fin-acc 2 summer topics

CHAPTER 3

Problem 3-1 Problem 3-2 Problem 3-3

1. A 6. C 1. C 6. B 1. D 6. B2. D 7. A 2. C 7. B 2. B 7. A3. D 8. C 3. A 8. A 3. A 8. D4. D 9. D 4. B 9. D 4. A 9. A5. C 10. C 5. C 10. D 5. B 10. D

Problem 3-4

Book of Marian Company (Lessor)

Jan. 1 Machinery 2,400,000Cash 2,400,000

Mar. 1 Cash 600,000Rent income 600,000

Dec. 31 Repair and maintenance 30,000Cash 30,000

31 Rent income 100,000Unearned rent income (600,000 x 2/12) 100,000

31 Depreciation (2,400,000 / 6) 400,000Accumulated depreciation 400,000

Book of Delia Company (Lessee)

Mar. 1 Rent expense 600,000 Cash 600,000

Dec. 31 Prepaid rent 100,000 Rent expense 100,000

Problem 3-5Requirement 1

Books of Lessor

1. Equipment 3,000,000Cash 3,000,000

2. Cash (40,000 x 9) 360,000Rent income 360,000

3. Cash 120,000Unearned rent income 120,000

4. Repairs 20,000Cash 20,000

5. Unearned rent income 30,000

Rent income (120,000 / 3 = 40,000 x 9/12) 30,000

6. Depreciation 300,000 Accumulated depreciation (3,000,000 / 10) 300,000

Books of Lessee

1. Rent expense 360,000Cash 360,000

2. Prepaid rent 120,000Cash 120,000

3. Rent expense 30,000Prepaid rent 30,000

Requirement 2

Rent income (360,000 + 30,000) 390,000Less: Repairs 20,000

Depreciation 300,000 320,000Net income of lessor 70,000

Problem 3-6Books of Lessor

1. Tractor 1,600,000 Cash 1,600,000

2. Cash 600,000 Rent income 600,000

3. Repairs 15,000 Transportation 5,000

Cash 20,000

4. Rent income 150,000 Unearned rent income (50,000 x 3) 150,000


Books of Lessee


2. Prepaid rent 150,000Rent expense 150,000

Problem 3-7Books of Lessor

1. Machinery 2,400,000 Cash 2,400,000

2. Cash (36,000 x 9) 324,000

Rent income 324,000

3. Machinery 120,000 Cash 120,000

4. Amortization of initial direct costs 22,500 Machinery (120,000 / 4 = 30,000 x 9/12) 22,500

5. Depreciation 180,000 Accumulated depreciation (2,400,000 / 10 x 9/12) 180,000

Books of Lessee

1. Rent expense 324,000 Cash 324,000

Problem 3-8

1. Rent expense 60,000 Prepaid rent 60,000 Rent deposit 80,000 Leasehold improvement 360,000

Cash 560,000

2. Depreciation 6,000 Accumulated depreciation (360,000 / 5 x 1/12) 6,000

Problem 3-9


2. Cash 6,000,000 Sales 6,000,000

3. Prepaid rent 250,000Cash 250,000

4. Rent expense (5% X 1,000,000) 50,000 Accrued rent payable 50,000

5. Rent expense 25,000Prepaid rent (250,000 / 10) 25,000

Problem 3-10

1. Machinery 4,800,000 Cash 4,800,000

2. Cash 850,000 Rent income 850,000

3. Cash 300,000 Unearned rent income 300,000

4. Insurance 80,000

Cash 80,000


6. Unearned rent income 100,000 Rent income (300,000 / 3) 100,000

Problem 3-11

20081. Equipment 375,000

Cash 375,000

2. Equipment 75,000 Cash 75,000

20091. Cash 180,000

Rent income 180,000

2. Repairs 7,000 Transportation 3,000

Cash 10,000

3. Depreciation 90,000 Accumulated depreciation (450,000 / 5) 90,000

4. Rent income 45,000 Unearned rent income (15,000 x 3) 45,000

Problem 3-12

2007Jan. 1 Building (800,000 x 4.17) 3,336,000

Lease liability 3,336,000 1 Building 100,000

Cash 100,000 1 Lease liability 800,000

Cash 800,000

2007Dec. 31 Depreciation (3,436,000 / 10) 343,600

Accumulated depreciation 343,600

31 Interest expense 253,600Accrued interest payable 253,600

Year Payment 10% interest Principal Present value 01/01/2008 3,336,000 01/01/2008 800,000 - 800,000 2,536,000 01/01/2009 800,000 253,600 546,400 1,989,600 01/01/2010 800,000 198,960 601,040 1,388,560

31 Taxes 40,000

Cash 40,000

2009Jan. 2 Accrued interest payable 253,600

Lease liability 546,400Cash 800,000

Dec. 31 Depreciation 343,600Accumulated depreciation 343,600


31 Taxes 40,000Cash 40,000

Problem 3-13

20081. Building (1,000,000 x 3.79) 3,790,000

Lease liability 3,790,000

2. Interest expense 379,000 Lease liability 621,000

Cash 1,000,000

Year Payment 10% interest Principal Present value01/01/2008 3,790,00012/31/2008 1,000,000 379,000 621,000 3,169,00012/31/2009 1,000,000 316,900 683,100 2,485,900

3. Taxes 75,000 Insurance 125,000

Cash 200,000

4. Depreciation (3,790,000 / 10) 379,000Accumulated depreciation 379,000

20091. Interest expense 316,900 Lease liability 683,100

Cash 1,000,0002. Taxes 75,000 Insurance 125,000

Cash 200,000

3. Depreciation 379,000Accumulated depreciation 379,000

Problem 3-14

2007Jan. 1 Machinery 6,392,400

Lease liability 6,392,400

Present value of rentals (1,000,000 x 6.328) 6,328,000Present value of bargain option (200,000 x .322) 64,400Total cost 6,392,400

1 Lease liability 1,000,000Cash 1,000,000

Dec. 31 Depreciation (6,392,400 / 15) 426,160Accumulated depreciation 426,160


Year Payment 12% interest Principal Present value 01/01/2008 6,392,400 01/01/2008 1,000,000 - 1,000,000 5,392,400 01/01/2009 1,000,000 647,088 352,912 5,039,488 01/01/2010 1,000,000 604,739 395,261 4,644,277


Lease liability 352,912Cash 1,000,000

Dec. 31 Depreciation 426,160Accumulated depreciation 426,160


Problem 3-15

1. Building (1,000,000 x 7.606) 7,606,000Lease liability 7,606,000

2. Depreciation 507,067Accumulated depreciation 507,067

The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset.

3. Interest expense (10% x 7,606,000) 760,600Lease liability 239,400

Cash 1,000,000


Present value of rentals (1,000,000 x 3.2743) 3,274,300Present value of guaranteed residual value (474,060 x .4761) 225,700Total present value 3,500,000

The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of the leased asset.

Year Payment 16% interest Principal Present value01/01/2008 3,500,00012/31/2008 1,000,000 560,000 440,000 3,060,00012/31/2009 1,000,000 489,600 510,400 2,549,60012/31/2010 1,000,000 407,936 592,064 1,957,53612/31/2011 1,000,00 0 313,206 686,794 1,270,74212/31/2012 1,000,000 203,318 796,682 474,060

Requirement 22008

Jan. 1 Equipment 3,500,000 Lease liability 3,500,000

Dec. 31 Interest expense 560,000 Lease liability 440,000

Cash 1,000,000

31 Depreciation 605,188 Accumulated depreciation 605,188

(3,500,000 – 474,060 / 5)

2009Dec. 31 Interest expense 489,600

Lease liability 510,400 Cash 1,000,000

31 Depreciation 605,188

Accumulated depreciation 605,188

Requirement 3

Accumulated depreciation (605,188 x 5) 3,025,940Lease liability 474,060

Equipment 3,500,000

Requirement 4

Accumulated depreciation 3,025,940Lease liability 474,060

Equipment 3,500,000

Loss on finance lease 174,060Cash (474,060 – 300,000) 174,060

Problem 3-17

1. Lease receivable 5,000,000Sales 3,072,500Unearned interest income 1,927,500

2. Cost of sales 2,000,000Inventory 2,000,000

3. Cash 500,000

Lease receivable 500,000

4. Unearned interest income 307,250Interest income (10% x 3,072,500) 307,250

Problem 3-18

2008Jan. 1 Lease receivable 500,000

Machinery 403,700 Unearned interest income 96,300

1 Cash 100,000 Lease receivable 100,000

Dec. 31 Unearned interest income 36,444 Interest income 36,444

Year Payment 12% interest Principal Present value 01/01/2008 403,700 01/01/2008 100,000 - 100,000 303,700 01/01/2009 100,000 36,444 63,556 240,144 01/01/2010 100,000 28,817 71,183 168,961

2009Jan. 1 Cash 100,000



Problem 10-3

1. Lease receivable (600,000 x 8) 4,800,000Sales 3,520,000Unearned interest income 1,280,000

2. Initial direct costs 50,000Cash 50,000

3. Cash 600,000Lease receivable 600,000

4. Unearned interest income 292,000Interest income 292,000

Year Payment 10% interest Principal Present value 01/01/2008 3,520,000 01/01/2008 600,000 - 600,000 2,920,000 01/01/2009 600,000 292,000 308,000 2,612,000

Problem 10-4

Books of Fox Company (Lessor)2008

Jan. 1 Lease receivable (500,000 x 10) 5,000,000 Sales 3,165,000 Unearned interest income 1,835,000

1 Cost of sales 2,675,000 Inventory 2,675,000

1 Cash 500,000 Lease receivable 500,000


Year Payment 12% interest Principal Present value 01/01/2008 3,165,000 01/01/2008 500,000 - 500,000 2,665,000 01/01/2009 500,000 319,800 180,200 2,484,800 01/01/2010 500,000 298,176 201,824 2,282,976

2009Jan. 1 Cash 500,000



Books of Tiger Company (Lessee)2008

Jan. 1 Equipment 3,165,000 Lease liability 3,165,000

1 Lease liability 500,000 Cash 500,000

Dec. 31 Depreciation (3,165,000 / 10) 316,500 Accumulated depreciation 316,500

31 Interest expense 319,800 Accrued interest payable 319,800


Lease liability 180,200 Cash 500,000

Dec. 31 Depreciation 316,500 Accumulated depreciation 316,500

31 Interest expense 298,176 Accrued interest payable 298,176

Problem 3-21

1. Equipment 2,330,000Lease liability 2,330,000

Interest expense (12% x 2,330,000) 279,600

Lease liability 320,400Cash 600,000

Depreciation 406,000Accumulated depreciation (2,330,000 – 300,000 / 5) 406,000

2. Lease liability 300,000Accumulated depreciation (406,000 x 5) 2,030,000

Equipment 2,330,000

3. Lease liability 300,000Accumulated depreciation 2,030,000

Equipment 2,330,000

Loss on finance lease 120,000Cash (300,000 – 180,000) 120,000

Problem 10-5Books of Universal Company (Lessor)

Gross rentals (700,000 x 8) 5,600,000Unguaranteed residual value 400,000Lease receivable 6,000,000Present value:

Gross rentals (700,000 x 4.968) 3,477,600Unguaranteed RV (400,000 x .404) 161,600 3,639,200

Unearned interest income 2,360,800

Cost of equipment sold 2,000,000Less: PV of unguaranteed RV 161,600Cost of sales 1,838,400

1. Lease receivable 6,000,000Cost of sales 1,838,400

Sales (equal to PV of rentals only) 3,477,600Unearned interest income 2,360,800Inventory 2,000,000

2. Cash 700,000Lease receivable 700,000

3. Unearned interest income 436,704Interest income (12% x 3,639,200) 436,704

Books of National Company (Lessee)

1. Equipment 3,477,600Lease liability 3,477,600

The residual value is unguaranteed, so it is not included in the computation of the lessee’s lease liability.

2. Interest expense (12% x 3,477,600) 417,312Lease liability 282,688

Cash 700,000

3. Depreciation 434,700Accumulated depreciation (3,477,600 / 8) 434,700

Problem 10-6

Gross rentals (3,000,000 x 5) 15,000,000Residual value – guaranteed 1,000,000Gross investment 16,000,000Present value:

Rentals (3,000,000 x 3.60) 10,800,000Residual value (1,000,000 x .57) 570,000 11,370,000

Total unearned financial revenue 4,630,000

Sales 11,370,000Cost of sales:

Cost of machinery ( 8,000,000)Initial direct costs ( 300,000)

Gross income 3,070,000

Books of Vanderbilt Company

1. Lease receivable 16,000,000Cost of sales 8,000,000

Sales 11,370,000Unearned interest income 4,630,000Inventory 8,000,000

2. Cost of sales (Initial direct costs) 300,000Cash 300,000

3. Cash 3,000,000Lease receivable 3,000,000

4. Unearned interest income 1,364,400Interest income (12% x 11,370,000) 1,364,400

Books of Thunder Company

1. Machinery 11,370,000Lease liability 11,370,000

2. Interest expense 1,364,400Lease liability 1,635,600

Cash 3,000,000

3. Depreciation 2,074,000Accumulated depreciation 2,074,000

(11,370,000 – 1,000,000 / 5)

Problem 3-24

1. Gross rentals (600,000 x 10) 6,000,000Net investment in the lease:

Cost of equipment (3,390,000)Initial direct costs ( 143,400)

Total financial revenue 2,466,600

2. Equipment 143,400Cash 143,400

Lease receivable 6,000,000Equipment 3,533,400Unearned interest income 2,466,600

Cash 600,000Lease receivable 600,000

Unearned interest income 388,674Interest income (11% x 3,533,400) 388,674

PV factor (3,533,400 / 600,000) 5.889

This factor is applicable to 11%. Thus, this is the new implicit rate in computinginterest income.

Problem 3-24

1. Lease receivable (3,328,710 x 5) 16,643,550PV of gross rentals (3,328,710 x 3.605) 12,000,000Total unearned financial revenue 4,643,550

The residual value of P500,000 is ignored by the lessor because ownership of the asset is transferred to the lessee at the end of the lease term.

2. Sales price (equal to present value of rentals) 12,000,000Cost of sales:

Cost of equipment ( 8,000,000)Initial direct costs ( 200,000)

Manufacturer’s profit 3,800,000

3. Interest income for first year (12% x 12,000,000) 1,440,000

Problem 3-26Books of German Company

1. Cash 1,100,000Accumulated depreciation 1,500,000

Equipment 2,500,000Gain on sale and leaseback 100,000


Books of Sterling Company

1. Equipment 1,100,000Cash 1,100,000

2. Cash 40,000

Rent income 40,000


Problem 3-27Books of Canada Company

1. Cash 500,000Accumulated depreciation 450,000Loss on sale and leaseback 50,000

Machinery 1,000,000


Books of Saigon Company

1. Machinery 500,000Cash 500,000

2. Cash 90,000Rent income 90,000

3. Depreciation (500,000 / 10) 50,000Accumulated depreciation 50,000

Problem 3-28Books of Cuba Company

1. Cash 2,415,000Accumulated depreciation 3,400,000

Building 5,000,000Deferred gain on sale and leaseback 815,000

2. Building 2,415,000Lease liability 2,415,000


4. Deferred gain on sale and leaseback 81,500Gain on sale and leaseback (815,000 / 10) 81,500

5. Interest expense (16% x 2,415,000) 386,400 Lease liability 113,600

Cash 500,000Books of Mexico Company

1. Building 2,415,000 Cash 2,415,000

2. Lease receivable (500,000 x 10) 5,000,000

Building 2,415,000 Unearned interest

income 2,585,000

3. Cash 500,000 Lease receivable 500,000

4. Unearned interest income 386,400 Interest income 386,400

Problem 3-29 Answer B

Rent for June 200,000Amortization of bonus (prepaid rent)[600,000 / 5 x 1/12] 10,000Rent expense for the month of June 210,000


Annual rent (15,000 x 12) 180,000Additional rent

6% x 3,000,000 180,0005% x 3,000,000 150,000

Property taxes 120,000Insurance 50,000Total expenses 680,000

Problem 3-31 Answer A

Total rent expense (200,000 x 51 remaining months) 10,200,000

Average annual rent expense, July 1, 2006 to June 30, 2007 (10,200,000 / 5) 2,040,000


Total rent expense (600,000 x 117 remaining months) 70,200,000

Average annual rent (70,200,000 / 10) 7,020,000

Rent expense from October 1 to December 31, 2008 (7,020,000 x 3/12) 1,755,000

Problem 3-33 Answer C

First year (1,200 x 1,000) 1,200,000Second year (3,000 x 1,000) 3,000,000Third year (3,000 x 1,000) 3,000,000Total rental revenue 7,200,000

Average annual rental (7,200,000 / 3) 2,400,000

Rental revenue from January1 to September 30, 2008 (2,400,000 x 9/12) 1,800,000


First year (800,000 x 6/12) 400,000Second year 1,250,000Third year 1,250,000Fourth year 1,250,000Fifth year 1,250,000Total rental revenue 5,400,000

Average annual rental revenue (5,400,000 / 5) 1,080,000Problem 3-35 Answer C

Average annual rental revenue (360,000 / 3) 120,000

Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2) 240,000Less: Rentals received:

First 12 months 60,000Second 12 months 90,000 150,000

Rent receivable, June 30, 2008 90,000


Rent income 500,000Less: Amortization of initial direct costs (150,000 / 10) 15,000

Depreciation 120,000Insurance and property tax 90,000 225,000

Net rent income 275,000


Annual rental 900,000Amortization of lease bonus (500,000 / 5) 100,000Total rent revenue 1,000,000

Problem 3-38 Answer D

This is not a finance lease and therefore no liability is recorded because:

1. There is no transfer of ownership or title to the lessee at the end of the lease term.

2. There is no a bargain purchase option.

3. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%).

4. The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the fair value of P4,000,000.


Cost of leased property (100,000 x 6.145) 614,500

The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years).



Present value of rentals (400,000 x 5.95) 2,380,000

The purchase option of P500,000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option. Again, the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12).


Cost of leased property 2,400,000Less: Residual value 200,000Depreciable cost 2,200,000

Depreciation (2,200,000 / 8) 275,000


Depreciation (1,080,000 / 12) 90,000

If the “transfer of ownership criterion” is used in qualifying a finance lease, the depreciation is based on the life of the asset.

Problem 3-44

Question 1 – Answer C Question 2 – Answer B Question 3 - Answer C

1. Date Payment 10% interest Principal Present value01/01/2007 1,352,00001/01/2007 200,000 - 200,000 1,152,00001/01/2008 200,000 115,200 84,800 1,067,200

Lease liability – December 31, 2008 1,152,000Current portion 84,800Noncurrent liability 1,067,200

2. Interest expense for 2008 115,200

3. Depreciation for 2008 (1,352,000 / 20) 67,600Problem 3-45 Answer B

Present value (using implicit rate of 10%) 3,165,000Less: Payment on December 31, 2007 (all applicable to principal) 500,000Balance – December 31, 2007 2,665,000Less: Principal payment on December 31, 2008

Payment 500,000Interest (10% x 2,665,000) 266,500 233,500

Lease liability – December 31, 2008 2,431,500


Present value, January 1, 2008 1,125,000

Less: First payment on December 30, 2008 100,000Interest for 2008 (8% x 1,125,000) ( 90,000) 10,000

Lease liability, December 31, 2008 1,115,000


Interest expense for 2008 (10% x 3,790,000) 379,Problem 3-48 Answer B

Present value, January 1, 2008 1,350,000Less: First payment on January 1, 2008 (all applicable to principal) 200,000Lease liability, January 1, 2008 1,150,000

Interest expense for 2008 (10% x 1,150,000) 115,000


Present value of rentals (1,300,000 x 4.24) 5,512,000Present value of guaranteed residual value (1,000,000 x 0.65) 650,000Total lease liability – 1/1/2008 6,162,000Less: First payment on January 1, 2008 (all applicable to principal) 1,300,000Lease liability – 12/31/2008 4,862,000

The present value of an “annuity due” factor is used in the computation because the rental is payable in advance.


Lease liability, January 1, 2007 (1,000,000 x 6.14) 6,140,000

The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee. In this case, the residual value is guaranteed by a third party and therefore excluded in computing the lease liability.


Present value – 12/31/2008 1,350,000Less: First payment on December 31, 2008 (all applicable to principal) 200,000Lease liability – 12/31/2008 1,150,000Less: Second payment on December 31, 2009:

Payment 200,000Interest for 2009 (10% x 1,150,000) 115,000Principal payment 85,000

Lease liability – 12/31/2009 1,065,000



Cash payment 1,440,000Book value of leased asset (2,000,000 – 800,000) 1,200,000Total consideration 2,640,000Balance of lease liability 1,300,000Cost of machinery purchased 1,340,000

The entry to record the actual purchase of the leased asset is:

Machinery (purchased) 1,340,000Lease liability 1,300,000Accumulated depreciation 800,000

Cash 1,440,000Machinery (leased) 2,000,000

Problem 3-54

Question 1 – Answer A

Question 2 – Answer B

1. Gain on sale (3,520,000 – 2,800,000) 720,000

2. Date Payment 10% interest Principal Present value07/01/2008 3,520,00007/01/2008 600,000 - 600,000 2,920,00007/01/2009 600,000 292,000 308,000 2,612,000

July 1 to December 31, 2008 (292,000 x 1/2) 146,000


Date Payment 10% interest Principal Present value01/01/2008 2,400,00001/01/2008 355,080 - 355,080 2,044,92001/01/2009 355,080 204,492 150,588 1,894,332

Selling price or fair value 2,400,000Less: Cost to Gallant Company 2,000,000Dealer’s profit 400,000Add: Interest income – 2008 204,492Total income before tax 604,492


This is mathematical. The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1”. Accordingly, the annual rental is equal to P323,400 divided by 4.312 or P75,000.

Lease receivable (75,000 x 5) 375,000Present value of rentals (fair value) 323,400Total interest revenue 51,600Problem 3-57 Answer A

Cost of equipment 4,361,200Present value of residual value (200,000 x .466) ( 93,200)Net investment to be recovered 4,268,000

Annual rental (4,268,000 / 5.335) 800,000


Interest income (5,250,000 – 900,000 x 12%) 522,000Problem 3-59 Answer A



Problem 3-62

Question 1 - Answer A

Gross rentals (1,500,000 x 20) 30,000,000Present value or fair value of asset (1,500,000 x 8.37) 12,555,000Unearned financial revenue 17,445,000

Observe that the present value of rentals is the same as the fair value of the asset. Note also that the residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term.

Question 2 - Answer B

Fair value of asset 12,555,000Cost of asset 8,000,000Profit on sale 4,555,000

Question 3 – Answer C

PV of rentals equals to the fair value of asset 12,555,000Payment of January 1, 2008 – all applicable to principal 1,500,000Balance – January 1, 2008 11,055,000

Interest income for 2008 (11,055,000 x 12%) 1,326,600

Problem 3-63


Interest income for 2008 (10% x 4,850,000) 485,000


Sales price 3,250,000Book value of lease receivable:

Lease receivable 5,850,000Unearned interest income (1,000,000 – 485,000) ( 515,000) 5,335,000

Loss on sale of machinery (2,085,000)

1. To recognize the interest income for 2008:

Unearned interest income 485,000Interest income 485,000

2. To record the sale of the machinery:

Cash 3,250,000Unearned interest income 515,000Loss on sale of machinery 2,085,000

Lease receivable 5,850,000






Sales price 1,500,000Cost of equipment sold 1,000,000Deferred gain on sale and leaseback 500,000Less: Realized gain in 2008 (500,000 / 10) 50,000Deferred gain – December 31, 2008 450,000


Sales price 480,000Carrying amount 360,000Deferred revenue 120,000

The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%).Problem 3-70 Answer A

Sales price 7,800,000Carrying amount 5,850,000Deferred gain – 12/31/2008 1,950,000Problem 3-71 Answer D

Sales price 360,000Carrying amount 330,000Gain on sale and leaseback 30,000

The gain is not deferred but recognized immediately because the leaseback is an operating lease.


Sales price 6,000,000Fair value 5,000,000Deferred gain 1,000,000

Fair value 5,000,000Carrying amount 3,500,000Gain on sale and leaseback to be recognized immediately 1,500,000

CHAPTER 4

Problem 4-1

1. C 6. B2. A 7. A3. D 8. B4. D 9. A5. A 10. D

Problem 4-2

1. Income tax expense 525,000Income tax payable (35% x 1,500,000) 525,000

2. Income tax expense 175,000Deferred tax liability (35% x 500,000) 175,000

3. Income tax payable 200,000Cash 200,000

Current tax expense 525,000 Deferred tax expense 175,000 Total income tax expense 700,000

Problem 4-3

1. Income tax expense 1,400,000Income tax payable (35% x 4,000,000) 1,400,000

2. Deferred tax asset 350,000Income tax benefit (35% x 1,000,000) 350,000

3. Income tax payable 500,000Cash 500,000

Current tax expense 1,400,000 Income tax benefit ( 350,000) Total income tax expense 1,050,000

Problem 4-4

20081. Income tax expense 2,450,000

Income tax payable (35% x 7,000,000) 2,450,000


Income statement presentation

Income before income tax 6,000,000Income tax expense:

Current tax expense 2,450,000Income tax benefit ( 350,000) 2,100,000

Net income 3,900,000



2. Income tax expense 350,000Deferred tax asset 350,000



Current tax expense 2,800,000Decrease in deferred tax asset 350,000 3,150,000


Problem 4-5



2. Income tax expense 175,000Deferred tax liability (35% x 500,000) 175,000



Current tax expense 1,750,000Deferred tax expense 175,000 1,925,000




2. Deferred tax liability 175,000Income tax expense 175,000



Current tax expense 2,625,000Decrease in deferred tax liability ( 175,000) 2,450,000


Problem 4-6

Accounting income 4,000,000Permanent differences:

Nondeductible expenses 200,000Nontaxable revenue ( 300,000)

Accounting income subject to tax 3,900,000

Taxable temporary differences:Deferred income ( 450,000)Excess tax depreciation ( 50,000)

Deductible temporary differences:Doubtful accounts 100,000Estimated warranty cost 100,000

Taxable income 3,600,000

1. Income tax expense 1,260,000 Income tax payable (35% x 3,600,000) 1,260,000

2. Income tax expense 175,000 Deferred tax liability (35% x 500,000) 175,000

3. Deferred tax asset 70,000 Income tax benefit (35% x 200,000) 70,000

4. Income before income tax 4,000,000 Income tax expense Current tax expense 1,260,000

Deferred tax expense 175,000Income tax benefit ( 70,000 ) 1,365,000


Problem 11-10

20081. Income tax expense 720T

Income tax payable (30% x 2,400,000) 720T

2. Income tax expense 180T Deferred tax liability (30% x 600,000) 180T



2. Income tax expense 450T Deferred tax liability (30% x 1,500,000) 450T



Income before construction income 3,200,000 Construction income 3,000,000 Taxable income 6,200,000

2. Deferred tax liability 630TIncome tax expense (35% x 2,100,000) 630T


The “current expense” is computed as follows:

2008 2009 2010 2011Income before depreciation 4,000,000 4,000,000 4,000,000 4,000,000Depreciation – SYD 400,000 300,000 200,000 100,000Taxable income 3,600,000 3,700,000 3,800,000 3,900,000

Current tax expense (35%) 1,260,000 1,295,000 1,330,000 1,365,000

The deferred tax liability arising from the taxable temporary difference is computed as follows:Temporary difference Rate Deferred tax liability

2008 150,000 35% 52,5002009 50,000 35% 17,5002010 ( 50,000) 35% ( 17,500)2011 (150,000) ( 52,500)Balance - -


Income tax payable 1,260,000

2. Income tax expense 52,500 Deferred tax liability 52,500



2. Income tax expense 17,500 Deferred tax liability 17,500

2010

1. Income tax expense 1,330,000 Income tax payable 1,330,000

2. Deferred tax liability 17,500 Income tax expense 17,5002011


2. Deferred tax liability 52,500 Income tax expense 52,500

Requirement 2 – Balance sheet on December 31, 2009

Noncurrent liabilities:Deferred tax liability 70,000


2008 2009 2010 2011Accounting income 2,000,000 3,000,000 4,000,000 5,000,000Doubtful accounts 100,000 ( 100,000)Rent income 120,000 ( 40,000) ( 40,000) ( 40,000)Warranty cost 300,000 ( 20,000) ( 80,000) ( 200,000)Taxable income 2,520,000 2,840,000 3,880,000 4,760,000

Tax rate 35% 35% 35% 35% Current tax expense 882,000 994,000 1,358,000 1,666,000

Temporary difference Rate Deferred tax asset

2008 520,000 35% 182,0002009 (160,000) 35% ( 56,000)2010 (120,000) 35% ( 42,000)2011 (240,000) 35% ( 84,000)Balance - -

20081. Income tax expense 882,000

Income tax payable 882,000

2. Deferred tax asset 182,000 Income tax benefit 182,000

20091. Income tax expense 994,000

Income tax payable 994,0002009

2. Income tax expense 56,000 Deferred tax asset 56,000







Requirement 2 – Balance sheet on December 31, 2008

Noncurrent assets:Deferred tax asset 182,000

Problem 11-13

Operating loss (1,000,000)Interest income on note receivable 1,100,000Taxable income 100,000

The interest income is part of taxable income because it arises from note receivable and not from bank deposit.

1. Income tax expense (35% x 100,000) 35,000Income tax payable 35,000

2. Deferred tax asset (35% x 300,000) 105,000Income tax benefit 105,000


Loss before income tax (200,000)Income tax expense:

Current tax expense ( 35,000)Income tax benefit 105,000 70,000

Net loss (130,000)

Problem 4-11

Accounting income 7,900,000Taxable temporary difference:

Tax depreciation (1,000,000)Deductible temporary differences:

Litigation loss 400,000Warranty cost 300,000


1. Income tax expense 2,660,000 Income tax payable (35% x 7,600,000) 2,660,000

2. Income tax expense 350,000 Deferred tax liability (35% x 1,000,000) 350,000

3. Deferred asset 245,000Income tax benefit (35% x 700,000) 245,000



Current tax expense 2,660,000Deferred tax expense 350,000Income tax benefit ( 245,000) 2,765,000


Balance sheet presentationNoncurrent assets:

Deferred tax asset 245,000Current liabilities:

Income tax payable 2,660,000Noncurrent liabilities:

Deferred tax liability 350,000Problem 4-12

1. Income tax expense 2,450,000Deferred tax liability (35% x 7,000,000) 2,450,000


3. Income tax expense 2,800,000Income tax payable 2,800,000

Pretax accounting income 13,000,000Future taxable amount ( 7,000,000)Future deductible amount 2,000,000Taxable income 8,000,000

Current tax expense (35% x 8,000,000) 2,800,000

4. Income before income tax 13,000,000Income tax expense:

Current tax expense 2,800,000Deferred tax expense 2,450,000Income tax benefit ( 700,000) 4,550,000


Problem 4-13

1. Equipment 4,000,000Accumulated depreciation 1,500,000Revaluation surplus 2,500,000

Cost Replacement cost Appreciation Equipment 8,000,000 12,000,000 4,000,000Accumulated depreciation

( 8,000,000 x 3/8) 3,000,000(12,000,000 x 3/8) 4,500,000 1,500,000

BV / SV / RS 5,000,000 7,500,000 2,500,000

2. Revaluation surplus 875,000Deferred tax liability (35% x 2,500,000) 875,000


Pretax income before depreciation 10,000,000Depreciation on cost (5,000,000 / 5) ( 1,000,000)Taxable income 9,000,000


4. Deferred tax liability 175,000Income tax expense 175,000

Equipment at replacement cost 12,000,000Accumulated depreciation:

January 1, 2008 4,500,000Depreciation on revalued amount

for 2008 (7,500,000 / 5) 1,500,000 6,000,000Carrying amount – 12/31/2008 6,000,000

Equipment at cost 8,000,000Accumulated depreciation:

January 1, 2008 3,000,000Depreciation on cost for 2008 1,000,000 4,000,000

Tax base – 12/31/2008 4,000,000

Carrying amount – 12/31/2008 6,000,000

Tax base – 12/31/2008 4,000,000Taxable temporary difference 2,000,000

Deferred tax liability – 12/31/2008 (35% x 2,000,000) 700,000Deferred tax liability – 01/01/2008 875,000Decrease in deferred tax liability (175,000)

5. Revaluation surplus (2,500,000 – 875,000 / 5) 325,000Retained earnings 325,000

6. Income before depreciation 10,000,000Depreciation on revalued amount ( 1,500,000) Income before

income tax 8,500,000Income tax expense:

Current tax expense 3,150,000Decrease in deferred tax liability ( 175,000) 2,975,000



Pretax accounting income 5,000,000Dividend received ( 100,000)Financial income subject to tax 4,900,000Estimated litigation loss 300,000Revenue from installment sale ( 600,000)Taxable income 4,600,000



Pretax accounting income 5,000,000Proceeds from life insurance ( 500,000)Accounting income subject to tax 4,500,000Excess tax depreciation ( 200,000)Cash received – taxable in 2008 ( 120,000)Taxable income 4,180,000

Total income tax expense (4,500,000 x 35%) 1,575,000


Percentage of completion 3,500,000Cost recovery method 2,200,000Temporary difference 1,300,000

Deferred tax liability (35% x 1,300,000) 455,000


The two items are nondeductible expense for tax purposes and therefore permanent differences.


Deferred tax asset (200,000 x 35%) 70,000

The unearned income on December 31, 2008 of P200,000 will result to a deferred tax asset because it is a future deductible temporary difference.


Current tax expense (35% x 150,000) 52,500


The deferred tax liability of P75,000 is noncurrent.


Current tax expense 260,000Income tax benefit (400,000 – 300,000) (100,000)Total income tax expense 160,000


Pretax accounting income 1,000,000Permanent difference:

Premium on officers’ life insurance (nondeductible) 90,000Accounting income subject to tax 1,090,000Temporary differences:

Rent income ( 50,000)Depreciation ( 60,000)

Taxable income 980,000

Income tax payable (980,000 x 35%) 343,000

The income tax payable is actually the current tax expense since there is no income tax payment during the year.


Income before tax and depreciation 2,000,000Tax depreciation for 2008 400,000Taxable income 1,600,000

Current income tax liability (1,600,000 x 35%) 560,000


Taxable income 380,000Excess tax depreciation (134,000 – 80,000) 54,000Goodwill impairment loss ( 45,000)Interest on treasury bills 25,000Pretax accounting income 414,000

The pretax accounting income is the accounting income per book and not the accounting income subject to tax.


The impact of the difference in the equipment of P80,000 is a higher financial income and therefore will result to a deferred tax liability. Accordingly, it is a future taxable temporary difference.

The difference of P75,000 is a permanent difference because the officers’ insurance premium is nondeductible. Therefore, this difference has no deferred tax consequence.

The impact of the difference of P50,000 in warranty liability is a higher taxable income and therefore will result to a deferred tax asset. Accordingly, it is a future deductible temporary difference.

Problem 4-26

Question 1 – Answer BCurrent tax expense (1,400,000 x 35%) 490,000

Question 2 – Answer CDeferred tax liability – noncurrent (250,000 x 35%) 87,500


Accounting income 6,000,000Future taxable amounts:

2009 (1,100,000)2010 (1,200,000)2011 (1,200,000)


Income tax payable (2,500,000 x 35%) 875,000


Pretax accounting income 2,000,000Permanent differences:

Interest income ( 500,000)Insurance premium 100,000

Accounting income subject to tax 1,600,000Temporary differences:

Gross profit on installment sale (4,500,000)Warranty liability 2,000,000

Net loss carryover ( 900,000)

Warranty liability (2,000,000 x 35%) 700,000Net loss carryover (900,000 x 35%) 315,000Gross deferred tax asset 1,015,000

Gross deferred tax liability (4,500,000 x 35%) 1,575,000


Pretax accounting income 20,000,000Taxable temporary differences ( 3,000,000)Deductible temporary differences 2,000,000Taxable income 19,000,000

Income tax payable (19,000,000 x 35%) 6,650,000


Deferred tax liability – 12/31/2008 (500,000 x 35%) 175,000

The deferred tax liability is based on the cumulative future taxable temporary difference of P500,000 on December 31, 2008.


Deferred tax expense (1,000,000 x 35%) 350,000Income tax benefit (200,000 x 35%) ( 70,000)Net deferred tax expense 280,000

Current tax expense (7,000,000 x 35%) 2,450,000

Taxable income 7,000,000Installment accounts receivable 1,000,000Litigation liability ( 200,000)Accounting income subject to tax 7,800,000 Income tax expense – total (7,800,000 x 35%) 2,730,000


Motor vehicle – carrying amount 1,650,000Motor vehicle – tax base 1,250,000Future taxable amount 400,000

Deferred tax liability (35% x 400,000) 140,000

The differences in accounts receivable, warranty and deposit are future deductible differences and therefore will give rise to deferred tax asset.


The deferred tax asset on December 31, 2008 is supposed to be the total deductible temporary differences of P2,000,000 times 35% or P700,000.

However, this amount cannot be fully recognized because there is strong evidence that future taxable income may not be available.

PAS 12 provides that a deferred tax asset shall be recognized only to the extent that it is probable that future taxable income will be available against which the deductible temporary difference can be used.

Since there are taxable temporary differences that will reverse in 2009, this will result to future taxable income.

Accordingly, the deferred tax asset on December 31, 2008 is recognized only to the extent of the taxable temporary differences of P1,200,000 times 35% or P420,000.

Problem 4-34



Excess tax depreciation 800,000Estimated product claim liability ( 1,200,000)Installment sales income not included in taxable income 2,600,000Accounting income subject to tax 10,200,000

Total income tax expense (35% x 10,200,000) 3,570,000


Deferred tax asset – 12/31/2008 (35% x 1,200,000) 420,000

The accrual for product liability in excess of actual claim is a future deductible amount and therefore will result to a deferred tax asset.

Question 3 - Answer A

Excess tax depreciation 800,000Installment sales income 2,600,000Total future taxable amount 3,400,000

Deferred tax liability – 12/31/2008 (35% x 3,400,000) 1,190,000


Deferred tax asset – 12/31/2008 (2,000,000 x 35%) 700,000


1. To record increase in deferred tax liability:

Income tax expense 4,000Deferred tax liability (144,000 – 140,000) 4,000

2. To record decrease in deferred tax asset:Income tax expense 40,000

Deferred tax asset 40,000

CHAPTER 6

Problem 6-1 Problem 6-2 Problem 6-31. D 6. C 11. A 1. A 6. B 1. C2. A 7. A 12. A 2. D 7. C 2. D3. A 8. A 13. A 3. A 8. A 3. A4. B 9. C 14. C 4. C 9. A 4. A5. D 10. D 15. A 5. A 10. C 5. B

Problem 6-4

2008 Benefit expense 200,000Cash (4,000,000 x 5%) 200,000

2009 Benefit expense 210,000Cash (4,200,000 x 5%) 210,000

Problem 6-5

2008 Benefit expense 850,000Cash 700,000Prepaid/accrued benefit cost 150,000

2009 Benefit expense 1,000,000 Prepaid/accrued benefit cost 50,000

Cash 1,050,000

Noncurrent liability – 12/31/2008Acrued benefit cost 150,000

Noncurrent liability – 12/31/2009Accrued benefit cost 100,000

Problem 6-6

1. Annual pension payment – PBO (300,000 x 1.48 x 3% x 12) 159,840

2. Annual pension payment – ABO (300,000 x 3% x 12) 108,000

Problem 6-7

1. Annual pension payment – ABO (500,000 x 2% x 10 years) 100,000Multiply by PV of an ordinary annuity of 1 at 8% for 15 years 8.559Present value – 1/1/2034 855,900Multiply by PV of 1 at 8% for 25 years 0.146Accumulated benefit obligation – 1/1/2009 124,961

2. Future salary – PBO (500,000 x 2.094) 1,047,000

Annual pension payment – PBO (1,047,000 x 2% x 10 years) 209,400Multiply by PV of an ordinary annuity of 1 at 8% for 15 years 8.559 Present value – 1/1/2034 1,792,255Multiply by PV of 1 at 8% for 25 periods 0.146Projected benefit obligation – 1/1/2009 261,669

Problem 6-8

1. Service cost 1,550,000Interest cost (10% x 4,000,000) 400,000Expected return (12% 5,000,000) ( 600,000)Benefit expense 1,350,000

2. Benefit expense 1,350,000Prepaid/accrued benefit cost 150,000

Cash 1,500,000

3. P/ABC – January 1 (5,000,000 – 4,000,000) 1,000,000Debit adjustment 150,000Debit balance 1,150,000

4. FVPA – January 1 5,000,000Contribution 1,500,000Actual return 600,000Balance – December 31 7,100,000

PBO – January 1 4,000,000Service cost 1,550,000Interest cost 400,000Balance – December 31 5,950,000Prepaid/accrued benefit cost – December 31 1,150,000

Problem 6-9

1. Current service cost 600,000Interest cost (10% x 6,500,000) 650,000Expected return (8% x 5,750,000) (460,000)Benefit expense 790,000

2. Benefit expense 790,000Prepaid/accrued benefit cost 110,000

Cash 900,000

3. P/ABC –January 1 (credit) (750,000)Debit adjustment 110,000Balance – December 31 (640,000)

4. FVPA – January 1 5,750,000Contribution 900,000Actual return 460,000Balance – December 31 7,110,000

PBO – January 1 6,500,000Current service cost 600,000Interest cost 650,000Balance – December 31 7,750,000P/ABC – December 31(credit) ( 640,000)

Problem 6-10

1. Current service cost 1,450,000Interest cost (10% x 7,600,000) 760,000Expected return (8% x 6,725,000) ( 538,000)Benefit expense 1,672,000

Actual return 500,000Expected return 538,000Actuarial loss – deferred ( 38,000)

2. Benefit expense 1,672,000Cash 1,500,000

Prepaid/accrued benefit cost 172,000

3. P/ABC – January 1 (credit) 875,000Credit adjustment 172,000Balance – December 31 1,047,000

4. FVPA – January 1 6,725,000Contribution 1,500,000Actual return 500,000Balance December 31 8,725,000Actuarial loss 38,000Total debits 8,763,000

PBO – January 1 7,600,000Current service cost 1,450,000Interest cost 760,000Balance – December 31 9,810,000P/ABC – December 31 (credit) (1,047,000)

Problem 6-11

Annual benefit (5% x 1,500,000) 75,000

2008 Current service cost (75,000 x .361) 27,075 Interest cost 0 Benefit cost 27,075

2009 Current service cost (75,000 x .404) 30,300 Interest cost (12% x 27,075) 3,249 Benefit expense 33,549

Problem 6-12

1. Actual fair value of plan assets 7,200,000Expected fair value 5,400,000Actuarial gain -1/1/2008 1,800,000

2. Actuarial gain 1,800,000Corridor (10% x 7,200,000) 720,000Excess actuarial gain 1,080,000

Amortization of actuarial gain (1,080,000 / 10) 108,000

Problem 6-13

1. Expected return2008 (12% x 5,000,000) 600,0002009 (12% x 6,750,000) 810,000

2. Fair value of plan assets – 1/1/2008 5,000,000Add: Expected return in 2008 600,000Expected fair value – 1/1/2009 5,600,000

1/1/2008 1/1/20093. Actual fair value 5,000,000 6,750,000

Expected fair value 5,000,000 5,600,000Actuarial gain 0 1,150,000

4. 2008 – No amortization because there is no actuarial gain or loss on January 1, 2008.

2009 Actuarial gain – 1/1/2009 1,150,000 Corridor (10% x 7,000,000) 700,000

Excess gain to be amortized 450,000

Amortization of actuarial gain (450,000 / 10) 45,000

Problem 6-14Aye Bee Cee

Cumulative actuarial loss 350,000 900,000 925,000Corridor – 10% of greater

Aye (10% x 5,000,000) 500,000Bee (10% x 6,500,000) 650,000Cee (10% x 8,000,000) _______ _______ 800,000

Excess 0 250,000 125,000

Amortization of actuarial lossAye NoneBee (250,000 / 8) 31,250Cee (125,000 / 5) 25,000

Problem 6-15

1. Expected Actual Gain (Loss)FVPA 4,000,000 5,500,000 1,500,000PBO 4,800,000 5,000,000 ( 200,000)Net actuarial gain - 1/1/2008 1,300,000

2. FVPA – January 1, actual 5,500,000PBO – January 1, actual 5,000,000Deferred actuarial gain 1,300,000Total credits 6,300,000P/ABC – January 1 (credit) ( 800,000)

3. Current service cost 1,750,000Interest cost 700,000Expected return (8% x 5,500,000) ( 440,000)Amortization of actuarial gain ( 75,000)Total benefit expense 1,935,000

Deferred actuarial gain – January 1 1,300,000Corridor (10% x 5,500,000) 550,000Excess over corridor 750,000

Amortization actuarial gain (750,000 / 10) 75,000

4. Benefit expense 1,935,000Cash 1,500,000Prepaid/accrued benefit cost 435,000

5. P/ABC – January 1 ( 800,000)Credit adjustment ( 435,000)Balance – December 31 (1,235,000)

FVPA – January 1 5,500,000Contribution 1,500,000Actual return 440,000FVPA – December 31 7,440,000PBO – January 1 5,000,000Service cost 1,750,000Interest cost 700,000

PBO – December 31 7,450,000Deferred actuarial gain – December 31 (1,300,000 – 75,000) 1,225,000Total credits 8,675,000P/ABC – December 31 (1,235,000)

Problem 6-16

2008 Expected Actual Gain (Loss)

FVPA - 1/1 6,600,000 7,400,000 800,000PBO - 1/1 6,600,000 7,000,000 (400,000)Net actuarial gain 400,000Corridor (10% x 7,400,000) 740,000Excess over corridor 0


FVPA - 1/1 7,800,000 9,000,000 1,200,000PBO - 1/1 7,600,000 7,800,000 ( 200,000)Net actuarial gain 1,000,000Add: Net actuarial gain – 1/1/2009 400,000Cumulative actuarial gain 1,400,000Corridor (10% x 9,000,000) 900,000Excess over corridor 500,000

Cumulative actuarial gain 1,400,000Amortization of actuarial gain for 2009 (500,000 / 10) ( 50,000)Net actuarial gain – 12/31/2009 1,350,000


FVPA - 1/1 9,600,000 6,000,000 (3,600,000)PBO - 1/1 8,600,000 8,000,000 600,000Net actuarial loss (3,000,000)Net actuarial gain – 1/1/2010 1,350,000Cumulative actuarial loss (1,650,000)Corridor (10% x 8,000,000) 800,000Excess over corridor ( 850,000)

Cumulative actuarial loss (1,650,000)Amortization of actuarial loss for 2010 (850,000 / 10) 85,000Net actuarial loss – 12/31/2010 (1,565,000)

Problem 6-17

1. Current service cost 2,100,000Interest cost 240,000Expected return ( 380,000)Amortization of actuarial loss 40,000Amortization of past service cost 60,000Total benefit expense 2,060,000


Cash 2,200,000

Problem 6-18

1. Current service cost 800,000Interest cost 450,000Expected return ( 600,000)Amortization of past service cost (300,000 / 3) 100,000Total benefit expense 750,000

2. Benefit expense 750,000Cash 500,000Prepaid/accrued benefit cost 250,000

P/ABC – January 1 800,000Credit adjustment ( 250,000)P/ABC – December 31, debit 550,000

3. FVPA – January 1 6,000,000Contribution 500,000Actual return 600,000Total 7,100,000Less: Benefits paid 150,000FVPA – December 31 6,950,000

PBO – January 1 5,500,000Current service cost 800,000Interest cost 450,000Total 6,750,000Less: Benefits paid 150,000PBO – December 31 6,600,000

FVPA 6,950,000Unamortized past service cost (300,000 – 100,000) 200,000PBO (6,600,000)P/ABC – December 31 550,000

4. Benefit expense 50,000Prepaid/accrued benefit cost 50,000

Debit balance – surplus 550,000Limit (200,000 + 300,000) 500,000Adjustment 50,000

Problem 13-23

1. Current service cost 925,000Interest cost 660,000Expected return ( 570,000)Amortization of PSC (1,250,000 / 10) 125,000Amortization of actuarial gain ( 30,000)Total benefit expense 1,110,000

Actuarial gain – January 1 850,000Corridor (10% x 5,500,000) 550,000Excess over corridor 300,000

Amortization actuarial gain (300,000 / 10) 30,000


Cash 1,350,000

3. FVPA – January 1 4,750,000Contribution 1,350,000Actual return 570,000Total 6,670,000Less: Benefits paid 995,000FVPA – December 31 5,675,000

Past service cost 1,250,000Amortization for 2008 ( 125,000)Unamortized PSC – December 31 1,125,000

PBO –January 1 5,500,000Current service cost 925,000Interest cost 660,000Increase due to changes n actuarial assumptions 140,000Total 7,225,000Less: Benefits paid 995,000PBO – December 31 6,230,000

Unrecognized actuarial gain – January 1 850,000Amortization for 2008 ( 30,000)Balance 820,000Actuarial loss due to increase in accrued benefit obligation ( 140,000)Net unrecognized gain – December 31 680,000

FVPA 5,675,000Unamortized PSC 1,125,000Total debits 6,800,000

PBO 6,230,000Unrecognized actuarial gain 680,000Total credits 6,910,000P/ABC – December 31 ( 110,000)

P/ABC – January 1 ( 350,000)Debit adjustment 240,000P/ABC – December 31 ( 110,000)

Problem 13-24

1. Current service cost 1,000,000Interest cost (10% x 7,500,000) 750,000Expected return (10% x 8,500,000) ( 850,000)Amortization of PSC (350,000 / 10) 35,000Amortization of actuarial loss (150,000 / 10) 15,000Total benefit expense 950,000

Unamortized actuarial loss – January 1 1,000,000Corridor (10% x 8,500,000) 850,000Excess loss to be amortized 150,000

2. P/ABC – January 1 2,350,000Overfunding (1,200,000 – 950,000) 250,000P/ABC – December 31 2,600,000

3. FVPA – January 1 8,500,000Contribution 1,200,000Actual return (12% x 8,500,000) 1,020,000Total 10,720,000Less: Benefits paid 1,500,000FVPA – December 31 9,220,000

Unamortized PSC – January 1 350,000Amortization for 2008 ( 35,000)Balance December 31 315,000

Unrecognized actuarial loss – January 1 1,000,000Amortization for 2008 ( 15,000)Balance – December 31 985,000Actuarial gain due to decrease in accrued benefit obligation ( 200,000)Actuarial gain due to the difference in actual and expected

return (1,020,000 – 850,000) ( 170,000)Net unrecognized actuarial loss – December 31 615,000

PBO – January 1 7,500,000Current service cost 1,000,000Interest cost 750,000Total 9,250,000Less: Benefits paid 1,500,000

Decrease in obligation 200,000 1,700,000PBO – December 31 7,550,000

Summary

FVPA 9,220,000Unamortized PSC 315,000Unrecognized actuarial loss 615,000Total 10,150,000PBO ( 7,550,000)P/ABC – December 31 2,600,000

4. Benefit expense 1,670,000Prepaid/accrued benefit cost 1,670,000

(2,600,000 – 930,000)


Current service cost 1,600,000Actual and expected gain on plan assets ( 350,000) Amortization of past service cost 50,000Annual interest on pension liability 500,000Total pension expense 1,800,000


Current service and interest cost 620,000Return on plan assets (10% x 1,000,000) (100,000)

Retirement benefit expense 520,000

Contribution to the plan 1,000,000Retirement benefit expense 520,000Prepaid benefit cost 480,000


Contribution related to past service cost 114,400Amortization of past service cost 83,400Prepaid pension cost 31,000

The current service cost is fully funded at the end of each year.

Problem 6-24


Annual pension payment – ABO (750,000 x 3% x 12 years) 270,000


Future salary (750,000 x 2.19) 1,642,500

Annual pension payment – PBO (1,642,500 x 3% x 12) 591,300


Projected benefit obligation:Before amendment 1,300,000After amendment 1,900,000Unrecognized PSC 600,000


Pension expense in 2008 800,000Contribution to the plan in 2008 500,000Accrued benefit cost -12/31/2008 300,000Pension expense in 2009 900,000Total 1,200,000Accrued benefit cost -12/31/2009 200,000Contribution to the plan in 2009 1,000,000


Unrecognized net loss 235,000Corridor (10% x 1,650,000) 165,000Excess over corridor 70,000

Amortization (70,000 / 5) 14,000


PBO – January 1 7,200,000Service cost 1,800,000

Interest cost (10% x 7,200,000) 720,000Total 9,720,000Less: Benefits paid 1,500,000PBO – December 31 8,220,000


FVPA 3,450,000PBO 5,700,000Prepaid/accrued benefit cost (2,250,000)


Lump sum payments 475,000PV of periodic payments 155,000Total liability 630,000

The entry to recognize the liability for termination benefits is as follows:

Accrued pension cost 45,000Loss on termination benefits 585,000

Liability for termination benefits 630,000


PBO – January 1 3,000,000Current service cost (squeeze) 700,000Interest cost (10% x 3,000,000) 300,000Total 4,000,000Less: Benefits paid 500,000PBO – December 31 3,500,000


FVPA – December 31 3,900,000FVPA – January 1 3,500,000Increase in fair value 400,000Add: Benefits paid 250,000Total 650,000Less: Contribution to the plan 280,000Actual return 370,000


Unrecognized actuarial gain 1,200,000Corridor (10% x 6,400,000) 640,000Excess over corridor 560,000

Amortization (560,000 / 8) 70,000


Current service cost 900,000Interest cost 750,000Expected return ( 600,000)Amortization of PSC (500,000 / 5) 100,000

Amortization of actuarial loss (1,000,000 – 750,000 / 5) 50,000Amortization of transition loss (150,000 / 3) 50,000Total benefit expense 1,250,000




PBO – January 1 3,500,000Current service cost (squeeze) 600,000Interest cost (10% x 3,500,000) 350,000 Total 4,450,000Benefits paid ( 250,000) PBO – December 31 4,200,000


FVPA – January 1 8,750,000Contribution to the fund 700,000Actual return on plan assets 950,000 Total 10,400,000Benefits paid ( 600,000) FVPA – December 31 9,800,000

Problem 6-39


Current service cost 1,800,000Interest cost 1,300,000Expected return (1,100,000)Amortization of past service cost (2,600,000 / 10) 260,000Amortization of actuarial gain (600,000 / 10) ( 60,000) Benefit expense 2,200,000

Actuarial gain – January 1 1,800,000Corridor (10% x 12,000,000) 1,200,000Excess to be amortized 600,000


FVPA – January 1 9,500,000Contribution to the plan 2,700,000Actual return 1,100,000Benefits paid ( 2,000,000)FVPA – December 31 11,300,000


PBO – January 1 12,000,000Current service cost 1,800,000Interest cost 1,300,000Increase in PBO due to changes in actuarial assumptions 280,000Benefits paid ( 2,000,000)

PBO – December 31 13,380,000

Question 4 – Answer D

Actuarial gain – January 1 1,800,000Amortization for 2008 ( 60,000)Actuarial loss during 2008 due to increase in PBO ( 280,000)Net actuarial gain – December 31 1,460,000


Prepaid/accrued benefit cost – January 1 (credit) (1,700,000)Overfunding (2,700,000 – 2,200,000) 500,000Balance – December 31 (credit) (1,200,000)

Proof

FVPA 11,300,000Unamortized past service cost (2,600,000 – 260,000) 2,340,000PBO (13,380,000)Net actuarial gain ( 1,460,000)Prepaid/accrued benefit cost – December 31 (credit) ( 1,200,000)

Problem 6-40


Service cost 1,200,000Interest cost (9% x 10,000,000) 900,000Expected return (10% x 9,200,000) ( 920,000) Pension expense 1,180,000


Fair value of pension fund – January 1 9,200,000Actual return 250,000Contribution to the fund 1,050,000Benefits paid (1,100,000)Fair value of pension fund – December 31 9,400,000


PBO – January 1 10,000,000Service cost 1,200,000Interest cost 900,000Benefits paid ( 1,100,000)PBO – December 31 11,000,000


Expected return 920,000Actual return 250,000Unrecognized actuarial loss 670,000


Prepaid/accrued benefit cost – January 1 (credit) (800,000)Underfunding (1,180,000 – 1,050,000) (130,000)Balance – December 31 (930,000)

Proof

Fair value of pension fund – December 31 9,400,000Deferred actuarial loss 670,000Projected benefit obligation – December 31 (11,000,000)Prepaid/accrued benefit cost ( 930,000)

Problem 6-41


Expected return (12% x 2,850,000) 342,000Actual return 315,000Pension loss deferral in 2008 27,000

Question 2 – Answer D

Unrecognized pension gain – January 1 420,000Corridor (10% x 3,900,000) 390,000Excess to be amortized 30,000

Amortization of pension gain (30,000 / 10) 3,000


Pension expense before pension gain or loss component 530,000Amortization of pension gain ( 3,000)Pension loss deferral in 2008 ( 27,000)Pension expense including pension gain or loss 500,000


Unrecognized pension gain – January 1 420,000Amortization of pension gain ( 3,000)Pension loss deferral in 2008 ( 27,000)Unrecognized pension gain – December 31 390,000

fin-acc 2 summer topics

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