PAGE 1CANNON BALL REVIEW PART 4 I. CURRENT LIABILITIES – ESTMATED LIABILITIES PREMIUMS: a) Net cost or expense per premium = Cost per premium + Distribution cost (-) Customer remittance b) Total premium expense = Units sold x estimate of redemption x Net cost (a) c) Premium liability = Premium expense less Net cost of premiums distributed WARRANTY: a) Warranty Expense (accrual method) = Sales x total percentage of expected repairs b) Warranty Liability = Warranty expense less actual expenditures of cost of services performed CUSTOMER LOYALTY LIABILITY: a) Allocate the proceeds from the total sale of the grocery items and the loyalty points by using the stand-alone price of each component. b) The allocated amount for the groceries shall be recognized immediately as sales revenue because the gro- ceries or other items have been delivered to customers. c) The amount allocated to the loyalty points shall be a liability. But amortized as revenue as loyalty points are redeemed in exchange for free groceries and discounts. Apply the ratio of number of loyalty points re- deemed to the expected total loyalty points expected to be redeemed. This will be subject to changes in “ac- counting estimates” in later periods. Hence, the cumulative amounts shall be computed and the amounts recognized in prior years are deducted to compute for the current year’s revenue. Problems 1. To increase sales, Lamar Company inaugurated a promotional campaign on June 30, 2017. Lamar placed a coupon redeemable for a premium in each package of cereal sold at P300. Each premium cost P200. A premi- um is offered to customers who send in 5 coupons and a remittance of P50. The distribution cost per premium is P10. Lamar estimated that only 80% of the coupons issued will be redeemed. For the six months ended De- cember 31, 2017, the following is available: Packages of cereal sold 50,000 Premiums purchased 8,000 Coupons redeemed 30,000 1. What is the 2017 premium expense? a. 1,280,000 b. 1,600,000 c. 1,200,000 d. 1,500,000 2. What is the estimated liability for premiums on December 31, 2017? a. 320,000 b. 1,500,000 c. 400,000 d. 1,280,000 2. Jim Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to cus- tomers who send in 10 coupons and a remittance of P5. Data for the premium offer are: 2016 2017 Boxes of soap sold 1,000,000 1,500,000 Number of towels purchased at P50 per towel 40,000 65,000 Number of towels distributed as premium 35,000 58,000 Number of towels to be distributed as premium next period 3,000 5,000 1. What is the 2016 premium expense? a. 1,575,000 c. 1,800,000 b. 1,710,000 d. 1,900,000 PAGE 2 2. What is the December 31, 2016 premium liability? a. 150,000 b. 225,000 c. 450,000 d. 135,000 3. What is the 2017 premium expense? a. 2,835,000 b. 2,700,000 c. 2,925,000 d. 2,250,000 4. What is the December 31, 2017 premium liability? a. 225,000 b. 360,000 c. 315,000 d. 250,000 3. During 2017, Luciana Company introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to peso sales are 3% within 12 months following sale and 5% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2016 and 2017 are as follows: Sales Actual expenditures 2016 40,000,000 1,000,000 2017 50,000,000 5,000,000 1. What is the 2016 warranty expense? a. 1,200,000 b. 3,200,000 c. 2,000,000 d. 1,000,000 2. What is the December 31, 2016 warranty liability? a. 1,000,000 b. 2,000,000 c. 1,200,000 d. 2,200,000 3. What is the 2017 warranty expense? a. 4,000,000 b. 1,500,000 c. 5,000,000 d. 2,500,000 4. What is the December 31, 2017 warranty liability? a. 3,000,000 b. 1,500,000 c. 1,900,000 d. 1,200,000 4. Jordan Company, a grocery retailer, operates a customer loyalty program. The entity grants program members loyalty points when they spend a specified amount on groceries. Program members can redeem the points for further groceries. The points have no expiry date. During 2016, the entity granted 10,000 points with a “stand alone price” fair value of P100. Management expects that 8,000 of these points will be redeemed. The 2016 sales amounted to P7,000,000 during the year based on its stand-alone selling price. On December 31, 2016, 4,000 points have been redeemed in exchange for groceries. In 2017, the management revised its expectations and now expects 9,000 points to be redeemed altogether. During 2017, the entity redeemed 4,100 points. 1. What is the total revenue recognized year ended December 31, 2016? a. 7,000,000 b. 6,125,000 c. 6,562,500 d. 6,200,000 PAGE 3 2. What is the revenue earned from loyalty points for the year ended December 31, 2017? a. 787,500 c. 350,000 b. 400,000 d. 410,000 ANSWERS: A,A,B,D,B,A,A,D,A,D,C,C II. CURRENT LIABILITIES - CONTINUED a) Provisions are liabilities with uncertain timing and amounts. b) Provisions are measured by using the best estimate of the amount to settle the obligation at the balance sheet date. c) If there is a large population of items related to the measurement of the provision, each possibility is weighted by its associated probability (expected value method) d) If there is a range of possible outcomes and each point in that range is as likely as any other, the midpoint of the range is used to measure the provision. e) The provision is discounted if the expected settlement is long-term. If the provision is contractually reim- bursable, the loss is net of the reimbursement but the provision is the total or gross amount. f) Deferred income like the sale of gift certificates, subscriptions and advances from customers are increased by receipts and decreased by the amounts earned and cancellations or forfeitures by the customers making the payments. Problems 1. The following information relate to Merck Company. Company Merck’s statement of financial position date is December 31, 2016. Assume that company Merck’s financial statements are authorized for issue on March 31, 2017. • An amount of P350,000 owing to Company Z for services rendered during December, 2016. • Long-service leave, estimated to be P5,000,000, owing to employees in respect of past services. • Costs of P2,300,000 estimated to be incurred for relocating an employee from Merck’s head office location to another city. The staff member will physically relocate during January 2017. • Provision of P200,000 for the overhaul of a machine. The overhaul is needed every five years and the machine was five years old as of December 30, 2016. • Damages awarded against Merck Company resulting from a court case decided on December 20, 2016. The judge has announced that the amount of damages will be set at a future date, ex- pected to be in April 2017. Merck Company has received advice from its lawyers that the amount of the damages could be anything between P4,000,000 and P5,000,000 How much is Merck Company’s provision in its December 31, 2016 statement of financial position? a. 4,500,000 c. 9,850,000 b. 9,500,000 d. 12,000,000 2. Loyola Company issued a P5,000,000 notes payable on April 1, 2016 bearing an interest rate of 12% that is compounded annually on March 31, 2016. If the principal and the interest is payable on maturity date, what is the accrued interest to be reported on Loyola’s December 31, 2017 statement of financial position? a. 1,200,000 c. 1,104,000 b. 1,272,000 d. 1,000,000 3. John Company sells gift certificates redeemable only when merchandise is purchased. The certificates have an expiration date of two years after issuance date. Upon redemption or expiration, John recognizes the un- earned revenue as realized. Data for 2017 are as follows: Unearned revenue, 1/1/2017 2,500,000 Gift certificates sold 6,000,000 Gift certificates redeemed 6,500,000 Estimated gift certificates not to be redeemed 500,000 Cost of goods sold 60% At December 31, 2017, what should John report as unearned revenue for gift certificates? a. 1,500,000 b. 2,000,000 c. 1,000,000 d. 500,000 PAGE 4 4. Tints Company requires advance payments with special orders for machinery constructed to customer specifica- tions. These advances are nonrefundable. Data for the year are: Customer advances 6,800,000 Advances received with orders in 2017 9,000,000 Advances applied to orders shipped 8,700,000 Advances applicable to orders canceled in 2017 2,600,000 The December 31, 2017 statement of financial position should report current liability for advances at a. 4,500,000 c. 6,400,000 b. 7,100,000 d. 4,400,000 5. On November 5, 2017, Pia Company’s truck was in an accident with an auto driven by John. Pia received no- tice on January 15, 2018, of a lawsuit for P4,000,000 damages for personal injuries suffered by John. Pia’s counsel believes it is probable that John will be awarded an estimated amount in the range between P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other amount. The accounting year, ends on December 31, and the 2017 financial statements were issued on March 31, 2018. What amount of provision should Pia accrue at December 31, 2017? a. 4,000,000 c. 2,000,000 b. 0 d. 2,500,000 6. Aretha Company carries P5,000,000 comprehensive public liability insurance with a P500,000 deductible clause. A suit for personal injury damages was brought against Aretha in 2017. Aretha's counsel believes it probable that the insurance company will settle out of court for an estimated amount of P3,000,000. 1. What is the amount of provision at December 31, 2017? a. 5,000,000 b. 0 c. 500,000 d. 3,000,000 2. What is the loss to be recognized in 2017? a. 0 b. 2,750,000 c. 500,000 d. 3,000,000 ANSWERS: B, C, A, A, D, D, C III. BONDS PAYABLE a) The issue price is a percentage of the face value (ex. 109 is 109% of face value) b) The amount received from the issuance is increased is by the accrued interest from the last interest date if the bonds are issued in between interest date. However, the interest is a payable and not included in the carrying amount of the bonds payable. c) Direct cost to issue the bonds or bond issue cost is included in the carrying amount of the bonds as a deduc- tion if the “amortized cost” is used. But expensed if the FV option is used. FV option is means the CA is the FV through profit or loss. d) The net premium or total discount is amortized using the effective interest method under amortized cost and not amortized under the FV option. The following relevant formulas apply: • Interest expense = CA x effective rate • Interest paid or payable = Face value x nominal rate • Effective interest less nominal interest equals amortization • Amortization of the discount increases the CA while amortization of the premium decreases the CA. • Amortization always increases while interest expense increases if discount and decreases if premi- um. e) Under FV option, the difference in the FV and previous CA is recognized in profit or loss unless the change is a result of credit risk. This amount is included in OCI. f) Bonds with warrants whether detachable or non-detachable and convertible bonds are known as compound financial instruments. The issue price shall be allocated to the bonds payable first that is measured at FV and the balance shall be what is known as the equity component and recorded as share premium. PAGE 5 Problems 1. On March 1, 2017, Jericho Company issued 5,000 of its P1,000 face value bonds at 110 plus accrued interest. Jericho Company paid bond issue cost of P100,000. The bonds were dated November 1, 2016, mature on No- vember 1, 2027, and bear interest at 12% payable semiannually on November 1 and May 1. What is the net amount received by Jericho from the bond issuance? a. 5,500,000 b. 5,700,000 c. 5,600,000 d. 6,000,000 2. On January 1, 2017, Gears Company issued 10,000 of its 12%, P1,000 face value bonds for P10,600,000, in- cluding accrued interest. The bonds are dated October 1, 2016, mature on October 1, 2023 and pay interest annually on October 1. The bonds were issued through an underwriter to whom Gears paid bond issue cost of P150,000. On January 1 2017, what should Gears report as bonds payable? a. 10,000,000 b. 10,450,000 c. 10,150,000 d. 10,300,000 3 On January 1, 2017, Cool Company issued eight-year bonds with a face value of P500,000 and a stated inter- est rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% ................................................... .627 Present value of 1 for 8 periods at 8% ................................................... .540 Present value of 1 for 16 periods at 3% ................................................. .623 Present value of 1 for 16 periods at 4% ................................................. .534 Present value of annuity for 8 periods at 6% ......................................... 6.210 Present value of annuity for 8 periods at 8% ......................................... 5.747 Present value of annuity for 16 periods at 3% ....................................... 12.561 Present value of annuity for 16 periods at 4% ....................................... 11.652 1 The present value of the principal is a. 267,000 c. 311,500 b. 270,000 d. 313,500 2. The present value of the interest is a. 172,410 c. 186,300 b. 174,780 d. 188,415 3. The issue price of the bonds is a. 441,780 c. 444,780 b. 442,410 d. 499,800 4. On January 1, 2017, Lucian Company issued 9% bonds in the amount of P5,000,000 which mature on January 1, 2027. The bonds were issued for P4,800,000 but Lucian had to pay for a P107,000 bond issuance cost. The effective rate determined by Lucian is 10%. Interest is payable annually on December 31. Lucian uses the in- terest method of amortizing bond discount. In its December 31, 2017 statement of financial position, what amount should Lucian report as bonds payable? a. 5,000,000 b. 4,693,000 c. 4,712,300 d. 4,723,700 5. On January 1, 2017, Christian Company issued its 5-year, 5,000, 8% bonds that will mature on December 31, 2021 and pay interest annually at 110. Christian however had to incur P80,000 of bond issue cost. The effec- tive rate on the same date was 6%. If Christian uses the effective interest method of amortization, what is the carrying amount of this bonds payable on December 31, 2017 a. 5,345,200 b. 5,300,000 c. 5,420,000 d. 5,375,600 PAGE 6 6. On June 30, 2017, Maury Company had outstanding 12%, P5,000,000 face value bonds maturing on June 30, 2022. Interest was payable semiannually every June 30 and December 31. On June 30, 2017, after amortiza- tion was recorded for the period, the unamortized bond discount and bond issue costs were P500,000 and P300,000, respectively. On that date, Maury acquired all its outstanding bonds on the open market at 96 and retired them. At June 30, 2017, what amount should Maury recognize as loss before income tax on redemption of bonds? a. 600,000 c. 400,000 b. 500,000 d. 800,000 7. On December 31, 2017, Michelle Company issued 5,000 of its 12%, 10-year P1,000 face value bonds with de- tachable stock warrants at 110. Each bond carried a non-detachable warrant for ten shares of Michelle's P100 par value ordinary shares at a specified option price of P120. Immediately after issuance, the market value of the bonds ex-warrants was P4,800,000 and the market value of the warrants were ascertained to be P1,200,000. For the issuance of the bonds, what amount should be the increase in shareholders equity? a. 600,000 c. 700,000 b. 1,100,000 d. 1,200,000 8. On December 31, 2017, Armor Company issued P5,000,000 face value, 5-year bonds at 109. Each P1,000 bond was issued with 10 non-detachable stock warrants, each of which entitled the bondholder to purchase one share of P100 par value common at P120. Immediately after the issuance, the market value of each war- rant was P5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without the warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On Decem- ber 31, 2017, what amount should Armor record as increase in stockholders’ equity as a result of the bond is- suance? a. 620,000 c. 250,000 b. 440,000 d. 0 10. Kart Company issued 4,000 convertible bonds on January 1, 2017. The bonds have a three-year term and are issued at par with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 6% in- terest rate. Each bond is convertible at anytime up to maturity into 100 ordinary shares with par value of P5. When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. What is the equity component of the issuance of convertible bonds on January 1, 2017? (Round off present value factors to two decimal places). a. 2,000,000 c. 312,800 b. 920,000 d. 0 11. On July 1, 2017, after recording interest and amortization, Hymn Company converted P5,000,000 of its 12% convertible bonds into 60,000 shares of P50 par value ordinary shares. On the conversion date the carrying amount of the bonds was P6,000,000, the market value of the bonds was P6,500,000, and Hymn’s ordinary shares was publicly trading at P150 per share. Hymn paid P300,000 in connection with the conversion and oth- er stock issue costs. The equity component on issue date of the bonds was P800,000. What is the share pre- mium from issuance should Hymn record as a result of the conversion? a. 3,000,000 c. 2,000,000 b. 2,700,000 d. 3,500,000 12.On January 1, 2017, Gomez Company received P5,385,000 for a P5,000,000 face amount, 12% bond, a price that yields 10%. The bond pays interest semiannually. The entity elected to use the fair value option for valuing financial liabilities. On the December 31, 2017, the fair value of the bonds was determined to be P5,100,000. It was also determined that P50,000 of the decline in fair value was because of the effect of credit risk. 1.What is the gain or loss that should be recognized in the 2017 income statement? a. 285,000 gain c. 235,000 loss b. 285,000 loss d. 235,000 gain 2. What is the 2017 interest expense? a. 536,963 c. 538,500 b. 600,000 d. 646,200 ANSWERS: B, B, A, B, A, C, A, A, C, A, C, B, D, B PAGE 7 IV. OPERATING LEASE LESSOR AND LEASEBACK a) Lessees now must treat all leases as finance lease unless it is only 1 year or shorter and determined to be low value items. b) The lessor shall recognize lease or rental income using the straight-line method over the lease term. c) If the rentals are uneven (increasing or decreasing) or there is a period where rentals are not paid. The total amount of rentals is computed and divided equally over the lease term. d) Contingent rentals are recognized as additional income by the lessor using the accrual method. e) Lease bonuses or prepayments (additional lumpsum amount received at the inception or start of the lease) should be deferred and amortized as additional rental income over the lease term. f) Initial direct cost is capitalized as cost of the leased asset and amortized as expense over the lease term. g) The depreciation on the asset and other expenses related to the ownership of the asset like insurance and taxes shall be recognized as an expense by the lessor. h) Sale and leaseback transactions are now treated differently from the side of the lessee. • The lessee shall automatically recognize a lease liability and capitalize the “right of use asset” ac- count for the asset sold and leased back. • There is no problem if the selling price is at fair value. If the selling price is above fair value, the dif- ference shall be treated as a lease incentive or additional financing and shall be deducted from the lease liability and other components in computing for the right of use asset. If the selling price is be- low fair value, the difference shall be treated as a lease prepayment and therefore added in compu- ting for the cost of the right of use asset. • The entity shall compute the “right of use retained” by dividing the cost of the asset by its fair val- ue and the percentage of “right of use transferred” by deducting from 1 the right of use retained. • The right of use asset to be capitalized is the total cost of the leased asset (lease liability + initial di- rect cost + lease prepayment – lease incentive received + PV of removal cost) x right of use re- tained. • The TOTAL “right of use transferred” is the FV less the total cost of the “right of use asset”. • The gain or loss on the right of use transferred is the “total right of use transferred” x percentage of right of use transferred. Problems 1. On January 1, 2016, Glory Company signed a 3-year operating lease for to lease office space at P3,500,000 per year. The lease included a provision for additional rent of 5% of annual company sales more than P10,000,000. The lessee’s sales for the year ended December 31, 2016 was P15,000,000. Upon execution of the lease, Glory paid P1,200,000 as a bonus for the lease in order to obtain a 3-year lease instead of the les- sor’s usual lease term of 5 years. What is Glory’s total rental income for the year ended December 31, 2016? a. 3,900,000 c. 4,150,000 b. 3,250,000 d. 3,500,000 2. As an inducement to enter a lease, Pride Company, a lessor, grants Mango Company, a lessee, six months of free rent under a five-year operating lease. The lease is effective on July 1, 2015, and provides for monthly rental of P250,000 to begin January 1, 2016. 1. What is the rental income for the year ended June 30, 2016? a. 3,000,000 c. 1,200,000 b. 2,700,000 d. 1,500,000 2. What is the rental receivable for the year ended June 30, 2017? a. 900,000 c. 600,000 b. 1,200,000 d. 300,000 3. On January 1, 2017, Resilient Company leased a building from Black Company under a 3-year operating lease. The total rent for the lease term will be P15,600,000, payable as follows: 12 months at P300,000 P3,600,000 12 months at P400,000 4,800,000 12 months at P600,000 7,200,000 All payments were made when due. Black’s reporting date is every December 31. 1. What is the amount of rental revenue that shall be reported by Black in 2017? a. 7,200,000 c. 2,000,000 b. 5,200,000 d. 0 PAGE 8 2. What is the rental receivable for the year ended June 30, 2018? a. 2,000,000 b. 2,800,000 c. 1,600,000 d. 1,200,000 4. On January 1, 2016, Splash Company leased a building to Palace Company under an operating lease for three years at P6,000,000 per year, payable the first day of each lease year. Splash paid P1,500,000 to a real estate broker as a finder’s fee. The building is depreciated P600,000 per year. For 2016, Splash incurred property tax expense totaling P300,000. What is the net rental income for 2016? a. 4,600,000 b. 6,000,000 c. 5,100,000 d. 4,500,000 5. Justice Company purchased a new machine for P5,000,000 on January 1, 2016 for the purpose of leasing it. The machine has an estimated 10-year life. On April 1, 2016, Justice leased the machine to Supremacy Com- pany for three years at a monthly rental of P300,000. Supremacy Company paid the rental for one year of P3,600,000 on April 1, 2016 and additionally paid P600,000 to Justice as a lease bonus to obtain the three-year lease. On April 1, 2016, Justice incurred initial direct costs of P240,000. What is Justice’s 2016 operating profit on this leased asset? a. 2,290,000 b. 2,415,000 c. 2,110,000 d. 2,740,000 6. On January 1, 2017 Gladys Company sold equipment with an estimated remaining useful life of 12 years to Bub- bles Company. At the same time, Gladys leased back the equipment for 5 years. The lease does not contain a purchase option and the equipment will revert to Bubbles at the end of the lease term. The selling price was be- low the fair value which is considered a lease prepayment. Additional information regarding this sale and lease- back transaction is as follows: Sales price 15,000,000 Fair value 16,000,000 Carrying amount 12,000,000 Lease payments in advance 2,000,000 Initial direct cost 200,000 Implicit rate 12% PV of an ordinary annuity 3.60 PV of an annuity due 4.04 1. What is the cost of the right of use asset? a. 6,810,000 b. 6,060,000 c. 7,010,000 d. 6,260,000 2. What is the gain on the right of use transferred to be recognized? a. 1,980,000 b. 1,930,000 c. 1,730,000 d. 2,180,000 ANSWERS: C, B, A, B, A, A, A, C, C PAGE 9 V. FINANCE LEASES – LESSEE AND LESSOR a) Lessee: • The lessee shall always treat the lease as a finance lease unless low value or short-term • The lease liability is the Present Value of lease payments whether fixed or variable less lease incen- tive receivable plus the present value of any reasonable certain purchase option or present value of the residual value guarantee. • If the lease payments are in advance use the PV of an annuity due if the it’s at the end of the period use the PV of an ordinary annuity. Meanwhile the PV of 1 is used for the purchase option and resid- ual value guarantee. • The cost of the right of use asset is the Lease Liability + Lease prepayment + Initial Direct Cost + PV of removal, dismantling and restoration cost minus lease incentive received. • The discount (difference of total payments and PV) is amortized using the effective interest method and recognized as interest expense. While the difference of the interest and payment shall be a re- duction of the lease liability. • The amount to be recognized as a reduction of the lease liability within 12 months shall be classified as a current liability. • The right of use asset shall be depreciated using the useful life if there is a transfer of ownership or reasonable certain purchase option. If not, the useful life or lease term whichever is shorter is used. b) Lessor: • The lease is either a sales type lease or direct financing lease. • Whether STL or DFL the gross investment and net investment is determined: a. Gross investment is the total lease receivable meaning the lease payments plus reasonable cer- tain purchase option or residual value whether guaranteed or unguaranteed. b. Net investment is the PV of the gross investment. Under the DFL, the NI is the cost of the asset plus the initial direct cost capitalized. c. The difference between the GI and NI is the total financial revenue. • If it is a sales type lease sales and cost of sales shall be recognized and the difference between the 2 is the selling profit that shall be recognized in full the period of sale. a) Sales is the FV or PV of the minimum lease payment (lease payments + reasonable certain pur- chase option or residual value guarantee) whichever is lower. b) Cost of sales is the cost of the asset plus initial direct cost minus the PV of the unguaranteed residual value. c) The interest income is also recognized by using the effective interest method over the lease term. • If it is a direct financing lease, the difference of the gross investment and the cost of the asset and di- rect cost is amortized as interest income over the lease term also under the effective interest meth- od. • The carrying amount of the lease receivable is equal to the PV or the net investment. Problems 1. Viola Company leased an equipment from Walsh Company on January 1, 2016 under a lease with the following pertinent information: Annual rental payable at the end of each year 500,000 Lease term 7 years Useful life of equipment 10 years Implicit interest rate 11% PV of an ordinary annuity of 1 for 7 periods at 11% 4.71 Present value of 1 for 7 periods at 11% 0.48 Lease prepayment 100,000 Lease incentive received 30,000 Present value of expected removal cost incurred 80,000 Viola has the option to purchase the machine on January 1, 2023 by paying P400,000 which is significantly less than the P600,000 expected fair value of the machine on the option exercise date and is expected to be rea- sonable exercised. On January 1, 2016, Viola incurred initial direct costs of P50,000. Viola uses the straight- line method of depreciation for all its assets with no expected residual value. PAGE 10 1. What is the cost of the machinery at the inception of the lease? a. 2,547,000 b. 2,747,000 c. 2,355,000 d. 2,643,000 2. What is the balance of the lease liability on December 31, 2016? a. 2,547,000 b. 2,047,000 c. 2,327,170 d. 2,549,170 3. What is the current portion of this lease liability on December 31, 2016? a. 500,000 b. 244,011 c. 219,830 d. 255,989 4. What is the depreciation expense for 2016 assuming no residual value? a. 254,700 b. 363,857 c. 274,700 d. 392,428 2. Jalen Company leased equipment for its entire nine-year useful life, agreeing to pay P1,000,000 at the start of the lease term on January 1, 2016, and P1,000,000 annually on each January 1, for the next eight years. The present value on January 1, 2016, of the nine lease payments over the lease term, using the rate implicit in the lease which Jalen knows to be 10% was P6,330,000. The January 1, 2016, present value of the lease pay- ments using Jalen’s incremental borrowing rate of 12% was P5,970,000. Jalen made a timely second lease payment. 1. What is the balance of the finance lease liability on December 31, 2016? a. 6,330,000 b. 5,330,000 c. 5,970,000 d. 4,970,000 2. What is the 2017 interest expense? a. 496,300 b. 596,300 c. 486,300 d. 547,968 3. What amount should Jalen report as finance lease liability in its December 31, 2017 statement of financial position? a. 4,863,000 b. 5,963,000 c. 4,963,000 d. 3,863,000 3. On January 1, 2016, Colbert Company leased two automobiles for executive use. The lease requires Cobert to make five annual payments of P2,000,000 beginning January 1, 2016. At the end of the lease term at Decem- ber 31, 2020, Colbert guarantees the residual value of the automobiles at P500,000. The interest rate implicit in the lease is 12% and present value factors are as follows: For an annuity due with 5 payments 4.04 For an ordinary annuity with 5 payments 3.60 Present value of 1 for 5 periods 0.57 1. What is the finance lease liability immediately after the first required payment? a. 6,080,000 b. 6,365,000 c. 5,485,000 d. 5,128,800 PAGE 11 2. What is the 2017 interest expense? a. 763,800 b. 615,456 c. 969,600 d. 729,600 4. On January 1, 2016, Adams entered into a 6-year lease with a lessor. Annual lease payments of P900,000 including annual executory cost of P100,000 are payable at the end of each year. Adams knows that the les- sor expects a 10% rate of return on the lease. Adams has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of 6 years. In addition, a third party has guaranteed to pay the lessor the residual value of P200,000 at the end of the lease. (round off present value factors to 2 decimal places) 1. What is Adams’s total lease liability in the January 1, 2016 statement of financial position? a. 3,488,000 b. 4,018,000 c. 3,924,000 d. 3,582,000 2. What is the lease liability balance on December 31, 2016? a. 3,140,200 b. 3,036,800 c. 3,416,400 d. 3,140,200 5. On January 1, 2016, Alicia Company entered into a 10-year lease for drilling equipment. Alicia accounted for the acquisition as a finance lease for P4,900,000 which included a P200,000 guaranteed residual value (gross amount). At the end of the lease, the asset will revert back to the lessor. It is estimated that the asset’s fair value at the end of its 12 year useful life will be P100,000. Alicia regularly uses the straight-line depreciation on similar equipment. 1. What amount should Alicia recognize as depreciation expense on the leased asset? a. 490,000 b. 400,000 c. 470,000 d. 408,333 2. If the total amount capitalized as an asset was still P4,900,000 but the residual value of P200,000 is un- guaranteed, what is the depreciation to be recorded in 2016? a. 490,000 b. 400,000 c. 470,000 d. 408,333 6. On January 1, 2016, Semmes Company signed an eight-year non-cancelable lease for a new machine requir- ing P900,000 annual payments at the beginning of each year. The machine has a useful life of 10 years, with no residual value. Title passes to Semmes at the lease expiration date. Semmes uses straight-line deprecia- tion for all of its plant assets. Aggregate lease payments have a present value on January 1, 2016 of P5,600,000 based on an appropriate rate of interest. What is the 2016 depreciation expense? a. 700,000 c. 470,000 b. 560,000 d. 612,500 7. Howard Company leased machinery with a fair value of P4,150,000 from another entity on December 31, 2016. The contract is a five-year noncancelable lease with an implicit interest rate of 10 percent. The lease requires annual payments of P1,000,000 beginning December 31, 2016. Howard appropriately accounted for the lease as a finance lease. Howard's incremental borrowing rate is 12 percent. The present value of an annuity due of 1 for 5 years at 10 percent is 4.170 and the present value of an annuity due of 1 for 5 years at 12 percent is 4.037. What is the lease liability after the first payment that Howard should report on the statement of financial position at December 31, 2016? a. 3,150,000 c. 4,170,000 b. 3,170,000 d. 3,037,000 PAGE 12 8. Davis Company is a dealer in machinery. On January 1, 2016, machinery was leased to another enterprise with the following provisions: Annual rental payable at the end of each year 2,000,000 Lease term 5 years Useful life of machinery 6 years Cost of machinery 5,000,000 Residual value - guaranteed 1,000,000 Implicit interest rate 10% PV of an ordinary annuity of 1 for 5 periods at 10% 3.79 PV of 1 for 5 periods at 10% 0.62 At the end of the lease term on December 31, 2016, the machinery will be returned to Davis. The perpetual in- ventory system is used. Davis incurred initial direct costs of P200,000 in finalizing the lease agreement. 1. What is the total financial revenue from the lease from the lease transaction? a. 2,800,000 b. 1,800,000 c. 3,000,000 d. 3,200,000 2. What amount of profit on the sale should Davis Company report? a. 3,200,000 b. 3,000,000 c. 2,000,000 d. 2,500,000 3. What amount of interest income should Davis Company report in 2016? a. 758,000 b. 820,000 c. 555,000 d. 920,000 4. What is the total income to be reported by Davis from this lease in 2016? a. 3,000,000 b. 2,800,000 c. 3,820,000 d. 820,000 9. Julia Financing Company leases equipment to customers under a direct financing lease arrangement for a noncancelable period of at least 10 years. On January 1, 2016, Julia purchased an equipment for P8,300,000 and immediately leased it to another company for 10 years. Lease payments of P1,200,000 are to be collected at the beginning of each year and Julia expects to earn 9% interest on leases. Julia incurs P100,000 of initial direct cost relating to the lease. The lease transfers the ownership of the asset to the lessee. 1. What is the total financial revenue to be earned by Julia in this lease? a. 3,000,000 b. 2,600,000 c. 3,600,000 d. 2,400,000 2. What is the financial revenue in 2016? a. 648,000 b. 756,000 c. 1,080,000 d. 500,000 3. What is the carrying amount of the lease receivable to be presented in Julia’ statement of financial position on January 1, 2016 and December 31, 2016? a. 12,000,000 and 10,800,000 b. 10,800,000 and 10,800,000 c. 8,400,000 and 9,156,000 d. 7,200,000 and 7,848,000 PAGE 13 10. Koresh Company is in the business of leasing new sophisticated equipment. As a lessor, Koresh expects a 12% return on its net investment with payments made in advance. All leases are classified as direct financing leases. At the end of the lease term, the equipment’s ownership is not transferred to the lessee. On January 1, 2016, equipment is leased to a lessee with the following information: Cost of equipment to Koresh 5,250,000 Residual value – unguaranteed 600,000 Useful life and lease term 8 years Implicit interest rate 12% Present value of an annuity due at 12% for 8 periods 5.564 Present value of 1 at 12% for 8 periods .404 1. What is the annual rent payable in advance? a. 900,000 b. 850,000 c. 1,000,000 d. 1,200,000 2. What is the total financial revenue from the direct financing lease transaction? a. 2,550,000 b. 1,550,000 c. 1,950,000 d. 1,200,000 ANSWERS: B, C, B, C, B, C, A, B, B, A, B, C, A, B, A, A, B, B, C, C, A, D, A, A VI. DEFERRED TAXES a) Taxable income is computed using tax laws. b) Accounting income is computed using GAAP. c) Accounting income after excluding permanent differences equals accounting income subject to tax. d) Current tax expense is the taxable income time the tax rate. This is the tax due for the year and the tax payable balance unless there are estimated tax payments made. e) Total tax expense is the current tax expense plus deferred tax expense minus income tax benefit. If the deferred tax expense is higher simply add the net deferred tax expense. If the income tax benefit is higher, deduct the net income tax benefit. f) If the enacted future tax rates are the same as the current tax rate, the total tax expense is simply computed by multiplying the tax rate to the accounting income subject to tax. g) Taxable temporary differences will cause taxable income to be LOWER than accounting income. This will also result in the CA of an asset to be higher than the tax base and the CA of a liability to be lower than the tax base. The taxable temporary difference will result to deferred tax expense and deferred tax liability. h) If the taxable temporary difference reverses, this will cause accounting income to be lower than taxable income. This will result in a decrease in the deferred tax liability and current tax expense. The credit will be to “income tax benefit” and as a deduction from current tax expense to get total tax expense. i) Deductible temporary differences will cause taxable income to be HIGHER than accounting income. This will also result in the CA of an asset to be lower than the tax base and the CA of a liability to be higher than the tax base. The taxable temporary difference will result to an income tax benefit and deferred tax asset. j) If the deductible temporary difference reverses, this will cause accounting income to be higher than taxable income. This will result in a decrease in the deferred tax asset and deferred tax expense. k) The deferred tax asset and deferred tax liability are presented separately and not offset as noncurrent. However, as an exception the net amount can be presented if both items are expected to reverse within one year, levied by the same taxing authority and the entity has the legal right to offset or settle at net. Problems 1. For the year ended December 31, 2016, David Company reported pretax financial income of P5,500,000. Its taxable income was P4,000,000. The difference is due to interest income of P1,000,000 earned from govern- ment treasury bill and an additional P500,000 charge for depreciation expense. Interest income from govern- ment securities is subject to final tax and the accelerated depreciation for income tax purposes. The income tax rate is 30% and David made estimated tax payments during 2016 of P900,000. PAGE 14 1. What should David report as current tax expense for 2016? a. 1,200,000 b. 1,350,000 c. 1,500,000 d. 1,650,000 2. In 2018, David’s pretax financial income amounted to P6,000,000 and the taxable income was P6,500,000. The difference was due to the reversal of the taxable temporary difference in 2016. There were no perma- nent differences in 2018. What is David’s 2018 current tax expense? a. 1,950,000 b. 1,800,000 c. 1,500,000 d. 1,650,000 2. For the year ended December 31, 2016, Rocky Company reported pretax financial income of P6,000,000. Its taxable income was P7,000,000. The difference is due to rental received in advance. Rental income is taxable when received but reported in financial income when the rent is received. The income tax rate is 30% and Rocky made estimated tax payment of P1,500,000 in 2016. There were no permanent differences in 2016. 1. What amount should Rocky report as 2016 total income tax expense? a. 1,500,000 b. 1,650,000 c. 1,800,000 d. 2,100,000 2. In 2017, Rocky’s pretax financial income amounted to P7,500,000 and the taxable income was P6,500,000. The difference was the inclusion of the rental income recognized in 2016 that was received and included in taxable income in 2016. There were no permanent differences in 2017. What is Rocky’s 2017 total tax ex- pense? a. 2,250,000 b. 1,950,000 c. 1,650,000 d. 1,400,000 3. At December 31, 2016, Sonic Corporation’s accounting profit is P8,000,000. The following items are the tempo- rary differences that caused Sonic’s income tax in the income tax return to differ from the amount reported in the income statement, future deductible amounts expected to reverse in 2017 of P1,000,000 and future taxable amounts expected to reverse in 2017 and later years of P1,200,000 and P1,800,000, respectively. Sonic’s in- come tax rate is 30%. What amount should be reported as income tax payable on December 31, 2016, assum- ing no taxes have been paid by Sonic? a. 1,800,000 b. 2,400,000 c. 2,000,000 d. 1,500,000 4. Vincent Company, organized on January 1, 2016, had pretax accounting income of P5,000,000 and taxable income of P7,000,000 for the current year. The only temporary difference is accrued product warranty cost that is expected to be paid in 2017. The enacted tax rates are 30% for 2016 and 25% for 2017 and the years thereafter. What amount should be reported as total income tax expense in the income statement for 2016? a. 1,500,000 b. 2,100,000 c. 1,250,000 d. 1,600,000 5. On December 31, 2015, Briggs Company reported a deferred tax liability of P500,000 and a deferred tax asset of P350,000. At the end of 2016, Briggs Company reported a deferred tax liability of P900,000, and a deferred tax asset of P100,000. What is the deferred tax expense for 2016? a. 450,000 b. 150,000 c. 300,000 d. 650,000 PAGE 15 6. Royce Company is determining the amount of pretax financial income for 2016 by making adjustments to taxa- ble income from the 2016 tax return. The tax return indicates taxable income of P6,000,000 on which a tax lia- bility of P1,800,000 has been recognized. The following is the list of items that may be required to determine pretax financial income: Tax depreciation in excess of book depreciation 1,000,000 Estimated warranty cost for 2016 2,000,000 Actual warranty cost paid in 2016 500,000 Proceeds from life insurance policy upon death of officer in 2016 received by Royce Company as the beneficiary not included in the tax return 4,000,000 Cash dividend received but not included in the 2016 tax return because it is from a domestic corporation 1,500,000 Interest revenue on treasury bill received but not included in the 2016 tax return because this revenue is subject to a final withholding tax 3,000,000 1. What was Royce Company’s pretax financial income? a. 14,000,000 b. 8,000,000 c. 3,500,000 d. 12,000,000 2. What was Royce Company’s total tax expense? a. 1,650,000 b. 4,200,000 c. 1,800,000 d. 1,500,000 3. What is the deferred tax expense or benefit? a. 150,000 deferred b. 150,000 benefit c. 350,000 deferred d. 350,000 benefit ANSWERS: A, A, C, A, A, D, D, A, A, A VII. DEBT RESTRUCTURING IFRS a) Asset Swap – The difference between the carrying amount of the liability both principal and accrued interest extinguished and the carrying amount of the (noncash) asset is recognized as a “gain on extinguishment of debt” b) Equity Swap – The equity instrument is either measured at FV of the shares (1 st priority) or FV of the liability (2nd priority). The difference between the FV (shares or liability) and par value of the shares as share premium and the difference of the carrying amount of the liability and FV as a “gain on extinguishment of debt”. If both FV is not determinable, the difference between the CA of the liability and par value of the shares is recognized as share premium, there is no gain to be recognized. c) Modification of terms – The principal, interest rate, maturity date and accrued interest owed is modified. The PV of the modified cash flows (original effective rate is used) and the carrying amount of the liability, principal and interest is recognized as either a gain or loss on extinguishment of debt if the difference is at least 10% (materiality test) of the original liability. d) Future interest expense is computed using the effective interest method. The difference between the interest expense and interest paid is amortization of the discount. PAGE 16 US GAAP a) Asset Swap – The difference between the carrying amount of the asset and the FV of the asset is recognized as a “gain on sale” (as if sold approach). The difference of the FV (assumed to be proceeds from sale) and the principal and accrued interest extinguished is recognized as a “gain on debt restructuring” b) Equity Swap – SAME AS IFRS c) Modification of terms – The absolute amount of modified future cash flows is compared to the principal and present accrued interest. If there is a gain it is recognized, if there is a loss it is ignored. The future interest is included in the face value of the new liability, therefore no or ZERO future interest expense is recognized. Problems 1. David Company is indebted to Mercury Company under a P5,000,000, 10% three-year note dated December 31, 2013. Because of financial difficulties, David owed accrued interest of P500,000 on the note at December 31, 2016. Under a debt restructuring on December 31, 2016, Mercury Company agreed to settle the note and accrued interest for a tract of land having a fair value of P3,500,000. The acquisition cost of the land is P2,000,000. What is the gain on extinguishment of debt in the 2016 income statement of David? a. 2,000,000 b. 2,500,000 c. 4,500,000 d. 3,500,000 2. On December 31, 2016, Cardinal Company shows the following data with respect to its maturing obligation: Note payable 6,000,000 Accrued interest payable 600,000 The company is threatened with a court suit if it could not pay its maturing debt. Accordingly, the company en- ters into an agreement with the creditor for the issuance of ordinary shares in full settlement of the note paya- ble. The agreement provides for the issue of 50,000 shares of ordinary shares with par value of P100. The or- dinary shares are currently quoted at P110 per share. How much is the gain on extinguishment of debt that Cardinal will recognize in its 2016 income statement from the “equity swap”? a. 1,600,000 b. 1,100,000 c. 500,000 d. 0 3. Due to adverse economic circumstances and poor management, Manchester Company has negotiated a re- structuring of its P5,000,000 note payable to Germany Bank. Germany Bank has agreed to reduce the face value of the note from P5,000,000 to P4,000,000, reduce the interest rate from 14% to 10%, and extend the due date two years from the date of restructuring. The restructuring will occur on December 31, 2016, the last day of Manchester’ annual reporting period. The unpaid interest on the restructured loan now is P700,000 which is forgiven. What is the gain on the debt restructuring under US GAAP? a. 1,700,000 b. 1,000,000 c. 700,000 d. 900,000 4. Due to extreme financial difficulties, Amsterdam Company has negotiated a restructuring of its 12%, P8,000,000 note payable due on December 31, 2016. The unpaid interest on the note on such date is P1,500,000. The creditor has agreed to reduce the face value to P7,000,000, forgive the unpaid interest, re- duce the interest rate to 10% and extend the due date three years from December 31, 2016. The present value of 1 at 12% for three periods is 0.712 and the present value of an ordinary annuity of 1 at 12% for three periods is 2.40. What should Amsterdam Company report in 2016 as a gain on extinguishment of debt? a. 2,836,000 b. 2,500,000 c. 1,000,000 d. 1,500,000 ANSWERS: D, B, D, A PAGE 17 VIII. POST EMPLOYMENT BENEFITS a. Memorandum record accounts* under a defined benefit plan: 1. Fair value of plan assets – Is the fund set aside for the payment of future benefits. This fund is in- creased by contributions from the employer and any income from the investment of the fund. 2. Projected benefit obligation – Actuarially computed present value of future benefits to be paid to the employees upon retirement (liability). This obligation is increased by the current service cost and in- terest on the projected benefit obligation. * Memorandum record accounts do not appear in the financial statements, but only the sum of the TWO ACCOUNTS (prepaid/accrued benefit cost) is shown in the statement of financial position as either a noncurrent asset or noncurrent liability. * If the FVPA exceeds the PBO, the difference is known as the surplus. However this surplus cannot exceed the asset ceiling. b. Components of “defined benefit cost” (Net or Total) 1. Service cost which comprises the following: a. Current service cost b. Past service cost c. Any gain or loss on settlement 2. Net interest which comprises the following: a. Interest expense on the defined benefit liability (PBO) b. Interest income on plan assets 3. Remeasurement gains and losses in OCI: a. Actuarial gain or actuarial loss on the decrease or increase of the PBO due to changes in “actuarial assumptions” b. Difference of actual return and interest income on plan assets c. Any change in the “effect of the asset ceiling” net of the interest on the beginning balance. The service cost and net interest are included in profit or loss as employee benefit expense, while the remeas- urement gain or loss at net or in total are fully recognized through other comprehensive income. c) Current Service Cost - Present Value of Post-employment benefits (earned by employees) incurred by the employer resulting from employee services in the current period. Component of benefit expense (pen- sion cost) and increases the Projected Benefit Obligation (PBO) d) Interest Expense - Amortization of the DISCOUNT on the beginning balance of the PBO. FORMULA: Be- ginning Balance of PBO time the settlement discount rate. The settlement discount rate is the rate used by the ACTUARY to compute for the present value of the post-employment benefits to be paid in the future. Component of benefit expense and increases the PBO. e) Past Service Cost - Is the increase in the present value of the defined benefit obligation for employee ser- vice in prior periods, resulting in the current period from the introduction of, or changes to, post- employment benefits or “curtailment”. Included as benefit expense whether vested or not vested. Vested benefits are employee benefits that are not conditional on future employment. f) Actual return on Plan Assets - Income on the plan assets in the form of dividends, interest, and gains on sale. May either increase or decrease the Fair Value of Plan Assets because sometimes the return might be a loss (decrease) g) Interest Income - Replaces the “expected return” under the old standard as the deduction from benefit ex- pense and is compared with the “actual return” in computing for the gain or loss on plan assets as part of remeasurements. FORMULA: Beginning FVPA times the Settlement discount rate. h) Gain or loss on Settlement - Difference between the settlement price paid to retirees and the present value of the defined benefit obligation that is eliminated on the date of settlement. i) Surplus - FVPA exceeds the PBO hence a debit balance in the prepaid accrued benefit cost account is presented in the statement of financial position. j) Asset Ceiling - The limitation to the amount to be presented as surplus in the statement of financial posi- tion. Present value of any economic benefits available in the from of refunds from the plan or reductions in future contributions to the plan. PAGE 18 k) “Effect of asset ceiling” - Is the reduction in the surplus that will be presented in the statement of financial position. FORMULAS • CSC, PSC & IC (–) Interest income + Settlement loss (-) Settlement Gain + Interest Benefit Expense on Beginning effect of asset ceiling • Beginning + CSC, PSC & IC (-) Benefits paid and PV settled +/(-) Inc. or Dec. in PBO PBO = Ending • Beginning + Employer Contributions – Benefits paid and Settlement Price +/(-) Ac- FVPA tual return = Ending • Gain: Decrease in PBO or • Loss: Increase in PBO • Gain: Difference if Actual return is higher than Interest Income or • Loss: Difference, if Interest Income is higher than Actual Return Remeasurements - OCI • Gain: If there is a decrease in the “effect of the asset ceiling” • Loss: If there is an increase in the “effect of the asset ceiling” • The increase or the decrease of the effect of the asset ceiling should be net of the interest on the beginning balance, which is part or a component of benefit ex- pense. Problems 1. Kristaps Company provided the following data in its memorandum records for a defined benefit plan on Janu- ary 1, 2017, prior to applying PAS 19R. Fair value of plan assets 9,000,000 Unamortized past service cost 1,000,000 Unrecognized actuarial gain ( 2,000,000) Projected benefit obligation ( 12,000,000) What is the balance of the prepaid/accrued benefit cost to be shown in the balance sheet as either a noncurrent asset or a noncurrent liability by Kristaps after applying the provisions of PAS 19R? a. 3,000,000 prepaid b. 3,000,000 accrued c. 4,000,000 prepaid d. 4,000,000 accrued P2. On January 1, 2017, Klein Company provided the following data in connection with its defined benefit plan: Fair value of plan assets 10,000,000 Projected benefit obligation 13,000,000 Prepaid /accrued benefit cost ( 3,000,000) The accountant revealed the following information affecting the plan in 2017: Current service cost 2,500,000 Past service cost – remaining vesting period of employees covered by the plan is 5 years 1,000,000 Contribution to the plan 3,500,000 Benefits paid to retirees 3,000,000 Actual return on plan assets 1,500,000 Decrease in projected benefit obligation due to changes in actuarial assumptions 400,000 Expected rate of return on plan assets 12% Settlement discount interest rate 10% PAGE 19 1. What is the 2017 total employee benefit expense? a. 4,800,000 b. 3,000,000 c. 3,800,000 d. 3,600,000 2. What is the remeasurement gain to be recognized in other comprehensive income in 2017? a. 900,000 b. 800,000 c. 400,000 d. 100,000 3. What is the total or net defined benefit cost for 2017? a. 3,800,000 b. 4,700,000 c. 2,900,000 d. 3,500,000 4. What is the fair value of plan assets on December 31, 2017? a. 12,000,000 b. 15,000,000 c. 11,700,000 d. 10,500,000 5. What is the projected benefit obligation on December 31, 2017? a. 14,400,000 b. 15,200,000 c. 17,800,000 d. 13,400,000 6. What is the balance of the prepaid/accrued cost account on December 31, 2017? a. 2,400,000 accrued b. 3,300,000 prepaid c. 2,400,000 prepaid d. 3,300,000 accrued 3. Jordan Company provided the following data in its memorandum records for a defined benefit plan on Janu- ary 1, 2017. Fair value of plan assets 7,000,000 Projected benefit obligation (8,000,000) Prepaid/accrued benefit cost (1,000,000) The transactions affecting the defined benefit plan for the current year are as follows: Current service cost 1,400,000 Past service cost 500,000 Contribution to the plan 1,200,000 Benefits paid to retirees 1,500,000 Actual return on plan assets 600,000 Increase in projected benefit obligation due to changes in actuarial assumptions 300,000 Present value of benefit obligation settled 1,000,000 Settlement price of benefit obligation 800,000 Discount rate 10% Expected rate of return 15% 1. What is the 2017 total employee benefit expense? a. 2,700,000 c. 1,800,000 b. 2,200,000 d. 2,000,000 2. What is the net remeasurement gain or loss to be recognized in 2017? a. 400,000 loss c. 200,000 loss b. 400,000 gain d. 200,000 gain PAGE 20 3. What is the total or net defined benefit cost for 2017? a. 2,000,000 c. 2,200,000 b. 2,300,000 d. 1,400,000 4. Mandy Company provided the following information regarding its defined benefit plan during 2017. Balances on January 1, 2017 are: Fair value of plan assets 6,000,000 Projected benefit obligation 5,000,000 Prepaid/accrued benefit cost - surplus 1,000,000 Asset ceiling* 700,000 Effect of asset ceiling 300,000 The asset ceiling is the present value of the economic benefits available in the form of refunds and reductions in future contributions to the plan and is considered in reporting the amount of surplus in the balance sheet. Therefore, the December 31, 2016 statement of financial position reported a prepaid accrued benefit cost of on- ly P700,000 as a noncurrent asset. The asset ceiling computed on December 31, 2017 amounted to P1,200,000. During the current year, the entity recognized current service cost of P700,000, past service cost of P200,000, actual return on plan assets of P900,000, a decrease in the PBO of P500,000 due to changes in actuarial as- sumptions and contribution to the plan of P1,000,000. The discount rate is 10%. 1. What is the employee benefit expense for the current year? a. 900,000 c. 830,000 b. 870,000 d. 800,000 2. What is the net remeasurement gain or loss in 2017? a. 400,000 loss c. 800,000 gain b. 470,000 loss d. 330,000 gain 5. Hero Company reported a prepaid benefit cost of 1,500,000 on January 1, 2017. The following information re- lated to Hero’s defined benefit plan are as follows: Service cost 3,000,000 Actual return on plan assets 1,200,000 Interest expense 800,000 Settlement price 500,000 Excess of actual return 200,000 Actuarial gain on PBO 400,000 Gain on settlement 100,000 Past service cost 500,000 Benefits paid to retirees 2,500,000 Increase in asset ceiling 500,000 Contribution 4,000,000 Projected benefit obligation 1/1 8,000,000 1. What is the 2017 benefit expense? a. 3,250,000 c. 3,300,000 b. 3,350,000 d. 3,000,000 2. What is the 2017 defined benefit cost? a. 3,200,000 c. 3,500,000 b. 3,250,000 d. 2,750,000 3. What is the prepaid benefit cost on December 31, 2017? a. 1,400,000 c. 1,000,000 b. 2,000,000 d. 1,600,000 ANSWERS: B,C,A,C,A,A,C,C,A,C,C,D,A,C,B - - END - -