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544 Chapter 10 Shareholders' 10. When capital stock is issued for consideration in the form of (d) Feb. property other than cash, the carrying amount of the property is used to record the transaction.503 a Huff Corp. began operations on January 1, 20x8. Huff recognizes revenues from all sales under the accrual method for financial reporting purposes and appropriately uses the installment method for income tax purposes, Huff's gross margin on installment sales under each method was as follows: Year Accrual method 20x8 800,000 Installment method 20x9 1,300,000 300,000 700,000 Enacted income tax rates are 30% for 20x9 and 25% thereafter. There are no other temporary differences. In Huff's December 31, 20x9, balance sheet, the deferred income tax liability should be a. 150,000 b. 180,000 c. 275,000 d. 330,000 IAICPA) 9. Stone Co. began operations in 20x1 and reported P225,000 in income before income taxes for the year. Stone's 20x1 tax depreciation exceeded its book depreciation by P25,000. Stone also had nondeductible book expenses of P10,000 related to permanent differences. Stone's tax rate for 20x1 was 40%, and the enacted rate for years after 20x1 is 35%. In its December 31, 20x1, balance sheet, what amount of deferred income tax liability should Stone report? c. 12,250 d. 14,000 a. 8,750 b. 10,000 (AICPA)le 501 benefit For the year ended December 31, 20x1, Mont Co.'s books showed income of P600,000 before provision for income tax ease in expense. To compute taxable income for taxation purposes, the following items should be noted: it Income from exempt municipal bonds Depreciation deducted for tax purposes in excess of depreciation recorded on the books 60,000 ease in Proceeds received from life insurance on death of officer 120,000 Estimated tax payments 100,000 Enacted corporate tax rate 30% se What amount should Mont report at December 31, 20x1, as its Income tax liability? ne lax a. 96,000 b. 114,000 IAICPA) C. 156,000 d. 162,000 J. Leer Corp.'s pretax income in 20x7 was P100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows; pense . Depreciation in the financial statements was P8,000 more than tax depreciation. . The equity method of accounting resulting in financial statement income of P35,000. A P25,000 dividend was received during the year, which is eligible for the 80% dividends received deduction. or the deral Leer's effective income tax rate was 30%% in 20x7. In its 20x7 Income statement, Leer should report a current provision for 0,000 income taxes of C. 21,900 d. 18,600 a. 26,400 b. 23,400 2.000 (AICPA) 1900 For the year ended December 31, 20x1, Tyre Co. reported Pretax financial statement income of P750,000, Its taxable income was P650,000. The difference is due to accelerated bility depreciation for income tax purposes. Tyre's effective income tax rate is 30%, and Tyre made estimated tax payments duringPeers Equity 552 Chapter it J aorb PROBLEM 5: MULTIPLE CHOICE - THEORY 1. If shares are issued below par or issued value, the deficiency freesury shares ar b. parv of the consideration received is recorded as "discount on share capital." The discount is presented in the statement of financial position as a. a receivable from the shareholder concerned JOBLEM 6: MULTI b. a deduction in shareholders' equity line Co.'s adjust c. an addition in shareholders' equity includes the follow d. a and b gary shares, P3 pa 2. Legal capital is the portion of contributed capital that cannot a premium ery stock, at cost be distributed to the owners during the lifetime of the corporation unless the corporation is dissolved and all of its emulated other co liabilities are settled first. For no-par value shares, legal capital used earnings app is ned earnings una a. the aggregate par value of shares issued and subscribed. b. the total consideration received or receivable from shares amount should issued or subscribed. december 31, 20x1, c. the aggregate stated value of shares issued and 4 1680,090 subscribed. d. the aggregate market value of shares issued and subscribed. in April 1, 20x9, 3. How should the excess of the subscription price over the par be following stock value of ordinary subscribed be recorded? Ordinary shar a. As share premium when the subscription is received. issued for P30 b. As share premium when the subscription is collected. Preference sha . As retained earnings when the subscription is received. issued for P50 (AICPA) d. As share premium when the capital stock is issued. "April 1, 20x9, 4. Share issuance costs are recognized directly in equity. If the related share premium is insufficient to offset any share mary shares issuance costs, the issuance costs are ronco a. recognized as expense in profit or loss b. charged directly to retained earnings c. charged directly to share capitalChapter 9 500 For the showed a. income tax expense (benefit) c. income tax payable b. current tax expense d. deferred tax expense (benefit) apense. the follow 7. If the increase in deferred tax liability exceeds the increase in came from e deferred tax asset during the period, there is a. income tax expense (benefit) c. deferred tax benefit Apreciation b. current tax expense d. deferred tax expense warneds recel ated tax 8. If the increase in deferred tax asset exceeds the increase in deferred tax liability during the period, there is loaded corpor a. income tax expense (benefit) c. deferred tax benefit that amount b. current tax expense d. deferred tax expense come tax lia 9. If the current tax expense is greater than the income tax 2 96,000 expense during the period, there must be a a. deferred tax benefit c. income tax payable b. deferred tax expense d. prepaid income tax Leer Corp temporary 10. If the current tax expense is less than the income tax expense financial st during the period, there must be a . Deprec a, deferred tax benefit c. income tax payable than ta b. deferred tax expense d. prepaid income tax The eq stateme PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL receive 1. Pine Corp.'s books showed pretax income of P800,000 for the divider year ended December 31, 20x1. In the computation of federal income taxes, the, following data were considered: ver's effective Gain on an involuntary conversion (expropriation) 350.000 scome statem Depreciation deducted for tax purposes in excess of come taxes of depreciation deducted for book purposes 50,000 a. 26.400 Estimated tax payments during 20x1 70,000 Income tax rate 30% What amount should Pine report as its current income tax liability For the yea on its December 31, 20x1, balance sheet? Pretax fina a. 50,000 b. 65,000 c. 120,000 d. 135,000 income wa (AICPA) depreciation tax rate is554 Chuapt 3. On March 1, 20x1, Rya Corp. issued 1,000 shares of its Paja sh value ordinary shares and 2.000 shares of its P20 par value convertible preference shares for a total of P80,000. Art date, Rya's ordinary share was selling for P36 per share, and the convertible preference share was selling for P27 per share What amount of the proceeds should be allocated to Ry Account fo convertible preference share? ucount a. 60,000 b. 54,000 C. 48,000 d. 44,000 (AICPA) 4. The stockholders equity section of Peter Corporation's balang sheet at December 31, 20X2, was as follows: buined ear Ordinary shares (P10 par value, authorized 1,000,000 and turnin shares, issued and outstanding 900,000 shares) P 9,000,000 chution to Share premium 2,700,000 bebusiness Retained earnings 1,300,000 On January 2, 20X3, Peter purchased and retired 100,000 shares of retained its stock for P1,800,000. Immediately after retirement of these Linstricter 100,000 shares, the balances in the share premium and retained for future d earnings accounts should be Share premium Retained earnings Appropriate a. P 900,000 P1,300,000 a cot avail b. P1,400,000 P. 800,000 bequent C. P1,900,000 P1,300,000 d. P2,400,000 (AICPA) P 800,000 Approp 5. Asp Co. was organized on January 2, 20x1, with 30,000 ub disclosu authorized shares of P10 par ordinary shares. During 20x1 the corporation had the following capital transactions: Jan. 5 Issued 20,000 shares at P15 per share. July 14 Purchased 5,000 shares at P17 per share. ha cost of f Dec. 27 Reissued the 5,000 shares held in treasury at P20 per share. helpry re Asp used the cost method to record the purchase and reissuance of the treasury shares. In its December 31, 20x1, balance sheet what amount should Asp report as additional paid-in capital in excess of par? a. 100,000 b. 125,000 (AICPA) C. 140,000 d. 115,000Incorn 490 Chapter 9 PROBLEMS 2. PROBLEM 1: TRUE OR FALSE TRUE 1. PAS 12 Income Taxes requires reporting entities to use the asset and liability method of accounting for income taxes. FALSE 2. Rent revenue received in advance is recognized as revenue for financial reporting purposes prior to its recognition for tax purposes. (Ad 3. Estimated warranty liabilities are deductible on the tax return prior to being reported in the income statement. 3. FALSE 4 . "Unrealized losses on held for trading securities" result in lower taxable income than financial accounting income. TRUE 5. The government uses the income tax laws for raising tax revenues and for implementing fiscal policy. TRUE 6. Permanent differences between financial and taxable income do not create any accounting or reporting problems. FALSE 7. Nontaxable revenues are added to, and nondeductible expenses are deducted from, financial income to determine the income that is subject to tax. 8. Current tax laws in the Philippines require a 3-year carryback of any net operating losses. 9. Current tax laws in the Philippines permit a 3-year carryforward of net operating losses. TRUE 10. The benefit that arises from the use of net operating loss carryforwards is used to reduce the tax payment in the current period.Pter In Shareholders' Equity (Part 1) 553 e deficiency d. aorb ount on share t of financial Treasury shares are accounted for at a. cost b. par value c. market value d. fair value PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL 1. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances: that cannot Ordinary shares, P3 par P600,000 ime of the Share premium Treasury stock, at cost 800,000 nd all of its Accumulated other comprehensive income (Debit) 50,000 legal capital Retained earnings appropriated for uninsured earthquake losses 150,000 20,000 bscribed. Retained earnings unappropriated 200,000 from shares What amount should Zinc report as total stockholders' equity in its December 31, 20x1, balance sheet? ssued and a. 1,680,000 b. 1,720,000 c. 1,780,000 d. 1,820,000 YAICPA) ssued and 2. On April 1, 20x9, Hyde Corp., a newly formed company, had the following stock issued and outstanding: . Ordinary shares, P1 par value, 20,000 shares originally over the par issued for P30 per share. Preference shares, P10 par value, 6,000 shares originally eived. issued for P50 per share. lected. eceived. Hyde's April 1, 20x9, statement of shareholders' equity should ued. report Share premium Ordinary shares Preference shares P820,000 a. P20,000 P60,000 P580,000 quity. If the P300,000 PO any share b. P20.000 C. P600,000 P300,000 P240,000 d. P600,000 P60,000 LAICPA)Pier In Shareholders' Equity (Part 1) 543 their relative fair values. When fair values are indeterminable, Ex the allocation is based on the intrinsic value of the warrants (e, fair value of the ordinary shares minus subscription price). The warrants are assigned their intrinsic value and the excess of the issue price is allocated to the preference shares. XX XX . Cash and non-cash assets received as donations from shareholders are credited to share premium. , Donated shares are initially recorded through memo entry and are recognized only upon their reissuance. PROBLEMS PROBLEM 1: TRUE OR FALSE XX 1. A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal age and a majority of whom are residents of the Philippines. 2. To amend the articles of incorporation, a majority vote of the issued is board plus a vote by shareholders representing at least two- roportional thirds (2/3) of the outstanding share capital is needed. inable fair 3. Under the memorandum method of accounting for share excess is capital, the entity records its authorized capitalization in a fair value debit/credit form. 4. Preferred stock is generally issued with a par value. shares as 5. In the Philippines, a corporation may issue only one class of hares are shares which is the preferred stock. 6. Convertible preferred stock allows the issuing corporation to recorded redeem the stock. lled, any 7. The call price on callable preferred stock is usually specified in the original agreement and provides for payment of dividends in arrears, if applicable, as part of the repurchase price. es are not B. Stock Subscriptions Receivable is usually regarded as a ion, the the new current asset . " Additional paid-in capital for the excess of the stock subscription price over par or stated value is recorded at the Ce shares allocated time of subscription.empe Fares 199 ctions for be preciating the Deferred tax liability to be presented in the statement of d is used for bass pro financial position as incurred paid Deferred tax asset to be presented in the statement of financial position come tax rate wit Ask a classmate to answer the requirements. (Do NOT show him/her your suggested answers.) as of January 1, 28 Check his/her work then submit his/her grade to your teacher. ility as of Decents PROBLEM 5: MULTIPLE CHOICE - THEORY If the carrying amount of an asset exceeds its tax base, the difference is a of December 31, Jug a: deductible temporary difference c. deferred tax asset for the year? b. taxable temporary difference d. deferred tax liability for the year? (benefit ) for the yard 1. This causes the profit determined under PERSs to be greater than the taxable profit determined under tax laws. a. deductible temporary difference c. deferred tax asset b. taxable temporary difference d. deferred tax liability he end of its first part 3. This causes the profit determined under PERSs to be less than the taxable profit determined under tax laws. a. deductible temporary difference c. deferred tax asset b. taxable temporary difference d. deferred tax liability 4 Taxable temporary difference multiplied by the tax rate equals al reporting a. income tax expense c. deferred tax asset b. current tax expense d. deferred tax liability Deductible temporary difference multiplied by the tax rate Pequals a, income tax expense c. deferred tax asset b. current tax expense d. deferred tax liability It is the sum of the net changes in deferred tax liabilities and deferred tax assets during the period.502 20x1 of P90,000. What amount should Tyre report as current an usstalin income tax expense for 2001? b. 135,000 C. 195,000 d. 225,000 Ha. 105,000 (AICPA) 5. On January 2, 20x1, Ross Co. purchased a machine for P70,000) This machine has a 5-year useful life, a residual value of P10,000, and is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation Income tax rat expense was P25,000 for 20x1 and P20,000 for 20x2. Ross' 20%2 income, before income taxes and depreciation expense, was are no other temp P100,000 and its tax rate was 30%. If Ross had made no adance sheet, the estimated tax payments during 20x2, what amount of current income tax liability would Ross report in its December 31, 20x2, balance sheet? a. 26,400 b. 25,800 c. 24,000 d. 22.500 hey Co. began ope (AICPA) me before inco 6. Scott Corp. received cash of P20,000 that was included in acation exceed revenues in its 20x4 financial statements, of which P12,000 will not be taxable until 20x5. Scott's enacted tax rate is 30% for in tad nondeduct 20x4, and 25% for 20x5, What amount should Scott report in retarent difference its 20x4 balance sheet for deferred income tax liability? Gerarded rate for y a. 2,000 (AICPA) b. 2,400 C. 3,000 d. 3,600 balance sheet, paty shraild Ston 7. West Corp. leased a building and received the P36,000 annual rental payment on June 15, 20x9. The beginning of the lease b was July 1, 20x9. Rental income is taxable when received West's tax rates are 30% for 20x9 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in it December 31, 20x9, balance sheet? a. 5,4000 (AICPA) b. 7,200 C. 10,800 d. 14,400