Quiz on Intermediate Accounting 2

THEORIES
1. When equipment held under an operating lease is subleased by the original
lessee, the original lessee would account for the sublease as
a. Sales type lease
b. Operating lease
c. Direct financing lease
d. Finance lease
2. It is the date on which the lessee is entitled to exercise the right of use the leased
asset.
a. Inception of the lease
b. Commencement of the lease
c. Date of lease agreement
d. Date of commitment to the provisions of the lease
3. What is the treatment of initial direct costs incurred by the lessee in a finance
lease?
a. Added to the carrying amount of the leased asset
b. Added to the lease liability
c. Added to the carrying amount of both
d. Expensed outright
4. Lessors shall recognize asset held under a finance lease as a receivable at an
amount equal to
a. Gross investment in the lease
b. Net investment in the lease
c. Gross rentals
d. Residual Value
5. Which if the following statements is correct regarding initial direct costs incurred
by the lessor?
a. In a direct financing lease, initial direct costs are added to the net
investment in the lease
b. In a sales type lease, initial direct costs are expensed as cost of COGS
c. In an operating lease, initial direct costs are deferred and allocated over
the lease term.
d. All are correct
6. An entity sold a building at a gain simultaneously leases back the building. If the
lease was reported as a finance lease at the time of sale, the gain should be
reported as
a. Component of profit or loss
b. Component of shareholders equity
c. An asset valuation allowance
d. None of the above
7. Statement I: Rent revenue received in advance is recognized as revenue for tax
purposes prior to its recognition for financial accounting purposes.
Statement II: Current tax laws in the Philippines require a 3-year carryback of
any net operating loss.
a. True, True
b. False, True
c. False,False
d. True, False
8. Statement I: Estimated warranty liability are deductible on the tax return prior to
being reported in the income statement.
Statement II: The benefit that arises from the use of the net operating loss
carryforwards is used to reduce the tax payment in the period.
a. True, True
 b. False, True
c. False,False
d. True, False
9. Statament I: Non taxable revenues are added to financial income for tax
computation purposes.
Statement II: Non deductible expenses are deducted to arrive at income subject
to tax.
a. True, True
b. False, True
c. False, False
d. True, False
10. Which of the following temporary differences ordinarily creates a deferred tax
asset assuming the taxpayer is taxed on cash basis?
a. Accrued warranty costs
b. Installment sales
c. Depreciation
d. Amortization of goodwill
11. A six year finance lease entered into on December 31 of the current year
specified equal minimum annual lease payments due on December 32 of each
year. The first minimum annual payment paid on December 31 of the current
year consists of which of the following?
a. Interest expense
b. Lease liability
c. Both interest expense and lease liability
d. Neither interest expense nor lease liability
12. The present value of the minimum lease payments should be used by the lessee
in the determination of
a. Finance lease liability
b. Operating lease liability
c. Both finance lease and operating lease
d. Neither finance nor operating
13. A lessee with a finance lease containing a bargain purchase option should
depreciate the leased asset over the
a. Useful life of the asset
b. Lease term
c. Whichever is shorter between the lease term and useful life
d. None of the above
14. Executory costs include all of the following, except
a. Bargain purchase option
b. Maintenance
c. Property taxes
d. Insurance
15. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest
b. The lessee records the lease obligation related to the leased asset
c. The lessor transfers title of the leased property to the lessee for the
duration of the lease term
d. The lessor records depreciation and lease revenue
16. It is deferred tax consequence attributable to a deductible temporary difference
and operating loss carryforward.
a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
17. It is the profit for a period before deducting tax expense
a. Accounting profit
b. Taxable profit
c. Gross profit
 d. Net profit
18. The deferred tax expense is equal to
a. Increase in deferred tax asset less the increase in deferred tax liability
b. Increase in deferred tax liability less the increase in deferred tax asset
c. Increase in deferred tax asset
d. Increase in deferred tax liability
19. It is an amount attributable to an asset or liability for tax purposes
a. Carrying amount
b. Tax base
c. Measurement base
d. Taxable amount
20. A temporary difference which would result in a deferred tax liability is
a. Interest revenue on municipal bonds
b. Accrual of warranty expenses
c. Excess of tax depreciation over accounting depreciation
d. Subscription received in advance
21. The classification of the lease is normally carried out
a. At the end of the lease term
b. After a cooling off period of one year
c. At the inception of the lease
d. When the entity deems it to be necessary
22. The government uses the income tax laws for raising revenues and implementing
fiscal policy
a. True
b. False
23. “Unrealized losses on held for trading securities” result in lower taxable income
than financial accounting purposes
a. True
b. False
24. Its is an arrangement whereby one party sells a property to another and then
immediately leases the property back from the new owner
a. Sale
b. Leaseback
c. Sale and leaseback
d. None of the above
25. Both finance lease and operating leases are subject to capitalization
a. True
b. False
PROBLEMS
Jannah Company began operations at the beginning of the current year. At the end of
the first year of operations, the entity reported P6,000,000 income before income tax in
the income statement but only P5,100,000 taxable income in the tax return.
Analysis of the P900,000 difference revealed that P500,000 was a permanent difference
and P400,000 was a temporary tax liability difference related to a current asset. The
enacted tax rate for the current year and future years is 30%.
26. What is the current tax expense?
a. 1,680,000
b. 1,800,000
c. 1,380,000
d. 1,530,000
27. What is the total income tax expense to be reported in the income statement for
the current year?
a. 1,650,000
b. 1,530,000
c. 1,950,000
 d. 1,800,000

Gina Company entered into a nine- year finance lease on a warehouse on December
31, 2016.
Lease payment of P520,000 which includes real estate taxes and other executory costs
of P20,000 are due annually, beginning on December 31,2017 and every December
thereafter.
The interest rate implicit in the lease is 9%. The rounded present value of an ordinary
annuity of 1 for nine years at 9% is 5.6.
28. What amount should be reported as lease liability on December 31,2016?
a. 500,000
b. 2,800,000
c. 4,500,000
d. None of the above
Eyasi, Inc. began operating on January 1, 2018. At the end of the first year of
operations, Eyasi reported P7,500,000 income before income taxes on its income
statement but only P700,000 taxable income on its tax return. Analysis of the
P6,800,000 difference revealed that P6,200,000 was a permanent difference and
P600,000 was a temporary difference related to a current asset. At the end of 2019, the
accumulated tax liability difference related to future years is P1,100,000. The enacted
tax rate is 30% for 2018 and 2019.
29. The journal entry to adjust the deferred tax liability at the end of 2019 should
include a
a. Debit to Deferred tax liability of P150,000
b. Credit to Deferred tax liability of P150,000
c. Debit to Deferred tax asset of P150,000
d. Credit to Deferred tax liability of P330,000
30. Assume that at the end of 2019, the accumulated temporary tax liability
difference related to future years is P550,000. What journal entry should be
made to adjust the deferred tax liability at the end of 2019.
a. Income tax expense 165,000
Deferred tax liability 165,000
b. Deferred tax assetq 15,000
Income tax benefit 15,000
c. Deferred tax liability 15,000
Income tax expense 15,000
d. Deferred tax liability 15,000
Deferred tax asset 15,000
On December 31,2017, Leman Co. signs a 10-year non cancellable agreement to lease
a storage building from Storage Company.
The following information pertains to this lease agreement:
1. The agreement requires equal rental payments of P720,000 beginning on
December 31, 2017.
2. The fair value of the building on December 31, 2017, is P4,400,000
3. The building has an estimated economic life of 12 years, with an
unguaranteed residual value of P100,000. Leman depreciates similar
buildings on the straight line method.
4. The lease is non renewable. At the termination of the lease, the building
reverts to the lessor.
5. The interest rate implicit in the lease is 12% per year.
 6. The yearly payment includes P24,705 of executory costs related to taxes
on the property.
The following PV factors are for 10 periods at 12% annual interest rate:
PV of annuity due of 1 6.32825
PV of ordinary annuity of 1 5.65022
Present value of 1 0.32197
31. What amount should be capitalized as the cost of the right of use asset?
a. 4,556,340
b. 4,400,000
c. 4,432,197
d. 0
32. What amount should be included in the non current liabilities section of Leman's
statement of financial position at December 31, 2018?
a. 3,453,975
b. 3,173,157
c. 5,562,360
d. 0
33. What amount should be included in the non current liabilities section of Leman's
statement of financial position at December 31, 2018?
a. 720,000
b. 414,477
c. 695,295
d. 280,818
34. What is the total lease-related expenses to be reported in Leman's income
statement for the year ended December 31,2018?
a. 909,270
b. 879,182
c. 1,160,000
d. 464,705
Kampesa, Inc., in its first year of operations, has the following differences between the
carrying value and tax base of its assets and liabilities at the end of 2018.
Carrying Value Tax base
Equipment P800,000 P680,000
Estimated warranty liability 400,000 0
Kampesa estimates that the warranty liability will be settled in 2019.
The difference in equipment(net) will result in taxable amounts as shown below:
Year Amount
2019 P40,000
2020 60,000
2021 20,000
The company has a taxable income of P1,040,000 for 2018. The income tax rate is
30%.
35. What amount of deferred tax liability should be reported in Kampesa's statement
off financial position at Dec. 31, 2018?
a. 36,000
b. 30,000
c. 24,000
d. 84,000
36. What amount of deferred tax asset should be reported in Kampesa's statement of
financial position at Dec. 31, 2018?
 a. 156,000
b. 0
c. 120,000
d. 84,000
37. What is the amount of income tax payable( current) to be reported in Kampesa's
statement of financial position?
a. 228,000
b. 396,000
c. 312,000
d. 156,000
38. What is the total income tax expense?
a. 228,000
b. 396,000
c. 192,000
d. 348,000
On Dec. 31, 2016, Thunder Company sold land with a cost of P1,500,000 to Victoria
Company for P2,300,000 when the land's fair value was P2,150,000.
Thunder Company immediately entered into a cancelable lease agreement to use the
land for 2 years at an annual rental of P20,000.
39. What amount of profit should Thunder record on the sale of land for 2016?
a. 150,000
b. 800,000
c. 650,000
d. 725,000
40. What amount should be recognized as deferred gain on December 31, 2016?
a. 800,000
b. 650,000
c. 150,000
d. 400,000