MODADV3 – ADVANCED ACCOUNTING III

CONCEPTS AND PROBLEM SOLVING - QUIZ#3

ANSWER SHEET

NAME: DATE:
ID NO.: FINAL SCORE:

TEST I – THEORIES
1. 6. 11. 16.

2. 7. 12. 17.

3. 8. 13. 18.

4. 9. 14. 19.

5. 10. 15. 20.

TEST II – PROBLEM SOLVING

TEST III – STRAIGHT PROBLEM

1. 4. 7. 10. 13.

2. 5. 8. 11. 14.

3. 6. 9. 12. 15.

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Instructions: Read the directions carefully for each part of the test. Anybody caught in the act of cheating
and the person allowing another to cheat will be sent to the discipline’s office and both will have a final
grade of zero for this subject. The professor is the only person to entertain any questions. Any violation
of the University’s policy shall be dealt with immediately. God bless.
A. TRUE OR FALSE (10 points) – On your answer sheet, write letter A if the statement is correct
and write letter B if the statement is incorrect. Write the letter of your choice in CAPITAL
LETTER.
1. Nontaxable revenues are added to, and nondeductible expenses are deducted from financial income
to determine the income that is subject to tax.
2. Rent revenue received in advance is recognized as revenue for financial reporting purposes prior
to its recognition for tax purpose
3. Permanent difference is always deducted to compute for taxable income of an entity.
4. Deferred tax asset and deferred tax liabilities shall never be classified as current asset (liability) in the
statement of financial position.
5. A temporary difference originates in one period and reverses, or turns around, in one or more later
periods.
6. Expenditures currently deducted in the tax return but not included with expenses in the income
statement until subsequent years create deferred tax liabilities.
7. Future taxable amounts result in deferred tax assets. .
8. A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as
current to the extent that the NOL will be recovered in the following year.
9. Revenues from installment sales of property reported on financial statements in prior years and
currently reported in the tax return create deferred tax assets.
10. Recoverable amount is the lower amount of an asset’s fair value less costs of disposal and its value in
use.

B. MULTIPLE CHOICE (10 points) – On your answer sheet, write the corresponding letter of the
best answer. Write the letter of your choice in CAPITAL LETTER.
1. The difference between accounting income and taxable income that do not have tax consequence are
called
A. permanent differences
B. timing differences
C. temporary differences
D. perpetual differences

2. All of the following can result in a temporary difference between pretax financial income and taxable
income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. provision for pending lawsuits.
d. product warranty costs.

3. Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on held for trading securities
d. Depreciation

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4. An asset is said to be impaired if its carrying amount
A. is less than its recoverable amount.
B. is greater than its recoverable amount.
C. will be recovered principally through continuing use.
D. will be recovered principally through a sale transaction rather than through continuing use.

5. All of the following requires annual impairment testing, except

A. intangible asset not yet available for use
B. cash generating unit to which goodwill is allocated
C. property, plant and equipment not yet available for use
D. all of the above requires annual impairment testing

6. If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs
of disposal
A. The asset is not impaired
B. There is no need to compute for carrying amount
C. The recoverable amount is the value in use
D. There is no need to determine future cash flows

7. Which of the following items results in a temporary difference deductible amount for a given year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value through
profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

8. PAS 36 Impairment of assets should be applied in accounting for the impairment of which of the
following types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
d. Non-current assets measured at cost

9. According to PAS 36 Impairment of assets, which of the following are relevant in determining a
non-current asset's 'value in use'?
I. The expected future cash flows from the asset
II. The carrying amount of the asset
III. The future annual depreciation expense in respect of the asset
IV. The time value of money

a. I, II, III c. I, IV
b. II, III, IV d. I, II, IV

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10. Under PAS 36 Impairment of Assets, which of the following statements best describes 'value in use'?
a. The present value of estimated future cash flows expected to arise from the continuing use of
an asset and from its ultimate disposal.
b. The amount of cash or cash equivalents that could currently be obtained by selling an asset in
an orderly disposal.
c. The net amount which an entity expects to obtain for an asset at the end of its useful life.
d. The amount at which an asset could be exchanged between knowledgeable, willing parties in
an arm's length transaction.

PROBLEM SOLVING (2 points each – 40 points) – Write your final answers on your answer sheet
and present your solutions in good accounting format using worksheets.

Use the following information for the next four items.

You have taken the following information for the records of Gabrielle Company as of 31 December 2018:
Gain from settlement of Ins. Co. (company is the beneficiary) – P50,000; Intercompany dividends for a
domestic corporation – P60,000; Interest income on time deposits – P35,000; Interest revenue of
government bonds – P10,000; Interest income on treasury bills – P8,000; Fines penalties on violations of
laws – P3,000; Charitable contribution in excess of tax liabilities – P12,000; Premiums on life insurance for
officers and employees – P15,000; Depreciation in excess of financial depreciation – P12,000; Gross
Income from installment sales are recognized as goods and are sold but are taxed only when installment
payments are collected – P10,000; Bad debt expense using allowance method – P6,000; Excess of
depreciation recognized for financial reporting over depreciation recognized for taxation purposes due to
shorter depreciation period used for financial reporting – P13,500; Rent received in advance – P9,800;
Pretax profit for 2018 – P250,000; and income tax rate is 30%.

Determine the following

1. Taxable Income
2. Income tax payable – current
3. Deferred tax liability
4. Deferred tax asset
5. Deferred tax expense (benefit)
6. Income tax expense

Use the following information for the next four items:

The following were obtained from the records of Pilot Company as of December 31, 2019:
Carrying Tax Base
Amount
Computer software P500,000 -
Machinery 1,000,000 600,000
Accrued liability 400,000 -
Additional information:
 The computer software account represents costs that were properly capitalized after establishment of
technological feasibility. As per tax laws, research and development costs must be expensed outright.
 Pilot depreciates its machinery using the straight-line method of depreciation while the machinery is
depreciated using the sum-of-the-years’ digits method for tax purposes.
 The accrued liability shall be tax deductible upon payment of cash.
 The pre-tax financial profit reported is P1,000,000 and the statutory tax rate is 30%.
 There were no temporary differences as of January 1, 2019.

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7. How much is the deferred tax liability as of December 31, 2019?
8. How much is the deferred tax asset as of December 31, 2019?
9. How much is the current income tax expense for 2019?
10. How much is the total tax expense for 2019?
11. How much is the deferred income tax expense (benefit) for 2019?

12. Woody Corp. had taxable income of P8,000 in the current year. The amount of MACRS depreciation
was P3,000 while the amount of depreciation reported in the income statement was P1,000. Assuming
no other differences between tax and accounting income, Woody's pretax accounting income was?

13. Bumble Bee Co. had taxable income of P7,000, MACRS depreciation of P5,000, book depreciation of
P2,000, and accrued warranty expense of P400 on the books although no warranty work was performed.
What is Bumble Bee's pretax accounting income?

14. In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and no
deferred tax liability. For 20x1, Quinn reported pretax financial statement income of ₱300,000.
Temporary differences of ₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December 31,
20x1, Quinn had cumulative taxable differences of ₱70,000. Quinn's effective income tax rate is 30%.
In its December 31, 20x1, income statement, what should Quinn report as deferred income tax expense?
30000

15. Basa Air Base Co. is determining the amount of its pretax accounting income for the year by making
adjustment to taxable income from the company’s year-end income tax return. The tax return indicates
taxable income of P100,000, on which a tax liability of P30,000 has been recognized (P100,000 x 30%
= P30,000). Additional information is shown below:

Goodwill impairment loss not included as a deduction in the tax return but may 35,000
be deducted for financial reporting
Interest income on savings and time deposits with private banks 6,000
Revenues from instalment sales are recognized as goods are sold but are taxed 40,000
out only when installment payments are collected
Excess depreciation recognized for financial reporting over depreciation 10,000
recognized for taxation purposes due to shorter depreciation period used for
financial reporting
Bad debt expense recognized using the allowance method 15,000

Compute the pretax income?

Use the following information for the next two items:

On 1 January 2017, EC purchased equipment with cost of P11,000,000, useful life of 10 years and no
residual value. The entity used straight line depreciation.

On 31 December 2017 and 31 December 2018, the entity determined that impairment indicators are present.
There is no change in the useful life or residual value.

31 December 2017 31 December 2018

Fair value less cost of disposal 8,100,000 8,400,000
Value in use 8,550,000 8,200,000

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16. What is the impairment loss in 2017?
17. What is the gain on reversal of impairment in 2018?

18. GC determined that due to obsolescence, equipment with an original cost of P9,000,000 and accumulated
depreciation of 1 January 2017, of P4,200,000 had suffered permanent impairment and as a result should
have a carrying amount of only P3,000,000 as of the beginning of the year. In addition, the remaining
useful life of the equipment was reduced from 8 years to 3 years. On 31 December 2017, what amount
should be reported as accumulated depreciation?

In 1 January 2015, RC purchased a machine for P8,000,000 and established an annual depreciation charge of
P1,000,000 over an eight year life. During 2018, after issuing the 2017 financial statements, the entity concluded
that the machine suffered permanent impairment and P2,000,000 is a reasonable estimate of the amount expected
to be recovered through use of the machine for the period 1 January 2018 through 31 December 2022.

19. What is the impairment loss for 2017?

20. What is the carrying amount of the machine on 31 December 2017?

STRAIGHT PROBLEM (10 points) – Write your final answers on your answer sheet and present
your solutions in good accounting format using worksheets.

Information on ECO operations during the year is shown below:

a. Revenues are recognized for financial reporting at point of sale while revenues are taxed on cash basis.
Gross profit recognized for financial reporting amounted to P4,000,000 while taxable gross profit is
P3,200,000.
b. Retirement benefit costs are deducted for financial reporting as services and rendered by employees but
are deductible only when actually paid to retiring employees. Current service cost recognized during
the year is P400,000 while benefits paid to retiring employees amounted to P600,000.
c. Research cost amounting to P360,000 are expensed immediately during the year for financial reporting.
For taxation purposes, research cost are amortized over a three-year period. Amortization of research
cost deducted for taxation purposes is P120,000.
d. Unrealized losses of P40,000 was recognized during the year in profit or loss on an investment held for
trading equity securities. No equivalent adjustments was made for taxation purposes. Any gain or loss
on actual disposal of such securities is taxable (tax deductible)
e. Payments during the year for fines, surcharges, and penalties arising from violation of law amounted
to P160,000 (Non-deductible expenses)
f. ECO reported pretax income of P4,000,000. Income tax rate is 30%
g. Any operating loss can be carried over to the next period. ECO expects to realize the economic benefit
of any operating loss carry forward.

Required:
a. Deferred tax liability (5pts)
b. Deferred tax asset (5pts)

***END OF QUIZ 3***

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