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Financial Accounting and Reporting Test Bank
Accounting (De La Salle Lipa)
Studocu is not sponsored or endorsed by any college or university
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FINANCIAL ACCOUNTING AND REPORTING TEST BANK
8152017 – 1
PROBLEM 1 – STATEMENT OF FINANCIAL POSITION
The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax
expense.
Cash
Accounts receivable
Inventory
Property, plant and equipment
Accounts payable
Income tax payable
Preference share capital
Ordinary share capital
Share premium
Retained earnings – January 1
Net sales and other revenue
Cost of goods sold
Expenses
Income tax expense
6,000,000
14,000,000
10,000,000
25,000,000
9,000,000
6,000,000
3,000,000
15,000,000
4,000,000
9,000,000
80,000,000
48,000,000
12,000,000
11,000,000
126,000,000
__________
126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax
rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased in
transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing
P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on
December 31, 2018.
1. What amount should be reported as current assets on December 31, 2017?
a.
b.
c.
d.
29,200,000
29,700,000
29,500,000
30,000,000
2. What amount should be reported as current liabilities on December 31, 2017?
a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000
3. What is the net income for 2017?
a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000
4. What amount should be reported as total shareholders’ equity on December 31, 2017?
a.
b.
c.
d.
40,000,000
37,000,000
45,000,000
42,000,000
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Page
2
SOLUTION - PROBLEM 1
Question 1 Answer A
Cash
Accounts receivable
Inventory (10,000,000 - 500,000 - 300,000)
Total current assets
6,000,000
14,000,000
9,200,000
29,200,000
Question 2 Answer C
Net sales and other revenue
80,000,000
Cost of goods sold
Expenses
Income before tax
( 48,000,000)
( 12,000,000)
20,000,000
Tax expense (30% x 20,000,000)
Net income
( 6,000,000)
14,000,000
Tax expense
6,000,000
Payment during year
Income tax payable
(5,000,000)
1,000,000
Accounts payable
Income tax payable
Redeemable preference
Total current liabilities
8,200,000
1,000,000
3,000,000
12,200,000
Accounts payable per book
9,000,000
Goods in transit FOB destination
Goods held on consignment
Adjusted accounts payable
( 500,000)
( 300,000)
8,200,000
Question 3 Answer B
Net income
14,000,000
Question 4 Answer D
Ordinary share capital
Share premium
Retained earnings
Total shareholders’ equity
15,000,000
4,000,000
23,000,000
42,000,000
Retained earnings – January 1
Net income
Total retained earnings
9,000,000
14,000,000
23,000,000
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Page
3
PROBLEM 2 - STATEMENT OF FINNACIAL POSITION
3. On December 31, 2017, an entity showed the following current assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
500,000
2,500,000
2,000,000
100,000
5,100,000
Cash on hand including customer postdated check of P20,000 and employee
IOU of P10,000
Cash in bank per bank statement (outstanding checks on December 31,
2017, P70,000)
Total cash
130,000
370,000
500,000
Customers’ debit balances, net of customer deposit of P50,000
Allowance for doubtful accounts
Sale price of goods invoiced to customers at 150% of cost on December 29,
2017 but delivered on January 5, 2018 and excluded from reported
inventory
Total accounts receivable
1. What is the adjusted cash balance?
a.
b.
c.
d.
500,000
470,000
430,000
400,000
2. What is the net realizable value of accounts receivable?
.
a.
b.
c.
d.
1,970,000
1,820,000
1,800,000
1,950,000
3. What is the adjusted inventory?
a.
b.
c.
d.
2,000,000
2,375,000
2,500,000
2,750,000
4. What total amount of current assets should be reported?
a.
b.
c.
d.
4,900,000
4,830,000
4,780,000
4,630,000
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1,900,000
(
150,000)
750,000
2,500,000
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Page 4
SOLUTION – PROBLEM 2
Question 1 Answer D
Cash on hand
130,000
Customer postdated check
Employee IOU
Adjusted cash on hand
( 20,000)
( 10,000)
100,000
Cash in bank per bank statement
Outstanding checks
370,000
( 70,000)
Adjusted cash balance
300,000
400,000
Question 2 Answer B
Customers’ debit balances
1,900,000
Customer deposit erroneously netted
50,000
Customer postdated check
20,000
Accounts receivable
1,970,000
Allowance for doubtful accounts
Net realizable value
( 150,000)
1,820,000
Question 3 Answer C
Inventory per book
Undelivered goods incorrectly excluded from inventory (750,000 / 150%)
Adjusted inventory
2,000,000
500,000
2,500,000
Question 4 Answer B
Cash
Accounts receivable, net of allowance
Advances to employee - IOU
Inventory
Prepaid expenses
Total current assets
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400,000
1,820,000
10,000
2,500,000
100,000
4,830,000
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Page 5
PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME
An entity reported the following data for the current year:
Net sales
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Gain from expropriation of land
Income tax
Income from discontinued operations
Unrealized gain on equity investment at FVOCI
Unrealized loss on futures contract designated as a cash flow hedge
Increase in projected benefit obligation due to actuarial assumptions
Foreign translation adjustment – debit
Revaluation surplus
9,500,000
4,000,000
1,000,000
1,200,000
700,000
500,000
800,000
600,000
900,000
400,000
300,000
100,000
2,500,000
1. What amount should be reported as income from continuing operations?
a.
b.
c.
d.
3,100,000
2,300,000
1,800,000
2,900,000
2. What net amount should recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d.
800,000
3. What net amount in OCI should be presented as “may not be recycled to profit or loss?
a.
b.
c.
d.
3,400,000
2,700,000
3,700,000
3,100,000
4. What amount should be reported as net income?
a.
2,900,000
b. 2,300,000
c.
3,100,000
d. 2,400,000
5. What amount should be reported as comprehensive income?
a. 5,500,000
b. 2,900,000
c. 2,600,000
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d.
6,100,000
Page
6
SOLUTION - PROBLEM 3
Question 1 Answer B
Net sales
9,500,000
Cost of goods sold
Gross income
(4,000,000)
5,500,000
Gain from expropriation of land
500,000
Total income
6,000,000
Selling expenses
1,000,000
Administrative expenses
1,200,000
Interest expense
700,000
Income before tax
2,900,000
3,100,000
Tax expense
Income from continuing operations
( 800,000)
2,300,000
Question 2 Answer A
Unrealized gain on equity investment at FVOCI
Unrealized loss – cash flow hedge
Actuarial loss – increase in PBO
Translation adjustment – debit
Revaluation surplus
Net gain - OCI
900,000
( 400,000)
( 300,000)
( 100,000)
2,500,000
2,600,000
Question 3 Answer D
Unrealized gain on equity investment at FVOCI
900,000
Actuarial loss on PBO
Revaluation surplus
( 300,000)
2,500,000
Net amount of OCI not reclassified to profit or loss
3,100,000
Question 4 Answer A
Income from continuing operations
Income from discontinued operations
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2,300,000
600,000
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Net income
2,900,000
Question 5 Answer A
Net income
Net gain – OCI
Comprehensive income
2,900,000
2,600,000
5,500,000
Page 7
PROBLEM 4 – INVESTMENT IN ASSOCIATE
On January 1, 2017, an entity acquired a 10% interest in an investee for P3,000,000. The investment
was accounted for under the cost method. During 2017, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000.
On January 1, 2018, the entity acquired a further 15% interest in the investee for P8,500,000. On such
date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the
10% existing interest was P3,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an equipment
whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of
5 years.
The investee reported net income of P8,000,000 for 2018 and paid dividend of P5,000,000 on
December 31, 2018.
1. What amount of investment income should be recognized in 2017?
a.
b.
c.
d.
400,000
100,000
500,000
300,000
2. What is the implied goodwill arising from the acquisition on January 1, 2018?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d.
0
3. What total amount of income should be recognized by the investor in 2018?
a.
b.
c.
d.
2,000,000
2,500,000
2,300,000
1,800,000
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4. What is the carrying amount of the investment in associate on December 31, 2018?
a.
b.
c.
d.
12,550,000
12,350,000
11,950,000
12,750,000
Page
SOLUTION - PROBLEM 4
Question 1 Answer B
Dividend income (10% x 1,000,000)
100,000
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Existing 10% interest remeasured at fair value
3,500,000
New 15% interest
8,500,000
Total cost – January 1, 2018
12,000,000
Net assets acquired (25% x 36,000,000)
Excess of cost over carrying amount
( 9,000,000)
3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000)
Goodwill
( 1,000,000)
2,000,000
Question 3 Answer C
Share in net income (25% x 8,000,000)
Amortization of excess attributable to equipment (1,000,000 / 5 years)
Net investment income
2,000,000
( 200,000)
1,800,000
Fair value of 10% interest
3,500,000
Historical cost
3,000,000
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Remeasurement gain
500,000
Net investment income
1,800,000
Total income in 2018
2,300,000
If the investment in associate is achieved in stages the old interest is remeasured at fair value through
profit or loss.
Question 4 Answer A
Total cost January 1, 2018
12,000,000
Net investment income
1,800,000
Share in cash dividend (25% x 5,000,000)
Carrying amount – December 31, 2018
( 1,250,000)
12,550,000
Page 9
PROBLEM 5 – INVESTMENT IN ASSOCIATE
An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s
assets and liabilities at that date were as follows:
Cash
Accounts receivable
Inventory – FIFO
Land
Plant and equipment – net
Liabilities
Carrying amount
Fair value
1,000,000
4,000,000
8,000,000
5,500,000
14,000,000
7,000,000
1,000,000
4,000,000
9,000,000
7,000,000
22,000,000
7,000,000
The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The
entity sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000.
The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid
P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018.
1. What is the implied a goodwill arising from the acquisition?
a.
b.
c.
d.
200,000
600,000
800,000
400,000
2. What is the investment income for 2017?
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a.
b.
c.
d.
880,000
480,000
400,000
580,000
3. What is the investment income for 2018?
a.
b.
c.
d.
1,080,000
2,280,000
1,680,000
2,880,000
4. What is the carrying amount of the investment in associate on December 31, 2018?
a.
b.
c.
d.
15,360,000
15,000,000
16,560,000
13,800,000
Page
10
SOLUTION – PROBLEM 5
Question 1 Answer B
Cash
1,000,000
Accounts receivable
4,000,000
Inventory
8,000,000
Land
5,500,000
Plant and equipment
14,000,000
Liabilities
Net assets at carrying amount
( 7,000,000)
25,500,000
Acquisition cost
15,000,000
Net assets acquired (40% x 25,500,000)
Excess of cost
(10,200,000)
4,800,000
Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%)
Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%)
Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%)
Implied goodwill
( 400,000)
( 3,200,000)
( 600,000)
600,000
s
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Question 2 Answer B
Share in net income for 2017(40% x 3,000,000)
1,200,000
Amortization of excess – inventory
Amortization of excess – plant and equipment (3,200,000 / 10 years)
Investment income for 2017
( 400,000)
( 320,000)
480,000
Question 3 Answer A
Share in net income for 2018 (40% x 5,000,000)
2,000,000
Amortization of excess – plant and equipment
Amortization of excess – land
Investment income for 2018
( 320,000)
( 600,000)
1,080,000
Question 4 Answer A
Acquisition cost
15,000,000
Investment income 2017
480,000
Cash dividend for 2017 (40% x 1,000,000)
Investment income for 2018
(
400,000)
1,080,000
Cash dividend for 2018 (40% 2,000,000)
Carrying amount – December 31, 2018
( 800,000)
15,360,000
Page 11
PROBLEM 6 – BOND INVESTMENT AT FVOCI
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June
30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at
an effective interest rate of 7%.
The business model for this investment is to collect contractual cash flows and sell the bonds in the
open market. On December 31, 2017, the bonds were quoted at 106.
1. What amount of interest income should be reported for 2017?
a.
b.
c.
d.
400,000
200,000
364,560
363,940
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2. What is the adjusted carrying amount of the investment on December 31, 2017?
a.
b.
c.
d.
5,300,000
5,171,940
5,174,560
5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2017?
a. 300,000
b. 125,440
c. 128,060
d.
92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for
2017?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
Page 12
SOLUTION - PROBLEM 6
Date
Interest received
Jan. 1, 2017
Jan. 30, 2017
Dec. 31, 2017
200,000
200,000
Interest income
Amortization
182,280
181,660
17,720
18,340
Carrying amount
5,208,000
5,190,280
5,171,940
Question 1 Answer D
Interest January to June
Interest July to December
Interest income for 2017
182,280
181,660
363,940
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Question 2 Answer A
Market value on December 31, 2017 (5,000,000 x 106)
5,300,000
Question 3 Answer C
Market value on December 31, 2017
Carrying amount December 31, 2017 (see table of amortization)
Unrealized gain - OCI
5,300,000
5,171,940
128,060
Question 4 Answer C
Market value on December 31, 2017
Acquisition cost, excluding transaction cost
Gain from change in fair value
Interest income (8% x 5,000,000)
Total income
5,300,000
5,100,000
200,000
400,000
600,000
Page
13
PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT
January 1, 2017, an entity disclosed the following balances:
Land
Land improvements
Buildings
Machinery and equipment
4,000,000
1,300,000
20,000,000
8,000,000
During the current year, the following transactions occurred:
* A tract of land was acquired for P2,000,000 cash as a building site.
* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the
entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The
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plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for the
building at the exchange date. Current appraised values for the land and the building, respectively,
are P2,000,000 and P8,000,000. The building has an expected life of forty years with a P200,000
residual value.
*
Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs
incurred were freight and unloading P100,000 and installation P300,000. The equipment has a
useful life of ten years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at the entity’s
various plant locations. These expenditures had an estimated useful life of fifteen years.
*
Research and development costs were P1,100,000 for the year.
*
A machine costing P200,000 on January 1, 2010 was scrapped on June 30, 2017. Straight line
depreciation had been recorded on the basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2017. Original cost of the machine sold was P700,000
on January 1, 2014, and it was depreciated on the straight line basis over an estimated useful life of
eight years and a residual value of P50,000.
1. What is the total cost of land on December 31, 2017?
b. 7,800,000
c. 7,600,000
d. 8,000,000
e. 6,800,000
2. What is the total cost of land improvements on December 31, 2017?
a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000
3. What is the total cost of buildings on December 31, 2017?
a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000
4. What is total cost of machinery and equipment on December 31, 2017?
a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000
Page
SOLUTION – PROBLEM 7
Question 1 Answer A
Land – January 1
Land acquired for cash
Land acquired by issuing shares (2/10 x 9,000,000)
Land – December 31
4,000,000
2,000,000
1,800,000
7,800,000
Quoted price of shares issued for land and building (200,000 x P45)
9,000,000
Current appraized value :
Land
2,000,000
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Building
8,000,000
Total
10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated
prorata to the land and building based on the current appraised value.
Question 2 Answer D
Land improvements – January 1
Expenditures for parking lot, street and sidewalk
Balance – December 31
1,300,000
1,200,000
2,500,000
Question 3 Answer C
Buildings – January 1
Building acquired by issuing shares (8/10 x 9,000,000)
Balance – December 31
20,000,000
7,200,000
27,200,000
Question 4 Answer B
Machinery and equipment - January 1
8,000,000
Machinery and equipment purchased
4,000,000
Freight and unloading
100,000
Installation
300,000
Machinery scrapped
Machinery sold
Machinery equipment – December 31
( 200,000)
( 700,000)
11,500,000
Page 15
PROBLEM 8 - INCOME TAX
An entity had the following financial statement elements for which the December 31, 2017 carrying
amount is different from the December 31, 2017 tax basis:
Equipment
Accrued liability – health care
Carrying amount
Tax basis
Difference
5,500,000
500,000
4,000,000
0
1,500,000
500,000
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Computer software cost
2,000,000
0
2,000,000
The difference between the carrying amount and tax basis of the equipment is due to accelerated
depreciation for tax purposes.
The accrued liability is the estimated health care cost that was recognized as expense in 2017 but
deductible for tax purposes when actually paid.
In January 2017, the entity incurred P3,000,000 of computer software cost. Considering the technical
feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes.
However, the total amount was expensed in 2017 for tax purposes.
The pretax accounting income for 2017 is P15,000,000. The income tax rate is 30% and there are no
deferred taxes on January 1, 2017.
1. What amount should be reported as current tax expense for 2017?
a.
b.
c.
d.
5,400,000
3,600,000
3,300,000
5,700,000
2. What amount should be reported as total tax expense for 2017?
a.
b.
c.
d.
4,500,000
4,950,000
4,050,000
3,900,000
3. What amount should be reported as deferred tax liability on December 31, 2017?
a. 1,050,000
b. 1,200,000
c.
900,000
d.
150,000
4. What amount should be reported as deferred tax asset on December 31, 2017?
.
a. 750,000
b. 600,000
c. 150,000
d.
0
Page 16
SOLUTION – PROBLEM 8
Question 1 Answer B
Accounting income
15,000,000
Future taxable amount:
Equipment
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Computer software
(1,500,000)
Future deductible amount:
Accrued liability
(2,000,000)
500,000
Taxable income
12,000,000
Current tax expense (30% x 12,000,000)
3,600,000
Question 2 Answer A
Total tax expense (30% x 15,000,000)
4,500,000
Question 3 Answer A
Deferred tax liability (30% x 3,500,000)
1,050,000
Question 4 Answer C
Deferred tax asset (30% x 500,000)
150,000
Page 17
PROBLEM 9 - BENEFIT COST
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An entity provided the following pension plan information:
Projected benefit obligation – January 1
Fair value of plan assets – January 1
Pension benefits paid during the year
Current service cost for the year
Past service cost for the year (vesting period 5 years)
Actual return on plan assets
Contribution to the plan
Actuarial loss due to change in assumptions on projected benefit obligation
Discount or settlement rate
3,500,000
2,800,000
250,000
1,750,000
425,000
180,000
1,500,000
200,000
10%
1. What is the employee benefit expense for the current year?
a.
b.
c.
d.
2,245,000
1,905,000
2,525,000
1,750,000
2. What is the net remeasurement loss for the current year?
a.
b.
c.
d.
200,000
100,000
300,000
400,000
3. What is the projected benefit obligation on December 31?
a.
b.
c.
d.
5,550,000
5,075,000
5,775,000
5,975,000
4. What is the fair value of plan assets on December 31?
a.
b.
c.
d.
4,480,000
4,230,000
4,300,000
4,050,000
1. What amount should be reported as accrued benefit cost on December 31?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d.
700,000
Page 18
SOLUTION - PROBLEM 9
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Question 1 Answer A
Current service cost
1,750,000
Past service cost
425,000
Interest expense (10% x 3,500,000)
350,000
Interest income (10% x 2,800,000)
Employee benefit expense
( 280,000)
2,245,000
Question 2 Answer C
Actual return
Interest income
Remeasurement loss on plan assets
Actuarial loss on PBO
Net remeasurement loss
180,000
280,000
100,000
200,000
300,000
Question 3 Answer D
PBO – January 1
3,500,000
Current service cost
1,750,000
Past service cost
425,000
Interest expense
350,000
Actuarial loss
200,000
Benefits paid
PBO – December 31
( 250,000)
5,975,000
Question 4 Answer B
FVPA – January 1
2,800,000
Actual return
180,000
Contribution to the plan
1,500,000
Benefits paid
FVPA – December 31
( 250,000)
4,230,000
Question 5 Answer A
FVPA – December 31
4,230,000
PBO – December 31
Prepaid/accrued benefit cost – December 31
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(5,975,000)
(1,745,000)
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Page 19
PROBLEM 10 - SALES TYPE LEASE
An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects
a 12% return. At the end of the lease term, the equipment will revert to the lessor.
On January 1, 2017, an equipment is leased to a lessee with the following information:
Cost of equipment to the entity
Fair value of equipment
Residual value – unguaranteed
Initial direct cost
Annual rental payable in advance
Useful life and lease term
Implicit interest rate
PV of 1 at 12% for 8 periods
PV of an ordinary annuity of 1 at 12% for 8 periods
PV of an annuity due of 1 at 12% for 8 periods
First lease payment
3,500,000
5,500,000
600,000
200,000
900,000
8 years
12%
0.40
4.97
5.56
January 1, 2016
1. What is the gross investment in the lease?
a.
b.
c.
d.
7,800,000
7,200,000
6,600,000
6,900,000
2. What is the net investment in the lease?
a.
b.
c.
d.
5,004,000
5,244,000
5,500,000
5,740,000
3. What is the total financial revenue?
a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000
4. What amount should be recognized as interest income for 2017?
a.
b.
c.
d.
600,480
492,480
536,760
521,280
5. What amount of cost of goods sold should be recognized in recording the lease?
a.
b.
c.
d.
3,260,000
3,500,000
3,740,000
3,460,000
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Page 20
SOLUTION – PROBLEM 10
Question 1 Answer A
Gross rentals (900,000 x 8)
Residual value
Gross investment
7,200,000
600,000
7,800,000
Question 2 Answer B
PV of rentals (900,000 x 5.56)
PV of residual value (600,000 x .40)
Net investment
5,004,000
240,000
5,244,000
Question 3 Answer C
Gross investment
Not investment
Total financial revenue
7,800,000
5,244,000
2,556,000
Question 4 Answer D
Net investment – January 1, 2017
5,244,000
Advance payment on January 1, 2017
Balance – January 1, 2017
( 900,000)
4,344,000
Interest income for 2017 (12% x 4,344,000)
521,280
Question 5 Answer D
Cost of equipment
3,500,000
PV of unguaranteed residual value
Initial direct cost
( 240,000)
200,000
Cost of goods sold
3,460,000
Sales, excluding present value of unguaranteed residual value
Cost of goods sold
Gross profit on sale
5,004,000
3,460,000
1,544,000
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Page 21
PROBLEM 11 – EARNINGS PER SHARE
An entity reported the following information on January 1, 2017:
Ordinary share capital, P10 par, 800,000 shares
Preference share capital, P50 par, 50,000 shares
12% Bonds payable
8,000,000
2,500,000
5,000,000
The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares.
Dividends on preference shares are in arrears for two years.
The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.
Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the
beginning and ending of 2017. The average market price of the ordinary share was P30 per share and
the market price on December 31, 2017 was P40 per share.
May 1
July 1
Oct. 1
Dec. 31
Issued 60,000 ordinary shares at P25 per share.
Purchased 100,000 ordinary shares at P15 to be held as treasury.
Converted bonds with face amount of P2,000,000.
The net income for 2017 was P5,000,000. The tax rate is 30%.
1. What is the amount of basic earnings per share?
a.
b.
c.
d.
6.02
5.26
5.72
5.42
2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a.
b.
c.
d.
530,000
500,000
590,000
560,000
3. What is the amount of diluted earnings per share?
a.
b.
c.
d.
5.52
4.20
4.07
3.97
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Page
22
SOLUTION - PROBLEM 11
Question 1 Answer C
Net income
5,000,000
Preference dividend (10% x 2,500,000)
Net income - ordinary
( 250,000)
4,750,000
January 1
(800,000 x 12/12)
800,000
May
( 60,000 x 8/12)
40,000
1
July
1
October 1
(100,000 x 6/12)
( 2,000 x 80 x 3/12)
( 50,000)
40,000
Average shares outstanding
830,000
Basic EPS (4,750,000 / 830,000)
5.72
Question 2 Answer A
Share options
90,000
Treasury shares (1,800,000 / 30)
Incremental ordinary shares from share options
( 60,000)
30,000
Ordinary shares from conversion of preference shares
100,000
Ordinary shares from conversion of bonds payable (5,000 x 80)
400,000
Potential ordinary shares
530,000
Question 3 Answer C
2.50
Incremental EPS on Preference shares (250,000 / 100,000)
Interest on bonds not converted (3,000,000 x 12% x 70%)
Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%)
Total interest expense
252,000
126,000
378,000
Incremental EPS on bonds (378,000 /400,000)
Basic EPS
Share options
Diluted EPS
Bonds payable
Diluted EPS
.94
Net income
Shares
EPS
4,750,000
830,000
30,000
860,000
360,000
1,220,000
5.72
4,750,000
378,000
5,128,000
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5.52
4.20
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Preference shares
Diluted EPS
250,000
5,378,000
100,000
1,320,000
4.07
Potential ordinary shares – bonds
400,000
Reported in basic EPS
Reported in diluted EPS
(40,000)
360,000
Page 23
PROBLEM 12 – STATEMENT OF CASH FLOWS
An entity presented the following comparative financial information:
Property, plant and equipment
Accumulated depreciation
Long-term investments
Prepaid expenses
Merchandise inventory
Accounts receivable, net of allowance
Cash
Share capital-ordinary
Retained earnings
Long-term note payable
Accounts payable
Dividend payable
Accrued expenses
2018
2017
2,190,000
450,000
225,000
351,000
1,950,000
1,560,000
690,000
3,000,000
906,000
1,275,000
309,000
201,000
825,000
1,440,000
270,000
315,000
1,260,000
1,080,000
640,000
2,400,000
688,000
1,095,000
282,000
-
2018
2017
Net credit sales
7,020,000
3,753,000
Cost of goods sold
Gross profit
(3,915,000)
3,105,000
(1,881,000)
1,872,000
Expenses, including income tax
Net income
(2,586,000)
519,000
(1,374,000)
498,000
Accounts receivable and accounts payable relate to merchandise for sale in the normal course of
business. The allowance for bad debts was the same at the end of 2018 and 2017 and no receivables
were charged against the allowance.
Accounts payable are recorded net of any discount and are always paid within the discount period.
The proceeds from the note payable were used to finance the acquisition of property, plant and
equipment. Ordinary shares were sold to provide additional working capital.
1. What amount should be reported as net cash provided by operating activities in 2018?
a. 345,000
b. 165,000
c. 546,000
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d. 510,000
2. What amount should be reported as net cash used in investing activities in 2018?
a.
b.
c.
d.
750,000
225,000
975,000
750,000
3. What amount should be reported as net cash provided by financing activities in 2018?
a.
b.
c.
d.
600,000
780,000
750,000
680,000
Page 24
SOLUTION – PROBLEM 12
Question 1 Answer A
Net income
519,000
Depreciation (450,000 - 27,000)
180,000
Increase in prepaid expenses
Increase in inventory
Increase in accounts receivable
Increase in accounts payable
( 36,000)
(690,000)
(480,000)
27,000
Increase in accrued expenses
825,000
Net cash provided - operating
345,000
Question 2 Answer C
Increase in PPE
Increase in long-term investments
Net cash used - investing
(750,000)
(225,000)
(975,000)
Question 3 Answer D
Dividend paid in 2018
Proceeds from share capital
Proceeds from note payable
Net cash provides - financing
(100,000)
600,000
180,000
680,000
Retained earnings - 2017
688,000
Net income - 2018
519,000
Total
1,207,000
Retained earnings - 2018
(
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906,000)
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Dividend declared in 2018
301,000
Dividend payable – 2018
Dividend paid in 2018
( 201,000)
100,000
Page
25
PROBLEM 13 – STATEMENT OF CASH FLOWS
1. An entity provided the following increases (decreases) in the statement of financial position
accounts.
Cash and cash equivalents
120,000
Available for sale securities
300,000
Accounts receivable, net
-
Inventory
80,000
Long-term investments
Plant assets
(100,000)
700,000
Accumulated depreciation
-
Accounts payable
Dividend payable
( 5,000)
160,000
Short-term bank debt
325,000
Long-term debt
110,000
Share capital, P10 par
100,000
Share premium
120,000
Retained earnings
290,000

Net income for the current year was P790,000.

Cash dividend of P500,000 was declared.

Building costing P600,000 and with carrying amount of P350,000 was sold for P350,000.
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
Equipment costing P110,000 was acquired through issuance of long-term debt.

A long-term investment was sold for P135,000. There were no other transactions affecting
long-term investment.

The shares were issued for cash.
1. What is the net cash provided by operating activities?
a. 1,160,000
b. 1,040,000
c.
920,000
d.
705,000
2. What is the net cash used in investing activities?
a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000
3. What is the net cash provided by financing activities?
a. 205,000
b. 150,000
c. 45,000
d. 20,000
Page
SOLUTION – PROBLEM 13
Question 1 Answer C
Net income
790,000
Increase in inventory
Gain on sale of long-term investment
Depreciation
Decrease in accounts payable
Net cash provided – operating
( 80,000)
( 35,000)
250,000
( 5,000)
920,000
Question 2 Answer A
Sale price of investment
135,000
Cost of investment sold – decrease in long-term investment
Gain on sale of long-term investment
(100,000)
35,000
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Net increase in accumulated depreciation
-
Add accumulated depreciation on building sold (600,000 – 350,000)
250,000
Depreciation for the year
250,000
Net increase in plant assets
700,000
Add cost of building sold
600,000
Total acquisition during year
1,300,000
Equipment acquired by issuing long-term debt
Cash payment for plant assets
( 110,000)
1,190,000
Cash payment for plant assets
Cash payment for available for sale securities
Sale price of investment
(1,190,000)
( 300,000)
135,000
Sale of building
350,000
Net cash used - investing
(1,005,000)
Question 3 Answer A
Increase in share capital
100,000
Increase in share premium
120,000
Cash received from issue of shares
220,000
Proceeds from short-term debt
325,000
Dividend paid
Net cash provided – financing
(340,000)
205,000
Dividend declared
500,000
Dividend payable
Dividend paid
(160,000)
340,000
Proof
Net cash provided - operating
920,000
Net cash used – investing
Net cash provided – financing
(1,005,000)
205,000
Increase in cash and cash equivalents
120,000
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PROBLEM 14 – STATEMENT OF CASH FLOWS
An entity provided the following data:
Trade accounts receivable, net of allowance
Inventory
Accounts payable
December 31, 2017
December 31, 2018
840,000
1,500,000
950,000
780,000
1,400,000
980,000

Total sales were P12,000,000 for 2018 and P11,000,000 for 2017. Cash sales were 20% of total
sales each year. Cost of goods sold was P8,400,000 for 2018.

Variable expenses for 2018 amounted to P1,200,000 and varied in proportion to sales. Variable
expenses had been paid 50% in the year incurred and 50% the following year.

Fixed expenses, including P350,000 depreciation and P50,000 bad debt expense, totaled
P1,000,000 each year. Eighty percent of fixed expenses involving cash were paid in the year
incurred and 20% the following year. Each year there was a P50,000 bad debt estimate and a
P50,000 writeoff.
1. What is the cash collected from customers during 2018?
a.
b.
c.
d.
12,010,000
12,060,000
11,960,000
11,890,000
2. What is the amount of purchases for 2018?
a.
b.
c.
d.
9,800,000
8,300,000
8,500,000
8,400,000
3. What is the cash disbursed for purchases during 2018?
a.
b.
c.
d.
8,500,000
8,270,000
8,300,000
8,200,000
4. What amount of cash was disbursed for variable expenses during 2018?
a. 1,150,000
b. 1,200,000
c. 1,100,000
d.
600,000
5. What amount of cash was disbursed for fixed expenses during 2018?
a.
b.
c.
d.
500,000
650,000
600,000
500,000
Page 28
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SOLUTION – PROBLEM 14
Question 1 Answer A
AR – December 31, 2017
Total sales – 2018
Total
AR – December 31, 2018
Bad debt writeoff
Collections from customers – 2018
840,000
12,000,000
12,840,000
( 780,000)
(
50,000)
12,010,000
A
Question 2 Answer B
Inventory – December 31, 2017
Purchases 2018 (SQUEEZE)
Goods available for sale
Inventory – December 31, 2018
Cost of goods sold - 2018
1,500,000
8,300,000
9,800,000
(1,400,000)
8,400,000
B
Question 3 Answer B
Accounts payable – December 31, 2017
Purchases 2018
Total
Accounts payable – December 31, 2017
Cash disbursed for purchases 2018
950,000
8,300,000
9,250,000
( 980,000)
8,270,000
B
Question 4 Answer A
Variable cost ratio (1,200,000 / 12,000,000)
10%
Variable expenses – 2017 (10% x 11,000,000)
1,100,000
Variable expenses 2017 paid in 2018 (50% x 1,100,000)
Variable expenses 2018 paid in 2018 (50% x 1,200,000)
Variable expenses paid in 2018
550,000
600,000
1,150,000
A
1,000,000
( 350,000)
( 50,000)
600,000
C
Question 5 Answer C
Fixed expenses each year
Depreciation
Bad debt expense
Cash disbursed for fixed expenses in 2018
END
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