FinAct 2 Prelim - Questions - Answer

National Teachers College, College of Accountancy and Business Solution-Answer-Discussion
FIN-ACT-02 Financial Accounting Theory and Practice 2 Preliminary Exam – 12.20.2017
INSTRUCTIONS:
o You are provided with two (2) solution sheets and one (1) answer sheet.
o For Multiple Choice (MC) type of questions, write in CAPITAL form, the letter that
represents your chosen answer. One (1) point each.
o For MC - identify whether the statements given/presented about specific accounting topic
is true/correct/right or false/incorrect/wrong.
o For Computation (Case #) type of questions, write your final answer legibly on the
respective number in the answer sheet. Two (2) points each.
o For Cases - use your solution sheets to prepare a short solution format or pattern.
o Only Calculator is to be used in computing. NO cellular or similar type electronic or machine other
than calculator is allowed.
o Erasable ink-pen (sample, Pilot-frixion) is NOT allowed. You can use pencil but final answer
written in your answer sheet must be in ink or ball point pen or ink-pen.
If you have other questions, ask now and not later. Open your mind, have fun learning, and begin!
1. MC - The following statements are about lease accounting
i - A lessee recognizes both a right of use asset and a lease liability. TRUE
ii - The lease liability is initially measured at the present value of the lease payments that are
not yet paid as at the commencement date and subsequently measured similar to an
amortized cost financial liability. TRUE 1
iii - Lease payments, if reasonably certain, includes purchase option or termination penalties for
optional extension periods. TRUE
A. One of the statements is true C. Only one statement is false

B. All of the statements are true D. All of the statements are false
i - Discount rate is the interest rate other than in the lease contract, if not determinable, then
the lessee’s employ the incremental borrowing rate. FALSE Implicit in the lease agreement
ii - The right-of-use asset consist of initial measurement of lease liability, advance lease
payments received less lease incentives received, initial direct costs, decommissioning and
restoration costs. TRUE
iii - For short-term and low value leases, lessee may elect to recognize lease payments as expense
over the lease term using the straight line basis or another more appropriate basis. TRUE
C. Two statements are correct G. Only one statement is correct

D. All of the statements are incorrect H. All of the statements are correct
1
i - A lessor classifies a lease as either a finance lease or an operating lease. A finance lease
transfers substantially all the risks and rewards incidental to ownership of an underlying
asset while operating lease does not. TRUE
ii - Indicators of a finance lease are transfer of ownership, bargain purchase option, 75% present
value of lease payment is substantially all, 90% major part of useful life finance, and
specialized in nature. FALSE 75% major part of useful life finance, 90% present value of lease
payment is substantially all – baliktad po.)
iii - Net investment is equal to the present value of lease payments and present value of
unguaranteed residual value. TRUE
A. Only one statement is wrong K. One of the statements is right

B. All of the statements are wrong L. All of the statements are right
4. Case 1 – Una Corp’s shareholders’ equity showed the following balances as of December 31,
20x1
6% cumulative preference shares, P100 par, liquidating value P110 per share, authorized,
issued and outstanding 50,000, P5,000,000.
Ordinary share, P5 par; 1,000,000 shares authorized; issued and outstanding 700,000 shares
2
including premium on issuance, P4,000,000.
Unappropriated Retained earnings, P3,000,0000 (erratum - Three Million po… P3,000,000)
Dividends on preferred shares have been paid up to 20x1. At December 31, 20x1, what would
be Una’s book value per ordinary share?
SOLUTION-ANSWER
o Question: What would be Una’s book value per ordinary share?

o Formula/Concept:
Total Stockholders’ Equity
P5,000,000. Preference shares (PS)
P4,000,000 Ordinary share including premium on issuance
P3,000,000 Unappropriated Retained earnings
P12,000,000 Total
LESS: Equity of Preference shares (tanggaling lahat)
PS – 6% cumulative, liquidating value P110 per share
P5,500,000 …………… Contributed P5,000,000 + liquidation premium (110-100) x 50,000)
NOTE: Dividends on preferred shares have been paid up to 20x1
Contributed P5,000,000 + liquidation premium (110-100) x 50,000)
P6,500,000 NET: Equity of Ordinary shares
700,000 Divided by Outstanding Ordinary shares
P 9.28571 BOOK VALUE per Ordinary shares
o ANSWER - P 9.28571 OR P 9.29 OR P 9.3

2
i - In initial accounting for finance lease, the lessor recognizes leased asset and recognized net
investment in the leases and in the subsequent accounting, the lessor apportions lease
payments as settlement of both interest and principal of net investment. FALSE
DeRecognized
ii - Initial direct costs are included automatically in the net investment and there’s no need to
add it separately. TRUE
iii - A manufacturer or dealer lessor recognizes profit from a sales type lease at the
commencement date, in addition to interest income over the lease term which direct costs are
outright expense. TRUE
C. Two statements are correct L. Only one statement is correct

D. All of the statements are incorrect M. All of the statements are correct
i - A lessor accounts for both guaranteed and unguaranteed residual value. Present value of
residual value is added to sales while present value of unguaranteed residual value is
deducted from cost of sales. Profit is the same whether residual value is guaranteed or not.
TRUE 3
ii - In operating lease, lessee recognizes lease payments as lease income over the lease term
using straight line basis or another more appropriate basis. FALSE - Lessor
iii - An intermediate lessor classifies a sublease as a finance lease or an operating lease. TRUE
E. Only one statement is wrong R. One of the statements is right

F. All of the statements are wrong S. All of the statements are right
i - In sublease, if the head lease is a short-term lease, the sublease is an operating lease.
Sublease is classified by reference to the right to use asset arising from the lead lease rather
than by reference to the underlying asset. TRUE
ii - In a sale and lease back arrangement, both seller-lessee and buyer-lessor determine whether
the transaction qualifies as a sale under PFRS 15. TRUE
iii - In a sale lease arrangement, the seller-lessee measures the tight of use asset as the
proportion of the asset’s carrying amount that relates to the rights retained, recognizes gain
or loss on the portion that relates to the rights transferred. TRUE
A. One of the statements is true E. Only one statement is false

B. All of the statements are true G. All of the statements are false
3
8. Case 2 - Dos Corp provided the following information pertaining to its shareholders’ equity
section as of Fiscal year ended September 2017:
Cumulative preference share capital, 9%, P150 par 750,000

Ordinary share capital, P120 par 1,200,000
Total premium on share capital…………………………… 250,000
Retained Earnings 800,000
Treasury from Ordinary shares, 1,000 shares at cost (150,000)
Dividends on preference shares are in arrears for two fiscal years. What is the book value of
preference share capital as of the end of 2017 fiscal year?
SOLUTION-ANSWER
o Question: What is the book value of preference share capital as of the end of 2017 fiscal
year?
o Formula/Concept:
Equity of Preference shares
P750,000 PS capital contribution – Cumulative 9%
P135,000 PS Dividend in arrears (P750,000 x 9% x 2 yrs)
NOTE: Dividends on PS are in arrears for two fiscal years
P885,000
5,000
Total Equity of Preference shares
Divided by Outstanding PS (P750,000 / P150/shr)
4
P 177 BOOK VALUE of Preference shares
o ANSWER - P 177
i - In initial accounting for finance lease, the lessee derecognizes leased asset and recognized net
investment in the leases and in the subsequent accounting, the lessor apportions lease
payments as settlement of both interest and principal of net investment. FALSE - Lessee
ii - Indicators of a finance lease are transfer of ownership, bargain purchase option, 80% major
part of useful life finance, 95% present value of lease payment is substantially all or fair
value, and specialized in nature. TRUE - 75% or more; 90% or more
iii - A lessee classifies a lease as either a finance lease or an operating lease. A finance lease
transfers substantially all the risks and rewards incidental to ownership of an underlying
asset while operating lease does not. FALSE - Lessor
A. Only one statement is wrong D. One of the statements is right

B. All of the statements are wrong E. All of the statements are right
4

i - Lease payments consist of fixed payments, variable payments based on rate, guaranteed
residual value, and if reasonably certain, purchase option or termination penalties for
optional extension periods. TRUE
ii - The lease liability includes present value of the lease payments that are not yet paid as at the
commencement date and subsequently measured similar to an amortized cost financial
liability. TRUE
iii - In a sale and lease back contract, either seller-lessee and buyer-lessor determines whether
the transaction qualifies as a sale under PFRS 15. FALSE - both


i - In a sublease, an intermediate lessee classifies a sublease as a finance lease or an operating
lease. FALSE - Lessor
ii - In operating lease, lessor can recognizes lease payments as lease income over the lease term
using a different or more appropriate accounting basis than using straight line basis. TRUE
iii - Discount rate is the interest rate implicit in the lease, if not determinable, then the lessee’s
employ the incremental borrowing rate. TRUE
5
E. One of the statements is true M. Only one statement is false
F. All of the statements are true P. All of the statements are false
12. Case 3 – Trio Corp had outstanding 50,000 8% preference shares with P100 par value and
125,000 P30 par value ordinary shares. Dividends have been paid every year except last year
and the current year. The preference shares are cumulative and nonparticipating. The entity
distributed P2,500,000 as dividend in the current year. What is the dividend payable to the
ordinary shareholders?
SOLUTION-ANSWER
o Question: What is the dividend payable to the ordinary shareholders?
o Formula/Concept:
P2,500,000 Total Dividend Distributable
P800,000 LESS Dividend to PS (50,000shrs X P100/shr X 8% X 2yrs)
NOTE: Dividends have been paid every year except last year and the current year
Preference shares are cumulative and nonparticipating (NO need to apportion)
P1,700,000 Dividend for Ordinary shares
o ANSWER - P 1,700,000
5
13. MC - The following statements pertains to employee benefits accounting
i - Employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees and may be short-term, post-employment, other long-term or
termination. TRUE
ii - An entity accrues those accumulating, vesting or non-vesting compensated absences that are
expected to be paid in cash or taken in the future in which the entity incurs present
obligation. TRUE
iii - Accumulating compensated absences are those that can be carried over to the next period if
not fully used during the year of entitlement. Non-accumulated are those that expire if not
fully used during the year of entitlement. TRUE

14. MC - The following statements pertains to employee benefits
i - Employee benefits are any forms of consideration given by an entity in exchange for service
rendered by employees and should be short-term or other long-term or termination. FALSE
– NOT should be 6
ii - Accumulating compensated absences are those that cannot be carried over to the next period
if not fully used during the year of entitlement. Non-accumulated are those that expire if not
fully used during the year of entitlement. FALSE – can
iii - Accumulating compensated absences can be both vesting and non-vesting which can be
monetized. FALSE – either be
C. Two statements are correct F. Only one statement is correct

D. All of the statements are incorrect G. All of the statements are correct
6
15. Case 4 – Quadro Company granted 10,000 share options to each of its ten executives on
July 1, 2010. The options vest on January 1, 2015. The fair value of each option on July 1,
2010 is P50 with an option price of P40. It is anticipated that all of the share options will vest
on January 1, 2015. What amount should be reported as increase in expense for the year
ended December 31, 2010?
SOLUTION-ANSWER
o Question: What amount should be reported as increase in expense for the year ended
December 31, 2010?
o Formula/Concept:
a. No of Employees 10
b. No of Equity Shares ………………………………………. X 10,000 / each
c. FAIR VALUE at Grant Date (Note 1)……………………………………… X Php 50
d. Fair Value of the Option for the entire VESTING – Service period P5,000,000
e. Divided by vesting period (July 2010 to Dec 2014) 4.5 years
Note 1 -
Granted… to each of its ten executives on July 1, 2010
7
The fair value of each option on July 1, 2010 is P50
(d / e) Compensation expense to be recognized

2010 - July 1 to December 31, 2010 (5,000,000 x point 5 divided by 4 point 5 ) P555,555.56
2011 - December 31, ………………………………………………………….. P1,111,111.11
2012 - December 31, ……………………………………………………………. P1,111,111.11
2013 - December 31, ………………………………………………………….. P1,111,111.11
2014 - December 31, ………………………………………………………….. P1,111,111.11
o ANSWER - P 555,555.56 OR P 555,555.60 OR P 555,556
o NOTE
Journal Entry upon Granting
July 1 – Memo Enty
Journal Entry to recognized compensation
December 31 - Salaries Expense

Premium on Share Capital - Option
7
i - Accumulating compensated absences may either be vesting or non-vesting. Vested benefits

are monetized; non-vested benefits are not monetized. TRUE
ii - Employee benefits are any forms of consideration given by an entity in exchange for service
rendered by employees and may be short-term, post-employment, other long-term or
termination. TRUE
iii - No liability is accrued for non-accumulated compensated absences. Expense is recognized

when absences occur. TRUE
A. Two statements are correct G. Only one statement is correct

B. All of the statements are incorrect H. All of the statements are correct
i - Post employment benefits are employee benefits other than termination benefits that are
payable after the completion of employment. TRUE
ii - Post employment benefit plans may either be defined contribution plan or define benefit plan.
TRUE
iii - When a post-employment benefit plan contains characteristics of both define contribution and
8
define benefit, the plan is considered defined benefit. TRUE
C. Only one statement is wrong R. One of the statements is right

D. All of the statements are wrong T. All of the statements are right
i - Define contribution plan is where the employee’s retirement benefit is dependent on the
employer’s contributions to the plan and on the plan’s investment performance. The employee
retains the risk that the benefits to be received may be insufficient. TRUE
ii - Defined benefit plan is where the employer assures the employee a definite amount of
retirement benefit. The employer retains the risk that funds needed to pay the agreed
benefits may be insufficient. TRUE
iii - Accounting for defined contribution plan is simple where actuarial computations are not
required. Retirement benefits expense is equal to the agreed periodic contributions to the
fund. TRUE
A. One of the statements is true F. Only one statement is false

B. All of the statements are true G. All of the statements are false
8
19. Case 5 – On June 30, 2015, Star Five Co granted compensatory share options for 30,000
P20 par value ordinary shares to certain key employees. The market price of the share on
that date was P36 and the option price was P30. Using an expert report on option pricing
model, it measured the total compensation expense to be 90% of the market price on that
date. The options are exercisable beginning January 1, 2018, provided the key employees are
still in entity’s employ at the time the options are exercised.
The options expire on June 30, 2019. On January 15, 2018, when the market price of the
share was P42, all 30,000 options were exercised. What is the compensation expense for 2017?
SOLUTION-ANSWER (see similar problem at #15 case 4 above)
o Question: What is the compensation expense for 2017?
o Formula/Concept:
FAIR VALUE at Grant Date (Note 1 – 30,000 x P36 x 90%)……………………………………… Php 972,000
Fair Value of the Option for the entire VESTING – Service period
Note 1 -
(a) Using an expert report on option pricing model, it measured the total compensation expense to be 90%
of the market price on that date
(b) The market price of the share on that date was P36 9
Fair Value of the Option for the entire VESTING – Service period P,972,000
Divided by vesting period (Note 2 - Granted on June 30 2015 to December 31, 2017)) 2.5
Note 2 -
(a) On June 30, 2015, Star Five Co granted compensatory share
(b) The options are exercisable beginning January 1, 2018…
Compensation expense to be recognized

December 31, 2015 (5,400,000 x point 5 divided by 2 point 5 )……………. P194,400
December 31, 2016………………………………………………………….. P388,800
December 31, 2017……………………………………………………………. P388,800
o ANSWER - P 388,800
9
i - The accounting for defined benefit plan is complex where actuarial computations are
required. Defined benefit cost is computed using actuarial assumptions and may not be equal
to contributions made to the fund. TRUE
ii - PAS 19 requires the use of the projected unit credit method (PUCM) in actuarial
computations for defined benefit plans because PUCM uses future salary levels of plan
participants. TRUE
iii - Actuarial assumptions consist of assumptions that relates to employee characteristics and
assumptions relating to market characteristics. TRUE
A. Only one statement is wrong Q. One of the statements is right

B. All of the statements are wrong V. All of the statements are right
i - If Present value of defined benefit obligation exceeds fair value of plan assets, the difference
is deficit. This deficit represents the net defined benefit liability to be presented in the
statement of financial position. TRUE
ii - If fair value of plan assets exceeds present value present value of defined benefit obligation,
the difference is surplus. The lower between the surplus and the asset ceiling represents the
10
net defined benefit asset. TRUE
iii - The plan asset is the present value of economic benefits from refunds from the plan or
reductions in future contributions to the plan. FALSE – asset ceiling
A. Two statements are false G. Only one statement is false

B. All of the statements are true H. All of the statements are false
i - Plan assets are legally separate from the employer, used only to meet retirement obligations,
and not available to the employer’s creditors even in cases of bankruptcy. TRUE
ii - Return on plan assets represents the actual income of the fund for the period including
realized or unrealized gains and losses minus costs of managing the fund and taxes payable
by the plan itself. TRUE
iii - Service cost consists of current service cost, past service cost and any gain or loss on
settlement. TRUE
A. Two statements are correct C. All of the statements are incorrect

B. Only one statement is correct D. All of the statements are correct
10
23. Case 6 - On February 1, 2016, Sixty Corp granted share options to certain key employees
as additional compensation. The options were for 100,000 ordinary shares of P10 par value at
an option price of P15 per share. On the grant date, the market price of this share on grant
date was P20 and the fair value of each share option is P8. The options were exercisable
beginning February 1, 2016 and expire on December 31, 2018. On April 1, 2016, all share
options were exercised. What amount of increase in liability should be reported in 2016?
SOLUTION-ANSWER
o Question: What amount of increase in liability should be reported in 2016?
o Concept / Formula:
RULE - If the options was exercised early or immediately or within the operating year, the total value of the
options shall be IMMEDIATELY be recognized in FULL as expense.
(a) On February 1, 2016, Sixty Corp granted share options

(b) On April 1, 2016, all share options were exercised
No of Equity Ordinary Shares ……………………………………. 100,000 / each

FAIR VALUE at Grant Date (Note 1)……………………………………… X Php 8
Fair Value of the Option for the entire VESTING – Service period P800,000
NOTE: On the grant date, the market price of this share on grant date was P20 and the fair value of each
share option is P8
11
o ANSWER - P 800,000
o LECTURE NOTE
Journal Entry upon Granting
February 1 – Memo Enty
Journal Entry to recognized compensation

April 1 - Salaries Expense 800,000
Premium on Ordinary Share Capital – Option…….. 800,000
24. MC - The following statements relates to Income/deferred taxes accounting
i - If in the period of origin, recognition of a revenue or expense will result to accounting income
being less than the taxable income, the temporary difference is a future deductible amount.
TRUE
ii - A change in deferred tax is a change in deferred tax liability plus the change in deferred tax
asset. FALSE – plus or minus
iii - A future taxable amount is indicated if the carrying amount of an asset by its tax base.
FALSE – when assets exceeds
A. Two statements are correct D. All of the statements are incorrect

B. Only one statement is correct E. All of the statements are correct
11
i - Temporary difference is a difference between the tax basis of an asset or liability and its
carrying amount in the financial statements that will result in taxable or deductible amount
in the future years when the reported amount of the asset or liability is recovered or settled.
TRUE
ii - Permanent differences do not have tax consequences and do not create an income tax asset or
income tax liability. TRUE
iii - Permanent differences generally are sub-classified into non-taxable revenues and non-
deductible expenses. TRUE
A. Only one statement is wrong C. All of the statements are wrong

B. Two statements are wrong D. All of the statements are right
26. Case 7 – Seven Seas Company had 500,000 ordinary shares issued and outstanding on
December 31, 2014. During 2015, no additional ordinary shares were issued. On January 1,
2015, the entity issued 400,000 noncumulative and nonconvertible preference shares. During
2015, the entity declared and paid P200,000 cash dividend on the ordinary share and
P100,000 annual dividend on the preference share. Net income for 2015 was 750,000. What
amount should be reported as basic earnings per share?
12
SOLUTION-ANSWER
o Question: What amount should be reported as basic earnings per share?
Net income 750,000

Less: Preference dividend (100,000)
Net income for ordinary 650,000
Divided by Number of shares 500,000
o ANSWER - P 1.3 OR P 1.30
i - Deferred tax assets and deferred tax liabilities are not discounted. TRUE
ii - Account Offset of deferred tax assets and liabilities is permitted if the entity has legal
enforceable right of offset and the taxes are levied by direct taxing authority. FALSE – Not
Direct but same taxing authority “District” or “Region” as permitted
iii - Unused tax losses and unused tax credits that cannot be carried over to the next accounting
period as deferred tax assets if they have no economic benefit. TRUE
12
A. One of the statements is true W. Only one statement is false

B. All of the statements are true X. All of the statements are false
i - Temporary differences are differences between the carrying among of an asset or liability and
its tax base. TRUE
ii - A temporary difference that makes financial income greater than taxable income is a taxable
temporary difference. TRUE
iii - Taxable temporary differences gives rise to deferred tax asset or liability. FALSE – as tax
liability only.

i - Intraperiod tax allocation pertains to the recognition of deferred tax assets and liabilities.
FALSE - Interperiod
13
ii - Intraperiod tax allocation pertains to the allocation of income taxes during the period to the
various items of related income that gave rise to the taxes. TRUE
iii - Current tax assets and liabilities are presented as current items while deferred tax assets
and liabilities are presented as noncurrent items. TRUE
C. Only one statement is wrong F. One of the statements is right
D. All of the statements are wrong G. All of the statements are right
30. Case 8 – On April of current year, Eighties Corporation was organized with the following
capital structure:
10% cumulated preference share capital, par value of P25, liquidation value of P30, authorized,
issued and outstanding 500,000 shares, P12,500,000
Ordinary share capital, par value P100, authorized 50,000 shares issued and outstanding, 40,000
shares, including premium on acquisition, P4,500,000
At year end, the operation resulted in an income of P6,000,000 and no dividends were declared
yet. What is the book value per ordinary share?
SOLUTION-ANSWER (similar to #4 - Case 1)
o Question: What is the book value per ordinary share?

Continued next…
13
o Formula/Concept:
P12,500,000 Preference shares (PS)
P4,500,000 Ordinary share including premium on issuance
P6,000,000 (Income) Retained earnings
P23,000,000 Total
P12,500,000 PS – 10% cumulative at par P25
P2,500,000 …………… Liquidation premium (30-25) x 500,000 shares
P1,250,000 Dividends on Income (12,500,000 x 10%)
P16,250,000 Total
P6,750,000 NET: Equity of Ordinary shares

40,000 Divided by Outstanding (NOT Authorized)Ordinary shares
o ANSWER - P 168.75

i - A deferred tax asset is recognized only to the extent that it is realizable. When deferred tax
assets will not be realized, the deferred tax asset is reduced to its realizable value. TRUE
ii - When a deferred tax asset reverses, income tax payable is reduced. When a deferred tax 14
liability reverses, income tax payable is increased. TRUE
iii - The reversal of deferred tax asset or liability affects current tax expense or income tax
payable and income tax expense. FALSE - not the income tax expense
A. One of the statements is true Q. Only one statement is false
B. All of the statements are true R. All of the statements are false
i - Deferred tax assets and deferred tax liabilities are measured at the tax rates that are
expected to apply to the period of their reversals, if there are changes in tax rates provided
that the new tax rates have been enacted or substantially enacted in the next reporting
period. FALSE - provided that the new tax rates have been enacted or substantially enacted by
the end of the reporting period.
ii - A temporary difference that makes financial income less than taxable income is deductible
temporary difference that give rise to a deferred tax asset. TRUE
iii - Income tax expense pertains to current tax expense and not deferred tax expense. FALSE –
Comprises both current tax expense and deferred tax expense
C. Two statements are correct K. Only one statement is correct

D. All of the statements are incorrect M. All of the statements are correct
14
i - Deferred tax assets can be discounted upon application for tax offset of tax liability. FALSE
– cannot be discounted
ii - Offsetting of deferred tax assets and liabilities is permitted only if the entity has legal
enforceable right of offset and the taxes are levied by the same taxing authority. TRUE
iii - Unused tax losses and unused tax credits that can be carried over to the next accounting
period may be recognized as deferred tax assets if they are expected to provide economic
benefit. TRUE
A. Only one statement is wrong D. All of the statements are wrong

B. One of the statements is right E. All of the statements are right
34. Case 9 – On December 31, 2015 and 2016, Nineties Corp had outstanding 40,000 6%
cumulative preference shares of P100 par value and 200,000 ordinary shares of P10 par
value. On December 31, 2015, preference dividends in arrears amounted to P120,000. Cash
dividends declared in 2016 totaled P450,000. What amount should be reported as dividend
payable to ordinary shares in 2016?
15
SOLUTION-ANSWER (similar to #12 Case 3)
o Question: What amount should be reported as dividend payable to ordinary shares in

2016?
o Formula/Concept:
P450,000 Total Cash dividend Distributable
LESS Dividend to Preference Share
P120,000 2015 – Dividends in arrears
P240,000 2016 – Share on earnings (40,000 shrs X P100/shr X 6%)
P90,000 NET Dividend for Ordinary shares
o ANSWER - P 90,000
i - Taxable temporary differences gives rise to deferred tax liability. TRUE
ii - Interperiod tax allocation pertains to the recognition of deferred tax assets and liabilities.
TRUE
iii - Interperiod tax allocation pertains to the allocation of income taxes during the period to the
various items of related income that gave rise to the taxes. FALSE - Intraperiod
15
C. Only one statement is wrong G. One of the statements is right

D. All of the statements are wrong H. All of the statements are right
i - A deferred tax liability is recognized only to the extent that it is payable. When deferred tax
assets will not be realized, the deferred tax asset is reduced to its realizable value. TRUE
ii - When a deferred tax asset reverses, income tax payable is increases. When a deferred tax
liability reverses, income tax payable is increased. FALSE - reduced
iii - Income tax expense comprises current tax expense and deferred tax expense. TRUE
A. Two statements are false C. Only one statement is false

i - The reversal of deferred tax asset or liability affect only the current tax expense or income tax
payable and not the income tax expense. TRUE
ii - If there are changes in tax rates, deferred tax assets and deferred tax liabilities are measured 16
at the tax rates that are expected to apply to the period of their reversals, provided that the
new tax rates have been enacted or substantially enacted by the end of the reporting period.
TRUE
iii - A temporary difference that makes financial position less than taxable income is deductible
temporary differences that give rise to a deferred tax asset. FALSE – financial income or
income statement
A. Only one statement is correct C. All of the statements are incorrect
B. One of the statements is incorrect D. All of the statements are correct
38. Case 10 – Teen Inc has an authorized capital of 1,000 P100 par 8% cumulative preference
shares and 100,000 P10 par ordinary shares. The equity account balances as of December 31,
20x1 are as follows:
P50,000 Cumulative preference share
P90,000 Ordinary share
P9,000 Share premium
P13,000 Retained earnings
P2,000 Treasury shares, ordinary – 100 shares at cost
Dividends on preferred stock are in arrears for the year 20x1. What would be the book value per
ordinary shares at December 31, 20x1?
Continued next…
16
SOLUTION-ANSWER (another analogy of #8 - Case 2 )
o Question: What would be the book value per ordinary shares at December 31, 20x1?
o Formula/Concept:
P50,000 Preference shares (PS)
P90,000 Ordinary share including premium on issuance
P9,000 Share Premium
P13,000 Retained earnings
(P2,000) Treasury Shares
P160,000 Balance
P50,000 PS – 8% cumulative at par P100
P4,000 …………… Dividends in arrears for the year 20x1 (50,000 x 8%)
P54,000 Total
P106,000 NET: Equity of Ordinary shares

Divided by Outstanding (NOT Authorized) Ordinary shares
9,000 …………………Issued - ( P90,000 ordinary contributed capital / P10 par value per share )
(100) …………………Re-acquired / Taken back (Treasury – Ordinary shares (given)
8,900 Outstanding Shares

17
o ANSWER - P 11.91 OR P11.9 OR P12
i - There is a contract of lease if there is an identified asset and the contract conveys the right to
control the use of the identified asset for a period of time in exchange for consideration.
TRUE
ii - A lessor shall recognized in its accounting records, at lease commencement date, a right of
use asset and a lease liability. FALSE - Lessee
iii - The lessee shall classify the right of use asset based on the nature of the underlying asset and
shall measure it depending on the accounting model/method used for the class of assets to
which the underlying asset belongs. TRUE

17
i - The right of use asset shall be initially recognized at cost, including lease payments of the
lease at commencement date, present value of lease payments not yet paid at commencement,
initial direct costs incurred by the lessee, and present value of decommissioning costs to the
extent recognized as a provision or allowance. TRUE
ii - The lease liability is initially measured at the present value of the lease payments that are
not yet paid to the lessor at commencement date, discounted at the implicit interest rate of
the lessor. TRUE
iii - If the lessee cannot practically determine the lessor’s implicit rate, the lessee shall use its
incremental borrowing rate. TRUE
A. Two statements are correct N. All of the statements are incorrect
B. Only one statement is correct O. All of the statements are correct
41. Case 11 – Eleven-Seven Corp had 100,000 ordinary shares outstanding on January 1, 2015. In
addition on January 1, 2015, the entity had issued 10,000 convertible cumulated 5%
preference shares with P100 par. These preference shares were converted on September 1,
2015. Each preference share was converted into six ordinary shares. The preference dividends
for the entire year were paid in full before the conversion. The entity has no other potentially
dilutive securities. Net income for the current year was P2,000,000. What amount should be
reported as diluted earnings per share?
18
SOLUTION-ANSWER
o Question: What amount should be reported as diluted earnings per share?
RULE – 1. The averaging procedure is NOT relevant in conversion within the year.
Case Facts –
 January 1, 2015, the entity had issued 10,000 convertible cumulated 5% preference shares with
P100 par
 These preference shares were converted on September 1, 2015
 Each preference share was converted into six ordinary shares
2. Under diluted EPS, annual dividend on CONVERTIBLE preference shares is NOT to be deducted from
NET INCOME.
P2,000,000 Net Income for the current year

Divided by Outstanding (NOT Authorized) Ordinary shares
100,000 shares…………Balance– on January 1, 2015.
60,000 shares……….. Converted PS to Ordinary (10,000 X into six (6) Ordinary shares)
o ANSWER - P 12.5
18

i - The lessee records depreciation on the leased asset based on the economic life of the asset, if
there is reasonable certainty that the lessee will obtain ownership by the end of the lease
term either through outright transfer of title at the end of the lease term as contained in the
lease contract or exercise of the bargain purchase option. TRUE
ii - If there is no reasonable certainty that the lessee will obtain ownership by the end of the
lease term, the right of use asset shall be depreciated over the shorter between the lease term
and the asset’s remaining life using the guaranteed residual value. TRUE
iii - If the right of use asset is an investment property and the lessee applies the fair value
accounting to its investment property , the lessee shall apply the fair value to all right of use
assets that meet the definition of investment property and no depreciation shall be
recognized. TRUE
C. Only one statement is wrong J. One of the statements is right
D. All of the statements are wrong K. All of the statements are right
43. MC - The following statements are about Lease accounting

I. A lessee may elect not to apply the recognition and measurement principles for leases
with lease term of 12 months or less and leases for which the underlying assets is of
low value. TRUE
II. If the lessee elects to apply the recognition and measurement exemptions, it shall
19
recognize the lease payments as an expense under the straight line basis, unless
another systematic bases is more representative of the lessee’s benefits from the
underlying asset. TRUE
III. A lease that contains a purchase option is not a short-term lease and an asset that is
being subleased by a lessee is not qualified as a low-value asset. TRUE
A. One of the statements is true O. Only one statement is false

B. All of the statements are true P. All of the statements are false

i - Applying the exemption for short-term leases must be made to a class of underlying asset,
while exemption for low-value assets can be exercised on a lease-by-lease basis. TRUE
ii - A lessor shall classify each of its leases as either an operating lease or a finance lease. TRUE
iii - A lease is a finance lease if it transfers substantially all the risks and rewards incidental to
the ownership of the asset to the lessee, otherwise it is to be classified as operating lease.
TRUE
C. Two statements are correct F. All of the statements are incorrect

D. Only one statement is correct G. All of the statements are correct
19
45. Case 12 – Dozen Corp had 200,000 ordinary shares of P20 par value and 20,000 shares of
P100 par, 6% cumulative, convertible preference share capital outstanding for the entire year
ended December 31, 2015. Each preference share is convertible into 5 ordinary shares. Net
income for the current year was P840,000. What amount should be reported as diluted
earnings per share?
SOLUTION-ANSWER (similar to #41 – case 11)
o Question: What amount should be reported as diluted earnings per share?
RULE – 1. The averaging procedure is NOT relevant in conversion within the year.
Case Facts –
 20,000 shares of P100 par, 6% cumulative, convertible preference share capital outstanding
 Each preference share is convertible into 5 ordinary shares
2. Under diluted EPS, annual dividend on CONVERTIBLE preference shares is NOT to be deducted from
NET INCOME.
P840,000 Net Income for the current year

Divided by Outstanding (NOT Authorized) Ordinary shares 20
200,000 shares…………Balance– on December 31, 2015.
100,000 shares……….. Converted PS to Ordinary (20,000 X into 5 Ordinary shares)
P 2.8 Diluted per Ordinary shares
o ANSWER - P 2.8
i - Under operating lease, the lessor recognizes on straight line basis lease income over the lease
term, unless another systematic basis is more representative of the time pattern in which
benefit from the asset is diminished. TRUE
ii - Initial direct costs incurred by the lessor are added to the carrying amount of the underlying
asset. TRUE
iii - Contingent rentals are deducted to rent revenue in the period in which they arise and
executory costs are charged to expense when incurred. FALSE - Added
A. One of the statements is true C. All of the statements are true

B. Only one statement is false D. All of the statements are false
20
i - The lessor classifies finance lease either as direct finance lease or dealer’s (manufacturer’s)
lease. TRUE
ii - In a direct finance lease, the lessor is a financing company that earns finance revenue over
the lease term. TRUE
iii - In a delear’s lease or manufacturer’s lease, the lessor uses leases to sell its inventory. TRUE

i - Under financing lease, the lessee recognizes on straight line basis lease income over the
lease term, unless another systematic basis is more representative of the time pattern in
which benefit from the asset is diminished. FALSE – Operating, lessor
ii - The right of use asset shall be initially recognized at cost, which is the sum of lease payments
to the lessor at commencement date, present value of lease payments not yet paid at
commencement, initial direct costs incurred by the lessee, and present value of
decommissioning costs to the extent recognized as a provision or allowance. TRUE 21
iii - A lessee shall recognized in its accounting records, at lease commencement date, a right of
use asset and a lease liability. TRUE
C. Only one statement is wrong S. One of the statements is right

D. All of the statements are wrong T. All of the statements are right
49. Case 13 – Lucky Thirteen Corp had 600,000 ordinary shares outstanding on January 1, issued
120,000 shares on May 1, purchased 60,000 treasury shares on September 1, and issued
90,000 shares on November 1. What is the weighted average number of shares outstanding
for the year?
SOLUTION-ANSWER
o Question: What is the weighted average number of shares outstanding for the year?
RULE – You can use – MOVING per period – NEXT period of CHANGED
OR One-year December-END - UNchanged
Continued next…
21
Illustration - MOVING per period – NEXT period of CHANGED
600,000 x 4 …………………………………………. Jan. (Jan 1 to Apr 30)

(600,000 + 120,000) x 4 ………………………… May (May 1 to Aug 31)
(600,000 + 120,000 less 60,000) x 2……………. Sep (Sep 1 to Oct 31) - Treasury
(600,000 + 120,000 less 60,000 plus 90,000) x 2 Nov (Nov 1 to Dec 31)
810,000 Total
12 Months per year
675,000 weighted average number of shares outstanding for the year
Illustration - One-year December-END - UNchanged
600,000 x 12 Jan (Jan 1 to Dec 31)

120,000 x 8 May (May 1 to Dec 31)
(60,000 x 4) Sept (Sept 1 to Dec 31) - Treasury
90,000 x 2 Nov (Nov 1 to Dec 31
810,000 Total
12 Months per year
675,000 weighted average number of shares outstanding for the year

22
o ANSWER - P675,000
i - Current service cost is the increase in the present value of a defined benefit obligation
resulting from employee service in the current period. TRUE
ii - Past service cost is the change in the present value of the defined benefit obligation for
employee service in prior periods, resulting from either plan amendment or curtailment. Past
service costs whether vested or unvested, are recognized immediately in the period that they
arise. TRUE
iii - The net interest on the net defined benefit liability or asset is computed using a discount rate
that is based on high quality corporate bonds, or in the absence thereof, on government
bonds. TRUE
A. Two statements are correct K. All of the statements are incorrect

B. Only one statement is correct L. All of the statements are correct
22
i - Return on plan assets represents a temporary income of the fund for the period including
realized or unrealized gains and losses minus costs of managing the fund and taxes
chargeable to the plan itself. FALSE – an income
ii - The asset ceiling is the present value of economic benefits from refunds from the plan or
reductions in future contributions to the plan. TRUE
iii - Actuarial assumptions consist of demographic assumptions that relates to employee

characteristics and financial assumptions relating to market characteristics. TRUE
C. Only one statement is wrong G. One of the statements is right

D. All of the statements are wrong H. All of the statements are right
52. Case 14 - On January 1, 2015, 4-Teens Company offered the chief executive officer share
appreciation rights (SAR) with the following terms: Predetermined price, P100 per share;
Number of shares 10,000 shares; Service period – 3 years, 2015 to 2017; Exercise date -
December 31, 2017.
The SAR are exercised on December 31, 2017. The quoted price of the ABC share is P118 on
December 31, 2015, P112 on December 31, 2016, and P124 on December 31, 2017. What 23
amount should be recognized as compensation expense for 2017?
SOLUTION-ANSWER
o Question: What amount should be recognized as compensation expense for 2017?
2015 - Computation base on the condition of the rights to shares

Quoted price ………………………………………. Php 118
LESS: Base / Pre-determined VALUE Php 100
Excess on 2015 Php 18
No of shares X 10,000
Fair Value of the Option as LIABILITY for 3 yrs 180,000
Multiply by Vesting period 1st yr of 3-year liability X 1yr / 3 yrs
Accrued Liability to date (cumulative) 60,000
Note 1 - … with the following terms: Predetermined price, P100 per share…
Journal Entry to Accrue compensation liability

December 31, 2015 Salaries Expense 60,000
Accrued Salaries Payable
Continued next…
23

Quoted price ………………………………………. Php 112
LESS: Base / Pre-determined VALUE Php 100
Difference on 2016 Php 12
Fair Value of the Option as LIABILITY 120,000
Multiply by Vesting period 2nd yr of 3-year liability X 2yrs / 3 yrs
Journal Entry to take up compensation expense

December 31, 2016 Salaries Expense (80,000 less 1st yr 60,000) 20,000
Solution
Market price ………………………………………. Php 124
LESS: BASE VALUE at Grant Date (Note 1 above) Php 100
Multiply by Vesting period 3rd yr of 3-year liability X 3yrs / 3 yrs
24
Journal Entry
December 31, 2014 Salaries Expense (240,000 less 2nd yr 80,000) 160,000
o ANSWER - P160,000
NOTE – The question/requirement is about EXPENSE… NOT Liability …

Thus, expense is NOT cumulative because it is being closed at the end of accounting period
i - Employee benefits should be accounted for either in the form of compensation or financial
assets of the employee. TRUE on the part of the employee
ii - Short term employee benefits that are recognized as liabilities are measured at the
undiscounted amount expected to be paid. Short term compensated absences, including sick
leave, paternity leave, vacation leave, are recognized depending whether they are
accumulating or non-accumulated. TRUE
iii - Accumulating compensated absences are recognized when the employees render service that
increases their entitlement to the benefits. TRUE
24
A. One of the statements is true Q. Only one statement is false

B. All of the statements are true R. All of the statements are false
i - Non-accumulating compensated absences are recognized when the absences occur. They are
recognized at amounts actually paid or at amounts expected to be paid. TRUE
ii - Expected costs of profit sharing and bonus payments are recognized as expense if the entity
has a legal or constructive obligation to make the payments and a reliable estimate of the
obligation can be made. TRUE
iii - Post-employment benefits are classified either as defined contribution plans or defined
benefit plans. TRUE

i - Contributions payable in respect of employee service for the reporting period are recognized 25
as a liability and as an expense, under defined contribution plans. TRUE
ii - Defined benefit plans provide for determinable post-employment benefits based on a formula.
TRUE
iii - Actuarial valuations are applied in measuring the amount to be recognized as expense and
liability under the defined benefit plan. TRUE
A. Only one statement is wrong G. All of the statements are wrong

B. One of the statements is right H. All of the statements are right
56. Case 15 - On January 1, 2015, 10-5 Century Egg Corp granted an employee an option to
buy 20,000 shares for P40 per share, the option exercisable for three years from January 1,
2017. Using a fair value option pricing model, total compensation expense is determined to be
P240,000. The employee exercised the option on September 1, 2017, and sold the 20,000
shares on December 1, 2017. The service period is for two years beginning January 1, 2015.
What amount should be recognized as compensation expense for 2015?
SOLUTION-ANSWER
o Question: What amount should be recognized as compensation expense for 2015?
Continued next…
25
Fair Value of the Option as determined (case facts) P240,000
Divided by vesting period (case facts) 2 years.
Case Facts –
 Using a fair value option pricing model, total compensation expense is determined to be P240,000.
 The service period is for two years beginning January 1, 2015
o ANSWER - P120,000
NOTE –
Journal Entry at Year-end - recognizing compensation expense as a result of the option granted to buy shares.
December 31, 2015 - Salaries Expense 120,000

December 31, 2016 - Salaries Expense 120,000

i - Benefit expense is the net total of the current service cost, interest cost on net defined
liability or net interest on benefit on plan assets, past service cost and the effects of plan
settlements. TRUE
26
ii - Components of retirement benefit cost that are taken to other comprehensive income are the
amounts resulting from remeasurements of the net defined liability or asset and include
actuarial gains and losses and remeasurement because of applying the asset ceiling. TRUE
iii - The amount recognized as a defined liability or asset is the net amount of the defined benefit
obligation and fair value of plan assets. TRUE
C. Only one statement is wrong J. Two statements are wrong

D. All of the statements are wrong K. All of the statements are right
i - An excess of defined benefit obligation over the fair value of plan assets is presented as a
liability in the statement of financial position. TRUE
ii - The excess of fair value of plan assets over the defined benefit obligation is the defined benefit
asset shown in the entity’s financial performance. FALSE - position
iii - Net asset should not exceed the ceiling which is the present value of economic benefits in the
form or reductions of future contributions to or refunds of contributions from the funding
agency. TRUE
26
A. One of the statements is true L. Only one statement is false

B. All of the statements are true N. All of the statements are false
i - Termination benefits are recognizes as a liability and an expense when the entity is
demonstrably committed to either terminate the employment of employees before the normal
retirement date or provide termination benefits as result of an offer made to encourage
voluntary redundancy. TRUE
ii - The separation benefit liability must be discounted to its present value if the benefits fall due
more than 12 months before the end of the reporting period. FALSE - after
iii - An entity shall present the required disclosures related to employee benefits in its financial
statements. TRUE

60. Case 16 - The employee stock purchase plan of STeen Corp specifies that for every P500
withheld from employee’s wages for the purchase of STeen’s ordinary share, STeen will
complement the plan for 25% more based on the withheld amount. 27
The stock is purchased from STeen’s treasury shares at market price on the date of purchase.
The following information pertains to the plan’s transactions for the current year:
STeen compliments amounted to 500,000

Market value of 110,000 shares issued 2,200,000
Carrying amount of treasury shares issued 1,500,000
As the stock purchase plan is exercised, what amount should be recognized as expense?
SOLUTION-ANSWER
o Question: As the stock purchase plan is exercised, what amount should be recognized as
expense?
Rule
For equity compensation plan, compensation expense is calculated as the EXCESS of Market/Fair Value of the
issued shares OVER counterpart contribution of the beneficiary or employee.
Continued next…
27
Market Value of the shares issued (given) ……………………………………. Php2,200,000

LESS: Employees’ contribution for the year ( case fact analogy)………………………… (Php 2,000,000)
Compensation Expense – Immediately recognizable ……………………………. Php 200,000
Case Fact –
 STeen will complement the plan for 25% more based on the withheld amount
Analogy –
P500,000 STeen complemented amount
Divided by 25% of the employees’ withheld contribution
P2,000,000 is the amount of Employees’ Contribution
o ANSWER - P200,000
i - Accumulating compensated absences should not be recognized when the employees render
service that decreases their entitlement to the benefits. TRUE on (double negative indicator
wordings) should be recognized… when increases (Robles- p.496 – 3rd bullet point, 2nd sentence.)
ii - Accumulating compensated absences are measured as the additional amount that the entity 28
expects to pay as a result of the unused entitlement that has accumulated at the end of the
reporting period. TRUE
iii - Employee benefits include all forms of consideration given by an entity in exchange for
service rendered by employees either in the form of compensation in financial assets, goods
and services and equity instruments of the employer. TRUE
F. Two statements are correct H. Only one statement is correct

G. All of the statements are incorrect J. All of the statements are correct
i - Pre-employment benefits are classified either as defined contribution plans or defined benefit
plans. FALSE – “Post” employment
ii - If the benefits exceed the net asset ceiling, economic obligation must be recognized.
FALSE – to be accounted for in the financial performance not financial position
iii - retirement benefit cost account that are based on other comprehensive income are the
amounts resulting from measurements of the net defined asset. FALSE – it must include
actuarial gains and losses and remeasurement because of applying the asset
ceiling.(nakasulat na pala – bonus - smile)
28
A. Two statements are false

B. Only one statement is false
C. All of the statements are true
D. All of the statements are false
i - The termination benefit liability must be discounted to its present value if the benefits fall
due more than 12 months after the end of the reporting period. TRUE
ii - The excess of fair value of plan assets over the defined benefit obligation is the defined benefit
asset shown in the statement of financial position. TRUE
iii - The benefit expense is the net total of the current service cost, interest cost on net defined
liability or net interest on benefit on plan assets, past service cost and the effects of plan
settlements. FALSE - interest cost on net defined liability as a result of past service cost and or
net interest on benefit on plan assets as an effects of plan settlements
E. Only one statement is correct V. One of the statements is incorrect

F. All of the statements are incorrect X. All of the statements are correct
64. Case 17 – 7-10 Inc granted 30,000 share appreciation rights (SAR) which entitled key
employees to receive cash equal to the difference between P20 and the market price of the 29
share on the date each right is exercised. The service period is 2012 through 2014, and the
rights are exercisable in 2015. The Market price of the share was P25 and P28 on December
31, 2012 and 2013, respectively. What amount should be reported as liability under the SAR
on December 31, 2013?
SOLUTION-ANSWER (another perspective with similar case facts in #52 case 14)
o Question: What amount should be reported as liability under the SAR on December 31,
2013?
Case Facts –
 Employees to receive cash equal to the difference between P20 and the market price of the
share on the date each right is exercised

Market price ………………………………………. Php 25
LESS: Base / Pre-determined VALUE (given) Php 20
Fair Value of the Option as LIABILITY for 3 yrs 150,000
Multiply by Vesting period 1st yr of 3-year liability X 1yr / 3 yrs
Continued next…
29

Market price ………………………………………. Php 28
LESS: BASE VALUE Php 20
Multiply by Vesting period 2nd yr of 3-year liability X 2yrs / 3 yrs
o ANSWER - P160,000
NOTE – The question/requirement is about LIABILITY … NOT Expense …

It does mean that LIABILITY is cumulative because it is a real account.
In comparison, to item # 52 - case 14,
the question is Expense, a nominal account being closed at the end of accounting period
i - Accounting profit is also called pre-tax financial income and is computed based on the
requirement of accounting standards and applying the definition of the elements, recognition
criteria and measurement bases of financial reporting. TRUE 30
ii - Taxable income is computed based on the regulation of the National Internal Revenue code
and other regulations of the Bureau of internal revenue. TRUE
iii - Current tax expense is recognized and measured as being the taxable income of the current
period multiplied by the tax rate. TRUE
A. Two statements are correct Y. Only one statement is correct

B. All of the statements are incorrect Z. All of the statements are correct
i - Differences between accounting income and taxable income are non-temporary differences
and temporary differences. TRUE
ii - Permanent differences occur when a revenue or expense is recognized at financial income but
is not recognized in taxable income. TRUE
iii - Temporary differences are sub-classified into non-taxable revenues and non-deductible
expenses. FALSE - Permanent
C. Only one statement is wrong Y. Two statements are wrong

D. All of the statements are wrong Z. All of the statements are right
30
67. Case 18 - During all of 2002, 11-7 Manufacturing Company had 950,000 shares of common
stock outstanding. On June 30, 2002, the company issued 10,000 7 percent convertible bonds
at par. The maturity value of each bond is $1,000. Each bond is convertible into 20 shares of
common stock. None were converted during 2002.
11-7 also had 60,000 stock warrants outstanding for all of 2002. The option price is $10 per
share. The market price of the common stock was $40 on December 31, 2002, and the
average market price for 2002 was $30.
11-7 reported a net income of $3,650,000 for 2002. Assume that the company had a 40
percent income tax rate, how much is the basic earnings per share?
SOLUTION-ANSWER
o Question: How much is the basic earnings per share?
P3,650,000 Reported a net income for 2002

Divided by
950,000 shares Common stock (Ordinary share) outstanding
3.842105 Basic Earnings per share
31
o ANSWER - P 3.842105 OR P 3.84 OR P3.8
i - Permanent difference is a difference between the tax basis of an asset or liability and its
carrying amount in the financial statements that will result in taxable or deductible amount
in the future years when the reported amount of the asset or liability is recovered or settled.
FALSE - Temporary
ii - Temporary differences do not have tax consequences and do not create an income tax asset
or income tax liability. FALSE - Permanent
iii - Current tax expense is recognized and measured as being the taxable income of the current
period multiplied by the tax rate. TRUE

31
i - On an account basis, if in the period of origin of the difference, accounting income exceeds
taxable income, the difference is a future taxable amount. TRUE
ii - A future taxable amount is indicated if the carrying amount of an asset exceeds its tax base.
TRUE
iii - If in the period of origin, recognition of a revenue or expense will result to accounting income
being less than the taxable income, the temporary difference is deductible in the period.
FALSE the temporary difference is a future deductible amount
C. Two statements are correct

D. Only one statement is correct
E. All of the statements are incorrect
F. All of the statements are correct
i - If a future deductible amount exists, a deferred tax asset is recognized to the extent
realizable. TRUE
ii - When the temporary difference reverses, the recorded tax asset or liability is removed from
the statement of financial position. TRUE
32
iii - A change in deferred tax is a change in deferred tax liability plus or minus the change in
deferred tax asset. TRUE
G. Only one statement is wrong J. One of the statements is right

H. All of the statements are wrong K. All of the statements are right
71. Case 19 - At December 31, 2002, K-9 Inc. had 400,000 shares of common stock outstanding.
The company also had 40,000 shares of $7 convertible preferred stock. Each share is
convertible into 4 shares of common stock. (Dividends were declared and paid.)
Transactions during 2003:

July 1, 2003 Sold 200,000 shares
July 8, 2003 Declared 100% stock dividend
September 1, 2003 Sold 120,000 shares
October 1, 2003 Purchased 60,000 shares to be held in treasury
December 31, 2003 Reported a loss of $670,000
What is the basic earnings (loss) per share for the year 2003?
Continued next…
32
SOLUTION-ANSWER (see related concept in #26 case 7 and # 39 case 13)
o Question: How much is the basic earnings per share?

OR One-year December-END – Unchanged (see #39 case 13)
(a) Computation of weighted-average shares - One-year December-END - UNchanged
January 1, 2003 400,000 x 12/12 X 2 (Declared 100% stock dividend)…. 800,000

July 1, 2003 200,000 x 6/12 X 2 200,000
September 1, 2003 120,000 x 4/12 40,000
October 1, 2003 (60,000) x 3/12 (15,000)
Weighted-average 1,025,000
(b) Computation of total Net Loss

Reported net loss for the year ……………………………….. 670,000
ADD:
Preferred share Interest at 7% (40,000 shares X “par” aaah – walang info)
Total Net Loss (kulang ang info)
(c) Solution Formula – 33

Total Net loss for the year ………………………………..
Divided by
Weighted-average – Common (Ordinary) shares
o ANSWER - INVALID TEST
i - The total amount of income tax expenses is the total of the current tax expense and the
deferred tax expense. TRUE
ii - The total amount of income tax income is the total of the current tax income and the deferred
tax benefit. TRUE
iii - A deferred tax asset should be recognized for the carry forward of unused tax losses and
unused tax credits to the extent that it is probable that future taxable profit will be available
against which the unused tax losses and unused tax credits can be utilized. TRUE
Q. Only one statement is wrong

R. Two statements are wrong
S. All of the statements are wrong
T. All of the statements are right
33
i - An enterprise can exercise its right to set off current tax assets and current tax liabilities and
deferred tax assets and deferred tax liabilities, if the entity has a legally enforceable right to
set off the recognized amounts and intends either to settle or a net basis of account
recognition. TRUE
ii - When an entity makes distinction between current and non-current assets and liabilities in
its financial statements, it should not classify deferred tax assets as current assets. TRUE
iii - When an entity provides for current and non-current assets and liabilities in its financial
statements, it should not classify deferred tax liabilities further. FALSE – should be classify
to NON current.
A. Two statements are false X. Only one statement is false

B. All of the statements are true Y. All of the statements are false
i - When an entity makes distinction between current and non-current assets and liabilities in
its financial statements, it should not classify deferred tax liabilities as current liabilities.
TRUE
ii - An enterprise should offset current tax assets and current tax liabilities and deferred tax
assets and deferred tax liabilities, if and only if, the entity has a legally enforceable right to
34
set off the recognized amounts and intends either to settle or a net basis, or to realize the
asset and settle the liability simultaneously. TRUE
iii - The total amount of income tax expenses is the total of the current tax expense less the
deferred tax expense. FALSE – and or plus
A. Only one statement is correct W. All of the statements are incorrect

B. One of the statements is incorrect X. All of the statements are correct
75. Case 20 - The Vision 20-20 Corp. provides the following data for 2003.
Transactions in common stock:

January 1, 2003, beginning balance ............................. 300,000 shares
April 1, 2003, issuance .................................................. 100,000 shares
8% $100 par nonconvertible cumulative preferred stock ... $100,000
Issued at par
6% $100 par convertible cumulative preferred stock ......... $200,000
Issued at $105 Convertible into 20,000 shares
Stock options ........................................................................ 60,000 shares
Option price ................................................................... $25
Average market ............................................................. $35
Year-end market ........................................................... $40
34
The net income for 2003 is $2,300,000. The company's tax rate is 30 percent. No conversions
or options were exercised during 2003. What is the basic earnings per share of the company
for the year 2003?
SOLUTION-ANSWER
o Question: What is the basic earnings per share of the company for the year 2003?
OR One-year December-END – Unchanged (see #39 case 13)
(a) Computation of weighted-average shares - MOVING per period – NEXT period of CHANGED
Jan 1, 2003 to Mar 31, 2003 300,000 X 3/12 ……………. 75,000

Apr 1, 2003 to Dec 31, 2003 (300,000 +100,000) X 9/12 300,000
Weighted-average 375,000
(b) Computation of Net Income distributable to Common (Ordinary) shares

The net income for 2003 is ………………………………………………….$2,300,000
Less:
Preferred share 8% nonconvertible cumulative ($100,000 at 8%)
Preferred share 6% convertible cumulative ($200,000 at 6%) .
(8,000)
(12,000)
35
Net Income distributable to Common (Ordinary) shares …………. $2,280,000
(c) Solution Formula –
Net Income distributable to Common (Ordinary) shares …………. $2,280,000

Divided by
Weighted-average – Common (Ordinary) shares 375,000
o ANSWER - P 6.08
NOTE – Compare # 71 case 19 and this # 75 case 20…
As to result of operation: Case 19 reported NET LOSS while Case 20 is Net INCOME.
Case 19 Net Loss was INCREASED due to Preferred (preference) Interest rate, as an additional burden to fixed
income equity.
As to the weighted average method, you can use either process – Changed or Unchanged
35
76. MC - The following statements are about Lease accounting
i - The lease asset by the lessee includes present value of the lease payments that are not yet
paid to the lease contract at commencement date discounted at the implicit interest rate of
the lessor. TRUE
ii - If the lessor failed to provide the lease contract implicit rate, the lessee can make use of its
incremental borrowing rate. TRUE
iii - A contract of lease that provides a purchase option is a short-term lease and an asset that is
being subleased by a lessee is not qualified as a low-value asset. FALSE – NOT a short-term
lease
A. Two statements are correct C. Only one statement is correct

B. All of the statements are incorrect D. All of the statements are correct
i - The lessor records depreciation on the leased asset based on the economic life of the asset, if
there is reasonable certainty that the ownership will be passed by the end of the lease term
either through outright transfer of title or exercise of the bargain purchase option. FALSE -
Lessee 36
ii - The election of the exemption for short-term leases must be applied to a class of underlying
asset, while the election of the exemption for low-value assets can be exercised on a lease-by-
lease basis. TRUE
iii - Contingent rentals are added to rent revenue in the period in which they arise and executory
costs are charged to expense when incurred. TRUE
C. Only one statement is wrong F. One of the statements is right

D. All of the statements are wrong G. All of the statements are right
78. Case 21 – Da End Corp’s current balance sheet reports the following equity section:
250,000 5% cumulative preference share, P100 par value

350,000 Ordinary share, par value P3.50 per share
125,000 Share premium on ordinary shares
300,000 Retained earnings
Dividends in arrears on the preference share amount to P25,000. If Da End were to be

liquidated, the preference stockholders would received par value plus a premium of P50,000.
What is the book value per ordinary share?
36
SOLUTION-ANSWER (look at the differences and similarities to #4 case 1)

o Question: What is the book value per ordinary share?
o Formula/Concept:
250,000 5% cumulative preference share, P100 par value
350,000 Ordinary share, par value P3.50 per share
125,000 Share premium on ordinary shares
300,000 Retained earnings
1,025,000 Total
PS – 5% cumulative, liquidating value P50,000
300,000 …………… Contributed 250,000 + liquidation premium 50,000
25,000 Dividends in arrears
700,000 NET: Equity of Ordinary shares
100,000 Divided by Outstanding Ordinary shares (350,000/3.50)
o ANSWER - P 7 OR P 7.00
37
That’s all folks!
Season’s Greetings to ALL!
MERRY NEW YEAR to All !!!
37

FinAct 2 Prelim - Questions - Answer

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National Teachers College, College of Accountancy and Business Solution-Answer-Discussion

FIN-ACT-02 Financial Accounting Theory and Practice 2 Preliminary Exam – 12.20.2017

1. MC - The following statements are about lease accounting

A. One of the statements is true C. Only one statement is false

2. MC - The following statements are about lease accounting

C. Two statements are correct G. Only one statement is correct

3. MC - The following statements are about lease accounting

A. Only one statement is wrong K. One of the statements is right

o Question: What would be Una’s book value per ordinary share?

o ANSWER - P 9.28571 OR P 9.29 OR P 9.3

5. MC - The following statements are about lease accounting

C. Two statements are correct L. Only one statement is correct

6. MC - The following statements are about lease accounting

E. Only one statement is wrong R. One of the statements is right

7. MC - The following statements are about lease accounting

A. One of the statements is true E. Only one statement is false

Cumulative preference share capital, 9%, P150 par 750,000

9. MC - The following statements are about lease accounting

A. Only one statement is wrong D. One of the statements is right

10. MC - The following statements are about lease accounting

C. Two statements are correct G. Only one statement is correct

11. MC - The following statements are about lease accounting

o Question: What is the dividend payable to the ordinary shareholders?

13. MC - The following statements pertains to employee benefits accounting

A. One of the statements is true C. Only one statement is false

14. MC - The following statements pertains to employee benefits

C. Two statements are correct F. Only one statement is correct

(d / e) Compensation expense to be recognized

o ANSWER - P 555,555.56 OR P 555,555.60 OR P 555,556

Journal Entry to recognized compensation

December 31 - Salaries Expense

16. MC - The following statements pertains to employee benefits

i - Accumulating compensated absences may either be vesting or non-vesting. Vested benefits

iii - No liability is accrued for non-accumulated compensated absences. Expense is recognized

A. Two statements are correct G. Only one statement is correct

17. MC - The following statements pertains to employee benefits

C. Only one statement is wrong R. One of the statements is right

18. MC - The following statements pertains to employee benefits

A. One of the statements is true F. Only one statement is false

SOLUTION-ANSWER (see similar problem at #15 case 4 above)

o Question: What is the compensation expense for 2017?

Compensation expense to be recognized

20. MC - The following statements pertains to employee benefits

A. Only one statement is wrong Q. One of the statements is right

21. MC - The following statements pertains to employee benefits

A. Two statements are false G. Only one statement is false

22. MC - The following statements pertains to employee benefits

A. Two statements are correct C. All of the statements are incorrect

(a) On February 1, 2016, Sixty Corp granted share options

No of Equity Ordinary Shares ……………………………………. 100,000 / each

Journal Entry to recognized compensation

24. MC - The following statements relates to Income/deferred taxes accounting

A. Two statements are correct D. All of the statements are incorrect

25. MC - The following statements relates to Income/deferred taxes accounting

A. Only one statement is wrong C. All of the statements are wrong

o Question: What amount should be reported as basic earnings per share?

Net income 750,000

o ANSWER - P 1.3 OR P 1.30

27. MC - The following statements relates to Income/deferred taxes accounting

A. One of the statements is true W. Only one statement is false

28. MC - The following statements relates to Income/deferred taxes accounting

A. Two statements are correct C. All of the statements are incorrect

29. MC - The following statements relates to Income/deferred taxes accounting