lOMoARcPSD|22039926 Financial Accounting and Reporting Test Bank Accounting (De La Salle Lipa) Studocu is not sponsored or endorsed by any college or university Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 1,900,000 ( 150,000) 750,000 2,500,000 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 400,000 1,820,000 10,000 2,500,000 100,000 4,830,000 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 2,300,000 600,000 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 8 lOMoARcPSD|22039926 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? Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 14 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) (5,975,000) (1,745,000) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 5.52 4.20 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 ( Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 906,000) lOMoARcPSD|22039926 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. Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 26 lOMoARcPSD|22039926 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 Page Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) 27 lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com) lOMoARcPSD|22039926 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 Downloaded by Angelo Cruz (itsmeeeac9@gmail.com)