PROBLEM 1: A Company provides a retirement benefit of 10% of the final salary per annum for a

contractual period of three years. One of its employees will be retiring in 2021. The employee’s
anticipated salary in 2019 to 2021 were P1,000,000; P1,200,000 and P1,440,000 respectively. Using the
applicable discount rate of 5% (using five decimal places) determine the following:
1. Current service cost for 2020.
2. Projected benefit obligation on December 31, 2021.

PROBLEM 2: B Company provided the following information related to its defined benefit obligation
plan in 2019:
Current service cost 15,000
Past service cost 57,500
Benefits paid 15,500
Contribution to the plan 10,500
Fair value of plan assets, 1/1 1,050,000
Fair value of plan assets, 12/31 1,200,000
Projected benefit obligation, 12/31 1,250,000
Projected benefit obligation, 1/1 1,100,000
B Company’s discount rate was 5% while its expected rate of return was 7%
3. What is the actual return on plan assets?
4. What is the actuarial loss arising from the increase in projected benefit obligation?

PROBLEM 3: C Company presented the following information in 2019:

Projected benefit obligation, January 1 7,000,000
Projected benefit obligation, December 31 8,400,000
Accumulated benefit obligation, January 1 5,600,000
Accumulated benefit obligation, December 31 6,200,000
Discount rate 10%
Benefits payment for the retired employees 500,000
5. How much was the current service cost?

PROBLEM 4: D Company provided the following:

Current service cost 1,600,000
Actual return on plan assets 400,000
Interest on the beginning fair value of plan assets 350,000
Past service cost 50,000
Interest on the beginning defined benefit obligation 500,000
6. How much was the total defined benefit cost?

PROBLEM 5: At December 31, 2019, E Company had a defined benefit obligation of P620,000, plan
assets of P347,000 and past service cost of P122,000.
7. What is the net defined benefit asset or liability that should report on December 31, 2019?
PROBLEM 6: F Company provided the following information related to employee benefits:
Settlement rate 10%
Benefits paid to retirees 1,250,000
Contribution to the plan 1,875,000
Actuarial loss on DBO 250,000
Actual return on plan assets 1,062,500
Past service cost 375,000
Present value of DBO settled 1,187,500
Loss on plan settlement before the normal retirement date 312,500
Interest income on plan assets 437,500
Interest expense on DBP 750,000
Current service cost 625,000
8. How much is the post-employment benefit expense in 2019?
9. How much is the net defined benefit asset or liability on January 1, 2019?
10. How much is the over or under funding of defined benefit cost?

PROBLEM 7: G Company provided the following information during the current year:
December 31 January 1
Defined benefit obligation 5,900,000 5,000,000
Fair value of plan assets 7,900,000 6,000,000
The present value of the future reductions in the contribution are:
December 31 January 1
800,000 300,000
G Company’s discount rate was 10%.
11. What is the amount of remeasurement on asset ceiling that will be recognized in other
comprehensive income?
12. How much is the net interest expense for the current year?

PROBLEM 8: The following information relates to the defined benefit pension plan of H Company in
relation to the company’s post-retirement benefit related accounts:
Present value of benefit obligation, January 1 6,250,000
Fair value of plan assets, January 1 5,955,000
Contribution during the year 890,000
Current Service cost 667,000
Benefits paid during the year, prior scheduled retirement 550,000
Settlement price to retirees prior scheduled retirement 620,000
Settlement to retirees at scheduled retirement 899,000
Present value of benefits obligation, December 31 6,166,000
Fair value of plan asset, December 31 5,784,000
Discount rate 6%
 13. What is the total employee benefit cost to be reported in the profit or loss portion of Statement
of Comprehensive Income?
14. What is the total employee benefit cost to be reported in the other comprehensive income/loss
portion of Statement of Comprehensive Income?

PROBLEM 9: I Company sells its products on installment basis. In 2019, I Company reported gross profit
of P6,000,000 for financial reporting purposes and P1,500,000 for taxation purposes. The difference of
P4,500,000 was expected to be recognized for tax purposesin 2020 and 2021 for P2,500,000 and
P2,000,000, respectively.
I Company provides 2-year warranty for its products. In 2019, I Company accrued P2,500,000 warranty
expense. Warranty payments in 2019, 2020 and 2021 are P500,000, P1,000,000 and P1,000,000,
respectively.
In addition to the above, I Company had the following transactions:
 Received and earned P500,000 interest, net of 20% final tax
 Paid P100,000 premium on life insurance of its President, the company is the beneficiary
I Company reported P2,000,000 pretax accounting income in 2019. Any operating loss for 2019 will be
carried to 2020. Tax rate for all years is 30%.
15. How much was I Company’s future taxable amount on December 31, 2019?
16. How much was I Company’s future deductible amount on December 31, 2019?

PROBLEM 10: The following facts relate to J Company for the year 2019:
Deferred tax liability, January 1, 2019 345,000
Deferred tax asset, January 1, 2019 135,000
Pretax financial income, 2019 2,250,000
Fines and penalties for late payment of taxes 120,000
Cumulative temporary difference at year-end giving rise to 700,000
future taxable amount
Cumulative temporary difference at year-end giving rise to 500,000
future deductible amount
Current tax rate 30%
17. What is the amount of taxable income?

PROBLEM 11: K Company’s partial income statement after its first year of operations:
Income before income taxes 3,750,000
Income tax expense
Current 1,035,000
Deferred 90,000 1,125,000
Net Income 2,625,000
K Company uses straight line method of depreciation for financial reporting purposes and accelerated
depreciation for tax purposes. The amount charged to depreciation expense on its books this year was
P1,500,000. No other differences existed between book income and taxable income except for the
amount of depreciation.
 18. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation’s tax
return for the current year?

PROBLEM 12: L Company reported a pretax financial income of P5,000,000 for the year ended
December 31,2019. The following items are included in the determination of financial income:

Estimated litigation loss 500,000

Prepaid expenses 300,000
Other unearned revenue 150,000
Income from life insurance policy settlement 100,000
Impairment loss on goodwill 200,000
Income tax rate 30%
19. What amount should L Company report as total tax expense and current tax expense
respectively?
20. What amount should L Company report as total tax expense and current tax expense
respectively, assuming that income tax rate is expected to increase to 35% after 2019?

PROBLEM 13: M Company computed a pretax financial income of P6,000,000 for the year ended
December 31,2019. In preparing the tax return, the following differences are noted between financial
income and taxable income:
Surcharges for late payment of taxes 200,000
Estimated warranty payable 300,000
Dividends received from domestic corporation 400,000
Excess financial depreciation over tax depreciation 250,000
Excess of financial revenue over tax revenue 200,000
21. What is the current tax expense for 2019 if the tax rate is 30%?

PROBLEM 14: N Company reported P3,000,000 pretax accounting profit in 2019, its first year of
operation. At year-end, N Company’s accountant noticed the following differences:
Accounting records Tax return
Doubtful accounts expense 150,000 100,000
Depreciation expense 250,000 400,000
Interest subjected to final tax 25,000
Tax rate in 2019 is 30%. Enacted future tax rate is 25%.
22. What is the current tax expense?
23. What is the net deferred tax expense?

PROBLEM 15: O Company reported a pretax financial income of ___________ for the year 2019. Among
the items reported in the 2019 income statement are:
Interest on time deposit 240,000
Proceeds received from life insurance on death of officer 1,200,000
Accrued rental income 300,000
 Payment of tax penalty, fine and surcharge 120,000
Excess tax depreciation over financial depreciation 200,000
Insurance premium on life of officer with the entity as 240,000
beneficiary
Prepaid operating expenses 120,000
Tax rate 30%
24. What amount should O Company report as deferred tax asset on December 31,2019?
25. What amount should O Company report as deferred tax liability on December 31, 2019?

PROBLEM 16: P Company made the following journal entry in late 2019 for rent on one of its leases to A
Corporation.
Cash 60,000
Unearned Rent 60,000
The receipt represents rent for years 2020 and 2021, the period covered by the lease. P Company is a
cash basis taxpayer. P Company has income tax payable of P92,000 at the end of 2019, and tax rate is
35%.
26. What amount of income tax expense should P Company report at the end of 2019?
27. Assuming the income tax payable at the end of 2020 is P102,000, what amount of income tax
expense would P Company record for 2020?

PROBLEM 17: Q Company issues P10,000,000 od 10-year, 9% bonds on March 1,2015 at 97 plus accrued
interest. The bonds are dated January 1,2015 and pay interest on June 30 and December 31.
28. What is the total cash received on the issue date?
29. The entity to record the issuance of the P10,000,000 bonds will include:
a. Credit to discount of 300,000
b. Credit to bonds payable of 9,700,000
c. Credit to interest expense of 150,000
d. Credit to cash of 9,850,000

PROBLEM 18: On June 30, 2019, R Company and B Corporation received P3,504,000 when it issued an
8%, 10-year, P4,000,000 bonds to yield 10%. Per contract, interests are payable every June 30 and
December 31 commencing December 31,2019.
30. What amount of additional interest expense should R Company record in 2019 as a result of
discount amortization?

Problem 19: On June 30, 2019, S Company prepared the following entry to record the first semi-annual
interest payment of its bonds payable:

Interest expense 53,113

Discount 3,113
Cash 50,000
On December 31, 2019, S Company reported P1,000,000 face value bonds and P108,370 unamortized
discount in its Statement of Financial Position. The bond was issued on January 1, 2019 to yield 12% and
will mature on December 31, 2028.
31. What amount of discount amortization should the company report for the year ended
December 31,2020?
32. Which of the following statements is correct?
a. Discount amortization in 2020 amounts to 3,708
b. S Company will record 50,000 interest expense on June 30,2020
c. The carrying value of the bonds payable on December 31, 2020 is 891,630
d. The balance of the unamortized discount on December 31, 2021 is 93,072

PROBLEM 20: The 10% bonds payable of T Company had a net carrying amount of 570,000 on December
31, 2019. The Bonds, which had face value of P600, 000, were issued discount to yield 12%. The
amortization of the bond discount was recorded under the effective-interest method. Interest was paid
on January 1 and July 1 of each year. On July 2, 2020, several years before their maturity the company
retired the bonds at 102. The interest payment on July 1, 2020 was made as scheduled.

33. What is the loss that T Company should record on the early retirement of the bonds on July 2,
2020?

PROBLEM 21: On January 1, 2019, A Inc. issued a 12% P10,000,000 five-year note payable and elected to
use the fair value option for financial repairing purposes. On December 31, 2019, based on interest and
market factors, the fair value of the note was determined to be P9,500,000.

34. What amount shall be reported in the profit or loss section of the 2019 statement of
comprehensive income?

PROBLEM 22: on January 1, 2019, B Corporation issued a P3,000,000, 6% convertible bonds at par. The
bonds mature in five years and interests are payable every December 31. The bonds may be converted
into ordinary shares on the basis of 50 shares for each P1,000 bond. The par value of each share is P15.
The interest rate for an equivalent bond without the conversion rights would have been 10%.

35. How much is the carrying value of the compound financial instrument as of December 31, 2020?
36. How much is the total credit to equity account upon conversion assuming the bonds were
converted on December 31, 2022?

PROBLEM 23: On January 1, 2019, C Inc. issued P2 million of 16% bonds of 102. Each P1,000 bonds has
one detachable warrant that allows the holder to purchase ten shares of P 50 par value stack at P70 per
share. The bonds would have sold at 99 without the warrants.
 37. Assuming that all the warrants were exercised at a time when the market value of the stock is
P100, how much is the total net effect on the equity upon exercise of the warrants?

PROBLEM 24: On December 31, 2019, U Company issued 20-year, nonconvertible bonds of P5,000,000
for P5,851,160 to yield 10%. Interest is payable annually on December 31 at 12%. On June 1, 2022, U
Company retires 3,000 of its own P1,000 bonds. Total cash paid by U Company is P3,120,000. The
accounting period of U Company is the calendar year.
38. What is the amount of gain or loss on early retirement of bond that will be reported in 2022
income statement?

PROBLEM 25: On January 2, 2019, V Company issued 2,000 of its 5-year, P1,000 face value, 11% bonds
dated January 1 at an effective annual interest rate of 9%. Interest is payable each December 31. V
Company uses the effective interest method of amortization. On December 31, 2020, the 2,000 bonds
were extinguished early through acquisition in the open market by V Company for P1,980,000 plus
accrued interest.
On July 1, 2019, V Company issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate for similar debt without the conversion option is 12%. On July 1, 2020, an investor in V Company’s
convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of V Company’s ordinary
shares, which had a fair value of P105 and a par value of P1 at the date of conversion.
39. ---
40. The gain on early retirement of bonds on December 31, 2020?
41. The carrying value of the 5,000, 6-year, P1,000 face value bonds on December 31,2019?
42. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2020 will increase share
premium by?

PROBLEM 26: On April 1, 2019, W Company issued a 3-year non-interest bearing note of 3,000,000 in
exchange of an equipment purchased. W Company shall pay P1,000,000 every March 31 with the first
payment due on March 31, 2020. The prevailing rate of notes of this type of note is 12%.
43. What is the carrying value of the note on December 31, 2019?
44. Use info from #43, what portion of the note payable shall be presented as noncurrent on
December 31, 2019?

PROBLEM 27: X Company borrowed P1,000,000 on July 1, 2019 and issued a 9% one-year note payable
every after three months starting September 30, 2019. The quarterly payments were P264,200 inclusive
of interest. X Company paid the required quarterly payments when due.
45. What is the carrying value of the note payable on December 31, 2019?

PROBLEM 28: On January 1, 2019, Y Company purchased a land by issuing a 3-year noninterest bearing
note of P7,200,000, payable annually of P2,400,000 with the first payment due on December 31,2019.
The prevailing rate of the notes of this type is 10%.
46. What is the carrying value of the note on December 31,2019?
PROBLEM 28: On December 31, 2018, Z Company had an outstanding loan payable to Rural Bank of
Manila amounting to P5,000,000 plus a 12% accrued interest, all due on the said date. The loan was
entered into on January 1, 2017, when the prevailing market rate of interest was 10%. At the end of
2018, because of the financial difficulties experienced by the company, it failed to settle the total
obligation. Rural Bank of Manila agreed to the following debt restructuring terms:
 The principal amount of the loan had been reduced by P1,000,000
 The interest due had been waived.
 The maturity of the load had been extended to December 31,2020 but the company is
required to pay an annual interest of 12% on the revised principal amount of the loan.
 Z Company paid P20,000 in expenses directly related to the negotiation of the restructuring
 The prevailing market rate of interest on December 31, 2018 is at 11%
47. What is the carrying value of the liability after the debt restructuring agreement?
48. How much should be recognized in the profit or loss as a result of the debt restructuring
arrangement?

PROBLEM 29: ABC Company has an overdue note payable to Union Bank with face value of P2,000,000.
One-year interest amounting to P300,000 was still unpaid as of December 31, 2019. The said note was
issued to yield 15%.
In 2019, ABC was experiencing financial difficulties and a downward trend in its financial performance.
Hence, its management has negotiated with Union Bank on how it can pay its overdue note. The
following were the options presented by ABC to Union Bank on December 31, 2019.

Option 1: ABC Company will exchange one of its equipment costing P12,000,000 but with an
accumulated depreciation of P10,400,000. The equipment’s fair value is P400,000 higher than its
carrying value.
Option 2: ABC Company will issue 20,000, P100 par value ordinary shares, which currently sell at P115
per share.
49. What is the gain or loss on disposal of asset using Option 1?
50. What is the gain or loss on debt restructuring using Option 2?
ANSWER KEY

1. 137, 146 26. 71,000

2. 411, 754 27. 112,500
3. 155,000 28. 9,850,000
4. 38,000 29. C
5. 1,200,000 30. 15,200
6. 1,750,000 31. 7,205
7. 273,000 32. D
8. 1,625,000 33. 37,800
9. 3,125,000 LIABILITY 34. 700,000
10. 625,000 OVERFUNDING 35. 3,074,504
11. BONUS— 36. 3,345,865
12. 30,000 37. 1,400,000
13. 754,700 38. 517,440
14. 222,300 39. 2,129,500 OR 2,127,500 (?)
15. 4,500,000 40. 121,200
16. 2,500,000 41. 4,605,800
17. 2,870,000 42. 1,374,600
18. 1,800,000 43. 2,617,962
19. 1,530,000 & 1,635,000 44. 1,690,016
20. 1,512,500 & 1,635,000 45. 511,162
21. 1,845,000 46. 4,165,416
22. 862,500 47. 4,068,501
23. 25,000 48. 1,511,499
24. 0 49. 400,000 GAIN
25. 186,000 50. 0