payment is substantial of fair value P
 Special in nature S
N9
Direct Financing
 The lessor sold the lease asset on installment basis
 The periodic payment is considered installment
payment  No gross profit nor gain or loss on sale
N10
How much is the gross investment?
Total periodic payment (periodic rent x lease term) X
Guaranteed (GRV) or unguaranteed (URV) residual value X
Gross investment X
in getting the periodic rent, exclude:
a. Executory cost
b. Contingent rent

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GRV or URV should be ignored if there will be transfer of title .
N11
How much is the net investment?
Present value of periodic payments (period rent x PVF X
annuity)
Present value of GRV or URV (GRV or URV x PVF) X
Net investment X
Use the following information for the next three (3) questions:
On January 1, 2021, Feline Financing Co. leased equipment to Kuting, Inc. information on the lease is shown below:
Cost of equipment 1,200,000

Useful life of equipment 5 years
Lease term 4 years
Annual rental payable at the end of each year 440,000
Additional information:
The annual lease payment includes P36,196 pertaining to insurance taken by Feline on the equipment leased. Direct
costs incurred by Feline in negotiating the lease amounted to P80,000. The implicit rate, after adjustment for the foregoing
items, is 10%.
10) How much is the gross investment n the lease on January 1, 2021?
A. 2,019,020 B. 1,760,000 C. 1,615,216 D. 1,200,000
11) How much is the net investment in the lease on January 1, 2021?
A. 1,360,000 B. 1,280,000 C. 1,254,641 D. 1,200,000
12) How much is the unearned interest income on January 1, 2021?

A. 764,379 B. 739,020 C. 415,216 D. 335,216
Meow Company is in the business of leasing new sophisticated equipment. As a lessor, Meow expects a 12% return on
net investment with payments made in advance beginning January 1, 2021 and every January 1 thereafter. All leases are

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classified as direct financing leases. At the end of the lease term, the equipment’s owner is not transferred to the lessee.
On January 1, 2021 equipment is leased to a lessee with the following information:
Cost of equipment to Meow 6,125,000
Residual value – unguaranteed 700,000
Useful life and lease term 8 years
Initial direct cost 176,400
A return of 12% is expected prior to the initial direct cost and a return of 11% is expected after the initial direct cost.
13) What is the gross investment in the lease?

A. 9,100,000 B. 8,400,000 C. 7,700,000 D. 6,125,000
14) What is the financial revenue in 2021?

A. 735,000 B. 693,154 C. 609,000 D. 577,654
15) What is the net investment / carrying amount of lease receivable on December 31, 2021?
A. 5,954,554 B. 5,829,054 C. 5,810,000 D. 5,684,000

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Alarcio Company is a dealer in equipment. On January 1, 2020, an equipment was leased to another entity with the
following provisions:
Annual rental payable at the end of each year 1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Guaranteed residual value 500,000
Implicit rate 12%
At the end of the lease term on December 31, 2024, the equipment will revert to the lessor. On such date, the fair value
of the asset is P350,000. The perpetual inventory system is used. The lessor incurred initial direct cost of P200,000 in
finalizing the lease agreement. PV of an ordinary annuity of 1 for 5 periods at 12% is 3.60, PV of 1 for 5 periods at 12%
0.57.
(Present value factor round to two decimal places)

A. 7,500,000 B. 8,000,000 C. 4,000,000 D. 4,500,000
17) What is the net investment in the lease?

A. 5,400,000 B. 5,685,000 C. 4,000,000 D. 3,500,000

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18) What is the total financial revenue?
A. 2,315,000 B. 1,815,000 C. 2,100,000 D. 2,600,000
19) What is the interest income to be recognized for 2020?

A. 682,200 B. 648,000 C. 900,000 D. 960,000
20) What amount should be reported as profit on sale for 2020?

A. 1,485,000 B. 1,685,000 C. 3,500,000 D. 4,000
Bitag is a dealer in machinery. On January 1, 2023, a machinery was leased to another entity with the following provisions:
Annual rental payable at the end of each year .......... .......... .......... .......... .......... .......... ........... 2,000,000
Lease term and useful life of machinery .......... .......... .......... .......... .......... .......... .......... .......... 5 years
Cost of machinery.......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 6,000,000
Residual value – unguaranteed.......... .......... .......... .......... .......... .......... .......... .......... .......... . 1,000,000
Implicit interest rate.......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ........ 12%
PV of an ordinary annuity of 1 for 5 periods at 12%.............................. .......... .......... .......... ...... 3.60
PV of 1 for 5 periods at 12%.......... .......... .......... .......... .......... .......... .......... .......... .......... ..... 0.57
There is no transfer of title nor bargain purchase option.
21) What amount should be reported as sales revenue?

A. 7,200,000 B. 7,770,000 C. 7,000,000 D. 8,000,000
22) What is the interest income for 2023?

A. 720,000 B. 795,600 C. 864,000 D. 932,400
23) What amount of cost of goods sold should be reported?

A. 6,630,000 B. 6,570,000 C. 6,000,000 D. 5,430,000
Use the following information for the next four (4) questions:
Chelu Company used leases as a method of selling products. During the current year, the entity completed construction
of a passenger ferry. At the beginning of current year, the ferry was leased on a contract specifying that ownership of
the ferry will transfer to the lessee at the end of the lease period.
Original cost of the ferry 8,000,000
Fair value of ferry at the inception of lease 13,000,000
Residual value 2,000,000
Annual rental payable in advance at the beginning of each year 1,500,000
Implicit interest rate 12%
Lease term 20 years
Present value of an annuity due of 1 at 12% for 20 periods 8.37
Present value of an ordinary annuity of 1 at 12% for 20 periods 7.47
Present value of 1 at 12% for 20 periods 0.10

A. 30,000,000 B. 32,000,000 C. 38,000,000 D. 10,000,000
25) What is the net investment in the lease?

A. 12,555,000 B. 13,000,000 C. 12,755,000 D. 11,205,000
26) What is the gross profit on sale for the current year?
A. 6,555,000 B. 4,555,000 C. 5,000,000 D. 3,205,000
27) What is the unearned interest income in the lease?

A. 17,445,000 B. 19,245,000 C. 19,445,000 D. 22,000,000
28) What is the interest income for the current year?

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A. 1,506,000 B. 1,560,000 C. 1,326,600 D. 1,380,000
9.2 Leases ‒ Lessee’s Point of View
N21
Finance Lease – Lessee Point of View
ü By substance the lessee purchased the leased asset on installment basis;
 Lessee will recognize the leased asset as “right-of-use” asset;
ü Lessee will recognize lease liability amounting the to the PV of future
payments  Lessee will incur interest expense based on the unpaid lease
liability; and  Lessee will recognize periodic depreciation of the “right-of-use”
asset.
N22
What is the initial measurement of lease liability?
Present value of periodic payment X
Present value of bargain purchase option (BPO) or guaranteed residual value GRV X
Initial measurement of lease liability X

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On January 1, 2024, Gwen leased an equipment from a lessor with the following pertinent information:
Annual rental payable at the end of each year 500,000

Lease term 8 years
Useful life of equipment 10 years
PV of an ordinary annuity of 1 for 8 periods at 10% 5.33
Present value of 1 for 8 periods at 10% 0.47
The entity has the option to purchase the equipment on January 1, 2032 by paying P500,000 which is significantly less
than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that the entity
shall exercise the option. On January 1, 2024, the entity incurred initial direct cost of P200,000.
29) What is the initial cost of the equipment?

A. 2,900,000 B. 3,100,000 C. 2,865,000 D. 0
30) What is the interest expense for 2024?

A. 290,000 B. 310,000 C. 266,500 D. 316,500
31) What is the lease liability on December 31, 2024?

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A. 2,690,000 B. 2,790,000 C. 2,398,500 D. 2,848,500
32) What is the depreciation for 2024?

A. 310,000 B. 387,500 C. 290,000 D. 362,500
On January 1, 2022, Godly Company entered into 5-year lease of a floor of a building with the following terms:
Annual rental for the first two years payable at the end of each year 200,000
Annual rental for the next three years payable at the end of each year 300,000
Initial direct cost paid by lessee 100,000
Estimated cost of restoration required by contract 50,000
Useful life of building 20 years
PV of an ordinary annuity of 1 at 8% for two periods 1.783
PV of an ordinary annuity of 1 at 8% for three periods 2.577
PV of 1 at 8% for two periods 0.857
33) What is the initial lease liability?

A. 1,019,147 B. 1,129,700 C. 1,288,500 D. 1,300,000
34) What is the cost of the right of use asset?

A. 1,438,500 B. 1,169,147 C. 1,419,147 D. 1,279,700
35) What is the depreciation for 2022?

A. 283,829 B. 255,940 C. 233,829 D. 58,457
36) What is the interest expense?

A. 103,080 B. 104,000 C. 90,376 D. 81,532
37) At the beginning of current year, Taguro entered into an 8-year lease for an equipment. The entity accounted for the
acquisition as a finance lease for P6,000,000 which included a P600,000 guaranteed residual value. at the end of the
lease, the asset will revert back to the lessor. It is estimated that the fair value of the asset at the end of the 10-year
life would be P400,000. The entity used the straight line depreciation. What amount should be recognized as
depreciation expense on the leased asset for the current year?
A. 675,000 B. 700,000 C. 540,000 D. 560,000
38) At the beginning of current year, Nicole Perez entered into an 8-year finance lease for an equipment. The entity
accounted for the acquisition of the finance lease at P5,000,000 which included a P500,000 bargain purchase option.
At the end of the lease, the entity expected to exercise the bargain purchase option. The expected fair value of the
equipment is P400,000 at the end of the 10-year useful life. The straight line depreciation is used. What amount of
depreciation should be recognized for the current year?
A. 575,000 B. 460,000 C. 625,000 D. 450,000

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N27
Computation of deferred tax expense (benefit) from DTL: (ALTERNATIVE)
DTL
X Beginning balance (TTD x TR)
Deferred tax benefit (squeeze) X X Deferred tax expense
N27
(squeeze)
Computation of deferred tax expense (benefit) from DTA: (ALTERNATIVE)
X Ending
DTA balance (TTD x TR)
Beginning balance (DTD x TR) X
Deferred tax benefit (squeeze) X X Deferred tax expense
(squeeze)
Ending balance (DTD x TR) X

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N34
Computation of income tax payable (current tax payable):
Income tax payable
X Beginning balance
Estimated tax payment made X X Current tax expense
X Ending balance
N34
Computation of current tax expense (3rd ALTERNATIVE)
Income tax payable
X Beginning balance
Estimated tax payment made X X Current tax expense (squeeze)
X Ending balance
Permanent Differences that will NOT result to DTLTA
Non Taxable Revenue Non Deductible Expenses

1) Income from municipal bonds 1) Expropriation of assets
2) Dividend received from domestic corp. 2) Payment of penalty taxes
3) Other revenue subjected to FT / CGT 3) Premium payment on life insurance
Taxable Temporary Differences (TTD) that will result to DTL
Revenue earned but not yet taxable Deductible expenses but not yet incurred
1) Rent earned but not received 1) Excess depreciation of books over ITR
2) Installment sales 2) Capitalized R & D
3) Revaluation surplus 3) Rent paid in advance
4) Investment income from associate 4) Impairment of inventory
5) Unrealized gain on investments 5) Impairment of PPE
6) Other accrued income 6) Unrealized loss on investments
7) Other prepaid expense
Deductible Temporary Differences (DTD) that will result to DTA
Taxable revenue but not yet earned Expenses incurred but not yet deductible
1) Rent received not yet earned 1) Warranty expense incurred
2) Other unearned revenue 2) Bad debt expense over write off
3) Lawsuit provision
4) Other accrued expenses
Midas Company started operations on January 1, 2021. At the end of the first year of operations, Midas reported pre-tax
income of P2,800,000. An analysis of the components included in this computation was a P300,000 non-taxable revenue
and installment sales of P800,000 of which P350,000 remained uncollected (due March 15, 2023). For tax purposes,
income from installment sales is taxable only when cash is collected. The enacted tax rates for 2021 and future years is
30%.
39) What is the current tax expense of Midas Company?

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A. 840,000 B. 750,000 C. 645,000 D. 105,000
40) What is the deferred tax expense (benefit) of Midas Company?

A. 840,000 B. 750,000 C. 645,000 D. 105,000
At the end of 2021, Pandamonium Company’s first year of operations. Pandamonium Company reported pretax financial
income of P4,900,000. Included under expenses was a P300,000 non-deductible expense. Furthermore, Pandamonium
Company includes a two-year warranty on its machinery sales. An analysis of the warranty records reveals that it has
recorded and accrued warranty provisions of P750,000. Cost and expenses under this classification, however, are
deductible only for tax purposes when paid. The enacted tax rates for 2021 and future year is 30%.
41) What is the current tax expense of Pandamonium for 2021?

A. 1,785,000 B. 1,560,000 C. 1,470,000 D. 1,335,000
42) What is the deferred tax expense (benefit) of Pandamonium for 2021?
A. 315,000 benefit B. 225,000 benefit C. 135,000 benefit D. 90,000
benefit
Use the following information for the next five (5) questions:
Acierto Company reported net income for the current year 2019 at P10,000,000 before taxes. Included in the determination
of the said net income were:
Permanent differences
Non deductible expenses P 100,000
Non taxable income 500,000
Temporary differences
Accrued warranty expenses 250,000
Rental payments made in advance 400,000
Advance collections from customers 500,000
Provision for probable losses 900,000
Income tax rate is 40% and is not expected to change in the future.
43) How much is the current tax expense?

A. 4,340,000 B. 4,000,000 C. 3,840,000 D. 3,340,000
44) How much is the total tax expense?

A. 4,340,000 B. 4,000,000 C. 3,840,000 D. 3,340,000
45) What is the total deferred tax asset to be presented in the 2019 statement of financial position?
A. 660,000 B. 460,000 C. 360,000 D. 160,000
46) What is the total deferred tax liability to be presented in the 2019 statement of financial position?
A. 660,000 B. 460,000 C. 360,000 D. 160,000
47) Toro Company reported P6,750,000 income before provision for income tax. To compute provision for income tax, the
following data are provided for 2018:
Rent received in advance 1,200,000
Income from exempt municipal bonds 1,500,000
Depreciation deduction for income tax purposes in excess of depreciation reported for financial accounting purposes
750,000
Estimated tax payment for 2018 375,000
Enacted corporate income tax rate 30%
What amount of current tax liability should be reported on December 31, 2018?
A. 1,335,000 B. 1,700,000 C. 1,935,000 D. 2,160,000

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EX Company reported in the first year of operations pretax financial income of P6,000,000. The year tax rate is 30% and
the enacted rate for future years is 25%.
Tax return Accounting record

Uncollectible accounts expense 200,000 300,000
Depreciation expense 800,000 500,000
Tax exempt interest revenue -- 150,000
48) What is the current tax expense?

A. 1,695,000 B. 1,755,000 C. 1,740,000 D. 1,600,000
49) What is the next deferred tax expense or benefit?

A. 75,000 expense B. 25,000 benefit C. 50,000 expense D. 50,000 benefit
50) What is the total tax expense?

A. 1,755,000 B. 1,462,500 C. 1,795,000 D. 1,745,000
51) Demonic Shield Company prepared the following reconciliation for the first year of operations:
Pretax financial income for 2019 9,000,000
Tax-exempt interest revenue (750,000)
Temporary difference (2,250,000)
Taxable income 6,000,000
The temporary difference will reverse evenly in 2020 and 2021 at an enacted tax rate of 35% in 2020, and 32% in
2021. The tax rate for 2019 is 30%. What amount should be reported as deferred tax asset or liability on December
31, 2019?
A. 720,000 DTA B. 753,750 DTA C. 720,000 DTL D. 753,750 DTL
52) AAA Co. reported current tax expense of P5,000,000 for 2020. The changes in assets and liabilities are as follows:
12/31/20 12/31/19
Deferred tax asset P 1,000,000 P 800,000
Deferred tax liability 450,000 600,000
Income tax payable 500,000 200,000
The deferred tax liability was caused by accelerated depreciation and the deferred tax asset is for rentals received in
advance. What amount of total tax expense should be recognized in 2020?
A. 4,650,000 B. 4,950,000 C. 5,350,000 D. 5,650,000
53) Accursed Entity has the following information:

12/31/20 12/31/21
Cumulative temporary difference giving rise to future taxable amount 8,000,000 10,000,000
Cumulative temporary difference giving rise to future deductible amount 6,000,000 5,000,000
Tax rate 30% 30%
The deferred tax expense for the year 2021 is

A. 1,50,000 B. 900,000 C. 600,000 D. 300,000
54) For the year 2021, Meowski Company reported income tax expense of P110,000. Income tax payable at the end of
2020 was P90,000 and at the end of 2021 was P100,000. The deferred tax liability that resulted from the use of
accelerated depreciation for tax purposes and the straight-line method for financial reporting purposes increased from
P105,000 at the beginning of 2021 to P130,000 at the end of 2021. How much cash was paid for income taxes during
the year?
A. 105,000 B. 95,000 C. 85,000 D. 75,000
55) Balances of the deferred tax accounts of Taxy Ltd were as follows:
December 31, 2021 December 31, 2022 Deferred tax liability 3,200 2,000
Deferred tax asset 2,650 1,900

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Income tax expense for the year ended December 31, 2022 was P1,750. The current tax payable at December 31,
2022 is P200 less than the current tax payable at the preceding year end. What was the amount of income tax paid
during the year ended December 31, 2022?
A. 1,100 B. 1,500 C. 2,000 D. 2,200
The accountant of Monkey King Company presented to you the following information in line with your 2022 audit of Monkey
King Company’s income tax related balances:
Pre-tax financial income 3,000,000
Impairment loss on Machinery 50,000
Unearned rental income 350,000
Prepaid advertising expense 250,000
Interest income on time deposit 80,000
Excess tax depreciation over accounting depreciation 420,000
Installment sale which will be recognized as taxable income upon collection 900,000
Bad debts expense using a method under accrual basis 75,000
Provision for warranty 180,000
Unrealized loss on trading securities 20,000
Impairment loss on goodwill 30,000
Capitalized development cost 100,000
Income tax rate is constant 30%
56) How much is the total income tax expense for the year 2022?
A. 1,183,500 B. 885,000 C. 586,500 D. 360,000
57) How much is the deferred tax asset at December 31, 2022?
A. 586,500 B. 501,000 C. 298,500 D. 202,500
58) How much is the deferred tax liability at December 31, 2022?
A. 586,500 B. 501,000 C. 298,500 D. 202,500
59) How much is the current tax expense for the year 2022?
A. 1,183,500 B. 885,000 C. 586,500 D. 360,000
N35
Computation of DTL or DTA using Balance Sheet Method
Asset:
Carrying amount > Tax base = TTD x TR = DTL
Carrying amount < Tax base = TTD x TR = DTA
Liability:
Carrying amount > Tax base = TTD x TR = DTA
Carrying amount < Tax base = TTD x TR = DTL
The following information was provided to you by Shackles Company:
Book Value Tax Base
Receivable 150,000 200,000
Building – net 300,000 100,000
Machinery and equipment – net 500,000 550,000
Unearned revenue 100,000 ---
Estimated warranty obligation 80,000
Current and future tax 30%. Taxable income for the year P300,000.
60) Deferred tax asset

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A. 90,000 B. 84,000 C. 60,000 D.
30,000
61) Deferred tax liability
A. 90,000 B. 84,000 C. 60,000 D.
30,000
Evade Company has the following financial statement elements for which the December 31, 2018 carrying amount is
different from the December 31, 2018 tax basis:
Carrying amount Tax basis Difference
Equipment 5,500,000 4,000,000 1,500,000
Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000
The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax
purposes. The accrued liability is the estimated health care cost that was recognized as expense in 2018 but deductible
for tax purposes when actually paid. In January 2018, Evade Company incurred P3,000,000 of computer software cost.
Considering the technical feasibility of the project, this cost was capitalized and amortized over 3 years for accounting
purposes. However, the total amount was expensed in 2018 for tax purposes. The pretax accounting income for 2018 is
P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2018.
62) What is the current tax expense for the year 2018?
A. 4,500,000 B. 3,600,000 C. 5,400,000 D. 3,300,000
63) What amount should be reported as total tax expense?

A. 4,500,000 B. 4,950,000 C. 4,050,000 D. 3,900,000
64) What amount should be reported as deferred tax liability on December 31, 2018?
A. 1,050,000 B. 1,200,000 C. 900,000 D. 150,000
65) What amount should be reported as deferred tax asset on December 31, 2018?
A. 750,000 B. 600,000 C. 150,000 D. 0
66) An equipment cost P4,000. For tax purposes, depreciation of P2,400 has already been deducted in the current and
prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction
on disposal. Revenue generated by using the equipment is taxable, any gain on disposal of the equipment will be
taxable and any loss on disposal will be deductible for tax purposes, how much is the tax base of the equipment?
A. 4,000 B. 2,400 C. 1,600 D. 0
67) An entity has spent P600,000 in developing a new product. These costs meet the definition of an intangible asset
under PAS 38 and have been recognized in the statement of financial position. These costs have been recognized as
an expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by P50,000. The tax base
of the intangible asset at year end is
A. 600,000 B. 550,000 C. 50,000 D. 0
68) Trade receivable have a carrying amount of P4,000. The related revenue has already been included in taxable profit.
How much is the tax base of the asset?
A. 4,000 B. 2,400 C. 1,600 D. 0
69) 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. 13 million B. 10 million C. 3 million D. 0
70) Sosa Company located its business in two jurisdictions, France and Germany. In both countries, Sosa has the legal
right to offset the taxes receivable and payable. The following information related to deferred tax assets and liabilities:
Classification Amount Taxing Jurisdiction Deferred tax asset 800,000 France

Deferred tax liability 300,000 Germany Deferred tax liability 600,000 France

J. S. CAYETANO
How should Sosa represent as deferred taxes at year-end?
DTA DTL DTA DTL
A. 800,000 900,000 C. 200,000 600,000
B. 0 1,000,000 D. 200,000 300,000
N41
What is the total benefit cost?
Total service cost:

- Current service cost X
- Past service cost X
- Loss on settlement of PBO in advance X
- Gain on settlement of PBO in advance (X) X
Net interest:
Interest expense (PBO, beg x discount rate) X
Interest income (FVPA, beg x discount rate) (X)
Interest on the effect (Effect, beg x discount rate) X X

J. S. CAYETANO
Cost reported to OCI:
Actuarial gain or loss on plan asset (gain or loss on return of plan X
asset)
Actuarial gain or loss on benefit obligation (increase=loss; X
decrease=gain)
Change in the effect of surplus X X
Total benefit cost X
N42
Computation of actuarial gain or loss on plan asset:
Actual return on plan asset X
Interest income (FVPA, beg x discount rate) (X)
Gain (loss) on actuarial gain or loss on plan asset X
N43
Computation of Fair Value of Plan Asset (FVPA):
FVPA
Beginning balance X
- Actual return on plan asset X X - Benefits paid to retiree
- Contributions received X X - Settlement price
Ending balance X
N44
Computation of Present Value of Benefit Obligation (PBO):
PBO
X Beginning balance
- Actuarial gain X X - Interest expense
- Benefits paid X X - Current service cost
- CA of benefits settled X X - Past service cost

J. S. CAYETANO
X - Actuarial loss
X Ending balance
Balictar Company agrees to provide lump-sum retirement benefits to employees equal to 6% of final salary for each year
of service. Information on an employee is shown below:
Average annual salary level on January 1, 2021 12,000,000
Average annual salary increase starting January 1, 2022 and every year thereafter 3%
Average service lives before entitlement to retirement benefits (January 1, 2021 to December 31, 2025) 5 years
Discount rate per year 10%
71) How much is the ultimate cost of the define benefit plan? or (How much is the total amount of retirement benefit to be
received by the employee?)
A. 13,506,104 B. 4,891,725 C. 4,051,832 D. 810,366
72) How much is the current service cost in 2022?

A. 669,724 B. 618,724 C. 608,840 D. 553,492
73) How much is the present value of the defined benefit obligation on December 31, 2022?
A. 1,908,117 B. 1,298,437 C. 1,250,000 D. 1,217,680
A lump sum benefit is payable on termination of services and equal to one percent of final salary for each year of service.
The salary in year 1 is P10,000 and is assumed to increase at 7% each year. The discount rate used is 10%. The entity
does not fund its obligation to pay lump-sum benefits. The employee is expected to leave at the end of year 5.
74) The defined benefit liability at the end of the second year is
A. 275 B. 262 C. 196 D. 187
75) The amount to be recognized as expense in the second year is

A. 196 B. 131 C. 107 D. 96
76) Narciso Company provided the following information on December 31, 2018.
Current service cost 520,000
Actual return on plan assets 810,000
Interest expense on PBO 590,000
Interest income on plan assets 150,000
Loss on plan settlement 240,000
Past service cost during the year 360,000
Contribution to pension fund 950,000
What is the net pension expense for 2018?

A. 1,710,000 B. 1,560,000 C. 1,470,000 D. 1,350,000
Jeff Irvin Company provided the following information for the current year:
Interest on PBO 600,000

J. S. CAYETANO
Interest income on plan asset 350,000
Loss on settlement 250,000
Past service cost during the year 300,000
Actual return on plan asset 850,000
Actuarial loss during the year 200,000
Contribution to the plan 1,500,000
77) What is the employee benefit expense for the current year?
A. 1,300,000 B. 1,050,000 C. 1,500,000 D. 1,100,000
78) What is the total defined benefit cost?

A. 1,000,000 B. 1,500,000 C. 1,700,000 D. 800,000
79) The plan asset account at January 1, 2022 has a balance of P3,000,000. The following items were provided by
Shrubbery Company in relation to this account:
Service cost for 2022 780,000
Settlement rate 10%
Expected rate of return 8%
Actuarial gain in relation to plan asset valuation 50,000
Contributions made to the plan for 2022 800,000
Benefits paid 250,000
The plan assets balance at December 31, 2022 included in Shrubbery Company’s memo-account is
A. 3,740,000 B. 3,840,000 C. 3,850,000 D. 3,900,000
80) Sani Company provided the following plan information for the current year:
January 1 Projected benefit obligation 3,500,000

During the year Pension benefit paid to retired employees 250,000
Actuarial loss 200,000
December 31 Projected benefit obligation 4,200,000
Discount or settlement rate 10%
What is the current service cost for the current year?

A. 600,000 B. 400,000 C. 800,000 D. 750,000
Use the following information for the next five (5) questions:
IF ONLY FOR A MINUTE Company provided the following information for the current:
Current service cost................ ................ ................ ................ ................ ................ ................ ........ 500,000
Past service cost during the year................ ................ ................ ................ ................ ................ ..... 300,000
Interest on PBO................ ................ ................ ................ ................ ................ ................ .............. 600,000
Interest income on plan assets................ ................ ................ ................ ................ ................ ........ 350,000
Loss on plan settlement before normal retirement date................ ................ ................ ................ ...... 250,000
Present value of benefit obligation settled in advance................ ................ ................ ................ ......... 950,000
Actual return on plan assets................ ................ ................ ................ ................ ................ ............. 850,000
Actuarial loss on PBO during the year................ ................ ................ ................ ................ ............... 200,000
Contribution to the plan................ ................ ................ ................ ................ ................ ................ .. 1,500,000
Benefits paid to retirees................ ................ ................ ................ ................ ................ ................ .. 1,000,000
Discount or settlement rate................ ................ ................ ................ ................ ................ .............. 10%
81) What is the employee benefit expense for the current year?
A. 1,300,000 B. 1,050,000 C. 1,500,000 D. 1,100,000
82) What is the net remeasurement of the defined benefit plan for the current year?
A. 300,000 gain B. 500,000 loss C. 500,000 gain D. 300,000 loss
83) What is the fair value of plan assets at year-end?

A. 3,650,000 B. 4,650,000 C. 4,900,000 D. 5,850,000
84) What is the projected benefit obligation at year-end?

J. S. CAYETANO
A. 5,650,000 B. 6,650,000 C. 6,400,000 D. 6,450,000
85) What amount should be reported as accrued benefit cost at year-end?

A. 2,000,000 B. 1,500,000 C. 1,750,000 D. 500,000
Usher Company had a defined benefit plan for the employees. On January 1, 2018, the entity provided the following
balances related to this plan:
Fair value of the plan assets 2,700,000

Projected benefit obligation 3,400,000
During 2018, the actuary provided the following information:

Service cost 450,000
Benefits paid to retirees 410,000
Discount rate 7%
Contribution to the plan ?
Usher reported a net pension liability of P468,000 on December 31, 2018.
86) What amount of employee benefit expense should be reported for 2018?
A. 499,000 B. 450,000 C. 418,000 D. 459,000
87) What is the cash contribution to the plan asset for 2018?
A. 418,000 B. 731,000 C. 232,000 D. 650,000
The following information pertains to Hoot Corporation defined benefit plan for the year 2022:
Defined benefit obligation, January 1, 2022 2,500,000
Fair value of plan assets, January 1, 2022 2,000,000
Fair value of plan assets, December 31, 2022 2,100,000
Present value of additional defined benefit obligation settled 175,000
Defined benefit obligation, December 31, 2022 2,400,000
Discount rate 10%
Benefit paid to retirees (at scheduled retirement) 620,000
Contribution made during the year 600,000
88) What amount of defined benefit cost should be reported in 2022 profit or loss?
A. 550,000 B. 555,000 C. 545,000 D. 450,000
89) What amount of net measurement gain/loss should be reported in 2022 other comprehensive income?
A. 155,000 B. 45,000 C. 150,000 D. 50,000
90) Platon Company’s defined benefit plan has the following information:
January 1 December 31
Fair value of plan assets 10,000,000 12,000,000
Defined benefit obligation 8,000,000 9,000,000
Discount rate 10% 10%
Present value of available future refunds and reduction in future contributions 1,600,000 2,000,000
In relation to the asset ceiling, the amount that the entity would recognize in other comprehensive income for the year
2020 should be
A. 1,000,000 B. 960,000 C. 600,000 D. 560,000
Use the following information for the next SIX (6) questions:
The following information is made available in relation to the defined benefit plan of SPIRIT Company for the year 2022:

J. S. CAYETANO
Fair value of plan asset – December 31, 2022 4,000,000
Asset ceiling – January 1, 2022 200,000
Fair value of plan asset – January 1, 2022 2,000,000
Contribution to the plan 700,000
Discount rate 12%
Defined benefit obligation – December 31, 2022 3,440,000
Asset ceiling – December 31, 2022 340,000
Benefits paid to retirees 400,000
Defined benefit obligation – January 1, 2022 1,700,000
91) What amount of defined benefit cost should be reported in profit or loss?
A. 164,000 B. 560,000 C. 176,000 D. 384,000
92) What is the remeasurement loss related to the change in the effect of asset ceiling?
A. 112,000 B. 220,000 C. 108,000 D. 0
93) What is the total net remeasurement gain/loss to be reported as a component of other comprehensive income?
A. 176,000 B. 384,000 C. 276,000 D. 560,000
94) How much is the actual return on plan assets for the year 2022?
A. 240,000 B. 1,460,000 C. 1,220,000 D. 1,700,000
95) How much is the overfunding/underfunding for the year 2022?

A. 140,000 over B. 140,000 under C. 248,000 over D. 248,000 over
96) How much is the balance of prepaid pension (asset) or accrued pension (liability) that should be presented in the
statement of financial position as of December 31, 2022?
A. 340,000 B. 220,000 C. 300,000 D. 560,000
Margaret Alarcio Company reported a prepaid benefit cost of P1,500,000 on January 1, 2019. The entity provided the
following information related to a defined benefit plan during the current year:
Current service cost..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 3,000,000
Actual return on plan assets..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 1,200,000
Interest cost..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 800,000
Settlement price of benefit obligation paid in advance..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... .... 500,000
Present value of benefit obligation paid in advance..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... .. 600,000
Interest income..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... .. 1,000,000
Actuarial loss in PBO..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 400,000
Past service cost..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 500,000
Benefits paid to retirees..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 2,500,000
Contribution to the plan..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... . 4,000,000
Projected benefit obligation – January 1..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... . 8,000,000
Fair value of plan assets – January 1..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 10,000,000
Asset ceiling – January 1..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 1,500,000
Asset ceiling – December 31..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 2,000,000
Discount rate..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... 10%
97) What is the 2019 benefit expense?

A. 3,250,000 B. 3,350,000 C. 3,300,000 D. 3,000,000
98) What is the fair value of the plan asset at December 31?
A. 12,700,000 B. 12,200,000 C. 12,100,000 D. 10,000,000
99) What is the projected benefit obligation at December 31?

A. 9,700,000 B. 9,600,000 C. 8,900,000 D. 8,800,000
100) What is the net remeasurement gain or loss in OCI?

J. S. CAYETANO
A. 250,000 gain B. 600,000 loss C. 250,000 loss D. 150,000 gain
END

Special Liabilities San Carlos College

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SAN CARLOS COLLEGE

9.1 Leases ‒ Lessor’s Point of View

Lease bonus received from lessee XXXX

3) What amount of rent receivable is recognized on December 31, 2021?

4) What amount of rent income should be reported for 2023?

5) On December 31, 2025, what amount should be reported as rent receivable?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 2 of 23

Cost of the leased asset (see chapter 5) X

Add: Unamortized cost of Initial direct cost (IDC)

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 3 of 23

Cost of equipment 1,200,000

12) How much is the unearned interest income on January 1, 2021?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 4 of 23

13) What is the gross investment in the lease?

14) What is the financial revenue in 2021?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 5 of 23

(Present value factor round to two decimal places)

17) What is the net investment in the lease?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 6 of 23

A. 2,315,000 B. 1,815,000 C. 2,100,000 D. 2,600,000

19) What is the interest income to be recognized for 2020?

20) What amount should be reported as profit on sale for 2020?

There is no transfer of title nor bargain purchase option.

21) What amount should be reported as sales revenue?

22) What is the interest income for 2023?

23) What amount of cost of goods sold should be reported?

24) What is the gross investment in the lease?

25) What is the net investment in the lease?

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

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

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 7 of 23

9.2 Leases ‒ Lessee’s Point of View

Initial measurement of lease liability X

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 8 of 23

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

29) What is the initial cost of the equipment?

30) What is the interest expense for 2024?

31) What is the lease liability on December 31, 2024?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 9 of 23

32) What is the depreciation for 2024?

33) What is the initial lease liability?

34) What is the cost of the right of use asset?

35) What is the depreciation for 2022?

36) What is the interest expense?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 10 of 23

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 11 of 23

Permanent Differences that will NOT result to DTLTA

Non Taxable Revenue Non Deductible Expenses

Taxable Temporary Differences (TTD) that will result to DTL

Deductible Temporary Differences (DTD) that will result to DTA

39) What is the current tax expense of Midas Company?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 12 of 23

40) What is the deferred tax expense (benefit) of Midas Company?

41) What is the current tax expense of Pandamonium for 2021?

43) How much is the current tax expense?

44) How much is the total tax expense?

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 13 of 23

Tax return Accounting record

48) What is the current tax expense?

49) What is the next deferred tax expense or benefit?

50) What is the total tax expense?

53) Accursed Entity has the following information:

The deferred tax expense for the year 2021 is

CHAPTER 9 ‒ SPECIAL LIABILITY TOPICS Page 14 of 23