Integrated Accounting Review - FAR T3, AY 2021-2022
Time Value of Money Concepts - Assessment
1. Time value of money supports the comparison of cash flows recorded at different time period by
ANSWER: Using either a or b
A. Discounting all cash flows to a common point of time
B. Compounding all cash flows to a common point of time
2. Time value of money indicates that
ANSWER: A unit of money obtained today is worth more than a unit of money
obtained in future
Nature of Interest - Simple and Compound - Assessment
1. Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is
often referred to as __________.
ANSWER: compound interest
2. What will be compounded amount? (check if data sufficient to get answer)
I.
P 200 was borrowed for 192 months at 6% compounded annually.
II. P 200 was borrowed for 16 years at 6%.
ANSWER: Either I or II alone sufficient to answer
I alone sufficient while II alone not sufficient to answer
II alone sufficient while I alone not sufficient to answer
Solution:
Either datum is sufficient to arrive in the requirement, since 192 months is basically 16 years.
3. An amount of money was lent for 3 years. What will be the difference between the simple and the
compound interest earned on it at the same rate? (check if data sufficient to get answer)
I.
II.
I.
II.
The rate of interest was 8% compounded annually
The total amount of simple interest was P 1,200.
ANSWER: Both I and II are necessary to answer
I alone sufficient while II alone not sufficient to answer
II alone sufficient while I alone not sufficient to answer
Solution:
All required given to answer are given in both data, using both Simple Interest = PRT and
Compound Interest = Principal x [(1 + Rate)Time – 1],
4. What is the rate of compound interest? (check if data sufficient to get answer)
I.
The principal was invested for 4 years.
II.
The earned interest was P 1,491.
ANSWER: Both I and II are not sufficient to answer
I.
I alone sufficient while II alone not sufficient to answer
II.
II alone sufficient while I alone not sufficient to answer
Solution: No sum/principal was given.
5. At what rate of compound interest per annum will a sum of P 1,200 become P 1,348.32 in 2 years?
ANSWER: 6%
Solution:
Principal = P1,200.00
Future Value = P1,348.32
Time = 2 years
Future Value = Principal x (1 + Rate)Time
1,348.32 = 1,200.00 x (1 + Rate)2
1,348.32/1,200 = (1 + Rate)2
1.1236 = (1+Rate)2
Rate = .06 or 6%
6. What is the sum which earned interest? (check if data sufficient to get answer)
I.
The total simple interest was P 7,000 after 7 years.
II.
The total of sum and simple interest was double of the sum after 5 years.
ANSWER: Both I and II are necessary to answer
I.
I alone sufficient while II alone not sufficient to answer
II.
II alone sufficient while I alone not sufficient to answer
Solution:
(1) 7,000 = Principal x Rate x 7 years
(2) 100% = Rate x 5 years
Rate = 100%/5 yearsTime Value of Money Concepts - Assessment
Rate = 20%
Principal = 7,000/(20% x 7 years)
Principal = 5,000
7. Interest paid (earned) on only the original principal borrowed (lent) is often referred to as
__________.
ANSWER: simple interest
8. The simple interest on a sum of money is P 50. What is the sum? (check if data sufficient to get
answer)
I.
The interest rate is 10% p.a.
II. The sum earned simple interest in 10 years.
ANSWER: Both I and II are necessary to answer
I alone sufficient while II alone not sufficient to answer
II alone sufficient while I alone not sufficient to answer
Solution:
General formula for Simple Interest is Interest = Principal x Rate x Time. Thus, interest rate of 10%
(Rate) and 10 years (Time) is necessary to get the required answer (Principal/Sum).
Principal = Interest/(Rate x Time)
Principal = 50/(10% x 10)
Principal = 50
9. What is the compound interest earned at the end of 3 years? (check if each data is necessary to
get answer)
I.
Simple interest earned on that amount at the same rate and for the same period is P 4,500.
II. The rate of interest is 10% compounded annually.
III.
Compound interest for 3 years is more than the simple interest for that period by
P 465.
ANSWER: Either II or III only
Solution:
Items I and III are the necessary data to get the answer.
Alternative Answer (Not in the choices)
Any two of the data are sufficient to get the answer. Either I and II, II and III or I and III—any combination
used can still arrive in the needed answer.
10. What is the rate of simple interest? (check if data sufficient to get answer)
I.
The total interest earned was P 4,000.
II. The sum was invested for 4 years.
ANSWER: Both I and II are not sufficient to answer
Solution:
There is no given sum/principal.
11. Ms. Santos borrowed a sum of money on compound interest. What will be the amount to be repaid
if he is repaying the entire amount at the end of 2 years? (check if each data is necessary to get answer)
I.
The rate of interest is 5% compounded annually.
II. Simple interest fetched on the same amount in one year is P 600.
III. The amount borrowed is 10 times the simple interest in 2 years.
ANSWER: II and Either I or III only
Solution:
With data on item II, Simple Interest of 600 in 1 year, you can determine the sum using the data in either
item I or III. Thus,
Using item I:
600 = Principal x 5% x 1 year
Principal = 600/5% = 12,000
Or, using Item III:
Principal = 10 x (600 x 2 years) = 10 x 1,200 = 12,000
11. Simple interest on a certain sum of money for 3 years at 8% per annum is half the compound
interest on P 4,000 for 2 years at 10% per annum. The sum placed on simple interest is:
ANSWER: 1,750
Solution:
(1) Simple Interest = ½ x Compound Interest
(2) Simple Interest = Sum x 8% x 3 years
(3) Compound Interest = 4,000 x (1.12 – 1)
Compound Interest = 4,000 x 0.21
Compound Interest = 840
Simple Interest = ½ x 840 = 420
Sum = 420/(8% x 3)
Sum = 1,750
12. The compound interest on Rs. 30,000 at 7% per annum is Rs. 4347. The period (in years) is:
ANSWER: 2
Solution:
Compound Interest = 4,347
Rate = 7%
Principal = 30,000
4,347 = 30,000 x [(1 + 7%)Time – 1]
4,347 = 30,000 x 1.07Time – 30,000
1.1449 = 1.07Time
Time = log1.07(1.1449)
Time = 2
Alternative Solution:
Trial and Error
Compound Interest = Principal x [(1 + Rate)Time – 1]
4,347 = 30,000 x [(1.07)2 – 1]
4,347 = 30,000 x 0.1449
4,347 = 4,347
13. What is the rate of compound interest? (check if data sufficient to get answer)
I.
The principal was invested for 4 years.
II. The earned interest was P 1,491.
ANSWER: Both I and II are not sufficient to answer
14.. What will be the compound interest on a sum of P 25,000 after 3 years at the rate of 12%?
ANSWER: 10,123.20
Solution:
Principal = 25,000
Rate = 12%
Time = 3 years
Compound Interest = Principal x [(1 + Rate)Time – 1]
Compound Interest = 25,000 x [(1 + 12%)3 – 1]
Compound Interest = 25,000 x 0.404928
Compound Interest = 10,123.20
15. What percentage of simple interest per annum did Tommy pay to Macar? (check if data sufficient to get
answer)
I.
II.
Tommy borrowed Rs. 8000 from Macar for four years.
Tommy returned Rs. 8800 to Macar at the end of two years and settled the loan.
ANSWER: Both I and II are necessary to answer
Solution:
Principal = 8,000
Interest = 800
Time = 2 years
Rate = Interest/(Principal x Time)
Rate = 800/(8,000 x 2)
Rate = 5%
16. There is 60% increase in an amount in 6 years at simple interest. What will be the compound interest
of P 12,000 after 3 years at the same rate?
ANSWER: 3,972
Solution:
Annual Interest = Total Interest/Time
Annual Interest = 60%/6 years
Annual Interest = 10%
Compound Interest = Principal x [(1 + Rate)Time – 1]
Compound Interest = P12,000 x [(1 + 10%)3 – 1]
Compound Interest = P12,000 x 0.331
Compound Interest = P3,972
Future Value – Assessment
1. You decide to begin saving toward the purchase of a new car in five years. If you put $1,000 at the
end of each of the next 5 years in a savings account paying 6 percent com-pounded annually, how
much will you accumulate after 5 years?
ANSWER: $5,637.10
Solution:
FV = Principal x (1+i)n
FV = 1,000 x (1.08)6
FV = 1,000 x 1.58687432294
FV = 1,586.90
2. Assume that you purchase a 6-year, 8 percent savings certificate for $1,000. If interest is
compounded annually, what will be the value of the certificate when it matures?
ANSWER: $1,586.90
Present Value - Assessment
1. On December 30, 2017, Timex Co. sold a machine to Fossil Co. in exchange for a noninterestbearing note requiring ten annual payments of P10,000. Fossil made the first payment on
December 30, 2017. The market interest rate for similar notes at date of issuance was 8%.
Information on present value factors is as follows:
Period
Present value of P1 at 8%
Present value of ordinary annuity of P1 at 8%
9
0.50
6.25
10
0.46
6.71
In its December 31, 2017 balance sheet, what amount should Timex report as note receivable?
ANSWER: P62,500
Solution:
Annual Payment
10,000.00
x PVOA of P1 @ 8% for 9 periods 6.25
Carrying Amount
62,500.00
2. On January 1, 2017, Parke Company borrowed P360,000 from a major customer evidenced by a
noninterest-bearing note due in three years. Parke agreed to supply the customer’s inventory needs
for the loan period at lower than fair value. At the 12% imputed interest rate for this type of loan,
the present value of the note is P255,000 at January 1, 2017. What amount of interest expense
should be included in Parke’s 2017 income statement?
ANSWER: P30,600
Solution:
Carrying amount of loan
255,000.00
Multiply by: Effective interest 12%
Interest expense
30,600.00
3. For which of the following transactions would the use of the present value of an annuity due concept
be appropriate in calculating the present value of the asset obtained or liability owed at the date of
incurrence?
ANSWER: A capital lease is entered into with the initial lease payment due upon the signing
of the lease agreement
Solution:
Annuity due is applicable for installment payments where the first installment payment is due immediately
upon inception of the agreement.
4. On July 1, 2017, James Pogi signed an agreement to operate as a franchisee of Fast Foods, Inc.
for an initial franchise fee of P60,000. Of this amount, P20,000 was paid when the agreement was
signed and the balance is payable in four equal annual payments of P10,000 beginning July 1,
2018. The agreement provides that the down payment is not refundable and no future services are
required of the franchisor. Pogi’s credit rating indicates that he can borrow money at 14% for a loan
of this type. Information on present and future value factors is as follows:
Present value of P1 at 14%for four periods
0.59
Future amount of P1 at 14% for four periods
1.69
Present value of an ordinary annuity of P1 at 14% for four periods
2.91
Pogi should record the acquisition cost of the franchise on July 1, 2017 at
ANSWER: P49,100
Solution:
Annual Installment
10,000.00
x PVOA of P1 @14 for 4 periods 2.91
Carrying amount of note
Add: Down payment
29,100.00
20,000.00
Cost of Franchise
49,100.00
5. On November 1, 2017, a company purchased a new machine that it does not have to pay for until
November 1, 2019. The total payment on November 1, 2019, will include both principal and interest.
Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by
what time value of money concept?
ANSWER: Present value of P1
Solution:
Present value of P1 is applicable for deferred one-time payment arrangements.
6. On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange
for a P600,000 noninterest-bearing note due January 2, year 4. There was no established
exchange price for the equipment. The prevailing rate of interest for a note of this type at January
2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017
income statement, what amount should be reported as gain (loss) on sale of machinery?
ANSWER: P(30,000) loss
Solution:
Face Value of Note
600,000.00
Multiply by: PV of P1 @ 10% for 3 periods
Z0.75
Carrying amount of Note, 1/2/2017
450,000.00
Less: Carrying amount of Equipment
480,000.00
Loss on sale
-30,000.00
7. Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment
notes in twenty-four equal monthly amounts, which include 12% interest. What is an installment
note’s receivable balance six months after the sale?
ANSWER: The present value of the remaining monthly payments discounted at 12%
Solution:
The carrying amount of any promissory note is basically the present value of all the remaining payments
discounted at its effective interest.
8. On December 31, 2017, Jet Co. received two P10,000 notes receivable from customers in
exchange for services rendered. On both notes, interest is calculated on the outstanding balance
at the interest rate of 3% compounded annually and payable at maturity. The note from Hart Corp.,
made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in
five years. The market interest rate for similar notes on December 31, 2017, was 8%. The
compound interest factors are as follows:
Future value of P1 due in nine months at 3%
1.0225
Future value of P1 due in five years at 3%
1.1593
Present value of P1 due in nine months at 8%
.944
Present value of P1 due in five years at 8%
.680
9. Jet does not elect the fair value option for reporting its financial assets. At what amounts should
these two notes receivable be reported in Jet’s December 31, 2017 balance sheet? Hart, Maxx
ANSWER: P10,000, P7,883
Solution:
Note from Hart Corp.
P10,000
Short-term notes are reported at face value, there is no need to compute for their present values.
Note from Maxx, Inc.
Principal
10,000.00
x FV of P1 @ 3% for 5 years 1.1593
Future Value of Note
x PV of P1 @ 8% for 5 years
11,593.00
0.680
Carrying amount of note
7,883.24
Long-term notes are reported at their present value using the effective (market/prevailing) interest rate.
10. Maricar Co. is investing in a machine with a three-year life. The machine is expected to reduce
annual cash operating costs by P30, 000 in each of the first two years and by P20,000 in year
three. Present values of an annuity of P1 at 14% are
Period
1
2
3
0.88
1.65
2.32
Using a 14% cost of capital, what is the present value of these future savings?
ANSWER: P62,900
Solution:
Total Present Value = PV of OA of P30,000 for 2 years + PV of P20,000 for 3 years
PV of OA of P30,000 for 2 years = P30,000 x 1.65 = P49,500
PV of P20,000 for 3 years = P20,000 x (2.32 – 1.65) = P20,000 x 0.67 = P13,400
Total Present Value = P 49,500 + P13,400 = P62,900
11. On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange
for a P600,000 noninterest-bearing note due January 2, year 4. There was no established
exchange price for the equipment. The prevailing rate of interest for a note of this type at January
2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017
income statement, what amount should be reported as interest income?
ANSWER: P45,000
Solution:
Face Value of Note
600,000.00
Multiply by: PV of P1 @ 10% for 3 periods 0.75
Carrying amount of Note, 1/2/2017
Multiply by: Interest Rate
450,000.00
10%
Interest income
45,000.00
12. On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange
for a P600,000 noninterest-bearing note due January 2, year 4. There was no established
exchange price for the equipment. The prevailing rate of interest for a note of this type at January
2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017
income statement, what amount should be reported as interest income?
ANSWER: B. $45,000
On December 30, 2017, Chang Co. sold a machine to Door Co. in exchange for a noninterest-bearing note
requiring ten annual payments of P10,000. Door made the first payment on December 30, 2017. The market
interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows:
Present value of ordinary
Period
Present value of P1 at 8%
annuity of P1 at 8%
9
0.50
6.25
10
0.46
6.71
In its December 31, 2017 balance sheet, what amount should Chang report as note receivable?
ANSWER: 62,500
Cash Basis vs. Accrual Basis – Assessment
1. Prior to the current year , an entity used the cash basis of accounting . As of December 31 of the
current year, the entity change to the accrual basis . The entity cannot determined the beginning
balance of supplies inventories . What is the effect of the entity’s inability to determined beginning
supply inventory on its accrual basis net income and December 31, accrual basis owner ‘s equity?
Net income, Owners equity
ANSWER: Overstated, No effect
2. When converting an income statement from a cash basis to an accrual basis, cash received for
services:
ANSWER: May exceed or be less than service revenue
3. The following books of account are used in single-entry bookkeeping
ANSWER: Cashbook and subsidiary ledger
4. Total net income over the life of an entity is?
ANSWER: The same under the cash basis as under the accrual basis
5. Which of the following transactions will not be recognized in cash basis accounting?
ANSWER: Unsold inventory at the end of the period
6. Incomplete accounting record using only a cash books is a characteristic of?
ANSWER: Single entry system
7. Which of the following regarding accrual versus cash basis accounting is true?
ANSWER: The cash basis is less useful in predicting the timing and amounts of future cash
flow of an entity
8. An entity inventory and accounts payable balances increase. Should these increase be added to
or deducted from cash payment to supplier to arrive at cost of goods sold for the current year?
9. Increase in Inventory, Increase in Accounts Payable
ANSWER: Deducted, Added
10. Which of the following accounts is recognized under single-entry bookkeeping?
ANSWER: Cash
11. Compared to the accrual basis of accounting, the cash basis of accounting produces a higher
amount of income by the net decrease during the accounting period of
Accrued income, Accrued expense
ANSWER: No, No
12. If ending accounts receivable exceeds the beginning accounts receivable.
ANSWER: Cash collections during the year are less than the amount of revenue earned
13. An entity wants to convert its financial statement from the accrual basis , Both supplies inventories
and office salaries payable increase between January 1 and December 31. To obtained cash basis
net income how should these increase be added to or deducted from accrual basis net income?
Supplies Inventory, Office salaries payable
ANSWER: Deducted, Added
14. Which of the following best describes the double-entry concept
ANSWER: Events and transactions are analyzed and recorded using the principle of duality
and equality
15. When the amount of interest receivable decreases during an accounting period:
ANSWER: Accrual-basis interest revenues are less than cash collections from borrowers
16. Compared to the accrual basis of accounting to the cash basis of accounting understates income
by the net decrease during the accounting period of?
ANSWER: Accrued expenses but not of accounts receivable
17. Under the accrual basis of accounting , cash receipts and disbursement may?
ANSWER: Proceeds, coincide with, or follow the period in which revenue and expenses are
recognized.
18. When converting an income statement from a cash basis to an accrual basis which of the following
is incorrect?
ANSWER: An adjustment for bad debts increases the net income
19. Under the cash basis of accounting
ANSWER: The matching principal is ignored
Single-Entry Computation of Profit and Reconciling Transaction vs. Net Asset Approach Assessment
1. Libunao Company disclosed the following changes in the account balances for the current year:
Cash
37,500 decrease
Accounts receivable
10,000 increase
Inventory
250,000 increase
Accounts payable
17,000 decrease
During the year, the entity borrowed P250,000 in notes from a bank and paid off notes of P100,000 and
interest of P15,000. Interest of P7,500 is accrued at year-end. There was no accrued interest at the
beginning of the year. The owner transferred trading securities to the business and these were sold for
P65,000 to finance purchase of inventory. The owner also made withdrawals of P20,000 in the current year.
What is the Profit or loss for the year?
Select one:
ANSWER: 37,000 income
Solution
Net Cash Flow
(37,500.00)
Add back:
Repayment of note
100,000.00
Withdrawals
20,000.00
Total
120,000.00
82,500.00
Deduct:
Borrowings (principal)
250,000.00
Securities sold
65,000.00
315,000.00
Net cash flow from operating activities
(232,500.00)
Increase in accounts receivable
10,000.00
Increase in inventory
250,000.00
Decrease in accounts payable
17,000.00
Accrued interest expense
(7,500.00)
Net income
37,000.00
All of the following are disadvantages of the single-entry bookkeeping system except for the fact that
ANSWER: It is simple and less costly to apply.
2. We were given the following information which were obtained from the single-entry records of ASH
Company:
January 1
June 30
Interest receivable
P 12,000
P
9,600
Accounts receivable
540,000
1,056,000
Notes receivable
180,000
144,000
Merchandise inventory
456,000
120,000
Store and office equipment (net)
390,000
360,000
Prepaid operating expenses
30,000
26,400
Interest payable
3,600
6,000
Accounts payable
420,000
300,000
Notes payable
120,000
144,000
Accrued operating expenses
32,400
60,000
An analysis of the cashbook shows the following:
Balance, January 1
Receipts:
Interest income
Accounts receivable
Notes receivable
Investment by Ash
P180,000
P 24,000
432,000
180,000
72,000
Disbursements:
Interest expense
Accounts payable
Notes payable
Operating expenses
Balance, June 30 – bank overdraft
P 18,000
624,000
96,000
204,000
708,000
888,000
942,000
(P 54,000)
Determine the Sales for the six months ended June 30, 2019:
ANSWER: P1,092,000
Solution:
Collections from Accounts Receivable
432,000.00
Collections from Notes Receivable
180,000.00
Accounts Receivable, June 30
1,056,000.00
Note Receivable, June 30
144,000.00
Total Credits
Less: Debits
Accounts Receivable, Jan 1
Note Receivable, Jan 1
1,812,000.00
540,000.00
180,000.00
720,000.00
Total Sales
1,092,000.00
Solution:
Collections from Accounts Receivable
Collections from Notes Receivable
Accounts Receivable, June 30
Note Receivable, June 30
432,000.00
180,000.00
1,056,000.00
144,000.00
Total Credits
Less: Debits
Accounts Receivable, Jan 1
Note Receivable, Jan 1
1,812,000.00
540,000.00
180,000.00
Total Sales
720,000.00
1,092,000.00
3. The capital account of Thirst Company decrease by P15,000 in 2013. During the year, Jim Water,
the owner issued a personal check to settle Thirst Company’s obligation amounting to P20,000. At
the end of the year, Jim Water took merchandise costing P10,000 for personal use. At year-end,
Thirst Company’s net income (loss) is
ANSWER: (25,000)
Solution:
Change in Capital for 2013
-15,000.00
Settlement of liabilities (contribution) -20,000.00
Withdrawal
10,000.00
Net income (loss)
-25,000.00
The transactions affecting the capital account are reversed, therefore, contributions are deducted while
withdrawals are added back.
4. Ricky Cornel, a retired engineer, formed Upland Cress Trading on July 1, 2018, investing his
retirement pay of P400,000 in the business. To cut on operating expenses, he did not hire an
accountant; as a consequence, his accounting records were incomplete. On January 1, 2019, his
cash balance was P410,000 and on December 31, 2019, it was P430,000. He wanted to have an
idea of the result of his operations for the year ended December 31, 2019. The following information
and other data were gathered for the year 2019:
Jan. 1
Dec. 31
Accounts receivable – trade
P 130,000
P 170,000
Money market placement
20,000
15,000
Accrued interest on money market placement
800
600
Merchandise inventory
175,300
280,400
Prepaid rent expense
6,000
4,500
Delivery equipment (at cost)
120,000
120,000
Store fixtures (at cost)
50,000
50,000
Rent deposit
12,000
6,000
Other assets
1,000
1,000
Accounts payable – trade
390,000
480,000
Notes payable (delivery equipment)
100,000
60,000
Accrued interest on notes payable
12,000
8,000
Accrued operating expenses (excluding rent)
8,000
10,000
Cornel was able to arrange with the owner of the building that his rental deposit be reduced by 50% and
the amount applied against rentals in 2019. From the 2019 cash memoranda of Ricky Cornel, you were
able to extract the following:
Cash received from:
Sales
P 380,000
Interest on money market placement
4,000
Collections of accounts receivable
1,328,000
Matured money market placement, not rolled over
5,000
Total
P1,717,000
Cash payments for:
Merchandise purchases
P 210,000
Interest on notes payable
25,000
Trade payables
940,000
Notes payable (delivery equipment)
40,000
Operating expenses
470,000
Ricky Cornel, drawing
12,000
Total
P1,697,000
You have established that the fixed assets have not been depreciated since they were acquired on July 1,
2018. Estimated life of these assets is ten years.
Determine the net profit for the year 2019 (Ignore income taxes)
ANSWER: P 99,400
Solution:
Collection from interest on money market placement
4,000.00
Accrued interest on money market placement, Dec 31 600.00
Accrued interest on money market placement, Jan 1
-800.00
Interest income
3,800.00
Payment for interest on notes payable
Accrued interest on notes payable, Dec 31
Accrued interest on notes payable, Jan 1
25,000.00
8,000.00
-12,000.00
Interest expense
21,000.00
Sales
Less: Cost of Sales
1,748,000.00
1,134,900.00
Gross profit on sales
Add: Interest income
613,100.00
3,800.00
Total gross profit
Less:
Expenses
Operating Expenses
Depreciation Expense
Interest Expense
616,900.00
Net Profit
479,500.00
17,000.00
21,000.00
517,500.00
99,400.00
5. We were given the following information which were obtained from the single-entry records of ASH
Company:
January 1
June 30
Interest receivable
P 12,000
P
9,600
Accounts receivable
540,000
1,056,000
Notes receivable
180,000
144,000
Merchandise inventory
456,000
120,000
Store and office equipment (net)
390,000
360,000
Prepaid operating expenses
30,000
26,400
Interest payable
3,600
6,000
Accounts payable
420,000
300,000
Notes payable
120,000
144,000
Accrued operating expenses
32,400
60,000
An analysis of the cashbook shows the following:
Balance, January 1
Receipts:
Interest income
Accounts receivable
Notes receivable
Investment by Ash
Disbursements:
Interest expense
Accounts payable
Notes payable
Operating expenses
Balance, June 30 – bank overdraft
P180,000
P 24,000
432,000
180,000
72,000
P 18,000
624,000
96,000
204,000
708,000
888,000
942,000
(P 54,000)
Determine the Operating expenses, excluding depreciation for the six months ended June 30, 2019:
ANSWER: P235,200
Solution:
Cash paid for operating expenses
204,000.00
Prepaid Expense, Jan 1
30,000.00
Accrued Expense, Jun 30
60,000.00
Total Debits
Less:
294,000.00
Credits
Prepaid Expense, Jun 30
Accrued Expense, Jan 1
26,400.00
32,400.00
Total Operating Expenses, excl. Depreciation
58,800.00
235,200.00
6. Ricky Cornel, a retired engineer, formed Upland Cress Trading on July 1, 2018, investing his
retirement pay of P400,000 in the business. To cut on operating expenses, he did not hire an
accountant; as a consequence, his accounting records were incomplete. On January 1, 2019, his
cash balance was P410,000 and on December 31, 2019, it was P430,000. He wanted to have an
idea of the result of his operations for the year ended December 31, 2019. The following information
and other data were gathered for the year 2019:
Jan. 1
Dec. 31
Accounts receivable – trade
P 130,000
P 170,000
Money market placement
20,000
15,000
Accrued interest on money market placement
800
600
Merchandise inventory
175,300
280,400
Prepaid rent expense
6,000
4,500
Delivery equipment (at cost)
120,000
120,000
Store fixtures (at cost)
50,000
50,000
Rent deposit
12,000
6,000
Other assets
1,000
1,000
Accounts payable – trade
390,000
480,000
Notes payable (delivery equipment)
100,000
60,000
Accrued interest on notes payable
12,000
8,000
Accrued operating expenses (excluding rent)
8,000
10,000
Cornel was able to arrange with the owner of the building that his rental deposit be reduced by 50% and
the amount applied against rentals in 2019. From the 2019 cash memoranda of Ricky Cornel, you were
able to extract the following:
Cash received from:
Sales
P 380,000
Interest on money market placement
4,000
Collections of accounts receivable
1,328,000
Matured money market placement, not rolled over
Total
Cash payments for:
Merchandise purchases
Interest on notes payable
Trade payables
Notes payable (delivery equipment)
Operating expenses
Ricky Cornel, drawing
Total
5,000
P1,717,000
P 210,000
25,000
940,000
40,000
470,000
12,000
P1,697,000
You have established that the fixed assets have not been depreciated since they were acquired on July 1,
2018. Estimated life of these assets is ten years.
Determine the Rocky Cornel, Capital, December 31, 2019 (Ignore income taxes)
ANSWER: P494,000
Solution:
Cash
Accounts receivable - trade
Money market placement
Accrued interest on money market placement
Merchandise inventory
Prepaid rent expense
Delivery equipment
120,000.00
Less: Accum. Dep (120,000 x 1.5/10) 18,000.00
Store fixtures
Less: Accum. Dep (50,000 x 1.5/10)
50,000.00
7,500.00
430,000.00
170,000.00
15,000.00
600.00
280,400.00
4,500.00
102,000.00
42,500.00
Rent deposit
Other assets
6,000.00
1,000.00
Total Assets
Less: Liabilities
Accounts payable - trade
Notes payable
Accrued interest
Accrued operating expenses
1,052,000.00
Rocky Cornel, Capital, Dec 31
480,000.00
60,000.00
8,000.00
10,000.00
558,000.00
494,000.00
7. Your audit of Colluccus Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this company was given to the customer when he paid his account.
On January 2, 2019, Colluccus started business and issued 108,000 ordinary shares with P100 par, for the
following considerations:
Cash
P 900,000
Building (useful life, 15 years)
8,100,000
Land
2,700,000
P11,700,000
An analysis of the bank statements showed total deposits, including the original cash investment, of
P6,300,000. The balance in the bank statement in December 31, 2019, was P450,000, but there were
checks amounting to P90,000 dated in December but not paid by the bank until January 2020. Cash on
hand on December 31, 2019 was P225,000 including customers’ deposit of P135,000. During the years,
Colluccus Company barrowed P900,000 from the bank and repaid P225,000 and P45,000 interest.
Disbursement paid in cash during the year was as follows:
Utilities
P 180,000
Salaries
180,000
Supplies
360,000
Dividends
270,000
P 990,000
An inventory of merchandise taken on December 31, 2019 showed P1,359,000 of merchandise. Tickets for
accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid
supplies invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was
purchased in early January on one-year installment basis. During the year, checks for the down payment
and all maturing installments totaled P801,000. The equipment has useful life of 5 years.
Determine the payment for merchandise purchase in 2019 (Disregard income taxes)
ANSWER: P4,869,000
Solution:
Total Deposits
6,300,000.00
Less: Cash in bank, adj (450,000-90,000) 360,000.00
Loan Repayment
225,000.00
Interest
45,000.00
Equipment
801,000.00 1,431,000.00
Payment for Purchase of Merchandise
4,869,000.00
8. On January 1, 2019, his cash balance was P410,000 and on December 31, 2019, it was P430,000.
He wanted to have an idea of the result of his operations for the year ended December 31, 2019.
The following information and other data were gathered for the year 2019:
Jan. 1
Dec. 31
Accounts receivable – trade
P 130,000
P 170,000
Money market placement
20,000
15,000
Accrued interest on money market placement
800
600
Merchandise inventory
175,300
280,400
Prepaid rent expense
6,000
4,500
Delivery equipment (at cost)
120,000
120,000
Store fixtures (at cost)
50,000
50,000
Rent deposit
12,000
6,000
Other assets
1,000
1,000
Accounts payable – trade
390,000
480,000
Notes payable (delivery equipment)
100,000
60,000
Accrued interest on notes payable
12,000
8,000
Accrued operating expenses (excluding rent)
8,000
10,000
Cornel was able to arrange with the owner of the building that his rental deposit be reduced by 50% and
the amount applied against rentals in 2019. From the 2019 cash memoranda of Ricky Cornel, you were
able to extract the following:
Cash received from:
Sales
P 380,000
Interest on money market placement
4,000
Collections of accounts receivable
1,328,000
Matured money market placement, not rolled over
5,000
Total
P1,717,000
Cash payments for:
Merchandise purchases
P 210,000
Interest on notes payable
25,000
Trade payables
940,000
Notes payable (delivery equipment)
40,000
Operating expenses
470,000
Ricky Cornel, drawing
12,000
Total
P1,697,000
You have established that the fixed assets have not been depreciated since they were acquired on July 1,
2018. Estimated life of these assets is ten years.
Determine the cost of sales for the year 2019 (Ignore income taxes)
ANSWER: P1,134,900
Solution:
Payments for trade payables
940,000.00
Accounts payable - trade, Dec 31
480,000.00
Accounts payable - trade, Jan 1
-390,000.00
Credit Purchases
Cash Purchases
1,030,000.00
210,000.00
Total Purchases
Merchandise Inventory, Jan 1
1,240,000.00
175,300.00
Goods available for sale
Less: Merchandise inventory, Dec 31
1,415,300.00
280,400.00
Cost of sales
1,134,900.00
9. On February 1, 2016, Tory began a service proprietorship with an initial cash investment
of P2,000. The proprietorship provided P5,000 of services in February and received full payment
in March. The proprietorship incurred expenses of P3,000 in February, which were paid in April.
During March, Tory drew P1,000 against the capital account. In the proprietorship’s financial
statements for the two months ended March 31, 2016, prepared under the cash basis method of
accounting, what amount should be reported as capital?
ANSWER: P6,000
Solution:
Initial Cash Investment
2,000.00
Cash Receipt on Services Rendered 5,000.00
Cash Withdrawal
-1,000.00
Capital, March 31, 2016
6,000.00
P3,000 expense was paid on April, therefore, no cash outflow was reflected for such expense as of March
31, 2016.
10. Your audit of Colluccus Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this company was given to the customer when he paid his account.
On January 2, 2019, Colluccus started business and issued 108,000 ordinary shares with P100 par, for the
following considerations:
Cash
P 900,000
Building (useful life, 15 years)
8,100,000
Land
2,700,000
P11,700,000
An analysis of the bank statements showed total deposits, including the original cash investment, of
P6,300,000. The balance in the bank statement in December 31, 2019, was P450,000, but there were
checks amounting to P90,000 dated in December but not paid by the bank until January 2020. Cash on
hand on December 31, 2019 was P225,000 including customers’ deposit of P135,000. During the years,
Colluccus Company barrowed P900,000 from the bank and repaid P225,000 and P45,000 interest.
Disbursement paid in cash during the year was as follows:
Utilities
P 180,000
Salaries
180,000
Supplies
360,000
Dividends
270,000
P 990,000
An inventory of merchandise taken on December 31, 2019 showed P1,359,000 of merchandise. Tickets for
accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid
supplies invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was
purchased in early January on one-year installment basis. During the year, checks for the down payment
and all maturing installments totaled P801,000. The equipment has useful life of 5 years.
Determine the equity a of December 31, 2019 (Disregarding income taxes)
ANSWER: P12,870,000
11. Your audit of Colluccus Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this company was given to the customer when he paid his account.
On January 2, 2019, Colluccus started business and issued 108,000 ordinary shares with P100 par, for the
following considerations:
Cash
P 900,000
Building (useful life, 15 years)
8,100,000
Land
2,700,000
P11,700,000
An analysis of the bank statements showed total deposits, including the original cash investment, of
P6,300,000. The balance in the bank statement in December 31, 2019, was P450,000, but there were
checks amounting to P90,000 dated in December but not paid by the bank until January 2020. Cash on
hand on December 31, 2019 was P225,000 including customers’ deposit of P135,000. During the years,
Colluccus Company barrowed P900,000 from the bank and repaid P225,000 and P45,000 interest.
Disbursement paid in cash during the year was as follows:
Utilities
P 180,000
Salaries
180,000
Supplies
360,000
Dividends
270,000
P 990,000
An inventory of merchandise taken on December 31, 2019 showed P1,359,000 of merchandise. Tickets for
accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid
supplies invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was
purchased in early January on one-year installment basis. During the year, checks for the down payment
and all maturing installments totaled P801,000. The equipment has useful life of 5 years.
Determine the total assets as of December 31, 2019 (Disregarding income taxes).
ABSWER: P14,310,000
12. Total Profit over the life of an entity is
ANSWER: The same under the cash basis as under the accrual basis
13. We were given the following information which were obtained from the single-entry records of ASH
Company:
January 1
June 30
Interest receivable
P 12,000
P
9,600
Accounts receivable
540,000
1,056,000
Notes receivable
180,000
144,000
Merchandise inventory
456,000
120,000
Store and office equipment (net)
390,000
360,000
Prepaid operating expenses
30,000
26,400
Interest payable
3,600
6,000
Accounts payable
420,000
300,000
Notes payable
120,000
144,000
Accrued operating expenses
32,400
60,000
An analysis of the cashbook shows the following:
Balance, January 1
Receipts:
Interest income
Accounts receivable
Notes receivable
Investment by Ash
P180,000
P 24,000
432,000
180,000
72,000
Disbursements:
Interest expense
Accounts payable
Notes payable
Operating expenses
Balance, June 30 – bank overdraft
P 18,000
624,000
96,000
204,000
708,000
888,000
942,000
(P 54,000)
Determine the Purchases for the six months ended June 30, 2019:
ANSWER: P624,000
Solution:
Payments for Accounts Payable
624,000.00
Payments for Notes Payable
96,000.00
Accounts Payable, June 30
300,000.00
Notes Payable, June 30
144,000.00
Total Debits
Less: Credits
Accounts Payable, Jan 1
Notes Payable, Jan 1
Total Purchases
1,164,000.00
420,000.00
120,000.00
540,000.00
624,000.00
Changes in account balances of Agamata Business Consultancy (ABC) for 2013 are as follows:
Increase
(Decrease)
Cash
P2,500,000
Accounts receivable net
1,750,000
Inventory
1,000,000
Investments
(250,000)
Accounts payable
(1,500,000)
Bonds payable
2,000,000
Share capital
3,000,000
Share premium
500,000
Unrestricted
Retained
Earnings
750,000
Restricted
Retained
Earnings
250,000
What should be the 2013 net income, assuming there were no entries in the retained earnings account
except for the net income and a dividend declaration of P1,000,000 which was paid in the current year?
ANSWER: P2,000,000
Solution:
Unrestricted retained earnings
750,000.00
Restricted retained earnings
250,000.00
Net increase in retained earnings
Add: Dividend payment
1,000,000.00
1,000,000.00
Net income
2,000,000.00
14. Ricky Cornel, a retired engineer, formed Upland Cress Trading on July 1, 2018, investing his
retirement pay of P400,000 in the business. To cut on operating expenses, he did not hire an
accountant; as a consequence, his accounting records were incomplete. On January 1, 2019, his
cash balance was P410,000 and on December 31, 2019, it was P430,000. He wanted to have an
idea of the result of his operations for the year ended December 31, 2019. The following information
and other data were gathered for the year 2019:
Jan. 1
Dec. 31
Accounts receivable – trade
P 130,000
P 170,000
Money market placement
20,000
15,000
Accrued interest on money market placement
800
600
Merchandise inventory
175,300
280,400
Prepaid rent expense
6,000
4,500
Delivery equipment (at cost)
120,000
120,000
Store fixtures (at cost)
50,000
50,000
Rent deposit
12,000
6,000
Other assets
1,000
1,000
Accounts payable – trade
390,000
480,000
Notes payable (delivery equipment)
100,000
60,000
Accrued interest on notes payable
12,000
8,000
Accrued operating expenses (excluding rent)
8,000
10,000
Cornel was able to arrange with the owner of the building that his rental deposit be reduced by 50% and
the amount applied against rentals in 2019. From the 2019 cash memoranda of Ricky Cornel, you were
able to extract the following:
Cash received from:
Sales
P 380,000
Interest on money market placement
4,000
Collections of accounts receivable
1,328,000
Matured money market placement, not rolled over
5,000
Total
P1,717,000
Cash payments for:
Merchandise purchases
P 210,000
Interest on notes payable
25,000
Trade payables
940,000
Notes payable (delivery equipment)
40,000
Operating expenses
470,000
Ricky Cornel, drawing
12,000
Total
P1,697,000
You have established that the fixed assets have not been depreciated since they were acquired on July 1,
2018. Estimated life of these assets is ten years.
Determine the total operating expenses for the year 2019 (Ignore income taxes)
ANSWER: P496,500
Solution
Delivery equipment
Store fixtures
120,000.00
50,000.00
Total fixed assets
Divide by: Estimated useful life
170,000.00
10 yrs
Depreciation Expense
17,000.00
Payment for operating expense
Prepaid rent expense, Jan 1
Rent deposit, Jan 1
Accrued operating expense, Dec 31
470,000.00
6,000.00
12,000.00
10,000.00
Total debits
498,000.00
Less:
Credits
Prepaid rent expense, Dec 31
Rent deposit, Dec 31
Accrued operating expense, Jan 1
4,500.00
6,000.00
8,000.00
18,500.00
Operating Expense
Add: Depreciation Expense
479,500.00
17,000.00
Total Operating Expense
496,500.00
15. We were given the following information which were obtained from the single-entry records of ASH
Company:
January 1
June 30
Interest receivable
P 12,000
P
9,600
Accounts receivable
540,000
1,056,000
Notes receivable
180,000
144,000
Merchandise inventory
456,000
120,000
Store and office equipment (net)
390,000
360,000
Prepaid operating expenses
30,000
26,400
Interest payable
3,600
6,000
Accounts payable
420,000
300,000
Notes payable
120,000
144,000
Accrued operating expenses
32,400
60,000
An analysis of the cashbook shows the following:
Balance, January 1
Receipts:
Interest income
Accounts receivable
Notes receivable
Investment by Ash
Disbursements:
Interest expense
Accounts payable
Notes payable
Operating expenses
Balance, June 30 – bank overdraft
P180,000
P 24,000
432,000
180,000
72,000
P 18,000
624,000
96,000
204,000
708,000
888,000
942,000
(P 54,000)
Determine the Net Loss for the six months ended June 30, 2019:
ANSWER: P 132,000
Solution:
Sales
1,092,000.00
Less: Cost of sales
Merchandise Inventory, Jan 1
456,000.00
Purchases
624,000.00
Goods Available for Sale
Less: Merchandise Inventory, Jun 30
1,080,000.00
120,000.00
960,000.00
Gross Profit on Sales
Add: Interest Income
132,000.00
21,600.00
Total Gross Income
Less: Expenses
Interest Expense
Operating Expenses
Depreciation Expense
153,600.00
20,400.00
235,200.00
30,000.00
Net Loss
285,600.00
-132,000.00
16. Which of the following statements is/are true?
I.
The primary distinction between double-entry and single- entry bookkeeping system is the use of
duality and equilibrium approach in double-entry while single entry recognizes only the duality principle.
II.
Single – entry bookkeeping recognizes only cash transactions and personal accounts.
III.
Single – entry bookkeeping and cash basis of accounting are one and the same.
ANSWER:
II only
17. Your audit of Colluccus Company disclosed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and
this company was given to the customer when he paid his account.
On January 2, 2019, Colluccus started business and issued 108,000 ordinary shares with P100 par, for the
following considerations:
Cash
P 900,000
Building (useful life, 15 years)
8,100,000
Land
2,700,000
P11,700,000
An analysis of the bank statements showed total deposits, including the original cash investment, of
P6,300,000. The balance in the bank statement in December 31, 2019, was P450,000, but there were
checks amounting to P90,000 dated in December but not paid by the bank until January 2020. Cash on
hand on December 31, 2019 was P225,000 including customers’ deposit of P135,000. During the years,
Colluccus Company barrowed P900,000 from the bank and repaid P225,000 and P45,000 interest.
Disbursement paid in cash during the year was as follows:
Utilities
P 180,000
Salaries
180,000
Supplies
360,000
Dividends
270,000
P 990,000
An inventory of merchandise taken on December 31, 2019 showed P1,359,000 of merchandise. Tickets for
accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid
supplies invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was
purchased in early January on one-year installment basis. During the year, checks for the down payment
and all maturing installments totaled P801,000. The equipment has useful life of 5 years.
Determine the collections from sales in 2019 (Disregarding income taxes).
ANSWER: P5,580,000
Prior Period Errors - Assessment
1. Statement of financial position extracts for Peter Company show the following:
December 31, 2009
December 31, 2008
Development costs
8,160,000
5,840,000
Amortization
(1,800,000)
(1,200,000)
The capitalized development costs relate to a single project that commenced in 2006. It has now
been discovered that one of the criteria for capitalization has never been met.
The adjustment required to restate retained earnings at December 31, 2008 is
ANSWER: 4,640,000
Solution:
Development cost, 12/31/2008
5,840,000.00
Less: Amortization, 12/31/2008
1,200,000.00
Carrying amount to be written off
4,640,000.00
2. Where single period statements are being presented prior period adjustments should:
ANSWER: Be shown as adjustments of the opening balance of retained earnings.
3. Which of the following errors could result in an overstatement of both current assets and
shareholder equity?
ANSWER: Holiday pay expense for administrative employees is miss classified as
manufacturing overhead
Prior period error are omission from end misstatement in the financial statement or one or
more period arising from a failure to use or misuse of reliable information that
I.
Was available when financial statement for those period were authorized for issue
II.
Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statement.
ANSWER: I only
4. Which of the following errors could result in an overstatement of both current assets and
stockholders’ equity?
ANSWER: Holiday pay expense for administrative employees is misclassified as manufacturing
overhead.
5. The general principle in PAS 8 is that an entity must correct all material prior period errors
retrospectively in the first set of financial statements authorized for issue after their discovery by:
ANSWER: Either a or b.
A. Restating the comparative amounts for the prior period(s) presented in which the error
occurred.
B. If the error occurred before the earliest prior period presented, restating the opening balances
of assets, liabilities and equity for the earliest prior period presented.
6. Jackson Company uses IFRS to report its financial results. During the current year, the company
discovered it had overstated sales in the prior year. How should the company handle this issue?
ANSWER: Restate the prior year financial statements presented for comparative purposes.
7. At the end of 2004, SOS Company failed to accrue sales commissions during 2004 but paid in
2005. The error was not repeated in 2005. What was the effect of this error on 2004 ending
working capital and on the 2005 ending retained earnings balance? 2004 ending working capital,
2005 ending retained earnings
ANSWER: No effect, No effect
8. These are omissions from, and misstatements in, an entity's financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that was available and
could reasonably be expected to have been obtained and taken into account in preparing those
statements.
ANSWER: Prior period errors
9. This means “correcting the recognition measurement and disclosure of amounts of elements of
financial statement as if a prior period error had ever occurred.
ANSWER: Retrospective restatement
10. The premium on a three year insurance policy expiring on December 31, 2021 was paid in total
on January 1, 20Y1. If the entity has six months operating cycle , then on December 31, 20Y1, the
prepaid insurance reported as a current assets would be for
ANSWER: 12 months
11. A company has included in its consolidated financial statements this year a subsidiary acquired
several years ago that was appropriately excluded from consolidated last year. This result in
ANSWER: An accounting change that should be reported by restating the FS of all prior periods
presented
12. Failure to record the expired amount of prepaid rent expense would not
ANSWER: Understate liabilities
13. During 2012, Kelly Corporation discovered that ending inventory reported in its 2011 financial
statements was understated by $10,000. How should Kelly account for this understatement?
ANSWER: Restate the financial statements with corrected balances for all periods presented.
14. At the beginning of the current year , an entity signed a 5- year contract enabling it to used a
patented manufacturing process beginning in the current year . A royalty is payable for each
product produce , subject to a minimum annual fee. Any royalties in excess of the minimum will
be paid annually . On the contract date , the entity prepaid a sum equal to two years minimum
annual fee, in the current year , only minimum fees were incurred , The royalty prepayment shall
be reported in the entity current year end financial statement as
ANSWER: A current asset and expense
15. An entity shall correct material prior period error retrospectively in the first set of financial statement
after their discovery by
I.
Restating the comparative amounts for the prior period presented in which the error occued
II.
Restating the opening balances of asset , liability and equity for the earliest prior period presented
ANSWER: Either I or II
16. Which of the following statements regarding prior period errors is incorrect?
ANSWER: The gain or loss recognized on the outcome of a contingency which previously could
not be estimated reliably constitute a correction of a prior period error
17. At the end of Year1, SOS Company failed to accrue sales commissions during Year1 but paid in
Year2. The error was not repeated in Year2. What was the effect of this error on Year1ending working
capital and on the Year2 ending retained earnings balance?
18. Year1 ending working capital;
Year2 ending retained earnings
ANSWER: No effect, No effect
An example of an item that should be reported as a prior period adjustment is the
ANSWER: correction of an error in financial statements of a prior year.
19. On January 1, 2013, Aker Company acquired a machine at a cost of P2, 000,000. The machine
is depreciated on the straight line method over a five-year period with no residual value. Because of a
bookkeeping error, no depreciation was recognized in Aker’s 2013 financial statements. Depreciation
expense on this machine for 2014 should be
ANSWER: 400,000
20. Failure to record depreciation expense at the end of an accounting period result in
ANSWER: Overstated assets
21. The ending inventory for an entity was overstated in 2009. The overstatement will cause the entity’s
ANSWER: 2010 statement of financial position not to be misstated
22. On December 31, 2004, special insurance costs, incurred but unpaid, were not recorded. If these
insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and
retained earnings in the December 31, 2004 balance sheet? Accrued liabilities, Retained earnings
ANSWER: Understated, No effect
23. During 2017, Kelly Corporation discovered that ending inventory reported in its 2016 financial
statements was understated by P10,000. How should Kelly account for this understatement?
ANSWER: Restate the financial statements with corrected balances for all periods presented.
On January 1, year 1, Newport Corp. purchased a machine for 100,000. The machine was depreciated
using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping
error, no depreciation was recognized in Newport’s year 1 financial statements, resulting in a 10,000
overstatement of the book value of the machine on December 31, year 1. The oversight was discovered
during the preparation of Newport’s year 2 financial statements. What amount should Newport report for
depreciation expense on the machine in the year 2 financial statements?
ANSWER: 10,000
Solution:
Cost
Divide by: Estimated useful life
100,000.00
10 yrs
Annual depreciation/depreciation expense, year 2
10,000.00
Justin Corporation discovered an error in their 2011 financial statements after the statements were issued.
This requires that
ANSWER: The financial statements are restated to reflect the correction of period-specific effects
of the error.
Which of the following would cause income of the current period to be understated?
ANSWER: Underestimating estimate of residual value
Che Che Company’s December 31, year end financial statement contained the following errors:
December 31,2012
December 31,2013
Ending inventory
P100,000 understated
P90,000 overstated
Depreciation expense
20,000 understated
An insurance premium of P75,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The
same was charged to expense in full in 2012. In addition, on December 31, 2013, a fully depreciated
machinery was sold for P160,000 cash, but the sale was not recorded until 2014. There were no other
errors during 2012, 2013 and 2014 and no corrections have been made for any of the errors. Ignore income
tax considerations.
What is the net effect of the errors on the 2013 profit?
ANSWER: Overstated by P55,000
Solution:
Understated beginning inventory
100,000.00
Overstated beginning inventory
90,000.00
Understated insurance expense (75,000/3) 25,000.00
Unrecorded gain on sale
-160,000.00
Net misstatement in 2013 profit
55,000.00
O
O
O
U
O
Which of the following statements regarding prior period errors is incorrect?
ANSWER: A.
The gain or loss recognized on the outcome of a contingency which
previously could not be estimated reliably constitute a correction of a prior period error
The premium on a four year insurance policy expiring on December 31, 20Y4 was paid in total on January
1, 20Y1. Assuming that the original payment was recorded as a prepaid asset, the balance in the prepaid
balance account on December 31, 20Y2 would be
ANSWER: Lower than the balance on December 31, 20Y1
Che Che Company’s December 31, year end financial statement contained the following errors:
December 31,2012
December 31,2013
Ending inventory
P100,000 understated
P90,000 overstated
Depreciation expense
20,000 understated
An insurance premium of P75,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The
same was charged to expense in full in 2012. In addition, on December 31, 2013, a fully depreciated
machinery was sold for P160,000 cash, but the sale was not recorded until 2014. There were no other
errors during 2012, 2013 and 2014 and no corrections have been made for any of the errors. Ignore income
tax considerations.
What is the net effect of the errors on the 2012 profit?
ANSWER: Understated by P130,000
Solution:
Understated ending inventory
-100,000.00
Understated depreciation expense
20,000.00
Overstated insurance expense (75,000 x 2/3) -50,000.00
Net misstatement in 2012 profit
-130,000.00
U
O
U
U
Universal Company failed to accrue warranty cost of P100, 000 in its December 31, 2013
financial statements. In addition, a change from straight line or accelerated depreciation made at the
beginning of 2014 resulted in a cumulative effect of P60, 000 on Universal’s retained earnings. What
amount before tax should Universal report as prior period error in 2014?
ANSWER: 100,000
Solution:
Only the unrecorded accrued warranty shall be considered as prior period error, since the accelerated
depreciation is considered change in accounting estimate, and thus treated as currently and prospectively.
Which of the following is a counter balancing error?
ANSWER: Prepaid expensed adjusted incorrectly
Types of Errors based on Periods Affected - Assessment
On December 31, 2015, special insurance costs were incurred and unpaid, but were not recorded. If these
insurance costs were related to a particular job order in work in process that was not completed during the
period, what is the effect of the omission on accrued liabilities and retained earnings in the December 31,
2015 balance sheet?
=Accrued Liabilities
Retained Earnings
Understated
Overstated
Bren Co.’s beginning inventory at January 1, 2015, was understated by P26,000, and its ending inventory
was overstated by P52,000. As a result, Bren’s cost of goods sold for 2015 was
=Understated by P78,000
Solution:
Understated beginning inventory
Overstated ending inventory
-26,000.00
-52,000.00
U
U
Net misstatement of cost of goods sold
-78,000.00
U
The premium on a three year insurance policy expiring on December 31, 2021 was paid in total on January
1, 2019. If the entity has six months operating cycle , then on December 31, 2019, the prepaid insurance
reported as a current assets would be for
=12 months
For an entity with a periodic inventory system , which of the following would cause income to be overstated
in the period of occurrence?
=Understating beginning inventory
On December 27, 2009, An entity ordered merchandized for resale. The merchandized was shipped f.o.b.
shipping point on December 28, 2009, and the goods arrived on January 2, 2010. The invoice was received
on December 30, 2009.The entity did not record the purchase in 2009 and did not include the goods in
ending inventory . The effect on the entity’s 2009 financial statement were
=Income and owners equity were correct assets and liabilities were incorrect
An entity uses a periodic inventory system and neglected to record a purchase of merchandised on
account at year end . This merchandised was omitted from the year –end physical count. How will these
errors affect assets liabilities , and shareholder s’ equity at year – end and the net earnings for the year?
Assets, Liabilities, Equity, Net Earnings
=Understate, Understate, No effect, No effect
Which of the following should not be reported retroactively?
=Correction of an overstatement of ending inventory made two years ago.
The premium on a three year insurance policy expiring on December 31, 2021 was paid in total on January
1, 2019. The original payment was initially debited to a prepaid asset account. The appropriate journal entry
had been recorded on December 31, 2019 . The balance in the prepaid asset account on December
31,2019 should be
=The same as it would have been if the original payment had been debited initially to an
expense account
At the beginning of the current year , an entity signed a 5- year contract enabling it to used a patented
manufacturing process beginning in the current year . A royalty is payable for each product produce ,
subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually . On the
contract date , the entity prepaid a sum equal to two years minimum annual fee, in the current year , only
minimum fees were incurred , The royalty prepayment shall be reported in the entity current year end
financial statement as
=A current asset and expense
Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate, with interest payable maturity. Loeb repaid each loan
on its scheduled maturity date.
Date of loan
Amount
Maturity date
Term of loan
11/1/18
P5,000
10/31/19
1 year
2/1/19
15,000
7/31/19
6 months
5/1/19
8,000
1/31/20
9 months
Loeb records interest expense when the loans are repaid. As a result, interest expense of P1,500
was recorded in 2019. If no correction is made, by what amount would 2019 interest expense be
understated?
= P540
Solution:
Overstated ending inventory
Overstated beginning inventory
-2,000,000.00
1,200,000.00
decrease
increase
Net adjustment in 2013 profit
-800,000.00
decrease
Conn Co. reported a retained earnings balance of P400,000 at December 31, 2014. In August 2015, Conn
determined that insurance premiums of P60,000 for the three-year period beginning January 1, 2014, had
been paid and fully expensed in 2014. Conn has a 30% income tax rate. What amount should Conn report
as adjusted beginning retained earnings in its 2015 statement of retained earnings?
=. P428,000
Solution:
Retained earnings, 12/31/2014 unadjusted
Overstated insurance expense (60,000 x 2/3)
Tax effect on adjustment (40,000 x 30%)
400,000.00
40,000.00
-12,000.00
Retained earnings, 12/31/2014 adjusted
428,000.00
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 2011. The
cumulative effect of this change should be reported in Lore’s 2011 financial statements as a
=Prior period adjustment resulting from the correction of an error.
An entity uses a periodic inventory system . If the entity beginning inventory in the current year is overstated
, and that is the only error in the current year , then the entity’s income for the current year would be
=Understated and asset correct
Tack, Inc. reported a retained earnings balance of P150,000 at December 31, 2014. In June 2015, Tack
discovered that merchandise costing P40,000 had not been included in inventory in its 2014 financial
statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained
earnings in its statement of retained earnings at December 31, 2015?
=. P178,000
Solution:
Retained earnings, 12/31/2014 unadjusted
Understated inventory, 12/31/2014
Tax effect on adjustment (40,000 x 30%)
150,000.00
40,000.00
-12,000.00
Retained earnings, 12/31/2014 adjusted
178,000.00
The draft financial statements for Savior Company for the year ended December 31, 2014 have been
prepared. A final review of the draft reveals an overvaluation of the ending inventory of P2, 000,000 at
December 31, 2013. Further investigation shows that there was overvaluation of ending inventory at
December 31, 2012 of P1, 200,000.
What adjustment should be made to the profit for the year ended December 31, 2013 presented as the
comparative figure in the 2014 financial statements?
=
During 2015, Paul Company discovered that the ending inventories reported on its financial statements
were incorrect by the following amounts:
2013
P60,000 understated
2014
75,000 overstated
Paul uses the periodic inventory system to ascertain year-end quantities that are converted to dollar
amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes,
Paul’s retained earnings at January 1, 2015, would be
=800,000 decrease
Solution:
Overstated ending inventory
Overstated beginning inventory
-2,000,000.00
1,200,000.00
decrease
increase
Net adjustment in 2013 profit
-800,000.00
decrease
The premium on a three –year insurance policy expiring on December 31,2021 was paid in total on January
1, 2019 . Assuming that the original payment was recorded as a prepaid assets , how would total assets
and shareholder equity be affected during 2019?
=Both total asset and shareholder equity would decrease
Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation
computation when using the
=Straight-line method
Production or use method
b. Yes
Yes
At the end of current year , special insurance cost incurred but unpaid , were not recorded . If these
insurance cost were related to work in process , what is the effect of the omission on accrued liabilities and
retained earnings in the current year – end statement of financial positions? Accrued liabilities, Retained
earnings
=Understated, No effect
During 2015, Paul Company discovered that the ending inventories reported on its financial statements
were incorrect by the following amounts:
2013
P60,000 understated
2014
75,000 overstated
Paul uses the periodic inventory system to ascertain year-end quantities that are converted to dollar
amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes,
Paul’s retained earnings at January 1, 2015, would be
=P 75,000 overstated
Solution:
Misstatements made in inventory are self-reconciling in the retained earnings, thus the effects of the 2013
errors would automatically be cancelled by the end of 2014, therefore, only the P75,000 overstated 2014
ending inventory shall be reflected in Jan 1, 2015, as overstatement. It is an overstated because an
overstated ending inventory would create the following effects: Cost of goods sold would be understated;
Net profit would be overstated; therefore, Retained earnings would be overstated.
At the end of 2014, Ritzcar Co. failed to accrue sales commissions earned during 2014 but paid in 2015.
The error was not repeated in 2015. What was the effect of this error on 2014 ending working capital and
on the 2015 ending retained earnings balance?
=Straight-line method
Production or use method
b. Yes
Yes
Accounting Cycle – Assessment
The worksheet helps facilitate the preparation of financial statements?
=Smaller than the total of the statement of financial position debit column
After the accounts have been closed
=The revenue, expense, and income summary accounts have zero balances
The general ledger of Ivory Corporation, a merchandising firm includes the following accounts:
1/1/2013
12/31/2013
Supplies inventory
P 8,500
P 9,600
Accumulated depreciation 80,200
89,500
Accounts payable
45,000
98,000
Supplies
used during the year was P28,200; Purchases of merchandise
during the year was P360,000; A depreciable asset with a cost of
P53,900, was sold for P10,000 which resulted in a gain of P8,300.
In reconstructing the transactions posted to the Supplies Inventory account, the missing item is?
=Purchase of supplies of P29,300
Supplies Inv.
Beg. bal.
8,500
Purchases 29,300
28,200
Used
End bal.
9,600
Premium on bonds payable is an example of?
=Real and adjunct account
The capital account of Thirst Company decrease by P15,000 in 2013. During the year, Jim Water, the owner
issued a personal check to settle Thirst Company’s obligation amounting to P20,000. At the end of the year,
Jim Water took merchandise costing P10,000 for personal use. At year-end, Thirst Company’s net income
(loss) is?-end, Thirst Company’s net income (loss) is?
=(25,000)
Solution:
Change in Capital for 2013
Settlement of liabilities (contribution)
Withdrawal
-15,000.00
-20,000.00
10,000.00
Net income (loss)
-25,000.00
The transactions affecting the capital account are reversed, therefore, contributions are deducted while
withdrawals are added back.
During the year Incredible Hulk Company, in its trial balance reported revenues of P130,000 and
expenses of P80,000 before adjustments for the following items:



P20,000 which was collected in advance, recorded initially as a liability was earned by yearend;
P10,000 of rentals initially recorded under prepaid rent expires by yearend;
P8,000 unrecorded and uncollected services rendered to customers;

P3,500 employees salaries incurred by yearend, remains unrecorded and unpaid.
After adjusting and closing entries have been posted, the balance of the Income Summary account is
=0
Solution:
After posting of the adjusting and closing entries, nominal accounts are already closed, that is, the accounts
are zeroed. Income summary is a nominal accounts, hence, will show a P0 balance, after posting of the
adjusting and closing entries
Which of the following is not true of a worksheet?
=The worksheet is included as part of the published financial statements
Which among the rules on debit and credit below is not correct?
=Debit means increase, and credit means decrease.
The accounts in the ledger of CD Company contain the following balances at yearend: Accounts receivable,
P30,240; Cash, P50,985; Equipment, P172,760; Gas and oil expense, P2,650; Insurance expense, P1,830;
Notes payable, P64,575; Prepaid insurance, P6,880; Repair expense, P3,360; Service revenue, P37,130;
CD drawing, P2,450; CD capital (beg), P156,290; Salaries expense, P15,490; Salaries payable, P2,850.
Assuming no error committed during the fiscal period, the balance of Accounts payable is
=25,800
Solution:
Accounts receivable
Cash
Equipment
Prepaid insurance
30,240.00
50,985.00
172,760.00
6,880.00
Total assets
Less: Equity
Service revenue
Gas & oil expense
Insurance expense
Repair expense
Salaries expense
260,865.00
Net income (loss)
CD, Capital
CD, Drawing
Total liabilities
Less: Notes payable
Salaries payable
Accounts payable
37,130.00
-2,650.00
-1,830.00
-3,360.00
-15,490.00
13,800.00
156,290.00
-2,450.00
167,640.00
93,225.00
64,575.00
2,850.00
67,425.00
25,800.00
Journalizing is performed in what phase of the accounting process?
=Recording
Which of the following is a “source document” and which source document requires an entry in the books?
=Sales invoice
Which of the following accounting tool exemplifies the ledger?
=T-account
On December 31, 2012, STO Company's bookkeeper made an entry debiting Supplies Expense and
crediting Supplies on Hand for P12,600. The Supplies on Hand account had a P15,300 debit balance on
January 1, 2012. The December 31, 2012 statement of financial position showed Supplies on Hand of
P11,400. Only one purchase of supplies was made during the month, on account. What is the reversing
entry on January 1, 2013?
=None is required.
Solution:
No reversing entry required for deferral method where the initial measurement is a permanent account, that
is either asset method or liability method.
Which statement about the trial balance is incorrect?
=A trial balance proves that all amounts have been posted to the correct amounts.
it helps localize accounting errors within a period of time.
=Trial balance
In which journal will an acquisition of merchandise by issuing note payable be recorded?
=General journal
The balancing figure in the worksheet is net loss if?
=In the statement of financial position columns, the total of the credits exceeds the total of
the debits
An example of a nominal and a contra account is?
=Sales return
The assets of BC Company amounted to P70,000 on January 1, but increased by P80,000 by December
31. During this same period liabilities decreased to P20,000. The owner’s equity on January 1, amounted
to P35,000. The amount of owner’s equity at December 31 is
=130,000
Solution:
Owner's Equity, Jan 1
Increase in assets
Decrease in liabilities
35,000.00
80,000.00
20,000.00
Owner's Equity, Dec 31
135,000.00
An entity initially records prepayments in nominal
accounts.
Which of the following yearend adjusting entries may be reversed?
=The entry to record the portion of rental received in advance
that is unearned at yearend
The trial balance prepared at December 31 did not balance. Dr total was P159,250 and Cr total was
P153,200. In determining the cause of the difference, you discovered the following errors: a credit to cash
of P650 was not posted; a P2,000 credit to be made to the Sales account was credited to the Accounts
receivable account instead; the wages payable account balance of P9,300 was listed in the trial balance as
P3,900. The correct trial balance is?
=160,600
Solution:
Balances
Unrecorded credit cash
Erroneous sale transaction
Erroneous wages payable (9,300-3900)
Adjusted Balance
Debit
159,250.00
-650.00
2,000.00
Credit
153,200.00
160,600.00
160,600.00
2,000.00
5,400.00
The trial balance of HI Company does not balance. The debit column totaled P588,600 while the credit
column totaled P598,300. An examination of the ledger shows these errors
·
Cash received from customer on account was recorded (both debit and credit) as P46,900
instead of P49,600
·
Check issued to supplier was recorded (both debit and credit) as P24,800 instead of P28,400
·
The purchase on account of a computer table worth P22,000 was recorded as a debit to
Office Expense and a credit to accounts payable.
·
Services performed on account for a client, for P12,250 were recorded both as a debit to
Accounts receivable and a credit to service revenue of P21,250
·
A payment of P2,500 for telephone charges was posted as a credit to Office Expense and a
credit to Cash
·
The unearned rent account was totaled at P15,200 instead of P12,200
·
The debit footings to purchases and interest income were both understated by P1,000
The correct debit/credit column totals should be
=582,000
Arrange the following steps in their correct order:
I.
Financial statements are prepared.
II.
Adjusting entries are recorded.
III.
Nominal accounts are closed.
=II, I and III
An analysis of the records of Alden Company disclosed changes in account balances for the current
year and the supplementary data listed below:
Cash
600,000 increase
Accounts receivable
350,000 decrease
Merchandise inventory
1,320,000 increase
Accounts payable
560000 increase
Accrued expenses
90,000 decrease
During the year Alden borrowed P2,000,000 from the bank and paid off P1,750,000 plus interest of
P200,000. Interest of P50,000 is accrued on December 31. There was no interest payable at the
beginning of the year.
Furthermore, Alden transferred equity securities to the business which were sold for P900,000 to finance
the acquisition of merchandise. Alden made weekly withdrawals in the current year of P15,000. The net
income for the current year is?
=680,000
Solution:
Net increase in cash
Loan proceeds from bank
Principal repayment
Proceeds from sale of securities
Withdrawals (15,000 x 52 weeks)
600,000.00
-2,000,000.00
1,750,000.00
-900,000.00
780,000.00
Cash flow from operations
Decrease in accounts receivable
Increase in merchandise inventory
Increase in accounts payable
Decrease in accrued expense
Increase in accrued interest
230,000.00
-350,000.00
1,320,000.00
-560,000.00
90,000.00
-50,000.00
Net income
680,000.00
Air Company had total assets of P4,000,000 and shareholders’ equity of P2,080,000 at the beginning of
the year. During the year, assets increased by P520,000 and liabilities decreased to P820,000. What was
the shareholders’ equity at the end of the year?
=3,700,000
Which among the following is the last step in the accounting cycle?
=Preparation of the post-closing trial balance
The following errors were made in preparing a trial balance, the P1,350 balance of inventory was omitted;
the P450 balance of Prepaid Insurance was listed as a credit; and the P300 balance of Salaries Expense
was listed as Utilities Expense. The debit and credit totals of the trial balance would differ by?
=P2,250
On March 31, the ledger for GH Services consists of the following: Cleaning equipment, P27,800; Accounts
payable, P15,700; Gail, capital, P20,000; Office equipment, P11,500; Accrued interest on note, P1,500;
Cleaning supplies, P2,600; Accounts receivable, P21,000; Accumulated depreciation, P2,000; Cash,
P7,900; Note payable, P22,000; Accrued salaries P9,600. In a trial balance prepared on March 31, the total
of the credit column is
=70,800
Solution:
Accounts payable
Gail, capital
Accrued interest on note
Accumulated depreciation
Note payable
Accrued salaries
15,700.00
20,000.00
1,500.00
2,000.00
22,000.00
9,600.00
Credit Balance
70,800.00
Debits
=Increase assets and expenses and decrease liabilities, revenue and equity
On January 1 of the current year a group of stockholders set up AB Corporation. They contributed cash of
P4,250,000 and borrowed P950,000. During the year, revenues from sales totaled P1,400,000, while total
costs and expenses were P750,000. AB Corporation declared a cash dividend of P300,000 on December
20, payable to the stockholders on January 30 of the following year. There were no additional activities
affecting stockholders’ equity. By December 31 of current year, liabilities decreased to P880,000. Total
assets at the end of the current year is?
=5,480,000
General ledger serves what phase of the accounting process?
=Classifying
Peter Company received P45,600 on May 1, 2012 for one year's
rent in advance and recorded the transaction with a credit to a
real account. The December 31, 2012 adjusting entry is?
=Dr Unearned rent 30,400; Cr Rent revenue 30,400
Received rent in advance
45,600
Rent: May 1 - Dec. 31
8/12
Rent income
30,400
Entry :
DR. Cash
45,600
CR. Unearned Rent
45,600
Adjusting entry:
DR. Unearned Rent
30,400
CR. Rent revenue
30,400
Closing entries
=Remove the balances from the entity’s temporary accounts
Which of the choices that follow is not a “book of original entry”?
=General ledger
Adjusting Entries - Assessment
On December 31 of the current year, Holmgren Company's bookkeeper made an entry debiting Supplies
Expense and crediting Supplies on Hand for P12,600. The Supplies on Hand account had a P15,300 debit
balance on January 1. The December 31 balance sheet showed Supplies on Hand of P11,400. Only one
purchase of supplies was made during the month, on account. The entry for that purchase was?
=debit Supplies on Hand, P8,700 and credit Accounts Payable, P8,700
Solution:
Supplies used
Supplies on hand, Dec 31
12,600.00
11,400.00
Supplies available for use
Less: Supplies on hand, Jan 1
24,000.00
15,300.00
Supplies purchased
8,700.00
Supplies on Hand
Accounts payable
8,700.00
8,700.00
An analysis of Hotel Efemela’s unadjusted prepaid expense account at December 31, 2013, revealed
the following:
•
An opening balance of P3,000 for Hotel Efemela’s comprehensive insurance policy. Hotel Efemela
had paid an annual premium of P6,000 on July 1, 2012.
•
A P6,400 annual insurance premium payment made July 1, 2013.
•
A P4,000 advance rental payment for a warehouse Hotel Efemela leased for one year beginning
January 1, 2013.
In its December 31, 2013 statement of financial position, what amount should Hotel Efemela report as
prepaid expenses?
=P 3,200
Solution:
Annual insurance premium
Divide by: Total coverage
6,400.00
12 months
Monthly insurance premium
Multiply by: Unexpired portion
533.33
6 months
Prepaid insurance
3,200.00
A P9,650 debit to rent expense was incorrectly posted as a P965 credit. What is the effect of this error on
the trial balance and the rent expense account?
=The debit column of the trial balance would be P10,615 too low and rent expense would
be understated by P10,615.
Solution:
Understatement in Debit side
Overstatement in Credit side
Net understatement
Expense
in
-9,650.00
-965.00
Rent
10,615.00
Since “Rent Expense” account has a normal debit balance, understatement of such would result to an
understatement in the debit column of the trial balance.
Accruals are
=Adjusting entries where revenue or expense recognition precedes cash flow
Paul Company paid P110,400 on June 1, 2012 for a one-year insurance policy and recorded the entire
amount in a real account The December 31, 2012 adjusting entry is?
=Dr Insurance exp 64,400; Cr Prepaid insurance 64,400
Solution:
Expired: Jun 1, 2012-Dec 31, 2012
Insurance expense (110,400 x 7/12)
Adjusting entry:
Insurance expense
64,400.00
Prepaid insurance
7 months
64,400.00
64,400.00
An enterprise has made all necessary adjusting entries and is now closing its accounts for the
period. Dividends of 30,000 were declared and distributed during the year. The entry to close the dividends
account would be?
=
Retained earnings
P30,000
Dividends
P30,000
Solution:
For the purpose of reporting the total amount of dividends declared in a period, a nominal (temporary)
account with a normal debit balance is used to separately report the said transaction, instead of directly
deducting outright said dividend declaration against retained earnings. Considering it is a nominal account,
it is closed against retained earnings every closing of the books with a pro forma entry of: Dr: Retained
earnings, and Cr: Dividends.
Accruals are?
=Adjusting entries where revenue or expense recognition precedes cash flow
The accountant of Review Company made the following adjusting entry on December 31, 2009.
Prepaid Rent
Rent Expense
P1,800
P1,800
If annual rent is paid in advance every October 1, the original transaction entry made was?
=Debit Rent Expense and credit Cash, P2,400.
Solution:
Unexpired Rent
Divide by: (Jan 1-Sep 30)
1,800.00
9 mos
Monthly Rent
Multiply by:
200.00
12 mos
Annual Rent
2,400.00
Rent Expense
Cash
2,400.00
2,400.00
The Supplies on Hand account balance at the beginning of the period was P6,600. Supplies totaling
P12,825 were purchased during the period and debited to Supplies on Hand. A physical count shows
P3,825 of Supplies on Hand at the end of the period. The proper journal entry at the end of the period
=debits Supplies Expense and credits Supplies on Hand for P15,600.
Solution:
Supplies on Hand, beginning
Supplies purchased
6,600.00
12,825.00
Supplies available for use
Less: Supplies on Hand, ending
19,425.00
3,825.00
Supplies Expense (Used)
15,600.00
Supplies Expense
Supplies on Hand
15,600.00
15,600.00
The general ledger of Ivory Corporation, a merchandising firm includes the following accounts:
1/1/2013
12/31/2013
Supplies inventory
P 8,500
P 9,600
Accumulated depreciation 80,200
89,500
Accounts payable
45,000
98,000
Supplies used during the year was P28,200; Purchases of merchandise during the year was P360,000; A
depreciable asset with a cost of P53,900, was sold for P10,000 which resulted in a gain of P8,300. In
reconstructing the transactions posted to the Accumulated Depreciation account, the missing item is
=Depreciation expense of P61,500
Solution:
Gain on sale
Cost of asset sold
8,300.00
53,900.00
Total credits
Less: Cash
62,200.00
10,000.00
Accumulated depreciation-derecognized
Accumulated depreciation, 12/31/2013
52,200.00
89,500.00
Total debits
Less: Accumulated depreciation, 1/1/13
141,700.00
80,200.00
Depreciation expense
61,500.00
Adjusting entries are needed because an entity?
=Uses the accrual basis of accounting
Caddis Co. had these unadjusted account balances on December 31, 2009:
Inventory, January 1, 2009
Purchases
Freight-In
Purchase Discounts
Purchase Returns
P188,250
142,700
12,880
2,140
26,710
Assuming that the ending inventory is P97,900, the entry to adjust the inventory accounts would include
=A debit to Cost of Goods Sold of P217,080
Solution:
Purchases
Less: Purchase discounts
Purchase returns
142,700.00
2,140.00
26,710.00
28,850.00
Net Purchases
Add: Freight-In
113,850.00
12,880.00
Net Cost of Purchases
Add: Inventory, Jan 1, 2009
126,730.00
188,250.00
Cost of Goods Available for Sale
Less: Inventory, Dec 31, 2009
314,980.00
97,900.00
Cost of Goods Sold
217,080.00
Cost of Goods Sold
217,080.00
Inventory
97,900.00
Purchases discounts
2,140.00
Purchases returns
26,710.00
Inventory
188,250.00
Purchases
142,700.00
Freight-In
12,880.00
A company receives interest on a P30,000, 8%, 5-year note receivable each April 1. At December 31,
2008, the proper adjusting entry was made to accrue interest receivable. Assuming that the company
does not use reversing entries, what entry should be made on April 1, 2009 when the annual interest
payment is received?
=Cash
P2,400
Interest Receivable
Interest Income
P1,800
600
Solution:
Annual interest (30,000 x 8%)
Less: Accrued interest, Apr-Dec 2008 (2,400 x 9/12)
2,400.00
1,800.00
Interest, Jan-Mar 2009
600.00
Cash
Interest income
Interest receivable
2,400.00
600.00
1,800.00
Dunlap Company sublet a portion of its warehouse for 5-years at an annual rental of P15,000, beginning
on March 1. The tenant paid 1 year’s rent in advance, which Dunlap recorded as a credit to unearned rental
income. Dunlap reports on a calendar-year basis. The adjustment on December 31, of the first year should
be?
=
Unearned rental income
P12,500
P12,500
Rental income
Solution:
Annual rental
15,000.00
Divide by:
12 mos
Monthly rental
Multiply by: Expired (Mar-Dec)
1,250.00
10 mos
Rental earned
12,500.00
Unearned rental income
Rental income
12,500.00
12,500.00
Adjusting entries involve
=At least one real and one nominal account
Daguioman Company received P9,600 on April 1, 2009 for one year's rent in advance and recorded the
transaction with a credit to a nominal account. The December 31, 2009 adjusting entry is?
=
At the end of 2009, Tayum Company made four adjusting entries for the following items:
1. Depreciation expense, P25,000.
2. Expired insurance, P2,200 (originally recorded as prepaid insurance).
3. Interest payable, P6,000.
4. Rental revenue receivable, P10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed
is (are)
=debit Rent Income and credit Unearned Rent, P2,400
Solution:
Annual Rent
Divide by:
9,600.00
12 mos
Monthly rent
Multiply by: Unexpired (Jan-Mar 2010)
800.00
3 mos
Unearned rent
2,400.00
Rent income
Unearned rent
2,400.00
2,400.00
Swert Inc.'s fiscal year ended on November 30, 2014. The balance in the prepaid insurance account
as of November 30, 2014, was P35,200 (before adjustment) and consisted of the following policies:
Date of
Date of
Balance in
Policy
Purchase
Expiration
Account
A
7/1/2009
6/30/2010
P14,400
B
12/1/2007
11/30/2009
9,600
C
4/1/2008
3/31/2010
11,200
P35,200
The adjusting entry required on November 30, 2014, would include a debit to Insurance Expense of
=P24,000
At the end of 2009, Tayum Company made four adjusting entries for the following items:
1. Depreciation expense, P25,000.
2. Expired insurance, P2,200 (originally recorded as prepaid insurance).
3. Interest payable, P6,000.
4. Rental revenue receivable, P10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed
is (are)
=Entries No. 3 and No. 4.
Solution:
As a general rule, all accruals and deferrals initially recognized in a nominal account (income method and
expense method) are subjected to reversing entries.
Adjusting entries for depreciation expense and expired insurance are deferrals initially recognized in a real
account (asset method), thus there is no need to require reversing entries. While, interest payable and
rental revenue receivable are both accruals, thus, require reversing entries
The accountant of Mutya Company made the following adjusting entry on December 31, 2009.
Rent Income
Unearned Rent Income
P 900
P 900
If annual rent is received in advance every March 1. the original transaction entry made was?
=Debit Cash and credit Rent Income, P5,400.
Havok Company adjusts and closes its books on December 31 and does not reverse adjusting
entries. At December 31, 2011, Havok Company reported accrued salaries of P31,000 on its balance
sheet. Salary payments to employees during 2012 were P262,000 and this amount was debited to
salaries expense. At December 31, 2012 accrued salaries amounted to P28,000.
The salaries expense to be reported in the 2012 income statement is
=P259,000
Solution:
Salaries paid
Accrued salaries, 12/31/2012
262,000.00
28,000.00
Total debits
Less: Accrued salaries, 12/31/2011
290,000.00
31,000.00
Salaries expense
259,000.00
John Company received cash of P77,400 on September 1, 2012 for one year's rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2012 adjusting entry is?
=Dr Rent revenue; Cr Unearned rent P51,600
Solution:
Expired: Sep 1, 2012-Dec 31, 2012
Unexpired:
Unearned rent (77,400 x 8/12)
Adjusting entry:
Rent revenue
51,600.00
Unearned rent
4 months
8 months
51,600.00
51,600.00
Tayum received P12,000 from a tenant on December 1 for four months' rent of an office. This rent was for
December, January, February, and March. If Lane debited Cash and credited Unearned Rental Income for
P12,000 on December 1, the necessary adjustment December 31 would include
=A credit to Rental Income of P3,000
Solution:
Rent Received
Divide by: Coverage (Dec-Mar)
12,000.00
4 mos
Monthly Rent/Rent Earned
3,000.00
Unearned Rental Income
Rental Income
3,000.00
3,000.00
The general ledger of Ivory Corporation, a merchandising firm includes the following accounts:
1/1/2013
12/31/2013
Supplies inventory
P 8,500
P 9,600
Accumulated depreciation
Accounts payable
80,200
45,000
89,500
98,000
Supplies used during the year was P28,200; Purchases of merchandise during the year was P360,000; A
depreciable asset with a cost of P53,900, was sold for P10,000 which resulted in a gain of P8,300. In
reconstructing the transactions posted to the Accounts Payable account, the missing item is
=Payment of accounts of P307,000
Solution:
Purchases of merchandise
Accounts payable, 1/1/2013
Accounts payable, 12/31/2013
360,000.00
45,000.00
-98,000.00
Payment of accounts
307,000.00
Moon Company purchased equipment on November 1, 2009, by giving its supplier a 12-month, 9 percent
note with a face value of P48,000. The December 31, 2009, adjusting entry is?
=debit Interest Expense and credit Interest Payable, P720.
Solution:
Principal
Multiply by: Interest
48,000.00
9%
Annual interest
Multiply by: Coverage (Nov-Dec 2009)
4,320.00
2 mos/12 mos
Accrued interest expense
720.00
Interest expense
Interest payable
720.00
720.00
The work sheet of Pilar Company shows Income Tax Expense of P9,000 and Income Tax Payable of
P9,000 in the Adjustments columns. What will be the ultimate disposition of these items on the work sheet?
=Income Tax Expense will appear as a debit of P9,000 in the Income Statement columns
and Income Tax Payable as credit in the Balance Sheet columns.
Solution:
Income Tax Expense is a nominal account whose normal balance is debit which is an Income Statement
account; while Income Tax Payable is a permanent/real account whose normal balance is credit which is a
Balance Sheet account.
Meiji Company acquired rights to a patent from Novie Co. under a licensing agreement that required
an advance royalty payment when the agreement was signed. Meiji remits royalties earned and due
under the agreement on October 31 each year. Additionally on the same date, Meiji pays in advance
estimated royalties for the next year. Meiji adjusts prepaid royalties at year-end. Information for the
year ended December 31, 2014 are shown below:
Date
Amount
01/01/14
Prepaid royalties
P130,000
10/31/14
Royalties
payment
(charged to royalties
expense)
220,000
12/31/14
Year-end credit adjustment
to royalty expense
50,000
In its December 31, 2014 balance sheet, Meiji should report prepaid royalties of
=P180,000
Solution:
Prepaid royalties, 1/1/14
Year-end adjustment, 12/31/14
130,000.00
50,000.00
Prepaid royalties, 12/31/14
180,000.00
Gehrig Corporation renewed an insurance policy for 3 years beginning July 1, 2009 and recorded the
P81,000 premium in the prepaid insurance account. The P81,000 premium represents an increase of
P23,400 from the P57,600 premium charged 3 years ago. Assuming Gehrig’s records its insurance
adjustments only at the end of the calendar year, the adjusting entry required to reflect the proper balances
in the insurance accounts at December 31, 2009, Gehrig’s year-end is to?
=Debit insurance expense for P23,100 and credit prepaid insurance for P23,100
Solution:
Old Insurance Policy
Multiply by: Balance (Jan-Jun 2009)
57,600.00
6 mos/36 mos
Remaining Balance, old insurance policy
9,600.00
New Insurance Policy
Divide by: Coverage
81,000.00
3 yrs
Annual insurance
Multiply by: Expired (Jul-Dec 2009)
27,000.00
6 mos/12 mos
New insurance consumed
13,500.00
Old insurance balance
New insurance consumed, 2009
9,600.00
13,500.00
Insurance expense, 2009
23,100.00
Insurance expense
Prepaid insurance
23,100.00
23,100.00
Which of the following is an example of an adjusting entry?
=Recording depreciation of a truck
Rice Corporation loaned P60,000 to another corporation on December 1, 2009 and received a 3-month,
8% interest-bearing note with a face value of P60,000. What adjusting entry should Rice make on
December 31, 2009?
=Debit Interest Receivable and credit Interest Income, P400.
Solution:
Principal
Multiply by: Interest (8% x 3 mos/12 mos)
60,000.00
2%
Total Interest
Multiply by: Coverage (Dec 2009)
1,200.00
1 mo/3 mos
Accrued interest income
400.00
Interest receivable
Interest income
400.00
400.00
Tineg Company paid P12,960 for a four-year insurance policy on September 1 and recorded the P12,960
as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Tineg make on December
31, the end of the accounting period?
=Insurance Expense
P 1,080
Prepaid Insurance
Solution:
P 1,080
Insurance Premium
Divide by:
12,960.00
4 years
Annual Insurance
Multiply by: Insurance used (Sep 1-Dec 31)
3,240.00
4 mos/12 mos
Insurance Expense
1,080.00
Insurance Expense
Prepaid Insurance
1,080.00
1,080.00
Adjusting entries involve
=Only real accounts
Development of Financial Reporting Framework and Standard-Setting Bodies - Module Assessment
Are the following statements about the Norwalk Agreement true or false?
Statement 1: The Norwalk Agreement requires the consolidated financial statements of all listed
United States companies, starting after 1 January 2005, to be prepared in accordance with
International Accounting Standards.
Statement 2: The Norwalk Agreement was an agreement for short-term financial reporting convergence
between the European Commission and the United States government
=False, False
The international accounting standard board was formed to
=Develop word wide accounting standard
The purposed of the international Financial Reporting Standard is to
=Promote uniform accounting standard among countries of the world
Once an accounting standard has been established
=The standard is continually reviewed to see if modifications is necessary
Which ONE of the following bodies is responsible for reviewing accounting issues that are likely to receive
divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching
consensus as to the appropriate accounting treatment?
=International Financial Reporting Interpretations Committee (IFRIC)
Are the following statements true or false?
Statement 1: The Norwalk Agreement outlines the commitment of the IASB and FASB towards
harmonisation of International and US Accounting Standards.
Statement 2: IOSCO requires mandatory preparation of financial statements in accordance with IFRS
=True, False
It is a global phenomenon intended to bring about transparency and a higher degree of comparability in
financial reporting , both of which will benefit the investors and are essential to achieved the goal of one
uniform and globally accepted financial reporting standard
=IFRS
The singularly unique functions performed by Certified Public Accountant is
=The attest functions
The process of establishing financial accounting standard
=Is a social process which incorporate political actions of various interested user group as
well as profession research and logic
As independent or external auditor , CPA are primarily responsible for
=Expressing an opinion as to the fairness of financial statement
Conceptual Framework - Module Assessment
One element of the objective of financial reporting is to provide information
=that is useful in assessing cash flows prospects.
What is the underlying concept that supports estimating a fixed asset impairment charge?
=Faithful representation
What is the concept that supports the issuance of interim reports?
=Relevance
Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example
of the
=economic entity assumption
The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include
=Periodicity
The assumption that a business enterprise will not be sold or liquidated in the near future is known as the
=none of these
Issuance of common stock for cash affects which basic element of financial statements?
=Equity.
To achieve faithful representation, the financial statements
=Must be complete, neutral and reasonably free from error
Which of the following are the two components of the revenue recognition principle?
=It is probable that future economic benefits will flow to the company and it is possible to
reliably measure the amount
Revenue generally should be recognized
=when a sale occurs.
The financial capital concepts requires that net assets shall be stated at
=Historical cost
The following statements are correct with regard to the concept of financial capital maintenance, except:
=Holding gains may not be recognised as such, however, until the assets are recognized in
an exchange transaction.
Which of the following statements is incorrect?
=The concepts of capital maintenance include the financial capital maintenance
and unit capital maintenance.
Which of the following is not a basic assumption underlying the financial accounting structure?
=Historical cost assumption.
The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include
all of the following except:
=Materiality
Revenue is generally recognized when a sale occurs. This statement describes the
=revenue recognition principle
Which of the following is an argument against using historical cost in accounting?
=Fair values are more relevant.
What is the general approach as to when product costs are recognized as expenses?
=In the period when the related revenue is recognized.
Which of the following statements is incorrect?
=The selection of the appropriate concept of capital by an entity should be based on the
needs of the management of its financial statements.
Which of the following statements regarding the concept of capital maintenance is incorrect?
=Only outflows of assets in excess of amounts needed to maintain capital may be regarded
as profit and therefore as a return on capital.
Which of the following is an implication of the going concern assumption?
=All of these
Which of the following is not a time when revenue may be recognized?
=All of these are possible times of revenue recognition.
When is revenue generally recognized?
=When the sale occurs.
Which of the following statements is incorrect?
=Selection of the basis under this concept is independent on the type of financial capital
that the entity is seeking to maintain.
Underlying Assumptions - Assessment
When a parent and subsidiary relationships exist, consolidated financial statement are prepared in
recognitions of
=Economic entity
Which basic assumption may not be followed when a firm in bankruptcy reports financial results?
=Going concern assumption
Valuing assets at their liquidation values rather than their cost is inconsistent with the
=historical cost principle
During the lifetime of an entity accountants produce financial statements at artificial points in time in
accordance with the concept of
Objectivity
=No
Periodicity
Yes
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in
accordance with which basic accounting concept?
=Periodicity assumption
Identify the pervasive constraint and underlying assumption mentioned in the Conceptual Framework.
Pervasive constraint
Underlying assumption
=
Cost
Going concern
Under current IFRS, inflation is ignored in accounting due to the
=monetary unit assumption
Which accounting assumption or principle is being violated if a company provides financial reports in
connection with a new product introduction?
=Economic entity
The economic entity assumption
=is applicable to all forms of business organizations
Which of the following basic accounting assumptions is threatened by the existence of severe inflation in
the economy?
=Monetary unit assumption
Elements of FS (Definition, Recognition, and Measurement) - Assessment
Which of the following is not a basic element of financial statements?
=Statement of financial position
The Allowance for Doubtful Accounts, which appears as a deduction from Accounts Receivable on a
statement of financial position and which is based on an estimate of bad debts, is an application of the
=expense recognition principle
Not adjusting the amounts reported in the financial statements for inflation is an example of which basic
principle of accounting?
=Historical cost.
When should an expenditure be recorded as an asset rather than an expense?
=When future benefit exits
Which of the following basic elements of financial statements is not associated with the statement of
financial position?
=Income.
The International Accounting Standards Board (IASB) defines one of the 5 elements as follows:
“the residual interest in the assets of the entity after deducting all its liabilities” Which element matches this
description?
=Equity.
Application of the full disclosure principle
=is demonstrated by the use of supplementary information presenting the effects of
changing prices.
Which of the following is not a required component of financial statements prepared in accordance with
generally accepted accounting principles?
=President's letter to shareholders
The accounting principle of expense recognition is best demonstrated by
=associating effort (expense) with accomplishment (revenue).
Which of the following practices may not be an acceptable deviation from recognizing revenue at the point
of sale?
=
Upon receipt of order.
Concepts of Capital and Capital Maintenance - Assessment
The physical capital maintenance concept required the adoptions of which measurements basis?
=Current cost
Under the physical capital concepts, a profit is earned only if
=The physical productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period after excluding any distributions to and contributions from
owners
The following statements are correct with regard to the concept of financial capital maintenance, except:
=Holding gains may not be recognised as such, however, until the assets are recognized in
an exchange transaction.
Which of the following statements is incorrect?
=And upward change in the value of its assets is profit.
Under the financial capital concepts, a profit is earned only if
=The monetary amount of net asset at the end of the period exceeds the monetary amount
of net asset at the beginning of the period , after excluding any distributions to and contributions from
owners
General Features of FS - Assessment
Which of the following statements is incorrect in relation to fair presentation?
=An entity can rectify in appropriate accounting policies either by disclosure of the
accounting policies used or by notes or explanatory material
When the classification of items in its financial statements is changed, the entity
=must reclassify the comparative amounts, unless it is impracticable to do so
An entity decided to extend the report period from a 12-month period to a 15-month period. Which of the
following is .not required in case of change in reporting period?
=The entity should change the reporting period only if other similar entities in the
geographical area in which it generally operates have done so in the current year.
Items of dissimilar nature or function
=must be presented separately in financial statements if those items are material
Statement of Comprehensive Income -Income Statement/ Profit or Loss from Continuing Operations
- Assessment
Rica Company reported the following changes in all the account balances for the current year, except for
retained earnings:
Cash
Increase (Decrease)
790,000
Accounts receivable, net
Inventory
Investments
Accounts payable
Bonds payable
Share capital
Share premium
240,000
1,270,000
(470,000)
(380,000)
820,000
1,250,000
130,000
There were no entries in the retained earnings account except for Profit and a dividend declaration of
P190,000 which was paid in the current year. What is the Profit for the current year?
=200,000
Solution
Increase/decrease
Cash
790,000.00
Accounts receivable, net
240,000.00
Inventory
1,270,000.00
Investments
(470,000.00)
Accounts payable
380,000.00
Bonds payable
(820,000.00)
Share capital
(1,250,000.00)
Share premium
(130,000.00)
Net change in retained earnings
10,000.00
Add: Dividend declared
190,000.00
Profit
200,000.00
An entity presents an analysis of expenses using a classification based on
=either the nature of expenses or the function of expenses within the entity, whichever
provides information that is reliable and more relevant
The following information provided by Maricar Company in preparing this year’s
comprehensive income statement:
Sales
8,000,000
Cost of sales
4,200,000
Depreciation and amortization expense
700,000
Employee beneft expense
900,000
Impairment of property, plant and equipment
200,000
Finance costs
800,000
Share of proft of associates
1,200,000
Translation loss on foreign operations
500,000
Loss on sale of fnancial instruments held for trading
300,000
Gain on sale of available-for-sale securities
450,000
Remeasurement gains on trading securities
400,000
Remeasurement gains on available for sale securities
300,000
Actuarial loss on employee benefts
100,000
Reduction of revaluation surplus as a result of a devaluation
200,000
Derivative gains on call options (speculation)
100,000
Gain on forward contract designated as a cash fow hedge
150,000
The amount included in the proft or loss section of the current year’s comprehensive income statement is
=3,050,000
\Solution:
Sales
Less: Cost of sales
8,000,000.00
4,200,000.00
Gross profit from sales
Share of profit of associates
Gain on sale of available-for-sale securities
Remeasurement gain on trading securities
Derivative gains on call options
3,800,000.00
1,200,000.00
450,000.00
400,000.00
100,000.00
Total income
Less: Expenses and losses
Depreciation and amortization expenses
Employee benefit expense
Impairment of property, plant and equipment
Finance cost
Loss on sale of financial instruments held for trading
5,950,000.00
700,000.00
900,000.00
200,000.00
800,000.00
300,000.00
Profit (loss)
2,900,000.00
3,050,000.00
Separate line items in an analysis of expenses by function include
=cost of sales, administrative expenses, distribution expenses etc.
On July 1, 20CY, Rica Company handed over to a client a new computer system. The contract price for
the supply of the system and after-sales support for 12 months was P1,000,000. Rica Company estimates
the cost of the after-sales support at P150,000 and it normally marks up such cost by 50%.
The total revenue reported by Rica Company in its 20CY statement of comprehensive income is
=887,500
Solution
Total contract price
1,000,000.00
Less: Contract price of after-sales support (whole year)
Cost of after-sales support
150,000.00
Multiply by: Cost plus markup rate
150%
Contract price of computer system
225,000.00
775,000.00
Add: After-sales support earned
Contract price of after-sales support
225,000.00
Divide by:
12 months
Monthly price of after-sales support
18,750.00
Multiply by: July 1 to Dec 31
6 months
Total revenue
Statement of Changes in Equity - Assessment
112,500.00
887,500.00
Which of the following should be presented in the statement of changes in equity?
=All of the above
Which of the following reports is not a component of the financial statements according to PAS 1?
=Director’s Report.
Changes in account balances of Agamata Business Consultancy (ABC) for 2013 are as follows:
Increase
(Decrease)
Cash
P2,500,000
Accounts receivable net
1,750,000
Inventory
1,000,000
Investments
(250,000)
Accounts payable
(1,500,000)
Bonds payable
2,000,000
Share capital
3,000,000
Share premium
500,000
Unrestricted
Retained
Earnings
750,000
Restricted Retained Earnings 250,000
What should be the 2013 net income, assuming there were no entries in the retained earnings account
except for the net income and a dividend declaration of P1,000,000 which was paid in the current year?
= P2,000,000
Solution:
Increase in unrestricted retained earnings
Increase in restricted retained earnings
Dividend declaration
750,000.00
250,000.00
1,000,000.00
Profit (loss)
2,000,000.00
Choose the correct statement
=The elements in the owners’ equity section of a statement of financial position are
classified primarily by source.
On December 31, 2010, the stockholders’ equity section of Alexandra Corp was as follows:
Common stock, par value P10; authorized
30,000 shares; issued and outstanding 9,000 shares
P 90,000
Additional paid-in capital
116,000
Retained earnings
146,000
Total stockholders’ equity
P352,000
On March 31, 2011, Alexandra declared a 10% stock dividend. Accordingly, 900 shares were issued
when the fair market value was P16 per share. For the 3 months ended March 31, 2011, Alexandra
sustained a net loss of P32,000. The balance of Alexandra’s retained earnings as of March 31, 2011
should be
= P99,600
Solution:
Retained earnings, 1/1/2010
Less: Small share dividend
(P16 x 900)
Net loss
Retained earnings, 3/31/2011
146,000.00
14,400.00
32,000.00
46,400.00
99,600.00
PAS 1 requires the following items to appear on the face of the Statement of Changes in Equity:
The net amount of cash from the issue of my securities during the period
The cumulative effect of changes in accounting policy and the correction of errors
Total
comprehensive
income
for
the
period
Profit or loss for the period
= I,II,III and IV
Retained earnings is a subcategory of
=Equity
The elements of the equity section of the statement of financial position should be classified primarily by:
= Source
Notes of FS - Assessment
The cross-reference between each line item in the financial statements and any related information
disclosed in the notes to the financial statements
=is mandatory
Which information should be disclosed in the summary of significant accounting policies?
=Criteria for determining which investments are treated as cash equivalents.
The presentation of the notes to the financial statements in a systematic manner
=is mandatory, as far as is practicable
Which of the following about note disclosures are considered mandatory rather than voluntary (optional)?
I.
Disclosure
of
information
about
key
sources
of
estimation
uncertainly
II. Disclosure of information about judgement that management has made in the process of applying
accounting
policies.
III.
The
presentation
of
notes
to
the
financial
statements
in
a
systematic
manner.
IV. The cross- reference between each line in the financial statements and any related information disclosed
in the notes to the financial statements.
=I, II , III and IV
Operating Activities - Assessment
Colon Company uses the direct method to prepare its statement of cash flows. The company had the
following cash flows during 2009:
Cash receipts from the issuance of ordinary shares
Cash receipts from customers
Cash receipts from dividends on long-term investments
Cash receipts from repayment of loan made to another company
Cash payments for wages and other operating expenses
Cash payments for insurance
Cash payments for dividends
Cash payments for taxes
Cash payment to purchase land
The net cash provided by (used in) operating activities is?
=P60,000
Solution:
P400,000
200,000
30,000
220,000
120,000
10,000
20,000
40,000
80,000
Cash receipts from customers
Cash receipts from dividends
Cash payments for wages and operating expenses
Cash payments for insurance
Cash payment for taxes
200,000.00
30,000.00
-120,000.00
-10,000.00
-40,000.00
Net cash flow from operating activities
60,000.00
During the financial year Marina Limited had sales of P720 000. The beginning balance of Accounts
receivable was P103 000, and the ending balance was P139 000. Bad debts amounting to P34 000 were
written off during the period. The cash receipts from customers during the year amounted to:
=P650 000;
Which of the following cash flows does not appear in a cash flow statement using indirect method?
=Cash received from customers
In preparing a statement of cash flows under the indirect method , cash flows from operating activities
=Can be calculated by appropriately adding to or deducting from net income those items
in the income statement that do not affect cash.
Aklan Company reported net income of P10,000,000 for 2009. Changes occurred in several balance sheet
accounts during 2009 as follows:
Investment in shares, carried at equity
Premium on bonds payable
Accumulated depreciation, caused by major repair
Deferred tax liability
P2,500,000 increase
500,000 decrease
1,000,000 decrease
400,000 increase
In the 2009 cash flow statement, the cash provided by operating activities should be
=P7,400,000
Solution:
Net income
Increase in investment in shares
Decrease in premium on bonds payable
Increase in deferred tax liability
10,000,000.00
-2,500,000.00
-500,000.00
400,000.00
Net cash provided by operating activities
7,400,000.00
Corinthians Company prepared the following balance sheet data.
December 31, 2013
Cash and cash equivalents
518,500
Accounts receivable (net)
360,000
Merchandise inventory
750,000
Prepaid insurance
4,500
Buildings and equipment
5,515,500
Accm dep’n – buildings & equipment (2,235,000)
Total Assets
4,913,500
Accounts payable
Salaries payable
Notes payable – bank (current)
Notes payable – bank (long-term)
Common stock, P20 par value
Premium on common shares
Retained earnings (deficit)
Total liabilities & stockholder’s equity
613,500
75,000
150,000
1,200,000
2,000,000
700,000
175,000
4,913,500
December 31, 2012
675,000
345,000
654,000
6,000
4,350,000
(1,995,000)
4,035,000
945,000
105,000
600,000
1,800,000
600,000
(15,000)
4,035,000

Cash needed to purchase new equipment and to improve the company’s working capital position
was raised by borrowing from the bank with a long-term note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were P25,000 and
P40,000 respectively. The bad debts expense for 2013 amounted to P40,000 while write-offs
amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for P18,000; the gain on sale
was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the acquisition of a building
acquired in June 2013. The building’s fair value at the time of purchase was P300,000 while the
shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of P300,000 for 2013. There
were no entries in the retained earnings account other than to record the dividend and net income
for the year
The cash provided by (used in) investing activities is
=(922,500)
Solution:
Buildings and equipment, 12/31/2013
Original cost of equipment sold
5,515,500.00
75,000.00
Total credits
Less: Buildings and equipment, 12/31/2012
5,590,500.00
4,350,000.00
Additions, 2013
Less: Acquisition of building through shares
1,240,500.00
300,000.00
Acquisition of equipment through cash
940,500.00
Cash payments for acquisition of equipment
Proceeds from sale of equipment
-940,500.00
18,000.00
Net cash provided by (used in) investing activities
-922,500.00
Sales, P102,000; Cost of goods sold, P40,000; Wages, P31,800; Purchase of land, P8,000; Increase in
accounts receivable, P3,600; Depreciation expense, P4,000; Gain on sale of equipment, P1,400; Issuance
of bonds, P16,000 at face value; Increase in accounts payable, P5,200; Patent amortization expense,
P2,600; Decrease in inventory, P2,000; Loss on sale of land P1,000; Decrease in wages payable, P600;
Declaration and payment of dividend, P6,800.
Net cash flows from operating activities is?
=P33,200
Solution:
Sales
Increase in accounts receivable
102,000.00
-3,600.00
Cash receipts from customers
Cost of goods sold
Decrease in inventory
Increase in accounts payable
-40,000.00
2,000.00
5,200.00
Cash payments to suppliers
Wages
Decrease in wages payable
-31,800.00
-600.00
98,400.00
-32,800.00
Cash payments to employees
-32,400.00
Net cash flow from operating activities
33,200.00
An entity other than a financial institution receives dividends from investment in shares. How should it
disclose the dividends received in the statement of cash flows?
=Either as operating cash inflow or as investing cash inflow.
Top Toms Co has been trading for a number of years and is currently going through a period of expansion.
An extract from the statement of cash flows for the year ended 31 December 20CY for Top Toms Co is
presented as follows (in thousands):
Net cash from operating activities
Net cash used in investing activities
Net cash used in financing activities
995
(540)
(200)
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
255
200
455
Which of the following statements is correct according to the extract of Top Toms Co’s statement
of
cash
flows?
Select one:
=Net cash generated from operating activities has been used to fund the additions
to non-current assets
In preparing a cash flow statement, cash flows from operating activities
=Can be calculated by appropriately adding to or deducting from net income those items
in the income statement that do not affect cash
Which of the following cash flows does not appear in statement of cash flows using the indirect method?
=Cash received from customers
How should gain on sale of an office building owned by the entity be presented in a cash flow statement?
=As an adjustment to the net income in the "operating activities" section of the cash flow
statement prepared under the indirect method
Mahogany Company had the following accounts balances for the current year:
Accounts payable
Inventory
Accounts payable
December 31
500,000
300,000
800,000
January 1
700,000
450,000
750,000
All purchases of inventory were on account. Mahogany Company provided the following income
information statement information for the current year:
Revenue
9,800,000
Cost of goods sold
(4,000,000)
Other expenses
(1,300,000)
Depreciation expenses
(1,000,000)
Loss on sale of equipment
(100,000)
Net income
3,400,000
The statement of cash flows should show net cash flow from operating activities at
=4,400,000
Solution 54-12 Answer b
Net income
Depreciation
Loss on sale of equipment
Decrease in accounts payable
Decrease in inventory
Increase in accounts receivable
3,400,000
1,000,000
100,000
(200,000)
150,000
(50,000)
Net cash flow from operating activities
4,400,000
During the financial year, Cresswell Limited had a Cost of Sales amounting to P260 000. Beginning and
ending balances were:
Inventory
Beginning
lance
P46 000
Accounts Payable
P18 000
Ba
Ending
Balance
P55 000
P26 000
A discount of P2 000 for prompt payment was received. The amount of cash paid for goods purchased
during the year was:
=P259 000
Solution
Cost of sales
260,000.00
Add: Inventory, ending
55,000.00
Total credits (Goods available for sale)
315,000.00
Less: Inventory, beginning
46,000.00
Purchases
269,000.00
Add: Accounts payable, beginning
18,000.00
Total A/P credits side
287,000.00
Less: Accounts payable, ending
26,000.00
Purchase discounts
2,000.00
Cash paid for goods purchased
28,000.00
259,000.00
Bumper Company’s statement of cash flows for the current year shows cash flow from operations of
P1,840,000. The following items also appear on the statement of financial position and income statement.
Depreciation expense
Accounts receivable increase
Inventory decrease
Accounts payable decrease
400,000
120,000
280,000
80,000
What is the net income for the current year?
=1,360,000
Solution 54-15 Answer a
Net income (SQEEZE)
Depreciation
Accounts receivable increase
Inventory decrease
Accounts payable decrease
1,360,000
400,000
(120,000)
280,000
(80,000)
Cash flow from operations
The net income is simply “squeezed’ by working back from cash flow from operations.
1,840,000
In preparing a statement of cash flows , the reconciliation of net income to cash from operating activities
does not include
=Adjustment to record debt or equity securities classified as available for sale securities
Cash advances and loans from bank overdrafts should be reported as:
=Operating activities.
Aries Limited had a net profit after tax of P850,000 for the financial year. Included in this profit was:
·
Depreciation expense of P120,000
·
Gain on sale of Investments of P28,000
Also, Accounts Receivable increased by P39,000 and Inventories decreased by P12,000. The cash
flow from operating activities during the year was:
=P915,000
Solution:
Net profit after tax
Depreciation expense
Gain on sale of investments
Increase in accounts receivable
Decrease in inventory
850,000.00
120,000.00
-28,000.00
-39,000.00
12,000.00
Net cash flow from operating activities
915,000.00
Under the direct method, which of the following would represent cash paid?
=Interest expense , adjusted for changes in interest payable and amortization of bond
premium or discount
Shery Limited had the following cash flows during the reporting period:
·
Purchase of intangibles - P30,000
·
Proceeds from sale of plant - P28,000
·
Receipts from customers - P832,000
·
Payments to suppliers - P593,000
·
Interest received - P17,600
·
Income taxes paid - P45,500
The net cash connected to operating activities was:
=P211,100
Solution:
Cash receipts from customers
Interest received
Total receipts
Less: Disbursements
Payments to suppliers
Income taxes paid
832,000.00
17,600.00
849,600.00
593,000.00
45,500.00
Net cash provided by (used in) operating activities
638,500.00
211,100.00
In a cash flow statement using the indirect approach for operating activities, an increase in inventory should
be presented as
=Deduction from net income
Fragile Company uses the direct method to prepare it statement of cash flows. The entity had the following
cash
flows
during
the
current
year:
Cash receipts from issuance of ordinary shares
Cash receipts from customers
Cash receipts from dividends on long- term investments
Cash receipts from repayment of loan made to another entity
Cash payments for wages and other operating expenses
Cash payments for insurance
Cash payments for dividends
Cash payments for taxes
Cash payments to purchase land
4,000,000
2,000,000
300,000
2,200,000
1,200,000
100,000
200,000
400,000
800,000
The net cash provided by operating activities is?
=600,000
Solution:
Cash receipts from customers
Cash receipts from dividends
Cash payments for wages and operating expenses
Cash payments for insurance
Cash payment for taxes
2,000,000.00
300,000.00
-1,200,000.00
-100,000.00
-400,000.00
Net cash flow from operating activities
600,000.00
Corinthians Company prepared the following balance sheet data.
December 31, 2013
Cash and cash equivalents
518,500
Accounts receivable (net)
360,000
Merchandise inventory
750,000
Prepaid insurance
4,500
Buildings and equipment
5,515,500
Accm dep’n – buildings & equipment (2,235,000)
Total Assets
4,913,500
Accounts payable
Salaries payable
613,500
75,000
December 31, 2012
675,000
345,000
654,000
6,000
4,350,000
(1,995,000)
4,035,000
945,000
105,000
Notes payable – bank (current)
Notes payable – bank (long-term)
Common stock, P20 par value
Premium on common shares
Retained earnings (deficit)
Total liabilities & stockholder’s equity
150,000
1,200,000
2,000,000
700,000
175,000
4,913,500
600,000
1,800,000
600,000
(15,000)
4,035,000

Cash needed to purchase new equipment and to improve the company’s working capital position
was raised by borrowing from the bank with a long-term note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were P25,000 and
P40,000 respectively. The bad debts expense for 2013 amounted to P40,000 while write-offs
amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for P18,000; the gain on sale
was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the acquisition of a building
acquired in June 2013. The building’s fair value at the time of purchase was P300,000 while the
shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of P300,000 for 2013. There
were no entries in the retained earnings account other than to record the dividend and net income
for the year.
The cash provided by (used in) operating activities is
=126,000
Solution:
Cost of equipment sold
Less: Book value of equipment
75,000.00
15,000.00
Accumulated depreciation of equipment sold
Accumulated depreciation, 12/31/013
60,000.00
2,235,000.00
Totals
Less: Accumulated depreciation, 12/31/2012
2,295,000.00
1,995,000.00
Depreciation, 2013
300,000.00
Net income
Depreciation
Gain on sale of equipment (P18,000-P15,000)
Increase in accounts receivable (net)
(P360,000-P345,000)
Increase in merchandise inventory
(P750,000-P654,000)
Decrease in prepaid insurance (P6,000-P4,500)
Decrease in accounts payable (P945,000-P613,500)
Decrease in salaries payable (P105,000-P75,000)
300,000.00
300,000.00
-3,000.00
Net cash provided by (used in) operating activities
126,000.00
-15,000.00
-96,000.00
1,500.00
-331,500.00
-30,000.00
Which should not be disclosed in the cash flow statement using the indirect method?
=Cash flow per share
Which of the following is not added to net income as an adjustment to reconcile net income to cash
from operating activities in the statement of cash flows?
=Increase in deferred tax asset
During the financial year Marina Limited had sales of $720 000. The beginning balance of Accounts
receivable was $103 000, and the ending balance was $139 000. Bad debts amounting to $34 000
were written off during the period. The cash receipts from customers during the year amounted to:
=$650 000;
Solution:
Accounts receivable, beginning
103,000.00
Sales
720,000.00
Total debits
Less: Accounts receivable, ending
Accounts written off
823,000.00
139,000.00
34,000.00
Cash receipts from customers
173,000.00
650,000.00
Which of the following cannot be classified as Cash flows from operating activities?
=Cash receipts from short term borrowings.
Which of the following will be classified as cash flows from operating activities?
=Cash receipts from royalties, fees, commissions and other revenue.
Word Corporation is preparing its statement of cash flows and has provided this information:
Net income before taxes
Depreciation on property, plant and equipment
Loss on sale of building
Interest expense
Interest payable, beginning of the year
Interest payable, end of the year
Income taxes paid
Accounts receivable, beginning of the year
Accounts receivable, end of the year
Inventory, beginning of the year
Inventory, end of the year
Accounts payable, beginning of the year
Accounts payable, end of the year
P400,000
200,000
100,000
150,000
100,000
50,000
100,000
500,000
850,000
500,000
400,000
200,000
500,000
The net cash provided by operating activities is
=P600,000
Solution:
Net income before taxes
Depreciation on property, plant and equipment
Loss on sale of building
Decrease in interest payable
(P100,000-P50,000)
Income taxes paid
Increase in accounts receivable
(P850,000-P500,000)
Decrease in inventory
(P500,000-P400,000)
Increase in accounts payable
(P500,000-P200,000)
400,000.00
200,000.00
100,000.00
Net cash provided by operating activities
600,000.00
-50,000.00
-100,000.00
-350,000.00
100,000.00
300,000.00
Corinthians Company prepared the following balance sheet data.
December 31, 2013
Cash and cash equivalents
518,500
Accounts receivable (net)
360,000
Merchandise inventory
750,000
Prepaid insurance
4,500
Buildings and equipment
5,515,500
Accm dep’n – buildings & equipment (2,235,000)
Total Assets
4,913,500
Accounts payable
Salaries payable
Notes payable – bank (current)
Notes payable – bank (long-term)
Common stock, P20 par value
Premium on common shares
613,500
75,000
150,000
1,200,000
2,000,000
700,000
December 31, 2012
675,000
345,000
654,000
6,000
4,350,000
(1,995,000)
4,035,000
945,000
105,000
600,000
1,800,000
600,000
Retained earnings (deficit)
Total liabilities & stockholder’s equity
175,000
4,913,500
(15,000)
4,035,000

Cash needed to purchase new equipment and to improve the company’s working capital position
was raised by borrowing from the bank with a long-term note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were P25,000 and
P40,000 respectively. The bad debts expense for 2013 amounted to P40,000 while write-offs
amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for P18,000; the gain on sale
was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the acquisition of a building
acquired in June 2013. The building’s fair value at the time of purchase was P300,000 while the
shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of P300,000 for 2013. There
were no entries in the retained earnings account other than to record the dividend and net income
for the year.
The cash provided by (used in ) financing activities is
=640,000
Solution:
Notes payable - bank (current), 12/31/2012
Less: Notes payable - bank (current), 12/31/2013
600,000.00
150,000.00
Cash payments for settlement of loan
450,000.00
Notes payable - bank (long-term)
1,200,000.00
Paid-in capital, 12/31/2013 (P2M+P0.7M)
Less: Paid-in capital, 12/31/2012 (P1.8M+P0.6M)
2,700,000.00
2,400,000.00
Increase in paid-in capital
Less: Issuance of shares for acquisition of building
300,000.00
300,000.00
Proceeds from issuance of shares
0.00
Proceeds from long-term notes
Payments for settlement of short-term notes
Payment of cash dividends
1,200,000.00
-450,000.00
-110,000.00
Net cash provided by (used in) financing activities
640,000.00
Kersley Company has provided the following account balances for the preparation of the statement
of cash flows for the current year:
Accounts receivable
Allowance for uncollectible accounts
Prepaid rent expense
Accounts payable
January 1
1,150,000
40,000
620,000
970,000
December 31
1,450,000
50,000
410,000
1,120,000
Kersley’s net income for the year is P7,500,000. Net cash provided by operating activities should be
=7,570,000
Solution 54-9 Answer d
Net income
Increase in net accounts receivable (1,400,000- 1,110,000)
Decrease in prepaid rent expense
Increase in accounts payable
7,500,000
(290,000)
210,000
150,000
Net cash provided by operating activities
7,570,000
Observe that the allowance account is “netted” against the accounts receivable for purposes of determining
the net change in accounts receivable.
The following
information
pertains
to
Lax
Company
during
the
Dividend received
500,000
Dividend paid
Cash received from customers
Proceeds from issuing share capital
Interest received
Proceeds from sale of long term investments
Cash paid to suppliers and employees
Interest paid on long term debt
Income taxes paid
Cash balance, January 1
1,000,000
9,000,000
1,500,000
200,000
2,000,000
6,000,000
400,000
300,000
1,800,000
current
year.
What is the net cash provided by operating activities for the current year using direct method?
=3,000,000
Solution:
Dividend received
Cash received from customers
Interest received
Cash paid to suppliers and employees
Interest paid on long term debt
Income taxes paid
500,000.00
9,000,000.00
200,000.00
-6,000,000.00
-400,000.00
-300,000.00
Net cash provided by operating activities
3,000,000.00
Amortization of premium on bonds payable is subtracted from net income in the reconciliation of net income
to cash flows from operation because
=Interest expense understates the cash paid for interest by the amount of the premium
amortization
In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash flow from
investing activities equals the carrying amount of the equipment
=Plus the gain
A change in unearned revenue would be classified into which of the following categories for purposes of
disclosure in the statement of cash flow?
=As an item reconciling earnings and operating cash flows
The following information is available from the financial statement of Arlyn Company for the current year:
Net income
Depreciation expense
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Payments of dividends
Purchases of available for sale securities
Decrease in income tax payable
Increase on long-term note payable
3,960,000
1,020,000
200,000
1,260,000
900,000
240,000
540,000
220,000
160,000
2,000,000
What is Arlyn Company’s net cash flow from operating activities?
=5,620,000
Solution 54-14 Answer d
Net income
Depreciation expense
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
3,960,000
1,020,000
200,000
1,260,000
(900,000)
(160,000)
Net cash flow from operating activities
5,620,000
The payment of dividends and the increase in long-term note payable shall be classified as financing. The
purchase of available for sale securities shall be classified as investing.
Star Company provided the following data for the preparation of statement of cash flows for the current
year using the direct method:
Cash balance, beginning
Cash paid to purchase inventory
Cash received from sale of building
Cash paid for interest
Cash paid to repay a loan
Cash collected from customers
Cash received from issuance of ordinary
shares
Cash paid for dividend
Cash paid for income taxes
Cash paid to purchase machinery
1,500,000
7,800,000
5,600,000
450,000
1,000,000
10,000,000
1,200,000
780,000
1,320,000
1,950,000
How much was the cash flow for operating activities?
=430,000
Solution:
Cash collected from customers
Cash paid to purchase inventory
Cash paid for interest
Cash paid for income taxes
10,000,000.00
-7,800,000.00
-450,000.00
-1,320,000.00
Cash flow from operating activities
430,000.00
The following was taken from the comparative financial statements of Champaca Company for
the current year:
Net income for the current year
Sales revenue
Cost of goods sold (except depreciation)
Depreciation expenses
Amortization of intangible assets
Interest expense on short-term debt
Dividend declared and paid during year
Accounts receivable
Inventory
Accounts payable
Interest payable
750,000
4,500,000
2,750,000
500,000
200,000
300,000
350,000
January 1
220,000
350,000
475,000
100,000
December 31
150,000
400,000
520,000
85,000
Under the indirect method, how much should be reported as net cash flow from operating activities?
=1,500,000
Solution 54-13 Answer a
Net income
Depreciation
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Decrease in interest payable
750,000
500,000
200,000
70,000
(50,000)
45,000
(15,000)
Net cash flow from operating activities
1,500,000
Brook Company provided the following information for the preparation of the statement of cash flows for
the current year:
Decrease in inventory
Increase in wages payable
Restructuring charge
Depreciation
Net income
300,000
100,000
2,300,000
1,000,000
500,000
The restructuring charge consists of two elements, namely P1,500,000 for the write down in value of certain
assets and P800,000 for recognition of an obligation to relocate employees. None of the relocation has yet
taken place.
Under the indirect method, how much should be reported as cash flow from operating activities?
=4,200,000
Solution:
Net income
Depreciation
Restructuring charge
Decrease in inventory
Increase in wages payable
500,000.00
1,000,000.00
2,300,000.00
300,000.00
100,000.00
Cash flow from operating activities
4,200,000.00
Which of the following is not a duty of the IFRS Interpretations Committee?
Select one:
= To work directly with national standard setters to bring about convergence with IFRS
Convergence refers to
=the process of reducing the differences between IFRS and GAAP.
Which of the following is not part of the 'due process' of the IASB in issuing a new International Financial
Reporting Standard?
=Issuing an interpretation as authoritative interim guidance
What is the chronological order in the evaluation of a typical standard?
=Discussion paper, Exposure draft and Standard.
The purposed of the international Financial Reporting Standard is to
Select one:
=Promote uniform accounting standard among countries of the world
It is a memorandum of agreement made between IASB and FASB (US) and signed in Norwalk Connecticut,
USA with the goal of achieving comparability in financial reporting standards by eliminating or minimizing
differences between IFRS and US GAAP.
=The Norwalk Agreement
Are the following statements about the Norwalk Agreement true or false?
Statement 1: The Norwalk Agreement requires the consolidated financial statements of all listed
United States companies, starting after 1 January 2005, to be prepared in accordance with
International Accounting Standards.
Statement 2: The Norwalk Agreement was an agreement for short-term financial reporting convergence
between the European Commission and the United States government
=False, False
The international accounting standard board was formed to
=Develop word wide accounting standard
As independent or external auditor , CPA are primarily responsible for
=Expressing an opinion as to the fairness of financial statement
Are the following statements true or false?
Statement 1: The Norwalk Agreement outlines the commitment of the IASB and FASB towards
harmonisation of International and US Accounting Standards.
Statement 2: IOSCO requires mandatory preparation of financial statements in accordance with IFRS
=True, False
The singularly unique functions performed by Certified Public Accountant is
=The attest functions
Once an accounting standard has been established
=The standard is continually reviewed to see if modifications is necessary
Which ONE of the following bodies is responsible for reviewing accounting issues that are likely to receive
divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching
consensus as to the appropriate accounting treatment?
=International Financial Reporting Interpretations Committee (IFRIC)
The process of establishing financial accounting standard
=Is a social process which incorporate political actions of various interested user group as
well as profession research and logic
It is a global phenomenon intended to bring about transparency and a higher degree of comparability in
financial reporting , both of which will benefit the investors and are essential to achieved the goal of one
uniform and globally accepted financial reporting standard
=IFRS
How does Conceptual Framework strengthen accountability?
=By reducing the information gap between the providers of capital and the people to whom
they have entrusted their money. Standards based on the Conceptual Framework provide information
needed to hold management to account. As a source of globally comparable information, those Standards
are also of vital importance to regulators around the world.
What is the status of the conceptual framework?
=Nothing in the conceptual framework overrides any Standard or any requirement in a
Standard.
How does Conceptual Framework contribute to transparency?
=By enhancing the international comparability and quality of financial information, enabling
investors and other market participants to make informed economic decisions.
All of the following is part of the mission to develop Standards that bring general-purpose financial reports
to the financial markets around the world, except:
=Effectiveness
Which of the following is not included in those tht would describe the Conceptual Framework for Financial
Reporting?
=Specific standards
To meet the objective of general purpose financial reporting, the Board may sometimes specify
requirements that depart from aspects of the Conceptual Framework. If the Board does so, it will explain
the departure in the
=Basis for Conclusions on that Standard.
How does Conceptual Framework contribute to economic efficiency?
=By helping investors to identify opportunities and risks across the world, thus improving
capital allocation. For businesses, the use of a single, trusted accounting language derived from Standards
based on the Conceptual Framework lowers the cost of capital and reduces international reporting costs.
The Conceptual Framework contributes to the stated mission of the following entities, except:
=Global financial markets and exchanges
All of the following are purposes of Conceptual Framework, except:
=Assist in analyzing he valuation of an enterprise.
The Conceptual Framework may be revised from time to time on the basis of the Board’s experience
of working with it. Identify the following statements.
Statement 1.
Revisions of the Conceptual Framework willautomatically lead to changes to the
specific Standards.
Statement 2.
Any decision to amend a Standard would require the Board to go through its due
process for adding a project to its agenda and developing an amendment to that Standard.
=False, True
General features of FS - Exercise
Which of the following information is not specifically a required disclosure of PAS 1?
=Names of major/significant shareholders of the entity
Financial statements achieved fair presentation when
=the PFRS issued by FRSC are appropriately applied, with additional disclosures when
necessary
S1. An entity whose financial statements comply with PFRSs shall make an explicit and unreserved
statement of such compliance in the notes to the financial statements.
S2. An entity shall not describe financial statements as complying with PFRSs unless they comply
with substantially all of the requirements of PFRSs.
S3. An entity can rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.
=True False False
Items of income and expense should be offset when, and only when
I.
A PFRS requires or permits it
II.
II.Gains and losses and related expenses arising from the same or similar
transactions and events are not material.
=Either I or II
They are financial statements intended to meet the needs of users who are not in a position to demand
reports tailored to meet their information needs
=general-purpose financial statements
They show the results of management’s stewardship of the resources entrusted to it
=financial statements
Little Inc. decided to extend its reporting period from a year (12-month period) to a 15-month period. Which
of the following is not required under PAS 1 in case of change in reporting period?
=XYZ Inc. should change the reporting period only if other similar entities in the
geographical area in which it generally operates have done so in the current year; otherwise its financial
statements would not be comparable to others.
Which one of the following is not required to be presented as minimum information on the face of the
statement of financial position?
=Goodwill
These are specific principles, conventions, rules and practices adopted by an enterprise in preparing and
presenting the financial statement
=Accounting policies
Financial statements achieved fair presentation when
=the PFRS issued by FRSC are appropriately applied, with additional disclosures when
necessary
XYZ Inc. decided to extend its reporting period from a year (12-month period) to a 15-month period. Which
of the following is not required under PAS in case of change in reporting period?
=XYZ Inc. should disclose that comparative amounts used in the financial statements are
not entirely comparable.
Under the accrual basis of accounting, the effects of transactions and other events are
=recorded in the accounting records and reported in the financial statement when they
occur
Which of the following information is not specifically a required disclosure of PAS 1?
=Names of major/significant shareholders of the entity
A complete set of financial statements includes the following components:
I.
Statement of Financial Position
II.
Statement of Comprehensive Income
III. Statement of Changes in Equity
IV. Statement of Cash Flows
V. Summary of Accounting policies and explanatory notes
=I, II, III, IV and V
The assumption that an enterprise will continue in operation for the foreseeable future is based on
=going concern
An entity must present additional line items in a statement of financial position when
=such presentation is relevant to an understanding of the entity’s financial position
Which of the basic financial statements is not prepared using the accrual basis of accounting?
=Statement of Cash Flows
An entity is required to disclose 3 statements of financial position as comparative information when (choose
the exception)
=It decides, for the first time, to disclose comparative information
A consideration in the presentation of financial statements where items are presented and classified on a
uniform basis from one period to another.
=Consistency
Which of the following statements is incorrect?
=When preparing financial statements, management should assume a liquidation of an
enterprise.
Which of the following is not among the overall principles of financial statement presentation?
=Financial statements need not present comparative information
They are structured financial representation of the financial position of and the transactions
undertaken by an enterprise
=financial statements
The reporting period of an enterprise
= is generally equal to one year
Under the accrual basis of accounting, the effects of transactions and other events are
= recorded in the accounting records and reported in the financial statement when they
occur
Which statement is incorrect concerning materiality?
= Materiality provides a threshold or cutoff point for useful information and therefore a
primary qualitative characteristic.
The following relates to materiality and aggregation, except
= Each financial statement item should be presented separately in the financial statements.
In presenting a statement of financial position, an entity
= must make the current/non-current presentation distinction except when a presentation
based on liquidity provides information that is reliable and more relevant
An entity disclosing comparative information shall present, as a minimum (choose the incorrect statement)
= 3 statements of comprehensive income when an entity applies an accounting
policy retrospectively
Describe the following statements in relation to IAS 1:
1. Fair presentation requires the faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Conceptual Framework.
2. An entity whose financial statements comply with IFRSs shall make an explicit and unreserved
statement of such compliance in the notes. An entity shall not describe financial statements as complying
with IFRSs unless they comply with all the requirements of IFRSs.
= True, True
An entity decided to extend the report period from a 12-month period to a 15-month period. Which of the
following is .not required in case of change in reporting period?
= The entity should change the reporting period only if other similar entities in the
geographical area in which it generally operates have done so in the current year.
At 31 December 20Y1 the following require inclusion in a company’s financial statements:
On 1 January 20Y1 the company made a loan of P12,000 to an employee, repayable on 1 January 20Y2,
charging interest at 2% per year. On the due date she repaid the loan and paid the whole of the interest
due on the loan to that date.
The company paid an annual insurance premium of P9,000 in 20Y1, covering the year ending 31 August
20Y2.
For these items, what total figures should be included in the company’s statement of financial position as
at 31 December 20Y1?
Select one:
= Current assets P22,240 Current liabilities nil
Solution
Particulars
Current Asset
Current Liability
Item a
Loan receivable
12,000.00
Interest receivable
Principal
12,000.00
Multiplied by: Interest rate
2%
240.00
Item b
Prepaid insurance
Annual insurance premium
9,000.00
Multiply by: (Jan 1-Aug 31, Y2)
8 mos/12 mos
6,000.00
Item c
Rent receivable
4,000.00
Totals
22,240.00
0.00
Maricar Company’s trial balance reflected the following accounts balance on December 31, 20CY:
Accounts Receivable (net)
260, 000
Financial assets at FVTOCI
60, 000
Accumulated depreciation on equipment and furniture
150, 000
Cash
110, 000
Inventory
300, 000
Equipment
250, 000
Patent
40, 000
Prepaid Insurance
20, 000
Land held for future business site
180, 000
The inventory included goods held on consignment amounting to P50,000. The patent was classified as
held for sale on December 31, 20Cy. What amount of total current assets should be reported on December
31, 20CY?
Select one:
= 680, 000
Solution
Cash
110,000.00
Accounts receivable (net)
260,000.00
Inventory, adjusted
Inventory, unadjusted
300,000.00
Less: Goods held on consignment
50,000.00
250,000.00
Prepaid insurance
20,000.00
Patent, classified as held for sale
40,000.00
Total current assets
680,000.00
Pony Company reported the following trial balance on December 31, 20Y1:
Cash overdraft
40,000
Accounts receivable
200,000
Inventory
500,000
Deferred charges
50,000
Land classified as "held for sale"
150,000
Property, plant and equipment, net
1,600,000
Accounts payable
460,000
Share capital
1,500,000
Share premium
150,000
Retained earnings
350,000
2,5000,000
2,500,000
Checks amounting to P100,000 were written to vendors and recorded on December 31, 20Y1
resulting in a cash overdraft of P400,000. The checks were mailed on January 15, 20Y2. On
January 1, 20Y1, the land was classified as held for sale but remained unsold on December 31,
20Y1. On March 15, 20Y2, he entity decided not to sell the land but continue to use it. The entity
issued the financial statements of March 31, 20Y2. On December 31, 20Y1, what amount should
be
reported
as
current
assets?
Select one:
= 760,000
Solution
Cash
Cash overdraft
(40,000.00)
Add: Undelivered check
100,000.00
60,000.00
Accounts receivable
200,000.00
Inventory
500,000.00
Total current assets
760,000.00
Elias Company reported liabilities on December 31, 20Y3 as follows:
Accounts payable and accrued interest
1,000,000
12% note payable issued November 1, 20Y1 maturing July 1, 20Y4
2,000,000
10% debentures payable, next annual principal installment of P500,000 7,000,000
due February 1, 20Y4
On December 31, 20Y3, the entity consummated a noncancelable agreement with the lender to
refinance 12% note payable on a long-term basis. The December 31, 20Y3 financial statements were
issued on March 31, 20Y4.
In the December 31, 20Y3 statement of financial position, what total amount should be reported as current
liabilities?
= 1,500,000
Solution:
Accounts payable and accrued interest
1,000,000.00
Current portion of 10% debentures payable
500,000.00
Total current liabilities
1,500,000.00
DL Company reported the following information relating to liabilities on December 31, 20Y1:
Accounts payable for goods and services purchased on open account amounted to P60,000 and
accrued expenses totaled P50,000 on December 31, 20Y1.
On July 1, 20Y1, the entity issued P500,000, 8% bonds for P440,000 to yield 10%. The bonds
mature on June 30, 2022, and pay interest annually every June 30. On December 31, 20Y1, the
bond were trading in the open market at 86 to yield 12%. The effective interest method is used to
amortize bond discount.
The pretax financial income for 20Y1 was P1,050,000 and the taxable income was P900,000. The
difference is due to P100,000 permanent difference and P50,000 temporary difference which is
expected to reverse in 20Y2. The entity is subject to the income tax rate of 30% and made
estimated income tax payments during the year of P100,000. What amount of current liabilities
should
be
reported
on
December
31,
20Y1?
Select one:
= 300,000
Solution
Accounts payable
60,000.00
Accrued expenses
50,000.00
Interest payable
Face amount of bonds
500,000.00
Multiply by: Nominal rate
8%
Annual nominal interest
40,000.00
Multiply by:
6 mos/12 mos
20,000.00
Income tax payable
Taxable income
900,000.00
Multiply by: Income tax rate
30%
Current tax expense
270,000.00
Less: Income tax payments
100,000.00
Current liabilities
170,000.00
300,000.00
Icar Corp.’s accounts payable at December 31, 20Y1, totaled P800,000 before any necessary year-end
adjustments relating to the following transactions:
·
On December 27, 20Y1, Icar Corp. wrote and recorded checks to creditors totaling
P350,000 causing an overdraft of P100,000 in Icar Corp.’s bank account at December 31,
20Y1. The checks were mailed on January 10, 20Y2.
·
On December 28, 20Y1, Icar Corp. purchased and received goods for P200,000, terms
2/10, n/30. Icar Corp. records purchases and accounts payable at net amounts. The invoice
was recorded and paid January 3, 20Y2.
·
Goods shipped FOB destination on December 20, 20Y1 from a vendor to Icar Corp
were received January 2, 20Y2. The invoice cost was P65,000.
At December 31, 20Y1, what amount should Icar Corp report as total accounts payable?
Select one:
Solution
= P1,346,000
Accounts payable, unadjusted
800,000.00
Undelivered checks
350,000.00
Unrecorded purchases, net of discount (200,000 x 98%)
196,000.00
Accounts payable, adjusted
1,346,000.00
Which of the following terms cannot be used to describe a line item in the statement of comprehensive
income?
= extraordinary item
Items of other comprehensive income are presented in the statement of comprehensive income analysed
= by nature
On July 1, 20CY, Rica Company handed over to a client a new computer system. The contract price for
the supply of the system and after-sales support for 12 months was P1,000,000. Rica Company estimates
the cost of the after-sales support at P150,000 and it normally marks up such cost by 50%.
The total revenue reported by Rica Company in its 20CY statement of comprehensive income is
= 887,500
Solution
Total contract price
1,000,000.00
Less: Contract price of after-sales support (whole year)
Cost of after-sales support
150,000.00
Multiply by: Cost plus markup rate
150%
Contract price of computer system
225,000.00
775,000.00
Add: After-sales support earned
Contract price of after-sales support
225,000.00
Divide by:
12 months
Monthly price of after-sales support
18,750.00
Multiply by: July 1 to Dec 31
6 months
Total revenue
112,500.00
887,500.00
If (P2,450) net of tax is the reclassification adjustment in cluded in other comprehensive income in the year
the securities are sold, what is the gain (loss) that is included in income from continuing operations before
income taxes? Assume a 30% tax rate.
= P3,500
Solution
Reclassification adjustment, net of tax
2,450.00
Divide by: After tax rate (100% minus 30%)
70%
Gain
3,500.00
Searles does not elect the fair value option for recording financial assets and liabilities. What amount of
comprehensive income should Searles Corporation report on its statement of income and comprehensive
income given the following net of tax figures that represent changes during a period?
Pension liability adjustment recognized in OCI
P (3,000)
Unrealized gain on available-for-sale securities
15,000
Reclassifi cation adjustment, for securities gain in (2,500)
cluded in Profit
Stock warrants outstanding
4,000
Profit
77,000
= P86,500
Solution:
Pension liability adjustment-OCI
Unrealized gain on AFS securities
Reclassification adjustment
Profit
-3,000.00
15,000.00
-2,500.00
77,000.00
Total comprehensive income
86,500.00
Madsen Company reported the following information for 20CY:
Sales revenue
Cost of goods sold
Operating expenses
Unrealized holding gain on FVOCI securities
Cash dividends received on the securities
For 20CY, Madsen would report other comprehensive income of
510,000
350,000
55,000
40,000
2,000
= 40,000
Solution
Only the unrealized holding gain FVOCI securities are reported under other comprehensive income portion
of statement of comprehensive income.
Which of the following is not added to Profit as an adjustment to reconcile Profit as an adjustment to
reconcile Profit to cash from operating activities in the statement of cash flows?
= Increase in deferred tax asset
Marie Company provided the following information for the current year:




Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller for the
remaining P800,000.
Executed a debt-equity swap and replaced a P600,000 loan by giving the lender ordinary shares
worth P600,000 on the date the swap was executed
Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.
Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan proceeds as
follows: P150,000 for the purchase of additional inventory, P300,000 to pay cash dividend, and
P100,000 to increase the cash balance.
What amount should be reported as net cash used in investing activities in the statement of cash flows?
= 750,000
Cash paid for purchase of building
(400,000.00)
Cash paid for purchase of land
(350,000.00)
Net cash used in investing activities
(750,000.00)
In 20CY, a typhoon completely destroyed a building belonging to Carpet Corporation. The building cost
P2,500,000 and had accumulated depreciation of P1,200,000 at the time of the loss. carpet received a cash
settlement from the insurance and reported a loss of P525,000.
In Carpet’s 20CY cash flow statement, how much would be the net changes that would be reported in the
cash
flows
from
investing
activities
section?
Select one:
= P775,000 increase
Solution
Building, at original cost
2,500,000.00
Less: Accumulated depreciation
1,200,000.00
Carrying amount
1,300,000.00
Less: Loss on insurance settlement
525,000.00
Cash proceeds from insurance
775,000.00
Hager Company sold some of its plant assets during 20CY. The original cost of the plant assets was
P900,000 and the accumulated depreciation at date of sale was P840,000. The proceeds from the sale of
the plant assets were P90,000. The information concerning the sale of the plant assets should be shown
on Hager's statement of cash flows (indirect method) for the year ended December 31, 20CY, as a(n)
= subtraction from Profit of P30,000 and a P90,000 increase in cash flows from investing
activities.
Solution
Proceeds from sale
90,000.00
Less: Carrying amount of plant assets
Cost
900,000.00
Accumulated depreciation
(840,000.00)
Gain on sale of plant assets
60,000.00
30,000.00
Gain on sale of plant asset amounting to P30,000 is deducted from profit while P90,000 proceeds from sale
of plant asset is classified as increase in cash flows from investing activities.
The balance in retained earnings at December 31, 20Y1 was P1,440,000 and at December 31, 20Y2 was
P1,164,000. Profit for 20Y2 was P1,000,000. A stock dividend was declared and distributed which
increased common stock P500,000 and paid-in capital P220,000. A cash dividend was declared and paid.
The amount of the cash dividend was
= P556,000
Solution
Retained earnings, Dec 31 20Y1
1,440,000.00
Add: Profit for 20Y2
1,000,000.00
Total R/E credit side
2,440,000.00
Less:
Stock dividend (500,000+220,000)
720,000.00
Retained earnings, Dec 31, 20Y2
1,164,000.00
Cash dividend
1,884,000.00
556,000.00
During 20Y2, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout, converted into common shares 540,000
of Stout
Payment in 20Y2 of cash dividend declared in 20Y1 to preferred shareholders
279,000
Payment for the early retirement of long-term bonds payable (carrying amount 3,975,000
P3,930,000)
Proceeds from the sale of treasury stock (on books at cost of P387,000)
450,000
The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 20Y2
should be
= P3,804,000
Solution
Cash paid on dividend declared to preference shareholders
-279,000.00
Cash paid on early retirement of bonds payable
-3,975,000.00
Cash received from sale of treasury stock
450,000.00
Net cash used in financing activities
-3,804,000.00
A company borrows P10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash
flows (indirect method), this event would be reflected as a(n)
= cash inflow from financing activities.
Which of the following subsequent events would require adjustment of the accounts before issuance of the
financial statements?
= Loss on a lawsuit, the outcome of which was deemed uncertain at year end
Most likely an adjusting event
= The discovery of fraud or errors that show that the financial statements are incorrect
At the balance sheet date, December 31, 20Y1, ABC Inc. carried a receivable from XYZ, a major customer,
at P10 million. The “authorization date” of the financial statements is on February 16, 20Y2. XYZ declared
bankruptcy on Valentine’s Day (February 14, 20Y2). ABC Inc. will
= Make a provision for this post–balance sheet event in its financial statements (as
opposed to disclosure in footnotes).
ABC Ltd. decided to operate a new amusement park that will cost P1 million to build in the year 20Y1. Its
financial year-end is December 31, 20Y1. ABC Ltd. has applied for a letter of guarantee for P700,000. The
letter of guarantee was issued on March 31, 20Y2. The audited financial statements have been authorized
to be issued on April 18, 20Y2. The adjustment required to be made to the financial statement for the year
ended December 31, 20Y1, should be
= Do nothing
A new drug named “EEE” was introduced by Genius Inc. in the market on December 1, 20Y1. Genius Inc.’s
financial year ends on December 31, 20Y1. It was the only company that was permitted to manufacture this
patented drug. The drug is used by patients suffering from an irregular heartbeat. On March 31, 20Y2, after
the drug was introduced, more than 1,000 patients died. After a series of investigations, authorities
discovered that when this drug was simultaneously used with “BBB,” a drug used to regulate hypertension,
the patient’s blood would clot and the patient suffered a stroke. A lawsuit for P100,000,000 has been filed
against Genius Inc. The financial statements were authorized for issuance on April 30, 20Y2. Which of the
following options is the appropriate accounting treatment for this post–balance sheet event under PAS 10?
= The entity should disclose P100,000,000 as a “contingent liability” because it is a present
obligation with an improbable outflow.
Each of the following events occurred after the reporting date of 31 March 2CY, but before the financial
statements were authorised for issue. Which would be treated as a non-adjusting event under IAS 10
Events After the Reporting Period?
Select one:
= A public announcement in April 20CY of a formal plan to discontinue an operation which
had been approved by the board in February 20CY.
An entity changed from an accounting principles that is not generally accepted to one that is generally
accepted. The effect of the change shall be reported , net of applicable income tax , in the current year
= Retained earnings statement as an adjustment of the opening balance
The effect of a change in accounting policy that is inseparable from the effect of a change in accounting
estimates shall be reported
= As a component of income from continuing operations in the period of change and future
periods if the change affects both
During 20Y3, a construction company changed from the cost-recovery method to the percentage-ofcompletion method for accounting purposes but not for tax purposes. Gross profit figures under both
methods for the past three years appear below:
Cost-Recovery
Percentage-of-Completion
20Y1
P 475,000
P 800,000
20Y2
625,000
950,000
20Y3
700,000
1,050,000
P1,800,000
P2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods
should be reported by a credit of
= P390,000 on the 2011 retained earnings statement.
SOLUTION
[(P800,000 + P950,000) – (P475,000 + P625,000)] × (1 – .40) = P390,000
When an entity changed from the straight line method of depreciation for previously recorded assets to the
double declining balance method , which of the following should be reported ?
= Change in accounting estimates
When an entity changed the expected service life of an asset because additional information has been
obtained , which of the following should be reported?
= An accounting changed that should be reported in the period of change and future period
if the change affects both
On January 1, year 1, Flax Co. purchased a machine for P528,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no residual value. On January 1, year 4, Flax
determined that the machine had a useful life of six years from the date of acquisition and will have a
residual value of P48,000. An accounting change was made in year 4 to reflect these additional data. The
accumulated depreciation for this machine should have a balance at December 31, year 4, of
= P292,000
From 1/1/01 to 12/31/Y3, depreciation was recorded using an eight-year life. Yearly depreciation was
P66,000 (P528,000 ÷ 8), and accumulated depreciation at 12/31/Y1 was P198,000 (3 × P66,000). In year
4, the esti mated useful life was changed to six years total with a sal vage value of P48,000. Therefore, the
12/31/Y3 carrying value (P528,000 – P198,000 = P330,000) is depreciated down to the P48,000 residual
value over a remaining useful life of three years (six years total – three years already recorded).
Depreciation expense for year 4 is P94,000 [(P330,000 – P48,000) ÷ 3], increasing accumulated
depreciation to P292,000 (P198,000 + P94,000).
Which of the following most likely would be considered a discontinued operations?
= An entity that is franchisor in the quick service restaurant business also operates
company owned restaurant that are unprofitable in a certain region and as a result , the entity decided to
exit both the quick service business as well as the company – owned restaurant in that region.
On September 30, 20Y1, when the carrying amount of the net assets of segment C has P 13,000,000, X
Company signed a binding contract to sell segment C for P 12,000,000. The sale is expected to be
completed by January 31, 20Y2. In addition, prior to January 31, 20Y2, the sale contract obliges X Company
to terminate certain employees of segment C incurring termination cost of P 2,000,000 to be paid on June
30, 20Y2. The company continued to operate segment C throughout 20Y1. Revenue of segment C
throughout 20Y1 was P 8,000,000, operating cost was P 4,000,000. How much income should be reported
as income from ordinary activities of the discontinued segment for 20Y1, before tax?
Select one:
= P1,000,000
Solution
Segment Revenue
8,000,000.00
Operating cost
(4,000,000.00)
Impairment loss
Fair value less cost to sell
12,000,000.00
Carrying amount of net assets
(13,000,000.00)
(1,000,000.00)
Termination cost
(2,000,000.00)
Net income from discontinued operations
1,000,000.00
Which of the following is true regarding accounting and reporting standard for discontinued operations?
= A recognitions of an impairment loss would be necessary for a component that had not
been sold by year end- if the fair value of the component was determined to be less than the carrying
amount
Which is false on the derecognition of a financial liability?
Select one:
= The difference between the carrying amount of a financial liability extinguished
or transferred to another party and the consideration paid, including any non-cash assets transferred or
liabilities assumed, shall not be recognized in profit or loss.
In a statement of cash flows, the cash flows from investing activities section should report
= a major repair to machinery charged to accumulated depreciation.
Which of the following would be classified as a financing activity on a statement of cash flows?
= Payment of a bond payable
If dividends are declared after the reporting period but before the financial statements are authorized for
issue
= No liability shall be recognized at the end of the reporting period
Excellent Inc. built a new factory building during 20Y1 at a cost of P20 million. At December 31, 20Y1, the
net carrying value of the building was P19 million. Subsequent to year-end, on March 15, 20Y2, the building
was destroyed by fire and the claim against the insurance company proved futile because the cause of the
fire was negligence on the part of the caretaker of the building. If the date of authorization of the financial
statements for the year ended December 31, 20Y1, was March 31, 20Y2, Excellent Inc. Should
= Disclose this non-adjusting event in the footnotes
Most likely a non-adjusting event
= Decline in market value of investments between the end of the reporting period and the
date when the financial statements are authorized for issue
Which of the following statement is not correct?
= A change from an in appropriate accounting policy to a proper one shall be
accounted for as an accounted for as a changed in accounting policy
During 20CY, Titus Company decided to change from the FIFO method of inventory valuation to the
weighted average method. Inventory balances under each method were as follows:
FIFO
Weighted Average
January 1
7,100,000
7,700,000
December 31
7,900,000
8,300,000
Ignoring income tax, in its 20CY statement of retained earnings, what amount should Titus report as the
cumulative effect of this accounting change?
= 600,000 addition
Solution
January 1, Weighted average
7,700,000.00
January 1, FIFO
7,100,000.00
Cumulative effect
600,000.00
Adjustment of 600,000 is added to the Beginning inventory (asset) with a previous balance of 7,100,000
thus affecting retained earnings through cumulative effect as an increase by 600,000.
On January 1, 20Y1, Lake Co. purchased a machine for P792,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no residual value. On January 1, 20Y4, Lake
determined that the machine had a useful life of six years from the date of acquisition and will have a
residual value of P72,000. An accounting change was made in 20Y4 to reflect these additional data. The
accumulated depreciation for this machine should have a balance at December 31, 20Y4 of
= P438,000.
SOLUTION
P792,000 × 3/8 = P297,000
P297,000 + [(P792,000 – P297,000 – P72,000) × 1/3] = P438,000
Diony Company operates two restaurants, one in Boracay and one in Dakak. The operations and cash
flows of each of the two restaurants are clearly distinguishable. During 20Y3, Jazz Company decided to
close the restaurant in Dakak and sell the property. It is probable that the disposal will be completed early
next year. The revenue and expenses of Jazz Company for 20Y3 and for the preceding two years as
follows:
20Y3
20Y2
20Y1
Sales – Boracay
60,000
48,000
40,000
Cost of goods sold – Boracay
26,000
22,000
18,000
Other expenses – Boracay
14,000
13,000
12,000
Sales – Dakak
23,000
30,000
52,000
Cost of goods sold- Dakak
14,000
19,000
20,000
Other expenses – Dakak
17,000
16,000
15,000
The other expenses do not included tax expense. During the later part of 20Y3, Diony Company
sold much of the kitchen equipment of the Dakak restaurant and recognized a pretax gain of
P15,000 on the disposal. The income tax rate is 30%.
Diony Company should report income or loss from discontinued operations for 20y3 at
= 4,900 gain
Solution 3-12
Sales – Dakak
Cost of goods – Dakak
Other expenses – Dakak
Gain on disposal
23,000
(14,000)
(17,000)
15,000
Income before tax
Income tax (30% x 7,000)
7,000
(2,100)
Income from discontinued operation
4,900
International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. Subsequent to the balance sheet date, and before the “date of authorization” of the
issuance of the financial statements, there were abnormal fluctuations in foreign currency rates.
International Inc. should
= Disclose the post–balance sheet event in footnotes as a non-adjusting event.
On December 31, 20CY Dean Company changed its method of accounting for inventory from the average
cost method to the FIFO method. This change caused the 20CY beginning inventory to increase by
P420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/CY,
assuming a 40% tax rate, is
= P252,000
SOLUTION
P420,000 × (1 – .40) = P252,000
On January 1, 20Y1, Hess Co. purchased a patent for P595,000. The patent is being amortized over its
remaining legal life of 15 years expiring on January 1, 2024. During 20Y4, Hess determined that the
economic benefits of the patent would not last longer than ten years from the date of acquisition. What
amount should be reported in the statement of financial position for the patent, net of accumulated
amortization, at December 31, 20Y4?
= P408,000
SOLUTION
P595,000 × 3/15 = P119,000
P595,000 – P119,000 – [(P595,000 – P119,000) × 1/7] = P408,000.
On January 1, 20Y1, Neal Corporation acquired equipment at a cost of P540,000. Neal adopted the sumof-the-years’-digits method of depreciation for this equipment and had been recording depreciation over an
estimated life of eight years, with no residual value. At the beginning of 20Y4, a decision was made to
change to the straight-line method of depreciation for this equipment. The depreciation expense for 20Y4
would be
= P45,000
SOLUTION
[(8 + 7 + 6) ÷ 36] × P540,000 = P 315,000 (AD)
(P540,000 - P 315,000) ÷ 5 = P 45,000
Tawilis Company is a diversified entity with nationwide interest in commercial real estate development,
banking, mining and food distribution. The food distribution division was deemed to be inconsistent with the
long- term direction of the entity. On October 1, 20Y1 the board of directors voted to approve the disposal
of this division. The sale is expected t occur in August 20Y2. The food distribution had the following revenue
and expenses in 20Y1. January1 to September 30, revenue of P35,000,000
and expenses of
P27,000,000 ; October 1 to December 31, revenue of P15,000,000 and expenses of P10,000,000. The
carrying amount of the division’s net assets at December 31, 20Y1 was P56,000,000 and the fair value
less cost to sell of the discontinued division was P56,500,000. The sale contract requires Zebra to terminate
certain employees incurring an expected termination cost of P4,000,000 to be paid by December 15, 20Y2.
Income tax rate is 30%. The income statement for the year ended December 31, 20Y1 will report income
from discontinued operation at
= 6,300,000
Solution 3-10
Revenue – January 1 to December 31
Expenses – January 1 to December 31
Termination cost
50,000,000
(37,000,000)
(4,000,000)
Income before tax
Income tax (30% 9, 000,000)
9,000,000
2,700,000
Income from discontinued operation
6,300,000
Fair value less cost to sell of division
Carrying amount of net assets
56,500,000
56,000,000
Expected gain – not recognized
500,000
The direct method
=Shows each major class of gross cash receipts and gross cash payments.
The net income for the current year for Roger Company was P3,520,000. Additional data are as follows:
Purchase of plant assets
Depreciation of plants assets
Dividends declared
Net decrease in noncash current assets
Loss on sale of equipment
2,800,000
1,480,000
970,000
290,000
130,000
What should be the net cash provided by operating activities in the statement of cash flows for the current
year using the indirect method?
=5,420,000
Solution 54-8 Answer a
Net income
Depreciation
Net decrease in noncash current assets
Loss on sale of equipment
3,520,000
1,480,000
290,000
130,000
Net cash provided by operating activities
The indirect method of presenting the cash flow from operations begins with the accrual basis net
income and applies a series of adjustments to convert the income to cash basis. The following general
guidelines are offered for the adjustment of the net income to cash basis:
1.
All increases in noncash trade current assets are deducted from net income.
2.
All decrease in noncash trade current assets are added to net income.
3.
All increase in trade current liabilities are added to net income.
4.
All decrease in trade current liabilities are deducted from net income.
5.
Depreciation, amortization and other noncash expenses are added to net income to
eliminate the effect they had on net income.
6.
Gain on disposal of property is included in net income but it is a non operating item. Thus
is deducted from the net income.
Loss on disposal of property is deducted from net income but this is a non operating item. Thus, this
is added back to net income.
The following information is available from the financial statement of Arlyn Company for the current year:
Net income
Depreciation expense
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Payments of dividends
Purchases of available for sale securities
Decrease in income tax payable
Increase on long-term note payable
3,960,000
1,020,000
200,000
1,260,000
900,000
240,000
540,000
220,000
160,000
2,000,000
What is Arlyn Company’s net cash flow from operating activities?
=5,620,000
Solution 54-14 Answer d
Net income
Depreciation expense
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
3,960,000
1,020,000
200,000
1,260,000
(900,000)
(160,000)
Net cash flow from operating activities
5,620,000
The payment of dividends and the increase in long-term note payable shall be classified as financing. The
purchase of available for sale securities shall be classified as investing.
Katsis Limited had the following cash flows during the reporting period:
·
·
·
·
·
·
Purchase of intangibles - P30,000
Proceeds from sale of plant - P28,000
Receipts from customers - P832,000
Payments to suppliers - P593,000
Interest received - P17,600
Income taxes paid - P45,500
The net cash connected to operating activities was:
=P211,100
Solution:
Receipts from customers
Interest received
Payments to suppliers
Income taxes paid
832,000.00
17,600.00
-593,000.00
-45,500.00
Cash flow from operating activities
211,100.00
Supplemental disclosures required only when the statement of cash flows is prepared using the indirect
method include
=Amounts paid for interest and taxes
Seawall Company provided the following data for the operation of the statement of cash flows for the current
year:
Dividends declared and paid
800,000
Cash flow from investing activities
(2,500,000)
Cash flows from financing activities
(800,000)
Cash
Other assets
Liabilities
Share capital
Retained earnings
December 31
2,100,000
21,000,000
10,500,000
2,000,000
10,600,000
January 1
1,200,000
22,700,000
11,700,000
2,000,000
10,200,000
How much was reported as cash flow from operating activities ?
=4,200,000
Solution 54- 3 Answer a
Cash – January 1
Cash flow from operating activities (SQUEEZE)
Cash flow from investing activities
Cash flow from financing activities
1,200,000
4,200,000
(2,500,000)
(800,000)
Cash - December 31
2,100,000
The cash flows from operating activities is “squeezed” by working back from the December 31 cash balance.
Brett Limited had a net profit after tax of $850 000 for the financial year. Included in this profit was:
· Depreciation expense of $120 000
· Gain on sale of Investments of $28 000
Also, Accounts Receivable increased by $39 000 and Inventories decreased by $12 000. The cash flow
from operating activities during the year was:
=$915 000;
Solution:
Net profit
Depreciation expense
Gain on sale of investments
Increase in accounts receivable
Decrease in inventories
850,000.00
120,000.00
-28,000.00
-39,000.00
12,000.00
Cash flow from operating activities
915,000.00
When preparing a reconciliation of net income to cash from operations , an increase in the ending inventory
will result in an adjustment to reported net income because
=The net increase in inventory is part of the difference between cost of goods sold and
cash paid to suppliers
The following information is available for Santana Company for the current year:
Cash
Retained earnings
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financial activities
Dividends declared and paid
Net income
December 31
1,500,000
7,000,000
?
(4,800,000)
1,800,000
2,000,000
3,600,000
January 1
1,000,000
5,400,000
How much was the cash flow operating activities?
=3,500,000
Solution:
Cash, Dec 31
Less: Cash, Jan 1
1,500,000.00
1,000,000.00
Net Cash Flow
Cash flow from investing activities
Cash flow from financing activities
500,000.00
4,800,000.00
-1,800,000.00
Cash flow from operating activities
3,500,000.00
During the financial year, Cresswell Limited had a Cost of Sales amounting to $260 000. Beginning and
ending balances were:
Inventory
Accounts Payable
Beginning
balance
Ending
balance
$46 000
$18 000
$55 000
$26 000
A discount of $2 000 for prompt payment was received. The amount of cash paid for goods purchased
during the year was:
=$259 000;
Solution:
Cost of sales
Inventory, end
Inventory, beg
260,000.00
55,000.00
-46,000.00
Purchases
Accounts payable, beg
Accounts payable, end
Purchases discounts
269,000.00
18,000.00
-26,000.00
-2,000.00
Cash payments to suppliers
259,000.00
Using the indirect method, cash flows from operating activities would be increased by which of the
following?
=Decrease in accounts receivable
Which of the following cannot be classified as Cash flows from operating activities?
=Cash receipts from short term borrowings.
How should a gain from the sale of used equipment for cash be reported in a cash flow statement using the
indirect method?
=In operating activities as a deduction from income
Sun Company provided the following data for the preparation of the statement of cash flows for the current
year:
Increase in accounts receivable
Decrease in income tax payable
Depreciation
Net income
Gain on sale equipment
Loss on sale building
300,000
170,000
1,000,000
250,000
440,000
210,000
Using the indirect method, how much should be reported as cash flow from operating activities?
=550,000
Solution:
Net income
Depreciation
Gain on sale of equipment
Loss on sale of building
Increase in accounts receivable
Decrease in income tax payable
250,000.00
1,000,000.00
-440,000.00
210,000.00
-300,000.00
-170,000.00
Cash flow from operating activities
550,000.00
Black town Company had the following account balances for the current year:
Accounts payable
Inventory
Accounts receivable
Prepaid expenses
·
·
·
December 31
500,000
300,000
800,000
400,000
January 1
650,000
250,000
900,000
600,000
All purchases of inventory were on account.
Depreciation expense of P900,000 was recognized during the year.
Equipment was sold during the year and gain of P300,000 was recognized.
Black town provided following cash flow information for the current year:
Cash collected from customers
Cash paid for inventory
Cash paid for other expenses
Cash flows from operations
4,000,000
What was black town Company’s net income for the current year?
=3,300,000
Solution 54-16 Answer a
Net income (SQUEEZE)
Decrease in accounts payable
Increase in inventory
Decrease in accounts receivables
Decrease in prepaid expenses
Depreciation
Gain on sale of equipment
9,500,000
(4,100,000)
(1,400,000)
3,300,000
(150,000)
(50,000)
100,000
200,000
900,000
(300,000)
Cash flow from operations
4,000,000
The net income is “squeezed” by working back from the cash flow from operations.
Star Company provided the following data for the preparation of statement of cash flows for the current
year using the direct method:
Cash balance, beginning
Cash paid to purchase inventory
Cash received from sale of building
Cash paid for interest
Cash paid to repay a loan
Cash collected from customers
Cash received from issuance of ordinary
shares
Cash paid for dividend
Cash paid for income taxes
Cash paid to purchase machinery
1,500,000
7,800,000
5,600,000
450,000
1,000,000
10,000,000
1,200,000
780,000
1,320,000
1,950,000
How much was the cash flow for operating activities?
=430,000
Solution:
Cash collected from customers
Cash paid to purchase inventory
Cash paid for interest
Cash paid for income taxes
10,000,000.00
-7,800,000.00
-450,000.00
-1,320,000.00
Cash flow from operating activities
430,000.00
Sinulog Company has provided the following 2009 current account balances:
Accounts receivable
Allowance for doubtful accounts
Prepaid insurance
Accounts payable
Jan. 1
P1,500,000
200,000
600,000
900,000
Dec. 31
P2,800,000
400,000
450,000
1,200,000
Sinulog’s net income for 2009 was P8,000,000. Net cash provided by operating activities should
be
=P7,350,000
Solution:
Net income
Increase in accounts receivable
(P2,800,000-P1,500,000)
Increase in allowance for doubtful accounts
(P400,000-P200,000)
Decrease in prepaid insurance
(P600,000-P450,000)
Increase in accounts payable
(P1,200,000-P900,000)
8,000,000.00
Net cash flow from operating activities
7,350,000.00
-1,300,000.00
200,000.00
150,000.00
300,000.00
How should gain on sale of an office building owned by the entity be presented in a statement of cash flows?
=As a deduction from the net income in the operating activities section prepaid under the
indirect method
During 2018, equipment was sold for $468,000. The equipment cost $786,000 and had a book value of
$432,000. Accumulated Depreciation—Equipment was $2,061,000 at 12/31/17 and $2,205,000 at
12/31/18. Depreciation expense for 2018 was
=$498,000.
Solution:
Cost of equipment
Less: Book value
786,000.00
432,000.00
Accumulated depreciation - Retirement
Accumulated depreciation, 12/31/18
354,000.00
2,205,000.00
Total debits
Less: Accumulated depreciation, 12/31/17
2,559,000.00
2,061,000.00
Depreciation, 2018
498,000.00
Fleming Company provided the following information on selected transactions during 2018:
Dividends paid to preferred stockholders
$ 500,000
Loans made to affiliated corporations
1,400,000
Proceeds from issuing bonds
1,600,000
Proceeds from issuing preferred stock
2,100,000
Proceeds from sale of equipment
800,000
Purchases of inventories
,400,000
Purchase of land by issuing bonds
600,000
Purchases of treasury stock
1,200,000
The net cash provided (used) by investing activities during 2018 is?
In a statement of cash flows, the cash flows from investing activities section should report
=a major repair to machinery charged to accumulated depreciation.
ns during 2018:
Dividends paid to preferred stockholders
$ 500,000
Loans made to affiliated corporations
1,400,000
Proceeds from issuing bonds
1,600,000
Proceeds from issuing preferred stock
2,100,000
Proceeds from sale of equipment
800,000
Purchases of inventories
,400,000
Purchase of land by issuing bonds
600,000
Purchases of treasury stock
1,200,000
The net cash provided (used) by investing activities during 2018 is?
=$(600,000).
Solution:
Loans made to affiliated corporations
Proceeds from sale of equipment
-1,400,000.00
800,000.00
Net cash provided by (used in) investing activities
-600,000.00
Napier Co. provided the following information on selected transactions during 2018:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury stock
$1,000,000
3,000,000
3,800,000
600,000
Loans made to affiliated corporations
1,400,000
Dividends paid to preferred stockholders
400,000
Proceeds from issuing preferred stock
1,600,000
Proceeds from sale of equipment
300,000
The net cash provided (used) by investing activities during 2018 is
=$(1,100,000).
Solution:
Loans made to affiliated corporations
Proceeds from sale of equipment
-1,400,000.00
300,000.00
Net cash provided by (used in) investing activities
-1,100,000.00
Capiz Company had the following activities during 2009:
·
Acquired ordinary shares of Iloilo Company for P3,000,000.
·
Sold an investment in Guimaras Company for P4,500,000 when the carrying amount was
P3,800,000.
·
Acquired a P5,000,000 one-year certificate of deposit from a bank. During the year, interest
of P400,000 was received from the bank.
·
Collected dividends of P800,000 on investments in equity securities.
In the 2009 statement of cash flows, net cash used in investing activities should be?
=P3,500,000
Solution:
Proceeds from sale of investment in Guimaras
Cash paid for ordinary shares of Iloilo Company acquired
Cash paid for one-year certificate of deposit acquired
4,500,000.00
-3,000,000.00
-5,000,000.00
Net cash provided by (used in) investing activities
-3,500,000.00
Equipment that cost $875,000 and had a book value of $390,000 was sold for $450,000. Data from the
comparative balance sheets are:
Equipment
Accumulated Depreciation
12/31/18
$5,400,000
1,650,000
12/31/17
$4,875,000
1,425,000
Equipment purchased during 2018 was
=$1,400,000.
Solution:
Cost of equipment sold
Equipment, 12/31/18
875,000.00
5,400,000.00
Total credits
Less: Equipment, 12/31/17
6,275,000.00
4,875,000.00
Equipment purchased
1,400,000.00
Marie Company provided the following information for the current year:
·
Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller
for the remaining P800,000.
·
Executed a debt-equity swap and replaced a P600,000 loan by giving the lender ordinary
shares worth P600,000 on the date the swap was executed.
·
Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.
·
Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan
proceeds as follows: P150,000 for the purchase of additional inventory, P300,000 to pay cash
dividend, and P100,000 to increase the cash balance.
What amount should be reported as net cash used in investing activities in the statement of cash flows?
=750,000
Solution:
Cash payment for purchase of building
Cash payment for purchase of land
-400,000.00
-350,000.00
Net cash used in investing activities
-750,000.00
Cash inflows from investing result from
=decreases in noncash assets.
Xanthe Corporation had the following transactions occur in the current year:
·
·
·
·
·
·
Cash sale of merchandise inventory.
Sale of delivery truck at book value.
Sale of Xanthe common stock for cash.
Issuance of a note payable to a bank for cash.
Sale of a security held as an available-for-sale investment.
Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a statement of cash
flows for the current year?
=Three items
Antique Corp. reported net income of P420,000 for 2009. Changes occurred in several balance sheet
accounts as follows:
Equipment
Accumulated depreciation
Note payable
P35,000 increase
56,000 increase
42,000 increase
Additional information:
·
During 2009, Antique sold equipment costing P35,000, with accumulated depreciation of
P16,800, for a gain of P7,000.
·
In December 2009, Antique purchased equipment costing P70,000 with P28,000 cash and
a 12% note payable of P42,000.
·
Depreciation expense for the year was P72,800.
In Antique's 2009 statement of cash flows, net cash used in investing activities should be
=P 2,800
Solution:
Cost of equipment sold
Less: Accumulated depreciation
35,000.00
16,800.00
Carrying amount
Gain on sale
18,200.00
7,000.00
Proceeds from sale of equipment
Cash paid on equipment purchased
25,200.00
-28,000.00
Net cash provided (used) in investing activities
-2,800.00
In preparing a statement of cash flows, which of the following transactions would be considered an investing
activity?
=Sale of a business segment
In 2013, a fire completely destroyed a building belonging to Jiffrey Company. The cost of the building was
P8,000,000 and had accumulated depreciation of P5,000,000 at the time of fire. Jiffrey received a cash
settlement from an insurance company and reported a casualty loss of P500,000. In its 2013 statement of
cash flows, the net change reported in the cash flows from investing activities should be
=P2,500,000 increase
Solution:
Cost of the building
Less: Accumulated depreciation
8,000,000.00
5,000,000.00
Carrying amount
Casualty loss
3,000,000.00
-500,000.00
Proceeds from insurance on burned building
2,500,000.00
In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as
cash inflows from
=investing activities.
In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2018, the following
amounts were available:
Collect note receivable
$615,000
Issue bonds payable
639,000
Purchase treasury stock
300,000
What amount should be reported on Titan, Inc.’s statement of cash flows for investing activities?
=$615,000
Solution:
Only the collection of note receivable shall be reported as cash flow from investing activities. Investing
activities are those cash transactions that involves non-current assets.
The following cash flow activities are regarded as investing cash flows:
=acquisition of subsidiary net of cash acquired;
Howell, Inc. reported net income of $88,000 for the year ended December 31, 2018. Included in net income
were depreciation expense of $16,800 and a gain on sale of equipment of $3,400. The equipment had an
historical cost of $80,000 and accumulated depreciation of $48,000. Each of the following accounts
increased during 2018:
Land
Prepaid rent
FVTOCI securities
Bonds payable
What is the amount of cash provided by or used by investing
December 31, 2018?
=$22,400
$11,000
$13,600
$2,000
$10,000
activities for Jarvis, Inc. for the year ended
Solution:
Cost of equipment sold
Less: Accumulated depreciation
80,000.00
48,000.00
Carrying amount
Gain on sale of equipment
32,000.00
3,400.00
Proceeds from sale of equipment
Payment for purchase of land
Payment for purchase of FVTOCI securities
35,400.00
-11,000.00
-2,000.00
Net cash provided by (used in) investing activities
22,400.00
Jeanette Corp.'s transactions for the year ended December 31, 2013 included the following:
·
Purchased real estate for P220,000 cash which was borrowed from a bank.
·
Sold available-for-sale securities for P200,000.
·
Paid dividends of P240,000.
·
Issued 500 shares of common stock for P100,000.
·
Purchased machinery and equipment for P50,000 cash.
·
Paid P180,000 toward a bank loan.
·
Reduced accounts receivable by P40,000.
·
Increased accounts payable P80,000.
Jeanette's net cash used in investing activities for 2013 was
=P70,000
Solution:
Proceeds from sale of AFS securities
Less: Purchase of real estate
Purchase of machinery and equipment
200,000.00
220,000.00
50,000.00
Net cash provided by (used in) investing activities
270,000.00
-70,000.00
Equipment which cost $426,000 and had accumulated depreciation of $228,000 was sold for $222,000.
This transaction should be shown on the statement of cash flows (indirect method) as a(n)
=deduction from net income of $24,000 and a $222,000 cash inflow from investing
activities.
Solution:
Proceeds from sale
Less: Carrying amount (426,000-228,000)
222,000.00
198,000.00
Gain on sale
24,000.00
Gain on sale of 24,000 shall be presented as deduction against net income, and proceeds from sale of
222,000 should be presented as increase in cash flow from investing activities.
Smiley Corp.'s transactions for the year ended December 31, 2018 included the following:
·
·
·
·
·
·
·
·
Purchased real estate for $1,250,000 cash which was borrowed from a bank.
Sold available-for-sale securities for $1,000,000.
Paid dividends of $1,200,000.
Issued 500 shares of common stock for $500,000.
Purchased machinery and equipment for $250,000 cash.
Paid $900,000 toward a bank loan.
Reduced accounts receivable by $200,000.
Increased accounts payable $400,000.
Smiley's net cash used in investing activities for 2018 was
=$500,000
Solution:
Cash paid for purchase of real estate
Cash proceeds from sale of available-for-sale securities
Cash paid for purchase of machinery and equipment
-1,250,000.00
1,000,000.00
-250,000.00
Net cash provided by (used in) investing activities
-500,000.00
Warner Limited had the following cash flows during a reporting period:
·
·
·
·
·
Acquisition of subsidiary, net of cash flows $250 000
Dividends paid $65 000
Repayment of borrowings $90 000
Interest paid on borrowings $57 000
Proceeds from sale of plant $215 000
What is the amount of the cash flows in relation to financing activities of Warner Limited for the reporting
period?
=net cash outflow $155 000;
Solution:
Dividend paid
Repayment of borrowings
-65,000.00
-90,000.00
Net cash inflow (outflow)
-155,000.00
The following information was taken from the 2018 financial statements of Dunlop Corporation:
Bonds payable, January 1, 2018
Bonds payable, December 31, 2018
$ 800,000
4,800,000
During 2018
·
A $720,000 payment was made to retire bonds payable with a face amount of $800,000.
·
Bonds payable with a face amount of $320,000 were issued in exchange for equipment.
In its statement of cash flows for the year ended December 31, 2018, what amount should Dunlop report
as proceeds from issuance of bonds payable?
=$4,480,000
Solution:
Bonds payable, 12/31/18
Bonds retired
4,800,000.00
800,000.00
Total debits
Less: Bonds payable, 1/1/18
Bonds issued for equipment
5,600,000.00
800,000.00
320,000.00
Bonds issued for cash
1,120,000.00
4,480,000.00
Which of the following would be classified as a financing activity on a statement of cash flows?
=Payment of a bond payable
1. During 2018, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout, converted into common shares
of Stout
Payment in 2018 of cash dividend declared in 2017 to preferred shareholders
Payment for the early retirement of long-term bonds payable (carrying amount
$3,930,000)
Proceeds from the sale of treasury stock (on books at cost of $387,000)
540,000
279,000
,975,000
450,000
The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2018
should be?
=$3,804,000.
Solution:
Payment of cash dividend to preferred shareholders
Payment for early retirement of long-term bonds
Proceeds from sale of treasury stock
-279,000.00
-3,975,000.00
450,000.00
Net cash provided by (used in) investing activities
-3,804,000.00
The transactions of Tsape Company for the year 2009 included the following:
Cash borrowed from bank for purchase of land
P6,000,000
Purchase of land for cash
Sale of securities for cash
Dividend declared (of which P2,000,000 was paid during the year)
6,000,000
1,000,000
3,000,000
Issuance of ordinary shares for cash
Payment of bank loan including interest of P500,000
Increase in customers’ deposits
7,000,000
3,500,000
500,000
The 2009 statement of cash flows should report net cash provided by financing activities at
=P8,000,000
Solution:
Cash borrowed from bank
Dividends paid
Issuance of ordinary shares
Payment of bank loan, excl. interest
(P3.5M-P500,000)
6,000,000.00
-2,000,000.00
7,000,000.00
Net cash provided by (used in) financing activities
8,000,000.00
-3,000,000.00
Dividends paid to stockholders are reported on the cash flow statement as
=Financing activity
In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2018, the following
amounts were available:
Collect note receivable
Issue bonds payable
Purchase treasury stock
$615,000
639,000
300,000
What amount should be reported on Titan, Inc’s statement of cash flows for financing activities?
=$339,000
Solution:
Proceeds from issuance of bonds payable
Payment for purchase of treasury stock
639,000.00
-300,000.00
Cash flow from financing activities
339,000.00
The balance in retained earnings at December 31, 2017 was $1,440,000 and at December 31, 2018 was
$1,164,000. Net income for 2018 was $1,000,000. A stock dividend was declared and distributed which
increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid.
The amount of the cash dividend was?
=$556,000.
Solution:
Retained earnings, Dec 31, 2017
Net income
1,440,000.00
1,000,000.00
Total credits
Less: Retained earnings, Dec 31, 2018
Stock dividend (500,000+220,000)
2,440,000.00
Cash dividend
1,164,000.00
720,000.00
1,884,000.00
556,000.00
In a cash flow statement, which of the following items is reported as a cash flow from financing activities?
I.
Payment to retire mortgage notes
II.
Interest payments on mortgage notes
III.
Dividend payments
=I and III
Howell, Inc. reported net income of $88,000 for the year ended December 31, 2018. Included in net income
was a gain on early extinguishment of debt of $120,000 related to bonds payable with a book value of
$2,400,000. Each of the following accounts increased during 2018:
Notes receivable
Deferred tax liability
Treasury stock
$90,000
$20,000
$240,000
What is the amount of cash used by financing activities for Jarvis, Inc. for the year ended December 31,
2018?
=$2,520,000
Solution:
Book value of bonds retired
Less: Gain on early extinguishment
2,400,000.00
120,000.00
Cash paid for bonds retired
Cash paid for treasury stock acquired
2,280,000.00
240,000.00
Net cash used in financing activities
2,520,000.00
Cash outflows for financing activities include all, except
=Interest payment on loans
Napier Co. provided the following information on selected transactions during 2018:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury stock
Loans made to affiliated corporations
Dividends paid to preferred stockholders
Proceeds from issuing preferred stock
Proceeds from sale of equipment
The net cash provided by financing activities during 2018 is?
=$3,600,000.
$1,000,000
3,000,000
3,800,000
600,000
1,400,000
400,000
1,600,000
300,000
Solution:
Proceeds from issuing bonds
Purchases of treasury stock
Dividends paid to preferred stockholders
Proceeds from issuing preferred stock
3,000,000.00
-600,000.00
-400,000.00
1,600,000.00
Net cash provided by financing activities
3,600,000.00
Lange Co. provided the following information on selected transactions during 2009:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury shares
Loans made to affiliated corporations
Dividends paid to preference shareholders
Proceeds from issuing preference shares
Proceeds from sale of equipment
P200,000
300,000
650,000
90,000
250,000
80,000
240,000
50,000
The net cash provided by financing activities during 2009 is?
=P370,000
Solution:
Proceeds from issuing bonds
Purchase of treasury shares
Dividends paid to preference shareholders
Proceeds from issuing preference shares
300,000.00
-90,000.00
-80,000.00
240,000.00
Net cash provided by (used in) financing activities
370,000.00
During 2009, Siquijor has the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying amount
of bonds payable P5,000,000)
Distribution in 2009 of cash dividend declared in 2008
Carrying amount of convertible preference shares converted into ordinary
shares
Proceeds from sale of treasury shares (cost, P2,000,000)
P5,500,000
3,000,000
2,000,000
2,500,000
In the 2009 statement of cash flows, net cash used in financing activities should be
=P6,000,000
Solution:
Payment for the early retirement of long-term bonds
Distribution of cash dividend
Proceeds from sale of treasury shares
-5,500,000.00
-3,000,000.00
2,500,000.00
Net cash provided by (used in) financing activities
-6,000,000.00
A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash
flows (indirect method), this event would be reflected as a(n)
=cash inflow from financing activities.
In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be
classified as a(n)
=financing activity
Selected information from Dinkel Company's 2018 accounting records is as follows:
Proceeds from issuance of common stock
Proceeds from issuance of bonds
Cash dividends on common stock paid
Cash dividends on preferred stock paid
Purchases of treasury stock
Sale of stock to officers and employees not included above
$ 800,000
2,400,000
290,000
120,000
240,000
200,000
Dinkel's statement of cash flows for the year ended December 31, 2018, would show net cash provided
(used) by financing activities of?
=$2,750,000
Solution:
Proceeds from issuance of common stock
Proceeds from issuance of bonds
Cash dividends on common stocks paid
Cash dividends on preferred stock paid
Purchase of treasury stock
Sale of stock to officers and employees
800,000.00
2,400,000.00
-290,000.00
-120,000.00
-240,000.00
200,000.00
Net cash provided by (used in) financing activities
2,750,000.00
During 2013, Jerwin has the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying amount of
bonds payable P5,000,000)
Distribution in 2009 of cash dividend declared in 2008
Carrying amount of convertible preference shares converted into ordinary shares
Proceeds from sale of treasury shares (cost, P2,000,000)
In the 2013 statement of cash flows, net cash used in financing activities should be
=P6,000,000
P5,500,000
3,000,000
2,000,000
2,500,000
Solution:
Payment of early retirement of long-term bonds
Distribution of cash dividends
Proceeds from sale of treasury shares
-5,500,000.00
-3,000,000.00
2,500,000.00
Net cash flow from financing activities
-6,000,000.00
1. During 2018, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout, converted into common shares
of Stout
Payment in 2018 of cash dividend declared in 2017 to preferred shareholders
Payment for the early retirement of long-term bonds payable (carrying amount
$3,930,000)
Proceeds from the sale of treasury stock (on books at cost of $387,000)
540,000
279,000
,975,000
450,000
The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2018
should be?
=$3,804,000.
Solution:
Payment of cash dividend to preferred shareholders
Payment for early retirement of long-term bonds
Proceeds from sale of treasury stock
-279,000.00
-3,975,000.00
450,000.00
Net cash provided by (used in) investing activities
-3,804,000.00
Warner Limited had the following cash flows during a reporting period:
·
Acquisition of subsidiary, net of cash flows P250,000
·
Dividends paid P65,000
·
Repayment of borrowings P90,000
·
Interest paid on borrowings P57,000
·
Proceeds from sale of plant P215,000
What is the amount of the cash flows in relation to financing activities of Warner Limited for the reporting
period?
=Net cash outflow P155,000
Solution:
Dividend paid
Repayment of borrowings
-65,000.00
-90,000.00
Net cash inflow (outflow)
-155,000.00
The transactions of Tsape Company for the year 2009 included the following:
Cash borrowed from bank for purchase of land
P6,000,000
Purchase of land for cash
Sale of securities for cash
Dividend declared (of which P2,000,000 was paid during the year)
6,000,000
1,000,000
3,000,000
Issuance of ordinary shares for cash
Payment of bank loan including interest of P500,000
Increase in customers’ deposits
7,000,000
3,500,000
500,000
The 2009 statement of cash flows should report net cash provided by financing activities at
=P8,000,000
Solution:
Cash borrowed from bank
Dividends paid
Issuance of ordinary shares
Payment of bank loan, excl. interest
(P3.5M-P500,000)
6,000,000.00
-2,000,000.00
7,000,000.00
Net cash provided by (used in) financing activities
8,000,000.00
-3,000,000.00
Marcum Corp.'s transactions for the year ended December 31, 2009 included the following:
·
Purchased real estate for P220,000 cash which was borrowed from a bank.
·
Sold available-for-sale securities for P200,000.
·
Paid dividends of P240,000.
·
Issued 500 shares of common stock for P100,000.
·
Purchased machinery and equipment for P50,000 cash.
·
Paid P180,000 toward a bank loan.
·
Reduced accounts receivable by P40,000.
·
Increased accounts payable P80,000.
Marcum's net cash used in investing activities for 2009 was
=P70,000
Solution:
Proceeds from sale of available-for-sale securities
Payment of acquisition of real estate
Payment of purchase of machinery and equipment
200,000.00
-220,000.00
-50,000.00
Net cash provided by (used in) investing activities
-70,000.00
Poole Company paid or collected during 2019 the following items:
Insurance premiums paid
P 15,400
Interest collected
30,900
Salaries paid
135,200
The following balances have been excerpted from Poole's balance sheets:
Prepaid insurance
Interest receivable
Salaries payable
12/31/2019
P 1,200
3,700
12,300
12/31/2018
P 1,500
2,900
10,600
The insurance expense on the income statement for 2019 was
=P15,700
Solution:
Insurance premiums paid
Prepaid insurance, 12/31/2018
Prepaid insurance, 12/31/2019
15,400.00
1,500.00
-1,200.00
Insurance expense
15,700.00
Under the accrual basis, rental income of Macho Company for the calendar year 2019 is
P60,000. Additional information regarding rental income are:
Unearned rental income, Jan. 1, 2019
P5,000
Unearned rental income, Dec. 31, 2019
7,500
Accrued rental income, Jan. 1, 2019
3,000
Accrued rental income, Dec. 31, 2019
4,000
How much actual cash rental was received by Macho Company in 2019?
=P61,500
Rental income
Unearned rental income, 12/31/2019
Accrued rental income, 1/1/2019
60,000.00
7,500.00
3,000.00
Total credits
Less: Debits
Unearned rental income, 1/1/2019
Accrued rental income, 12/31/2019
70,500.00
5,000.00
4,000.00
Cash received from rentals
9,000.00
61,500.00
During the year ended December 31, 2019. Pine Company paid P46,000 for interest, but Pine's 2019
income statement properly reported interest expense of P50,000. There was no prepaid interest either at
the beginning or at the end of 2019. Accrued interest at December 31, 2019 amounted to P5,000. How
much was the accrued interest at December 31, 2018?
=P1,000
Solution:
Interest paid
Accrued interest, 12/31/2019
46,000.00
5,000.00
Total debits
Less: Interest expense
51,000.00
50,000.00
Accrued interest, 12/31/2018
1,000.00
Statement of financial position extracts for Animus Company show the following:
December 31, 2014
December 31, 2013
Development costs
8,160,000
5,840,000
Amortization
(1,800,000)
(1,200,000)
The capitalized development costs relate to a single project that commenced in 2012. It has now been
discovered that one of the criteria for capitalization has never been met. What adjustment is required
to restate earnings at December 31, 2013?
=4,640,000
olution:
Research & Development Expense
R&D already expensed as Amortization
5,840,000.00
-1,200,000.00
Net adjustment in earnings
4,640,000.00
An audit of Angelina Company has revealed the following four errors that have occurred but have not
been corrected:
·
Inventory at December 31, 20Y1-P40,000, understated
·
Inventory at December 31, 20Y2-P15,000, overstated
·
Depreciation for 20Y1-P7,000, understated
·
Accrued expenses at December 31, 20Y2-P10,000, understated
The errors cause the reported retained earnings at December 31, 20Y2 to be
=Overstated by P65,000
Solution:
Understated Inventory, 12/31/Y1
Overstated inventory, 12/31/Y2
Understated accrued expense, 12/31/Y2
40,000.00
15,000.00
10,000.00
O
O
O
Net misstatement in net income
65,000.00
O
The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of its
machines recorded as follows:
Cash
Accumulated depreciation - machine
Machine
270,000
30,000
300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
=DR: Cash 30,000; CR: Gain on Sale of Machine 30,000
Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31, 20Y1 financial
statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of
20Y2 resulted in a cumulative effect of P30,000 on Colasissi’s retained earnings. Both the P50,000 and
P30,000 are net of related income taxes. What amount should Colasissi report as prior period adjustments
in 20Y2?
=P 50,000
The following information on selected cash transactions for 2018 has been provided by Mancuso Company:
Proceeds from sale of land
$315,000
Proceeds from long-term borrowings
600,000
Purchases of plant assets
216,000
Purchases of inventories
1,020,000
Proceeds from sale of Mancuso common stock
360,000
What is the cash provided (used) by investing activities for the year ended December 31, 2018, as a result
of the above information?
=$99,000
In 2009, a fire completely destroyed a building belonging to Negros Company. The cost of the building was
P8,000,000 and had accumulated depreciation of P5,000,000 at the time of fire. Negros received a cash
settlement from an insurance company and reported a casualty loss of P500,000. In its 2009 statement of
cash flows, the net change reported in the cash flows from investing activities should be?
=P2,500,000 increase
Financing activities are the?
=Activities that result in changes in the size and composition of equity capital and
borrowings of the enterprise.
A company borrows P10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash
flows (indirect method), this event would be reflected as a(n)
=cash inflow from financing activities.
Jennifer Co. provided the following information on selected transactions during 2013:
Purchase of land by issuing bonds
Proceeds from issuing bonds
P200,000
300,000
Purchases of inventory
Purchases of treasury shares
Loans made to affiliated corporations
Dividends
paid
to
preference
shareholders
Proceeds from issuing preference
shares
Proceeds from sale of equipment
650,000
90,000
250,000
80,000
240,000
50,000
The net cash provided by financing activities during 2013 is
=
P370,000
Solution:
Proceeds from issuing bonds
Proceeds from issuing preference shares
300,000.00
240,000.00
Total cash receipts
Less: Purchases of treasury shares
Dividends paid to preference shareholders
540,000.00
90,000.00
80,000.00
Net cash provided by (used in) financing activities
170,000.00
370,000.00
Smiley Corp.'s transactions for the year ended December 31, 2018 included the following:
Purchased real estate for $1,250,000 cash which was borrowed from a bank.
·
Sold available-for-sale securities for $1,000,000.
·
Paid dividends of $1,200,000.
·
Issued 500 shares of common stock for $500,000.
·
Purchased machinery and equipment for $250,000 cash.
·
Paid $900,000 toward a bank loan.
·
Reduced accounts receivable by $200,000.
·
Increased accounts payable $400,000.
Smiley's net cash used in financing activities for 2018 was?
=$350,000.
Solution:
Proceeds from bank loan
Cash payment for dividends
Proceeds from issuance of common stock
Cash payment for bank loan
1,250,000.00
-1,200,000.00
500,000.00
-900,000.00
Net cash flow from financing activities
-350,000.00
In a statement of cash flows, which of the following items is reported as a cash flow from financing
activities?
I.
Payments to retire mortgage notes
II.
Interest payments on mortgage notes
III.
Dividends payments
=I, II, and III
Solution:
Cash flows from financing activities include transactions that involve either non-current liabilities or the
equity.
Timothy Company carried a provision of P 2,000,000 in its draft financial statements on December 31,
2009 in relation to an unresolved court case. On January 31, 2010, when the financial statements on
December 31, 2009 had not yet been authorized for issue, the case was settled and the court decided
the final total damages payable by Timothy to be P2,800,000.
The amount of adjustment to the December 31, 2009 statement of financial position in relation to this
event is
=800,000
Solution:
Final total damages
Less: Initial amount recognized
2,800,000.00
2,000,000.00
Adjustment in provision
800,000.00
Thessalonians Company is completing the preparation of its draft financial statements for the year
ended December 31, 2009. The financial statements are authorized for issue on March 31, 2010.
On March 15, 2010, a dividend of P 1,750,000 was declared and a contractual profit share payment
of P 350,000 was made, both based on the profit for the year ended December 31, 2009.
On February 1, 2010, a customer went into liquidation having owed the entity P 340,000 for the past
5 months. No allowance had been made against this debt in the draft financial statements.
On March 20, 2010, a manufacturing plant was destroyed by fire resulting in a financial loss of P
2,600,000.
The profit or loss for the year ended December 31, 2009 to reflect adjusting events is
=
690,000
Solution:
Contractual profit share payment
Allowance for uncollectible account
350,000.00
340,000.00
Total adjusting events
690,000.00
Per PAS 10 Events after the Reporting Period, these are events that provide evidence of conditions that
existed at the end of the reporting period
=Adjusting events

The following data are provided by Colossians Company. The end of the reporting period is
December 31, 2009 and the financial statements are authorized for issue on March 15, 2010.

On December 31, 2009, Colossians Company had a receivable of P 400,000 from a customer that
is due 60 days after the end of reporting period. On January 15, 2010, a receiver was appointed
for the said customer. The receiver informed Colossians that the P 400,000 would be paid in full by
June 30, 2010.

Colossians Company measures its investments in listed shares as held for trading at fair value
through profit or loss. On December 31, 2009, these investments were recorded at the market
value of P 5,000,000. During the period up to February 15, 2010, there was a steady decline in the
market value of all the shares in the portfolio, and at February 15, 2010, the market value had fallen
to P 2,000,000.

Colossians Company had reported a contingent liability on December 31, 2009 related to a court
case in which Colossians Company was the defendant. The case was not heard until the first week
of February 2010. On February 11, 2010, the judge handed down a decision against Colossians
Company. The judge determined that Colossians Company was liable to pay damages and costs
totaling P 3,000,000.

On December 31, 2009, Colossians Company had a receivable from a large customer amounting
to P3,500,000. On January 31, 2010 Colossians Company was advised by the liquidator of the
customer that the customer was insolvent and would be unable to repay the full amount owed.. The
liquidator advised Colossians Company in writing that only 10% of the receivable will be paid on
April 30, 2010.
Colossians Company should report a total amount of “adjusting events” on December 31, 2009 at
= 6,150,000
Solution:
Contingent liability on court case
Liquidated uncollectible amount from a large customer
(P3,500,000 x 90%)
3,000,000.00
Total adjusting events
6,150,000.00
3,150,000.00
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed
at the end of the reporting period, including an event that indicates that the going concern assumption in
relation to the whole or part of the enterprise is not appropriate. [IAS 10.3]
These are the events that provide evidence of conditions that exist at the end of the reporting period
=Adjusting events after reporting period
Which statement is incorrect regarding events after balance sheet date?
=If an entity declares dividends after the balance sheet date, the entity shall recognize
those dividends as a liability at the balance sheet date.
The following events will not require the enterprise to adjust its financial statements, except
=The sale of inventories at after the balance sheet date that may give evidence about their
net realizable value.
Events after the balance sheet date are the events, both favorable and unfavorable, that occur between the
balance sheet date and the date
=When financial statements are authorized for issue.
Adjusting events after balance sheet date include all of the following, except
=Dividends to holders of equity instruments proposed or declared after balance sheet date
An entity financial statements for the year ended April 30, 2009 were approve by its finance director on July
7, 2009 and the public announcement of its profits for the year was made on July 10,2009.
The board of director authorized the financial statements for issue on July 15, 2009 and they were approved
by the shareholder on July 20, 2009.
Under PAS10 after what date should considerations no longer be given as to weather the financial
statements on April 30, 2009 need to reflect adjusting and non adjusting events?
=July 15, 2009
Non-adjusting Type II events that are indicate of conditions that arose after the balance sheet date is given
the following treatment.
=Note disclosure, in the financial statements
These are events whether favorable or unfavorable that occurred between the end of the reporting period
and the date on which the financial statements are authorized for issued.
=Events after reporting period
Under PAS 10, an entity shall disclose all of the following in each material category of non- adjusting events,
except
=
A statement that an entity chooses to classify the event as a non- adjusting
event rather than as an adjusting event rather than as an adjusting event.
Non adjusting events after reporting period that generally results in disclosure includes all of the following
excepts
=None of the choices
The financial statements are authorized for issue
=When the board of director review the financial statements and authorizes them for issue
An entity is preparing its financial statement for the year ended June 30, 2009. The board of director reviews
the final draft financial statement and authorizes them for issue on August 15, 2009
The earning figure and key data are issued to the public on September 15, 2009. The financial statements
are issued to shareholder on October 15, 2009and approved by shareholder on October 31, 2009.
The period in respect of which the entity would considered events after the end of reporting period in
accordance with PAS 10, IS from June 30, 2009 to
=August 15, 2009
Type II events that are indicative of conditions that arose after the balance sheet date are given the following
treatment:
=Note disclosure in the financial statements.
Events after the balance sheet date are
=Both adjusting and nonadjusting events
The management of an entity completes draft of financial statements for the year ended December 31,
2005 on February 28, 2006. On March 15, 2006, the board of directors reviews the financial statements
and authorizes them for issue. The entity announces its profit and selected other financial information on
March 20, 2006. The financial statements are made available to shareholders and others on April 1,
2006. The shareholders approved the financial statements at their annual meeting on May 10, 2006 and
the approved financial statements are then filed with SEC and BIR on May 30, 2006. For purposes of
identifying events after balance sheet date, the financial statements were authorized for issue on
=March 15, 2006
Under PAS 10, which of the following is classified as an adjusting event rather than a non – adjusting event?
=A mistake was discovered in the calculation of the allowance for uncollectable
trade receivables resulting to an understatement of the trade receivables.
Type 1 events that provide evidence of conditions that existed at the balance sheet date are given the
following treatment:
=Recognition in the financial statements.
Adjusting event is
I.
An event after the balance sheet date that provides evidence of conditions that
existed at the balance sheet date.
II.
An event after the balance sheet date that is indicative of a condition that arose
after the balance sheet date.
=I only
Adjustments of financial statements are required for those events after events after balance sheet date
which
=Provide additional information for determining amounts relating to conditions existing on
the balance sheet date.
Adjusting Type I events that provide evidence of conditions existing at the balance sheet date are given the
following treatment.
=Recognition in the financial statements
Under PAS 10, which of the following is classified as an adjusting event rather than a non – adjusting event?
=A mistake was discovered in the calculation of the allowance for uncollectable
trade receivables resulting to an understatement of the trade receivables.
The audit of Anne Company for year ended December 31, 2009 was completed on March 1, 2010. The
financial statements were signed by the managing director on March 15, 2010 and approved by the
shareholders on March 31, 2010. The next events have occurred.
·
On January 15, 2010, a customer owing 900,000 to Anne filed for bankruptcy. The
financial statements include an allowance for doubtful accounts pertaining to this customers
only of P100,000
·
Anne Company’s issued share capital comprised 100,000 ordinary shares with P100 par
value. The entity issued additional 25,000 shares on March 1, 2010 at par value.
·
Specialized equipment costing P525,000 purchased on September 1, 2009 was
destroyed by fire on December 15, 2009. Anne Company has booked a receivable of P400,
000 from insurance entity. After the insurance entity completed its investigation on February 1,
2010, it was discovered that the fire took place due to negligence of the machine operator. As
a result, the insurer’s liability was zero on this claim.
Anne Company report a total amount of “adjusting events” on December 31, 2009 at
=1,200,000
Solution 1-36 Answer b
Doubtful accounts (900,000 – 100,000)
Loss on claim receivable
Total adjusting events
800,000
400,000
1,200,000
Between the date on which the financial statement for this year were completed and the date on which they
were due to be authorized for issue , a number of events took, place . According to PAS 10 , All of the
following events would be classified as non adjusting events requiring disclosure excepts,
=A mistake was discovered in the calculations of the allowance for uncollectible trade
receivables
A new drug named “EEE” was introduce by an entity in the market on December 1 , 2009 . The entity’s
financial year end on December 31, 2009 . It was the only entity that was permitted to manufacture this
patented drug . The drug is used by patient suffering from an irregular heartbeat . On March 31, 2010 after
the drug was introduce , more than 1,000 patient died.after a series of investigations , authorities discovered
that when this drug was simultaneously used with BBB , a drug used to regulate hypertension , the patients
blood would clot and the patient suffer a stoke . A suit for 100 million has been field against the entity . The
financial statement were authorized for issuance on April 30, 2010 . Which of the following options is the
appropriate accounting treatment for this post reporting period event?
=The entity should disclose P 100,000,000 as a continent liability because it is a presents
obligations with an improbable outflow
The following data are provided by Norway Company. The end of the reporting period is December 31,
2009 and the financial statements are authorized for issue on March 15, 2010.
·
On December 31, 2009, Norway Company had receivable of 400,000 from a customer
that is due 60 days after the end of reporting period. On January 15, 2010 a receiver was
appointing for a said customer. The receiver informed Norway that the P400, 000 would be
paid in full by June 30, 2010.
·
Norway Company measures its investments in listed shares as held for trading at fair
value through profit of loss. On December 31, 2009, these investments were recorded at the
market value of P5, 000,000. During the period up to February 15, 2010, there was a steady
decline in the market value of all the shares in the portfolio, and at February 15, 2010, the
market value had fallen to P2, 000,000.
·
Norway Company had reported a contingent liability on December 31, 2009 related to a
court case in which Norway Company was the defendant. The case was not heard until the
first week of February 11, 2010, the judge handed down a decision against Norway Company.
The judge determined that Norway Company was liable to pay damages and costs totaling P3,
000,000.
·
On December 31, 2009, Norway Company had a receivable from a large customer in
the amount of P3, 500,000. ON January 31, 2010, Norway Company was advised by the
liquidator of the said customer that the customer was insolvent and would be unable to repay
the full amount owed to Norway Company. The liquidator will be paid on April 30, 2010.
Norway Company should report a total amount of “adjusting events” on December 31, 2009 at
=6,150, 000
Solution 1-37 Answer a
Litigation loss
Bad debt expense (3, 500,000 x 90 %)
Total amount of adjusting events
3,000,000
3,150,000
6,150,000
The receivable of P400, 000 is nonadjusting event because the amount is still collectible although a longer
term has given but not so long as to cause it to be reclassified as noncurrent.
The investments in trading securities are measured at fair which must be determined at the end of each
reporting period. The change in the fair value on February 15, 2010 shall be recognized in the next reporting
period, not December 31, 2009.
An entity decided to operate a new amusement park that will cost P 1 million to build in the year 2010 .Its
financial year end is DECEMBER 31, 2009 .The entity has applied for a letter of guarantee for P 700.000 .
The letter of guarantee was issued on March 31, 2010. The audited financial statement have been
authorized to be issued on April 15, 2010. The adjustment required to be made on December 31,2009
should be
=Do nothing
Ginger Company is completing the preparation of its draft financial statements for the year ended December
31, 2009. The financial statements are authorized for issue on March 31, 2010.
On March 15, 2010, A divided of P1, 750,000 was declared and a contractual profit share payment of P350,
000 was made, both based on the profit for the year ended December 31, 2009.
On February 1, 2010, a customer went into liquidator having owed the entity P340, 000 for the past 5
months. No allowance had been made against this debt in the draft financial statements.
On March 20, 2010, a manufacturing plant was destroyed by fire resulting in a financial loss of P2,600,000.
What total amount should be recognized in profit or loss for the year ended December 31, 2009 to reflect
adjusting events after the end of reporting period?
=690, 000
An entity deals extensively with foreign entities , and its financial statements reflect these foreign currency
transactions. Subsequent to the reporting period and before the date of authorizations of the issuance of
the financial statements , there were abnormal fluctuations in foreign currency rates . The entity should
=Disclose the post reporting period event in notes as a non adjusting event.
At the end of the reporting period , December 31, 2009 , an entity carried receivable from another entity , a
major customers , The authorizations date of the financial statements is on February 16, 2010 . The
customers declared bankruptcy on Valentines day February 14, 2010. The entity should
=Make a provision for this post reporting period event in its financial statements as opposed
to disclosure in notes
Are the statements about the classifications of each of the following events after the end of reporting period
but before the financial statements are authorized for issue true or false?
Statement 1 A decline in the market value of investments would normally be classified as an adjusting
events.
Statement 2 The settlement of long running court case would normally be classified as a non adjusting
event.
Statement 1
=False
Statement 2
False
Adjusting events after reporting period include all of the following , excepts
=The settlement of a court case after the issuance of the financial statements that confirms
that the entity has a presents obligations
Type 1 events that provide evidence of conditions existing at the balance sheet date are given the following
treatment.
=Recognition in the financial statements
An entity build a new factory building during 2009at a cost of P 20 million . At December 31, 2009 , the net
book value of the building was P 19 MILLION . Subsequent to year – end March 15, 2010 , the building
was destroyed by fire and the claim against the insurance entity proved futile because the cause of the fire
was negligence on the part of the care taker of the building . If the date of the authorizations of the financial
statements for the year ended December 31, 2009, was March 31, 2010 the should
=Disclose this non adjusting event in the notes
Elysee Company’s raft financial statements showed the profit before tax for year ended December 31, 2009
at 9, 000,000. The board of directors authorized the financial statement for issue on March 20, 2010.
A fire occurred at one of Elysee’s sites on January 15, 2010 with resulting damage costing P7, 000,000,
only P4,000 ,000 of which is covered by insurance. The repairs will take place and be paid for in April 2010.
The P4, 000,0000 claim from the insurance entity will however be received on February 14, 2010. What
should be Elysee’s profit before tax in its financial statements?
=9,000,000
Solution 1-39 Answer b
The profit remains at P9, 000,000. The fire occurring on January 15, 2010 is a nonadjusting event on
December 31, 2009.
Prospective application of a change in accounting policy is required.
=
When the amount of adjustment to the opening balance of retained earnings
cannot be reasonable determined.
A change in accounting policy shall be made when
I.
Required by an accounting standard or an interpretation of the standard
II.
The change will result in more relevant or reliable information about the financial position
, financial performance and cash flows of the entity
=Either I or II
This means “ applying “ a new accounting policy to transaction other events and conditions as if that policy
had always been applied
=Retrospective application
Accounting policies are?
=Specific principles, bases, conventions, rules and practices adopted by an enterprise in
preparing and presenting financial statements
Which of the following statement is not correct?
=A change from an in appropriate accounting policy to a proper one shall be accounted for
as an accounted for as a changed in accounting policy.
Which of the following terms best describe applying a new accounting policy to transaction as if that policy
had always been applied ?
=Retrospective applications.
How should the following changes be treated?
I.
A change is to be made in the method of calculating the provision for
uncollectible receivables
II.
Investment properties are now measured at fair value having previously been
measured at cost.
Change 1
=Change in accounting estimate
Change II
Change in accounting policy
Which of the following is a characteristic of a change in accounting policy?
=Shall be reported by retrospectively adjusting the financial statement for all years reported
, and reporting the cumulative effect of the change in income for all preceding years as an adjustment to
the beginning balance of retained earnings for the earliest year reported.
Which of the following is a change in accounting policy?
=The adoption of a new accounting policy for events or transactions that occurred
previously.
Retrospective application means?
=Adjusting the opening balance of each affected component of equity for the earliest prior
period presented and the other comparative amounts disclosed for each prior period presented as if the
new accounting policy had always been applied.
XYZ Inc. changes is method of valuation of inventories from weighted-average method to first-in, first-out
(FIFO) method. XYZ Inc. should account for this change as?
=A change in accounting policy and account for it retrospectively.
In the absence of an accounting standard that applies specifically to a transaction , what is the most
authoritative source in developing and applying an accounting policy ?
=The requirement and guidance in the standard or interpretation dealing with similar and
related issue.
The initial application of a policy to revalue asset is?
=A change in accounting policy.
On December 31, 2011 Dean Company changed its method of accounting for inventory from the average
cost method to the FIFO method. This change caused the 2011 beginning inventory to increase by
$420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/11,
assuming a 40% tax rate, is
=$252,000
Change in accounting policy does not include
= Change in useful life from 10 years to 7years.
Which of the following statement best describe prospective application
=Applying a new accounting policy to transactions occurring after the date at which the
policy changed.
Which statement is incorrect regarding the selection and application of accounting policies?
=Management must use the requirements and guidance in ASC standards and
interpretations dealing with similar and related issues in the absence of a Standard or an Interpretation that
specifically applies to a transaction, other event or condition.
When an entity makes a voluntary change to its accounting policies that has an effect on the current
period, it is required to disclose:
I.
The reasons why the change will provide more relevant information.
II. The amount of the adjustment for each financial statement line item affected.
III. The nature of the change.
IV. The reasons why the previous policy no longer provides reliable information.
=
I, II, and III only;
On December 31, 2011, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost
from average cost for financial statement and income tax purposes. The change will result in a $1,500,000
increase in the beginning inventory at January 1, 2011. Assume a 30% income tax rate. The cumulative
effect of this accounting change on beginning retained earnings is?
=$1,050,000.
This means “ applying “ a new accounting policy to transaction other events and conditions as if that policy
had always been applied
=Retrospective application
During 2011, a construction company changed from the cost-recovery method to the percentage-ofcompletion method for accounting purposes but not for tax purposes. Gross profit figures under both
methods for the past three years appear below:
Cost-Recovery
Percentage-of-Completion
2009
$ 475,000
$ 800,000
2010
625,000
950,000
2011
700,000
1,050,000
$1,800,000
$2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods
should be reported by a credit of
=$390,000 on the 2011 retained earnings statement.
Solution:
Understatement in:
2009 Gross income
(P800,000-P475,000)
2010 Gross Income
(P950,000-P625,000)
325,000.00
Cumulative understatement in gross income
Less: Income tax (P650,000 x 40%)
650,000.00
260,000.00
Cumulative effect in retained earnings
390,000.00
325,000.00
An entity changes its accounting policy if
I.
It is required to do so by law.
II.
The change will result in providing reliable and more relevant information.
=II only
When a public shareholding company changes an accounting policy voluntarily, it has to?
=Account for it retrospectively.
Which statement is correct concerning application of a change in accounting policy?
I. An entity shall account for a change in accounting policy resulting from the initial application
ofa standard or an interpretation in accordance with the transitional provision , if any
II. When an entity changes an accounting policy upon initial application of a standard or an
interpretation that does not include specific transitional provision applying to that change shallbe applied
retrospectively.
=Both I and II
Per PAS 8, it is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied.
=Retrospective application
The cumulative effects of changes in accounting principles generally are reported as
=adjustments to prior period statements
A change in accounting policy includes all of the following excepts
=The change in depreciation method from sum of years digit to straight line.
Which of the following terms best describe applying a new accounting policy to transaction as if that policy
had always been applied ?
=Prospective application.
An entity changed its method of inventory valuations from weighted average to FIFO. The entity shall
accounts for this change as
=
A change in accounting policy and account for it retrospectively.
A change in accounting policy includes all of the following excepts
=The change in depreciation method from sum of years digit to straight line.
Which statement is correct regarding changes in accounting policies?
=If a change in accounting policy is required by a new ASC standard or interpretation, the
change is accounted for as required by that new pronouncement.
What is the treatment of a change in accounting policy
=Retrospectively , meaning any resulting adjustment is reported as an adjustment to the
opening balance of retained earnings.
During 2009, Titus Company decided to change from the FIFO method of inventory valuation to the
weighted average method. Inventory balances under each method were as follows:
FIFO
Weighted Average
January 1
7,100,000
7,700,000
December 31
7,900,000
8,300,000
Ignoring income tax, in its 2009 statement of retained earnings, what amount should Titus report as the
cumulative effect of this accounting change?
=200,000 Decrease
Solution:
Understatement in Jan 1 inventory
(P7,700,000-P7,100,000)
Understatement in Dec 31 Inventory
(P8,300,000-P7,900,000)
Cumulative effect in retained earnings
-600,000.00
400,000.00
-200,000.00
A change in the estimated useful life of a building
=Affect the depreciations on the building beginning with the year of the change.
A change from the straight line method of depreciations to an accelerated method shall be accounted for
as
=Change in accounting estimates.
The estimated life of building that has been depreciated 30 years of an originally estimated life of 50 years
has been revised to a remaining life of 10 years . Based o this information the accountant shall
=Depreciate the remaining book value over the remaining life of the asset.
Which of the following is not a justifications for a change in depreciations method?
=To conform with the depreciations method prevalent in a particular industry.
Which statement is incorrect concerning accounting estimate?
=By its very nature, the revision of an estimate relates to a prior period and is a correction
of error.
A change in the period benefited by a deferred cost because additional information has been obtained is
=An accounting change that should be reported in the period of change and future period
if the change affect both.
On January 1, 2009, Piper Co., purchased a machine (its only depreciable asset) for $300,000. The
machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used
for financial statement reporting and the elective straight-line method for income tax reporting. Effective
January 1, 2012, for financial statement reporting, Piper decided to change to the straight-line method for
depreciation of the machine. Assume that Piper can justify the change. Piper's income before depreciation,
before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended
December 31, 2012, is $250,000. The income tax rate for 2012, as well as for the years 2009-2011, is 30%.
What amount should Piper report as net income for the year ended December 31, 2012?
=$154,000
SOLUTION
[(5/15 + 4/15 + 3/15) × $300,000] = $240,000 (AD)
($300,000 – $240,000) = $60,000 (BV)
[$250,000 – ($60,000 ÷ 2)] × (1 – .3) = $154,000.
It is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption
of an asset that results from the assessment of the present status and expected future benefit and obligation
associated with the asset and liability.
=Change in accounting estimates
On January 1, 2013, Warren Co. purchased a P600,000 machine, with a five-year useful life and no salvage
value. The machine was depreciated by an accelerated method for book and tax purposes. The machine’s
carrying amount was P240,000 on December 31, 2014. On January 1, 2015, Warren changed to the straight
line method for financial reporting purposes. Warren can justify the change. Warren’s income tax rate is
30%.
In its 2015 income statement, what amount should Warren report as the cumulative effect of this change?
=P0
Solution:
Changes in depreciation method are considered changes in accounting estimates, thus treated as currently
and prospectively. No cumulative effect shall be computed nor recognized.
For the prior year , an entity estimated its two year equipment warranty cost based on a certain amount per
unit sold in the prior year. Experience during the current year indicated that the estimates should have been
higher than the previous year. The effect of these increase in the estimates is reported
=In income from continuing operations of the current year.
A change in amortization rate, such as on a copyright should be accounted for?
=prospectively
On January 1, year 1, Flax Co. purchased a machine for $528,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no salvage value. On January 1, year 4, Flax
determined that the machine had a useful life of six years from the date of acquisition and will have a
salvage value of $48,000. An accounting change was made in year 4 to reflect these additional data. The
accumulated depreciation for this machine should have a balance at December 31, year 4, of?
=$292,000
Solution
From 1/1/01 to 12/31/Y3, depreciation was recorded using an eight-year life. Yearly depreciation was
$66,000 ($528,000 ÷ 8), and accumulated depreciation at 12/31/Y1 was $198,000 (3 × $66,000). In year 4,
the esti mated useful life was changed to six years total with a sal vage value of $48,000. There fore, the
12/31/Y3 book value ($528,000 – $198,000 = $330,000) is depreciated down to the $48,000 salvage value
over a remaining useful life of three years (six years total – three years already recorded). Depreciation
expense for year 4 is $94,000 [($330,000 – $48,000) ÷ 3], increasing accumulated depreciation to $292,000
($198,000 + $94,000).
On January 1, 2009, Knapp Corporation acquired machinery at a cost of $250,000. Knapp adopted the
double-declining balance method of depreciation for this machinery and had been recording depreciation
over an estimated useful life of ten years, with no residual value. At the beginning of 2012, a decision was
made to change to the straight-line method of depreciation for the machinery. The depreciation expense
for 2012 would be?
=
$18,286
SOLUTION
{$250,000 – [($250,000 × .2) + ($200,000 × .2) + ($160,000 × .2)]} ÷ 7 = $18,286
A change from the straight line method of depreciations to an accelerated method shall be accounted for
as
=Change in accounting estimates.
During the current year, an entity increase the estimated quantity of copper recoverable from its mine . The
entity uses the units of production depletion method. As a result of the change, which of the following should
be reported in the entity financial statement?
=Chance in the accounting estimates.
A change in the residual value of an asset arising because additional information has been obtained is?
=An accounting change that should be reported in the period of change and future period
if the changed affects both.
Prospective recognition of the effect of a change in an accounting estimates means that the change is
applied to transaction from the?
=Beginning of the year of change.
On January 1, 2009, Hess Co. purchased a patent for $595,000. The patent is being amortized over its
remaining legal life of 15 years expiring on January 1, 2024. During 2012, Hess determined that the
economic benefits of the patent would not last longer than ten years from the date of acquisition. What
amount should be reported in the statement of financial position for the patent, net of accumulated
amortization, at December 31, 2012?
=$408,000
Solution:
Original cost of patent
Less: Accumulated amortization, 1/1/20Y4
Annual amortization
(P595,000/15 yrs)
39,666.67
Multiply by: Age
3 yrs
595,000.00
Carrying amount, 1/1/20Y4
Divide by: Remaining est. useful life
476,000.00
7 yrs
New annual amortization
68,000.00
Original cost of patent
Less: Accumulated amortization
Jan 1, 20Y1-Dec 31, 20Y3 119,000.00
Jan 1-Dec 31, 20Y4
68,000.00
595,000.00
Carrying amount, Dec 31, 20Y4
408,000.00
119,000.00
187,000.00
Per PAS 8, it is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities.
=Change in accounting estimate
When it is difficult to distinguish between a change in estimate and in accounting policy, then an entity
should
=Treat the entire change as a change in estimate with appropriate disclosure
Which statement is incorrect concerning accounting estimates?
=By its very nature , the revision of an estimates relates to a prior period and is a correction
of an error.
Which of the following is the proper time period in which to record a change in accounting estimates
=Current period and future period.
The effect of a change in accounting estimate shall be recognized currently and prospectively by
including it in income or loss of
I.
The period of change if the change effect that period only
II.
The period of hange and future period if the change affect both
=Both I and II
On January 1, year 1, Taft Co. purchased a patent for $714,000. The patent is being amortized over its
remaining legal life of fifteen years expiring on January 1, year 16. During year 4, Taft determined that the
economic benefits of the patent would not last longer than ten years from the date of acquisition. What
amount should be reported in the balance sheet for the patent, net of accumulated amortization, at
December 31, year 4?
=$489,600
Solution
This situation is a change in accounting estimate and should be accounted for currently and prospectively.
From 1/1/Y1 to 12/31/Y3, patent amortization was recorded using a fi fteen-year life. Yearly amortization
was $47,600 ($714,000 ÷ 15), accumulated amortization at 12/31/Y3 was $142,800 ($47,600 × 3), and the
book value of the patent at 12/31/Y3 was $571,200 ($714,000 – $142,800). Beginning in year 4, this book
value must be amortized over its remaining useful life of 7 years (10 years – 3 years). Therefore, year 4
amortization is $81,600 ($571,200 ÷ 7) and the 12/31/Y4 book value is $489,600 ($571,200 – $81,600).
Which of the following is characteristic of a change in an accounting estimates?
=It does not effect the financial statement of prior period.
On January 1, 2009, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the
straight-line method of depreciation for this machine and had been recording depreciation over an estimated
life of ten years, with no residual value. At the beginning of 2012, a decision was made to change to the
double-declining balance method of depreciation for this machine. The amount that Nobel should record as
depreciation expense for 2012 is?
=$120,000
SOLUTION
{($600,000 – [($600,000 ÷ 10) × 3]} ÷ 7 × 2 = $120,000.
The effect of a changes in the expected pattern of consumption of economic benefits of a depreciable
assets shall be?
=Included in the determination of income or loss in the period of change and future period.
In 2009, a firm changed from straight-line (SL) method of depreciation to double declining balance
(DDB). The firm’s 2008 and 2009 comparative financial statements will reflect method or methods
2008
2009
=SL
DDB
When an independent valuation expert advises an entity that the salvage value of its plant and machinery
had drastically changed and thus the change is material, the entity should?
=Change the annual depreciation for the current year and future years.
Which of the following is not correct regarding the provision of PAS 8?
=A change in depreciation method is classified as a change in accounting policy.
Which of the following statements is incorrect?
=
The historical cost of an asset when it is incurred or taken on is the value of the
consideration received to incur or take on the liability minus transaction costs.
All of the following statements are correct, except:
=Even if an item meeting the definition of an asset or liability is not recognised, an entity
may need not to provide information about that item in the notes.
It comprises operations and cash flow that can be clearly distinguished , operationally and
for financial reporting purposes from the rest of the entity
=Component of an entity
All of the following statements are correct, except:
=The amount at which an asset, a liability or equity is recognised in the statement of
financial position is referred to as its ‘carrying amount’ or “base amount”.
Current value measurement bases include:
=value in use for liabilities and fulfilment value for assets.
On October 1, 2016 Tom Company approved the disposal of its subsidiary. The sale of which was
expected to be completed by July of 2017.The following information in relation to the subsidiary is as
follows:
Jan 1 – Sep 30
Oct 1 – Dec 31
Revenues
17,500,000
7,500,000
Expenses
13,500,000
5,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2016 was P28,000,000 and the
fair value less cost to sell was P30,500,000.
The sale contract requires Tom Company to terminate certain employees and the expected cost is
estimated at P2,000,000. Income tax rate for 2016 is 30%
The amount reported as income (loss) from discontinued operations is
=3,150,000
Solution:
Revenues (P17.5M+P7.5M)
Less: Expenses (P13.5M+P5M)
Termination cost
25,000,000.00
18,500,000.00
2,000,000.00
20,500,000.00
Profit before tax
Less: Income tax (P4.5M x 30%)
4,500,000.00
1,350,000.00
Profit (loss) from discontinued operations
3,150,000.00
All of the following statements are correct, except:
=Compliance to the derecognition procedures is strict and without reservations.
The historical cost of an asset is updated over time to depict, if applicable, except:
=accrual of interest to reflect any investing component of the asset.
A component of an entity is classified as a discontinued operation
I.
II.
When the entity has actually disposed of the operation
When the operation meets the criteria to be classified as “held for sale”
=Both I and II
Which of the following statements is incorrect?
=In some cases, fair value can be determined directly by observing prices in an
inactive market.
Which of the following statements is incorrect?
=One way to apply a historical cost measurement basis to financial assets and financial
liabilities is to measure them at book value.
Booker Company committed to sell its comic book division (a component of the business) on September 1,
2009. The carrying amount of the division was P4,000,000 and the fair value was P3,500,000. The disposal
date is expected to be June 1,2010. The division reported an operating loss of P200,000 for the year ended
December 31, 2009. Ignoring income tax, what amount should be reported as loss from discounted
operation in 2009?
=700,000
All of the following statements are correct, except:
=In some cases, an entity might appear to transfer an asset or liability, but that asset or
liability might nevertheless remain an asset or liability of the entity, but nevertheless should be recognized.
The discontinued operations section of the Statement of Comprehensive Income is comprised of which one
of the following?
=Post-tax Income from the discontinued operation of the business segment and post-tax
gain or loss from the disposal of the discontinued operations or post-tax gain or loss from measurement to
realizable value of net assets.
On October 1, 2016 Tom Company approved the disposal of its subsidiary. The sale of which was
expected to be completed by July of 2017.The following information in relation to the subsidiary is as
follows:
Jan 1 – Sep 30
Oct 1 – Dec 31
Revenues
17,500,000
7,500,000
Expenses
13,500,000
5,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2016 was P28,000,000 and the
fair value less cost to sell was P30,500,000.
The sale contract requires Tom Company to terminate certain employees and the expected cost is
estimated at P2,000,000. Income tax rate for 2016 is 30%
The amount reported as income (loss) from discontinued operations is
=3,150,000
Solution:
Revenues (P17.5M+P7.5M)
Less: Expenses (P13.5M+P5M)
Termination cost
25,000,000.00
18,500,000.00
2,000,000.00
20,500,000.00
Profit before tax
Less: Income tax (P4.5M x 30%)
4,500,000.00
1,350,000.00
Profit (loss) from discontinued operations
3,150,000.00
Which of the following statements is incorrect?
=Current value accounting is also discounted value accounting.
The following measurement bases are to be used, except:
=Replacement value and time value of money
Which of the following statements is incorrect?
=The historical cost of an asset when it is incurred or taken on is the value of the
consideration received to incur or take on the liability minus transaction costs.
Which of the following is a requirement for a component of an entity to be classified as a discontinued
operation?
=It must have been cash generating units while being held for use
Which is incorrect concerning the presentations of the discontinued operations in the statements of financial
positions?
=sset of the component held for sale are measured at the higher of fair value less cost to
sell and their carrying amount
An entity manufacture and sell household products . The entity experienced losses associated with its small
appliance group. Operations and cash flow for this group can be clearly distinguished from the rest of the
entity operations . The entity plans to sell the small appliance group with its operations . What is the earliest
point at which the entity shall report the small appliance group as a discontinued operations.
=When the entity classifies it as held for sale
On November 1, 2016, management of Myto Corporation committed to a plan to dispose of Timms
Company, a major subsidiary. The disposal meets the requirements for classification as discontinued
operations. The carrying value of Timms Company was P8,000,000 and management estimated the fair
value less costs to sell to be P6,500,000. For 2016, Timms Company had a loss of P2,000,000. How much
should Myto Corporation present as loss from discontinued operations before the effect of taxes in its
income statement for 2016?
=P3,500,000
Solution:
Operating loss
Impairment loss (P8M-P6.5M)
-2,000,000.00
-1,500,000.00
Profit (loss) from discontinued operations
-3,500,000.00
The following statement relate to a discontinue operation .Which statement is true?
I.
When the discontinue criteria are met after the date of the reporting period , the
operations shall retrospectively be separately presented as a discontinue operations
II.
The net cash flow attributable to the operating investing , and financing activities
of a discontinue operations shall be separately presented.
=II only
Which of the following is a discontinued operation?
=Both (b) and (c) above
b. An entity has three machines located in one plant. Each machine produces a completely different product
and each machine is managed as a separate business unit. The entity significantly scales down its
operations by disposing of one of the machines and in doing so discontinues manufacturing one of its three
products.
c. An entity has three plants that all produce the same product. Each plant is located in a separate continent
and sells its output to customers local to the plant in which the product is manufactured. The entity scales
down its operations by disposing of one of the plants.
The historical cost of a liability is updated over time to depict, if applicable, except:
=accrual of interest to reflect any investing component of the liability.
A discontinued operations is a component of an entity that either has been disposed of or is classified as
held for sale and
I.
Represents a separate major line of business or geographical area of operations.
II.
Is a Part of a single co- ordinate plan to dispose of a separate major line of business or business or
geographical area of operations.
III. Is a subsidiary acquire exclusively with a view to resale.
.
=I, II and III
What is the presentation of the results from discontinued operation in the income statements?
=The entity shall disclose a single amount on the face of the income statement with
analysis in the notes or a sections of the income statement separate from continuing operations
Enron Company decided on August 1, 2009 to dispose of a component of its business. The component
was sold on November 30, 2009. Enron’s income for 2009 included income of P5, 000,000 from operating
the discontinued segment from January 1 to the sale date. Enron incurred a loss on the November 30 sale
of P4, 500,000. Ignoring income tax, what amount should be reported in the 2009 income statement as
income or loss under “discontinued operation”?
=500,000 income
Solution:
Income from operations
Loss on sale
5,000,000.00
-4,500,000.00
Income (loss) on discontinued operations
500,000.00
A discontinued operation is defined as
=
Derivative
On September 30, 2009, when the carrying amount of the net assets of a business segment was P70,
000,000, Young Company signed a legally binding contract to sell the business segment. The sale is
expected to be completed by January 31, 2010 at selling price of P60, 000,000. In addition, prior to January
31, 2010 the sale contract obliges Young Company to terminate the employment of certain employees of
the business segment incurring an expected termination cost of P2, 000,000 to be paid on June 30, 2010.
The segment’s revenue and expenses for 2009 were P40, 000,000 and P45, 000,000 respectively. Before
income tax, how much will be reported as loss from discontinued operation for 2009?
=17,000,000
Solution:
Segment revenue
Less: Segment expenses
Impairment loss
(P70,000,000-P60,000,000)
Termination cost
40,000,000.00
45,000,000.00
10,000,000.00
2,000,000.00
Profit (loss) from discontinued operations
57,000,000.00
-17,000,000.00
A component of an entity is classified as a continue operations
I.
II.
When the entity has actually disposed of the operations
When the operations meets the criteria to be classified as “ held” for sale.”
=Either I or II
All of the following statements are correct, except:
=Recognition of a particular asset or liability and any resulting income, expenses or
changes in equity must always provide relevant information
Which of the following criteria does not have to be met in order for an operations to be classified as
discontinued
=he operations must be sold within three months of the year - end
A change in the measurement basis is?
=A change in accounting policy.
Jacob, Inc., changed from the average cost to the FIFO cost flow assumption in 2012. the increase in
the prior year`s income before taxes is €1,100,000. The tax rate is 35%. Jacob’s 2012 journal entry to
record the change in accounting policy will include.
=
a credit to deferred Tax Liability for €385,000
Solution:
Cumulative inventory on inventory
Tax effect on cumulative effect (800,000 x 30%)
800,000.00
-240,000.00
Net adjustment in retained earnings
560,000.00
When the public share holder entity change an accounting policy voluntarily , it has to
=Account for it retrospectively.
During 2011, Eden Company made the following accounting policy changes:


Change from straight-line method to the declining balance method of depreciation for its
manufacturing equipment. The equipment was acquired on January 1, 2009 for P1,200,000;
expected useful life of 10 years with no expected residual value.
Change from completed contract to percentage of completion with respect to a specially made unit
for a contract price of P750,000. The total estimated cost of manufacturing the unit remained the
same at P400,000 since Eden Company started on the project in 2009. Cost incurred for 2009,
2010 and 2011 were P120,000, 180,000 and P100,000 respectively.
The adjustment to the opening balance of the retained earnings as shown in the 2011 statement of
changes in equity as a result of the above-mentioned changes in accounting policy is
=262,500
Solution:
Cost incurred, 2009
Cost incurred, 2010
120,000.00
180,000.00
Cost incurred to date
300,000.00
Contract price
Less: Total estimated cost
750,000.00
400,000.00
Gross profit
Multiply by: Ratio
350,000.00
300K/400K
Realized gross profit to date
Less: Income, cost recovery, to date
262,500.00
0.00
Net change in retained earnings
262,500.00
Ana Inc. changes its method of valuation of inventories from weighted-average method to first-in, firstout (FIFO) method. Ana Inc. should account for this change as?
=A change in accountancy policy and account for it retrospectively.
Denny Company completed construction of its warehouse on January 1, 2008 at a cost of P2,000,000.
Denny Company uses the cost model as its accounting policy. The warehouse was to be depreciated
under the straight-line method over useful period of 10 years with no expected residual value.
On January 1, 2011 Denny Company changes its accounting policy in the measurement of its
warehouse from cost model to revalued model. The following information was derived from the
independent appraiser hired by Denny Company: (a) no changes in the original useful life of the
warehouse; (b) the expected residual value remains at P0; (c) sound value of the warehouse on
January 1, 2010 and January 1, 2011 were computed as P2,236,500 and P2,520,000.
The depreciation expense for 2010 in the 2011 comparative income statement is
=200,000
Solution:
Original cost
Divide by: Estimated useful life
2,000,000.00
10 yrs
Annual depreciation
200,000.00
Philippine Accounting Standard 8 requires
=
The reporting of the cumulative effect of a change in accounting policy as a direct adjustment to
beginning retained earnings in the year of the change.
Per PAS 8, these are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
=Accounting policies
Iceman Corporation began operations in 2010. The company has been using the first-in, first-out
method in costing its raw materials. However, during 2012, Iceman Corporation decided to change to
average costing method. Inventory balances under each method were as follows:
December 31, 2010
December 31, 2011
December 31, 2012
FIFO
P 490,000
P 438,000
P 576,000
Average
465,000
374,000
482,000
In its 2012 statement of changes in retained earnings, Iceman Corporation should report a cumulative
effect of this accounting change of
=P64,000
Solution:
Dec 31, 2011, FIFO
Dec 31, 2011, Average
438,000.00
374,000.00
Understatement in Dec 31, 2011 Inventory
64,000.00
During 2015, Orca Corp. decided to change from the FIFO method of inventory valuation to the weightedaverage method. Inventory balances under each method were as follows:
January 1, 2015
December 31, 2015
Orca’s
FIFO
P71,000
P79,000
income
tax
Weighted-average
P77,000
P83,000
rate
is
30%.
In its 2015 financial statements, what amount should Orca report as the gain or loss on the cumulative
effect of this accounting change?
=P0
Solution:
Proceeds from borrowings from bank
Payment of dividends
Proceeds from issuance of common stock
Repayment of bank loan
1,250,000.00
-1,200,000.00
500,000.00
-900,000.00
Net cash flow from financing activities
-350,000.00
Which among the following conditions results in a misleading comparison?
=Changes in the nature on the underlying transactions are not disclosed.
On January 1, 2011, Frost Corp. changed its inventory method to FIFO from average cost for both
financial and income tax reporting purposes. The change resulted in an $800,000 increase in the
January 1, 2011 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect
of the accounting change should be reported by Frost in its 2011
=retained earnings statement as a $560,000 addition to the beginning balance.
Solution:
Cumulative inventory on inventory
Tax effect on cumulative effect (800,000 x 30%)
800,000.00
-240,000.00
Net adjustment in retained earnings
560,000.00
A change of accounting policy includes
I.
Adoption of an accounting policy for events or transactions that differ in substance from
previously occurring event or transactions.
II. The adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial
=Neither I nor II
On January 1, 2009, Philemon Company purchased heavy duty equipment for P 4,000,000. On the
date of installation, it was estimated that the equipment has a useful life of 10 years and a residual
value of P 400,000.
On January 1, 2009, the entity decided to review the useful life of the equipment and its residual value
and technical experts were consulted. The experts have determined that the useful life of the equipment
was 12 years from the date of acquisition and its residual value was P460,000.
The depreciation of the equipment for 2009 is
=262,500
An accounting estimate may be revised
=if changes occur regarding the circumstances on which the estimate was based.
On January 1, 2009, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the
straight-line method of depreciation for this machine and had been recording depreciation over an
estimated life of ten years, with no residual value. At the beginning of 2012, a decision was made to
change to the double-declining balance method of depreciation for this machine. Assuming a 30% tax
rate, the cumulative effect of this accounting change on beginning retained earnings, is?
=$0.
SOLUTION
$0, No cumulative effect; handle prospectively.
How should the effect of a change in accounting estimates be accounted for?
=In the period of change and future period if the changed affects both.
The effect of a change in an accounting estimate shall be recognized prospectively by including it in
profit or loss in:
=The period of the change, if the change affects that period only.
When it is difficult to distinguish between a change in estimate and in accounting policy, then an entity
should
=Treat the entire change as a change in estimate with appropriate disclosure
When an independent valuation expert advises an entity that the residual value of its plants and
machinery had drastically change and the change is material , the entity shall
=Change the annual depreciations for the current year and future year.
If a change in accounting estimates affects balance sheet items, PAS 8 Accounting Policies, Changes
in Accounting Estimates, and Errors, requires that the following disclosures be made:
I.
The nature of the change.
II. The amount of the change that has an effect in the current period.
III. The amount of the change that affects future periods.
IV.
The effect of the change on comparative numbers.
=I, II and III only.
A change in the unit depletion rate would be accounted for as a
=
Change in accounting estimates.
Prospective recognition of the effect of a change in an accounting estimates means that the change is
applied to transaction from the?
=Date of the change in estimates.
On January 1, 2013, Bray Company purchased for P240,000 a machine with a useful life of ten years
and no salvage value. The machine was depreciated by the double declining balance method and the
carrying amount of the machine was P153,600 on December 31, 2014. Bray changed to the straightline method on January 1, 2015. Bray can justify the change. What should be the depreciation expense
on this machine for the year ended December 31, 2015?
=P19,200
Solution:
Carrying amount, Jan 1, 2015
Divide by: Remaining est. useful life
153,600.00
8 yrs
New annual depreciation
19,200.00
During 2009, Titus Company decided to change from the FIFO method of inventory valuation to
the weighted average method. Inventory balances under each method were as follows:
FIFO
7,100,000
7,900,000
January 1
December 31
Weighted Average
7,700,000
8,300,000
Ignoring income tax, in its 2009 statement of retained earnings, what amount should Titus report as the
cumulative effect of this accounting change?
=600,000 addition
Solution:
January 1 at Weighted Average
January 1 at FIFO
7,700,000.00
7,100,000.00
Understatement in retained earnings
600,000.00
Addition
On November 1, 2011 Romans Company approved the disposal of its subsidiary. The sale of
which was expected to be completed by March of 2012.
The following information in relation to the subsidiary is as follows:
Revenues
Expenses
January 1 – October 30
8,500,000
7,500,000
November 1 – December 31
2,500,000
3,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was P18,000,000 and
the fair value less cost to sell was P16,000,000.
The sale contract requires Romans Company to terminate certain employees and the expected
cost is estimated at P1,000,000.
The amount reported as income (loss) from discontinued operations is
=(2,500,000)
Solution:
Revenues (P8.5M+P2.5M)
Less: Expenses (P7.5M+P3M)
Impairment loss (P18M-P16M
Termination cost
Net income (loss) before tax
11,000,000.00
10,500,000.00
2,000,000.00
1,000,000.00
13,500,000.00
-2,500,000.00
On the Statement of Comprehensive Income, income from discontinued operations is shown
=As a separate item after income from continuing operations, net of income tax
On November 1, 2011 Romans Company approved the disposal of its subsidiary. The sale of
which was expected to be completed by March of 2012.
The following information in relation to the subsidiary is as follows:
Revenues
Expenses
January 1 – October 30
8,500,000
7,500,000
November 1 – December 31
2,500,000
3,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was P18,000,000 and
the fair value less cost to sell was P16,000,000.
The sale contract requires Romans Company to terminate certain employees and the expected
cost is estimated at P1,000,000.
The amount reported under “disposal group held for sale” in Romans Company’s December 31, 2011
statement of financial position is
=16,000,000
On October 1, 2011 Acts Company approved the disposal of its subsidiary. The sale of which was
expected to be completed by July of 2012.
The following information in relation to the subsidiary is as follows:
January 1 – September 30
October 1 – December 31
Revenues 17,500,000
7,500,000
Expenses 13,500,000
5,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was P28,000,000 and
the fair value less cost to sell was P30,500,000.
The sale contract requires Acts Company to terminate certain employees and the expected cost is
estimated at P2,000,000. Income tax rate for 2011 is 30%
The amount reported as income (loss) from discontinued operations is
=3,150,000
Solution:
Revenues (P17.5M+P7.5M)
Less: Expenses (P13.5M+P5M)
Termination cost
25,000,000.00
18,500,000.00
2,000,000.00
20,500,000.00
Income before tax
Less: Income tax (P4.5M x 30%)
4,500,000.00
1,350,000.00
Income (loss) from discontinued operations
3,150,000.00
PAS 1 precludes an entity to present or classify this account as current in the statement of financial position.
=Deferred tax assets
The asset section of Anne Company’s draft statement of financial position as of December 31,
2011 is as follows:
Cash and cash equivalents
1,200,000
Trade and other receivables
800,000
Inventory
700,000
Deferred tax asset
600,000
Land held for sale
140,000
Property, plant and equipment
2,100,000
Intangible assets
300,000
Goodwill
500,000
Financial assets at fair value - through profit or loss
650,000
Financial assets at fair value – through comprehensive income
600,000
Financial assets at amortized cost
750,000

The cash and cash equivalents balance was net of a P300,000 overdraft in its PNB account. Anne
Company does not have any other account in PNB. Furthermore, treasury bonds amounting to
P400,000 were included in the above-mentioned balance. These bonds were acquired on July 1,
2011 and had a scheduled maturity date of February 1, 2012. Lastly, a sinking fund amounting to
120,000 was included in this balance. Anne Company set up the fund in settlement of its bond
issuances in October 1, 2011 in which P60,000 will mature in September 30, 2012 and September
30, 2013 respectively.

Anne Company’s income statement includes 800,000 of revenue for credit sales made on a ‘sale
or return’ basis. At December 31, 2011, customers who had not paid for the goods, had the right to
return P195,000 of them. Anne Company applied a mark up on cost of 30% on all these sales. In
the past, Anne Company’s customers have sometimes returned goods under this type of
agreement.

Inventories include goods costing P120,000 from Zen Company which were received on
consignment

The land held for sale account is in relation to a plot of land in Manila which Anne Company is
committed to sell within the next 8 months. At December 31, 2011, the fair value of the property
was P155,000 while the related cost to sell it amounted to P25,000.

The financial assets at fair value through profit or loss include listed shares acquired by Anne
Company in late September at P620,000. The gain of P30,000 was included in Anne Company’s
profit or loss statement

The financial assets at fair value through comprehensive income include listed shares acquired by
Anne Company in early February of 2011. The loss of P20,000 was included in Anne Company’s
comprehensive income statement.

The financial assets at amortized cost represent Anne Company’s investment in Xenon Company’s
8% 5-year term bonds dated July 1, 2009.
The amount reported as non-current assets in Anne Company’s December 31, 2011 statement of
financial position
=4,910,000
Solution:
Deferred tax asset
Property, plant and equipment
Intangible assets
Goodwill
Financial assets at fair value-through other comprehensive income
Financial assets at amortized cost
Bond sinking fund-noncurrent portion
600,000.00
2,100,000.00
300,000.00
500,000.00
600,000.00
750,000.00
60,000.00
Total noncurrent assets
4,910,000.00
An asset shall be classified as current asset when it satisfies any of the following criteria, except
=It is cash or cash equivalent that is restricted from being exchanged or used to settle a
liability for at least twelve months after the balance sheet date
The accounts and balances below were taken from Minnie Company’s trial balance on December 31, 2012.
All appropriate adjusting entries have been made.
Cash overdraft
50,000
Accounts payable and accrued expenses
80,000
Current tax payable
120,000
6% note; due date 2/1/13
170,000
8% note; due date 2/1/13
210,000
Deferred tax liability
270,000
8% serial bonds, P50,000 maturing annually
200,000
Provision for employee benefits
120,000
Dividends payable (distributable)
60,000
5% loan payable – December 31, 2016
1,000,000
Additional information in relation to the reported liabilities:


The 6% note was refinance on January 14, 2013, in which Minnie Company and BDO Financial
signed a new loan facility that expires in three years.
The 8% note includes a provision that grants Minnie Company full discretion to refinance the
obligation. On January 15, 2013, Minnie Company and MBTC Financial signed a new loan facility
that expires in three years
The amount reposted as current liabilities in the December 31, 2012 balance sheet
=650,000
Solution:
Cash overdraft
Accounts payable and accrued expenses
Current tax payable
6% note, due 2/1/13
Current portion of 8% serial bonds
Provision for employee benefits
Dividends payable (distributable)
50,000.00
80,000.00
120,000.00
170,000.00
50,000.00
120,000.00
60,000.00
Current liabilities
650,000.00
For the purpose of stating the working capital of Mukherjee Corporation on December 31,2013, the
following data are submitted:
Cash on hand and in bank, net of bank of overdraft of P5,000s
P136,000
Petty cash(unreplenished petty cash expense, P400)
1,000
Accounts receivable, including discounted accounts with credit balance of
P10,000
110,000
Merchandise inventory, including goods held on consignment of P18,000
148,000
Prepaid expenses
9,000
Total current assets
P399,000
Accounts payable, including accounts with debit balance o f P5,000
Notes payable in annual instalment at P100,000 payable every May 31
Accrued expenses
Total current liabilities
P60,000
200,000
8,000
P268,000
How much is the total current liability of Mukherjee Corp. or December 31, 2013?
=P178,000
Solution:
Accounts payable, adj (P60,000+P5,000)
Bank overdraft
Current portion of note payable
Accrued expenses
65,000.00
5,000.00
100,000.00
8,000.00
Total current liabilities
178,000.00
The following information provided by Maricar Company in preparing this year’s comprehensive income
statement:
Sales
8,000,000
Cost of sales
4,200,000
Depreciation and amortization expense
700,000
Employee benefit expense
900,000
Impairment of property, plant and equipment
200,000
Finance costs
800,000
Share of profit of associates
Translation
loss
on
foreign1,200,000
operations
Loss on sale of financial500,000
instruments held for
trading
300,000
Gain on sale of available-for-sale
securities
Remeasurement gains on trading450,000
securities
Remeasurement
gains
on400,000
available for sale
securities
300,000
Actuarial loss on employee
benefits
100,000
Reduction of revaluation surplus as
a result of
a devaluation
200,000
Derivative gains on call options
(speculation)
Gain
on
forward
contract100,000
designated as a cash
flow hedge
150,000
The amount included in the other comprehensive income of the current year’s comprehensive income
statement is
=(350,000)
Solution:
Translation loss on foreign operations
Remeasurement gains on available for sale securities
Actuarial loss on employee benefits
Reduction of revaluation surplus as a result of a devaluation
Gain on forward contract designated as a cash flow hedge
-500,000.00
300,000.00
-100,000.00
-200,000.00
150,000.00
Net Gain (Loss)-OCI
-350,000.00
Box Company provided the following information during the current year.
Dividend
500,000
Proceeds from sale 2,000,000
received
of
long-term
investments
Dividend paid
1,000,000 Cash
paid
to 6,000,000
suppliers
and
employees
Cash received 9,000,000 Interest paid on long 400,000
from customers
term debt
Proceeds from 1,500,000 Income taxes paid
300,000
issuing
share
capital
Interest received 200,000
Cash balance, Jan 1 1,800,000
What is the net cash provided by operating activities for the current year?
=3,000,000
Solution:
Cash received from customers
Cash paid to suppliers and employees
Dividend received
Interest paid on long-term debt
Income taxes paid
Interest received
9,000,000.00
-6,000,000.00
500,000.00
-400,000.00
-300,000.00
200,000.00
Net cash provided by operating activities
3,000,000.00
An entity was incorporated on January 1, 2015 with proceeds from the issuance of P7,500,000 in shares
and borrowed funds of P1,100,000. During the first year of operations, revenue from sales and
consulting amounted to P820,000, and operating costs and expenses totaled P640,000. On December
15, the entity declared a P30,000 cash dividend, payable to shareholders on January 15, 2016. No
additional activities affected owners’ equity in 2015. The liabilities increased to P1,200,000 by
December 31, 2015. What amount should be reported as total assets on December 31, 2015?
=8,850,000
Liabilities
1,200,000
Share capital
Retained earnings
Total liabilities and equity
7,500,000
150,000
8,850,000
Revenue from sales and consulting
820,000
Operating costs and expenses
Net income
Dividend declared
Retained earnings
( 640,000)
180,000
( 30,000)
150,000
The financial statement that presents an entity’s assets, liabilities and equity at a point in time
=could be titled the statement of financial position, the balance sheet or any other title that
is not misleading
The following trial balance of Robertson Co. at December 31, 2009 has been adjusted except for
income tax expense.
Debit
Cash
P 825,000
Accounts receivable
2,475,000
Prepaid taxes
525,000
Credit
Accounts payable
P180,000
Share capital
750,000
Share premium
450,000
Retained earnings
945,000
Revenues
5,400,000
Expenses
3,900,000
_________
P7,725,000
P7,725,000
During 2009, estimated tax payments of P525,000 were charged to prepaid taxes. Robertson had not
yet recorded income tax expense. There were no differences between financial statement and income
tax income, and Robertson’s tax rate is 35%. Included in accounts receivable is P750,000 due from a
customer. Special terms granted to this customer require payment in equal semi-annual installments
of P187,500 every April 1, and October 1.
In Robertson’s December 31, 2009 balance sheet, what amount should be reported as total current assets?
=P2,925,000
Solution:
Cash
Accounts receivable
Less: Noncurrent portion of long-term receivable
(P750,000/P187,500 = 4; P187,500 x 2)
825,000.00
2,475,000.00
Total current assets
2,925,000.00
-375,000.00
The current sections of the unadjusted statement of financial position of Baguio Company on
December 31, 2019 were as follows:
Cash
Accounts receivable
Inventory
Prepaid expenses
Trade accounts payable, net of debit balance
of P50,000
Interest payable
Income tax payable
Money claims of the union, pending final
decision
Mortgage payable, due in 4 annual
installments
2,000,000
3,000,000
1,900,000
100,000
2,450,000
150,000
300,000
500,000
2,000,000
A review showed that the cash balance of P2,000,000 included a customer’s check amounting to
P100,000 returned by the bank marked NSF, an employee IOU of P50,000, and P200,000 deposited
with the court for a case under litigation. The cash in bank portion of P1,650,000 is the balance per
bank statement. On December 31, 2019, outstanding checks amounted to P250,000. The accounts
receivable included the following:
Customer’s debit balance
Advance to subsidiary
Advances to suppliers
Receivable from officers
Allowance for doubtful accounts
Selling price of merchandise invoiced at 120%
of cost, not yet delivered and excluded from
ending inventory
1,600,000
400,000
200,000
300,000
(100,000)
600,000
What amount should be reported as total current assets on December 31, 2019?
=6,100,000
Solution:
Cash, adjusted
Cash, unadjusted
NSF Check
Employee IOU
Cash deposit in court
Outstanding checks
2,000,000.00
-100,000.00
-50,000.00
-200,000.00
-250,000.00
1,400,000.00
Accounts receivable, adjusted
Accounts receivable, unadjusted
Advance to subsidiary
Advances to suppliers
Receivable from officers
Undelivered merchandise
NSF Check
3,000,000.00
-400,000.00
-200,000.00
-300,000.00
-600,000.00
100,000.00
1,600,000.00
Receivable from officers
Advances to suppliers
Suppliers' debit balance
Advances to employees (Employee IOU)
Inventory, adjusted
Inventory, unadjusted
Undelivered merchandise
(P600,000/120%)
300,000.00
200,000.00
50,000.00
50,000.00
1,900,000.00
500,000.00
2,400,000.00
Prepaid expenses
100,000.00
Total current assets
6,100,000.00
The accounts and balances were taken from Disneyland Company’s adjusted trial balance on
December 31, 2019.
Inventory
Investment in subsidiary
Cash and cash equivalents
Patents
Prepaid rent
Sinking fund asset
FVTPL Securities
Machineries and Equipment
Allowance for doubtful accounts
Goodwill
Available for sale securities
Land held for future business site
Land “held for sale”
Deferred tax asset
Trade and other receivables (assigned
accounts 170,000)
Cash surrender value of life insurance
Accumulated Depreciation – M & E
170,000
220,000
100,000
110,000
120,000
130,000
140,000
890,000
40,000
200,000
150,000
300,000
250,000
280,000
450,000
90,000
390,000
The amount reported as non-current assets in the December 31, 2019 Statement of Financial Position is
=1,980,000
Solution:
Machineries and Equipment
Less: Accumulated depreciation - M & E
890,000.00
390,000.00
500,000.00
Patents
Available for sale securities
Investment in subsidiary
Sinking fund asset
Land held for future business site
Cash surrender value of life insurance
Deferred tax asset
Goodwill
110,000.00
150,000.00
220,000.00
130,000.00
300,000.00
90,000.00
280,000.00
200,000.00
Total noncurrent assets
1,980,000.00
Which of the following is the correct accounting treatment of a
which is part of loan agreement
with the bank?
I.
reported as other current asset if the restriction is less than one year.
II.
reported as part of cash, if no restrictions imposed.
=I and II are correct
You are given the following information which may be relevant to the computation of the cash balance of
Bella Corporation on December 31, 2009:
·
Two checks for P125,000 were received in December from a customer for payment of its P125,000
account balance. One of the checks was returned in January.
·
A check was received and deposited for P175,000 in December. The check was returned by the
bank in January marked “NSF”.
·
A check from a customer for P87,000, was received and deposited in December. In January it was
discovered that it was in payment of an invoice in the amount of P78,000. A check for P9,000 was issued
and mailed by the company to the customer.
Using the above data, what is the total amount to be included in the cash balance for purpose of the
December 31, 2009 balance sheet?
=P387,000
Solution:
Checks
125,000.00
175,000.00
87,000.00
Cash balance, Dec 31, 2009
387,000.00
The cash balance reported in the balance sheet normally will not include:
=temporary investments due in one year.
Which of the following is/are to be included in the cash balance for financial reporting?
I. un-deposited cash collections
II. 4 months’ time deposit in the bank
=Only I
Cookie Company is negotiating a loan with Excel Bank. Cookie needs P3,600,000. As part of the loan
agreement, Excel Bank will require Cookie to maintain a compensating balance of 15% of the loan amount
on deposit in a checking account at the bank. Cookie currently maintains a balance of P200,000 in the
checking account. The interest rate Cookie is required to pay on the loan is 12%. Excel Bank pays 1%
interest on checking accounts. The amount of the loan is?
=P4,000,000
Solution:
Required proceeds
Less: Existing compensating balance
3,600,000.00
200,000.00
Net proceeds
Divide by: (100% - 15% required compensating balance)
3,400,000.00
85%
Required loan amount
4,000,000.00
For financial reporting, which of the following should be included as cash equivalent?
=Investment in preferred shares of X corp., acquired 2 months before stipulated
redemption date
AGOO Corp. is sourcing for fund for its project. It will need P1,125,000 to finance the project that will take
2 years to complete construction. Aringay bank is offering a 12% loan package that will require 10%
compensating balance which will earn 5%. What is the effective interest on the loan?
=12.78%
Solution:
Interest Payment (1,125,000 x 12%)
Compensating Balance (1,125,000 x 10%)
Interest Income on Compensating Balance (112,500 x 5%)
135,000.00
112,500.00
5,625.00
Net interest (135,000-5,625)
Divide by: Net proceeds (1,125,000 - 112,500)
129,375.00
1,012,500.00
Effective interest
12.78%
The cash account in ABC Company’s ledger showed a balance at December 31, 2019 of P4,415,000 which
consisted of the following:
Petty cash fund
Undeposited receipts, including a postdated customer check for P70,000
Cash in Allied Bank, per bank statements, with a check for P40,000 still outstanding
Bond sinking fund - cash
Vouchers paid out of collections, not yet recorded
IOUs signed by employees, taken from collections
24,000
1,220,000
2,245,000
850,000
43,000
33,000
4,415,000
At what amount should cash be reported in the December 31, 2019 statement of financial position?
=3,379,000
Solution:
Petty cash fund
Undeposited receipts, adjusted (1,220,000 - 70,000)
Cash in Allied Bank, adjusted (2,245,000 - 40,000)
24,000.00
1,150,000.00
2,205,000.00
Total cash
3,379,000.00
Deposits held as compensating balances
I.
usually don’t earn interest
II.
If legally restricted but held against short term credit may be included as part of cash
III. If legally restricted but held against long term credit may be included as other current assets.
=All the above statements are not correct
Burr Company had the following account at December 31, 2019:
Cash in Bank
Cash on hand
Cash restricted for addition to plant (expected to be disbursed in 2020)
2,250,000
125,000
1,600,000
Cash in bank includes P600,000 of compensating balance against short term borrowing arrangement. The
compensating balance is not legally restricted as to withdrawal by Burr. In the current assets section of
Burr’s December 31, 2019 statement of financial position, total cash should be reported at
=2,375,000
Solution:
Treasury bills, purchased 2 months before maturity
Cash (coins, currency and savings account)
Commercial papers
2,000,000.00
3,400,000.00
1,500,000.00
Cash and cash equivalent
6,900,000.00
The cash account in the current assets section of the statement of financial position of Tawiran Company
consisted of the following:
Bond sinking fund cash
Checking account in FEBTC (A P320,000 check is still outstanding per bank statement )
Currency and coins awaiting deposit
Deposit in a bank closed by BSP
Petty cash fund (of which P10,000 in is the form of paid vouchers)
Receivable from officers and employees
1,500,000
3,155,000
1,135,000
500,000
50,000
175,000
6,515,000
The correct cash balance should be?
=4,330,000
Solution:
Checking account in FEBTC*
Currency and coins
Petty cash fund, adjusted (50,000 - 10,000)
3,155,000.00
1,135,000.00
40,000.00
Correct cash balance
4,330,000.00
* Outstanding check already recorded by bank
Ral Company’s checkbook balance on December 31, 2019 was P5, 000, 000. In addition,
following items in its safe on that date:
Check payable to Ral, dated January 2, 2020 in payment of a sale made in
December 2019, not included in December 31 checkbook balance
Check payable to Ral, deposited December 31 checkbook balance, but returned
by bank on December 30 stamped “NSF.” The check was redeposited on January
2, 2020 and cleared on January 9, 2020
Check drawn on Ral’s account, payable to a vendor, dated and recorded in Ral’s
books on December 31, 2019 but not mailed until January 10, 2020
Ral held the
2,000,000
500,000
300,000
The proper amount to be shown as “cash” on December 31, 2019 should be?
=4,800,000
Solution:
Checking accounts at Second Bank
Payroll account
Value added tax account
Traveler's check
Petty cash fund, adjusted
Money order
3,500,000.00
500,000.00
400,000.00
300,000.00
20,000.00
180,000.00
Total unrestricted cash
4,900,000.00
Solution:
Checkbook, unadjusted balance
NSF Check
Undelivered check
5,000,000.00
-500,000.00
300,000.00
Adjusted cash balance
4,800,000.00
Dasol Company reported a total unadjusted cash and cash equivalent of P6,325,000 on December 31,
2013, which includes the following information:
a)
Two certificates of deposits, each totalling P500,000. These certificates of deposit have a maturity
of 60 days.
b)
A check that is dated January 12, 2014 in the amount of P125,000.
c)
A commercial paper of P2,100,000 which is due in 120 days.
d)
Currency and coins on hand amounted to P7,700.
Dasol Company has agreed to maintain a cash balance of P500,000 in one of its bank at all times and
it is not available for withdrawal and to ensure future credit availability (this amount was included in the
above balance). How much is the adjusted “cash” balance of Dasol Company as of December 31,
2013?
=P2,600,000
Solution:
Unadjusted cash and cash equivalent
Less: Certificates of deposits (P500K x 2)
Post-dated check
Commercial paper
Restricted maintaining balance
6,325,000.00
1,000,000.00
125,000.00
2,100,000.00
500,000.00
Adjusted cash
3,725,000.00
2,600,000.00
Bank overdraft
=which cannot be offset is classified as current liability
Which of the following should be reported at expected recoverable insured amount of deposit?
=Deposit in financially distressed bank
Cash in bank balance of William Co. on January 1, 2009 was P70,000 representing 35% paid-up Capital
of its authorized share capital of P200,000. During the year you ascertained the following postings to some
accounts, as follows:
Petty cash fund
Accounts receivable trade
Subscription receivable
Delivery equipment
Accounts payable trade
Bank loan
Accrued expenses
Subscribed share capital
Unissued share capital
Authorized share capital
Sales
Purchases
Expenses (including depreciation of P5,000 and accrued expenses of P1,500)
Debit
P 2,000
450,000
60,000
50,000
280,000
35,000
130,000
430,000
90,000
Cash in bank balance at December 31, 2009 was?
=39,500.00
Solution:
Cash in bank, Jan 1, 2009
Establishment of petty cash fund
Collections from customers
Collections from subscription
Purchase of delivery equipment
Payment to suppliers
Proceeds from bank loan
Repayment of bank loan
Payment of expenses (90.000-5,000-1,500)
70,000.00
-2,000.00
290,000.00
50,000.00
-50,000.00
-280,000.00
80,000.00
-35,000.00
-83,500.00
Cash in bank, Dec 31, 2009
39,500.00
Which of the following is not part of cash to be reported in the financial statement?
I.
Check collection that could not be presented for encashment until the date specified
on its face.
II.
Postdated check drawn by the reporting entity
=Only I is correct
Which of the following is not considered cash for financial reporting purposes?
=postdated checks and IOUs
On December 31, 2009, Alfonso Company had the following cash balances:
Cash in bank
Petty cash fund
Time deposit
Saving deposit
P15,000,000
50,000
5,000,000
2,000,000
Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at
December 31, 2009. The compensating balance is legally restricted as to withdrawal by Alfonso. A check
of P300,000 dated January 15, 2010 in payment of accounts payable was recorded and mailed on
December 31, 2009. In the current assets section of the December 31, 2009 balance sheet, what amount
should be reported as “cash and cash equivalents”?
=P21,850,000
Solution:
Cash in bank
Compensating balance
Post-dated check delivered
15,000,000.00
-500,000.00
300,000.00
Cash in bank, adjusted
Petty cash fund
Time deposit
Savings deposit
14,800,000.00
50,000.00
5,000,000.00
2,000,000.00
Cash and cash equivalents
21,850,000.00
For financial reporting, the following should be excluded from cash, except:
=Post dated check issued to a customer
A compensating balance is best reflected by which of the following?
=The portion of any demand deposit, time deposit, or certificate of deposit maintained by
a corporation which constitute support for existing borrowing arrangements of the corporation with the
lending institution
Which of the following financial positions is not presented as cash equivalents?
Select one:
=An entity acquires a three-year fixed rate (5 per cent per year) government bond in an
active market, two months before the bond’s maturity date. The entity holds the instrument to speculate on
changes in market interest rates.
Islander Company provided the following information with respect to its cash and cash equivalents on
December 31, 2019.
Checking account at First Bank
Checking accounts at Second Bank
Treasury bonds
Payroll account
Value added tax account
Foreign bank account – restricted (in equivalent pesos)
Postage stamps
Employee’s postdated check
IOU from president’s brother
Credit memo from a vendor for a purchase return
Traveler’s check
Not – sufficient – fund check
Petty cash fund (P20,000 in currency and expense receipts for P30,000)
Money order
What amount would be reported as unrestricted cash on December 31, 2019?
=4,900,000
Solution:
Checking accounts at Second Bank
Payroll account
Value added tax account
3,500,000.00
500,000.00
400,000.00
(200,000)
3,500,000
1,000,000
500,000
400,000
2,000,000
50,000
300,000
750,000
80,000
300,000
150,000
50,000
180,000
Traveler's check
Petty cash fund, adjusted
Money order
300,000.00
20,000.00
180,000.00
Total unrestricted cash
4,900,000.00
You are given the following information which may be relevant to the computation of the cash balance of
Bella Corporation on December 31, 2009:
·
Two checks for P125,000 were received in December from a customer for payment of its P125,000
account balance. One of the checks was returned in January.
·
A check was received and deposited for P175,000 in December. The check was returned by the
bank in January marked “NSF”.
·
A check from a customer for P87,000, was received and deposited in December. In January it was
discovered that it was in payment of an invoice in the amount of P78,000. A check for P9,000 was issued
and mailed by the company to the customer.
Using the above data, what is the total amount to be included in the cash balance for purpose of the
December 31, 2009 balance sheet?
=P387,000
Solution:
Checks
125,000.00
175,000.00
87,000.00
Cash balance, Dec 31, 2009
387,000.00
Which of the following is/are true regarding the compensating balances?
I.
These are reserve balances maintained for emergency spending requirements
II.
If legally restricted these are to be presented as separate line item on the balance sheet
=Only II is correct
Ralf Corporation had the following account balances at December 31, 2009:
Cash on hand and in bank
Cash restricted for bonds payable due on June 30, 2010
Time deposit
Savings deposit set aside for dividends payable on June 30, 2010
P2,500,000
1,000,000
3,000,000
500,000
In the current assets section of Ralf’s December 31, 2009 balance sheet, what total amount should be
reported as cash and cash equivalents?
==P7,000,000
Solution:
Cash on hand and in bank
2,500,000.00
Cash restricted for bonds payable
1,000,000.00
Time deposit
3,000,000.00
Savings deposit set aside for dividends 500,000.00
Cash and cash equivalents
7,000,000.00
AGOO Corp. is sourcing for fund for its project. It will need P1,125,000 to finance the project that will take
2 years to complete construction. Aringay bank is offering a 12% loan package that will require 10%
compensating balance which will earn 5%. How much principal loan should AGOO take from Aringay bank?
=P1,250,000
Look Company had the following cash balances on December 31, 20Y1:
Undeposited coin and currency
10,000
Unrestricted demand deposit
230,000
Company checks written and deducted from the demand
deposit amount but not scheduled to be mailed until January 15,
20Y2
30,000
Time deposit restricted for use in 20Y2
100,000
Commercial papers
150,000
In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance
of P20,000 in its unrestricted demand deposit account. What amount should be reported as “Cash”
on
December
31,
20Y1?
Select one:
==270,000
Solution
Undeposited coin and currency
10,000.00
Unrestricted demand deposit
230,000.00
Undelivered checks
30,000.00
Total Cash
270,000.00
On December 31, 2019, West Company had the following cash balances:
Cash in bank
Petty cash fund (all funds were reimbursed on December 31,2019)
Time deposit (due February 1, 2020)
1,800,000
50,000
250,000
Cash in bank includes P600, 000 of compensating balances against short-term borrowing arrangement at
December 31, 2019. The compensating balance is legally restricted as to withdrawal by West. In the current
assets section of West’s December 31, 2019 statement of financial position, what total amount should be
reported as cash and cash equivalents?
=1,500,000
Solution:
Cash in bank, including compensating balance
Cash on hand
2,250,000.00
125,000.00
Total cash
2,375,000.00
Campbell Company had the following account balances on December 31, 2019.
Petty cash fund
Cash in bank – current account
Cash in bank - sinking fund
Cash on hand
Cash in bank – restricted account for plant addition expected to be disbursed in 2020
Treasury bills
The petty cash fund includes unreplenished December 2019 petty cash expense vouchers of P10, 000 and
employee IOU of P5, 000. The cash on hand includes a P100, 000 check payable to Campbell dated
January 15, 2020. In exchange for a guaranteed line of credit, Campbell has agreed to maintain a minimum
balance of P200, 000 in its unrestricted current bank account. The sinking fund is set aside to settle a bond
payable that is due on June 30, 2020. What should be reported as “cash and cash equivalents” on
December 31, 2019?
=7,435,000
Solution:
Petty cash fund, adjusted (50,000 - 10,000 - 5,000)
Cash in bank-current account
Cash in bank-sinking fund
Cash on hand, adjusted (500,000 - 100,000)
Treasury bills
35,000.00
4,000,000.00
2,000,000.00
400,000.00
1,000,000.00
Cash and cash equivalent
7,435,000.00
Which of the following items counted at balance sheet date should not be reported as part of cash?
50,000
4,000,000
2,000,000
500,000
1,500,000
1,000,000
=Postdated check received
This fraud occurs when collection of receivable from one customer is misappropriated and then concealed
by applying a subsequent collection from another customer.
=Lapping
When making check payments to the supplier, the payor normally credits this account
=Cash in bank
Compensating balance will?
=Increase the yield of the lender on the loan
For financial accounting purposes, Bank overdraft if material should be?
=Reported as a current liability
The Ingersoll Co.’s ledger showed a balance in its cash account at December 31, 2009 of P341,125
which was determined to consist of the following:
Petty cash fund
Cash in Allied Bank per bank statement with a check for P3,000 still outstanding
P 1,800
168,375
Notes receivable in the possession of a collecting agency
12,500
Undeposited receipts, including postdated check for P5,250 and traveler’s check for P5,000
89,000
63,750
2,475
3,225
P341,125
Bond sinking fund – cash
IOUs signed by employees
Paid vouchers not yet recorded
Total
At what amount should “Cash on hand and in bank” be reported on Ingersoll’s balance sheet?
=P250,925
Petty Cash Fund
Cash in Allied Bank, NET of outstanding check
Undeposited receipts, EXCLUDING postdated check
Total Cash on Hand and in Bank
1,800.00
165,375.00
83,750.00
250,925.00
*Note: The paid vouchers not yet recorded was not deducted from the petty cash fund as the petty cash
fund amount reflected is obviously net of the paid vouchers.
Cash in foreign currency is valued at?
=Current exchange rate
Pygmalion Company had the following account balances on December 31, 2019:
Cash in bank - current account
Cash in bank – payroll account
Cash on hand
Cash in bank – restricted account for building construction expected to be disbursed in 2020
Time deposit, purchased December 15,2019 and due March 15, 2020
The cash on hand includes a P200, 000 check payable to Pygmalion dated January 15, 2020. What should
be reported as “cash and cash equivalents” on December 31, 2019?
=8,300,000
Solution:
Cash in bank-current account
Cash in bank-payroll account
Cash on hand, adj (500,000 - 200,000)
Time deposit
5,000,000.00
1,000,000.00
300,000.00
2,000,000.00
Cash and cash equivalents
8,300,000.00
5,0
1,0
500
3,0
2,0
The checkbook balance of Dove Company on December 31, 2019 was P4,000,000. Data about certain
cash items follow:
·
A customer check amounting to P200, 000 dated January 2, 2020 was included in the December
31, 2019 checkbook balance.
·
Another customer check for P500, 000 deposited on December 22, 2019 was included in its
checkbook balance but returned by the bank for insufficiency of fund. This check was redeposited as
December 26, 2019 and cleared two days later.
·
A P400,000 check payable to supplier dated and recorded on December 30, 2019 was mailed
on January 16, 2020.
·
A petty cash fund of P50, 000 with the following summary on December 31, 2019:
Coins and currencies
Petty cash vouchers
Return value of 20 cases of soft drinks
·
5,000
43,000
2,000
50,000
A check of P43,000 was drawn on December 31, 2019 payable to Petty Cash
What is the “cash” balance on December 31, 2019?
=4,248,000
Solution:
Checkbook balance, unadjusted
Post-dated check
Undelivered check
4,000,000.00
-200,000.00
400,000.00
Checkbook balance, adjusted
Petty cash fund
Coins and currencies 5,000.00
Check replenishment 43,000.00
4,200,000.00
Total cash balance
4,248,000.00
48,000.00
The following data pertain to Thor Company on December 31, 2019:
Checkbook balance
Bank statement balance
Check drawn on Thor’s account, payable to supplier, dated and recoded on December
31,2019, but not mailed until January 15,2020
Cash in sinking fund
On December 31, 2019, how much should be reported as “cash”?
=4,500,000
Solution:
Checkbook balance
Undelivered check
4,000,000.00
500,000.00
Cash
4,500,000.00
Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted cash balance?
=Note receivable collected by the bank in favor of the depositor and credited to the account of the
depositor
The following information was included in the bank reconciliation for Ryan, Inc. for June. Assume all other
reconciling items are listed.
Checks and charges recorded by bank in
June, including a June service charge of
P600
Service charge made by bank in May and
recorded in the books in June
Total of credits to Cash in all journals during
June
Customer’s NSF check returned as a bank
charge in June (no entry made on books)
P344,200
400
396,040
2,000
4,000,000
5,000,000
500,000
2,000,000
Customer’s NSF check returned in May and
redeposited in June (no entry made on
books in either May or June)
Outstanding checks at June 30
Deposits in transit at June 30
5,000
265,200
12,000
What was the total of outstanding checks at the beginning of June?
=
=P211,160
Solution:
Outstanding checks, June 30
Add: June charges/disbursements reflected in bank, adj
June service charge
June NSF check
Totals
Less: June payments reflected in books, adj
May service charge
265,200.00
344,200.00
-600.00
-2,000.00
606,800.00
396,040.00
-400.00
Outstanding checks, June 1
Balance per bank statement
2,100,000
Deposits in transit
300,000
Checks outstanding
( 30,000)
Correct cash balance
2,370,000
Balance per book
2,372,000
Bank service charge
(
Correct cash balance
2,370,000
2,000)
June data are as follows:
Bank
Total credits
P1,620,000
Total debits
2,300,000
Collection by bank (P400,000
NSF check
Balance
420,000
10,000
1,420,000
Books
Deposits recorded
1,800,000
Checks recorded
2,360,000
Balance
1,810,000
The deposits in transit on June 30, 2019 amount to
=P900,000
Solution:
Deposits in transit, May 31, 2019
Add: June deposits recorded in books
395,640.00
211,160.00
Reconciliation of Heaven Company’s bank account at May 31, 2019 is:
Note plus interest)
341,600.00
300,000.00
1,800,000.00
Totals
Less: June deposits reflected in bank, adj
2,100,000.00
1,620,000.00
Deposits in transit, June 30, 2019
480,000.00
Shown below is the bank reconciliation for YOUR Company for May 2019:
Balance per bank, May 31, 2019
Add: Deposits in transit
Total
Less: Outstanding checks
Bank credit recorded in error
Cash balance per books, 5/31/09
P75,000
12,000
87,000
P14,000
5,000
19,000
P68,000
The bank statement for June 2019 contains the following data:
Total deposits
Total charges, including an NSF check of P4,000 and a service charge of P200
P55,000
48,000
All outstanding checks on May 31, 2019, including the bank credit, were cleared in the bank in June 2019.
There were outstanding checks of P15,000 and deposits in transit of P19,000 on June 30, 2019.
What is the cash balance per bank on June 30, 2019?
=P82,000
Solution:
Balance per bank, May 31, 2019
Total deposits
Total charges
75,000.00
55,000.00
-48,000.00
Balance per bank, June 30, 2019
82,000.00
In reconciling the Cash in bank of Mimic Company with the bank statement balance for the
November 2008, the following data are summarized:
Book debits for November, including October CM for note collected, P60,000
Book credits for November, including NSF of P20,000 and service charge of P800 for
October
Bank credits for November including CM for November for bank loan of P100,000 and
October deposit in transit for P80,000
Bank debits for November including October outstanding checks of P170,800 and
November service charge of P200
The outstanding checks for November is
=P170,200
Solution:
Outstanding checks, October 31
Add: Book credits for November
NSF
October service charge
170,800.00
620,000.00
-20,000.00
-800.00
Total
Less: Bank debits for November
November service charge
600,000.00
-200.00
599,200.00
770,000.00
Outstanding checks, November 30
599,800.00
170,200.00
IF Company provided the following information for the month of October:
Cash in bank, per bank statement, October 31
Bank service charge for October
Interest paid by the bank to IF Company for October
Deposits made but not yet recorded by the bank
Checks written and mailed but not yet recorded by the bank
5,600,000
24,000
20,000
700,000
1,300,000
month of
P 800,000
620,000
700,000
600,000
A check payment for P40,000 had been erroneously recorded as P4,000.
What
is
the
cash
balance
per
ledger
on
October
31?
Select one:
=5,040,000
Solution
Cash in bank
5,600,000.00
Deposits in transit
700,000.00
Outstanding check
(1,300,000.00)
Adjusted cash balance
5,000,000.00
Reverse application:
Interest income
Bank
service
charge
(20,000.00)
24,000.00
Book Error:
Actual check disbursement
40,000.00
Recorded check disbursement
(4,000.00)
Cash balance per ledger
36,000.00
5,040,000.00
Information pertaining to Kotse Company appears below.
Balance per bank statement July 31
1,240,000
Balance per ledger, July 31
750,000
Deposit of July 30 not recorded by bank
280,000
Debit memo – service charge
10,000
Credit memo – collection of note by bank for
Kotse
300,000
Outstanding checks
?
An analysis of the canceled checks returned with the bank statement reveals the following:
·
Check for purchases of supplies was drawn for P60,000 but was recorded as P90,000.
·
The manager wrote a check for traveling expenses of P100,000 while out of town. The check was
not recorded.
What is the amount of outstanding checks on July 31?
=550,000
Solution:
Balance per ledger
Credit memo
Debit memo
Book disbursement error (90,000-60,000)
Unrecorded check
750,000.00
300,000.00
-10,000.00
30,000.00
-100,000.00
Adjusted cash balance
Less: Deposit in transit
970,000.00
280,000.00
Totals
Less: Balance per bank statement
690,000.00
1,240,000.00
Outstanding checks
-550,000.00
In preparing adjusted balances bank reconciliation, which of the following is added to the book cash
balance?
=Credit memo
In the process of preparing a bank reconciliation:
=items that appear on the reconciliation as corrections to the book balance of cash should
be entered in the accounting records.
The cash in bank account of S-mart, Inc. for April 2019 showed an ending balance of P129,298. Deposits
in transit on April 30 was P18,200. Outstanding checks as of April 30, were P59,435, including a P5,000
check which the bank had certified on April 27. During the month of April, the bank charged back NSF
checks in the amount of P3,435 of which P1,835 had been redeposited by April 20. On April 23, the bank
charged S-Mart’s account for a P2,200 items which should have been charged against K-mart, Inc., the
error was not detected by the bank. During April, the proceeds from notes collected by the bank for S-Mart,
Inc. was P7,548 and bank charges for this services was P18.
How much is the unadjusted balance per bank on April 30?
=P169,263
Solution:
Cash balance per books
Add: Outstanding checks, adj (59,435-5,000)
Note collected by bank
Totals
Less: Deposit in transit
NSF checks, adj (3,435-1,835)
Bank error-K-mart
Bank service charge
129,298.00
54,435.00
7,548.00
61,983.00
191,281.00
18,200.00
1,600.00
2,200.00
18.00
Cash balance per bank
22,018.00
169,263.00
Shown below is the bank reconciliation for YOUR Company for May 2019:
Balance per bank, May 31, 2019
Add: Deposits in transit
Total
Less: Outstanding checks
Bank credit recorded in error
Cash balance per books, 5/31/09
P75,000
12,000
87,000
P14,000
5,000
19,000
P68,000
The bank statement for June 2019 contains the following data:
Total deposits
Total charges, including an NSF check of P4,000 and a service charge of P200
P55,000
48,000
All outstanding checks on May 31, 2019, including the bank credit, were cleared in the bank in June 2019.
There were outstanding checks of P15,000 and deposits in transit of P19,000 on June 30, 2019.
What is the cash balance per books on June 30, 2019?
=P90,200
Solution:
Balance per bank, June 30, 2019
Add:
Deposit in transit
NSF check
Service charge
Totals
Less:
Outstanding check
Balance per book, June 30, 2019
82,000.00
19,000.00
4,000.00
200.00
23,200.00
105,200.00
15,000.00
90,200.00
The information below is from the books of the Seminole Corporation on June 30:
Balance per bank statement
Receipts recorded but not yet deposited in the bank
Bank charges not recorded
Note collected by bank and not recorded on books
Outstanding checks
NSF checks - not recorded on books nor redeposited
P11,164
1,340
16
1,120
1,100
160
Assuming no errors were made, compute the cash balance per books on June 30 before any reconciliation
adjustments.
=P10,460
Solution:
Balance per bank statement
Add: Deposit in transit
Bank charges
NSF checks
Totals
Less: Outstanding checks
Note collected by bank
11,164.00
1,340.00
16.00
160.00
1,516.00
12,680.00
1,100.00
1,120.00
Balance per books
2,220.00
10,460.00
As of June 30, 2019, the bank statement of Ang Po Trading had an ending balance of P373,612. The
following data were assembled in the course of reconciling the bank balance:





The bank erroneously credited Ang Po Trading for P2,150 on June 22.
During the month, the bank charged back NSF checks amounting to P2,340 of which P800 had
been redeposited by the 25th of June.
Collection for June 30 totalling P10,330 was deposited the following month.
Checks outstanding as of June 30 were P30,205.
Notes collected by the bank for Ang Po Trading were P8,150 and the corresponding bank charges
were P50.
The adjusted bank balance on June 30, 2019 is?
=P351,587
Solution:
Balance per bank
Deposit in transit
Outstanding check
Bank error
373,612.00
10,330.00
-30,205.00
-2,150.00
Adjusted cash balance
351,587.00
The cash account shows a balance of P38,000 before reconciliation. The bank statement does not include
a deposit of P2,300 made on the last day of the month. The bank statement shows a collection by the bank
of P940 and a customer's check for P220 was returned because it was NSF. A customer's check for P450
was recorded on the books as P540, and a check written for P79 was recorded as P97. The correct balance
in the cash account was?
=P38,648
Solution:
Unadjusted cash balance
Add: Collection by bank
Book error, check (97-79)
940.00
18.00
38,000.00
Totals
Less: NSF Check
Book error, receipt (540-450)
220.00
90.00
958.00
38,958.00
Adjusted cash balance
310.00
38,648.00
Shadowcat Company deposits all receipts and makes all payments by check. The following
information is available from the cash records:
MARCH 31 BANK RECONCILIATION
Balance per bank
Add: Deposits in transit
Deduct: Outstanding checks
Balance per books
Month of April Results
P
26,746
2,100
(3,800)
P 25,046
Balance April 30
April deposits
April checks
April note collected (not included in April deposits)
April bank service charge
April NSF check of a customer returned by the bank
(recorded by bank as a charge)
Per Bank
P 27,995
10,784
11,100
3,000
35
900
Per Books
P 30,355
15,889
10,080
-0-0-0-
Deposits in transit, April 30, 2012
=7,205
Solution:
Deposit in transit, 3/31/2012
Deposits per books
2,100.00
15,889.00
Total
Less: Deposits per bank
17,989.00
10,784.00
Deposit in transit, 4/30/2012
7,205.00
The following information pertains to Yowie Company as of December 31, 2016:
Cash balance per bank statement
4,000,000
Checks outstanding (including certified check of 500,000
P100,000)
Bank service charge shown in December bank 20,000
statement
Error made by Yowie in recording a check that
cleared the bank December (check was drawn in
December for P100,000 but recorded at 90,000
P10,000)
Deposit in transit
1,300,000
What is the cash balance per ledger on December 31, 2016?
=5,010,000
Solution:
Cash balance per bank statement
Add: Deposit in transit
4,000,000.00
1,300,000.00
Total
Less: Outstanding check (500,00-100,000)
5,300,000.00
400,000.00
Adjusted cash balance
Add: Bank service charge
Book disbursement error
4,900,000.00
20,000.00
90,000.00
Cash balance per book
110,000.00
5,010,000.00
Part of Tsibog Co.’s unadjusted trial balance at December 31, 2019 showed a Cash balance of
P17,400. The balance per bank statement was P12,000 on December 31, 2019. Outstanding checks
amounted to P6,900. Interest of P40 was credited to the enterprise's account by the bank during December,
but has not yet been entered on the company’s books.
Assuming no errors exist in the company’s cash balance, deposits in transit at December 31, 2019 amount
to?
=P12,340
Solution:
Cash balance per book
Add: Outstanding check
Interest
17,400.00
6,900.00
40.00
Total
Less:
24,340.00
12,000.00
Cash balance per bank
Deposit in transit
12,340.00
In preparing adjusted balances bank reconciliation, which of the following is added to the bank statement
cash balance?
=Deposit in transit
The bookkeeper of Santa Clara Co. recently prepared the following bank reconciliation:
Santa Clara Co.
Bank Reconciliation
December 31, 2019
Balance per bank statement
Add:
Deposit in transit
Checkbook printing charge
P126,420
P8,700
210
Error made in recording check No. 25 (issued in December)
1,600
5,000
NSF check
Deduct:
Outstanding checks
Note collected by bank (includes P50 interest
15,510
P141,930
P4,480
9,500
Balance per books
13,980
P127,950
Santa Clara has P9,100 cash on hand on December 31, 2019.
The amount Santa Clara should report as cash on the balance sheet as of December 31, 2019 should be?
=P139,740
Solution:
Unadjusted cash balance
Add: Collection by bank
Book error, check (97-79)
940.00
18.00
Totals
Less: NSF Check
Book error, receipt (540-450)
220.00
90.00
Adjusted cash balance
38,000.00
958.00
38,958.00
310.00
38,648.00
The bank statement of Night Crawler Corporation for February 2012 showed an ending balance of
P169,700. Deposit in transit on February 28 was P18,200. Outstanding checks as of February 28 were
P59,000, including a P5,000 check which the bank had certified on February 25. During the month of
February, the bank charged back NSF checks in the amount of P3,000 of which P1,000 had been
redeposited in February. On February 20, the bank charged the account of Night Crawler for P2,000 which
should have been charged against the account of another company; the error was not detected by the
bank. During February, the proceeds from the note collected by the bank for Night Crawler was P7,500
and
bank
charge
for
this
service
was
P50.
The adjusted cash balance on February 28, 2012 is
=P135,900
Solution:
Cash balance, per bank
Add: Deposits in transit
Bank error
169,700.00
18,200.00
2,000.00
Total
Less: Outstanding check
(P59,000-P5,000)
189,900.00
Adjusted cash balance
135,900.00
54,000.00
On April 12, 2011, upon the receipt of the March 2011 bank statement, the accountant of Cloak
Company prepared the following bank reconciliation dated March 31, 2011 and immediately recorded
the appropriate adjusting entry.
Balance per bank statement, March 31, 2011
Add: Deposit in transit
P 980,000
P
34,500
Error in recording check No.125412 (P45,000 instead
of P54,000)
Service charges for March
Less: Outstanding checks
9,000
1,500
45,000
P 15,000
Erroneous bank credit
2,000
Loan proceeds including interest for March
15,500
32,500
Balance per books, March 31, 2011
P 992,500
The bank statement reported total receipts of P265,000 and total disbursements of P215,000 for April
2011. All reconciling items as of March 31, 2011 cleared the bank on April 2011. However, the bank,
in April 2011 erroneously debited Cloak Company P20,000 for a check that was supposed to be against
the account of Croak Company. Service charges for April 2011 was P1,200. Deposits in transit
amounted to P42,000 while checks still outstanding amounted to P33,000 as of April 2011.
The total cash debits (receipts) to the cash in bank account is
=P288,000
Solution:
Particulars
Deposits/
Disbursements/
Receipts
265,000.00
-34,500.00
42,000.00
Payments
215,000.00
Mar 31, 11
Balance per bank
DIT, Mar 31
DIT, Apr 30
OC, Mar 31
OC, Apr 30
Bank error, Mar 31
Bank error, Apr 30
980,000.00
34,500.00
Adjusted cash balance
CM, Mar 31
BSC, Mar 31
BSC, Apr 30
Book error, Mar 31
997,500.00
-15,500.00
1,500.00
Balance per book
992,500.00
Apr 30, 11
-15,000.00
42,000.00
-15,000.00
33,000.00
-2,000.00
-20,000.00
-2,000.00
272,500.00
15,500.00
9,000.00
288,000.00
1,030,000.00
-33,000.00
20,000.00
211,000.00
1,059,000.00
1,500.00
-1,200.00
9,000.00
1,200.00
220,300.00
1,060,200.00
Shown below is the bank reconciliation for Agdao Company for June 2013:
Balance per bank, June 30, 2013
P3,000,000
Deposit in transit
480,000
Outstanding checks
( 560,000)
Bank credit record in error
( 200,000)
Cash balance per book, June 30, 2013
P2,720,000
The bank statement for July 2013 contains the following data:
Total deposits
P 2,200,000
Total charges, including an NSF of P160,000
and service charge of P8,000
1,920,000
All outstanding checks and deposit in transit on June 30, including the bank credit, were cleared in the
bank during the month of July. There were outstanding checks of P600,000 and deposits in transit of
P760,000 on July 31, 2013.
What is cash balance per book as of July 31, 2013?
=P3,608,000
Solution:
Balance per bank, Jun 30
Add: Total deposits
3,000,000.00
2,200,000.00
Total
Less: Total charges
5,200,000.00
1,920,000.00
Balance per Bank, Jul 31
Add: Deposits in transit 760,000.00
3,280,000.00
NSF
Service charge
160,000.00
8,000.00
928,000.00
Total
Less: Outstanding checks
4,208,000.00
600,000.00
Cash balance per book, Jul 31
3,608,000.00
The following data pertaining to the cash transactions and bank account of Mandirigma Company for the
month of May are available to you:
Cash balance, per records, May 31
Cash balance, per bank statement, 5/31
Bank service charge for May
Debit memo for the cost of printed checks delivered by the bank
Outstanding checks, May 31
Deposit
of
May
30
not
recorded
until June 1
Proceeds of a bank loan of May 30, net of interest of P300
P17,194
31,948
109
125
6,728
by
bank
4,880
5,700
Proceeds from a customer's promissory note, including interest of P100
8,100
Check No. 2772 issued to a supplier entered in the accounting records at P2,100
but deducted in the bank statement at an erroneous amount of
1,200
Stolen check lacking an authorized signature, deducted from Mandirigma's account
by the bank in error
800
Customer's check returned by the bank marked NSF; no entry has been made in
the accounting records to record the returned check
760
What is the correct cash balance at May 31?
=P30,000
Solution:
Unadjusted balances
Bank service charge
Debit memo-cost of check printing
Outstanding check
Deposits in transit
Proceeds of bank loan
Proceeds of customer's promissory note
Bank error (2,100-1,200)
Bank error, stolen checks
NSF Check
Adjusted cash balance
Book
17,194.00
-109.00
-125.00
Bank
31,948.00
-6,728.00
4,880.00
5,700.00
8,100.00
-900.00
800.00
-760.00
30,000.00
30,000.00
On March 3, 2016, Maricar Company received its bank statement. However, the closing balance of the
account was unreadable. Attempts to contact the bank after hours did not secure the desired
information. Thus, you had to prepare a bank reconciliation from the available information summarized
below:
February 28 book balance
1,460,000
Note collected by bank
100,000
Interest earned on note
10,000
NSF check of customer
130,000
Bank service charge on NSF check
2,000
Other bank service charges
3,000
Outstanding checks
202,000
Deposit of February 28 placed in night 85,000
depository
Check issued by Axle Company charged to 20,000
Maricar’s account
What was the cash balance per bank statement?
=1,532,000
Solution:
Cash balance per ledger
Add: Credit memos
Note collected by bank
Interest earned on note
1,460,000.00
100,000.00
10,000.00
Totals
Less: Debit memos
NSF Check of customer
Bank service charge on NSF check
Other bank service charges
1,570,000.00
130,000.00
2,000.00
3,000.00
Adjusted cash balance
Add: Outstanding checks
Totals
Less: Deposit in transit
Bank disbursement error
110,000.00
135,000.00
1,435,000.00
202,000.00
1,637,000.00
85,000.00
20,000.00
Cash balance per bank statement
105,000.00
1,532,000.00
Bank reconciliations are needed to:
=identify differences between cash balances reported by the company and its bank.
You obtained the bank statement, paid checks, and other memoranda relating to Emerson Company’s
bank account for December 2019. In reconciling the bank balance at December 31, 2019, you
observed the following facts:
Balance per bank statement, 12/31/09
Outstanding checks, 12/31/09
Receipts of 12/31/09, deposited 1/2/10
Proceeds of bank loan, 12/15/09,
discounted for 90 days at 10% per year,
omitted from records
Deposit of 12/23/09, omitted from bank
statement
Check 733 of Ralph Waldo, charged by the
bank in error to Emerson Co.
Proceeds of note receivable of Emerson
Co. collected by bank, 12/10/09, not
entered in cash records (Principal,
P40,000; Interest, P400; Collection
charge, P100)
Erroneous debit memo of 12/31/09, to
charge
company’s
account
with
settlement of bank loan, paid by check
no. 9344 on same date
Deposit of Ralph Waldo of 12/6/09 credited
in error to Emerson Co.
P1,465,800
624,750
95,550
195,000
53,000
82,100
40,300
100,000
25,000
The cash balance per books of Emerson Company on December 31, 2019 is?
=P911,400
Solution:
Cash balance per bank
Add: Deposit in transit, 1/2/10
Error-deposit, 12/23/09
Error-Check 733
Error-Debit memo
95,550.00
53,000.00
82,100.00
100,000.00
Totals
Less: Outstanding checks
Bank loan proceeds
Note receivable proceeds
Error-deposit, 12/6/09
624,750.00
195,000.00
40,300.00
25,000.00
Cash balance per book
A bank reconciliation is
1,465,800.00
330,650.00
1,796,450.00
885,050.00
911,400.00
=A schedule that accounts for the differences between an entity’s cash balance as shown in the
bank statement and the cash balance shown in the general ledger.
The cash account in the ledger of Sue Company shows a balance of P1,652,000 at September 30,2016.
The bank statement, however shows a balance of P2,090,000 at the same date. The only reconciling items
consist of a bank service charge of P2,000, a large number of outstanding checks totaling P 590,000 and
a deposit in transit . What is the deposit in transit in the September 30, 2016 bank reconciliation?
=150,000
Solution:
Cash balance per ledger
Bank service charge
1,652,000.00
-2,000.00
Adjusted cash balance
Add: Outstanding checks
1,650,000.00
590,000.00
Totals
Less: Cash balance per bank statement
2,240,000.00
2,090,000.00
Deposits in transit
150,000.00
Maricar Corporation keeps all its cash in a checking account. An examination of the company’s
accounting records and bank statement for the month ended June 30, 2016 revealed the following
information:
a. The cash balance per book on June 30 is P850,000
b. A deposit o P100,000 that was placed in the bank’s night depository on June 30 does not
appear on the bank statement.
c. The bank statement shows on June 30, the bank collected note for Maricar and credited the
proceeds of P95,000 to the company’s account.
d. Checks outstanding on June 30 amount to P30,000
e. Maricar discovered that a check written in June for P20,000 in payment of an account payable,
had been recorded in the company’s record as 2,000
f. Included with the June bank statement was NSF check for P25,000 that Maricar had received
from a customer on June 26.
g. The bank statement shows a P2,000 service on June 30, 2016
The adjusted cash balance is?
=900,000
Solution:
Cash balance per book
Credit memo
Book disbursement error (20,000-2,000)
NSF Check
Bank service charge
850,000.00
95,000.00
-18,000.00
-25,000.00
-2,000.00
Adjusted cash balance
900,000.00
Long-term notes receivables which nominally bear no interest or an interest which is unreasonably low shall
be recognized initially at
=Present value
LMN Company issued a note solely in exchange for cash. Assuming that the items below differ in amount
the present value of note at issuance is equal to the
=Proceeds received
In the case of long term installment receivables ( real state installment sale ) where a major portions of the
receivables will be collected beyond the normal operating cycle
=Only the portion currently due is shown as current and the balance as non current
Statement 1: Trade receivables are classified as current assets if these are expected to be realized with in
once normal operating cycle or 12 months from balance sheet date, whichever is shorter.
Statement 2: Non-trade receivables that are expected to be collected within 12 months from balance sheet
date are to be reported as current assets.
=only statement 2 is correct
Which of the following is not acceptable in estimating uncollectible accounts receivables under GAAP?
=No estimates of uncollectible accounts is made but accounts are written off when it is determined
they cannot be collected
Which of the following method of determining bad debts expense most closely matches expense to
revenue?
=Charging bad debts with a percentage of sales for that period
The ‘’amortized cost” of loan receivable is the amount of which
=The loan receivable is measured initially minus principal repayment, plus or minus the cumulative
amortization of any difference between the initial amount recognized and the principal maturity amount,
minus reduction for impairment.
Trade receivables are classified as current asset if they are reasonably expected to be collected
=Within one year or within the operating cycle whichever is longer
What is the presentation of accounts receivable from officers, employees or affiliated entities?
=As assets but separately from other receivables
An Entity uses the allowance method to recognized uncollectible account expense . What is the effect at
the time of the collections of an account previously written off on each of the following accounts?
Allowance for doubtful account, Uncollectible accounts expense
=Increase , No effect
A method of estimating bad debts that focuses on the income statements of financial positions is the
allowance method based on
=
Credit sales
Which of the following is/are acceptable statement of financial position presentation of Receivables?
Statement 1: unearned finance charges included in the face amount of receivables are presented as
deduction from the related receivables.
Statement 2: trade notes receivable are combined with trade accounts receivable.
=Both statements are correct
When the allowance method of recognizing bad debts expense is used , the entry to record the write off a
specific uncollectible account would decrease
=Allowance for doubtful accounts
When specific customers account receivables is written off as an collectible , what will be the effect o net
income under each of the following methods of recognizing bad debts expense?
1) ALLOWANCE
2) DIRECT WRITE OFF
=1) None
2) Decease
Which is the proper presentations of receivables in the statement of financial positions ?
=Trade receivables and nontrade receivables which are currently collectibles shall be
presented as one line item called trade and other receivables
Which is more theoretically correct about cash discounts related to accounts receivable?
=Net approach
When the allowance method of recognizing uncollectible accounts would
=Decrease both accounts receivables and the allowance for uncollectible accounts
Which method of recording bad debt loss is consistent with accrual accounting ?
=Allowance method
Statement 1: Trade receivables are classified as current assets if these are expected to be realized with in
once normal operating cycle or 12 months from balance sheet date, whichever is shorter.
Statement 2: Non-trade receivables that are expected to be collected within 12 months from balance sheet
date are to be reported as current assets.
=only statement 2 is correct
What is the proper accounting for credit card sales if the credit card company is Affiliated with a bank, Not
affiliated with a bank
=Cash sale, Sale on account
The entry debiting account receivables and crediting allowance for doubtful accounts would be made when
=A previously defaulted customers pay its outstanding balance
A method of estimating uncollectible accounts that’s emphasizes asset valuations rather than income
measurements is the allowance method base on
=Aging the receivables
Nontrade receivables are classified as current assets only if they are reasonably expected to be realized in
cash
=Within one year , the length of the operating cycle not with standing
Estimations of uncollectible accounts receivables based on aging schedules of sales
=Emphasized measurements of bad debt expense
When the allowance method of recognizing bad debts expense is used , the allowance for doubtful accounts
would decrease when
=Specific uncollectible account is written off
When comparing the allowance method of accounting for bad debts with the direct write off method, which
is the following is true
=The allowance method is exact but it less illustrate the matching principles
Trade receivables are classified as current assets if they are reasonably expected to be collected
=Within one year or within the operating cycle, whichever is longer
Mardi Company uses the allowance method in recognizing uncollectible accounts. Ignoring
deferred taxes, the entry to record the write-off of a specific uncollectible account
=Affects neither net income nor working capital
An entity uses the allowance method for recognizing uncollectible accounts . Ignoring deferred tax , the
entry to record the writte off of a specific uncollectible accounts.
=Affect neither net income nor working capital
Which of the following method of determining bad debt expense does not match expense and revenue?
=Charging bad debts as account are written off as uncollectibles
When an accounts receivables aging schedules is prepared at the end of the fiscal year , a series of
computations like the following is sometimes made 5% of the total peso balance of account from 1- 30 days
past –due , plus 10 % of the total peso balance of accounts from 31- 60 days past due and so on. Which
of the following statements best describe how the sum of the amounts determined in this series of
computation is used
=It is the amounts of desire credit balance of the allowance for doubtful accounts to be
reported in the year end statement of financial positions
Which of the following should be included in the category of Trade Receivables?
=NIL
Assuming that the ideal measure of short- term receivables in the statement of financial positions is the
discounted value of the cash to be received I the future , failure to the follow his practice usually does not
make the statement of financial position misleading because
=The amount of the discount is not material
The following will not be included in the account “Account Receivable” except,
=NIL
Receivables from subsidiaries shall be classified as
=Either as current or non current depending on the expectations of realizing them within
one year or over one year
Credit balances in accounts receivables shall be classified as
=Current liabilities
Account receivables shall be recognized initially at
=Face value
During your review of the records of Yoko Corporation for the year 2009, you noted that Yoko sold a
machine with a carrying amount of P640,000 (cost is P1,600,000) on June 30, 2009. Yoko received an
P800,000 non-interest bearing note due in 3 years. There is no established market value for the
machine. The prevailing interest rate for a note of this type is 12%. Yoko recorded the transaction by
debiting Note Receivable for P800,000 and crediting Machinery for P640,000 and Gain on sale of Machine
for the difference. Because of this, Yoko’s profit for the year ended December 31, 2009 had been
overstated by
=P196,394
Solution:
Face amount of note
Multiply by: PVF of 1 at 12% for 3 periods
800,000.00
0.7118
Present value of note
Carrying amount of machine
569,440.00
640,000.00
Loss on sale
Interest income, 2009 (569,440 x 12% x 6/12)
-70,560.00
34,166.40
Total profit (loss), adjusted
-36,393.60
Profit (loss), unadjusted (800,000-640,000)
Less: Profit (loss), adjusted
160,000.00
-36,393.60
Overstatement
196,393.60
At the beginning of 2007, Marcos Company received a three-year non-interest-bearing P1,000,000 trade
note. Marcos reported this note as a P1,000,000 trade note receivable on its 2007 year-end statement of
financial position and P1,000,000 as sales revenue for 2007. What effect did this accounting for the note
have on Marcos's profit for 2007, 2008, 2009, and its retained earnings at the end of 2009, respectively?
=Overstate, understate, understate, no effect
On January 1, 2014, Santayana Company sold a special machine that had a list price of P900,000. The
buyer paid P100,000 cash and signed an P800,000 note. The note specified that it would be paid off in
four equal annual payments of P274,565 each starting on December 31, 2014. The carrying amount of the
receivable on December 31, 2014 is
=P637,435
On January 1, 2009, Boy Company sold a machine to Bawang Company. Bawang signed a non-interestbearing note requiring payment of P30,000 annually for seven years. The first payment was made on
January 1, 2009. The prevailing rate of interest for this type of note at date of issuance was
10%. Information on present value factors is as follows:
Periods
Present value of 1 at 10%
6
.56
7
.51
Boy should record the sale in January 2009 at
Present value of ordinary annuity of 1 at 10%
4.36
4.87
=P160,800
Solution:
Annual payment
Multiply by: PVF of OA of 1 at 10% for 6 periods
30,000.00
4.36
Carrying amount of note
Initial/down payment
130,800.00
30,000.00
Total consideration/selling price
160,800.00
Palaboy Company borrowed from CERTS Bank under a 10-year loan in the amount of P5,000,000 with
interest rate of 6%. Payments are due monthly and are computed to be P55,500. Gold Bank incurs
P200,000 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, CERTS
Bank charges Palaboy a 5-point nonrefundable loan origination fee. CERTS Bank, the lender, has carrying
amount of
=P4,950,000
Solution:
Loan amount
Direct origination cost
5,000,000.00
200,000.00
Total
Less: Origination fee
(P5,000,000 x 5%)
5,200,000.00
Loan proceeds
4,950,000.00
250,000.00
On December 1, 2009, Money Co. gave Home Co. a P200,000, 11% loan. Money paid proceeds of
P194,000 after the deduction of a P6,000 nonrefundable loan origination fee. Principal and interest are due
in 60 monthly installments of P4,310, beginning January 1, 2010. The repayments yield an effective interest
rate of 11% at a present value of P200,000 and 12.4% at a present value of P194,000. What amount of
income from this loan should Money report in its 2009 income statement?
=P2,005
Solution:
Initial measurement of loan, 12/1/2009
Multiply by: Interest rate
194,000.00
12.4%
Interest income, 12/1/2009-11/30/2010
Multiply by: 12/1/2009-12/31/2009
24,056.00
1 mo/12 mos
Interest income, 2009
2,004.67
On December 31, 2018, Flint Corporation sold for P750, 000 an old machine having an original cost of P1,
350, 000 and a book value of P600, 000. The terms of the sale were as follows: P150,000 down payment;
P200, 000 payable on December 31 each of the next three years. The agreement of sale made no mention
of interest; however 9% would be a fair rate for this type of transaction.
What is the amount of interest income should Flint Company report in the December 31, 2019?
=P45, 563
Solution:
Annual payment
Multiply by: PVF of OA of 1 at 9% for 3 periods
200,000.00
2.5313
Present value of note, Dec 31, 2018
506,260.00
Multiply by: Interest rate
9%
Interest income, 2019
45,563.00
On December 31, 2009, Paoay Company received two P5,000,000 notes receivable from customers in
exchanged for consulting services rendered. On both notes, interest is calculated on the outstanding
principal balance at the annual rate of 4% and payable at maturity. The note from Pok Corporation, made
under customary trade terms, is due on October 1, 2010 and the note from Wang Corporation is due on
December 31, 2014. The market interest rate for similar notes on December 31, 2009 was 10%. The
compound interest factors to convert future value into present value at 10% follow: present value of 1 due
in nine months, 0.93, and present value of 1 due in five years, 0.62. At what amounts should these two
notes receivable be reported in Paoay’s December 31, 2009 statement of financial position?
1) Pok
2) Wang
=1) P5,000,000
2) P3,720,000
Solution:
Receivable from Pok (Not discounted)
5,000,000.00
Receivable from Wang
Principal
Total Interests (5,000,000 x 4% x 5 years)
5,000,000.00
1,000,000.00
Maturity value
Multiply by: PVF of 1 at 10% for 5 periods
6,000,000.00
0.62
Initial measurement
3,720,000.00
On January 1, 2015, Shine Co. sells its equipment with a carrying value of P160,000. The company receives
a non-interest bearing note due in 3 years with a face amount of P200,000. There is no established market
value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the
present value factors of 1 at 12%:
Present value of 1 for 3 periods
Present value of an ordinary annuity of 1 for 3 periods
0.71178
2.40183
The discount amortization at the end of the third year using the effective interest method is
=21,428
January 1, 2011, Cable Company sold goods to Sage Company for P2,100,000. Sage Company signed
a non-interest-bearing note requiring payment of P300,000 annually for seven years. The first payment
was made on January 1, 2011. The prevailing rate of interest for this type of note at date of issuance
was 10%.
If Cable Company’s accountant reported the transaction as sales of P2,100,000, the net income for 2011
would be overstated (understated) by
=P362,764
Solution:
Annual payment
300,000.00
Multiply by: PVF of AD of P1 at 10% for 7 periods
5.3553
Fair value of goods sold
1,606,590.00
Less: 1/1/2011 Payment
300,000.00
Carrying amount of note, 1/1/2011
1,306,590.00
Multiply by: Interest rate
10%
Interest income, 2011
130,659.00
Sales, per record
2,100,000.00
Less: Actual revenues
Sales, at fair value
1,606,590.00
Interest income, 2011
130,659.00
Net overstatement (understatement) of income
1,737,249.00
362,751.00
On July 1, 2013, Joy Corporation sold equipment to Sad Company for P1,000,000. Joy accepted a 10%
note receivable for the entire sales price. This note is payable in two equal installments of P500,000 plus
accrued interest on December 31, 2013 and December 31, 2014. On July 1, 2014, Joy discounted the note
at a bank at an interest rate of 12%. Joy’s proceeds from the discounted note were
=P517,000
Solution:
Face value of note
Accrued interest (P500,000 x 10%)
500,000.00
50,000.00
Future value
Less: Discount
(P550,000 x 12% x 6/12)
550,000.00
Net proceeds
517,000.00
33,000.00
On December 31, 2009, Wolfgang Corporation sold for P50,000 an old machine having an original cost of
P90,000 and a carrying amount of P40,000. The terms of the sale were as follows: 1) P10,000 down
payment; and 2) P20,000 payable on December 31 each of the next two years. The agreement of sale
made no mention of interest; however, 9% would be a fair rate for this type of transaction.
How much should be recognized as gain on sale of machine?
=P5,182
Solution:
Annual payment balance
Multiply by: PVF of OA of 1 at 9% for 2 periods
20,000.00
1.7591
PV of receivable
Down payment
35,182.00
10,000.00
Total consideration
Less:
Carrying amount of old machine
45,182.00
40,000.00
Gain on sale
5,182.00
Ampong Company sold a machine to Ongan Corporation on January 1, 2013, for which the cash sales
price was P379,100. Ongan entered into an installment sales contract with Ampong, calling for annual
payments of P100,000 for five years, including interest at 10%. The first payment was due on December
31, 2013. How much interest income should be recorded by Ampong in 2014?
=P31,701
Solution:
Initial measurement, 1/1/2013
Less: 2013 Payment 100,000.00
2013 Interest
(P379,100 x 10%) 37,910.00
379,100.00
Carrying amount, 1/1/2014
Multiply by: Interest rate
317,010.00
10%
Interest income
31,701.00
62,090.00
On December 31, 2009, Wolfgang Corporation sold for P50,000 an old machine having an original cost of
P90,000 and a carrying amount of P40,000. The terms of the sale were as follows: 1) P10,000 down
payment; and 2) P20,000 payable on December 31 each of the next two years. The agreement of sale
made no mention of interest; however, 9% would be a fair rate for this type of transaction. How much should
be recognized as interest income in 2010 related to above transaction?
=P3,166
Solution:
Annual payment balance
Multiply by: PVF of OA of 1 at 9% for 2 periods
20,000.00
1.7591
PV of receivable
Multiply by: Interest rate
35,182.00
9%
Interest income, 2010
3,166.38
On December 30, 2009, Chang Co. sold a machine to Door Co. in exchange for a noninterest-bearing note
requiring ten annual payments of P10,000. Door made the first payment on December 30, 2009. The
market interest rate for similar notes at date of issuance was 8%. Information on present value factors is
as follows:
Period
Present Value of 1 at
Present Value of Ordinary Annuity of 1 at
8%
8%
9
0.50
6.25
10
0.46
6.71
In its December 31, 2009 statement of financial position, what amount should Chang report as note
receivable?
=P62,500
Solution:
Annual payment
Multiply by: PVF of OA of 1 at 8% for 9 periods
10,000.00
6.25
Initial measurement of notes receivable
62,500.00
Payla Company borrowed from Gold Bank under a 10-year loan in the amount of P5,000,000 with interest
rate of 6%. Payments are due monthly and are computed to be P55,500. Gold Bank incurs P200,000 of
direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Gold Bank charges
Payla a 5-point nonrefundable loan origination fee. Gold Bank, the lender, has carrying amount of
=P4,950,000
Solution:
Loan amount
Direct origination cost
Loan origination fee (5,000,000 x 5%)
5,000,000.00
200,000.00
-250,000.00
Loan proceeds
4,950,000.00
On January 1, 2015, Shine Co. sells its equipment with a carrying value of P160,000. The company receives
a non-interest bearing note due in 3 years with a face amount of P200,000. There is no established market
value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the
present value factors of 1 at 12%:
Present value of 1 for 3 periods
0.71178
Present value of an ordinary annuity of 1 for 3 periods
2.40183
What is the gain or loss to be recognized on the sale of the equipment?
=17,644 loss
Solution:
Present value of note (200,000 x 0.71178)
Less: Carrying amount of equipment
142,356.00
160,000.00
Gain (loss) on sale
-17,644.00
Pagudpud Company received a seven-year zero-interest-bearing note on February 22, 2009, in exchange
for property it sold to Rear Company. There was no established exchange price for this property and the
note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22,
2009, 7.5% on December 31, 2009, 7.7% on February 22, 2010, and 8% on December 31, 2010. What
interest rate should be used to calculate the interest revenue from this transaction for the years ended
December 31, 2009 and 2010, respectively?
=7% and 7%
Solution:
The prevailing market interest rate at the time of the initial measurement of the instrument shall be used.
On July 1, year 1, James Rago signed an agreement to operate as a franchisee of Fast Foods, Inc. for an
initial franchise fee of 60,000. Of this amount, 20,000 was paid when the agreement was signed and the
balance is payable in four equal annual payments of 10,000 beginning July 1, year 2. The agreement
provides that the down payment is not refundable and no future services are required of the franchisor.
Rago’s credit rating indicates that he can borrow money at 14% for a loan of this type. Information on
present and future value factors is as follows:
Present value of 1 at 14% for four periods
Future amount of 1 at 14% for four periods
0.59
1.69
Present value of an ordinary annuity of 1 at 14% for four periods
2.91
Rago should record the acquisition cost of the franchise on July 1, year 1 at
=49,100
On December 31, 2018, Flint Corporation sold for P750, 000 an old machine having an original cost of P1,
350, 000 and a book value of P600, 000. The terms of the sale were as follows: P150,000 down payment;
P200, 000 payable on December 31 each of the next three years. The agreement of sale made no mention
of interest; however 9% would be a fair rate for this type of transaction.
What should be the amount of the notes receivable net of the unamortized discount on December 31, 2019
rounded to the nearest peso?
=P351, 822
Solution:
Annual payment
Multiply by: PVF of OA of 1 at 9% for 3 periods
200,000.00
2.5313
Present value of note, Dec 31, 2018
Less: 2019 Payment
Interest income, 2019 (506,260 x 9%)
506,258.80
200,000.00
-45,563.29
Carrying amount, Dec 31, 2019
154,436.71
351,822.09
On January 1, 2015, Shine Co. sells its equipment with a carrying value of P160,000. The company receives
a non-interest bearing note due in 3 years with a face amount of P200,000. There is no established market
value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the
present value factors of 1 at 12%:
Present value of 1 for 3 periods
Present value of an ordinary annuity of 1 for 3 periods
0.71178
2.40183
The discount on note receivable on January 1, 2015, is
=57,644
On July 1, 2008, Jolly Corporation sold equipment to Vee Company for P1,000,000. Jolly accepted a 10%
note receivable for the entire sales price. This note is payable in two equal installments of P500,000 plus
accrued interest on December 31, 2008 and December 31, 2009. On July 1, 2009, Jolly discounted the
note at a bank at an interest rate of 12%. Jolly’s proceeds from the discounted note were
=P517,000
Solution:
Balance Principal
Total interest (500,000 x 10%)
500,000.00
50,000.00
Maturity value
Less: Discount (550,000 x 12% x 6/12)
550,000.00
33,000.00
Proceeds from discounting
517,000.00
RTCo. assigned P500,000 of accounts receivable to CERTS Finance Co. as security for a loan of
P420,000. CERTS charged a 2% commission on the amount of the loan; the interest rate on the note
was 10%. During the first month, RTCo. collected P110,000 on assigned accounts after deducting
P380 of discounts. RTCo. accepted returns worth P1,350 and wrote off assigned accounts totaling
P3,700.
The amount of cash RTCo. received from CERTS at the time of the transfer was
=P411,600
Solution:
Loan amount
Less: Commission (P420,000 x 2%)
Net proceeds
420,000.00
8,400.00
411,600.00
Boy Company sold a machine to Golden Corporation on January 1, 2009, for which the cash sales price
was P379,100. Golden entered into an installment sales contract with Boy, calling for annual payments of
P100,000 for five years, including interest at 10%. The first payment was due on December 31, 2009. How
much interest income should be recorded by Boy in 2010?
=
P31,701
When examining the accounts of Medved Company, you ascertain that balances relating to both
receivables and payables are included in a single controlling account called receivables control that has a
debit balance of P4,850,000. An analysis of the composition of this account revealed the following:
Account receivable – customers
Accounts receivable – officers
Debit balances – creditors
Postdated checks from customers
Subscriptions receivable
Accounts payable for merchandise
Credit balances in customers’ accounts
Cash received in advance from
customers for goods not yet shipped
Expected bad debts
Debit
P7,800,000
500,000
300,000
400,000
800,000
Credit
P4,500,000
200,000
100,000
150,000
After further analysis of the aged accounts receivable, you determined that the allowance for doubtful
accounts should be P200,000. What is the correct total of current net receivables?
=P8,800,000
The balance sheet of Norman Company shows the accounts receivable balance at December 31, 2014 as
follows:
Accounts receivable-trade
Allowance for doubtful accounts
450,000
9,000
During 2015, transactions relating to the accounts receivable were as follows: Sales on account, P4,
800,000; Cash received from collections of current receivables totaled P3, 920,000, after discounts of
P80,000 were allowed for prompt payment; Bad accounts previously written off prior to 2009 amounting
to P5,000 were recovered. The company decided to provide P26,000 for doubtful accounts by a journal
entry at the end of the year. Accounts receivable of P700,000 have been pledge to a local bank on a
loan of P400,000. Collections of P150, 000 were made on these receivables (not included in the
collections previously given) and applied as partial payment for the loan. Estimated realizable value of
accounts receivable at December 31, 2015 was
=1,065,000
Solution:
Accounts receivable-trade, Dec 31, 2014
Sales on account
Recoveries
450,000.00
4,800,000.00
5,000.00
Total debits
Less: Collections
Sales discounts
Collection from pledged accounts
5,255,000.00
Accounts receivable-trade, Dec 31, 2015
Less: Allowance for doubtful accounts
Beginning balance
Recoveries
Doubtful accounts expense
Estimated realizable value
3,920,000.00
80,000.00
150,000.00
4,150,000.00
1,105,000.00
9,000.00
5,000.00
26,000.00
40,000.00
1,065,000.00
Vick Company had the following account balances at December 31, 2015:
Accounts receivable
Allowance for doubtful accounts before any provision for 2015 doubtful
accounts expense
Credit sales for 2015
900,000
16,000
1,750,000
Vick is considering the following methods of estimating doubtful accounts expense for 2015:
A.
B.
Based on credit sales at 2%
Based on accounts receivable at 5%
What amount should Vick charge to doubtful accounts expense under each
method?
Percentage
of
Credit
Sales,
Percentage
of
Accounts
Receivable
=35,000, 29,000
Solution:
Sales on account
Less: Notes received to settle accounts
Accounts determined to be worthless
Sales returns
Collections from customers
Sales discounts
3,600,000.00
400,000.00
25,000.00
15,000.00
2,450,000.00
40,000.00
2,930,000.00
Accounts receivable
Less: Provision for doubtful accounts, adj (90,000-25,000)
670,000.00
65,000.00
Net realizable value
605,000.00
Roxy Company had the following information for 2009 to its accounts receivable.
Accounts receivable on January 1
Credit sales
Collections from customers, excluding recovery
Accounts written off
Collection of Accounts written off in prior year (customer credit was not
reestablished)
Estimated uncollectible receivables per aging of receivables at December 31
1,300,000
5,400,000
4,750,000
125,000
25,000
165,000
On December 31, 2009, the balance of accounts receivable before allowance for doubtful accounts should
be
=1,825,000
Solution:
Accounts receivable, Jan 1
Add: Credit sales
Recovery
5,400,000.00
25,000.00
Total debits
Less: Collections from customers
Collections from recovered accounts
Accounts written off
4,750,000.00
25,000.00
125,000.00
Accounts receivable, Dec 31
1,300,000.00
5,425,000.00
6,725,000.00
4,900,000.00
1,825,000.00
Roxy Company had the following information relating to its accounts receivable:
Accounts receivable at 12/31/2008
Credit sales for 2009
Collections from customers for 2009, excluding recovery
Accounts written off 9/30/2009
Collection of accounts written off in prior year (customer credit was
not reestablished)
Estimated uncollectible receivables per aging of receivables at
12/31/2009
On December 31, 2009, the amortized cost of accounts receivable is
=P1,660,000
P1,300,000
5,400,000
4,750,000
125,000
25,000
165,000
Bishop Company, in its December 31, 2011 balance sheet reported accounts receivable of P1,291,000
net of allowances totaling to P146,000.
Majority of Bishop Company’s sales are on account. Credit term being provided by Bishop Company is
2/10, n/30. Likewise, Bishop Company provides for uncollectible account losses equal to 1.5% of net
credit sales.
The following transactions affected the company’s accounts receivable during 2012:
Total sales (cash and credit)
Cash received from credit customers all of whom took advantage of the discount
feature offered by Bishop Company
Cash sales
Accounts receivable written off as worthless
Credit memoranda issued to credit customers for sales returns and allowances
Cash refunds, given to cash customers for sales returns and allowances
Recoveries on accounts receivable written off as uncollectible in prior periods
The accounts receivable at December 31, 2012 before subtracting the allowance is
=P2,474,000
P8,925,000
5,145,000
2,200,000
78,000
360,000
199,000
97,000
Solution:
Accounts receivable, 12/31/2011
(P1,291,000+P146,000)
Add: Credit sales
Total sales
Less: Cash sales
1,437,000.00
8,925,000.00
2,200,000.00
6,725,000.00
Recoveries on accounts written off
97,000.00
Total debits
Less: Collection of accounts
Sales discounts
(P5,145,000 x 2%/98%)
Sales returns & allowances
Collection of recovered accounts
Accounts written off
8,259,000.00
5,145,000.00
105,000.00
360,000.00
97,000.00
78,000.00
Accounts receivable, 12/31/2012
5,785,000.00
2,474,000.00
In the December 31, 2009 statement of financial position of Miami Company, the current receivables
consisted of the following:
Trade accounts receivable
Allowance for uncollectible accounts
Claim against shipper for goods lost in transit (Nov. 2009)
Selling price of unsold goods sent by Miami on consigment at 130% of
cost(not included in Miami’s ending inventory)
Security deposit on lease of warehouse used for storing some inventories
Total
At December 31, 2009, the correct total of current net receivables was?
=940,000
Answer A
Trade accounts receivable
Allowance for uncollectible accounts
Claim receivable
Total current net receivables
930,000
(20,000)
30,000
260,000
300,000
1,500,000
930,000
(200,000)
30,000
940,000
The selling price of goods on consignement is excluded from accounts receivable because the
goods are still unsold. The cost of consigned goods of P200,000(260,000/130%) should be
included in inventory.
The security deposit is a noncurrent receivable.
The following data were taken from the records of MJ Corporation for the year ended December 31, 2015.
Sales on account
Notes received to settle accounts
Provision for doubtful accounts
3,600,000
400,000
90,000
Accounts receivable determined to be worthless
25,000
Purchases on account
3,900,000
Payments to creditors
3,200,000
Discounts allowed by creditors
260,000
Merchandise returned by customer
15,000
Collections received to settle accounts
2,450,000
Notes given to creditors in settlement of accounts
250,000
Merchandise returned to suppliers
70,000
Payments on notes payable
100,000
Discounts taken by customers
40,000
Collections received in settlement of notes
180,000
What is the net realizable value of accounts receivable on December 31, 2015?
=605,000
Solution:
Purchases
Inventory, Jan 1
4,800,000.00
2,880,000.00
Goods available for sale
Less: Inventory, Dec 31
7,680,000.00
2,640,000.00
Cost of sales
Gross profit on sales
5,040,000.00
2,160,000.00
Net Sales
Less: Cash sales
7,200,000.00
1,200,000.00
Credit sales
Accounts receivable, Jan 1
6,000,000.00
1,920,000.00
Total debits
Less: Collection of receivables
7,920,000.00
6,240,000.00
Accounts receivable, Dec 31
1,680,000.00
24. Tommy Co. assigned P500,000 of accounts receivable to CERTS Finance Co. as security for a loan of
P420,000. CERTS charged a 2% commission on the amount of the loan; the interest rate on the note was
10%. During the first month, Tommy Co. collected P110,000 on assigned accounts after deducting P380
of discounts. Tommy Co. accepted returns worth P1,350 and wrote off assigned accounts totaling
P3,700. The amount of cash Tommy Co. received from CERTS at the time of the transfer was
Select one:
=P411,600
Solution
Loan amount
420,000.00
Less: Commission (2% x 420,000)
8,400.00
Loan proceeds
411,600.00
Banayoyo Company sells to wholesalers on terms of 5/15, net 30. Banayoyo has no cash sale but 50% of
customers take advantage of the discount. Banayoyo uses the gross method of recording sales. An
analysis of trade receivables at December 31, 2009 revealed the following:
Age
0 – 15 days
16 – 30 days
Over 30 days
Amount
P15,000,000
3,000,000
2,000,000
Collectible
100%
95%
P1,500,000
On the December 31, 2009, what amount should be reported as allowance for discounts?
=P375,000
Solution:
Receivable within discount period
Multiply by: Probability of collection within discount period
15,000,000.00
50%
Estimated collectible within discount period
Multiply by: Cash discount
7,500,000.00
5%
Allowance for discount
375,000.00
On the December 31, 2009 balance sheet of Mann Company, the receivables consisted of the following:
Trade accounts receivable
P 93,000
Allowance for uncollectible accounts
( 2,000)
Claim against shipper for goods lost in transit last November 2009
3,000
Selling price of unsold goods sent by Mann on consignment at 30% of 26,000
cost (not included in Mann's ending inventory)
Security deposit on the lease of a warehouse used for storing some
30,000
inventories
Total
P150,000
How much should be reported as trade and other receivables in Mann's December 31, 2009 balance sheet?
=P94,000
Solution:
Trade accounts receivable
Claim against shipper for goods lost in transit
Allowance for uncollectible accounts
Trade and other receivables
93,000.00
3,000.00
-2,000.00
94,000.00
Joseph Company provided some information on their financial records on December 31, 2015:
Accounts receivable, January 1
Collections of account receivable
Bad debts
Inventory, January 1
Inventory, December 31
Accounts payable, January 1
Accounts payable, December 31
Cash sales
Purchases
Gross Profit on Sales
P1,920,000
6,240,000
200,000
2,880,000
2,640,000
1,000,000
1,500,000
1,200,000
4,800,000
2,160,000
What is the ending balance of accounts receivable on December 31, 2015?
=1,680,000
Solution:
Purchases
Inventory, Jan 1
4,800,000.00
2,880,000.00
Goods available for sale
Less: Inventory, Dec 31
7,680,000.00
2,640,000.00
Cost of sales
Gross profit on sales
5,040,000.00
2,160,000.00
Net Sales
Less: Cash sales
7,200,000.00
1,200,000.00
Credit sales
Accounts receivable, Jan 1
6,000,000.00
1,920,000.00
Total debits
Less: Collection of receivables
7,920,000.00
6,240,000.00
Accounts receivable, Dec 31
1,680,000.00
The following information pertains to the receivable ledger of Soliman Company for the year ended
December 31, 2013:
Unassigned
Assigned
Jan. 1, 2013 balance
2,000,000
3,000,000
Sales on account
10,000,000
Collection of net sales discounts
6,000,000
1,750,000
Sales discounts
100,000
50,000
Write-off
50,000
25,000
Sales return
60,000
30,000
Also during the year, Soliman Company factored some of its unassigned receivables receiving a net
proceeds of P720,000 and recognized in its profit or loss a loss of P130,000 as a result of the transfer.
Also, at the close of the business year December 31, 2013 recognized a provision for uncollectible,
future returns and discounts on all outstanding receivables for a total amount of P250,000. What is the
amortize cost of the receivables as of December 31, 2013?
=P5,835,000Solution:
Unassigned receivables, Jan 1
Add: Sales on account
2,000,000.00
10,000,000.00
Total
Less: Collection of net sales discounts
Sales discounts
Write-off
Sales return
Receivable factored
Net proceeds
Loss on factoring
Unassigned receivables, Dec 31
Add: Assigned receivables, Dec 31
Assigned receivables, Jan 1
Less: Collection of net sales discounts
Sales discounts
Write-off
Sales return
12,000,000.00
6,000,000.00
100,000.00
50,000.00
60,000.00
720,000.00
130,000.00
850,000.00
7,060,000.00
4,940,000.00
3,000,000.00
1,750,000.00
50,000.00
25,000.00
30,000.00
1,855,000.00
1,145,000.00
Total accounts receivables
Less: Allowance for uncollectible accounts
6,085,000.00
250,000.00
Amortized cost of receivables
5,835,000.00
From inception of operations to December 31, 20Y2, Mark Company provided for uncollectible accounts
expense under the allowance method, provisions were made monthly at 2% of credit sales, bad debts
written off were charged to the allowance account, recoveries of bad debts previously written off were
credited to the allowance account, and no year-end adjustments to the allowance account were made. The
usual credit terms are net 30 days
The allowance for doubtful accounts was P120,000 on January 1, 20Y2. During the current year, credit
sales totaled P9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P90,000
of bad debts were written off, and recoveries of accounts previously written off to P15,000.
The entity prepared an aging of accounts receivable for the first time on December 31, 20Y2.
Classification
Balance
Uncollectible
November – December
2,000,000
2%
July – October
600,000
10%
January – June
400,000
25%
Prior to January 1, 20Y2
200,000
75%
3,200,000
Based on the review of collectibility of the account balances in the “prior to January 1, 20Y2” aging category,
additional accounts totaling P60,000 are to be written off on December 31, 20Y2. Effective with the year
ended December 31, 20Y2, the entity adopted a new accounting method for estimating the allowance for
doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable. What is
the year-end adjustment to the allowance for doubtful accounts on December 31, 20Y2?
=140,000
Solution:
November - December
2,000,000.00
x 2%
40,000.00
July - October
600,000.00
x 10%
60,000.00
January - June
400,000.00
Prior to January 1, 20Y2
200,000.00
Less: Write-off
60,000.00
140,000.00
x 25%
100,000.00
x 75%
105,000.00
Allowance for doubtful accounts, Dec 31, 20Y2
305,000.00
Less: Allowance for doubtful accounts, Dec 31, 20Y2 unadjusted
Allowance for doubtful accounts, Jan 1, 20Y2
120,000.00
Interim provision (9,000,000 x 2%)
180,000.00
Total write-off (90,000 + 60,000)
(150,000.00)
Recoveries of accounts
15,000.00
Year-end adjustment/Additional provision
165,000.00
140,000.00
On December 31, 2013 the accounts receivable control account of Raha Co. had a balance of
P181,000. An analysis of the accounts receivable account showed the following:
Accounts known to be worthless
P 2,500
Advance payments to creditors on purchase orders
10,000
Advances to affiliated companies
25,000
Customers’ accounts reporting credit balance arising from
sales return
(15,000)
Interest receivable on bonds
10,000
Other trade accounts receivable – unassigned
50,000
Subscriptions receivable for ordinary share capital due in 30
days
55,000
Trade accounts receivable – assigned
15,000
Trade installment receivable due 1 – 18 months, (including
unearned finance charges, P2,000)
Trade receivables from officers, due currently
22,000
1,500
Trade accounts on which post-dated checks are held (no
entries were made on receipts of checks)
5,000
P181,000
Total
The correct balance of trade accounts receivable of Raha on December 31, 2013 is
=P 91,500
Solution:
Other trade accounts receivable-unassigned
Trade accounts receivable-assigned
Trade installment receivable, adj.
(P22,000-P2,000)
Trade receivables from officers
Trade accounts on which PDC are held
Trade accounts receivable
50,000.00
15,000.00
20,000.00
1,500.00
5,000.00
91,500.00
On December 1, 20CY, Tam Company signed a specific accounts receivable totalling 5,000,000 as
collateral on a 3,000,000, 10% notes from a certain finance entity. Tam Company will continue to collect
the assigned account receivable. In addition to the interest on the note, the entity also charged a 5% finance
fee deducted in advance on the 3,000,000 value of the note. The December collections of assigned
accounts receivable amounted to 1,500,000 less cash discount of 100,000. On December 31, 20CY, Tam
Company remitted the collection to the finance entity in payment of the interest accrued on December 31,
20CY and the note payable. What amount should be disclosed as the equity of Tam Company in assigned
accounts on December 31, 20CY?
=1,875,000
Solution:
Assigned accounts receivable balance
Accounts receivable
5,000,000.00
Less: Collection plus cash discount
1,500,000.00
Note payable balance
3,500,000.00
Face value of note
3,000,000.00
Less: Principal payment
Collection (1,500,000 - 100,000 discount)
1,400,000.00
Interest payment (3,000,000 x 10% x 1/12)
(25,000.00)
1,375,000.00
Equity on assigned accounts receivable
1,625,000.00
1,875,000.00
At January 1, 2015, Kaila Co. had a credit balance of 260,000 its allowance for uncollectible accounts.
Based on past experience, 2% of Kaila’s credit sales have been uncollectible. During 2015,
Kaila wrote off 325,000 of uncollectible accounts. Credit sales for 2015 were 9,000,000. In its December
31, 2015 balance sheet, what amount should Kaila report as allowance for uncollectible accounts?
=115,000
Solution:
Credit sales
Multiply by:
9,000,000.00
2%
Uncollectible accounts expense
Allowance for uncollectible accounts, Jan 1
180,000.00
260,000.00
Total credits
Less:
Accounts written off
440,000.00
325,000.00
Allowance for uncollectible accounts, Dec 31
115,000.00
Gomez Company's net accounts receivable were P400,000 at December 31, 2008 and P440,000
at December 31, 2009. Net cash sales for 2009 were P260,000. The accounts receivable turnover for
2009 was 7.0. What were Gomez's total net sales for 2009?
=P3,200,000
Solution:
Receivable turnover = Net credit sales / Average receivables
Net credit sales = Receivable turnover x Average receivables
Accounts receivable, 2008
Accounts receivable, 2009
400,000.00
440,000.00
Total
Divide by:
840,000.00
2
Average receivables
Multiply by: Receivable turnover
420,000.00
7.00
Net credit sales
Net cash sales
2,940,000.00
260,000.00
Total net sales
3,200,000.00
On December 1, 2011 Thor Company factors P400,000 of its accounts receivable to Iron Man
Company. The agreement includes a factoring fee of 8% based on the amount factored. In addition,
10% of the factored receivables will be withheld until the receivables are fully collected. Iron Man
Company shall maintain the holdback account at 10% of the uncollected receivables and will make
payments to Thor Company at the end of each month for any excess. Thor Company had previously
established an Allowance for Doubtful Accounts for these receivables of P12,000. By yearend, Iron
Man Company has collected 80% of the receivables factored
The loss arising from the factoring of the receivables
=20,000
Solution:
Accounts receivable
Less: Factor's fee (P400,000 x 8%)
400,000.00
32,000.00
Total proceeds
Less: Carrying amount of receivable
Accounts receivable
Less: Allowance for doubtful accounts
368,000.00
Loss on factoring
400,000.00
12,000.00
388,000.00
-20,000.00
On June 9, 20CY, Pol Corp. sold merchandise with a list price of P5,000 to Pot on account. Pol allowed
trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping
point. Pol prepaid P200 of delivery costs for Pot as an accommodation. On June 25, 20CY, Pol received
from Pot a remittance in full payment amounting to
=P3,000
Solution:
List price
5,000.00
Less: 1st trade discount (5,000 x 30%)
1,500.00
Total
3,500.00
Less: 2nd trade discount (3,500 x 20%)
700.00
Invoice price*
2,800.00
Add: Reimbursement on delivery cost
200.00
Total collection
3,000.00
*Sales discount forfeited as collection made on the 16th day after sale
Certain information relative to the operation of Cuyonin Company follows:
Accounts receivable, January 1
Account receivable collected
Cash sales
Inventory, January 1
Inventory, December 31
Purchases
Gross profit on sales
P 800,000
2,600,000
500,000
1,200,000
1,100,000
2,000,000
900,000
What is the accounts receivable balance at December 31?
=P 700,000
Solution:
Purchases
Inventory, January 1
2,000,000.00
1,200,000.00
Goods available for sale
Less: Inventory, December 31
3,200,000.00
1,100,000.00
Cost of sales
Gross profit on sales
2,100,000.00
900,000.00
Total sales
Less: Cash sales
3,000,000.00
500,000.00
Credit sales
Accounts receivable, January 1
2,500,000.00
800,000.00
Total debits
Less: Accounts receivable collected
3,300,000.00
2,600,000.00
Accounts receivable, December 31
700,000.00
The December 31, 2009 balances of selected accounts of Bicolano Company and pertinent information are
shown below:
Inventory, January 1
Purchases
Purchases returns and allowances
Sales returns and allowances
Inventory at December 31
Gross profit rate on net sales
Gross
sales
for
=P8,500,000
P2,000,000
7,500,000
500,000
750,000
2,800,000
20%
2009
amount
to
Solution:
Accounts receivable, Jan 1
Sales
Recovery of accounts
2,500,000.00
7,935,000.00
15,000.00
Total debits
Less: Collection from customers
Discount within 10-day period (4,410,000 x 2%/98%)
Discount within 15-day period (2,475,000 x 1%/99%)
Sales return
Accounts written off
10,450,000.00
8,000,000.00
90,000.00
25,000.00
30,000.00
55,000.00
Accounts receivable, Dec 31
8,200,000.00
2,250,000.00
Diana Corp. factored P400,000 of accounts receivable with Carla, Inc., on a without-recourse
basis. The factor charge was 1.75% of the amount of receivables, and an additional 4% was retained
to cover probable adjustments. In addition to the factor charge, a finance charge was withheld equal
to 12% annually for any amounts advanced prior to the due dates of the receivables. This charge was
based on 100% of the face value. The average credit term was 30 days from the date of
transfer. According to the terms of the factoring agreement, Diana was to handle returned goods,
allowances, and shipping disputes. Carla was to collect the cash and acknowledge sales discounts,
but such discounts were to be charged to Diana. Credit losses were to be absorbed by Carla. Diana
has not recorded any bad debt expense related to the factored receivables. The following transactions
pertain to this factoring arrangement:
Aug. 1
31
Sept. 20
30
Oct. 10
The receivable records were transferred to Carla. Carla estimated
that P2,900 of the accounts will prove to be uncollectible.
Carla collected P234,000 during August after allowing for P9,000 of
sales discounts. Sales returns and allowances during August totaled
P2,400.
Carla wrote off a P2,000 account after learning of the company's
bankruptcy.
Carla collected P151,720 during September. Sales returns and
allowances during September totaled P880.
Diana and Carla made a final cash settlement.
What net cash proceeds did Diana ultimately realize from the factoring?
=P376,720
Solution:
Accounts receivable factored
Less: Factor's fee (P400,000 x 1.75%)
Finance charge (P400,000 x 12% x 1/12)
Aug 31 Sales discounts
Aug 31 sales returns and allowances
Sep 30 sales returns and allowances
400,000.00
7,000.00
4,000.00
9,000.00
2,400.00
880.00
Net cash proceeds
23,280.00
376,720.00
Certain information relative to the operation of Cuyonin Company follows:
Accounts receivable, January 1
Account receivable collected
Cash sales
Inventory, January 1
Inventory, December 31
Purchases
Gross profit on sales
P 800,000
2,600,000
500,000
1,200,000
1,100,000
2,000,000
900,000
What is the accounts receivable balance at December 31?
=P 700,000
Solution:
Purchases
Inventory, January 1
2,000,000.00
1,200,000.00
Goods available for sale
3,200,000.00
Less:
Inventory, December 31
1,100,000.00
Cost of sales
Gross profit on sales
2,100,000.00
900,000.00
Total sales
Less: Cash sales
3,000,000.00
500,000.00
Credit sales
Accounts receivable, January 1
2,500,000.00
800,000.00
Total debits
Less: Accounts receivable collected
3,300,000.00
2,600,000.00
Accounts receivable, December 31
700,000.00
The following information is available for Faith Company relating to 2009 operations:
Accounts receivable, January 1
Accounts receivable collected
Cash sales
Inventory, January 1
Inventory, December 31
Purchases
Gross margin on sales
4,000,000
8,400,000
2,000,000
4,800,000
4,400,000
8,000,000
4,200,000
What is faith Company’s account receivable balance at December 31, 2009?
=6,200,000
Answer B
Inventory-January 1
Purchases
Goods available for sale
Inventory – December 31
Cost of goods sold
Gross margin on sales
Gross sales
Cash Sales
Credit sales
Accounts receivable – January 1
Total
4,800,000
8,000,000
12,800,000
(4,400,000)
8,400,000
4,200,000
12,600,000
(2,000,000)
10,600,000
4,00,000
14,600,000
Accounts receivable collected
Accounts receivable – december 31
(8,400,000)
6,200,0000
Ilocos Company sold merchandise on credit to Norte Company for P100,000 on July 1, with terms of 2/10,
net /30. On July 6, Norte returned P20,000 worth of merchandise claiming the materials were defective. On
July 8, Ilocos received a payment from Norte and credited Accounts Receivable for P45,000. On July 24,
Norte Company paid the remaining balance on its account. What was the total cash received from Norte
during July?
=P79,100
Solution:
Invoice price (5,000,000 x 90% x 80%)
Sales discount (3,600,000 x 5%)
Freight out paid by customer
3,600,000.00
-180,000.00
-50,000.00
Total remittance/collection from customer
3,370,000.00
Colossus Company provides an allowance for its doubtful accounts receivable. At December 31,
2011, the allowance account had a credit balance of P20,000. Each month Colossus Corporation
accrues bad debts expense in an amount equal to 1% of credit sales. Total credit sales during 2008
amounted to P4,500,000. During 2012, uncollectible accounts receivable totaling P15,000 were
written off against the allowance account. An aging of P916,000 accounts receivable at December
31, 2012 indicates that an allowance of P62,000 should be provided for doubtful accounts as of that
date
The year-end adjustment at December 31, 2012 to the allowance for doubtful accounts is
=P12,000 debit
Solution:
Allowance for doubtful accounts, 12/31/12
Accounts written off
62,000.00
15,000.00
Total debits
Less: Allowance for doubtful accounts, 12/31/11
77,000.00
20,000.00
Bad debts expense, adjusted
Bad debts expense, initial (P4.5M x 1%)
57,000.00
45,000.00
Net credit (debit) adjustment
12,000.00
Wolverine Company had the following information relating to its accounts receivable for the year 2012:
Accounts receivable, January 1
Sales all on credit
Collections from customers (including P40,000
recovery of accounts written off)
Allowance for doubtful accounts, January 1
Accounts written off as worthless
P 1,200,000
5,300,000
4,750,000
75,000
60,000
Banshee uses 2% of sales to estimate its uncollectible accounts. The balance of the accounts
receivable at December 31, 2006 before considering the allowance for doubtful accounts is
=P1,730,000
Solution:
Accounts receivable, Jan 1
Add: Sales on credit
Recovery
1,200,000.00
5,300,000.00
40,000.00
Totals
Less: Collections
Accounts written off
6,540,000.00
4,750,000.00
60,000.00
Accounts receivable, Dec 31
4,810,000.00
1,730,000.00
Based on the aging of its accounts receivable at December 31, 2015, Jane Company determined that the
net realizable value of the receivables that date is P190, 000. Additional information is as follows:
Accounts receivable at 12/31/2015
Allowance for doubtful accounts at 1/1/2015 – credit balance
Accounts written off as uncollectible at 9/30/2015
220,000
32,000
24,000
Jane’s doubtful accounts expense for the year ended December 31, 2015, is
=22,000
The balances of selected accounts taken from January 1, 2013 statement of financial position of ATC
Company were as follows:
Accounts receivable
Allowance
for
doubtful
P2,500,000
accounts
60,000
The following summary of transactions affecting accounts receivable occurred during the year ended
December
31,
2013.
Sales – all on account (2/10, 1/15, n/30)
Cash received from customers
The cash received includes the
following:
Customer paying within the 10-day
discount period
Customer paying within the 15-day
discount period
Recovery of accounts written off
Customers paying beyond the
discount period
Accounts receivable written off as
worthless
P7,935,000
8,000,000
4,410,000
2,475,000
15,000
?
55,000
Credit memoranda for sales return
30,000
The balance of accounts receivable on December 31, 2013 is
=P2,250,000
Solution:
Accounts receivable, Jan 1
Sales, all on account
Recovery of accounts written off
2,500,000.00
7,935,000.00
15,000.00
Total debits
Less: Total credits
Cash received from customers
Accounts written off
Sales returns
Sales discounts
Within 10-day period
(P4,410,000 x 2%/98%)
Within 15-day period
(P2,475,000 x 1%/99%)
10,450,000.00
8,000,000.00
55,000.00
30,000.00
90,000.00
25,000.00
Accounts receivable, Dec 31
8,200,000.00
2,250,000.00
Badoc Corporation's books disclosed the following information for the year ended December 31, 2009:
Net credit sales
Net cash sales
Accounts Receivable at beginning of year
Accounts Receivable at end of year
P1,500,000
240,000
200,000
400,000
Badoc's accounts receivable turnover is
=5.00 times
On January 1, 20CY, Ponytail Company had accounts receivable and allowance for doubtful accounts of
P950, 000 and P100, 000 respectively. During 20CY, cash and credit sales totalled P5,900,000. Collections
from customers were as follows: from credit customers who took advantage of the 4/10, n/30, P3,024,000,
from credit customers who did not take advantage of the credit terms which included recovery of accounts
previously written off of P25,000, P450,000, from cash customers, P2,100,000. Also, P50,000 of accounts
were written off during the year and sales returns and allowances were as follows: credit memorandum
issued to credit customers, P250,000 and cash refund to cash customers, P20,000. Ponytail estimated that
5% of its accounts receivable on December 31, 20CY is considered doubtful. What is the amortized cost of
accounts receivable on December 31, 20CY?
Select one:
=831,250
Solution
Accounts receivable, Jan 1
950,000.00
Credit sales
Total sales
5,900,000.00
Less: Cash sales
2,100,000.00
3,800,000.00
Recovery of previously written off account
25,000.00
Total debits
4,775,000.00
Less: Total credits
Collections of accounts
Total collections (3,024,000 + 450,000)
3,474,000.00
Sales discounts (3,024,000 x 4%/96%)
126,000.00
Sales returns (credit memo)
250,000.00
Written off accounts
50,000.00
3,900,000.00
Accounts receivable, Dec 31
875,000.00
Less: Allowance on doubtful accounts (5% x 875,000)
43,750.00
Amortized cost of accounts receivable
831,250.00
Joseph, Inc. sells to wholesalers on terms 2/15,net 30. Joseph has no cash sales but 50% of Joseph's
customers take advantage of the discount. Joseph uses the gross method of recording sales and trade
receivables. An analysis of Joseph's trade receivable at December 31,2015 revealed the following:
Age
0 - 15 days
16-30 days
31-60 days
Over 60 days
Amount
Collectible
2,000,000
100%
1,200,000
95%
100,000
90%
50,000
50%
3,350,000
What is the net realizable value of receivable at December 31, 2015?
=3,235,000
The balances of selected accounts taken from January 1, 2009 balance sheet of Huygens Company were
as follows:
Accounts receivable
Allowance for doubtful accounts
P2,500,000
60,000
The following summary of transactions affecting accounts receivable occurred during the year ended
December 31, 2009.
Sales – all on account (2/10, 1/15, n/30)
Cash received from customers
The cash received includes the following:
Customer paying within the 10-day discount period
Customer paying within the 15-day discount period
Recovery of accounts written off
Customers paying beyond the discount period
Accounts receivable written off as worthless
Credit memoranda for sales return
P7,935,000
8,000,000
4,410,000
2,475,000
15,000
?
55,000
30,000
The balance of accounts receivable on December 31, 2009 is
=P2,250,000
Solution:
Accounts receivable, Jan 1
Sales
Recovery of accounts
2,500,000.00
7,935,000.00
15,000.00
Total debits
Less: Collection from customers
Discount within 10-day period (4,410,000 x 2%/98%)
Discount within 15-day period (2,475,000 x 1%/99%)
Sales return
Accounts written off
10,450,000.00
Accounts receivable, Dec 31
8,000,000.00
90,000.00
25,000.00
30,000.00
55,000.00
8,200,000.00
2,250,000.00
When examing the accounts of Brute Company, it is ascertained that balance relating to both receivables
and payables are included in a single controlling account called receivables control that has a debt balance
of P4,850,000. An analysis of the make up of this account revealed the following:
Accounts receivable - customers
Debit
7,800,000
Credit
Accounts receibable - officers
Debit balances – creditors
Postdated checks from customers
Subscription receivable
Accounts payable for merchandise
Credit balances in customer’s accounts
Cash received in advance from customers for goods not yet shipped
Expected bad debts
500,000
300,000
400,000
800,000
4,500,000
200,000
100,000
150,000
After further analysisof the aged accounts receivable, it is determined that the allowance for doubtful
accounts should be P200,000. What is the correct total of current not receivables?
=8,800,000
Norman Company was organized in 2015. For the year ended December 31, 2015, Norman
made available the following information:
Total merchandise purchases for the year
Merchandise inventory at December 31
Collection from customers
7,000,000
1,400,000
4,000,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales are on credit basis and all
receivables are collectible, what should be the balance in accounts receivable at December 31, 2015?
=3,840,000
The following data relate to accounts receivable of Jay Company for 2009.
Accounts receivable, January 1
Credit Sales
Sales returns
Accounts writtern off
Collections from customers
Estimated future sales return at December 31
Estimated uncollectible accounts at 12/31 per aging
650,000
2,700,000
75,000
40,000
2,150,000
50,000
110,000
What amount should Jay report as net realizable value of accounts receivable at December 31, 2009?
=925,000
Answer D
Accounts Receivable January 1
650,000
Credit sales
2,700,000
Total
3,350,000
Less: Collections from customers
2,150,000
Accounts written off
40,000
Sales return
75,000
2,265,000
Accounts Receivable- December 31
1,085,000
The net realizable value of accounts eceivable is computed as follows
Accounts receivable
1,085,000
Less: Allowance for doubtful accounts
110,000
Allowance for sales returns
50,000
160,000
Net realizable value
925,000
The following information relates to Storm Company’s accounts receivable for 2011:
Accounts receivable, 1/1/11
Credit sales for 2011
Sales returns for 2011
Accounts written off during 2011
Collections from customers during 2011
Allowance for doubtful accounts 1/1/11
P
650,000
2,700,000
75,000
40,000
2,150,000
90,000
The net realizable value of accounts receivable at December 31, 2011 amounted to P975,000.
The uncollectible accounts expense of Storm Company for 2011 is
=P60,000
Solution:
Accounts receivable, 1/1/11
Credit sales
650,000.00
2,700,000.00
Total debits
3,350,000.00
Less: Collections from customers
Sales returns
Accounts written off
2,150,000.00
75,000.00
40,000.00
2,265,000.00
Accounts receivable, 12/31/11
Less: Net realizable value
1,085,000.00
975,000.00
Allowance for doubtful accounts, 12/31/11
Add: Accounts written off
110,000.00
40,000.00
Total debits
Less: Allowance for doubtful accounts, 1/1/11
150,000.00
90,000.00
Uncollectible accounts expense
60,000.00
On January 1, 2012 Waverly Bank grants a 3-year, P4,000,000 loan to a borrower. The interest rate on
the loan is 10% payable annually starting December 31, 2012. The origination fee collected from the
borrower was P342,100 while the direct origination cost incurred was P150,000. The effective rate of the
loan after considering the fee charged against the borrower and the origination cost incurred was 12%. The
carrying amount of the loan receivable on December 31, 2012
=3,864,848
Solution:
Principal amount
Direct origination cost
Origination fee received
4,000,000.00
61,500.00
-350,000.00
Initial carrying amount
Add: Amortization of discount
Interest income (3,711,500 x 12%)
Interest received (4,000,000 x 10%)
3,711,500.00
445,380.00
400,000.00
Carrying amount, Dec 31, 2012
45,380.00
3,756,880.00
BDO granted a loan to a borrower on January 1, 20Y1. The interest on the loan is 8% payable
annually starting December 31, 20Y1. The loan matures in three years on December 31, 20Y3. Data related
to the loan are:
Principal amount
Origination fee charged against the borrower
Direct origination cost incurred
3,000,000
100,000
260,300
After considering the origination fee charged to the borrower and the direct origination cost incurred, the
effective rate on the loan is 6%. The carrying amount of the loan receivable on December 31, 20Y1
=3,109,918
Solution:
Principal amount
3,000,000.00
Origination fees received
(100,000.00)
Direct origination cost incurred
260,300.00
Initial measurement of loan
3,160,300.00
Less: Amortization of premium
Interest received (nominal) (3,000,000 x 8%)
240,000.00
Interest earned (effective) (3,160,300 x 6%)
189,618.00
Carrying amount, Dec 31, 20Y1
50,382.00
3,109,918.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five
years on December 31, 2018. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The carrying amount of the loan as of December 31, 2014 is
=P4,696,128
Solution:
Principal amount
Direct origination cost
Origination fee received (5,000,000 x 8%)
5,000,000.00
39,400.00
-400,000.00
Initial carrying amount
Add: Amortization of discount
Interest income (4,639,400 x 12%)
Interest received
4,639,400.00
556,728.00
500,000.00
Carrying amount, Dec 31, 2014
56,728.00
4,696,128.00
On July 1, 20CY Gringo Bank granted a 5-year, P4,000,000 loan to a borrower. The interest rate on the
loan is 10%. The direct origination cost incurred was P61,500 while the origination fee collected from the
borrowers was P350,000. The effective rate of the loan after considering the direct origination costs and
origination fees is 12% The interest income for the period ending December 31, 20CY is
=222,690
Solution:
Principal amount of loan
4,000,000.00
Origination fees received
(350,000.00)
Direct origination cost
61,500.00
Initial measurement of loan, Jul 1, 20CY
3,711,500.00
Multiply by: Effective interest rate
12%
Effective interest, Y1
445,380.00
Multiply by: Coverage (Jul 1 to Dec 31, 20CY)
6 mos/12 mos
Interest income, CY
222,690.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five
years on December 31, 2018. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The carrying amount of the loan as of January 1, 2014 is
=P4,639,400
Solution:
Principal amount
Direct origination cost
Origination fee received (5,000,000 x 8%)
5,000,000.00
39,400.00
-400,000.00
Initial carrying amount
4,639,400.00
Palaboy Company borrowed from CERTS Bank under a 10-year loan in the amount of P5,000,000 with
interest rate of 6%. Payments are due monthly and are computed to be P55,500. Gold Bank incurs
P200,000 of direct loan origination cost and P50 amount of
=Solution:
Loan amount
Direct origination cost
Loan origination fee (5,000,000 x 5%)
5,000,000.00
200,000.00
-250,000.00
Loan proceeds
4,950,000.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 20Y1. The
interest rate on the loan is 10% payable annually starting December 31, 20Y1. The loan matures in five
years on December 31, 20Y5. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The carrying amount of the loan as of December 31, 20Y1 is
=P4,696,128
Solution:
Face amount of loan
5,000,000.00
Nonrefundable originate fee (5,000,000 x 5%)
(250,000.00)
Direct origination cost
200,000.00
Carrying amount of loan
4,950,000.00
Face amount of loan
5,000,000.00
Nonrefundable origination fee (5,000,000 x 8%)
(400,000.00)
Direct origination cost
39,400.00
Carrying amount of loan
4,639,400.00
Trial B - 11.94%
PV of Principal (5,000,000 x 0.5690)
2,845,000.00
PV of Interest payments (5,000,000 x 10% x 3.6101)
1,805,050.00
4,650,050.00
Trial C - 12%
PV of Principal (5,000,000 x 0.5674)
2,837,000.00
PV of Interest payments (500,000 x 3.6048)
1,802,400.00
4,639,400.00
Trial D - 9.8%
PV of Principal (5,000,000 x 0.6266)
3,133,000.00
PV of Interest payments (500,000 x 3.8102)
1,905,100.00
5,038,100.00
Carrying amount of loan, Jan 1, 20Y1
4,639,400.00
Add: Amortization of discount
Interest income (effective), 20Y1 (4,639,400 x 12%)
556,728.00
Interest received (nominal), 20Y1 (5,000,000 x 10%)
500,000.00
Carrying amount of loan, Dec 31, 20Y1
56,728.00
4,696,128.00
On December 1, 2011, Tigg Mortgage Co. gave Pod Corp. a P200,000, 12% loan. Pod received proceeds
of P194,000 after the deduction of a P6,000 nonrefundable loan origination fee. Principal and interest are
due in sixty monthly installments of P4,450, beginning January 1, 2012. The repayments yield an effective
interest rate of 12% at a present value of P200,000 and 13.4% at a present value of P194,000. Tigg does
not elect the fair value option for recording the note to Pod. What amount of accrued interest receivable
should Tigg include in its December 31, 2014 statement of financial position?
=P2,000
Solution:
P200,000 x 12% x 1/12 = P2,000
Installment payments are done at every beginning of the month, therefore, the January 1, 2015 payment
includes accrued interest receivable for December 2014.
Duff, Inc. borrowed from Martin Bank under a ten-year loan in the amount of 150,000 with a stated interest
rate of 6%. Payments are due monthly, and are computed to be 1,665. Martin Bank incurs 4,000 of direct
loan origination costs and 2,000 of indirect loan origination costs. In addition, Martin Bank charges Duff,
Inc. a four-point nonrefundable loan origination fee. Martin Bank, the lender, has a carrying amount of
=148,000
Solution:
Loan amount
Direct origination cost
Loan origination fee (150,000 x 4%)
150,000.00
4,000.00
-6,000.00
Loan proceeds
148,000.00
On July 1, 2013 Gringots Bank granted a 5-year, P4,000,000 loan to a borrower. The interest rate on the
loan is 10%. The direct origination cost incurred was P61,500 while the origination fee collected from the
borrowers was P350,000. The effective rate of the loan after considering the direct origination costs and
origination fees is 12% The interest income for the period ending December 31, 2013 is
=
222,690.00
Solution:
Principal amount
Direct origination cost
Origination fee received
4,000,000.00
61,500.00
-350,000.00
Initial carrying amount
Multiply by: Effective interest rate
3,711,500.00
12%
Annual interest income
Multiply by: Period (Jul 1-Dec 31, 2013)
445,380.00
6 mos/12 mos
Interest income, 2013
222,690.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 20Y1. The
interest rate on the loan is 10% payable annually starting December 31, 20Y1. The loan matures in five
years on December 31, 20Y5. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The effective interest rate of the loan is
=12.00%
Solution:
Face amount of loan
5,000,000.00
Nonrefundable origination fee (5,000,000 x 8%)
(400,000.00)
Direct origination cost
39,400.00
Carrying amount of loan
4,639,400.00
Trial B - 11.94%
PV of Principal (5,000,000 x 0.5690)
2,845,000.00
PV of Interest payments (5,000,000 x 10% x 3.6101)
1,805,050.00
4,650,050.00
Trial C - 12%
PV of Principal (5,000,000 x 0.5674)
2,837,000.00
PV of Interest payments (500,000 x 3.6048)
1,802,400.00
4,639,400.00
Trial D - 9.8%
PV of Principal (5,000,000 x 0.6266)
3,133,000.00
PV of Interest payments (500,000 x 3.8102)
1,905,100.00
5,038,100.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five
years on December 31, 2018. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The interest income to be recognized in 2014 is
=P556,728
Solution:
Principal amount
Direct origination cost
Origination fee received (5,000,000 x 8%)
5,000,000.00
39,400.00
-400,000.00
Initial carrying amount
Multiply by: Effective interest
4,639,400.00
12%
Interest income
556,728.00
Grey Company holds an overdue note receivable of P800,000 plus recorded accrued interest of
P64,000. The effective interest rate is 8%. As a result of a court-imposed settlement on December 31,
2014, Grey agreed to the following restructuring arrangement:
·
Reduced the principal obligation to P600,000.
·
Forgave the P64,000 of accrued interest.
·
Extended the maturity date to December 31, 2016.
·
Annual interest of P40,000 is to be paid on December 31, 2015 and 2016.
The present value of the interest and principal payments to be received by Grey Company discounted
for two years at 8% is P585,734. On December 31, 2014, Grey would recognize a valuation allowance
for impaired loans of
=214,266
Solution:
Face amount of old note
Less: Present value of new note
800,000.00
585,734.00
Allowance for impairment
214,266.00
Scotia Bank granted a loan to a borrower on January 1, 2015. The interest rate on the loan is 10% payable
annually starting December 31, 2015. The loan matures in five years on December 31, 2019.
Principal amount
4,000,000
Direct origination cost
61,500
Origination fee received from borrower
350,000
The effective rate on the loan after considering the direct origination cost and origination fee received
is 12%.
What is the interest income for 2015?
=445,380
Solution:
Principal amount
Direct origination cost
Origination fee received
4,000,000.00
61,500.00
-350,000.00
Initial measurement of loan
Multiply by: Effective interest rate
3,711,500.00
12%
Interest income
445,380.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 2014. The
interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five
years on December 31, 2018. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The effective interest rate of the loan is
=12.00%
Solution:
Principal amount
Direct origination cost
Origination fee received (5,000,000 x 8%)
5,000,000.00
39,400.00
-400,000.00
Initial carrying amount
4,639,400.00
Trial and error
If 11.94% effective interest:
Principal (5,000,000 x 0.5689)
Interest (500,000 x 3.6101)
2,844,500.00
1,805,050.00
Total present value
4,649,550.00
If 12% effective interest:
Principal (5,000,000 x 0.5674)
Interest (500,000 x 3.6048)
2,837,000.00
1,802,400.00
Total present value
4,639,400.00
On July 1, 20CY Gringo Bank granted a 5-year, P4,000,000 loan to a borrower. The interest rate on the
loan is 10%. The direct origination cost incurred was P61,500 while the origination fee collected from the
borrowers was P350,000. The effective rate of the loan after considering the direct origination costs and
origination fees is 12% The interest income for the period ending December 31, 20CY is
=222,690
Solution:
Principal amount of loan
4,000,000.00
Origination fees received
(350,000.00)
Direct origination cost
61,500.00
Initial measurement of loan, Jul 1, 20CY
3,711,500.00
Multiply by: Effective interest rate
12%
Effective interest, Y1
445,380.00
Multiply by: Coverage (Jul 1 to Dec 31, 20CY)
6 mos/12 mos
Interest income, CY
222,690.00
On January 1, 2012 Gringots Bank granted a 5-year, P4,000,000 loan to a borrower. The interest rate on
the loan is 10% payable annually starting on December 31, 2012. The direct origination cost incurred was
P61,500 while the origination fee collected from the borrowers was P350,000. The effective rate of the loan
after considering the direct origination costs and origination fees is 12% The interest income for 2012 is
=445,380
Solution:
Principal amount
Direct origination cost
Origination fee received
4,000,000.00
61,500.00
-350,000.00
Initial carrying amount
Multiply by: Effective interest rate
3,711,500.00
12%
Interest income, 2012
445,380.00
Bank of Montreal granted a loan to a borrower in the amount of P5,000,000 on January 1, 20Y1. The
interest rate on the loan is 10% payable annually starting December 31, 20Y1. The loan matures in five
years on December 31, 20Y5. The bank incurs P39,400 of direct loan origination cost and P10,000 of
indirect loan origination cost. In addition, the bank charges the borrower an 8-point nonrefundable loan
origination fee. The carrying amount of the loan as of January 1, 20Y1 is
=P4,639,400
Solution:
Face amount of loan
5,000,000.00
Nonrefundable origination fee (5,000,000 x 8%)
(400,000.00)
Direct origination cost
39,400.00
Carrying amount of loan
4,639,400.00
On December 1, 2014, Rose Co. gave JP Co. a P200,000,11% loan. Rose paid proceeds of P194,000 after
the deduction of a P6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly
installment of P4,310 beginning January 1, 2015. the repayments yield an effective interest rate of 11% at
a present value of P200,000 and 12.4% at a present value of P194,000. What amount of income from this
loan should Rose report in its income statement?
=2,005
Solution:
P194,000 x 12.4% x 1/12 = P2,005.
BDO granted a loan to a borrower on January 1, 2012. The interest on the loan is 8% payable
annually starting December 31, 2012. The loan matures in three years on December 31, 2014. Data related
to the loan are:
Principal amount
Origination fee charged against the borrower
Direct origination cost incurred
3,000,000
100,000
260,300
After considering the origination fee charged to the borrower and the direct origination cost incurred, the
effective rate on the loan is 6%. The carrying amount of the loan receivable on December 31, 2012
=3,109,918
Scotia Bank granted a loan to a borrower on January 1, 2015. The interest rate on the loan is 10% payable
annually starting December 31, 2015. The loan matures in five years on December 31, 2019
Principal amount
4,000,000
Direct origination cost
61,500
Origination fee received from borrower
350,000
The effective rate on the loan after considering the direct origination cost and origination fee received
is 12%.
What is the carrying value of the loan receivable on January 1, 2015?
=3,711,500
Solution:
Principal amount
Direct origination cost
Origination fee received
4,000,000.00
61,500.00
-350,000.00
Initial measurement of loan
3,711,500.00
Sleeping Corporation factored P600,000 of accounts receivable to Beauty Finance Co. on October 1,
20CY. Control was surrendered by Sleeping. Beauty accepted the receivables subject to recourse for
nonpayment. Beauty assessed a fee of 3% and retains a holdback equal to 5% of the accounts
receivable. In addition, Beauty charged 15% interest computed on a weighted-average time to maturity of
the receivables of 54 days. The fair value of the recourse obligation is P9,000. Sleeping will receive and
record cash of
=P538,685
Solution:
Face amount of accounts receivable factored
600,000.00
Factor's fee (600,000 x 3%)
(18,000.00)
Factor's holdback (600,000 x 5%)
(30,000.00)
Interest (600,000 x 15% x 54/365)
(13,315.00)
Cash proceeds
538,685.00
Sleeping Corporation factored P600,000 of accounts receivable to Beauty Finance Co. on October 1,
20CY. Control was surrendered by Sleeping. Beauty accepted the receivables subject to recourse for
nonpayment. Beauty assessed a fee of 3% and retains a holdback equal to 5% of the accounts
receivable. In addition, Beauty charged 15% interest computed on a weighted-average time to maturity of
the receivables of 54 days. The fair value of the recourse obligation is P9,000.
Assuming all receivables are collected, Sleeping’s cost of factoring the receivables would be
=P31,315
Solution:
Factor's fee (600,000 x 3%)
18,000.00
Interest (600,000 x 15% x 54/365)
13,315.00
Total cost of factoring
31,315.00
In an entity’s April 30, 20Y1 statement of financial position a note receivable was reported as a noncurrent
asset and its accrued interest for eight months was reported as a current asset . Which of the following
terms would fit the entity’s note receivable?
=Principal is due August 31, 20Y2 and interest is due August 31, 20Y1 and August 31,
20Y2.
SOLUTION
Since the accrued interest for eight months from September 1, 20Y0 to April 30 , 20Y1 reported as current
asset , it can be assumed that it will be received annually on August 31, 20Y1 and August 31, 20Y2.
Since the note receivable is reported as a current asset , it can be assumed that the principle will be
collected on August 31, 20Y2, which is more than one year from April 30 20Y1.
Because the interest is payable every August 31, it can deduce that the principal is due on August 31,
20Y2.
The note receivable is actually a 2 year note dated September 1, 20Y0 and maturing on August 31, 20Y2.
The interest is payable annually every August 31.
On November 30, 20CY, accounts receivable in the amount of P900,000 were assigned to
Kaban Finance Co. by Kalan as security for a loan of P750,000. Kaban charged a 3% commission on the
accounts; the interest rate on the note is 12%. During the December 20CY, Kalan collected P350,000 on
assigned accounts after deducting P560 of discounts. Kalan wrote off a P530 assigned account. On
December 31, 20CY, Kalan remitted to Kaban the amount collected plus one month's interest on the note.
How much is Kalan’s equity in the assigned accounts receivable as of December 31, 20CY?
=P148,910
Solution:
Carrying amount of accounts receivable
Accounts receivable assigned
900,000.00
Collections
(350,000.00)
Sales discounts
(560.00)
Write-off
(530.00)
548,910.00
Less: Carrying amount of loan
Face amount of loan
750,000.00
Payment of principal from collections
(350,000.00)
Equity on assigned accounts receivable
400,000.00
148,910.00
On July 1 at the current year an entity received a one year note receivable bearing interest at the market
rate. The face amount of the note receivable and the entire amount of the interest due on June 30 of the
next year . AT December 31 of the current year , the entity should report in its statement of financial
position
=Interest receivable for the interest accruing in the current year
SOLUTION: There is an accrued interest receivable from July 1, to December 31 of the current year
On August 15 , an entity sold goods for which is received a note bearing the market rate of interest on that
date . The four month note are dated July 15, Note principal , together with all interest is due November 15.
When the note was recoded on August 15, Which of the following accounts increased?
=Interest receivable
SOLUTION: Since the note was dated July 15, and it was received on August 15, there is an accrued
interest receivable for one month from July 15 to August 15
On December 31, 2013, Charlton acquired an investment for P500,000 plus a purchase commission of
P10,000. The investment is designated as financial asset at fair value through other comprehensive
income. On December 31, 2013, quoted market price of the investment is P500,000. If the investment
were sold, a commission of P15,000 would be paid. On December 31, 2013, the investment should be
carried at
=P500,000
Solution:
Subsequent measurement for financial assets at fair value through other comprehensive income shall be
at fair value, hence, P500,000 shall be the carried amount as at December 31, 2013.
On January 2, 2013, Theodora Company purchased 40,000 shares of Byzantine, Inc. stock at P100 per
share. Brokerage fees amounted to P120,000. A P5 dividend per share of Byzantine, Inc. shares had
been declared on December 15, 2012, to be paid on March 31, 2013 to shareholders of record on January
31, 2013. The shares are designated as financial assets at fair value through other comprehensive
income. On December 31, 2013 the investment has a fair value of P3,820,000. How much should be
recognized as component of equity as of December 31, 2013 related to these securities?
=P100,000
Solution:
Fair value, Dec 31, 2013
Less: Carrying amount, Dec. 31, 2013
Acquisition cost (100 x 40,000)
Brokerage fees
Total proceeds
Less: Accrued dividends (5 x 40,000)
3,820,000.00
4,000,000.00
120,000.00
4,120,000.00
200,000.00
Gain (Loss) on change in fair value
3,920,000.00
-100,000.00
On January 2, 2013, Gamu Company purchased as a long term investment 10,000 ordinary shares of
Ilagan Corporation for P70 per share, which represents a 1% interest. On July 1, Ilagan Corporation
declared its annual dividend on its ordinary shares of P5 per share payable on August 1 to shareholder’s
of record at July 25, 2013. On July 20, 2013 Gamu needed additional cash for operations and sold all
10,000 shares Ilagan for P100 per share. For the year ended December 31, 2013, Gamu should report on
its income statement a gain on disposal of
=P250,000
Solution:
Fair value, Dec 31, 2013
Less: Carrying amount, Dec. 31, 2013
Acquisition cost (100 x 40,000)
Brokerage fees
Total proceeds
Less: Accrued dividends (5 x 40,000)
3,820,000.00
4,000,000.00
120,000.00
4,120,000.00
200,000.00
Gain (Loss) on change in fair value
3,920,000.00
-100,000.00
The irrevocable election to present subsequent changes in fair value in other comprehensive income is
applicable only to
=Investment in equity instrument that is not held for trading
On January 1, 20Y1, Rockford Company purchased 5-year bonds with face value of P 8,000,000 and stated
interest of 10% per year payable semi annually January 1 and July 1. The bonds were acquired to yield
8%. Present value factors are:
Present value of an annuity of 1 for 10 periods at 5%
Present value of an annuity of 1 for 10 periods at 4%
Present value of 1 for 10 periods at 4%
7.72
8.11
0.6756
What is the purchase price of the bonds?
=8,648,800
Solution:
PV of Principal amount (8,000,000 x 0.6756)
5,404,800.00
PV of Interest payments (8,000,000 x 5% x 8.11)
3,244,000.00
Purchase price of bonds
8,648,800.00
Ramses Company purchased investment in bonds on January 1, 2012. At this date, the cost and fair value
is P1,000,000. Nestle’s business model is to hold the asset in order to collect contractual cash flows. On
December 31, 2012 the bonds were selling at 90. Because of the significant financial difficulty of the issuer,
the bonds are considered impaired on December 31, 2013 when the bonds are quoted at 70. On December
31, 2014, the bonds are quoted at 95. The increase in the fair value of the bonds on December 31, 2014
is due to the improvement of the issuer’s credit rating.
How much should be recognized in profit or loss in 2013 as a result of the fair value changes?
=P300,000
Solution:
Fair value of bonds, 12/31/2013
(P1,000,000 x .7)
Less: Carrying amount, 1/1/2012
Impairment loss
700,000.00
1,000,000.00
-300,000.00
On July 1, 20Y1, Abenson Company purchased as a financial asset at amortized cost P 5,000,000 face
amount, 8% bonds of Western Company for P 4,615,000 to yield 10% per year. The bonds pay interest
semi-annually on January 1 and July 1. In its December 31, 20Y1 statement of financial position, Abenson
should report interest receivable of
=200,000
Solution:
Face amount of financial asset
5,000,000.00
Multiply by: Nominal interest rate
8%
Annual nominal interest
400,000.00
Multiply by: Coverage (Jul 1-Dec 31)
6 mos/12 mos
Interest receivable
200,000.00
On January 1, 2012 Broncos Company adopted a plan to accumulate a fund for a new warehouse
building. The warehouse would be constructed in July 1, 2017 at an estimated cost of
P7,500,000. Broncos Company plans to make 5 annual deposits in the fund which will earn interest at
8% compounded annually starting on July 1, 2012.
The following factors at 10% were provided as follows;
Present value of P1 at 10% for five periods
0.621
Present value of an ordinary annuity of P1 @ 10% for five periods
3.791
Present value of an annuity of P1 in advance @ 10% for five periods
4.170
Future value of an ordinary annuity of P1 10% for five periods
6.105
Future value of an annuity of P1 in advance @ 10% for five periods
6.716
The annual deposit to the fund is
=1,116,736
Solution:
Estimated cost
Divide by: FVF of AD of P1 @ 10% for 5 periods
7,500,000.00
6.716
Annual deposit
1,116,736.15
On July 1, 20Y1, Charlize Company paid P 1,198,000 of 10%, 20-year bonds with a face amount of P
1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Charlize
uses the effective interest method to recognize interest income from this financial asset at amortized cost.
The carrying amount of bonds in December 31, 20Y1 statement of financial position is
=1,195,920
Solution:
Initial measurement, Jul 1, 20Y1
1,198,000.00
Less: Amortization of premium
Interest received (1,000,000 x 5%)
50,000.00
Interest income (1,198,000 x 4%)
47,920.00
Carrying amount, Dec 31. 20Y1
2,080.00
1,195,920.00
Ramses Company purchased investment in bonds on January 1, 2012. At this date, the cost and fair value
is P1,000,000. Nestle’s business model is to hold the asset in order to collect contractual cash flows. On
December 31, 2012 the bonds were selling at 90. Because of the significant financial difficulty of the issuer,
the bonds are considered impaired on December 31, 2013 when the bonds are quoted at 70. On December
31, 2014, the bonds are quoted at 95. The increase in the fair value of the bonds on December 31, 2014
is due to the improvement of the issuer’s credit rating.
How much should be recognized in profit or loss in 2014 as a result of the fair value changes?
=
P250,000
Solution:
Fair value of bonds, 12/31/2014
(P1,000,000 x .95)
950,000.00
Less: Fair value of bonds, 12/31/2013
(P1,000,000 x .7)
700,000.00
Gain from reversal of impairment
250,000.00
On January 1, 20Y1, Panasonic Company purchased as a financial asset at amortized cost P 5,000,000
face value of Sony Company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest.
The bonds mature on January 1, 20Y6 and pay interest annually on December 31. Panasonic uses the
interest method of amortization.
The carrying amount (rounded to nearest P 100) should Panasonic report in its December 31, 20Y2
statement of financial position is
=4,680,020
Solution:
Initial measurement, Jan 1, 20Y1
4,562,000.00
Add: Amortization of discount, 20Y1
Interest income (4,562,000 x 10%)
456,200.00
Interest received (5,000,000 x 8%)
400,000.00
Carrying amount, Dec 31, 20Y1
56,200.00
4,618,200.00
Add: Amortization of discount, 20Y2
Interest income (4,618,200 x 10%)
461,820.00
Interest received (5,000,000 x 8%)
400,000.00
Carrying amount, Dec 31, 20Y2
61,820.00
4,680,020.00
On June 30, 2009, Aileen Corp. purchased a two-year bond, which it classified as fair value through other
comprehensive income. The bond had a stated principal amount of P10,000,000, which Aileen Corp. will
receive on June 30, 2011. The stated coupon interest rate was 10% per year, which is paid semiannually
on December 31 and June 30. The bond was purchased at a quoted annual yield of 8% on a bondequivalent yield basis. On December 31, 2009, the bonds are quoted at 101.1. How much should be
recognized as component of equity as of December 31, 2009 related to this bond investment? (Round off
present value factors to four decimal places)
=P167,468
Solution:
PVF of P1 at 4% for 4 periods
PVF of OA of P1 at 4% for 4 periods
0.8548
3.6299
PV of Principal (P10,000,000 x 0.8548)
PV of Interests (P500,000 x 3.6299)
8,548,000.00
1,814,950.00
Initial measurement
10,362,950.00
Fair value, 12/31/2009 (P10,000,000 x 1.011)
Less: Amortized cost, 12/31/2009
Initial measurement
10,362,950.00
Multiply by:
104%
10,110,000.00
Total
Less: Interest payment
OCI, component in equity
10,777,468.00
500,000.00
10,277,468.00
-167,468.00
On July 1, 20Y1, Toshiba company purchased as a financial asset at amortized cost P 1,000,000 of
National Company’s 8% bonds for P 946,000, including accrued interest of P 40,000. The bonds were
purchased to yield 10% interest. The bonds mature on January 1, 20Y7, and pay interest annually on
January 1.
The carrying amount that Toshiba report as investment in bonds as at December 31, 20Y1 is
=911,300
Solution:
Total proceeds
Less:
Accrued
interest
946,000.00
Initial measurement, Jul 1, 20Y1
906,000.00
40,000.00
Amortization of discount, remainder of 20Y1
Interest income (906,000 x 10% x 6/12)
45,300.00
Interest received (1,000,000 x 8% x 6/12)
40,000.00
Carrying amount, Dec 31, 20Y1
5,300.00
911,300.00
On July 1, 2013, Korn Corporation acquired a held to maturity security in Conrad Company’s 10year 12% bonds, with face value of P 5,000,000, for P 5,386,300. Interest is payable semi-annually
on January 1 and July 1. The bonds mature on July 1, 2018. Bonds effective rate is 10%. On
December 31, 2014, Korn Corporation sold its debt instrument for P 5,500,000.
The gain that Korn Corporation recognize as a result of the disposal is
=P 210,434
Solution:
Proceeds from sale of bonds
Less: Amortized cost, 12/31/2014
Initial measurement
5,386,300.00
Multiply by:
105%
Total
Less: Interest payment
5,655,615.00
300,000.00
Amortized cost, 12/31/2013
Multiply by:
5,355,615.00
105%
Total
Less: Interest payment
5,623,395.75
300,000.00
Amortized cost, 6/30/2014
Multiply by:
5,323,395.75
105%
Total
Less: Interest payment
5,589,565.54
300,000.00
Gain on disposal
5,500,000.00
5,289,565.54
210,434.46
On April 1, 2013, Kopi, Inc. purchased P2,000,000 face value, 9%, Treasury Notes for P1,985,000,
including accrued interest of P45,000. The notes mature on July 1, 2014, and pay interest semiannually
on January 1 and July 1. Kopi uses the straight-line method of amortization. The notes were sold on
December 1, 2013 for P2,065,000 including accrued interest of P75,000. If Kopi’s business model is to
hold the asset to collect contractual cash flows, the carrying amount of this investment in the company’s
October 31, 2013 statement of financial position should be
=P1,968,000
Solution:
Total consideration paid
Less: Accrued interest
1,985,000.00
45,000.00
Initial measurement of investment
Add: Amortization of discount
Discount (P2M-P1.94M)
60,000.00
Divide by: Remaining term
Apr 1, 2013-Jul 1, 2014
15 months
Monthly amortization
Multiply by: Age
(Apr 1 - Oct 31, 2013)
Carrying amount, 10/31/2013
1,940,000.00
4,000.00
7 months
28,000.00
1,968,000.00
On January 1, 20Y1, Rockford Company purchased 5-year bonds with face value of P 8,000,000 and stated
interest of 10% per year payable semi annually January 1 and July 1. The bonds were acquired to yield
8%. Present value factors are:
Present value of an annuity of 1 for 10 periods at 5%
7.72
Present value of an annuity of 1 for 10 periods at 4%
Present value of 1 for 10 periods at 4%
8.11
0.6756
What is the carrying value of the bond investment on December 31, 20Y1?
=8,538,542
Solution:
PV of Principal amount (8,000,000 x 0.6756)
5,404,800.00
PV of Interest payments (8,000,000 x 5% x 8.11)
3,244,000.00
Initial measurement of bonds, Jan 1, 20Y1
8,648,800.00
Less: Amortization of premium, Jan 1-Jun 30, 20Y1
Interest received (8,000,000 x 5%)
400,000.00
Interest income (8,648,800 x 4%)
345,952.00
Carrying amount, Jul 1, 20Y1
54,048.00
8,594,752.00
Less: Amortization of premium, Jul 1-Dec 31, 20Y1
Interest received (8,000,000 x 5%)
400,000.00
Interest income (8,594,752 x 4%)
343,790.00
Carrying amount, Dec 31, 20Y1
56,210.00
8,538,542.00
Chu Company acquired a 40% interest in Wawa Company for P1,700,000 on January 1, 2009. The
shareholders' equity of Wawa Company on January 1 and December 31, 2009 is presented below:
January 1
December 31
Share capital
3,000,000
3,000,000
Revaluation surplus
1,300,000
Retained earnings
1,000,000
1,500,000
On January 1, 2009, all the identifiable assets and liabilities of Wawa Company were recorded at fair
value. Wawa Company reported profit of P650,000, after income tax expense of P350,000 and paid
dividends of P150,000 to shareholders during the current year.
The revaluation surplus is the result of the revaluation of land recognized by Wawa Company on December
31, 2009. Additionally, depreciation is provided by Wawa Company on the diminishing balance method
whereas Chu Company uses the straight-line. Had Wawa Company used the straight line, the accumulated
depreciation would be increased by P200,000. The tax rate is 35%. Chu Company should report its
investment in associate on December 31, 2009 at
=P2,420,000
On January 1, 2009, Cyber Company bought 30% of the outstanding ordinary shares of Free Company for
P5,000,000 cash. Cyber Company accounts for this investment by the equity method. At the date of
acquisition, Free Company’s net assets had a carrying value of P12,000,000. Depreciable assets with an
average remaining life of five years have a current market value that is P2,500,000 in excess of their
carrying value. The remaining difference between the purchase price and the value of the underlying equity
cannot be attributed to any identifiable tangible or intangible assets. Accordingly,the remaining difference
is allocated to goodwill. At the end of 2009, Free Company reported net income of P4,000,000. During
2009, Free Company declared and paid cash dividends of P1,000,000. What is the balance of Cyber
Company’s investment in Free Company on December 31, 2009?
=5,750,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value
12,000,000.00
Excess FV over BV
2,500,000.00
Total FV of equity
Multiply by: Share in ownership
14,500,000.00
30%
5,000,000.00
4,350,000.00
Goodwill (Gain on acquisition)
650,000.00
Investment in associate, 1/1/2009
Add: Share in associate net income, adj
Net income, unadj
4,000,000.00
Amortization of excess FV
(P2,500,000/5 yrs)
-500,000.00
5,000,000.00
Net income, adj
3,500,000.00
Multiply by:
30%
1,050,000.00
Total
Less: Share in associate dividend
(P1,000,000 x 30%)
6,050,000.00
Investment in associate, 12/31/2009
5,750,000.00
300,000.00
On January 1, 2009, Bing Company purchased 30,000 shares of Latt Company’s 200,000 outstanding
ordinary share for P6,000,000. On that date, the carrying amount of the acquired shares on Latt’s books
was P4,000,000. Bing attributed the excess of cost over carrying amount to patent. The patent has a
remaining useful life of 10 years.
During 2009, Bing’s officers gained a majority on Latt’s board of directors. Latt reported earnings of
P5,000,000 for the year ended December 31, 2009, and declared and paid dividend of P3,000,000 during
2009. On December at P15. What is the carrying value of the investment in Latt Company on December
31, 2009?
=6,100,000
Solution:
Acquisition cost
Book value of net assets acquired
Excess of cost applicable to pantent
Aquisition cost
Share in net income (5,000,000 x 15%)
Share in cash dividend (3,000,000 x 15%)
Amortization of patent (2,000,000/10)
Carrying value of investment
Interest acquired (30,000 / 200,000)
6,000,000
4,000,000
2,000,000
6,000,000
750,000
(450,000)
(200,000)
6,100,000
15%
The equity method is used even if the investment is less than 20% because the officers of the investor
entity are a majority of the board of the invesyee entity.
On July 1, 2009, Miller Company purchase 20% of wall Company ‘s outstanding ordinary shares and no
goodwill resulted from the purchase. Miller appropriately carries this investment at equity and the balance
in Miller’s investment account was P1,900,000 at December 31, 2009. Wall reported net income of
P1,200,000 for the year ended December 31, 2009, and paid dividend totaling P480,00 on December 31,
2009. How much did Miller pay for its 25% interest in Wall ?
=1,870,000
Solution:
Investment in associate, 12/31/2009
Add: Share in associate dividend
(P480,000 x 25%)
1,900,000.00
Total
Less: Share in associate net income
(P1,200,000 x 25% x 1/2)
2,020,000.00
Investment in associate, 1/1/2009
1,870,000.00
120,000.00
150,000.00
Alcala Company owns 50% of Aparri Company’s preference shares and 30% of its ordinary
shares. Aparri’s shares outstanding at December 31, 2013 includes P20,000,000 of 10% cumulative
preference shares and P50,000,000 of ordinary shares. Aparri reported net income of P10,000,000 for the
year 2013. What amount should Alcala report as investment income for the year 2013?
=P2,400,000
Solution:
Net income
Less: Preference dividends
(P20M x 10%)
10,000,000.00
2,000,000.00
Net income attributable to ordinary shareholders
Multiply by: % ownership
8,000,000.00
30%
Investment income
2,400,000.00
On January 1, 2009, Julius Corporation acquired 25% of the shares of Caesar, Inc. for P425,000. At
this date all the identifiable assets and liabilities of Caesar, Inc. were recorded at amounts equal to fair
value, and the equity of Caesar consisted of the following:
Share capital
General reserve
Asset revaluation surplus
Retained earnings
P1,000,000
300,000
200,000
200,000
In 2009, Caesar reported net income of P250,000. P50,000 of the asset revaluation surplus was realized
in 2009. Caesar paid a P40,000 dividend and transferred P30,000 to general reserve. What is the carrying
amount of the investment in Caesar, Inc. as of December 31, 2009?
=P477,500
Solution:
Consideration transferred
Less: Fair value of shares acquired
Share capital
General reserve
Asset revaluation surplus
Retained earnings
Total equity
Multiply by: Share in ownership
425,000.00
1,000,000.00
300,000.00
200,000.00
200,000.00
1,700,000.00
25%
425,000.00
Goodwill (Gain on acquisition)
0.00
Investment in associate, 1/1/2009
Add: Share in associate net profit (P250,000 x 25%)
425,000.00
62,500.00
Total
Less: Share in associate dividend (P40,000 x 25%)
487,500.00
10,000.00
Investment in associate, 12/31/2009
477,500.00
Alpha Company acquired 20,000 shares of Beta Company on January 1, 2009 at P120 per share. Beta
Company had 80,000 shares outstanding with a book value of P8,000,000. The difference between the
book value and fair value of Beta Company on January 1, 2009 is attributable to a broadcast license
intangible assets. Beta Company recorded earnings of P3,600,000 and P3,900,000 for 2009 and 2010,
respectively, and paid per – share dividend of P16 in 2009 and P20 in 2010. Alpha Company has a 20 –
years straight line amortization policy for the broadcast license. What is the carrying amount of Alpha
Company’s investment in Beta Company on December 31, 2010?
=3,515,000
Solution:
Consideration transferred (P120 x 20,000)
Less: Book value of shares acquired
(P8,000,000 x 20/80)
2,400,000.00
Excess - attributable to broadcast license
400,000.00
Investment in associate, 1/1/2009
Add: Share in associate net income, adj
Net income, 2009
3,600,000.00
Multiply by: Share
25%
2,400,000.00
Share in net income, unadj
Amort of excess FV over BV
Broadcast license
(P400,000/20 yrs)
900,000.00
Net income, 2010
Multiply by: Share
3,900,000.00
25%
Share in net income, unadj
Amort of excess FV over BV
975,000.00
-20,000.00
-20,000.00
Total
Less: Share in associate dividend
2009 Dividend (P16 x 20,000) 320,000.00
2,000,000.00
880,000.00
955,000.00
4,235,000.00
2010 Dividend (P20 x 20,000)
400,000.00
Investment in associate, 12/31/2010
720,000.00
3,515,000.00
On January 2, 2009, Tuao Company purchased 10% of Abulug Company’s outstanding ordinary shares for
P20,000,000. Tuao is the largest single shareholder in Abulug and Tuao’s officers are majority of Abulug’s
board of directors. Abulug reported net income of P10,000,000 and paid dividend of P4,000,000. In its
December 31, 2009 balance sheet, what amount should Tuao report as investment in Abulug Company?
=P20,600,000
Solution:
Investment in associate, 1/2/2009
Add: Share in associate net income (P10,000,000 x 10%)
20,000,000.00
1,000,000.00
Total
Less: Share in associate dividend (P4,000,000 x 10%)
21,000,000.00
400,000.00
Investment in associate, 12/31/2009
20,600,000.00
On January 1, 20CY, Cyber Company bought 30% of the outstanding ordinary shares of Free Company for
P5,000,000 cash. Cyber Company accounts for this investment by the equity method. At the date of
acquisition, Free Company’s net assets had a carrying value of P12,000,000. Depreciable assets with an
average remaining life of five years have a current market value that is P2,500,000 in excess of their
carrying value. The remaining difference between the purchase price and the value of the underlying equity
cannot be attributed to any identifiable tangible or intangible assets. Accordingly, the remaining difference
is allocated to goodwill. At the end of 20CY, Free Company reported Profit of P4,000,000. During 20CY,
Free Company declared and paid cash dividends of P1,000,000. What is the balance of Cyber Company’s
investment in Free Company on December 31, 20CY?
=5,750,000
Solution:
Acquisition cost
Net assets acquired (30% x 12,000,000)
Excess of cost
Excess attributable to depreciable assets (30% x2,500,000)
Excess attributable to goodwill
Aquisition cost
Share in Profit (30% x 4,000,000)
Share in cash dividend (30% x 1,00,000)
Amortization of depreciable assets (750,000/5)
Carrying value of investment
5,000,000
3,600,000
1,400,000
750,000
650,000
5,000,000
1,200,000
(300,000)
(150,000)
5,750,000
Augustus Corp. acquired a 25% interest in Octavius Co. on January 1, 2009, for P5,000,000. At that time,
Octavius had 1,000,000, P1 par, ordinary shares issued and outstanding. During 2009, Octavius paid cash
dividends of P2.2 per share and thereafter declared and issued a 5% share dividend when the market value
was P2 per share. Octavius' net income for 2009 was P4,800,000. What should be the balance in
Augustus’ investment in Octavius Co. at the end of 2009?
=P5,650,000
Solution:
Investment in associate, 1/1/2009
Add: Share in associate net income (P4,800,000 x 25%)
5,000,000.00
1,200,000.00
Total
Less: Share in associate cash dividend (P2.20 x 1,000,000 x 25%)
6,200,000.00
550,000.00
Investment in associate, 12/31/2009
5,650,000.00
Investor company acquired a 40% interest in an associate for P3,000,000. The investor is part of a
consolidated group. In the financial period immediately following the date on which it became an
associate, the investee took the following action:
·
revalued assets up to fair value by P500,000
·
generated profits of P1,600,000
·
declared a dividend of P300,000
The balance in the investor’s account of ‘Shares in associate’, after equity accounting has been applied, is:
=P3,720,000
Baggao Company purchased 15% of Badoc Company’s 500,000 outstanding ordinary shares on January
2, 2009, for P15,000,000. On December 31, 2009, Baggao purchased additional 125,000 shares of Badoc
for P35,000,000. There was no goodwill as a result during 2009. Badoc reported earnings of P20,000,000
for 2009. What amount should Baggao report in its December 31, 2009 balance sheet as investment in
Badoc Company?
=P53,000,000
Solution:
Consideration transferred (125/500 = 25%)
Fair value of presently held shares
(P35,000,000/25%)
140,000,000.00
Less: Net income, 2009 20,000,000.00
Total
Multiply by:
35,000,000.00
120,000,000.00
15%
18,000,000.00
Investment in associate, initial measurement
53,000,000.00
Aye Company acquired 30% of the issued share capital of Bee Company for P1,000,000 on January
1, 2008. The accumulate profits of Bee Company on this date totaled P2,000,000. Aye Company
appointed tree directors to the board of Bee and Aye intends to hold the investment for a significant
period of time. The entities prepare their financial statements on December 31, of each year. The
abbreviated statement of financial position of Bee Company on December 31, 2009 is as follows:
Sundry net assets
6,000,000
Share capital, P10 par
1,000,000
Share premium
2,000,000
Retained earnings
3,000,000
Bee Company made no new issued of shares since the acquisition of the investment by Aye Company.
The fair value of the net assets of Bee Company at the date of acquisition was P5,000,000. The
recoverable amount of the net assets of Bee Company is deemed to be P7,000,000 on December 31,
2000.
What amount should be shown in Aye company’s statemen of financial position at December 31, 2009 for
the investment in Bee Company?
=1,800,000
On January 1, 2009, Well Company purchased 10% of Rea Company’s outstanding ordinary shares for
P4,000,000. Well is the largest single share holder in rea and well’s officers are a majority of Rea’s board
of directors. Rea reported net income of P5,000,000,for 2009 and paid dividends of P1,500,000. In its
December 31, 2009 statement of financial position, what amount should well report as investment in Rea?
=4,350,000
Solution:
PAS 28 provides that if the investor holds, directiy or indirectly trough subsidiaries, less that 20% of the
voting power of the investee, it is presumed that the investor does not have significant influence , uless
such influence can be clearly demonstrated.
Well’s position as Rea’s largest single shareholder and the presence of Well’s officers as a majority of Rea’s
board of directors demonstrate that Well does have significant influence despite the 10% ownership.
Accordingly, the equity method is used.
Acquistion, January 1
Add: Share in net income (10% x 5,000,000)
Total
Less: share in cash dividends (10% x 1,500,000)
Carrying value of investment, December 31
4,000,000
500,000
4,500,000
150,000
4,350,000
Bill Co. received a cash dividend from a common stock investment. Should Bill report an increase in the
investment account if it has classified the stock as available-for-sale or uses the equity method of
accounting?
=No, No
Marc Company purchased 10% of another entity’s 500,000 outstanding ordinary shares on January 1, 20Y1
for P100,000. The investment was accounted for at FVTOCI. On December 31, 20Y1, the fair value of the
investment was P150,000. On January 1, 20Y2, the entity purchased additional 100,000 shares of the same
investee for P300,000. On this date, it was determined that the carrying amount of the investee net assets
was P900,000. All identifiable assets’ carrying amount of the equalled fair valued except for the land whose
fair value exceeded carrying amount by P100,000. The investee reported earnings of P200,000 for 20Y2
and paid no dividends. What amount should be reported as investment in associate on December 31,
20Y2?
Select one:
Solution
=
510, 000
Ownership interest after purchasing
100,000 shares (150,000/500,000)
30%
Fair value of 50,000 shares at Jan 1, 20Y2
150,000.00
Consideration transferred for 100,000 shares
300,000.00
Total carrying amount
450,000.00
Alternatively:
Fair value of 150,000 shares (P3 x 150,000)
450,000.00
Share in associate's adjusted net income (200,000 x 30%)
60,000.00
Share in associate's dividends declared
0.00
Investment in associate, Dec 31, 20Y2
510,000.00
Seiko Company has 100,000 ordinary shares outstanding. Blobe Company acquired 30,000 shares of
Seiko for P120 per share in 2007. The secrities are being held as long – term investment. Changes in
retained earnings for Seiko for 2009 and 2010 are as follows:
Retained earnings (deficit), January 1, 2009
(500,000)
Net income for 2009
700,000
Retained earnings, December 31, 2009
200,000
Net income for 2010
800,000
Cash dividend paid on December 31, 2010
(400,000)
Retained earnings, December 31, 2010
600,000
What is the carrying value of Globe Company’s investment in Seiko Company on December 21, 2010?
=3,780,000
Solution:
Aquisition cost (30,000 x 120)
Deficit on January 1, 2009 (30% x 500,000)
Carrying value of investment – 1/1/2009
Net income for 2009 (30% x 700,000)
Net income for 2010 (30% x 800,000)
Cash dividend on 12/31/2010 (30% x 400,000)
Carrying value of investment – 12/31/2010
Another approach
Acquisition cost
Share in retained earnings -12/31/2010 (30% x 600,000)
Carrying value of investment – 12/31/2010
3,600,000
(150,000)
3,450,000
210,000
240,000
(120,000)
3,780,000
3,600,000
180,000
3,780,000
Green Company owns 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative
nonvoting preference shares of Axel Company. In 20CY, Axel declared dividend of P1,000,000 on its
ordinary share capital and P600,000 on its preference share capital. What amount of dividend revenue
should Green report in its income statement for the year ended December 31, 20CY?
=600,000
Solution:
Only the dividend on preference share capital is recognized as dividend revenue. The equity method is not
applicable to investment in preference shares regardless of the interest.
The dividend on the ordinary share investment is not income but a reduction of investment because the
equity method is used in accounting for the investment in ordinary shares.
An investor uses the equity method of accounting for an investment in the common stock of another
company when the investment
=Enables the investor to exercise significant influence over the investee
On January 1, 2009, Solana Co. purchased 25% of Orr Corp.'s ordinary shares; no goodwill resulted from
the purchase. Solana appropriately carries this investment at equity and the balance in Solana’s investment
account was P480,000 at December 31, 2009. Orr reported net income of P300,000 for the year ended
December 31, 2009, and paid dividends totaling P120,000 during 2009. How much did Solana pay for its
25% interest in Orr?
=P435,000
Solution:
Investment in associate, 12/31/2009
Add: Share in associate dividend (P120,000 x 25%)
480,000.00
30,000.00
Total
Less: Share in associate net income (P300,000 x 25%)
510,000.00
75,000.00
Investment in associate, 1/1/2009
435,000.00
On January 1, 2009, Marie Company purchased 40% of the outstanding ordinary shares of Lester Company
paying P2,560,000 when the book value of the net assets of Lester equaled P5,000,000. The difference
was attributed to equipment which had a book value of P1,200,000 and a fair value of P2,000,000, and to
building with a book value of P1,000,000 and a fair value of P1,600,000. The remaining useful life of the
equipment and building was 4 years and 12 years, respectively. During 2009, Lester reported net income
of P1,600,000 and dividends of P1,000,000. What is the carrying value of the investment in Lester Company
on December 31, 2009?
=2,700,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value of equity
Excess FV over BV
Equipment (P2,000,000-P1,200,000)
Building (P1,600,000-P1,000,000)
Fair value of equity
Multiply by: Share in ownership
2,560,000.00
5,000,000.00
800,000.00
600,000.00
6,400,000.00
40%
2,560,000.00
Goodwill (Gain from acquisition)
0.00
Investment in associate, 1/1/2009
Add: Share in associate net income, adj
Net income
1,600,000.00
Amort of excess FV over BV
Equipment (P800,000/4 yrs)
-200,000.00
Building (P600,000/12 yrs)
-50,000.00
2,560,000.00
Net income, adjusted
Multiply by:
1,350,000.00
40%
540,000.00
Total
Less: Share in associate dividend (P1,000,000 x 40%)
3,100,000.00
400,000.00
Investment in associate, 12/31/2009
2,700,000.00
The excess of cost over the book value of the underlying equity acquired which is attributable to
undervaluation of a depreciable asset should be amortized over remaining useful life of the depreciable
asset. Such amortization will decrease the investment income and investment account. The entry to
record the amortization is:
Investment income
200,000
Investment in associate
200,000
On January 1, 2009, Dell Company paid P18,000,000 for 50,000 ordinary share of Case company which
represent a 25% interest in the net assets of Case. The acquistion cost is equal to the book value of the
net assets aquired. Dell has the ability to exercise significant influence over Case. Dell received a dividend
of P35 per share from Case in 2009. Case reported net income of 31, 2009 statement of financial position,
Dell should report the investment in Case Company at
=18,650,000
Solution:
Acquisition cost, January 1
Add: Share in net income (25% x 9,600,000)
Total
Less: Cash dividend received (50,000 x 35)
Carrying value of inverstment, December 31
18,000,000
2,400,000
20,400,000
1,750,000
18,650,000
On January 1, 2009, Saxe Company purchased 20% of Lex Company’s ordinary shares outstanding for
P6,000,000. The acquision cost is equal to book value of the net assets acquired. During 2009, Lex reported
net income of P7,000,000 and paid cash dividend of P4,000,000. The balance is Saxe’s investment in Lex
Company on December 31, 2009 should be
=6,600,000
Solution:
Acquisition cost
Add: Share in net income (20% x 7,000,000)
Total
Less: Share in cash dividend (20% x 4,000,000)
Investment balance
6,000,000
1,400,000
7,400,000
800,000
6,600,000
PAS 28 provides that an investor holds, directly or indirectly througt subsidiaries, 20% or more of the voting
power of the investee, it is presumed that the invester does have significant influeance, unless it can be
clearly demonstrated that this is not the case.
The equity method of accounting is used if the investment is 20% or more of the voting power of the
investee.
Under the equity method, the investment account is increased by the investor’s share of the investee’s
earnings and decreased by the investor’s share of the investee’s losses. Dividednd from the investee
reduces the carrying of the investment.
On January 1, 2009, Kean Company purchased 30% interest in Pod Company for P2,500,000. On this date
Pod’s shareholders’ equity was P5,000,000. The carrying amount of Pod’s identifiable net assets
approximated their fair value exceeded its carrying amounth by P2,000,000. Pod reported net income of
P1,000,000 for 2009 and paid no dividends. Kean accoutns for this investment using the equity method. In
its December 31, 2009 statement of financial position, what amount should Kean report as investment in
associate?
=2,800,000
Solution:
Consideration transferred
Less: Fair value of shares, acquired
Book value
5,000,000.00
Unrecorded excess in FV
2,000,000.00
Total
Multiply by: Share in ownership
7,000,000.00
30%
2,500,000.00
2,100,000.00
Goodwill (Gain on acquisition)
400,000.00
Investment in associate, 1/1/2009
Add: Share in associate net income*
(1,000,000 x 30%)
2,500,000.00
Investment in associate, 12/31/2009
2,800,000.00
300,000.00
*no information given whether the unrecorded excess in fair value over book value is attributed to a
depreciable asset or inventory, hence, amortization cannot be determined. Therefore, excess fair value is
assumed to be attributed to a non-depreciable asset (e.g., Land)
Chur Company acquired a 40% interest in Flim Company for P1,700,000 on January 1, 2009. The
shareholders’ equity of Flim Company on January 1 and December 31, 2009 is presented below.
January 1
December 31
Share capital
3,000,000
Revaluation surplus
3,000,000
1,300,000
Retained earnings
1,000,000
1,500,000
On January 1, 2009, all the identifiable assets and liabilities of Flim Company were recorded at fair
value. Flim Company reported profit of P700,000, after income tax expense of P300,000 and paid
dividend of P150,000 to shareholders during the current year.
The revaluation surplus is the result of the revaluation of land recognized is provided by Flim Company
on the diminishing balance method whereas Chur Company user the straight line. Had Flim Company
used the straight line, the accumulated depreciation would be increased by P200,000. The tax rate
30%.
What is the carrying value of Chur Company’s investment in Flim Company on December 31, 2009?
=2,440,000
Solution:
Acquisition cost
Net assets acquired (40% x 4,000,000)
Goodwill – not amortized
Acquisition cost
Net income (40% x 700,000)
Cash dividend (40% x 150,000)
Revaluation surplus (40% x 1,300,000)
Carrying value of investment – 12/31/2009
1,700,000
1,600,000
100,000
1,700,000
280,000
(60,000)
520,000
2,440,000
There is no need to adjust for the difference in depreciation method. If both entities have chosen a method
that best reflects the flow of benefits as the assets are consumend, then there is no policy difference.
On January 1, 2009, Bridge Comapny purchased 25,000 shares of the 100,000 outstanding shares of
River Company for a total of P1,000,000. At the time of the purchase, the book value of River
Company’s equity was P3,000,000. River Company assets having a market value greater than book
value at the time of the acquisition were as follwos:
Book value Market value Remaining life
Inventory
400,000
500,000
Less than 1 year
Equipment
2,000,000
2,500,000
5 years
Goodwill
0
400,000
indefinite
River Company’s net income in 2009 was P700,000. Dividends per share paid by River Company amounted
to P3 in 2009. What is the carrying amount of Bridge Campany’s investment in River Comapany on
December 31, 2009?
=1,050,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value of equity
Excess FVs over BVs
Inventory
(P500,000-P400,000)
Equipment
(P2,500,000-P2,000,000)
Fair value of equity
1,000,000.00
3,000,000.00
100,000.00
500,000.00
3,600,000.00
Multiply by: Share in ownership
25%
900,000.00
Goodwill (Gain from acquisition)
100,000.00
Investment in associate, 1/1/2009
Add: Share in associate net income, adj
Net income, unadj
700,000.00
Amortization of excess FV over BV
Inventory
-100,000.00
Equipment
(P500,000/5 yrs)
-100,000.00
1,000,000.00
Net income, adj
Multiply by: Share
500,000.00
25%
125,000.00
Total
Less: Share in associate dividend
(P3 x 25,000)
1,125,000.00
Investment in associate, 12/31/2009
1,050,000.00
75,000.00
According to PAS 28, which of the following will not fall under the situation of “existence of significant
influence by an investor in the financial and operating policy decisions of the investee but not control of
these decisions”
=Power to govern the financial and operating policy decisions of an enterprise so as to
obtain benefits from its activities
In January 2009, Farley Company acquired 20% of the outstanding ordinary shares of Davis Company for
P8,000,000. This investment gave Farley the ability to execise significant influence over Davis. The book
value of the acquired shares was P6,000,000. The excess of cost over book value was attributed to a
depreciable asset which was undervalued on Davi’s statement of financial position and which had a
remaining useful life of ten years. For the year ended December 31, 2009, Davis reported net income of
P1,800,000 and cash dividends of P400,000 and thereafter issued 5% stock dividend. What is the proper
carrying value of Farley’s investment in Davis at December 31, 2009?
=8,080,000
Solution:
Original cost
Share in net income (20% x 1,800,00)
Total
Less:
Share in cash dividends (20% x 400,000)
Amortization of excess of cost (2,000,000/10)
Carrying value of investment – 12/31/2009
Stock dividends do not affect the investment balance.
Acquisition cost
Less: Book value of interest acquired
Excess of cost over book value
8,000,000
360,000
8,360,000
80,000
200,000
280,000
8,080,000
8,000.000
6,000,000
2,000,000
Jay Company purchased 35% of Jerry Company on January 1, 20CY for P11,200,000 when Jerry’s carrying
value was P32,400,000.On that day, the market value of the net assets of jerry Company equalled their
carrying value with the following exception:
Equipment
Building
Book
7,000,000
1,600,000
Market
5,600,000
2,600,000
The equipment has a remaining useful life of 5 years, and building has a remaining useful life of 10 years.
Jerry reported Profit of P3,200,000 and cash dividends of P1,000,000 for 20CY. What is the investment
income that will be reported by Jay Company for 20CY?
=1,183,000
Solution:
Aquisition cost
Net assets aquired (35% x 32,400,000)
Excess of carrying value over cost
Equipment – carrying value higher than market value (1,400,000 x 35%)
Building – market value higher than carrying value
11,200,000
11,340,000
(140,000)
(490,000)
350,000
(140,000)
Share in Profit (35% x 3,200,000)
1,120,000
Amortization of excess:
Overdepreciation of equipmet (490,000/5)
98,000
Underdepreciation of building (350,000/10)
(35,000)
Investment income
1,183,000
The amortization of the equipment is added because the equipment is overvalued. The amortization of the
building is deducted because the building is undervalued.
Alcala Company owns 50% of Aparri Company’s preference shares and 30% of its ordinary
shares. Aparri’s shares outstanding at December 31, 2009 includes P20,000,000 of 10% cumulative
preference shares and P50,000,000 of ordinary shares. Aparri reported net income of P10,000,000 for the
year 2009. What amount should Alcala report as investment income for the year 2009?
=P2,400,000
Solution:
Net income
Less: Preference dividend
(P20,000,000 x 10%)
10,000,000.00
Net income attributable to ordinary shareholders
Multiply by: % ownership in ordinary shares
8,000,000.00
30%
Investment income
2,400,000.00
2,000,000.00
On January 1, 20Y1, Occidental Company purchased 40% of the outstanding ordinary shares of Manapla
Company for P3,500,000 when the net assets of Manapla amounted to P7,000,000. At acquisitions date,
the carrying amounts of the identifiable assets and liabilities of Manapla were equal to their fair value, except
for equipment for which the fair value was P1,500,000 greater than its carrying amount and inventory whose
fair value was P500,000 greater than its cost. the equipment has a remaining life of 4 years and inventory
was all sold during 20Y1. Manapla Company reported Profit of P4,000,000 for 20Y1 and paid no dividends
during 20Y1. The maximum anount which could be included in Occidental’s 20Y1 income before tax reflect
Occidental’s “equity in earnings of Manapla Company” should be
=1,350,000
Solution:
Cost
Carrying value of interest aquired (40% x 7,000,000)
Excess of cost over carrying value
Excess applicable to equipment (40% x 1,500,000)
Excess aplicable to equipment (40% x 500,000)
Excess applicable to inventory (40% x 500,000)
Excess fair value
3,500,000
2,800,000
700,000
600,000
(600,000)
(200,00)
(100,000)
PAS 28 provides that any excess of the net fair value of the associate’s identifiable net assets is included
in income in the determination of the investor’s share of the associate’s profit or loss in the period in which
the investment is aquired.
Share in Profit (40% x 4,000,000)
Excess of fair value over cost
Excess of cost over carrying value:
Equipment (600,000/4)
Inventory – all sold
Invenstment income
1,600,000
100,000
(150,000)
(200,000)
1,350,000
On July 1, 2009, Diamond, Inc, paid P1,000,000 for 100,000 ordinary shares (40%) of
Ashley Corporation. At that date the net assets of Ashley totaled P2,500,000 and the fair values of all of
Ashley's identifiable assets and liabilities were equal to their book values. Ashley reported net income of
P500,000 for the year ended December 31, 2009, of which P300,000 was for the six months ended
December 31, 2009. Ashley paid cash dividends of P250,000 on September 30, 2009. Diamond does not
elect the fair value option for reporting its investment in Ashley. In its income statement for the year ended
December 31, 2009, what amount of income should Diamond report from its investments in Ashley?
=P120,000
Sage Company bought 40% of Eve company’s outstanding ordinary share on January 1, 20CY, for
P4,000,000. The carrying amount of Eve’s net assets at the purchase date totalled P9,000,000. Fair value
and carrying amounts were the same for all items except for plant and inventory for which fair values
exceeded their carrying amounts by P900,000 and P100,000, respectively. The plant has an 18 – year life.
All inventory was sold during 20CY. During 20CY, Eve reported profit of P1,200,000 and paid a P200,000
cash dividend. What amount should Sage report as investment income in its income statement for the year
ended December 31, 20CY?
=420,000
Solution:
Acquisition cost
Net assets acquired (40% x 9,000,000)
Excess of cost over carrying value
4,000,000
(3,600,000)
400,000
The excess of cost is identified as follows:
Understatement of plan (40% x 900,000)
Understatement of inventory (40% 100,000)
Total excess of cost
Share in Profit (40% x 1,200,000)
Less: Amortization (40% x 1,200,000)
Depreciation of plan (360,000/18)
Inventory (totally sold)
Investment income
360,000
40,000
400,000
480,000
20,000
40,000
60,000
420,000
Intor Company acquired 20% of the ordinary shares of Intee Company on January 1, 2008. At this
date, all the identifiable assets and liabilities of Intee were recorded at fair value. An analysis of the
acquisition showed that P200,000 of goodwill was acquired. Intee Company recorded a profit of
P1,000,000 for 2009 and paid dividend of P700,000 during the same year. The following transactions
have occurred between the two entities.
·
In December 2009, Intee sold inventory to Intor for P1,500,000. This inventory had
previously cost Intee P1,000,000 and remains unsold by Intor in December 31, 2009.
·
In November 2009, Intor sold inventory to Intee at a before tax profit of P300,000. Half of
this was sold by Intee before December 31, 2009.
·
In December 2008, Intee sold inventory to Intor for P1,800,000. This inventory had cost
Intee P1,200,000. At December 31, 2008, this inventory remained unsold by Intor. However, it
was all sold by Intor in 2009.
Ignoring income tax, Intor company shall report a "share of profit of associate" in 2009 at
=P190,000
Solution:
Net income, unadjusted
Elimination of intercompany transactions
Upward transactions
UGP in Ending Inventory (P1.5M-P1M)
UGP in Beginning Inventory (P1.8M-P1.2M)
Downward transactions
UGP in Ending inventory (P300,000 x 50%)
1,000,000.00
Net income, adjusted
Multiply by: Share in ownership
950,000.00
20%
Investment income
190,000.00
-500,000.00
600,000.00
-150,000.00
On July 1, 2013, Diamond, Inc, paid P1,000,000 for 100,000 ordinary shares (40%) of Ashley
Corporation. At that date the net assets of Ashley totaled P2,500,000 and the fair values of all of Ashley's
identifiable assets and liabilities were equal to their book values. Ashley reported net income of P500,000
for the year ended December 31, 2013, of which P300,000 was for the six months ended December 31,
2013. Ashley paid cash dividends of P250,000 on September 30, 2013. Diamond does not elect the fair
value option for reporting its investment in Ashley. In its income statement for the year ended December
31, 2013, what amount of income should Diamond report from its investments in Ashley?
=P120,000
Solution:
Second semester net income of P300,000 x 40% = P120,000
On January 1, 2009, Anne Company purchased 20% of the outstanding ordinary shares of Dune
Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 is payable with 12%
annual interest on Decemeber 31, 2010. Anne also paid P500,000 to a bisiness broker who helped find
a suitable business and negotiated the purchase.
At the time of acquisition, the fair value of Dune’s identifiable assets and liabilities were equal to their
carrying values except for an office building which had a fair value in excess of value of P2,000,000
and an estimated life of 10 years. Dune’s shareholders’ equity on January 1, 2009 was P13,000,000.
During 2009, Dune reported net income of P5,000,000 and paid dividend of P2,000,000. What amount of
income should Anne Company report for 2009 as a result of the investment?
=960,000
Solution:
Acquistion cost (4,000,000 + 500,000)
Book value of net assets acquired (20% x 13,000,000)
Excess of cost
Exess attributable to building (20% x 2,000,000)
Excess attributable to goodwill – not amortized
Share in net income (20% x 5,000,000)
Amortization of excess of cost: Attributable to building (400,000/10)
Investment income
4,500,000
2,600,000
1,900,000
400,000
1,500,000
1,000.000
( 40,000)
960,000
On January 1, 20Y1, Anne Company purchased 20% of the outstanding ordinary shares of Dune Company
for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 is payable with 12% annual interest
on December 31, 20Y2. Anne also paid P500,000 to a business broker who helped find a suitable business
and negotiated the purchase.
At the time of acquisition, the fair value of Dune’s identifiable assets and liabilities were equal to their
carrying values except for an office building which had a fair value in excess of value of P2,000,000 and an
estimated life of 10 years. Dune’s shareholders’ equity on January 1, 20Y1 was P13,000,000.
During 20Y1, Dune reported Profit of P5,000,000 and paid dividend of P2,000,000. What amount of income
should Anne Company report for 20Y1 as a result of the investment?
=960,000
Man Company purchased 10% of kind Corporation’s 200, 000 outstanding shares of ordinary shares on
January 2, 20Y1 for P2, 500, 000. On January 2, 20Y1, Man Company purchased another 40, 000
shares of kind for reported earnings of P6, 000, 000 and P7, 000, 000 for the year ended December 31,
20Y1 and December 31, 20Y2, respectively. No dividends were declared in years 20Y1 and 20Y2,
respectively by Kind Company. What amount of income from investment should Man Company report in its
ended statement of comprehensive income related to its investment for the year ended December 31,
20Y2?
Select one:
=P2, 100, 000
Solution
Shares purchased on Jan 2, 20Y1 (200,000 x 10%)
20,000.00
Shares purchased on Jan 2, 20Y2
40,000.00
Total shares owned
60,000.00
Divide by: Total outstanding shares
200,000.00
Ownership interest
30%
20Y2 Associate's adjusted net income
7,000,000.00
Multiply by: ownership interest
30%
Share in associate's adjusted net income
2,100,000.00
On April 1, 2014, Joshtin Company purchased 30% of the outstanding ordinary shares of an associate for
P4,000,000. On this date, the investee’s net assets totaled P8,000,000 and Joshtin Company cannot
attribute the excess of cost of the investment over the equity in the investee’s net assets to any particular
factor. The investee reported net income of P1,000,000 for 2014. What is the maximum amount which could
be included in Joshtin Company’s 2014 income before tax to reflect its equity earnings of the investee?
=225,000
Solution:
Net income of P1,000,000 x 30% x 9 months/12 months = P225,000
Moss Company owns 20% of Durbro Company’s preference share capital and 80% of its ordinary share
capital. Durbo’s share capital outstanding at December 31, 2009 is as follows:
10% cumulative preference share capital
5,000,000
Ordinary share capital
7,000,000
Dubro reported net income P3,000,000 for the year ended December 31,2009. What amount should Moss
record as equity in earnings of Durbo for the year ended December 31, 2009?
=2,000,000
Solution:
When an investee has outstanding cumulative preference share capital, an investor should copute its share
of earnings after deducting the investee’s preference dividends, whether or not such dividends are declared.
Net income
Preference dividend (10% x 5,000,000)
Net income to ordinary share
Share income – ordinary share (80% x 2,500,000)
3,000,000
(500,000)
2,500,000
2,000,000
On July 1, 2009, Dever Company purchased 30,000 shares of Eagle Company’s 100,000 outstanding
ordinary shares for P200 per share. On December 15, 2009, Eagle paid P400,000 in dividends to its
ordinary shareholders. Eagle’s net income for the year ended December 31, 2009 was P1,200,000 earned
evenly throughout the year. In its 2009 income statement, what amount of income from this investment
should Denver report?
=180,000
Solution:
Net income of P1,200,000 x 30% x 6 months/12 months = P180,000
Allapacan Company bought 20% of Amulung Corporation’s ordinary shares on January 1, 2009 for
P20,000,000. Carrying amount of Amulung’s net assets at purchase date totaled P60,000,000. Fair value
and carrying amounts were the same for all items except for plant and inventory, for which fair values
exceed their carrying amounts by P15,000,000 and P5,000,000 respectively. The plant has a 5-year
life. All inventory was sold during 2009. Goodwill, if any, has an indefinite life. During 2009, Amulung
reported net income of P40,000,000 and paid a P15,000,000 cash dividend. What amount should
Allapacan report as investment income for 2009?
=P6,400,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value
60,000,000.00
Excess FV over BV
Plant
15,000,000.00
Inventory
5,000,000.00
20,000,000.00
Fair value of equity
Multiply by: Share in ownership
80,000,000.00
20%
16,000,000.00
Goodwill (Gain from acquisition)
4,000,000.00
Net income, unadj
Amort of excess FV over BV
Plant (P15,000,000/5 yrs)
Inventory
40,000,000.00
Net income, adj
Multiply by: Share in ownership
32,000,000.00
20%
Investment income
6,400,000.00
-3,000,000.00
-5,000,000.00
On January 1, 2009, Dyer Company acquired as a long – term investment a 20% ordinary share interest in
Eason Company. Dyer paid P7,000,000 for this investment when the fair value of Eason’s net assets was
P35,000,000. Dyer can exercise significant influence over Eason’s operating and financial policies. For the
year ended December 31, 2009, Eason reported net income of P4,000,000 and declared and paid cash
dividends of P1,600,000. How much revenue from this investment should Dyer report for 2009?
=800,000
Solution:
Share in net income (20% x 4,000,000)
800,000
Under the equity method, the investor recognizes as income its share of the investee’s earnings. Cash
dividends are not recorded as income but reduction of the investment account.
On January 1, 2009, Ronald Company purchased 40% of the outstanding ordinary shares of New
Company, paying P6,400,000 when the book value of the net assets of New Company equaled
P12,500,000. The difference was attributed to equipment which had a book value of P3,000,000 and a fair
market value of P5,000,000 and to building which had a book value of P2,500,000 and a fair value of
P4,000,000. The remaining usefull life of the equipment and building was 4 years and 12 years of
P5,000,000 and paid dividends of P2,500,000. Ronald Company shall report investment income for 2009
at
=1,750,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value
12,500,000.00
Excess FVs over BVs
Equipment (P5M-P3M)
2,000,000.00
Building (P4M-P2.5M)
1,500,000.00
Fair value of equity
Multiply by: Share in ownership
16,000,000.00
40%
6,400,000.00
6,400,000.00
Goodwill (Gain from acquisition)
0.00
Net income, unadj
Amort of difference in FV and BV
Equipment (P2,000,000/4 yrs)
Building (P1,500,000/12 yrs)
5,000,000.00
Net income, adj
Multiply by: Share in ownership
4,375,000.00
40%
Investment income
1,750,000.00
-500,000.00
-125,000.00
Jay Company purchased 35% of Jerry Company on January 1, 2009 for P11,200,000 when Jerry’s
book value was P32,400,000.On that day, the market value of the net assets of jerry Company equled
their book value with the following exception:
Book
Market
Equipment
7,000,000
5,600,000
Building
1,600,000
2,600,000
The equipment has a remaining useful life of 5 years, and building has a remaining useful life of 10 years.
Jerry reported net income of P3,200,000 and cash dividends of P1,000,000 for 2009. What is the investment
income that will be reported by Jay Company for 2009?
=1,183,000
Solution:
Aquisition cost
Net assets aquired (35% x 32,400,000)
Excess of book value over cost
Equipment – book value higher than market value (1,400,000 x 35%)
Building – market value higher than book value
11,200,000
11,340,000
(140,000)
(490,000)
350,000
(140,000)
1,120,000
Share in net income (35% x 3,200,000)
Amortization of excess:
Overdepreciation of equipmet (490,000/5)
98,000
Underdepreciation of building (350,000/10)
(35,000)
Investment income
1,183,000
Sage Company bought 40% of Eve company’s outstanding ordinary share on January 1, 2009, for
P4,000,000. The carrying amount of Eve’s net assets at the purchase date totaled P9,000,000. Fair value
and carrying amounts were the same for all items except for plant and inventory for which fair values
exceeded their carrying amounts by P900,000 and P100,000, respectively. The plant has an 18 – year life.
All inventory was sold during 2009. During 2009, Eve reported ner income of P1,200,000 and paid a
P200,000 cash dividend. What amount should Sage report as investment income in its income statement
for the year ended December 31, 2009?
=420,000
Solution:
Consideration transferred
Less: Fair value of shares acquired
Book value
9,000,000.00
Excess FVs over BVs
Plant
900,000.00
Inventory
100,000.00
Fair value of equity
Multiply by: Share in ownership
10,000,000.00
40%
4,000,000.00
4,000,000.00
Goodwill (Gain from acquisition)
0.00
Net income, unadjusted
Amort of difference in FV and BV
Plant (P900,000/18 yrs)
Inventory
1,200,000.00
Net income, adjusted
Multiply by: Share in ownership
1,050,000.00
40%
Investment income
420,000.00
-50,000.00
-100,000.00
On April 1, 2009, Ben Company purchased 40% of the outstanding ordinary shares of Clarken
Company for P10,000,000. On that date, Clarken’s net assets were P20,000,000 and Ben cannot
attribute the excess of the cost of its investment in clarke over its equity in Clarke’s net assets to any
particular factor.
Clarke’s 2009 net income is P5,000,000. Ben plans to retain its investment in Clarke indefinitely. Ben
accounts for its investment in Clarke by the equity method. The maximum amout which could be inclueded
in Ben’s 2009 income befor tax reflect Ben’s “equity in net income of Clarke” is
=1,500,000
Solution:
If the investor is unable to relate the excess of cost to any specific identifiable asset, the difference is
considered as goodwill.
PAS 28 provides that goodwill relating to an associate is included in the carrying amount of the investment.
However, amortization of the goodwill is not permitted and therefore not included in the determination of
the investor’s share of the associate’s profit or loss.
Share in net income from April 1 to December 31, 2009 (5,000,000 x 9/12 x 40%)
Acquisition cost
Less: Book value of net assets acquired (40% x 20,000,000)
Goodwill – not amortized
1,500,000
10,000,000
8,000,000
2,000,000
On January 1, 2013, TIni Company acquired as a long term investment for P7,000,000, a 40% interest
in Dora Company when the fair value of Dora’s net assets was P17,500,000. Dora Company reported
the following net losses:
2013
5,000,000
2014
7,000,000
2015
8,000,000
2016
4,000,000
On January 2015, TIni Company made cash advances of P2,000,000 to Dora Company. On December
31, 2016, it is not expected that TIni Company will provide further financial support for Dora Company.
What amount should TIni Company report in 2016 a loss from investment?
=1,000,000
Santo, Inc. acquired 30% of Nino Corp.'s voting stock on January 1, 2008 for P360,000. During 2008,
Nino earned P150,000 and paid dividends of P90,000. Santo's 30% interest in Nino gives Santo the
ability to exercise significant influence over Nino's operating and financial policies. During 2009, Nino
earned P180,000 and paid dividends of P60,000 on April 1 and P60,000 on October 1. On July 1,
2009, Santo sold half of its stock in Nino for P237,000 cash.
What should be the gain on sale of this investment in Santo's 2009 income statement?
=P43,500
On July 1, 2005, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At
that date, the equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being
measured at amounts equal to fair value. The table below shows the profits and losses made by
Marcus during 2005 to 2009:
Year
Profit (Loss)
2005
P 200,000
2006
(2,000,000)
2007
(2,500,000)
2008
200,000
2009
300,000
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2009?
=P15,000
On July 1, 2005, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At
that date, the equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being
measured at amounts equal to fair value. The table below shows the profits and losses made by
Marcus during 2005 to 2009:
Year
Profit (Loss)
2005
P 200,000
2006
(2,000,000)
2007
(2,500,000)
2008
160,000
2009
300,000
The amount to be disclosed in 2008 related to the investment in Cleopatra, Corporation.
=60,000
On January 1, 2013, TIni Company acquired as a long term investment for P7,000,000, a 40% interest
in Dora Company when the fair value of Dora’s net assets was P17,500,000. Dora Company reported
the following net losses:
2013
5,000,000
2014
7,000,000
2015
8,000,000
2016
4,000,000
On January 2015, TIni Company made cash advances of P2,000,000 to Dora Company. On December
31, 2016, it is not expected that TIni Company will provide further financial support for Dora Company.
What amount should TIni Company disclosed in 2016?
=600,000
Solution:
Disclosure
Investment in associate, 1/1/2013
Share in net loss, 2013 (P5,000,000 x 40%)
7,000,000.00
-2,000,000.00
Investment in associate, 12/31/2013
Share in net loss, 2014 (P7,000,000 x 40%)
5,000,000.00
-2,800,000.00
Investment in associate, 12/31/2014
Cash advance to Dora Company
Share in net loss, 2015 (P8,000,000 x 40%)
2,200,000.00
2,000,000.00
-3,200,000.00
Investment in Associate, 12/31/2015
Share in net loss, 2016
(P4,000,000 x 40%)
-1,600,000.00
1,000,000.00
-1,000,000.00
-600,000.00
Investment in associate, 12/31/2016
0.00
-600,000.00
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that
date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by EB during 2013 to
2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The carrying amount of the investment in EB, Inc. as of December 31, 2017
=P15,000
On July 1, 20Y1, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that date,
the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at amounts
equal to fair value. The table below shows the profits and losses made by EB during 20Y1 to 20Y5:
Year
20Y1
20Y2
20Y3
20Y4
20Y5
Profit (Loss)
P200,000
(2,000,000)
(2,500,000)
160,000
300,000
The amount to be recognized in 20Y5 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 30
=15,000
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that
date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by EB during 2013 to
2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The amount to be recognized in 2016 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 30
=0
Solution:
Disclosure
Investment in associate, 7/1/2013
Share in 2013 Profit (P200,000 x 25% x 6/12)
1,000,000.00
25,000.00
Investment in associate, 12/31/2013
Share in 2014 Loss (P2,000,000 x 25%)
1,025,000.00
-500,000.00
Investment in associate, 12/31/2014
Share in 2015 Loss (P2,500,000 x 25%)
-625,000.00
525,000.00
-525,000.00
-100,000.00
Investment in associate, 12/31/2015
Share in 2016 Profit (P160,000 x 25%)
40,000.00
0.00
0.00
-100,000.00
40,000.00
On July 1, 20Y1, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that date,
the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at amounts
equal to fair value. The table below shows the profits and losses made by EB during 20Y1 to 20Y5:
Year
20Y1
20Y2
20Y3
20Y4
20Y5
Profit (Loss)
P200,000
(2,000,000)
(2,500,000)
160,000
300,000
The amount to be recognized in 20Y3 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 29
=525,000
On July 1, 2009, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At that
date, the equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by Marcus during 2009 to
2013:
Year
2009
2010
2011
2012
2013
Profit (Loss)
P 200,000
(2,000,000)
(2,500,000)
160,000
300,000
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2013?
=P15,000
Company A has a 25% investment in the common stock of (carrying value of P1 million), and advances to
(amounting to P0.5 million), Company B. Company B has been incurring significant losses in the past
years. Company A uses the equity method to account for this investment but has no commitment to support
Company’s B operations. Company A should
=discontinue applying the equity method when the investment and advances accounts are
reduced to zero.
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that
date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by EB during 2013 to
2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The amount to be recognized in 2016 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 30
=0
Solution:
Disclosure
Investment in associate, 7/1/2013
Share in 2013 Profit (P200,000 x 25% x 6/12)
1,000,000.00
25,000.00
Investment in associate, 12/31/2013
Share in 2014 Loss (P2,000,000 x 25%)
1,025,000.00
-500,000.00
Investment in associate, 12/31/2014
Share in 2015 Loss (P2,500,000 x 25%)
Investment in associate, 12/31/2015
Share in 2016 Profit (P160,000 x 25%)
-625,000.00
525,000.00
-525,000.00
-100,000.00
40,000.00
0.00
0.00
-100,000.00
40,000.00
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that
date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by EB during 2013 to
2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The amount to be recognized in 2017 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 30
=15,000
Solution:
Disclosure
Investment in associate, 7/1/2013
Share in 2013 Profit (P200,000 x 25% x 6/12)
1,000,000.00
25,000.00
Investment in associate, 12/31/2013
Share in 2014 Loss (P2,000,000 x 25%)
1,025,000.00
-500,000.00
Investment in associate, 12/31/2014
Share in 2015 Loss (P2,500,000 x 25%)
-625,000.00
525,000.00
-525,000.00
-100,000.00
Investment in associate, 12/31/2015
Share in 2016 Profit (P160,000 x 25%)
40,000.00
0.00
0.00
-100,000.00
40,000.00
Investment in associate, 12/31/2016
Share in 2017 Profit (P300,000 x 25%)
75,000.00
0.00
15,000.00
-60,000.00
60,000.00
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that
date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by EB during 2013 to
2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The carrying amount of the investment in EB, Inc. as of December 31, 2014
=525,000
Solution:
Investment in associate, 7/1/2013
Share in 2013 Profit (P200,000 x 25% x 6/12)
1,000,000.00
25,000.00
Investment in associate, 12/31/2013
Share in 2014 Loss (P2,000,000 x 25%)
1,025,000.00
-500,000.00
Investment in associate, 12/31/2014
525,000.00
On July 1, 2013, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At
that date, the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured
at amounts equal to fair value. The table below shows the profits and losses made by EB during 2013
to 2017:
Year
Profit (Loss)
2013
P200,000
2014
(2,000,000)
2015
(2,500,000)
2016
160,000
2017
300,000
The amount to be recognized in 2015 profit or loss related to the investment in EB, Inc. in accordance with
PAS 28, par. 29
=525,000
Solution:
Disclosure
Investment in associate, 7/1/2013
Share in 2013 Profit (P200,000 x 25% x 6/12)
1,000,000.00
25,000.00
Investment in associate, 12/31/2013
Share in 2014 Loss (P2,000,000 x 25%)
1,025,000.00
-500,000.00
Investment in associate, 12/31/2014
525,000.00
Share in 2015 Loss (P2,500,000 x 25%)
-625,000.00
-525,000.00
-100,000.00
On January 1, 2006, Bart Company acquired as long term investment for P7,000,000, a 40% interest in
Hall Company when the fair value of Hall’s net assets was P17,500,000. Hall Company reported the
following net losses:
2006
5,000,000
2007
7,000,000
2008
8,000,000
2009
4,000,000
On January 1, 2008, Bart Company made cash advances of P2,000,000 to Hall Company. On December
31, 2009, it is not expected that Bart Company will provide further financial support for Hall Company. Bart
Company should report in 2009 a loss from investment of
=1,000,000
On July 1, 20Y1, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that date,
the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at amounts
equal to fair value. The table below shows the profits and losses made by EB during 20Y1 to 20Y5:
Year
20Y1
20Y2
20Y3
20Y4
20Y5
Profit (Loss)
P200,000
(2,000,000)
(2,500,000)
160,000
300,000
The amount to be recognized in 20Y4 profit or loss related to the investment in EB, Inc. in accordance with
PAS
28,
par.
30
=0
On January 2, 2012, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson
Corporation for P30 per share. The purchase price was equal to Emerson’s underlying book
value. Pido plans to hold this stock to influence the activities of Emerson.
The following data are applicable for 2012 and 2013:
2012
2013
Emerson dividends (paid Oct. 31)
P 40,000
P 48,000
Emerson profit
140,000
160,000
Emerson share market price at
year-end
32
31
On January 2, 2014, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 2014, Emerson reported profit of P120,000, and on October 31, 2014, Emerson paid
dividends of P20,000. At December 31, 2014, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does
not expect to exercise significant influence over Emerson, and the shares are classified as fair value
through other comprehensive income.
Total amount to be recognized in profit or loss on January 2, 2014
=P37,600
On January 1, 20Y1, TIn Company acquired as a long term investment for P7,000,000, a 40% interest in
Dora Company when the fair value of Dora’s net assets was P17,500,000. Dora Company reported the
following net losses:
20Y1
20Y2
20Y3
20Y4
5,000,000
7,000,000
8,000,000
4,000,000
On January 20Y3, TIni Company made cash advances of P2,000,000 to Dora Company. On December
31, 20Y4, it is not expected that TIni Company will provide further financial support for Dora Company.
What amount should TIni Company disclosed in 20Y4?
=600,000
On July 1, 20Y1, HHWW Corporation acquired 25% of the shares of EB, Inc. for P1,000,000. At that date,
the equity of EB was P4,000,000, with all the identifiable assets and liabilities being measured at amounts
equal to fair value. The table below shows the profits and losses made by EB during 20Y1 to 20Y5:
Year
20Y1
20Y2
20Y3
20Y4
20Y5
Profit (Loss)
P200,000
(2,000,000)
(2,500,000)
160,000
300,000
The carrying amount of the investment in EB, Inc. as of December 31, 20Y2
=525,000
Grant Company aquired 30% of South Company’s voting share capital for P2,000,000 on January 1,
2009. Grant’s 30 % interest in South gave Grant the ability to exercise significant influence over South’s
operating and financial policies. During 2009, South earned P800,000 and paid dividend of P500,000.
South reported earnings of P1,000,000 for the 6 months ended June 30,2010, and P2,000,000 for the
year ended December 31, 2010. On July 1, 2010, Grant sold half of its investment in South for
P1,500,000 cash. South paid dividend of P600,000 on October 1, 2010. The fair value of the retained
investment is P1,600,000 on July 1, 2010 and P1,800,000 on December 31, 2010. The retained
investment is to be held as fair value through other comprehensive income.
In its 2010 income statement, what amount should Grant report as gain from the sale of half its investment?
=305,000
Solution:
Carrying amount of investment, December 31, 2009
Add: Share in net income from January 1 to June 30, 2010 (30% x 1,000,000)
Carrying amount of investment, June 30,2010
Sale price
Cost of investment sold (2,390,000/2)
Gain from sale of investment
2,090,000
300,000
2,390,000
1,500,000
(1,195,000)
305,000
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc. on
January 2, 2009. At the date of acquisition, the book value of XYZ’s net assets was P155, 000, 000.
The book values and fair value of XYZ’s net assets approximated their fair values except for the
following assets:
Excess of fair values
from book value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 2009, XYZ reported a net income of P28, 400, 000 for the year
ended December 31, 2009, and paid cash dividends at P6, 000, 000. ABC’s statement of financial
position as of December 31, 2009 shows an amount of P88, 200,000 at investment in XYZ Inc.
What is the total acquisition cost of the investment on January 2, 2009?
=80, 000, 000
Solution:
Net income, unadj
28,400,000.00
Amort of excess FV over BV
Inventories
Building (P4,000,000/8 yrs)
Patent (P2,000,000/5 yrs)
-1,000,000.00
-500,000.00
-400,000.00
Net income, adj
Multiply by: % in ownership
26,500,000.00
40%
Investment income
10,600,000.00
Investment in associate, 12/31/2009
Add: Share in associate dividends (P6,000,000 x 40%)
88,200,000.00
2,400,000.00
Total
Less: Investment income
90,600,000.00
10,600,000.00
Investment in associate, 1/2/2009
80,000,000.00
On July 1, 2011 DEF Corp. acquired 60,000 shares of the 200,000 shares outstanding of ZYX Inc. at P25
per share. The company incurred P2 transaction per share. The book value of ZYX Inc.’s net assets on this
date amounted to P5M. The fair value of one of its identifiable intangible with a 5 year remaining life higher
than book value by P50,000 while its Equipment having a remaining life of 8 years has a fair value P160,000
higher than book value. All other identifiable assets had fair value approximating their book values.
ZYX reported total net income in 2011 at P800,000 and distributed dividends at year end at P300,000. Fair
value of shares on this date was P30 per share while cost to sell is at P2 share.
ZYX reported total comprehensive income in 2012 at P1,250,000 which is net of an foreign translation loss
amounting to P150,000. It also distributed dividends at year end at P500,000. Fair value of shares on this
date was at P34 per share while costs to sell remained P2 per share.
Required:
Assuming that on January 1, 2013, ZYX Inc. issued additional 50,000 shares to other stockholders at P34
per share without the participation of ABC Corp., what is the amount of gain or loss to be recognized in the
income statement as a result of the transaction?
=35,700.
Solution:
Acquisition cost (P27 x 60,000)
Less: Fair value of shares acquired
Book value
Excess FVs over BVs
Intangible asset
Equipment
Fair value of equity
Multiply by: % in ownership
1,620,000.00
5,000,000.00
50,000.00
160,000.00
5,210,000.00
30%
1,563,000.00
Goodwill (Gain from acquisition)
57,000.00
Investment in associate, 7/1/2011
Add: Share in associate net income, adj
2011 Income, unadj
800,000.00
Amort of excess FV/BV
Intangibe asset (P50,000/5 yrs)
-10,000.00
Equipment (P160,000/8 yrs)
-20,000.00
1,620,000.00
2011 income, adj
Multiply by: Coverage
770,000.00
50%
Claimable income
Multiply by: % in ownership
385,000.00
30%
2012 Income, unadj
Amort of excess FV/BV
Intangibe asset
Equipment
1,250,000.00
2012 income, adj
Multiply by: % in ownership
1,220,000.00
30%
Total
Less: Share in associate dividend
115,500.00
-10,000.00
-20,000.00
366,000.00
2,101,500.00
2011 Dividends (P300,000 x 30%)
2012 Dividends (P500,000 x 30%)
90,000.00
150,000.00
240,000.00
Investment in associate, 12/31/2012
1,861,500.00
% before issuance (60.000/200,000)
% after issuance (60,000/(200,000+50,000)
30%
24%
Carrying amount of investment
Less: Cost of deemed disposal
(P1,861,500 x (30%-24%)/30%)
1,861,500.00
Total
Add: Share in new contribution
(P34 x 50,000 x 24%)
1,489,200.00
New carrying amount
Less: Old carrying amount
1,897,200.00
1,861,500.00
Gain (loss)
35,700.00
372,300.00
408,000.00
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 2009. At the date of acquisition, the book value of XYZ’s net assets was P155, 000, 000.
The book values and fair value of XYZ’s net assets approximated their fair values except for the
following assets:
Excess of fair values
from book value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 2009, XYZ reported a net income of P28, 400, 000 for the year
ended December 31, 2009, and paid cash dividends at P6, 000, 000. ABC’s statement of financial
position as of December 31, 2009 shows an amount of P88, 200,000 at investment in XYZ Inc.
How much is the income from the investment in 2009?
=10, 600, 000
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc. on
January 2, 2009. At the date of acquisition, the book value of XYZ’s net assets was P155, 000, 000.
The book values and fair value of XYZ’s net assets approximated their fair values except for the
following assets:
Excess of fair values
from book value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 2009, XYZ reported a net income of P28, 400, 000 for the year
ended December 31, 2009, and paid cash dividends at P6, 000, 000. ABC’s statement of financial
position as of December 31, 2009 shows an amount of P88, 200,000 at investment in XYZ Inc.
Assuming on January 1, 2010 ABC sold 300, 000 of its investment in XYZ at P200 per share. The retained
investment is classified as fair value through other comprehensive income. Assuming further that the XYZ
shares are selling at P220 per share as of December 31, 2010, how much is the unrealized holding gain or
loss to be reported in the balance sheet in 2010?
=2, 000, 000
Solution:
Fair value, Dec 31, 2010 (P220 x 100,000)
22,000,000.00
Less: Fair value, Jan 1, 2010 (P200 x 100,000)
20,000,000.00
Unrealized holding gain (loss)-OCI
2,000,000.00
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 2009. At the date of acquisition, the book value of XYZ’s net assets was P155, 000, 000.
The book values and fair value of XYZ’s net assets approximated their fair values except for the
following assets:
Excess of fair values
from book value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 2009, XYZ reported a net income of P28, 400, 000 for the year
ended December 31, 2009, and paid cash dividends at P6, 000, 000. ABC’s statement of financial
position as of December 31, 2009 shows an amount of P88, 200,000 at investment in XYZ Inc.
Assuming on January 1, 2010 ABC sold 300, 000 of its investment in XYZ at P200 per share, how much is
the total gain or loss on cessation?
=8, 200, 000
Solution:
Total proceeds from sale (P200 x 300,000)
Less: Cost of investment sold
(P88,200,000 x 300,000/400,000)
60,000,000.00
Gain (loss) on sale
-6,150,000.00
Fair value of shares left (P200 x 100,000)
Less: Cost of investments left
(P88,200,000 x 100,000/400,000)
20,000,000.00
Gain (loss) on reclassification
-2,050,000.00
Gain (loss) on sale
Gain (loss) on reclassification
-6,150,000.00
-2,050,000.00
Total gain (loss) on cessation
-8,200,000.00
66,150,000.00
22,050,000.00
On January 2, 2012, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson
Corporation for P30 per share. The purchase price was equal to Emerson’s underlying book
value. Pido plans to hold this stock to influence the activities of Emerson.
The following data are applicable for 2012 and 2013:
Emerson dividends (paid Oct. 31)
Emerson profit
Emerson share market price at
year-end
2012
2013
P 40,000
P 48,000
140,000
160,000
32
31
On January 2, 2014, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 2014, Emerson reported profit of P120,000, and on October 31, 2014, Emerson paid
dividends of P20,000. At December 31, 2014, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does
not expect to exercise significant influence over Emerson, and the shares are classified as fair value
through other comprehensive income.
The income from investment in Emerson in 2014 is
=P3,000
On January 2, 2012, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson
Corporation for P30 per share. The purchase price was equal to Emerson’s underlying book
value. Pido plans to hold this stock to influence the activities of Emerson.
The following data are applicable for 2012 and 2013:
2012
2013
Emerson dividends (paid Oct. 31)
P 40,000
P 48,000
Emerson profit
140,000
160,000
Emerson share market price at
year-end
32
31
On January 2, 2014, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 2014, Emerson reported profit of P120,000, and on October 31, 2014, Emerson paid
dividends of P20,000. At December 31, 2014, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does
not expect to exercise significant influence over Emerson, and the shares are classified as fair value
through other comprehensive income.
Carrying amount of Investment in Emerson as of December 31, 2013
=P2,442,400
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 2009. At the date of acquisition, the book value of XYZ’s net assets was P155, 000, 000.
The book values and fair value of XYZ’s net assets approximated their fair values except for the
following assets:
Excess of fair values
from book value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 2009, XYZ reported a net income of P28, 400, 000 for the year
ended December 31, 2009, and paid cash dividends at P6, 000, 000. ABC’s statement of financial
position as of December 31, 2009 shows an amount of P88, 200,000 at investment in XYZ Inc.
Assuming on January 1, 2010, XYZ issued additional 600, 000 fresh new shares to other stockholders, at
P200 per share (ABC not participating on the share issuance), how much is gain or loss deemed sale?
=3, 075, 000
Solution:
% ownership after issuance (400,000/(1M+600,000)
25%
Cost of deemed sale (P88,200,000x(40%-25%)/40%
Share in new contribution (600,000 x P200 x 25%)
-33,075,000.00
30,000,000.00
Gain (Loss) on deemed sale
-3,075,000.00
ABC Corp. acquired 400,000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 20Y1. At the date of acquisition, the carrying value of XYZ’s net assets was P155,000,000.
The carrying values and fair value of XYZ’s net assets approximated their fair values except for the following
assets:
Inventories
Building, 8 year remaining life
Patent, 5 year remaining life
Excess of fair values
from carrying value
P1, 000, 000
4, 000, 000
2, 000, 000
All inventories acquired were sold in 20Y1, XYZ reported a Profit of P28,400,000 for the year ended
December 31, 20Y1, and paid cash dividends at P6,000,000. ABC’s statement of financial position as of
December 31, 20Y1 shows an amount of P88, 200,000 at investment in XYZ Inc. Assuming on January 1,
20Y2, XYZ issued additional 600,000 fresh new shares to other stockholders, at P200 per share (ABC not
participating on the share issuance), how much is gain or loss deemed sale?
=3, 075, 000
Santo, Inc. acquired 30% of Nino Corp.'s voting stock on January 1, 2008 for P360,000. During 2008,
Nino earned P150,000 and paid dividends of P90,000. Santo's 30% interest in Nino gives Santo the
ability to exercise significant influence over Nino's operating and financial policies. During 2009, Nino
earned P180,000 and paid dividends of P60,000 on April 1 and P60,000 on October 1. On July 1,
2009, Santo sold half of its stock in Nino for P237,000 cash.
What should be the gain on sale of this investment in Santo's 2009 income statement?
=P43,500
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc. on
January 2, 20Y1. At the date of acquisition, the carrying value of XYZ’s net assets was P155,000,000. The
carrying values and fair value of XYZ’s net assets approximated their fair values except for the following
assets:
Inventories
Building, 8 year remaining life
Patent, 5 year remaining life
Excess of fair values
from carrying value
P1, 000, 000
4, 000, 000
2, 000, 000
All inventories acquired were sold in 20Y1, XYZ reported a Profit of P28, 400, 000 for the year ended
December 31, 20Y1, and paid cash dividends at P6,000,000. ABC’s statement of financial position as of
December 31, 20Y1 shows an amount of P88,200,000 at investment in XYZ Inc
Assuming on January 1, 20Y2 ABC sold 300, 000 of its investment in XYZ at P200 per share. The retained
investment is classified as fair value through other comprehensive income. Assuming further that the XYZ
shares are selling at P220 per share as of December 31, 20Y2, how much is the unrealized holding gain or
loss
to
be
reported
in
the
balance
sheet
in
20Y2?
=2, 000, 000
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc. on
January 2, 20Y1. At the date of acquisition, the carrying value of XYZ’s net assets was P155,000,000. The
carrying values and fair value of XYZ’s net assets approximated their fair values except for the following
assets:
Excess of fair values
from carrying value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 20Y1, XYZ reported a Profit of P28,400,000 for the year ended
December 31, 20Y1, and paid cash dividends at P6,000,000. ABC’s statement of financial position as of
December 31, 20Y1 shows an amount of P88,200,000 at investment in XYZ Inc.
What is the total acquisition cost of the investment on January 2, 20Y1?
=80, 000, 000
On January 2, 2012, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson
Corporation for P30 per share. The purchase price was equal to Emerson’s underlying book
value. Pido plans to hold this stock to influence the activities of Emerson.
The following data are applicable for 2012 and 2013:
Emerson dividends (paid Oct. 31)
Emerson profit
Emerson share market price at
year-end
2012
2013
P 40,000
P 48,000
140,000
160,000
32
31
On January 2, 2014, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 2014, Emerson reported profit of P120,000, and on October 31, 2014, Emerson paid
dividends of P20,000. At December 31, 2014, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does
not expect to exercise significant influence over Emerson, and the shares are classified as fair value
through other comprehensive income.
Net unrealized loss on fair value through other comprehensive income securities as of December 31,
2014
=P540,000
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 20Y1. At the date of acquisition, the carrying value of XYZ’s net assets was P155,000,000.
The carrying values and fair value of XYZ’s net assets approximated their fair values except for the following
assets:
Excess of fair values
from carrying value
Inventories
P1, 000, 000
Building, 8 year remaining life
4, 000, 000
Patent, 5 year remaining life
2, 000, 000
All inventories acquired were sold in 20Y1, XYZ reported a Profit of P28,400, 000 for the year ended
December 31, 20Y1, and paid cash dividends at P6,000,000. ABC’s statement of financial position as of
December 31, 20Y1 shows an amount of P88,200,000 at investment in XYZ Inc.
How much is the income from the investment in 20Y1?
=10, 600, 000
In its 2010 income statement, what amount should Grant report as gain from remeasurement of its retained
investment?
=405,000
Solution:
Fair value – 7/1/2010
Carrying amount of retained investment
Gain from remeasurement
Fair value – 12/31/2010
Fair value – 7/1/2010
Unrealized gain – FVTOCI
1,600,000
1,195,000
405,000
1,800,000
1,600,000
200,000
The unrealized gain of P200,000 is reported as other comprehensive income in the 2010 statement of
comprehensive income because the retained investment is accounted for as FVTOCI.
On January 2, 20Y1, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson Corporation
for P30 per share. The purchase price was equal to Emerson’s underlying carrying value. Pido plans to
hold this stock to influence the activities of Emerson.
The following data are applicable for 20Y1 and 20Y2:
Emerson dividends (paid Oct. 31)
Emerson profit
Emerson share market price at year-end
20Y1
20Y2
P 40,000
P 48,000
140,000
160,000
32
31
On January 2, 20Y3, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 20Y3, Emerson reported profit of P120,000, and on October 31, 20Y3, Emerson paid
dividends of P20,000. At December 31, 20Y3, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does not
expect to exercise significant influence over Emerson, and the shares are classified as fair value through
other comprehensive income.
Carrying amount of Investment in Emerson as of December 31, 20Y1
=P2,420,000
On January 2, 2012, Pido Company acquired 20% of the 400,000 ordinary shares of Emerson
Corporation for P30 per share. The purchase price was equal to Emerson’s underlying book
value. Pido plans to hold this stock to influence the activities of Emerson.
The following data are applicable for 2012 and 2013:
Emerson dividends (paid Oct. 31)
Emerson profit
Emerson share market price at
year-end
2012
2013
P 40,000
P 48,000
140,000
160,000
32
31
On January 2, 2014, Pido Company sold 20,000 shares of Emerson at their quoted price of P31 per
share. During 2014, Emerson reported profit of P120,000, and on October 31, 2014, Emerson paid
dividends of P20,000. At December 31, 2014, after a significant stock decline, which is expected to be
temporary, Emerson’s stock was selling for P22 per share. After selling the 20,000 shares, Pido does
not expect to exercise significant influence over Emerson, and the shares are classified as fair value
through other comprehensive income.
Carrying amount of Investment in Emerson as of December 31, 2012
=P2,420,000
Solution:
Investment in associate, 1/2/2012 (P30 x 400,000 x 20%)
Add: Share in 2012 profit (P140,000 x 20%)
2,400,000.00
28,000.00
Total
Less: Share in 2012 dividends (P40,000 x 20%)
2,428,000.00
8,000.00
Investment in associate, 12/31/2012
2,420,000.00
ABC Corp. acquired 400, 000 shares (40%) of the outstanding common shares issued of XYZ Inc.
on January 2, 20Y1. At the date of acquisition, the carrying value of XYZ’s net assets was P155, 000, 000.
The carrying values and fair value of XYZ’s net assets approximated their fair values except for the following
assets:
Inventories
Building, 8 year remaining life
Patent, 5 year remaining life
Excess of fair values
from carrying value
P1, 000, 000
4, 000, 000
2, 000, 000
All inventories acquired were sold in 20Y1, XYZ reported a Profit of P28,400 000 for the year ended
December 31, 20Y1, and paid cash dividends at P6,000,000. ABC’s statement of financial position as of
December 31, 20Y1 shows an amount of P88,200,000 at investment in XYZ Inc.
Assuming on January 1, 20Y2 ABC sold 300,000 of its investment in XYZ at P200 per share, how much is
the
total
gain
or
loss
on
cessation
=8, 200, 000
On July 1, 2011 DEF Corp. acquired 60,000 shares of the 200,000 shares outstanding of ZYX Inc. at P25
per share. The company incurred P2 transaction per share. The book value of ZYX Inc.’s net assets on this
date amounted to P5M. The fair value of one of its identifiable intangible with a 5 year remaining life higher
than book value by P50,000 while its Equipment having a remaining life of 8 years has a fair value P160,000
higher than book value. All other identifiable assets had fair value approximating their book values.
ZYX reported total net income in 2011 at P800,000 and distributed dividends at year end at P300,000. Fair
value of shares on this date was P30 per share while cost to sell is at P2 share. ZYX reported total
comprehensive income in 2012 at P1,250,000 which is net of an foreign translation loss amounting to
P150,000. It also distributed dividends at year end at P500,000. Fair value of shares on this date was at
P34 per share while costs to sell remained P2 per share.
Required:
Assuming that on January 1, 2013, DEF Corp. sold 24,000 ZYX shares P32/share, what is the amount of
gain/loss to be recognized in the 2012 income statement as a result of the transaction?
=85,500
Which of the following risk is inherent in an interest rate swap agreement?
I.
The risk of exchanging a lower interest rate for a higher interest rate.
II.
The risk of nonperformance by the counterparty to the agreement.
=Both I and II
Which statement is incorrect regarding derivatives?
=It is not settled.
An entity enters into a call option contract with an investment bank on December 31 2009. This contract
gives the entity the option to purchase 10,000 shares at P 100 per share . The option expires on April 30,
2010 . The share are trading at P 100 per share on December 31, 2009, at which time the entity pays P
40,000 for the call option . The 40,000 paid by the entity to the investment bank is referred to as
==Option premium
Uncertainly that the party on the other side of an agreement will abide by the terms of the agreement is
referred to as
=Credit risk
Which of the following is not a derivative ?
=Regular way purchase or sale
It is the financial instrument that derives its value from another underlying items such as a share price ,
exchange rate or interest rate .
=Derivative
Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency
at a specified price determined at the outset, with delivery or settlement at a specified future date.
=Forwards
The basic purpose of derivative financial instrument is to manage some kind of risk such as all of the
following except
=Uncollectibility of accounts receivable
All of the following are characteristic of a derivative except
=It is acquired or incurred by the entity for the purpose of generating a profit from shortterm fluctuation in market factor.
If the price of the underlying is greater than the strike or exercise price , the call option is
=In the money
Which is incorrect concerning an option?
=An option requires no payment
A contract giving the owner the right , but not the obligation , to buy or sale an assets At a specified period
in the future is referred as
=Option
Which choice best describes the information that should be disclosed related to derivative contract?
=Both fair value and nominal amount
An example of a notional amount is
=Number of barrels of oil
An agreement between two parties to exchange a specified amount of a commodity , security or foreign
currency at a specified date in the future with the price or exchange rate being set now is referred to as
=Forward contract
Which type of contract is unique in that it protect the owner against unfavorable movement in the
price or rate while allowing the owner to benefit from favorable movement?
=Option
In exchange for the right inherent in an option contract , the owner of the option will typically pay a price
=At the time the option is received regardless of whether the 0ption is exercised or not
Derivatives are measured at
=Fair value
Which of the following is an underlying?
=All of the above could be underlying
A contract , traded on an exchange , that allows a company to buy a specified quantity of a commodity or
a financial security at a specified price on a specified future date is referred to as
=Future contract
The characteristic of a derivative include (choose the incorrect one)
=A derivative has no notional amount .
Uncertainly about the future market value of an assets is referred to as
=Price risk
Zamboanga Company is a golf course developer that constructs approximately 5 courses each year. On
January 1, 2013, Zamboanga has agreed to buy 5,000 trees on January 1, 2014 to be planted in the courses
it intends to build. In recent years, the price of trees has fluctuated wildly. On January 1, 2013, Zamboanga
entered into a forward contract with a reputable bank. The price is set at P500 per tree.
The derivative forward contract provides that if the market price on January 31, 2014 is more than P500,
the difference is paid by the bank to Zamboanga. On the other hand, if the market price is less than P500,
Zamboanga will pay the difference to the bank. This derivative forward contract was designated as a cash
flow hedge. The market price on December 31, 2013 and January 31, 2014 is P800, the appropriate
discount rate is 8% and the present value of 1 at 8% for one period is 0.926.
On December 31, 2013, what amount should be recognized as derivative asset or liability?
=1,500,000 asset
Solution:
Variable interest (P6,000,000 x 9%)
Less: Underlying interest (P6,000,000 x 8%)
540,000.00
480,000.00
Interest rate swap-undiscounted
Multiply by: PVF of OA of P1 at 9% for 4 periods
60,000.00
3.24
Interest rate swap receivable
194,400.00
On January 1, 2013, Telco Company received a 5-year variable interest rate loan of P6,000,000
with interest payment at the end of each year and the principal to be repaid on December 31, 2017. The
interest rate in each succeeding years is equal to market interest rate on January 1 of each year.
On January 1, 2013, Telco Company entered into an interest rate swap agreement with a financial institution
to the effect that Telco Company will receive a swap payment if the interest on January 1 is more than 8%.
The swap payments are made at the end of each year. This interest rate swap agreement is designated as
a cash flow hedge.
On January 1, 2014, the market rate of interest is 9%. The present value of an ordinary annuity of 1 at 9%
for four periods is 3.24.
On December 31, 2013, what amount should be reported as “interest rate swap receivable?
=194,400
Solution:
Investment in associate, 1/2/2012 (P30 x 400,000 x 20%)
Add: Share in 2012 profit (P140,000 x 20%)
2,400,000.00
28,000.00
Total
Less: Share in 2012 dividends (P40,000 x 20%)
2,428,000.00
8,000.00
Investment in associate, 12/31/2012
2,420,000.00
The advantage of relating an entity’s bad debts experience to its accounts receivables is that this approach
=Give a reasonably accurate measurement of receivables in the statement of financial
positions
Long term note receivables which normally bear no interest or an interest which is reasonably low shall be
recognized initially at
=Present value
Which of the following should be valued at fair value subsequent to initial recognition?
=Financial assets acquired or held for the purpose of selling in the short term
On January 1, 2008, Ball, Inc. purchased a P1,000,000 ordinary life insurance policy on its
president. The policy year and Ball’s accounting year coincide. Additional data are available for the
year ended December 31, 2013:
Annual premium paid on 1/1/2013
P20,000
Dividend received 7/1/2013
3,000
Cash surrender value, 1/1/2013
43,500
Cash surrender value, 12/31/2013
54,000
Ball, Inc., is the beneficiary under the life insurance policy. How much should Ball report as life
insurance expense for 2013?
=P6,500
Solution:
Annual premium paid
Less: Increase in cash surrender value
(P54,000-P43,500)
10,500.00
20,000.00
Dividend received
3,000.00
Life insurance expense, 2013
13,500.00
6,500.00
On January 1, 2008, Ball, Inc. purchased a P1,000,000 ordinary life insurance policy on its
president. The policy year and Ball’s accounting year coincide. Additional data are available for the
year ended December 31, 2013:
Annual premium paid on 1/1/2013
P20,000
Dividend received 7/1/2013
3,000
Cash surrender value, 1/1/2013
43,500
Cash surrender value, 12/31/2013
54,000
Ball, Inc., is the beneficiary under the life insurance policy. How much should Ball report as life
insurance expense for 2013?
=P6,500
Solution:
Annual premium paid
Less: Increase in cash surrender value
(P54,000-P43,500)
10,500.00
Dividend received
3,000.00
Life insurance expense, 2013
20,000.00
13,500.00
6,500.00
At December 31, 20CY, Jazmine Corp. had the following Fair value through profit or loss (FVPL) purchased
during 20CY, its first year of operation:
Security A
Security B
Totals
P
P
Cost
900, 000
150, 000
1, 050, 000
P
P
Unrealized
Gain (Loss)
P(300, 000)
50, 000
P(250, 000)
Fair Value
600, 000
200, 000
800, 000
How will the fair value adjustments for 20CY impact the year’s Profit?
Select one:
=An unrealized holding loss will decrease Profit by P250, 000.
When the allowance method of recognizing bad debts expense is used the entries atb the time of collections
of an account previously written of would
=Have no effect on net income
On January 1, 20Y1, Tommy Company purchased 12% bonds, having a face value of P800,000. For
P860,700. The bonds provide the bondholders with a 10% yield, are dated January 1, 2016, and mature
January 1, 20Y6. With interests receivable December 31 of each year. The business model is to hold the
collect contractual cash flows. What amount of interest income should be recognized for 20Y2?
Select one:
=85,077
Solution
Carrying amount, Jan 1, 20Y1
860,700.00
Less: Amortization of premium, 20Y1
Nominal interest (800,000 x 12%)
96,000.00
Effective interest (860,700 x 10%)
86,070.00
9,930.00
Carrying amount, Jan 1, 20Y2
850,770.00
Multiply by: Effective interest rate
10%
Interest income, 20Y2
85,077.00
During 20Y1, A Company purchased marketable equity securities as a short-term investment. These
securities are classified as financial assets at fair value through other comprehensive income. The cost and
market value at December 31, 20Y1, were as follows:
Security
ABC—100 shares
DEF—1,000 shares
GHI—2,000 shares
Cost
P 2,800
17,000
31,500
P51,300
Market value
P 3,400
15,500
29,500
P48,200
A Company sold 1,000 shares of Company DEF stock on January 31, 20Y2, for P15 per share, incurring
P1,500 in brokerage commission and taxes. On the sale, Rex should report a realized loss of
Select
one:
=P2,000
Solution
Selling price (P15 x 1,000)
15,000.00
Less: Cost to sell
1,500.00
Net proceeds
13,500.00
Less: Market value, Dec 31, 2016
15,500.00
Realized loss
(2,000.00)
On derecognition of a financial asset, the difference between the consideration received and the carrying
amount of the financial asset shall be
=Recognized in other comprehensive income for financial asset at amortized cost and
profit or loss for financial asset at fair value
On December 31, 2013, Entity X acquired an investment for P100,000 plus a purchase commission of
P2,000. The investment is classified as financial assets through other comprehensive income. On
December 31, 2013, quoted market price of the investment is P100,000. If the investment were sold, a
commission of P3,000 would be paid. On December 31, 2013, the entity should recognize unrealized loss
directly in equity of
=P2,000
Solution:
Since the initial measurement for financial assets at fair value through other comprehensive income shall
be at fair value, any payments are charged as unrealized loss-OCI.
Villaverde Company insures the life of its president for P8,000,000, the corporation being the beneficiary of
an ordinary life policy. The premium is P200,000. The policy is dated January 1, 2010. The cash surrender
value on December 31, 2012 and 2013 are P60,000 and P80,000 respectively. The corporation follows the
calendar year as its fiscal period. The president dies on October 1, 2013 and the policy is collected on
December 31, 2013. What is the gain on life insurance settlement?
=P7,875,000
Solution:
Cash surrender value, 12/31/2012
Add: Increase in CSV, 1/1/2013-10/1/2013
((P80,000-P60,000) x 9/12)
60,000.00
15,000.00
Cash surrender value, 10/1/2013
75,000.00
Total premium paid
Divide by: Coverage
200,000.00
12 months
Monthly premium
Multiply by: Period unused (10/1/2013-12/31/2013)
16,666.67
3 months
Prepaid premium
50,000.00
Insurance proceeds
Less: Cash surrender value, 10/1/2013
Prepaid premium, 10/1/2013
Gain on life insurance settlement
8,000,000.00
75,000.00
50,000.00
125,000.00
7,875,000.00
On January 1, 2014, Alameda Company purchased bonds with face value of P 5,000,000 to be held as
“available for sale.” The entity paid P 4,600,000 plus transaction costs of P 142,000. The bonds mature on
December 31, 2016 and pay 6 % interest annually on December 31 of each with 8% effective yield. The
bonds are quoted at 105 on December 31, 2014. The bonds are sold at 110 on December 31, 2015.
The gain on sale on these bonds in the 2015 income statement.
=592,931
On December 31, 2013, Charlton acquired an investment for P500,000 plus a purchase commission of
P10,000. The investment is designated as financial asset at fair value through other comprehensive
income. On December 31, 2013, quoted market price of the investment is P500,000. If the investment
were sold, a commission of P15,000 would be paid. On December 31, 2013, the investment should be
carried at
=P500,000
Solution:
Subsequent measurement for financial assets at fair value through other comprehensive income shall be
at fair value, hence, P500,000 shall be the carried amount as at December 31, 2013.
The business model approach refers to how an entity manages its financial assets in order to generate
cash flows either by collecting contractual cash flows, selling financial assets or both. How are financial
assets accounted for where the business model's objective is to hold assets in order to collect contractual
cash flows and not sell those assets?
=Amortised cost
On April 1, 2009, Purefoods Company purchased as a short-term investment a P1,000,000 face value 8%
bond for P905,000 including accrued interest. The bonds were designated as held for trading. The
commission to acquire the bonds was P5,000. The bonds are dated January 1, 2009 and mature on January
1, 2014, and pay interest semi-annually on January 1 and July 1. On December 31, 2009, the bonds had a
market value of P920,000. On April 1, 2010, Purefoods sold the bonds for a total consideration of P950,000.
How much is the gain from the sale of short-term investment in debt securities on April 1, 2010?
=P10,000
Solution:
Total proceeds
Less: Accrued interest (1,000,000 x 8% x 3/12)
950,000.00
20,000.00
Proceeds attributable to debt instrument
Less: Fair value, 12/31/2009
930,000.00
920,000.00
Gain on sale
10,000.00
On May 1, 2015 Cheerleader Company purchased a short-term P1,000,000 face value, 12% debt
instrument for P940,000 including accrued interest and classified it as held-for-trading. Transaction costs
incurred amounted to P3,200. The securities scheduled maturity date is on January 1, 2020 and pays
interest annually every June 30 and December 31. On December 31, 2015 the fair value of the debt
securities was quoted at 96.75. On March 1, 2016 the securities were sold for a total consideration, including
accrued interest of P971,300. The gain (loss) on the sale included in the 2016 comprehensive income
statement is
=
16,200
Solution:
Total proceeds
Less: Accrued interest (1,000,000 x 12% x 2/12)
971,300.00
20,000.00
Proceed attributable to debt instrument
Less: Fair value, 12/31/2015 (1,000,000 x .9675)
951,300.00
967,500.00
Gain (loss) on disposal
-16,200.00
On January 1, 2014, Alameda Company purchased bonds with face value of P 5,000,000 to be held as
“available for sale.” The entity paid P 4,600,000 plus transaction costs of P 142,000. The bonds mature on
December 31, 2016 and pay 6 % interest annually on December 31 of each with 8% effective yield. The
bonds are quoted at 105 on December 31, 2014. The bonds are sold at 110 on December 31, 2015.
The gain on sale on these bonds in the 2015 income statement.
=592,931
On January 1, 2009, Alaska Corporation purchased P1,000,000 10% bonds for P1,051,510 (including
broker’s commission of P20,000). Interest is payable annually every December 31. The bonds mature on
December 31, 2011. The bonds are classified as fair value through other comprehensive income. The
bonds were selling at 103 on December 31, 2009. On December 31, 2010, Alaska sold the bonds at 105.
(Round off present value factors to four decimal places). How much is the gain on sale of bonds on
December 31, 2010?
=P31,519
Solution:
Trial and error - 9%
PV of principal (P1,000,000 x 0.7722)
PV of interests (P100,000 x 2.5313)
772,200.00
253,130.00
PV of bonds
1,025,330.00
Trial and error - 8%
PV of principal (P1,000,000 x 0.7938)
PV of interests (P100,000 x 2.5771)
793,800.00
257,710.00
PV of bonds
1,051,510.00
Proceeds from sale (P1,000,000 x 1.05)
Less: Amortized cost, 12/31/2010
Initial measurement
1,051,510.00
Multiply by:
108%
1,050,000.00
Total
Less: Interest payment
1,135,630.80
100,000.00
Amortized cost, 12/31/2009
Multiply by:
1,035,630.80
108%
Total
Less: Interest payment
1,118,481.00
100,000.00
Gain on sale of bonds
1,018,481.00
31,519.00
The new standard clarifies the existing guidance on the collection of the asset's contractual cash flows.
When determining the applicability of this business model, an entity should consider past and future sales
information. If an entity holds financial assets for sale then it will fail the business model test for accounting
for the financial assets at amortised cost. How are financial assets accounted for where the business
model's objective is both collecting contractual cash flows and selling financial assets?
=
FVTOCI
On January 1, 2017, Gelyka Company purchased 12% bonds with face amount of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The bonds
are dated January 1, 2017 and pay interest annually on December 31 of each year. The bonds are quoted
at 115 on December 31, 2017. The entity has irrevocably elected to use the fair value option. What amount
of interest income should be reported for 2017?
=600,000
Solution:
P5,000,000 x 12% = P600,000
The Company purchases 20,000 of bonds. The asset has been designated as one at fair value through
profit and loss. One year later, 10% of the bonds are sold for 4,000. Total cumulative gains previously
recognized in Jerome's financial statements in respect of the asset are 1,000. What is the amount of the
gain on disposal to be recognized in profit or loss?
=1,900
Solution:
Proceeds
Less: Carrying amount of bonds sold
Purchase price
20,000.00
Cumulative gains 1,000.00
Total
Multiply by:
Gain on disposal
21,000.00
10%
4,000.00
2,100.00
1,900.00
On January 1, 20CY, Snap Company paid P3,000,000 for 30,000 shares of Croc Company which
represents a 15% interest in the net assets of the investee. The purchase price is equal to the carrying
amount of the net asset acquired. Snap’s board of directors is represented in Croc’s board of directors
which gives it the ability to exercise significant influence over the investee. The entity received a dividend
of P15 per share from the investee in 20CY. The investee reported Profit of P8,000,000 and revaluation
surplus of P2,500,000 in 20CY. What amount should be reported as investment in Croc Company for the
year ended December 31, 20CY?
Select one:
=4,125,000
Solution
Investment in associate, Jan 1, 20CY
3,000,000.00
Share in associate's adjusted net income (8,000,000 x 15%)
1,200,000.00
Share in associate's revaluation surplus (2,500,000 x 15%)
375,000.00
Share in associate's dividends declared (P15 x 30,000)
(450,000.00)
Investment in associate, Dec 31, 20CY
4,125,000.00
In April 1, 2013, San Mig Company purchased as a short-term investment a P1,000,000 face value 8%
bond for P905,000 including accrued interest. San Mig’s business model is to the asset for trading. The
commission to acquire the bonds was P5,000. The bonds are dated January 1, 2013 and mature on
January 1, 2018, and pay interest semi-annually on January 1 and July 1. On December 31, 2013, the
bonds had a market value of P920,000. On April 1, 2014, Purefoods sold the bonds for a total
consideration of P950,000.
How much is the gain from the sale of short-term investment in debt securities on April 1, 2014?
=P30,000
A retailer importer goods at a cost of P260,000, including P40,000 import duties and P20,000 nonrefundable purchase taxes. The risks and rewards of ownership of the imported goods were transferred to
the retailer upon collection of the goods from the harbour warehouse. The retailer was required to pay for
the goods upon collection. The retailer incurred P10,000 to transport the goods to its retail outlet and a
further P4,000 in delivering the goods to its customer. Further selling costs of P6,000 were incurred in
selling the goods. What amount should the inventory be valued?
=
P270,000
Solution:
Cost of imported goods
Freight in (Harbor warehouse to retail outlet)
Measurement of inventory
260,000.00
10,000.00
270,000.00
As a rule, goods are included in the inventory of a buyer when:
=the title has been passed to the buyer.
Seller Co. is a calendar-year retailer. Its year-end physical count of inventory on hand did not consider
the effects of the following transactions:
·
Goods with a cost of P50,000 were shipped by Seller FOB shipping point on December 30
and were tendered to and accepted by the buyer on January 4.
·
Goods with a cost of P40,000 were shipped FOB destination by a vendor on December 30
and were tendered to and accepted by Seller on January 4.
·
Goods were sold on the installment basis by Seller. Installment receivables representing
sales of goods with a cost of P30,000 were reported at year-end. Seller retains title to such goods
until full payment is made.
·
Goods with a cost of P20,000 were held on consignment for a vendor. These goods were
excluded from the count although they were sold in January.
If inventory based solely on the physical count of items on hand equaled P1 million. Seller should report
inventory at year-end of?
=
P1,000,000
Inventories are assets (choose the incorrect one)
=Held for use in the production or supply of goods and services.
The physical inventory of Pangasinan Company on December 31, 2019, showed merchandise with a
cost of P4,000,000 was on hand at that date. You also discovered the following items were all excluded
from the count:
a.
Merchandise costing P160,000, which was held by Pangasinan on consignment. The
consignor is a subsidiary.
b.
A special machine, fabricated to order for a customer costing P400,000, was finished and
specifically segregated in the back part of the shipping room on December 31, 2019. The customer
was billed on that date and the machine excluded from inventory although it was shipped on
January 4, 2020.
c.
Merchandise costing P80,000, which was shipped by Pangasinan f.o.b. destination to a
customer on December 31, 2019. The customer expects to receive the merchandise on January
3, 2020.
d.
Merchandise costing P120,000 which was shipped by Pangasinan f.o.b. shipping point to a
customer on December 29, 2019.
e.
Merchandise costing P50,000 shipped by a vendor f.o.b. shipping point on December 28,
2019 and received by Pangasinan on January 10, 2020.
The corrected balance of Pangasinan’s inventory should be?
=P4,130,000
At the beginning of the year, Jose Realty embarked on a real estate development project involving
single family dwellings. On July 1, 2013, Jose realty purchased a track of land for P60,000,000. Jose
incurred additional cost of P10,000,000 during the remainder of 2013 in preparing the land for sale as
follows.
Subdivision Phase
Number
of Sales price per lot
lots
1
100
400,000
2
200
300,000
3
400
250,000
What amount of cost should be allocated Phase 1 lots?
=P14,000,000
Solution:
Subdivision Phase
Phase 1
Phase 2
Phase 3
Number of lots
100
200
400
Sales price per lot
400,000.00
300,000.00
250,000.00
Total
Total
40,000,000.00
60,000,000.00
100,000,000.00
10/50
15/50
25/50
200,000,000.00
Purchase price
Additional cost
60,000,000.00
10,000,000.00
Total cost
Multiply by: Ratio for Phase 1
70,000,000.00
10/50
Cost of Phase 1
14,000,000.00
These are assets held for sale in the ordinary course of business, in the process of production for such sale
or in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
=Choice 1
The Alcala Company counted its ending inventory on December 31. None of the following items were
included when the total amount of the company’s ending inventory was computed:
·
P150,000 in goods located in Alcala’s warehouse that are on consignment from another
company.
·
P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit
on December 31; the goods were received by the customer on January 2. Terms were FOB
Destination.
·
P300,000 in goods were purchased by Alcala and shipped on December 30 and were in
transit on December 31; the goods were received by Alcala on January 2. Terms were FOB
shipping point.
·
P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by the customer on January 2. Terms were FOB shipping
point.
The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount
of the company’s inventory on December 31?
=P2,500,000
Solution:
Inventory, unadjusted
Goods sold in transit FOB destination
Goods purchased in transit FOB shipping point
2,000,000.00
200,000.00
300,000.00
Inventory, adjusted
2,500,000.00
Lunar Company included the following items under inventory.
Materials
1,400,000
Advance for materials ordered
200,000
Goods on process
650,000
Unexpired insurance on inventory
60,000
Advertising catalogs and shipping cartons
150,000
Finished goods in factory
250,000
Finished goods in entity-owned retail store, including 50% profit on sales
750,000
Finished goods in hands of consignees including 40% profit on sales
400,000
Finished goods in transit to customers, shipped FOB destination at cost
250,000
Finished goods out on approval, at cost
100,000
Unsalable finished goods, at cost
50,000
Office supplies
40,000
Materials in transit, shipped FOB shipping point, excluding freight of P30,000
330,000
Goods held on consignment, at sales price, cost P150,000
200,000
What is the correct inventory?
=5,500,000
The information below is taken from the records of Ram Company at the end of current year.
Finished goods in store room, at cost, including overhead of P400,000 or 20%
Finished goods in transit, including freight charge of P20,000 FOB shipping point
Finsihed goods held by salesmen, at selling price cost, P100,000
Goods in process, at cost of materials and direct labor
Materials
Materials in trnasit, FOB destiantion
Defective materials returned to suppliers
Shipping supplies
Gasoline and oil for testing finished goods
Machine lubricators
2,000,000
250,000
140,000
720,000
1,000,000
50,000
100,000
20,000
110,000
60,000
What is the correct amount of inventory?
=4,000,000
Solution:
Finished goods in store room
Finished goods held by salesmen, at cost
Goods in process, adj (P720,000/80%)
Materials
2,000,000.00
100,000.00
900,000.00
1,000,000.00
Correct amount of inventory
4,000,000.00
Which of the following items is not includible in the inventory?
=goods in transit and purchase FOB destination
Dell Company’s inventory at December 31, 2011 was 6,000,000 based on a physical count of goods
priced at cost, and before many necessary year=end adjustments relating to the following
·
Included in the physical count were goods billed to a customer FOB shipping point on
December 30,2011. These goods had a cost of P125,000 and were picked up by the carrier on
January 7, 2011.
·
Goods shipped FOB shipping point on December 28,2019, from a vendor to Dell were
received on January 4,2020. The invoice cost was P300,000.
What is the amount should Dell report as inventory on December 31, 2019?
=6,300,000
Solution:
Inventory, unadjusted
Goods shipped FOB shipping point from vendor
6,000,000.00
300,000.00
Inventory, adjusted
6,300,000.00
Which of the following is not an inventory?
=land held for resale
What is meant by the term “FOB destination” but shipped “freight collect”?
=the ownership of goods purchased is vested in the buyer upon receipt and the freight
charge is paid by the buyer
The Josephine Ventura Company included the following in its unadjusted trial balance as of December
31, 2013:
Inventory, 12/31/12
P 19,450,000
Purchases
127,850,000
Additional Information:
·
The inventory at December 31, 2013 was counted at a cost of P8.5 million. This includes
P500,000 of slow moving inventory that is expected to be sold for a net amount of P300,000.
·
Sales include P8 million for goods sold in December 2013 for cash to Omar Company. The cost
of these goods was P6 million. Omar Company has the option to require Josephine Ventura to
repurchase these goods within the month of year-end at their original selling price plus a facilitating fee
of P250,000.
The cost of sales for the year ended December 31,2013 is:
=P133,000,000
Solution:
Inventory, 12/31/12
Purchases
19,450,000.00
127,850,000.00
Goods available for sale, adjusted
Less: Ending inventory, adj
Inventory, per count 8,500,000.00
Reduction to NRV
-200,000.00
Sale or return
6,000,000.00
147,300,000.00
Cost of sales
133,000,000.00
14,300,000.00
The primary objective of inventory accounting is:
=Choice 1
The goods costing P125,000 are properly included in the December 31,2019 physical count because
they are shipped FOB shipping point only on January 7, 2020(picked up by the common carrier).
·
Hero Company inventory at December 31,2019 was P7,500,000 based on physical count
priced at cost any necessary adjustment for the following:
·
Merchandise Costing P450,000, shipped point from a vendor on December 30,2019, was
received and recorded on January 5, 2020.
·
Goods in the shipping area were excluded from inventory although shipment was not made
until january 4, 2020. The goods, billed to the customer FOB shipping point on December 30, 2019,
had a cost of P600,000.
What amount should Hero report as inventory on December 31, 2019?
=8,550,000
Solution:
Inventory, unadjusted
Merchandise shipped from a vendor
Goods in shipping area
7,500,000.00
450,000.00
600,000.00
Inventory, adjusted
8,550,000.00
Moreno Co. is a calendar-year retailer. Its year-end physical count of inventory on hand did not consider
the effects of the transactions:
·
Goods with a cost of P50,000 were shipped by Moreno FOB shipping point on December 30 and
were tendered to and accepted by the buyer on January 4.
·
Goods with a cost of P40,000 were shipped FOB destination by a vendor on December 30 and
were tendered to and accepted by Moreno on January 4.
·
Goods were sold on the instalment basis by Moreno. Instalment receivables representing sales
of goods with a cost of P30,000 were reported at year-end. Moreno retain title to such goods until full
payment is made.
·
Goods with a cost of P20,000 were held on consignment for a vendor. These goods were
excluded from the count although they were sold in January.
If inventory based solely on the physical count of items on hand equalled P1 million. Moreno should
report inventory at year-end of:
=P1,000,000
Aman Company provides the following data with respect to its inventory
Items counted in the bodega
Items included in the count specifically segregated per sale contract
Items in receiving department, returned by customer, in good conditon
Items ordered and in receiving department, invoice not recevied
Items ordered, invoice received but goods not received. Freight is on account of seller.
Items shipped today, invoice mailed, Fob shipping point
Items shipped today, invoice mailed, FOB destination
Items currently being used for window display
Items on counter for sale
Items in receiving department refused by Aman Company because of damage
Items included in count,damaged and unsalable
Items in shipping department
What is the correct amount of inventory
4,000,000
100,000
50,000
400,000
300,000
250,000
150,000
200,000
800,000
180,000
50,000
250,000
=5,700,000
Solution:
Items counted in the bodega
Items included in the count specifically segregated per sale contract
Items ordered and in receiving department, invoice not received
Items shipped today, invoice mailed, FOB destination
Items on counter for sale
Items in shipping department
4,000,000.00
100,000.00
400,000.00
150,000.00
800,000.00
250,000.00
Correct amount of inventory
5,700,000.00
These are assets held for sale in the ordinary course of business, in the process of production for such sale
or in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
=inventories
The primary objective of inventory accounting is:
=
to determine the peso amount of inventory and cost of sales.
On December 15, 2015, Obama purchased goods costing P100,000. The terms were FOB
shipping point. Costs incurred by Obama in connection with the purchase and delivery of the goods
were as follows:
Normal freight charges
P3,000
Handling costs
2,000
Insurance on shipment
500
Abnormal freight charges for express shipping
1,200
The goods were received on December 17, 2015. What is the amount that Obama should charge to
inventory and to current period expense? Inventory, Current period expense
=P5,500, P1,200
The following information has been extracted from the records of Changeling Company about one of
its products. Changeling Company uses the perpetual system.
Units
Unit cost
Total cost
Jan. 1
Beginning balance
8,000
70.00
560,000
6
Purchase
3,000
70.50
211,500
Feb. 5
Sale
10,000
Mar. 5
Purchase
11,000
73.50
808,500
Mar. 12
Purchase return
800
73.50
58,800
Apr. 8
Sale
7,000
Apr. 14
Sale return
300
Assuming the FIFO cost flow method is used, what is the cost of the inventory on April 30?
=P330,750
Solution:
Jan 1 Beginning Balance
Jan 6 Purchases
Mar 5 Purchases
Mar 12 Purchase returns
8,000.00
3,000.00
11,000.00
-800.00
Total net purchases (units)
Less: Units sold
Feb 5 Sale
10,000.00
Apr 8 Sale
7,000.00
Apr 14 Sales return -300.00
21,200.00
Total ending inventory
Multiply by: Latest unit cost
4,500.00
73.50
Cost of ending inventory
330,750.00
16,700.00
A company determined the following values for its inventory as of the end of its fiscal year:
Historical cost
P100,000
Current replacement cost
70,000
Net realizable value
90,000
Net realizable value less a normal profit margin
85,000
Fair value
95,000
What amount should the company report as inventory on its statement of financial position?
=P90,000
Buyer Co. regularly buys shirts from Vendor Company and is allowed trade discounts of 20% and 10% from
the list price. Buyer purchased shirts from Vendor on May 27, 2009 and received an invoice with a list price
of P100,000 and payment terms 2/10, n/30. If Buyer uses the net method of recording purchases, the
journal entry to record the payment on June 8, 2009 will include?
=A debit to Purchase Discounts Lost of P1,440
How should unallocated fixed overhead costs be treated?
=Recognized as an expense in the period in which they are incurred.
When a portion of the inventories has been pledged to secure the payment of indebtedness:
=The value of the inventories shown in the current assets section of the balance sheet
remains the same but the fact of having been pledged a portion of the inventories should be disclosed in
the financial statements or notes
The trial balance of Esplanade Company showed inventories of P164,000. The inventories
include some goods that have a production cost of P18,000. These goods have a manufacturing defect
that will cost P6,000 to correct. The normal selling price for these goods would be P25,000, but after the
remedial work they will be sold through an agent as refurbished goods at a discount of 20% on the normal
selling price. The agent will receive a commission of 10% of the reduced selling price. In relation to the
defective goods, the company will recognize a loss on inventory write down of?
=P6,000
The moving average inventory cost flow method is applicable to which of the following inventory systems?
Periodic
Perpetual
=No
Yes
Alapag, Inc is a wholesaler of office supplies. The activity for Model III calculators during August is
shown below:
Date Balance/Transaction Units Cost
Aug. Inventory
2,000 P36.00
1
7
Purchase
3,000 37.20
12
Sales
3,600
21
Purchase
4,800 38.00
22
Sales
3,800
29
Purchase
1,600 38.60
If Alapag, Inc. uses a FIFO perpetual inventory system, the ending inventory of Model III calculators at
August 31 is reported as
=P152,960
Solution:
Aug 1 Inventory
Aug 7 Purchase
Aug 21 Purchase
Aug 29 Purchase
2,000
3,000
4,800
1,600
Goods available for sale
Less: Goods sold
Aug 12 Sales 3,600
Aug 22 Sales 3,800
11,400
Goods on hand
4,000
Units
1,600
2,400
4,000
Cost
38.60
38.00
7,400
Total
61,760.00
91,200.00
152,960.00
The following items were included in Opal Co.’s inventory account at December 31, 2015:
Merchandise out on consignment, at sales price, including
40% markup on selling price
P40,000
Goods purchased, in transit, shipped FOB shipping point
36,000
Goods held on consignment by Opal
27,000
By what amount should Opal’s inventory account at December 31, 2015, be reduced?
=P 43,000
GH Depot is a retailer of Italian furniture and has five major products lines: sofas, dining tables, beds,
closets, and lounge chairs. At December 31, 2013, quantity on hand, cost per unit, and net realized
value (NRV) per unit of the product lines are as follows:
Product line
Quantity
Cost per unit
NRV per unit
Sofas
100
P1,000
P1,020
Dining tables 200
500
450
Beds
300
1,500
1,600
Closets
400
750
770
Lounge
chairs
500
250
200
In GH’s December 31, 2013 statement of financial position, Inventory should be carried at
=P1,040,000
Solution:
Cost
NRV
Product line
Qty
LCNRV
Total
per unit
per unit
Sofas
100 1,000.00 1,020.00 1,000.00 100,000.00
Dining tables
200 500.00
450.00
450.00
90,000.00
Beds
300 1,500.00 1,600.00 1,500.00 450,000.00
Closets
400 750.00
770.00
750.00
300,000.00
Lounge chairs 500 250.00
200.00
200.00
100,000.00
Total cost of inventory
1,040,000.00
The following information applied to Fenn Company for the current year
Merchandise purchased for resale
Freight in
Freight Out
Purchase returns
Interest on inventory loan
4,000,000
100,000
50,000
20,000
200,000
Fenn’s inventoriable cost was
=4,080,000
Balungao Company changed its accounting policy in 2008 with respect to the valuation of inventories. Up
to 2008, inventories were valued using weighted-average cost (WAC) method. In 2009 the method
was changed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and
flow of inventories in the economic cycle. The impact on inventory valuation was determined to be
At December 31, 2007:
An increase of P100,000
At December 31, 2008:
An increase of P150,000
At December 31, 2009:
An increase of P200,000
The change in accounting policy increased net profit for 2009 by?
=P 50,000
When manufacturing inventory, what is the accounting treatment for abnormal freight-in costs?
=Charge to expense for the period.
On July 1, the Oriental Company recorded purchases of inventory of P408,000 and P510,000 under credit
terms of 2/15, net 30. The payment due on the P408,000 purchases were remitted on July 14. The
payment due on the P510,000 purchases was remitted on July 25. Under the net method and the gross
method, these purchases would be included at what respective net amounts in the determination of cost of
goods available for sale? Net Method, Gross Method
=P899,640, P909,840
Reporting inventory at the lower of cost or market is a departure from the accounting principle of?
=Historical cost
Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown
below:
Balance/
Date
Transaction
Units
Cost
Aug. 1
Inventory
2,000
P36.00
7
Purchase
3,000
37.20
12
Sales
3,600
21
Purchase
4,800
38.00
22
Sales
3,800
29
Purchase
1,600
38.60
If Miller Inc. uses a weighted average cost periodic inventory system, the ending inventory of Model
III calculators at August 31 is reported as
=P150,080
Freight and other handling charges on goods out on consignment are part of the cost of
goods consigned. What is its appropriate account title in the income statement prepared by the consignor?
=transportation out to consignees
In a periodic inventory system which uses the FIFO inventory cost flow method, the cost of goods for sale
is net purchases:
=plus the beginning inventory
Caravana Development Corporation bought a 10-hectare land in Novaliches, to be improved,
subdivided into lots, and eventually sold. Purchase price of the land was P58,000,000. Taxes and
documentation expenses on the transfer of the property amounted to P800,000. The lots were
classified as follows:
Lot
class
A
B
C
D
Number
of lots
10
20
40
50
Selling price
per lot
P1,000,000
800,000
700,000
600,000
Total
clearing costs
None
P1,000,000
3,000,000
8,000,000
Purchase and improvement costs allocated for class B lots under the relative sales value method of
inventory valuation are
=P12,200,000
Brilliant Company purchases motorcycles from various countries and exports them to Europe. Brilliant
Company has incurred the following costs during the current year:
Cost of purchases based on vendors invoices
Trade discounts on purchases already deducted from vendors invices
Import duties
Freight and insurance on purchase
Other handling costs relating to imports
Salaries of accounting department
Brokerage commission paid to agents for arranging imports
Sales commission paid to sales agents
After-sales warranty costs
5,000,000
500,000
400,000
1,000,000
100,000
600,000
200,000
300,000
250,000
What is the total cost of the purchases?
=6,700,000
Which of the following represents the best justification for valuing the inventories at the lower of cost and
net realizable value?
=Choice 1
Which of the following represents the best justification for valuing the inventories at the lower of cost and
net realizable value?
=The practice of writing inventories below cost to net realizable value is consistent with the
view that assets should not be carried in excess of amount expected to be realized from their sale or use.
Alapag, Inc is a wholesaler of office supplies. The activity for Model III calculators during August is
shown below:
Date Balance/Transaction Units Cost
Aug. Inventory
2,000 P36.00
1
7
Purchase
3,000 37.20
12
Sales
3,600
21
Purchase
4,800 38.00
22
Sales
3,800
29
Purchase
1,600 38.60
If Alapag, Inc. uses a weighted average cost periodic inventory system, the ending inventory of Model
III calculators at August 31 is reported as
=P150,080
Solution:
Date Transaction
Aug 1 Inventory
Aug 7 Purchase
Aug 21 Purchase
Aug 29 Purchase
Units
2,000
3,000
4,800
1,600
Goods available for sale
11,400
Less: Goods sold
Aug 12 Sales
Aug 22 Sales
7,400
3,600
3,800
Goods on hand
Multiply by: Average unit cost
(P427,760/11,400)
4,000
Cost of ending inventory
150,080.00
Unit Cost
36.00
37.20
38.00
38.60
Total Cost
72,000.00
111,600.00
182,400.00
61,760.00
427,760.00
37.52
On January 1, 2015, Card Corp. signed a three-year noncancelable purchase contract, which allows Card
to purchase up to 500,000 units of a computer part annually from Hart Supply Co. at P.10 per unit and
guarantees a minimum annual purchase of 100,000 units. During 2015, the part unexpectedly became
obsolete. Card had 250,000 units of this inventory at December 31, 2015, and believes these parts can be
sold as scrap for P.02 per unit. What amount of probable loss from the purchase commitment should Card
report in its 2015 income statement?
=
Choice 1
On November 15, 2009, Socrates entered in to a commitment to purchase 200,000 units of raw material X
for P8,000,000 on March 15, 2010. Socrates entered into this purchase commitment to protect itself against
the volatility in the price of raw material X. By December 31, 2009, the purchase price of material X had
fallen to P35 per unit. However, by March 15, 2010, when Socrates took delivery of the 200,000 units, the
price of the material had risen to P42 per unit. How much will be recognized as gain on purchase
commitment on March 15, 2010?
= P1,000,000
When using the moving average method of inventory valuation, a new unit cost must be computed after
each?
= purchase
The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other
than those subsequently recoverable by the entity from the taxing authorities), and transport, handling
and other costs directly attributable to the acquisition of finished goods, materials and services. Trade
discounts, rebates and other similar items are deducted in determining the costs of purchase.
The costs of conversion of inventories include costs directly related to the units of production, such as
direct labor. They also include a systematic allocation of fixed and variable production overheads that
are incurred in converting materials into finished goods.
= True, True
On December 28, 2015, Kerr Manufacturing Co. purchased goods costing P50,000. The terms were FOB
destination. Some of the costs incurred in connection with the sale and delivery of the goods were as
follows:
Packaging for shipment
P1,000
Shipping
1,500
Special handling charges
2,000
These goods were received on December 31, 2015. In Kerr’s December 31, 2015 balance sheet, what
amount of cost for these goods should be included in inventory?
= P50,000
Lower of cost or net realizable value
= is most conservative if applied to individual items of inventory
The following information pertains to Deal Corp.’s 2015 cost of goods sold:
Inventory, 12/31/14
P 90,000
2015 purchases
124,000
2015 write-off of obsolete inventory
34,000
Inventory, 12/31/15
30,000
The inventory written off became obsolete due to an unexpected and unusual technological
advance by a competitor.
In its 2015 income statement, what amount should Deal report as cost of goods sold?
= P150,000
The following are costs excluded from the cost of inventories, except
= Import duties
Which of the following inventory methods developed from consideration of the flow of goods rather than the
flow of costs?
= Specific identification
The following information for Bagulin Industries was taken from the company's financial statements
(amounts in thousands):
2009
2008
Sales
P24,000
P18,000
Cost of goods sold
19,600
13,900
Inventory
1,400
1,200
Accounts receivable
3,900
3,600
Net income
560
320
What is the inventory turnover for the year 2009?
= 15 times
Which statement is incorrect regarding cost formulas?
= The FIFO formula assumes that the items of inventory that were purchased or produced
last are sold first, and consequently the items remaining in inventory at the end of the period are those
earlier purchased or produced
An inventory determined by observation and evidenced by a listing of the actual count, weight, or measure
is called:
= physical inventory
The best method of inventory valuation for a dealer in jewelries is:
= Choice 1
Transactions for the month of June were:
Sales
Purchases
June 1 (balance)
400 @ June 2
300
@
P3.20
P5.50
3
1,100
@ 3.10
6
800
@ 5.50
7
600
@ 3.30
9
500
@ 5.50
15
900
@ 3.40
10
200
@ 6.00
22
250
@ 3.50
18
700
@ 6.00
25
150
@ 6.00
Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost
basis is?
= P1,956
When allocating costs to inventory produced for the period, fixed overhead should be based upon?
= The normal capacity of production facilities
Eagle Company produces a certain product. The following costs have been incurred:
Direct materials and labor
Variable production overhead
Factory administrative costs
Fixed production costs
180,000
25,000
15,000
20,000
What is the correct inventory value of the product?
= 240,000
Yontabal Company started operations in 2007. The following data are abstracted from the company’s
production and sales records:
2007
2008
2009
Number of units produced
240,000
232,500
202,500
Number of units sold
150,000
217,500
195,000
Unit production cost
4.50
5.20
5.80
Sales revenue
1,200,000
1,800,000
1,950,000
Using the FIFO cost flow assumption, the gross profit for the year ended December 31, 2009 is?
= P882,000
The following costs were among those incurred by Wendel Corporation during 2015:
Merchandise purchased for resale
P500,000
Salesmen’s commissions
40,000
Interest on notes payable to vendors
5,000
How much should be charged to the cost of merchandise purchases?
= P500,000
The following information was taken from Cody Co.’s accounting records for the year ended December 31,
2015:
Decrease in raw materials inventory
P 15,000
Increase in finished goods inventory
35,000
Raw material purchased
430,000
Direct labor payroll
200,000
Factory overhead
300,000
Freight-out
45,000
There was no work in process inventory at the beginning or end of the year. Cody’s 2015 cost of goods
sold is
= P910,000
An example of an inventory accounting policy that should be disclosed is the?
= method used for inventory costing.
The best method of inventory valuation for a dealer in jewelries is:
= specific identification
Parrot Company is a manufacturing entity. The cost of an inventory is shown on its card as follows:
Materials
Production labor costs
Production overheads
General administration costs
Marketing costs
300,000
330,000
120,000
100,000
50,000
What is the value of the inventory in Parrot’s statement financial position?
= 750,000
Buyer Co. regularly buys shirts from Vendor Company and is allowed trade discounts of 20% and 10% from
the list price. Buyer purchased shirts from Vendor on May 27, 2009 and received an invoice with a list price
of P100,000 and payment terms 2/10, n/30. If Buyer uses the net method of recording purchases, the
journal entry to record the payment on June 8, 2009 will include?
= Choice 1
Which of the following inventory methods developed from consideration of the flow of goods rather than the
flow of costs?
= Choice 1
In a periodic inventory system which uses the FIFO inventory cost flow method, the cost of goods for sale
is net purchases:
= Choice 1
The Bayambang Corporation was organized on January 1, 2018. On December 31, 2019, the corporation
lost most of its inventory in a warehouse fire just before the year-end count of inventory was to take
place. Data from the records disclosed the following:
Beginning
inventory,
January 1
Purchases
Purchases returns and
allowances
Sales
Sales
returns
and
allowances
2018
2019
P
0
4,300,000
P1,020,000
3,460,000
230,600
3,940,000
323,000
4,180,000
80,000
100,000
On January 1, 2019, the Corporation’s pricing policy was changed so that the gross profit rate would
be three percentage points higher than the one earned in 2018.
Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise was
marked to sell at P80,000 had an estimated realizable value of P18,000.
How much is the inventory loss due to fire?
= P947,000
Solution:
Gross profit rate for 2018
Sales
Less: Sales returns and allowances
Net sales
Less: Cost of sales
Purchases
Less: Purchases returns & allowances
Net purchases
Less: Inventory, 12/31/2018
3,940,000.00
80,000.00
3,860,000.00
4,300,000.00
230,600.00
4,069,400.00
1,020,000.00
3,049,400.00
Gross profit
810,600.00
Gross profit rate (P810,600/P3,860,000)
Add:
21%
3%
New gross profit rate for 2019
24%
Computation for 2019:
Purchases
Less: Purchases returns & allowances
3,460,000.00
323,000.00
Net purchases
Inventory, 12/31/2018
3,137,000.00
1,020,000.00
Goods available for sale
Less: Cost of goods sold
Sales
Less: Sales returns & allowances
4,157,000.00
Net sales
Multiply by: Cost ratio
Estimated ending inventory
Less: Cost of undamaged inventory
(P120,000 x 76%)
Estimated realizable value of damaged inventory
Inventory loss due to fire
4,180,000.00
100,000.00
4,080,000.00
76%
3,100,800.00
1,056,200.00
91,200.00
18,000.00
109,200.00
947,000.00
Cyclops Company uses the average retail inventory method to estimate ending inventory for its
monthly financial statements. In the past, Cyclops Company has had a stable cost-to-retail
relationship for its inventory due to buying only from one supplier and marking up the goods by a fixed
percentage. Because of lack of competition, Cyclops Company has not previously needed to mark
down any of its goods. During 2012, however, two department store chains have opened which
provided intense competition and Cyclops Company has found itself buying products from a variety of
manufacturers with lower costs, reducing markup on many of its goods and marking down various
items of inventory. The following data pertain to a single department of Cyclops Company for March
2012: Inventory, March 1: at cost – P200,000, at retail – P300,000; purchases: at cost – P1,001,510,
at retail – P1,464,950; freight-in – P45,400; purchase returns: at cost – P21,000, at retail – P28,000;
additional markups – P25,000; markup cancellations – P2,650; net markdowns – P8,000; normal
spoilage
and
breakage
–
P36,000;
sales
–
P1,347,300.
The cost of the March 31 inventory is
= 257,600
Solution:
Cost
Retail
Inventory, Mar 1
Purchases
Freight in
Purchase returns
Additional markups
Markup cancellations
Net markdowns
200,000.00
1,001,510.00
45,400.00
-21,000.00
300,000.00
1,464,950.00
Goods available for sale
Cost ratio
(P1,225,910/P1,751,300)
Less: Sales
Normal spoilage
1,225,910.00
1,751,300.00
70.00%
1,347,300.00
36,000.00
1,383,300.00
Inventory at retail, Mar 31
Inventory at cost, Mar 31
(P368,000 x 70%)
-28,000.00
25,000.00
-2,650.00
-8,000.00
368,000.00
257,600.00
Which of the following is not a basic assumption of the gross profit method?
= The total amount of purchases and the total amount of sales remain relatively unchanged
from the comparable previous period.
On August 15, 2019, a typhoon damaged a warehouse of Caba Merchandise Company. The
entire inventory and many accounting records stored in the warehouse were completely
destroyed. Although the inventory was not insured, a portion could be sold for scrap. Through the use
of the remaining records, the following data are assembled:
Inventory, January 1
Purchases, January 1-August 15
Cash sales, January 1-August 15
Collection of accounts, Jan. 1-August 15
Accounts Receivable, January 1
Accounts Receivable, August 15
Salvage value of inventory
Gross profit percentage on sales
P 375,000
1,385,000
225,000
2,115,000
175,000
265,000
5,000
32%
Compute the inventory loss as a result of the typhoon.
= P102,600
Solution:
Collection of accounts
Accounts receivable, Jan 15
2,115,000.00
265,000.00
Total credits
Less: Accounts receivable, Jan 1
2,380,000.00
175,000.00
Credit sales
Cash sales
2,205,000.00
225,000.00
Total sales
2,430,000.00
Inventory, Jan 1
Purchases
375,000.00
1,385,000.00
Cost of goods available for sale
Less: Cost of goods sold
1,760,000.00
Sales
Multiply by: Cost ratio
2,430,000.00
68%
1,652,400.00
Estimated ending inventory
Less: Salvage value of inventory
107,600.00
5,000.00
Loss on inventory
102,600.00
On
June 30, 2019, a flash flood damaged the warehouse and factory of Naguilian
Corporation, completely destroying the work in process inventory. There was no damage to either the
raw materials or finished goods inventories. A physical inventory taken after the flood revealed the
following valuations:
Finished Goods
Work-in-process
Raw Materials
P112,000
0
52,000
The inventory on January 1, 2019, consisted of the following.
Finished Goods
Work-in-process
Raw Materials
P120,000
115,000
42,500
P277,500
A review of the books and records disclosed that the gross profit margin historically approximated 34%
of sales. The sales for the first 6 months of 2019 were P428,000. Raw materials purchases were
P96,000. Direct labor costs for this period were P130,000, and manufacturing overhead has historically
been applied at 60% of direct labor.
Compute the value of the work in process inventory lost on June 30, 2019.
= Choice 1
Manufacturing Co. There was no purchase of raw materials from the time of the fire until December 31,
20CY.
Inventories
Raw materials
Factory supplies
Goods in process
Finished goods
01/01/CY
P 90,000
6,000
185,000
220,000
12/31/CY
?
P 5,000
210,000
225,000
The accounting records show the following data:
Sales
Purchases of raw materials
Purchases of factory supplies
Freight-in, raw materials
Direct labor
Manufacturing overhead
Gross profit rate
P1,200,000
400,000
30,000
15,000
220,000
75% of direct labor
35% of sales
The cost of the raw materials destroyed by the fire was
= 80,000
The retail inventory is based on the assumption that:
= the final inventory and the total of goods available for sale contain the same proportion
of high-cost and low-cost goods.
How should sales staff commission be dealt with when valuing inventories at the lower of cost and net
realizable value (NRV), according to PAS2 Inventories?
Select one:
= Deducted in arriving at NRV
Compute for the cost of inventory lost in fire using the data below:
Inventory, July 1, 2018
P 51,600
Purchases, July 1, 2018 to Jan. 19, 2019
368,000
Sales, July 1, 2018 to Jan. 19, 2019
583,000
Purchase returns
11,200
Purchase discounts taken
5,800
Freight in
3,800
Sales returns
8,600
A fire destroyed the entire inventory except for purchases in transit, FOB shipping point, of P2,000 and
goods having selling price of P4,900 that were salvaged from the fire. The average gross profit rate on net
sales is 40%.
= P56,820
Solution:
Purchases
Less: Purchase returns
Purchase discounts taken
368,000.00
11,200.00
5,800.00
17,000.00
Net purchases
Add: Freight in
351,000.00
3,800.00
Net cost of purchases
Inventory, Jul 1, 2018
354,800.00
51,600.00
Goods available for sale
Less: Cost of goods sold
Sales
Less: Sales returns
406,400.00
583,000.00
8,600.00
Net sales
Multiply by: Cost ratio
574,400.00
60%
Estimated ending inventory
Less: Inventory in transit
Goods salvage (P4,900 x 60%)
61,760.00
2,000.00
2,940.00
Loss on inventory
On
344,640.00
4,940.00
56,820.00
June 30, 2019, a flash flood damaged the warehouse and factory of Naguilian
Corporation, completely destroying the work in process inventory. There was no damage to either the
raw materials or finished goods inventories. A physical inventory taken after the flood revealed the
following valuations:
Finished Goods
Work-in-process
Raw Materials
P112,000
0
52,000
The inventory on January 1, 2019, consisted of the following.
Finished Goods
Work-in-process
Raw Materials
P120,000
115,000
42,500
P277,500
A review of the books and records disclosed that the gross profit margin historically approximated 34%
of sales. The sales for the first 6 months of 2019 were P428,000. Raw materials purchases were
P96,000. Direct labor costs for this period were P130,000, and manufacturing overhead has historically
been applied at 60% of direct labor.
Compute the value of the work in process inventory lost on June 30, 2019.
= P135,020
Solution:
Raw material purchases
Raw materials, beginning
96,000.00
42,500.00
Raw materials available for use
Less: Raw materials, ending
138,500.00
52,000.00
Raw materials used
Direct labor costs
Manufacturing overhead (P130,000 x 60%)
86,500.00
130,000.00
78,000.00
Total manufacturing costs
Work in process, beginning
294,500.00
115,000.00
Cost of goods placed in process
Less: Cost of goods manufactured
Sales
409,500.00
428,000.00
Multiply by: Cost ratio
66%
Cost of goods sold
Finished goods, ending
282,480.00
112,000.00
Goods available for sale
Less: Finished goods, beginning
394,480.00
120,000.00
Work in process, ending
A
274,480.00
135,020.00
physical inventory taken on December 31, 2019 resulted in an ending inventory of
P1,440,000. Banak Company suspects some inventory may have been taken by employees. To
estimate the cost of missing inventory, the following were gathered:
Inventory, Dec. 31, 2018
P1,280,000
Purchases during 2019
5,640,000
Cash sales during 2019
1,400,000
Shipment received on December 26, 2019,
included in physical inventory, but not
recorded as purchases
40,000
Deposits made with suppliers, entered as
purchases. Goods were not received in
2019
80,000
Collections on accounts receivable, 2019
7,200,000
Accounts receivable, January 1, 2019
1,000,000
Accounts receivable, Dec. 31, 2019
1,200,000
Gross profit percentage on sales
40%
At December 31, 2019 what is the estimated cost of missing inventory?
= P160,000
Solution:
Collection of accounts
Accounts receivable, Dec 31
7,200,000.00
1,200,000.00
Total credits
Less: Accounts receivable, Jan 1
8,400,000.00
1,000,000.00
Credit sales
Cash sales
7,400,000.00
1,400,000.00
Total Sales
8,800,000.00
Inventory, Dec 31, 2018
Add: Net purchases, adjusted
Purchases, unadjusted
Shipment received, 12/26/2019
Deposits made with suppliers
1,280,000.00
Goods available for sale
Less: Cost of goods sold
Sales
Multiply by: Cost ratio
5,640,000.00
40,000.00
-80,000.00
5,600,000.00
6,880,000.00
8,800,000.00
60%
5,280,000.00
Estimated ending inventory
Less: Ending inventory, per count
1,600,000.00
1,440,000.00
Cost of missing inventory
160,000.00
Londinium Corp. values its inventory by using the retail method (FIFO basis, lower of cost or NRV). The
following information is available for the year just ended:
Beginning inventory
Purchases
Freight-in
Breakage
Markups (net)
Markdowns (net)
Sales
Cost
P 80,000
297,000
4,000
Retail
P140,000
420,000
8,000
10,000
2,000
400,000
At what amount would Londinium report its ending inventory?
= P112,000
Solution:
Cost
297,000.00
4,000.00
Purchases
Freight in
Markups (net)
Retail
420,000.00
10,000.00
Totals
Markdowns (net)
Beginning inventory
301,000.00
80,000.00
430,000.00
-2,000.00
140,000.00
Goods available for sale
381,000.00
568,000.00
Cost ratio (P301,000/P430,000)
Less: Sales
Breakage
70%
400,000.00
8,000.00
408,000.00
Ending inventory at retail
Ending inventory at cost (160,000 x 70%)
160,000.00
112,000.00
Dart Company’s accounting records indicated the following information:
Inventory, 1/1/1CY
P 500,000
Purchases during 20CY
2,500,000
Sales during 20CY
3,200,000
A physical inventory taken on December 31, 20CY, resulted in an ending inventory of P575,000. Dart’s
gross profit on sales has remained constant at 25% in recent years. Dart suspects some inventory may
have been taken by a new employee. At December 31, 20CY, what is the estimated cost of missing
inventory?
= P 25,000
The gross profit method of estimating ending inventory may be used for all of the following, except:
= Internal as well as external year-end reports
The retail inventory method would include which of the following in the calculation of the goods available
for sale at both cost and retail?
= purchase returns
An analysis of the ending inventory accounts of Rica Company on December 31, 20CY disclosed the
inclusion on the following items:
Merchandise in transit purchased on terms:
CIF
30, 000
Ex-ship
20, 000
Merchandise out on consignment at sales price (including markup
of 30% on cost)
39, 000
Merchandise sent to customers for approval (cost of goods,
P6,400)
8,400
Merchandise held on consignment
7, 000
What is the reduction on the inventory account on December 31, 20CY?
Select one:
= 38, 000
Solution:
Ex-ship
30,000.00
Mark-up of merchandise out on consignment (39,000 x 30%/130%)
9,000.00
Mark-up of merchandise sent to customers for approval (8,400 - 6,400)
2,000.00
Merchandise held on consignment
7,000.00
Total reduction of inventory account
48,000.00
A store uses the gross profit method to estimate inventory and cost of goods sold for interim reporting
purposes. Past experience indicates that the average gross profit rate is 25% of sales. The following data
relate to the month of October:
Inventory cost, October 1
P255,000
Purchases during the month at cost
683,400
Sales
856,800
Sales returns
30,600
Using the data above, what is the estimated ending inventory at October 31?
= P318,750
Pugo uses the retail inventory method. The following information is available for the current year:
Cost
Retail
Beginning inventory
P 1,300,000
P 2,600,000
Purchases
18,000,000
29,200,000
Freight in
400,000
Purchase returns
600,000
1,000,000
Purchase allowances
300,000
Departmental transfer in
400,000
600,000
Net markups
600,000
Net markdowns
2,000,000
Sales
24,700,000
Sales returns
350,000
Sales discounts
200,000
Employee discounts
600,000
Loss from breakage
50,000
The estimated cost of inventory at the end of the current year using the conventional (lower of cost or
market) retail inventory method is?
= P3,000,000
Solution:
Cost
1,300,000.00
18,000,000.00
400,000.00
-600,000.00
-300,000.00
400,000.00
Retail
2,600,000.00
29,200,000.00
Goods available for sale - conventional
Net markdown
19,200,000.00
32,000,000.00
-2,000,000.00
Goods available for sale - average
19,200,000.00
30,000,000.00
Cost ratio (19.2M/32M)
Less: Sales
Sales returns
Employee discounts
Loss from breakage
60.00%
24,700,000.00
-350,000.00
600,000.00
50,000.00
25,000,000.00
Beginning inventory
Purchases
Freight in
Purchase returns
Purchase allowances
Departmental transfer in
Net markups
Ending inventory at retail
Ending inventory at cost
(P5,000,000 x 60.00%)
-1,000,000.00
600,000.00
600,000.00
5,000,000.00
3,000,000.00
The retail inventory method is characterized by
= the recording of purchases at selling price.
The records of CSI’s Department Store report the following data for the month of January 2013:
Sales
P7,100,000
Sales allowance
100,000
Sales returns
500,000
Employee discounts
200,000
Theft and other losses
100,000
Initial markup on purchases
2,900,000
Additional mark up
250,000
Mark up cancellations
100,000
Mark down
600,000
Mark down cancellations
100,000
Freight on purchases
100,000
Purchases at cost
4,500,000
Purchase returns at cost
240,000
Purchase returns at sales price
350,000
Beginning inventory at cost
440,000
Beginning inventory at sales price
800,000
Using the average retail inventory method, CSI’s ending inventory is
= P384,000
Solution:
Beginning inventory
Purchases at cost
Initial markup on purchases
Purchases returns
Freight on purchases
Additional markup
Markup cancellations
Markdown
Markdown cancellations
Cost
440,000.00
4,500,000.00
-240,000.00
100,000.00
Retail
800,000.00
4,500,000.00
2,900,000.00
-350,000.00
250,000.00
-100,000.00
-600,000.00
100,000.00
Goods available for sale
Cost ratio (P7.5M/P4.8M)
4,800,000.00
64.00%
Less: Sales
Sales returns
Employee discounts
Theft and other losses
7,100,000.00
-500,000.00
200,000.00
100,000.00
7,500,000.00
6,900,000.00
Ending inventory at retail
Multiply by: Cost ratio
600,000.00
64%
Ending inventory at cost
384,000.00
To determine an inventory valuation that using the retail method under the average method, the
computation of the cost to retail percentage should?
On
= include markups and markdowns
June 30, 2019, a flash flood damaged the warehouse and factory of Naguilian
Corporation, completely destroying the work in process inventory. There was no damage to either the
raw materials or finished goods inventories. A physical inventory taken after the flood revealed the
following valuations:
Finished Goods
Work-in-process
Raw Materials
P112,000
0
52,000
The inventory on January 1, 2019, consisted of the following.
Finished Goods
Work-in-process
Raw Materials
P120,000
115,000
42,500
P277,500
A review of the books and records disclosed that the gross profit margin historically approximated 34%
of sales. The sales for the first 6 months of 2019 were P428,000. Raw materials purchases were
P96,000. Direct labor costs for this period were P130,000, and manufacturing overhead has historically
been applied at 60% of direct labor.
Compute the value of the work in process inventory lost on June 30, 2019.
= Choice 1
Professor X Company lost most of its inventory in a fire in December 2011 just before the year-end
physical inventory was taken. The company’s books disclosed the following:
Purchases for the year P 390,000
Purchase returns
30,000
Sales
Sales returns
P650,000
24,000
Merchandise with a selling price of P21,000 remain undamaged after the fire. Damaged merchandise
with an original selling price of P15,000 had a net realizable value of P5,300. Partial comparative
income statements for 2010 and 2009 also disclosed the following:
Sales
Cost of goods sold
Inventory, Jan. 1
Purchases (net)
Available for sale
Inventory, Dec. 31
Gross profit
2010
500,000
94,500
2009
560,000
110,000
378,000
472,500
(170,000)
Cost of goods sold
318,000
428,000
(94,500)
302,500
333,500
197,500
226,500
Using the average profit rate for the past two years, Professor X Company’s loss as a result of the fire is
= P136,500
Solution:
Gross profit rate, 2009
(P226,500/P560,000)
Gross profit rate, 2010
(P197,500/P500,000)
Average gross profit rate
40.4%
39.5%
((P40.45%+39.50%)/2)
40.0%
Purchases for the year
Less: Purchases returns
390,000.00
30,000.00
Net purchases
Add: Inventory, Jan 1
360,000.00
170,000.00
Goods available for sale
Less: Cost of sales
Sales
Less: Sales returns
530,000.00
Net sales
Multiply by: Cost ratio
(100%-40%)
Estimated ending inventory
Less: Undamaged inventory
(P21,000 x 60%)
NRV of damaged inventory
Inventory loss
650,000.00
24,000.00
626,000.00
60%
375,600.00
154,400.00
12,600.00
5,300.00
17,900.00
136,500.00
Pugo uses the retail inventory method. The following information is available for the current year:
Cost
Retail
Beginning inventory
P 1,300,000
P 2,600,000
Purchases
18,000,000
29,200,000
Freight in
400,000
Purchase returns
600,000
1,000,000
Purchase allowances
300,000
Departmental transfer in
400,000
600,000
Net markups
600,000
Net markdowns
2,000,000
Sales
24,700,000
Sales returns
350,000
Sales discounts
200,000
Employee discounts
600,000
Loss from breakage
50,000
The estimated cost of inventory at the end of the current year using the average retail inventory method is?
= P3,200,000
Bautista Company’s accounting records indicated the following for 2019:
Inventory, January 1
P6,000,000
Purchases
20,000,000
Sales
30,000,000
A physical inventory taken on December 31, 2019 resulted in an ending inventory of P4,500,000. The
gross profit on sales remained constant at 30% in recent years. Bautista suspects some inventory may
have been taken by a new employee. At December 31, 2019 what is the estimated cost of missing
inventory?
= P500,000
Solution:
Inventory, January 1
Purchases
6,000,000.00
20,000,000.00
Goods available for sale
Less: Cost of goods sold
26,000,000.00
Sales
Multiply by: Cost ratio
30,000,000.00
70%
21,000,000.00
Estimated Inventory, December 31
Less: Inventory, December 31, per count
5,000,000.00
4,500,000.00
Cost of missing inventory
500,000.00
The records of Binmaley’s Department Store report the following data for the month of January 2019:
Sales
P7,100,000
Sales allowance
100,000
Sales returns
500,000
Employee discounts
200,000
Theft and other losses
100,000
Initial markup on purchases
2,900,000
Additional mark up
250,000
Mark up cancellations
100,000
Mark down
600,000
Mark down cancellations
100,000
Freight on purchases
100,000
Purchases at cost
4,500,000
Purchase returns at cost
240,000
Purchase returns at sales price
350,000
Beginning inventory at cost
440,000
Beginning inventory at sales price
800,000
Using the average retail inventory method, Binmaley’s ending inventory is?
= P384,000
Solution:
Cost
440,000.00
4,500,000.00
Beginning inventory
Purchases
Initial markup on purchases
Purchase returns
Freight on purchases
Additional markup
Markup cancellations
Markdown
Markdown cancellations
-240,000.00
100,000.00
Retail
800,000.00
4,500,000.00
2,900,000.00
-350,000.00
250,000.00
-100,000.00
-600,000.00
100,000.00
Goods available for sale - average
4,800,000.00
7,500,000.00
Cost ratio (P4,800,000/P7,500,000)
Less: Sales
Sales returns
Employee discounts
Theft and other losses
64%
7,100,000.00
-500,000.00
200,000.00
100,000.00
6,900,000.00
Ending inventory at retail
600,000.00
Ending inventory at cost (600,000 x 64%)
384,000.00
On December 24, 2019, a fire destroyed totally the raw materials bodega of Bautista Manufacturing
Co. There was no purchase of raw materials from the time of the fire until December 31, 2019.
Inventories
Raw materials
Factory supplies
01/01/09
P 90,000
6,000
12/31/09
?
P 5,000
Goods in process
Finished goods
185,000
220,000
210,000
225,000
The accounting records show the following data:
Sales
Purchases of raw materials
Purchases of factory supplies
Freight-in, raw materials
Direct labor
Manufacturing overhead
Gross profit rate
P1,200,000
400,000
30,000
15,000
220,000
75% of direct labor
35% of sales
The cost of the raw materials destroyed by the fire was?
= Choice 1
The records of Binmaley’s Department Store report the following data for the month of January 2019:
Sales
P7,100,000
Sales allowance
100,000
Sales returns
500,000
Employee discounts
200,000
Theft and other losses
100,000
Initial markup on purchases
2,900,000
Additional mark up
250,000
Mark up cancellations
100,000
Mark down
600,000
Mark down cancellations
100,000
Freight on purchases
100,000
Purchases at cost
4,500,000
Purchase returns at cost
240,000
Purchase returns at sales price
350,000
Beginning inventory at cost
440,000
Beginning inventory at sales price
800,000
Using the average retail inventory method, Binmaley’s ending inventory is?
= P384,000
The use of the gross profit method assumes?
=
the relationship between selling price and cost of goods sold is similar to prior
years.
Based on a physical inventory taken on December 31, 20CY, Gem Co. determined its chocolate inventory
on a FIFO basis at P26,000 with a replacement cost of P20,000. Gem estimated that, after further
processing costs of P12,000, the chocolate could be sold as finished candy bars for P40,000. Gem’s normal
profit margin is 10% of sales. Under the lower of cost or net realizable value rule, what amount should Gem
report as chocolate inventory in its December 31, 20CY statement of financial position?
Select one:
= P26,000
Solution:
Estimated selling price
40,000.00
Less: Estimated cost to complete
12,000.00
Net realizable value
28,000.00
vs. Cost
26,000.00
Lower of cost and net realizable value
26,000.00
Pugo uses the retail inventory method. The following information is available for the current year:
Cost
Retail
Beginning inventory
P 1,300,000
P 2,600,000
Purchases
18,000,000
29,200,000
Freight in
400,000
Purchase returns
Purchase allowances
Departmental transfer in
Net markups
Net markdowns
Sales
Sales returns
Sales discounts
Employee discounts
Loss from breakage
600,000
300,000
400,000
1,000,000
600,000
600,000
2,000,000
24,700,000
350,000
200,000
600,000
50,000
The estimated cost of inventory at the end of the current year using the FIFO retail inventory method is
= P3,250,000
On December 24, 2019, a fire destroyed totally the raw materials bodega of Bautista Manufacturing
Co. There was no purchase of raw materials from the time of the fire until December 31, 2019.
Inventories
Raw materials
Factory supplies
Goods in process
Finished goods
01/01/09
P 90,000
6,000
185,000
220,000
12/31/09
?
P 5,000
210,000
225,000
The accounting records show the following data:
Sales
Purchases of raw materials
Purchases of factory supplies
Freight-in, raw materials
Direct labor
Manufacturing overhead
Gross profit rate
P1,200,000
400,000
30,000
15,000
220,000
75% of direct labor
35% of sales
The cost of the raw materials destroyed by the fire was?
= P 80,000
Solution:
Sales
Multiply by: Cost ratio (100%-35%)
1,200,000.00
65%
Cost of goods sold
Add: Finished goods, 12/31/2009
780,000.00
225,000.00
Goods available for sale
Less: Finished goods, 1/1/2009
1,005,000.00
220,000.00
Cost of goods manufactured
Add: Goods in process, 12/31/2009
785,000.00
210,000.00
Cost of goods placed in process
Less: Goods in process, 1/1/2009
995,000.00
185,000.00
Total manufacturing cost
Less: Direct labor cost
Manufacturing overhead (P220,000 x 75%)
810,000.00
220,000.00
165,000.00
385,000.00
Raw materials used
425,000.00
Raw material purchases
Freight-in
400,000.00
15,000.00
Net cost of raw material purchases
Add: Raw materials, 1/1/2009
415,000.00
90,000.00
Raw materials available for use
Less: Raw materials used
505,000.00
425,000.00
Raw materials, 12/31/2009
80,000.00
The term ‘’ betterment ‘’ refers to
= An expenditure made to improve existing facilities by increasing ‘’ capacity’’
Which of the following expenditures subsequent to acquisition cannot be added to the carrying amount of
the asset?
= Cost of material repairs that did not increase the life of the asset nor productive capacity
Which type of expenditure occurs when an entity install a higher capacity boiler to heat its plant?
= Betterment
Which statement is incorrect regarding recognition of PPE?
= All of the following are correct
In relation to the financial statements, PAS 16 Property, Plant and Equipment, requires that the following
disclosures be made for each class of asset:
I.
II.
III.
IV.
V.
The carrying amount at the beginning and end of the reporting period.
Accumulated depreciation.
Total additions and disposals.
The total of impairment losses.
Fair value at reporting date.
= I, II III and IV only
Chucky Company purchased land for P1,100,000. The entity paid P70,000 to tear down a building on the
land. Salvage was sold for P10,500. Legal fees of P6,500 were paid for title investigation and making the
purchase. Architect fees were P40,500. Title insurance was P4,500, and liability insurance during
construction amounted to P13,500. Excavation cost was P12,000. The contractor was paid P1,357,000. A
one-time assessment made by the city for sidewalks was P7,500. Chucky installed lighting and signage at
a cost of P11,000. What is the total cost of the land?
= 1,178,000
Solution:
Purchase price of land
Demolition cost
Less: Salvage proceeds
1,100,000.00
70,000.00
10,500.00
59,500.00
Legal fees
Title insurance
Assessment
6,500.00
4,500.00
7,500.00
Cost of land
1,178,000.00
Which of the following relating to noncurrent assets shall not be capitalized?
= Replacement of small spare parts annually.
According to PAS 16, Property, plant and equipment includes all of the following except
= Biological assets related to agricultural activity and mineral rights
A building suffered uninsured fire damage. The damage portion of the building was refurbishing with higher
quality materials, The cost and related accumulated depreciation of the damage portion are identifiable .
To account for these events , the owner shall
= Capitalized the cost of refurbishing and record a loss in the current period equal to the
carrying amount of the damage portion of the building.
The cost of building shall include all of the following except:
= Cost incurred to have existing building removed to make room for construction of new
building.
The cost of land shall include all of the following except:
= Property taxes after date of acquisition assumed by the purchaser.
Which of the following expenditures may properly be capitalized?
= Insurance on plant during construction.
Which of the following would ordinarily be treated as a revenue expenditures rather than a capital
expenditures?
= Cost of servicing and overhaul to restore or maintain the originally assessed standard of
performance.
An entity incurred cost to modify its building and to rearrange its production line. As a result ,
an overall reduction in production cost is expected . However the modification did not increase the building
market value and the rearrangement did not extend the production line’s life. Should the building
modification cost and the production line rearrangement cost be capitalized?
= Both the building modification cost and production line rearrangement cost should be
capitalized.
An improvement made to a machine increased its fair market value and its production capacity by 25
percent without extending the machine useful life . The cost of the improvement shall be?
= Capitalized in the machine account
An item of property, plant and equipment should be recognized as an asset when:
I.
It is probable that future economic benefits associated with the asset will flow to the
enterprise.
II.
The cost of the asset to the enterprise can be measured reliably.
= both I and II
On January 1, 2010 Glen Company started construction of its own warehouse. Glen Company
specifically borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred during
the construction amounted to P120,000 while the income derived from its temporary investment
amounted to P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. Glen Company
depreciates similar assets using the straight-line method
On January 1, 2012 Glen Company adopted the revalued model. The sound value of the warehouse
was P1,510,000.
The revaluation surplus recognized on January 1, 2012, assuming that Glen Company for reporting
purposes was classified as an SME
=0
Solution:
Under IFRS for SMEs, property, plant and equipment are subsequently measured using cost model only.
Therefore, there are no revaluation being considered.
What is the recoverable amount of an asset?
= net selling price or value in use, whichever is higher
Victoria Company had purchased equipment for P10,000,000 on January 1, 2007. The equipment had a
5-year life and a residual value of 1,000,000. Victoria Company depreciated the equipment using the
straight-line method. On December 31, 2009, Victoria questioned the recoverability of the carrying amount
of this equipment. On December 31, 2009, the undiscounted expected net future cash flows related to the
continued use and eventual disposal of the equipment totaled P4,800,000. The equipment’s fair value on
December 31, 2009 is P4,000,000, while the discounted cash flows related to the equipment is
P4,200,000. After any loss on impairment has been recognized, what is the carrying amount of the
equipment?
= P4,200,000
Solution:
Original cost
Less: Accumulated depreciation
Depreciable amount (P10M-P1M)
Divide by: Estimated useful life
Annual depreciation
Multiply by: Age
10,000,000.00
9,000,000.00
5 yrs
1,800,000.00
3 yrs
Carrying amount
vs.
Net realizable value
Value in use
Fair value less cost to sell
Higher
5,400,000.00
4,600,000.00
4,200,000.00
4,000,000.00
4,200,000.00
In the June 30, 2013 annual report of Penong Ltd, the equipment was reported as follows:
Equipment (at cost)
P5,000,000
Accumulated depreciation
1,500,000
P3,500,000
The equipment consisted of two machines, Machine A and Machine B. Machine A had cost P3,000,000
and had a carrying amount of P1,800,000 at June 30, 2013, while Machine B had cost P2,000,000 and
was carried at P1,700,000. Both machines are measured using the cost model, and depreciated on a
straight-line basis over a ten-year period.
On December 31, 2013, the directors of Penong Ltd decided to change the basis of measuring the
equipment from the cost model to the revaluation model. Machine A was revalue to P1,800,000 with
an expected useful life of six years, and Machine B was revalue to P1,550,000 with an expected useful
life of five years.
The amount to be recognized in profit or loss as a result of the revaluation of assets on December 31,
2013 is:
= (P50,000)
Solution:
Machine A
Revalued amount
Less: Carrying amount, 12/31/2013
1,800,000.00
Carrying amount, 6/30/2013
Depreciation, 7/1 to 12/31/2013
(P3,000,000/10 yrs x 6/12)
1,800,000
-150,000
Revaluation surplus-Machine A
Machine B
Revalued amount
Less: Carrying amount, 12/31/2013
Carrying amount, 6/30/2013
1,700,000
Depreciation, 7/1 to 12/31/2013
(P2,000,000/10 yrs x 6/12)
-100,000
Impairment loss-Machine B
1,650,000.00
150,000.00
1,550,000.00
1,600,000.00
-50,000.00
In January 2012, Wilbert Company purchased equipment at a cost of P 5,000,000. The equipment had an
estimated residual value of P 1,000,000, an estimated 8-year useful life, and was being depreciated by the
straight line method. Two years later, it became apparent to Wilbert that this equipment suffered a
permanent impairment of value. In January 2012, management determined the carrying amount should be
only P1,750,000 with a 2-year remaining useful life, and the residual value should be reduced to P 250,000.
In Wilbert’s December 31, 2012 statement of financial position, what should be reported as carrying amount
of the equipment?
= 1,000,000
Solution:
Carrying amount, 1/1/2012
Less: 2012 Depreciation
Depreciable amount (P1,750,000-P250,000)
Divide by: Remaining useful life
1,750,000.00
1,500,000.00
2 yrs
Carrying amount, 12/31/2012
750,000.00
1,000,000.00
On January 1, 2007, Famy Company signed an eight-year lease for office space. Famy has the option
to renew the lease for an additional six-year period on or before January 1, 2013. During January 2009,
Famy incurred the following costs.
General improvements to the leased premises with useful life of 10 years
Office furniture and equipment with useful life of 8 years
Moveable assembly line equipment with useful life of 5 years
P5,400,000
2,400,000
1,800,000
At December 31, 2009, Famy’s intention as to the exercise of the renewal option is uncertain. A full
year depreciation of leasehold improvement is taken for year 2009. In Famy’s December 31, 2009
balance sheet, accumulated depreciation of leasehold improvement should be
= P 900,000
Solution:
Cost of improvement
Divide by: Remaining original lease term
5,400,000.00
6 yrs
Annual depreciation/Accumulated depreciation
900,000.00
On December 31, 2008, the balance sheet of Pink Company showed the following property and equipment
after charging depreciation:
The company has adopted the revaluation model for the valuation of property and equipment. This has
resulted in the recognition in prior periods of an asset revaluation surplus for the building of P140,000. On
December 31, 2008, an independent valuer assessed the fair value of the building to be P1,600,000 and
the
equipment
to
be
P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December
31,
2008.
Amount to be recognized in 2008 profit or loss related to the revaluation of property and equipment
= P260,000
Cuyapo Company purchased a machine in January 2, 2008, for P500,000. The machine has an estimated
useful life of five years and a salvage value of P50,000. Depreciation was computed by the 150% decliningbalance method. The accumulated depreciation balance at December 31, 2009, should be
= P255,000
Solution:
Depreciation rate ((100%/5 yrs) x 150%)
30%
2008 Depreciation (500,000 x 30%)
2009 Depreciation ((P500,000-P150,000) x 30%)
150,000.00
105,000.00
Accumulated depreciation, 12/31/2009
255,000.00
On January 1, 2007, Paete Company signed a 12-year lease for a building. Paete has an option to renew
the lease for an additional 8-year period on or before January 1, 2011. During January 2009, Paete made
substantial improvements to the building. The cost of the improvements was P3,600,000, with an estimated
useful life of 15 years. At December 31, 2009, Paete intended to exercise the renewal option. Paete has
taken a full year’s amortization on this improvement. In the December 31, 2009, balance sheet, the carrying
amount of this leasehold improvement should be
= P3,360,000
Solution:
Cost of improvement
Less: Accumulated depreciation
(P3,600,000 x 1/10)
3,600,000.00
Carrying amount, 12/31/2009
3,240,000.00
360,000.00
Value in use of an asset is equal to the:
= discounted future net cash flows from the use and eventual disposition of the asset.
CK Company purchased a machine on December 1, 2012 at an invoice price of P4,500,000 with terms
2/10, n/30. On December 10, 2012, CK paid the required amount for the machine. On December 1, 2012,
CK paid P80,000 for delivery of the machine and on December 31, 2012, it paid P 310,000 for installation
and testing of the machine. The machine was ready for use on January 1, 2013. It was estimated that the
machine would have a useful life of 5 years, and a residual value of P 800,000.
Engineering estimate indicated that the useful life in productive units was 200,000. Units actually produced
during the first two years were 30,000 in 2013 and 48,000 in 2014. CK Company decided to use the output
method of depreciation.
The accumulated depreciation of the machine on the December 31, 2014 is?
= 1,560,000
Solution:
Invoice price
Cash discount (P4.5M x 2%)
Delivery cost
Installation and testing cost
4,500,000.00
-90,000.00
80,000.00
310,000.00
Total cost of machine
Less: Residual value
4,800,000.00
800,000.00
Depreciable amount
Divide by: Productive units
4,000,000.00
200,000.00
Depreciation rate
20.00
2013 Depreciation (P20 x 30,000)
2014 Depreciation (P20 x 48,000)
600,000.00
960,000.00
Accumulated depreciation, 12/31/2014
1,560,000.00
Bongabon Corporation acquired a machine in the first week of July 2008 and paid the following bills:
Invoice price
P5,000,000
Freight in
Installation cost
Cost of removing the old machine
50,000
150,000
100,000
The estimated life of the machine is 8 years or a total of 100,000 working hours with no salvage value. The
operating hours of the machine totaled: 2008, 5,000 hours; 2009, 12,000 hours. The company follows the
working hours method of depreciation. On December 31, 2009, the carrying amount of the machine is
= P4,316,000
Solution:
Invoice price
Freight in
Installation cost
5,000,000.00
50,000.00
150,000.00
Cost of machine
Divide by: Total working hours
5,200,000.00
100,000.00
Depreciation rate
52.00
Cost of machine
Less: Accumulated depreciation
(P52 x (5,000 hrs + 12,000 hrs)
5,200,000.00
Carrying amount, 12/31/2009
4,316,000.00
884,000.00
Kurt Company acquired a machine on January 1, 2011 for P 8,000,000. The machine has a 10-year useful
life, a P 500,000 residual value, and is to be depreciated using the straight line method.
By the end of 2012, the machine was damaged by a major accident occuring in the plant. The entity’s
engineers and technicians could not repair this damage and therefore the machine’s performance was
expected to decline in the future and unlikely to be sold at the end of its useful life. Thus, the machine has
a zero residual value.
On December 31, 2012, a test for recoverability revealed that the expected net future undiscounted cash
flows related to the continued use and eventual disposal of the machine totaled P7,000,000. The machine’s
fair value on December 31, 2012 is P6,600,000 while the discounted net future cash flows amount to
P6,300,000.
The depreciation expense for the year ended December 31, 2013?
= 825,000
On January 1, 2010 Glen Company started construction of its own warehouse. Glen Company
specifically borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred during
the construction amounted to P120,000 while the income derived from its temporary investment
amounted to P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. Glen Company
depreciates similar assets using the straight-line method
On January 1, 2012 Glen Company adopted the revalued model. The sound value of the warehouse
was P1,510,000.
The revaluation surplus recognized on January 1, 2012
= 318,000
Solution:
Sound value
Less: Carrying amount, 1/1/2012
Original cost
Less: Accumulated depreciation
(P1,490,000 x 2/10)
Revaluation surplus
1,510,000.00
1,490,000.00
298,000.00
1,192,000.00
318,000.00
On January 1, 2007, Lance Company acquired equipment for P 1,000,000 with an estimated 10year useful life. Lance estimated a P 100,000 residual value and used the straight-line method of
depreciation. During 2011, after its 2010 financial statements had been issued, Lance determined that, due
to obsolescence, this equipment’s remaining useful life was only four more years and its residual value
would be P 40,000.
In the December 31, 2011 balance sheet, the carrying amount is?
= 490,000
Solution:
Original cost
1,000,000.00
Less: Accumulated depreciation, 12/31/2010
Depreciable amount (P1M-P100,000) 900,000.00
Divide by: Estimated useful life
10 yrs
Annual depreciation
Multiply by: Age
90,000.00
4 yrs
Carrying amount, 12/31/2010
Less: Depreciation, 2011
Carrying amount, 12/31/2010
Less: Residual value
Remaining depreciable amount
Divide by: Rem. Estimated useful life
360,000.00
640,000.00
640,000.00
40,000.00
600,000.00
4 yrs
Carrying amount, 12/31/2011
150,000.00
490,000.00
VF Company purchased equipment on January 2, 2010 for P4,000,000. The equipment had an estimated
useful life of 5 years. The company’s policy is to depreciate the asset using the 200%-declining balance in
the first two years of the asset’s life and then switch to the straight-line method for the remaining useful life
of the asset.
The total accumulated depreciation as of December 31, 2012 is?
= 3,040,000
Solution:
Depreciation rate (200% x 100%/5 yrs)
40%
2010 Depreciation (P4,000,000 x 40%)
2011 Depreciation ((P4M-P1.6M) x 40%)
2012 Depreciation ((P4M-P2.56M)/3 yrs)
1,600,000.00
960,000.00
480,000.00
Accumulated depreciation, 12/31/2012
3,040,000.00
On April 1, 2012, Kelly Company purchased new machinery for P3,000,000. The machinery has
an estimated useful life of five years, and depreciation is computed by the sum of the years’ digits method.
The accumulated depreciation of the machinery on December 31, 2013?
= 1,600,000
Solution:
Depreciation base (5 yrs x (5+1)/2)
15.00
Apr 1, 2012-Mar 31, 2013 Depreciation (P3,000,000 x 5/15)
Apr 1-Dec 31, 2014 Depreciation (P3,000,000 x 4/15 x 9/12)
1,000,000.00
600,000.00
Accumulated depreciation, 12/31/2014
1,600,000.00
On January 1, 2012, HANSON Company borrowed P 6,000,000 at an annual interest rate of 10% to
finance specifically the cost of building an electricity generating plant. Construction commenced on January
1, 2012 with a cost P6,000,000. Not all the cash borrowed was used immediately, so interest income of P
80,000 was generated by temporarily investing some of the borrowed funds prior to use. The project was
completed on November 30, 2012.
The carrying amount of the plant on November 30, 2012
= 6,470,000
Vincent Inc. reported an impairment loss of P150,000 on its income statement for the year ended December
31, 2008. This loss was related to an item of equipment which Vincent intended to use in its operations. On
the company's December 31, 2008 balance sheet, Vincent reported this equipment at P920,000 and, as of
December 31, 2008, Vincent estimated that this equipment would be used for another five years. On
December 31, 2009, Vincent determined that the recoverable amount of its impaired equipment had
increased by P25,000 over its recoverable amount at December 31, 2008. The increase in recoverable
amount is due to the unwinding of discount. On the company's December 31, 2009 balance sheet, what
amount should be reported as the carrying amount for this equipment?
= P736,000
Solution:
Carrying amount, 12/31/2008
Less: Depreciation, 2009
(P920,000/5 yrs)
920,000.00
184,000.00
Carrying amount, 12/31/2009
736,000.00
Jaen Advertising Inc. reported the following on its December 31, 2009, balance sheet:
Equipment
P500,000
Accumulated depreciation—equipment
P135,000
In a footnote, Jaen indicates that it uses straight-line depreciation over 10 years and estimates salvage
value as 10% of cost. What is the average age of the equipment owned by Jaen?
= 3 years
Green Company acquired a building on January 1, 2012 at a cost of P50,000,000. The building has an
estimated life of 10 years and residual value of P5,000,000. The building was revalued on January 1, 2016
and the revaluation revealed replacement cost of P80,000,000, residual value of P2,000,000 and revised
life of 12 years. What is the revaluation surplus on December 31, 2016?
= 14,700,000
Solution:
Annual depreciation on cost ((P50M-P5M)/10 yrs)
4,500,000.00
Replacement
Cost
Appreciation
Building
Residual value
50,000,000.00
-2,000,000.00
Cost
80,000,000.00
-2,000,000.00
Depreciable amount
Accumulated depreciation - 4 yrs
48,000,000.00
-18,000,000.00
78,000,000.00
-31,200,000.00
30,000,000.00
-13,200,000.00
Remaining depreciable amount
30,000,000.00
46,800,000.00
16,800,000.00
30,000,000.00
0.00
Revaluation surplus, 1/1/2016
Less: Piecemeal realization (P16,800,000/8 yrs)
16,800,000.00
2,100,000.00
Revaluation surplus, 12/31/2016
14,700,000.00
On January 2, 2006, Union Co. purchased a machine for P264,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no salvage value. On January 2, 2009, Union
determined that the machine had a useful life of six years from the date of acquisition and will have a
salvage value of P24,000. An accounting change was made in 2009 to reflect the additional data. The
accumulated depreciation for this machine should have a balance at December 31, 2009, of?
= P146,000
Solution:
Original cost
Divide by: Estimated useful life
264,000.00
8 yrs
Annual depreciation
Multiply by: Age before revision
33,000.00
3 yrs
Accumulated depreciation, 12/31/2008
2009 Depreciation
Carrying amount (P264,000-P99,000)
Less: Residual value
99,000.00
Remaining depreciable amount
Divide by: Remaining useful life
Accumulated depreciation, 12/31/2009
165,000.00
24,000.00
141,000.00
3 yrs
47,000.00
146,000.00
MLS Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry and thus has
significant other property, plant, and equipment that it carries in its books. It decided to revalue its property,
plant, and equipment. The company’s accountant has suggested the alternatives that follow. Which one of
the options should MLS Inc. select in order to be in line with the provisions of PAS 16?
= Revalue an entire class of property, plant, and equipment.
Worn Company had purchased equipment for P10,000,000, on January 1, 2007. The equipment had a 5year life and a salvage value of 10%. Worn Company depreciated the equipment using the straight line
method. On December 31, 2009, Worn had doubts on the recoverability of the carrying amount of this
equipment. On December 31, 2009, the discounted expected net future cash inflows related to the
continued use and eventual disposal of the equipment totaled P4,300,000. The equipment’s fair value less
costs to sell on December 31, 2009 is P4,500,000. After any loss on impairment has been recognized,
what is the carrying amount of the equipment?
= P4,500,000
Solution:
Original cost
Less: Accumulated depreciation
Depreciable amount (P10M x 90%)
Divide by: Estimated useful life
Annual depreciation
Multiply by: Age
10,000,000.00
9,000,000.00
5 yrs
1,800,000.00
3 yrs
Carrying amount
5,400,000.00
4,600,000.00
vs.
Net realizable value
Value in use
Fair value less cost to sell
4,300,000.00
4,500,000.00
Higher
4,500,000.00
Gracia Company is in the tin-mining extraction business. The cash-generating unit is the cash business as
a whole, which is now considered as a “sun net” business. The assets of the cash-generating unit consist
of the following: Property, P30,000,000; plant, machinery and equipment, P40,000,000 and extraction
rights, P30,000,000. The value in use of the cash generating unit is estimated at P20,000,000. There is no
fair value less cost to sell of the cash generating unit, except for the property which could be sold for a net
cash proceeds of P30,000,000. The other assets have no resale value. The extraction rights have an
unrecognized lease obligation of P10,000,000 payable to the state government and this could not be
avoided. What amount of impairment loss that must be allocated to the extraction rights?
= P40,000,000
Solution:
Property
Plant, machinery and equipment
Extraction rights (P30M+P10M)
Total assets
Less: Lease obligations
Carrying amount of CGU
Less: Value in use
Impairment
30,000,000
.00
40,000,000
.00
40,000,000
.00
110,000,00
0.00
10,000,000
.00
100,000,00
0.00
20,000,000
.00
80,000,000
.00
Final
Initial
allocation
impairment
of
Carrying
Realizable
Impairment
amount
Property
amount
30,000,000
.00
40,000,000
.00
21,818,181
.82
29,090,909
.09
8,181,818
.18
10,909,09
0.91
Extraction rights
40,000,000
.00
29,090,909
.09
10,909,09
0.91
Totals
110,000,00
0.00
80,000,000
.00
30,000,00
0.00
Plant, machinery and
equipment
Initial allocation of impairment
Adjustment
Total
rights
impairment
loss-Extraction
29,090,909
.09
10,909,090
.91
40,000,000
.00
Adjustmen
t
21,818,18
1.82
10,909,09
0.91
10,909,09
0.91
0.00
Realizable
amount
30,000,00
0.00
0.00
0.00
30,000,00
0.00
Toshiba Company purchased a machine for P 4,500,000 on January 1, 2011. The machine has an
estimated useful life of four years and a residual value of P 500,000. The machine is being depreciation
using the sum-of-the-years’ digits method.
The December 31, 2012 asset balance net of depreciation is?
= 1,700,000
Solution:
Depreciation base (4 yrs x ((4 + 1)/2)
10.00
Original cost
Less: Accumulated depreciation, 12/31/2012
Depreciable amount (P4.5M-P500,000) 4,000,000.00
Multiply by: Age
7/10
4,500,000.00
Carrying amount, 12/31/2012
1,700,000.00
2,800,000.00
On July 1, 2010, Richmond purchased computer equipment at a cost of P 3,600,000. This equipment was
estimated to have a six-year life with no residual value and was depreciated by the straight line method.
On January 1, 2013, Richmond determined that this equipment could no longer process data efficiently,
that its value had been permanently impaired, and that P 700,000 could be recovered over the remaining
useful life of the equipment.
What is the carrying amount of the equipment on December 31, 2013?
= 500,000
Solution:
Original cost
Less: Accumulated depreciation (P3.6M x 2.5/6)
3,600,000.00
1,500,000.00
Carrying amount, 1/1/2013
vs.
Recoverable amount
2,100,000.00
Lower
Less: 2013 Depreciation (P700,000/3.5 yrs)
700,000.00
200,000.00
Carrying amount, 12/31/2013
500,000.00
700,000.00
Glenn Company determined that, due to obsolescence, equipment with an original cost of P 9,000,000 and
accumulated depreciation on January 1, 2012, of P 4,200,000 had suffered permanent impairment and as
a result should have a carrying amount of only P 3,000,000 as of the beginning of the year. In addition, the
remaining useful life of the equipment was reduced from a years to 3.
In its December 31, 2012 statement of financial position, what amount should Glenn report as accumulated
depreciation?
=
7,000,000
Solution:
Accumulated depreciation, 12/31/2011
Impairment, 1/1/2012 ((P9M-P4.2M)-P3M)
2012 Depreciation (P3M/3 yrs)
4,200,000.00
1,800,000.00
1,000,000.00
Accumulated depreciation, 12/31/2012
7,000,000.00
Guimba Co. purchased equipment on January 2, 2007 for P50,000. The equipment had an estimated 5year service life. Guimba’s policy for 5-year assets is to use the 200% double-declining balance
depreciation method for the first two years of the asset’s life and then switch to the straight-line depreciation
method. In its December 31, 2009 balance sheet, what amount should Guimba report as accumulated
depreciation for equipment?
= P38,000
Solution:
Depreciation rate (200% x 100%/5 yrs)
40%
2007 Depreciation (P50,000 x 40%)
2008 Depreciation ((P50,000-P20,000) x 40%)
2009 Depreciation ((P50,000-P32,000)/3 yrs)
20,000.00
12,000.00
6,000.00
Accumulated depreciation, 12/31/2009
38,000.00
On May 1, 2011, Norman Company purchased a new machinery for
P 2,700,000. The machinery
has an estimated useful life of 7 years and depreciation is computed using the sum-of-years-digit method.
Estimated salvage value of the machine is P 180,000.
The total accumulated depreciation on December 31, 2012 is?
= P 990,000
Spawn Company had purchased equipment for P2,800,000 on January 1, 2009. The equipment had an 8year life and residual value of P400,000. Spawn depreciated the equipment using the straight
line method. In August 2010, Spawn questioned the recoverability of the carrying amount of this
equipment. On August 31, 2012, the undiscontinued expected net future cash inflows related to the
continued use and eventual disposal of the equipment amounted to P1,600,000. The equipment’s fair value
on August 31, 2012 is P1,500,000.
After any loss on impairment has been recognized, what is the carrying amount of the equipment?
= 1,500,000
Solution:
Original cost
Less: Accumulated depreciation
Depreciable amount (P2.8M-P400,000)
Divide by: Estimated useful life
Annual depreciation
Multiply by: Age
2,800,000.00
2,400,000.00
8 yrs
300,000.00
1 8/12 yrs
Carrying amount
500,000.00
2,300,000.00
vs.
Net realizable value
Value in use
Fair value less cost to sell
1,500,000.00
Higher
1,500,000.00
A machine with a five-year estimated useful life and an estimated 10% salvage value was acquired on
January 1, 2007. On December 31, 2010, accumulated depreciation, using the sum-of-the-years’ digits
method, would be?
= (Original cost less salvage value) multiplied by 14/15.
Cabiao Company purchased a machine on December 2, 2008 at an invoice price of P4,500,000
with terms 2/10, n/30. On December 10, 2008, Cabiao paid the required amount for the machine. On
December 2, 2008, Cabiao paid P80,000 for delivery of the machine and on December 31, 2008, it paid
P310,000 for installation and testing of the machine. The machine was ready for use on January 1, 2009. It
was estimated that the machine would have a useful life of 5 years, and a residual value of
P800,000. Engineering estimates indicated that the useful life in productive units was 200,000. Units
actually produced during the first two years were 30,000 in 2009 and 48,000 in 2010. Cabiao Company
decided to use the productive output method of depreciation. What is the depreciation of the machine for
2009?
= P600,000
Solution:
Invoice price
Cash discount (P4.5M x 2%)
Delivery cost
Installation and testing cost
4,500,000.00
-90,000.00
80,000.00
310,000.00
Total cost of machine
Less: Residual value
4,800,000.00
800,000.00
Depreciable amount
Divide by: Productive units
4,000,000.00
200,000.00
Depreciation rate
Multiply by: 2009 Output
20.00
30,000.00
Depreciation expense, 2009
600,000.00
On September 30, 2011, J Company acquired a smelting machine for P270,000 paying a down payment
of P90,000 and the balance to be paid in two equal annual installments on September 30, 2012 and
September 30, 2013. There was no stated interest provided in the note, however, an 8% interest rate is
considered to be appropriate for a note of this type. The PVF for an ordinary annuity of P1 @ 8% for 2
periods is 1.78. Additional costs for freight P5,000; installation and testing for P10,000. J Company uses
the straight-line method of depreciation. The smelting machine’s expected useful life is 5 years with a
salvage
value
of
P20,000.
The depreciation expense included in J Company’s 2011 income statement is?
= 12,260
If there is a change from double declining balance to straight line method:
= The accumulated depreciation is not adjusted but the remaining book value is allocated
over the remaining life using the straight line method.
A factory equipment with an estimated useful life of 10 years was purchased by Carranglan Co. on
December 30, 2005. The equipment was expected to have a residual value of P5,000 at the end of its
service life. The sum of the years’ digit method was used in computing depreciation. For the year ended
December 31, 2009, the depreciation applicable to this equipment was P42,000. The cost of the factory
equipment purchased on December 30, 2005 was?
= P335,000
Solution:
Depreciation base (10 yrs x (10+1)/2)
55.00
2009 Depreciation (Year 4)
Multiply by:
42,000.00
55/7
Depreciable amount
Add: Residual value
330,000.00
5,000.00
Cost of factory equipment
335,000.00
Car Inc. bought a private jet for the use of its top-ranking officials. The cost of the private jet is P15 million
and can be depreciated either using a composite useful life or useful lives of its major components. It is
expected to be used over a period of 7 years. The engine of the jet has a useful life of 5 years. The private
jet’s tires are replaced every 2 years. The private jet will be depreciated using the straight line method
over
= 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life
applied to the balance of the cost of the jet
Macy Company uses the inventory method to account for numerous small tools. The balance of the tools
account on January 1, 2012 was P 364,000.The following transactions occurred related to the small tools
during 2012:Purchases during the year, P 156,000; sale of used tools in December, P10,400; Inventory of
small tools on December 31, 2012, P390,000. What is the amount of tools depreciation for the year 2012”?
= P 119,600
Solution:
Assuming question asked is the depreciation/expense for the year:
Small tools, Jan 1, 2012
Purchases
364,000.00
156,000.00
Total
Less: Sale of used tools
Small tools, Dec 31, 2012
520,000.00
10,400.00
390,000.00
Depreciation, 2012
400,400.00
119,600.00
Which is correct concerning depreciation of PPE?
= Depreciation should be charged to the income statement, unless it is included in the
carrying amount of another asset.
On January 1, 2010 Glen Company started construction of its own warehouse. Glen Company
specifically borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred during
the construction amounted to P120,000 while the income derived from its temporary investment
amounted to P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. Glen Company
depreciates similar assets using the straight-line method
On January 1, 2012 Glen Company adopted the revalued model. The sound value of the warehouse
was P1,510,000.
The depreciation expense for 2010
= 149,000
Solution:
Construction cost
Net borrowing cost (P120,000-P30,000)
1,400,000.00
90,000.00
Cost of warehouse
Divide by: Estimated useful life
1,490,000.00
10 yrs
Depreciation expense, 2010
149,000.00
Accumulated depreciation at December 31, 2012 and December 31, 2011 were P390,000 and
P245,000 respectively. During the year, Polaris Company acquired machineries costing P200,000 to
replace the retired machines costing P120,000. In disposing the retired machines Polaris Company
generated cash inflows of P80,000 recognizing a gain of P15,000. At yearend, there was no indication
of any impairment on the machineries of Polaris Company as the carrying amounts of the machinery
accounts were less than the net recoverable amounts of the said items.
In Polaris Company’s 2012 income statement, the amount of depreciation expense reported is
= P200,000
Solution:
Cost of retired machines
Less: Carrying amount of retired machines
Proceeds from sale
80,000.00
Less: Gain on sale
15,000.00
120,000.00
Accumulated depreciation - retirement
Accumulated depreciation, 12/31/2012
55,000.00
390,000.00
Totals
Less: Accumulated depreciation, 12/31/2011
445,000.00
245,000.00
Depreciation expense
200,000.00
65,000.00
On the first day of its current fiscal year, Lupao Corporation purchased equipment costing P400,000 with a
salvage value of P80,000. Depreciation expense for the year was P160,000. If Lupao uses the doubledeclining-balance method of depreciation, what is the estimated useful life of the asset?
= 5 years
Solution:
Depreciation expense
Divide by: Cost of equipment
160,000.00
400,000.00
Double declining rate
Divide by:
40%
200%
Depreciation rate
20%
Estimated useful life (100%/20%)
5.00
The depreciable amount of an item of property, plant and equipment is the?
= Cost of the asset, or other amount substituted for cost in the financial statements, less
its residual value.
M Company purchased a noncurrent asset with a useful life of 10 years on January 1, 2012 for P 6,500,000.
On December 31, 2012, the amount the entity would receive from the disposal of the asset if it was already
of the age and in the condition expected at the end of its useful life was estimated at P 700,000. Inclusive
of inflation, the actual amount expected to be received on disposal was estimated at P 900,000.
The depreciation charge for the year ended December 31, 2012 is
= 580,000
The sum of units method of depreciation results in:
= Charge based on the expected use or output of the asset.
Ikea Company takes a full year’s depreciation expense in the year of an asset’s acquisition and
no depreciation expense in the year of disposal. Data relating to one of Ikea Company’s depreciable assets
on December 31, 2012 are as follows: Acquisition year 2010; cost P1,100,000; residual value P200,000;
accumulated depreciation P720,000; estimated useful life 5 years.
Using the same depreciation method in 2010, 2011 and 2012, the depreciation expense to be recognized
in 2013 for the asset is?
=
120,000
Riles Truckers, Inc. acquired a heavy road transporter on January 1, 2003 at a cost of P10
million. The estimated useful life is 10 years. On January 1, 2009, the power train requires replacement,
as further maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is
perfectly roadworthy and is expected to last for the next four years. The cost of the new power train is P4.5
million.
Assuming that the original cost of the power train is P3 million, the total depreciation expense in 2009 is
= P1,825,000
Solution:
Heavy road transporter
Original cost
Less: Original cost of power train
10,000,000.00
3,000,000.00
Cost of remaining heavy road transporter
Divide by: Estimated useful life
7,000,000.00
10 yrs
700,000.00
Power train
Replacement cost
Divide by: Estimated useful life
4,500,000.00
4 yrs
1,125,000.00
Total depreciation expense, 2009
1,825,000.00
April Company purchased factory equipment which was installed and put into service July 1, 2015 at a total
cost of P9,000,000. Residual value was estimated at P1,000,000. The equipment is being depreciated
over 10 years by the double declining balance method. For the year 2016 how much depreciation expense
should April record on this equipment?
= 1,620,000
Solution:
Depreciation rate (200% x 100%/10 yrs)
20%
Y1 Depreciation (P9M x 20%)
Y2 Depreciation ((P9M-P1.8M) x 20%)
1,800,000.00
1,440,000.00
Jan 1-Jun 30 Depreciation (P1.8M x 6/12)
Jul 1-Dec 31 Depreciation (P1.44M x 6/12)
900,000.00
720,000.00
Depreciation expense, 2016
1,620,000.00
Rock Company acquired equipment on January 1, 2000. Rock used the straight line depreciation with a
useful life of 15 years and no residual value for this equipment. On January 1, 2004, Rock estimated that
the remaining life of the equipment was six years with no residual value. How should this change be
accounted for?
= Revising future depreciation annually to equal the carrying amount of January 1, 2004
divided by six.
Bugis Corp. acquired a machine on January 1, 2001. Details of the machine at December 31, 2008 are
given below:
Component
Engine
Outer casings
Other components
Cost
P170,000,000
510,000,000
255,000,000
P765,000,000
Depreciation basis
Useful life of 40,000 hours
25 years straight line
12 years straight line
During the year 2009, the following events took place:
a) Engine, which had run for 30,000 hours till date developed serious snags. It was replaced by
a better engine with a cost of P238 million and estimated life of 50,000 hours. The new engine was
used for 5,000 hours during the year.
b)
Polishing and painting was done to the outer casings at a cost of P1.3 million.
c) Other components were upgraded at a cost of P102 million. The remaining life of the other
components is 5 years.
Compute the total depreciation for the year 2009, assume that all the work mentioned above was completed
at the beginning of
= P81,600,000
Solution:
Depreciation, Engine
Cost of new engine
Divide by: Estimated useful life
Depreciation rate
Multiply by: Output
238,000,000.00
50,000 hrs
4,760.00
5000 hrs
23,800,000.00
Depreciation, Outer casings
Original cost
Divide by: Estimated useful life
510,000,000.00
25 yrs
Depreciation, Other components
Original cost
Less: Accumulated depreciation
(P255M x 8/12)
20,400,000.00
255,000,000.00
170,000,000.00
Carrying amount, 12/31/2008
Cost of upgrade
85,000,000.00
102,000,000.00
New carrying amount
Divide by: Remaining est. useful life
187,000,000.00
5 yrs
Total depreciation, 2009
37,400,000.00
81,600,000.00
Which is incorrect concerning residual value of PPE?
= Depreciation is not recognized if the fair value of the asset exceeds its carrying amount,
even if the asset’s residual value does not exceed its carrying amount.
On January 1, 2012, LEX Company bought machinery under a contact that required a down payment of
P 100,000, plus 24 monthly payments of P 50,000 each, for total cash payments of P 1,300,000. The cash
equivalent price of the machinery was P 1,100,000. The machinery has an estimated useful life of 10 years
and estimated residual value of P 50,000. LEX uses straight line depreciation.
In its 2012 income statement, what amount should LEX report as depreciation for the machinery?
= 105,000
Laur Company uses the composite method of depreciation and has a composite rate of 25%. During 2009,
it sold assets with an original cost of P100,000 and residual value of P20,000 for P80,000 and acquired
P60,000 worth of new assets with residual value of P10,000. The original group of assets had the following
characteristics:
Total cost
Total residual value
P250,000
30,000
The above original group includes the assets sold in 2009 but not the assets purchased in 2009. What was
the depreciation in 2009?
= P52,500
Solution:
Total cost
Retirement
Additions
250,000.00
-100,000.00
60,000.00
New total cost
Multiply by: Composite depreciation rate
210,000.00
25%
Depreciation, 2009
52,500.00
Tinio Company purchased a machine for P100,000 on January 1, 2006, with the following additional items
paid or incurred
Separation pay for laborer laid off upon
acquisition of new machine
Loss on sale of machine replaced
Transportation in
Installation cost
P1,200
1,300
1,000
4,000
The new machine is estimated to have a useful life of 10 years and a residual value of P4,000. On
January 1, 2009, new parts which cost P12,600 were added to the machine so as to reduce its fuel
consumption, but with no change in its estimated life or residual value. The annual depreciation charge
on the machine for 2009 was
= P11,900
On January 1, 2010 Glen Company started construction of its own warehouse. Glen Company
specifically borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred during
the construction amounted to P120,000 while the income derived from its temporary investment
amounted to P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. Glen Company
depreciates similar assets using the straight-line method
On January 1, 2012 Glen Company adopted the revalued model. The sound value of the warehouse
was P1,510,000.
The depreciation expense in 2010, assuming that Glen Company for reporting purposes was
considered an SME
= 140,000
Solution:
Construction cost
Divide by: Estimated useful life
1,400,000.00
10 yrs
Depreciation expense, 2010
140,000.00
On January 1, 2006, Crater, Inc. purchased equipment having an estimated salvage value equal to 20% of
its original cost at the end of a ten-year life. The equipment was sold December 31, 2010, for 50% of its
original cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation
methods did Crater use?
= Straight-line
Riles Truckers, Inc. acquired a heavy road transporter on January 1, 2003 at a cost of P10 million. The
estimated useful life is 10 years. On January 1, 2009, the power train requires replacement, as further
maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is perfectly
roadworthy and is expected to last for the next four years. The cost of the new power train is P4.5 million.
Assuming that the original cost of the power train is not separately identifiable and the appropriate discount
rate is 5%, the total depreciation expense in 2009 is
= P1,789,210
On January 1, 2011 Led Company bought machinery that required a down payment of P100,000, plus 24
monthly payments of P50,000 each. The cash equivalent price of the machinery was P1,100,000. The
machinery has an estimated useful life of 10 years and estimated residual value of P50,000. Led uses
straight line depreciation.
In its 2011 income statement the depreciation for this machinery is
= 105,000
Solution:
Depreciable amount (P1,100,000-P50,000)
Divide by: Estimated useful life
1,050,000.00
10 yrs
Depreciation expense, 2011
105,000.00
Pantabangan Company takes a full year’s depreciation in the year of an assets acquisition, and no
depreciation in the year of disposition. Data relating to one depreciable asset acquired in 2007, with
residual value of P900,000 and estimated useful life of 8 years, at December 31, 2008 are:
Cost
Accumulated depreciation
P9,900,000
3,750,000
Using the same depreciation method in 2007 and 2008, how much depreciation should Pantabangan record
in 2009 for this asset?
= P1,500,000
Solution:
Accumulated depreciation
Divide by: Depreciable amount (P9.9M-P0.9M)
3,750,000.00
9,000,000.00
Percentage depreciated
Period used (2yrs/8yrs)
Method used:
42%
25%
Either DDB or SYD
If SYD:
Depreciation base (8 yrs x (8+1)/2)
36.00
2007 Depreciation (P9M x 8/36)
2008 Depreciation (P9M x 7/36)
2,000,000.00
1,750,000.00
Accumulated depreciation
3,750,000.00
2009 Depreciation (P9M x 6/36)
1,500,000.00
D Company acquired a drilling machine on October 1, 2010 at a cost of P2,500,000 and depreciated it at
25% per annum on a straight line basis. On October 1, 2012, the entity spent P 500,000 on upgrade to the
machine in order to improve its efficiency and increase the inflow of economic benefits over the machine’s
remaining
life.
The depreciation expense for the year ended September 30, 2013
= 875,000
Solution:
Assuming question ask is how much the depreciation for 2013 is:
Original cost
Less: Accumulated depreciation (P2.5M x 25% x 2 yrs)
2,500,000.00
1,250,000.00
Carrying amount, 10/01/2012
Add: Cost of upgrade
1,250,000.00
500,000.00
New carrying amount
Divide by: Remaining useful life
1,750,000.00
2 yrs
Depreciation, 2013
875,000.00
Miller Company acquired a machine for P420,000 on June 30, 2012. The machine has a seven-year life,
no salvage value, and was depreciated using the straight-line method. On August 31, 2015, a test for
recoverability reveals that the expected net future undiscounted cash inflows related to the continued use
and eventual disposal of the machine total P275,000. The machine’s actual fair value on August 31, 2015,
is P261,000. Assuming a loss on impairment is recognized August 31, 2015, what is Miller’s depreciation
expense for September 2015?
= P5,000
Solution:
Original cost
Less: Accumulated depreciation
Depreciable amount
Divide by: Useful life (months, 7 x 12)
Monthly depreciation
Multiply by: Age (3 yrs & 2 mos)
420,000.00
420,000.00
84.00
5,000.00
38.00
190,000.00
Carrying amount
vs.
Recoverable amount
230,000.00
Lower
Divide by: Remaining useful life (84 mos-38 mos)
230,000.00
46.00
Depreciation, September 2015
5,000.00
261,000.00
In which of the following situations is the units-of production method of depreciation most appropriate?
= An asset’s service potential declines with use.
Which ONE of the following statements best describes 'residual value'?
=
The estimated net amount currently obtainable if the asset were at the end of its
useful life
Natividad Company purchased a tooling machine in 1999 for P3,000,000. The machine was
being depreciated on the straight-line method over an estimated useful life of twenty years, with no salvage
value. At the beginning of 2009, when the machine had been in use for ten years, the company paid
P600,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful
life of the machine would be extended an additional five years. What should be the depreciation expense
recorded for the machine in 2009?
= P140,000
Solution:
Original cost
Less: Accumulated depreciation
(P3M x 10/20)
3,000,000.00
Carrying amount, 1/1/2009
Cost of overhauling machine
1,500,000.00
600,000.00
New carrying amount
2,100,000.00
1,500,000.00
Divide by: Revised remaining useful life
15 yrs
Depreciation expense, 2009
140,000.00
Jangoy Co. purchased equipment on January 2, 2011 for P100,000. The equipment had an estimated life
of 5 year with salvage value of P6,000. The Company will use 200% declining balance depreciation method
for the first two years of the assets life and then switch to the straight-line depreciation method. In its
December 31, 2013 statement of financial position, what amount should Jangoy report as accumulated
depreciation for equipment?
=
P74,000
Solution:
Double declining rate (100%/5yrs x 2)
2011 Depreciation (P100,000 x 40%)
2012 Depreciation ((P100,000-P40,000) x 40%)
2013 Depreciation
Cost
100,000.00
Less: Accumulated depreciation
(P40,000+P24,000)
64,000.00
Carrying amount, 1/1/2013
Less: Salvage value
36,000.00
6,000.00
Remaining depreciable amount
Divide by: Remaining useful life
30,000.00
3 yrs
Accumulated depreciation, 12/31/2013
40%
40,000.00
24,000.00
10,000.00
74,000.00
The following account balances relating to property, plant and equipment of Clark Company appear on the
books on January 1, 2012:
Land
Power Station
Accumulated depreciation
Dock Installation
Accumulated depreciation
Assets have been carried at cost since their acquisition. All assets
The straight line method is used.
2,000,000
15,000,000
3,750,000
3,000,000
1,500,000
were acquired on January 1, 2002.
On January 1, 2012, Clark Company revalued the property, plant and equipment. On such date the
following were identified:
Replacement Cost
Land
5,000,000
Power station
25,000,000
Dock installation
5,000,000
The revaluation surplus on January 1, 2012
= 11,500,000
On December 31, 2008, the balance sheet of Pink Company showed the following property and equipment
after charging depreciation:
Building
P3,000,000
Accumulated depreciation
(1,000,000)
Equipment
1,200,000
Accumulated depreciation
(400,000)
P2,000,000
800,000
The company has adopted the revaluation model for the valuation of property and equipment. This has
resulted in the recognition in prior periods of an asset revaluation surplus for the building of
P140,000. On December 31, 2008, an independent valuer assessed the fair value of the building to be
P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December 31, 2008.
Carrying amount of property and equipment as of December 31, 2009
= P2,211,000
The following account balances relating to property, plant and equipment of Clark Company appear on the
books on January 1, 2012:
Land
2,000,000
Power Station
15,000,000
Accumulated depreciation
3,750,000
Dock Installation
3,000,000
Accumulated depreciation
1,500,000
Assets have been carried at cost since their acquisition. All assets were acquired on January 1, 2002.
The straight line method is used.
On January 1, 2012, Clark Company revalued the property, plant and equipment. On such date the
following were identified:
Replacement Cost
Land
5,000,000
Power station
25,000,000
Dock installation
5,000,000
The depreciation for 2012
= 875,000
The following account balances relating to property, plant and equipment of Guagua Company appear on
the books on December 31, 2008:
Land
Building
Accumulated depreciation
P 6,000,000
45,000,000
11,250,000
Plant, property and equipment have been carried at cost since their acquisition. The land was acquired
15 years ago while the building was acquired on January 1, 1999. The straight line method for
depreciation is used. On January 1, 2009, the company revalued property plant and equipment and
on
the
same
date,
competent
appraisers
submitted
the
following:
Land
Building
Replacement cost
P 8,000,000
60,000,000
What is the revaluation surplus on December 31, 2009?
= P12,875,000
Realized revaluation surplus is transferred to retained earnings
= upon disposal or retirement of the asset or during the period of use of the asset
On January 1, 2008, Richard Company acquired a building at cost of P 5,000,000. The building has been
depreciated on the basis of a 20-year life. On January 1, 2013, an appraisal of the building showed its
replacement cost at P 8,000,000 with no change in useful life.
What is the revaluation surplus that should be reported in the December 31, 2013, statement of financial
position?
= 2,100,000
Revaluation surplus account is reported as
= a separate component of stockholders’ equity
On January 1, 2008, Richard Company acquired a building at cost of P 5,000,000. The building has
been depreciated on the basis of a 20-year life. On January 1, 2013, an appraisal of the building showed
its
replacement
cost
at
P
8,000,000
with
no
change
in
useful
life.
What is the depreciation for 2013?
= 400,000
A revaluation decrease
= is debited to revaluation surplus to the extent that the decrease does not exceed
the amount held in the revaluation surplus in respect of that same asset.
On January 1, 2009, the historical balances of the land and building of Floridablanca Company are:
Land
Building
Cost
P 50,000,000
300,000,000
Accumulated depreciation
P
0
90,000,000
The land and building were appraised on same date and the revaluation revealed the following:
Fair value
P 80,000,000
350,000,000
Land
Building
There were no additions or disposals during 2009. Depreciation is computed on the straight line. The
estimated life of the building is 20 years. The depreciation of the building for the year ended December 31,
2009 should be
= P25,000,000
Goo-Goo Company owns a building on January 1, 2012 with historical cost of P40,000,000. The property
is depreciated over 40 years on a straight line basis with no residual value. The entity adopts a policy of
revaluation of property. The building has so far been revalued twice at fair value as follows:
January 1, 2013
January 1, 2015
46,800,000
55,500,000
The revaluation surplus on January 1, 2013
= 7,800,000
In the 30 June 2009 annual report of Bamban Ltd, the equipment was reported as follows:
Equipment (at cost)
Accumulated depreciation
P5,000,000
1,500,000
P3,500,000
The equipment consisted of two machines, machine A and machine B. Machine A had cost P3,000,000
and had a carrying amount of P1,800,000 at 30 June 2009, while machine B had cost P2,000,000 and
was carried at P1,700,000. Both machines are measured using the cost model, and depreciated on a
straight-line basis over a ten-year period.
On 31 December 2009, the directors of Bamban Ltd decided to change the basis of measuring the
equipment from the cost model to the revaluation model. Machine A was revalued to P1,800,000 with
an expected useful life of six years, and machine B was revalued to P1,550,000 with an expected useful
life of five years.
What is the revaluation surplus on December 31, 2009?
= P150,000
Goo-Goo Company owns a building on January 1, 2012 with historical cost of P40,000,000. The property is
depreciated over 40 years on a straight line basis with no residual value. The entity adopts a policy of
revaluation of property. The building has so far been revalued twice at fair value as follows:
January 1, 2013
January 1, 2015
46,800,000
55,500,000
The increase in revaluation surplus recognized as a component of other comprehensive income on
January 1, 2015
= 11,100,000
On January 1, 2008, Richard Company acquired a building at cost of P 5,000,000. The building has been
depreciated on the basis of a 20-year life. On January 1, 2013, an appraisal of the building showed its
replacement cost at P 8,000,000 with no change in useful life.
Ignoring income tax, what amount should be credited to revaluation surplus on January 1, 2013?
= 2,250,000
On December 31, 2008, the balance sheet of Pink Company showed the following property and equipment
after charging depreciation:
Building
P3,000,000
Accumulated depreciation
(1,000,000)
Equipment
1,200,000
Accumulated depreciation
(400,000)
P2,000,000
800,000
The company has adopted the revaluation model for the valuation of property and equipment. This has
resulted in the recognition in prior periods of an asset revaluation surplus for the building of
P140,000. On December 31, 2008, an independent valuer assessed the fair value of the building to be
P1,600,000 and the equipment to be P900,000.
The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December 31, 2008.
Revaluation surplus as of December 31, 2009
= P75,000
Revaluation of plant asset should be made
= at sufficient regula rity
On June 30, 2012, the statement of financial position of Love Company reported the following:
Equipment at cost
5,000,000
Accumulated depreciation
1,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over 10years. On December 31, 2012, Love Company decided to change the basis of measuring the
equipment from the cost model to the revaluation model. The equipment was revalued to its fair value
of P 4,550,000 with an expected remaining useful life of 5 years.
Ignoring income tax, the revaluation surplus on December 31, 2012
= 1,300,000
A revaluation increase is credited to
= Income to the extent that it reverses a revaluation decrease of the same asset previously
recognized as an expense
On January 1, 2007, Avril Company purchased a new building at a cost of P6,000,000 with a useful life of
10 years. Depreciation was computed using the double declining balance method.
On January 1, 2012, the building was revalued at a fair value of P5,000,000. Ignoring income tax, the
revaluation surplus on January 1, 2012 is
= 3,033,920
On June 30, 2012, the statement of financial position of Love Company reported the following:
Equipment at cost
5,000,000
Accumulated depreciation
1,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over 10years. On December 31, 2012, Love Company decided to change the basis of measuring the
equipment from the cost model to the revaluation model. The equipment was revalued to its fair value
of P 4,550,000 with an expected remaining useful life of 5 years.
The annual depreciation for 2013
= 910,000
The following account balances relating to property, plant and equipment of Clark Company appear on the
books on January 1, 2012:
Land
2,000,000
Power Station
15,000,000
Accumulated depreciation
3,750,000
Dock Installation
3,000,000
Accumulated depreciation
1,500,000
Assets have been carried at cost since their acquisition. All assets were acquired on January 1, 2002. The
straight line method is used.
On January 1, 2012, Clark Company revalued the property, plant and equipment. On such date the
following were identified:
Replacement Cost
Land
5,000,000
Power station
25,000,000
Dock installation
5,000,000
The revaluation surplus on December 31, 2012
= 11,150,000
Goo-Goo Company owns a building on January 1, 2012 with historical cost of P40,000,000. The property is
depreciated over 40 years on a straight line basis with no residual value. The entity adopts a policy of
revaluation of property. The building has so far been revalued twice at fair value as follows:
January 1, 2013
January 1, 2015
46,800,000
55,500,000
The revaluation surplus reported in the statement of changes in equity for the year ended December
31 2015
= 18,000,000
In June 30, 2013, the statement of financial position of Love Company reported the following:
Equipment at cost
Accumulated depreciation
P 5,000,000
1,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over a 10year period. On December 31, 2013, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model. The equipment was revalued to its fair value
of P 4,550,000 with remaining useful life of 5 years.
Ignoring income tax, what amount should Love report as revaluation surplus on December 31, 2013?
= 1,300,000
In the case of grant related to an assets , which of the following accounting treatment is prescribe by PAS
20?
= Either set up the grant as deferred income or deduct it in arriving at the carrying amount
of the assets.
In the case of grant related to income . which of the following accounting treatment is prescribe by PAS 20?
= Present the grant in the income statement as order income ‘’ or as a separate line item ,
or deduct it from the related expense.
In the case of grants related to income, which of these accounting treatments is prescribed by PAS 20?
= Present the grant in the income statement as “other income” or as a separate line item,
or deduct it from the related expense.
Padre Company purchased equipment for P15,000,000 on January 1, 20Y1. Padre received a government
grant of P1,500,000 in respect of this asset on the condition that Padre will hire personnel from the
depressed area to operate the machine and provide them livelihood. Padre treated the grant as a deduction
from the cost of the asset. The equipment has a useful life of 5 years and will use SYD in depreciating the
asset. On January 1, 20Y4, Padre violated the condition and thus returned the grant. What is the
depreciation for 20Y4?
= 3,200,000
A grant that becomes repayable shall be accounted for as a
= Change in accounting estimate
Which is not a characteristic of an intangible asset?
= the asset has indeterminate useful life
A trademark is an example of which general category of intangible assets
= Market related
The term intangible asset is applied to competitive rights, privileges or advantages belonging to a business
enterprise. Which of the following statements is correct about intangible asset?
= the recognition of such an asset requires that it be purchased
Paragraph 63 of IAS 38 Intangibles, prohibits the recognition of the following internally generated
identifiable intangibles:
I
II
III
IV
Brands
No
No
No
Yes
Mastheads
No
Yes
Yes
Yes
Publishing titles
No
No
Yes
Yes
Customer lists
No
Yes
No
Yes
- IV.
A copy right is an example of which general category of intangible assets
= Artistic related
Order backlogs and customer list are an example of which general category of intangible assets
= Customer related
Which amount these criteria are required for the recognition of development costs of an internal project?
I.
Technical feasibility of completing and the intention to complete the intangible asset, and the ability
to use or sell the intangible asset.
II.
The ability of the intangible asset to generate probable future economic benefit, the existence of a
market for the output of the intangible asset, or its usefulness, if to be used internally.
III. The availability of adequate, technical, financial and other resources to complete, use or sell the
intangible asset.
IV. The ability to measure reliably the expenditure attributable to the intangible asset during its
development.
= all are correct
Trade secret and patents are an example of which general category of intangible assets?
= Technology based
When an internally generated asset meets the recognition criteria, the appropriate treatment for costs
previously expensed is:
= no adjustment as these amounts may not be reinstated;
Broadcast right and franchises are an example of which general category of intangible assets?
= Contract base
Intangible assets denote:
= Properties without physical characteristics that have long-term effects on a business
entity
Goodwill shall be recorded only when
= An entity report above normal earnings for five or more consecutive years
Which is incorrect concerning the recognition and measurement of an intangible asset?
= If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal
to the total payments over the credit period.
Siniloan Company incurred research and development costs in 2009 as follows:
Equipment acquired for use in various R&D projects
P6,000,000
Depreciation on the above equipment
1,200,000
Materials used
3,000,000
Compensation costs of personnel
4,000,000
Outside consulting fees
1,500,000
Indirect costs appropriately allocated
1,300,000
The 2009 total research and development expense should be
= P11,000,000
Which statement is incorrect regarding internal – used software?
= Internal used software is considered to be software that is marketed as a separate
product or as part of a product or process.
If an entity construct a laboratory building to be used as a research and development facilities , the cost of
the laboratory building is match against earning as
= Depreciation deducted as part of research and development cost
Marc Inc. incurred the following costs during the year ended December 31, 2016:
Laboratory research aimed at discovery of new knowledge
180,000
Costs of testing prototype and design modifications (economic viability not achieved) 45,000
Quality control during commercial production, including routine testing of products
270,000
Construction of research facilities having an estimated useful life of 6 years but no alternative future
use
360,000
The total amount to be classified and expensed as research and development in 2016 is
= 285,000
Solution:
Laboratory research aimed at discovery of new knowledge
Costs of testing prototype and design modifications (economic viability not achieved)
Depreciation of research facilities (P360,000/6 yrs)
180,000.00
45,000.00
60,000.00
Research and development expense
285,000.00
CRC Company reported the following expenditures in relation to Patent Q which it created during the
year.
Research Phase
January 1, 2010 – April 30, 2010
§ Costs incurred in obtaining new knowledge in relation to new hydraulics process
§ Costs incurred in searching alternative materials, devices and processes related to the new
hydraulics process
§ Formulation, design and final selections of possible alternatives for improved hydraulics
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
P 250,000
240,000
150,000
450,000
Development Phase
May 1, 2010 – June 30, 2010
210,000
§ Costs for designing and constructing pre-use prototypes
§ Costs for construction and testing of chosen alternative
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
330,000
345,000
July 1 : Technical feasibility in relation to project “Q” was achieved
§ Costs for the construction of jigs, molds and dies applying the new “Q” technology
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
360,000
260,000
CRC Company expects that the useful life of Patent Q would be for 10 years with no
residual
value. Amortization commences in 2011.
The amount reported as expense in CRC Company’s 2010 financial statements in relation to the
internally generated intangible asset is
= 1,975,000
Solution:
Cost of obtaining new knowledge
Cost of searching alternative materials, devices and processes
Formulation, design and final selections
Salary costs, 1/1/2010-4/30/2010
Designing and constructing pre-use prototypes
Construction and testing
Salary costs, 5/1/2010-6/30/2010
250,000.00
240,000.00
150,000.00
450,000.00
210,000.00
330,000.00
345,000.00
Total R&D Expense
1,975,000.00
A computer software purchased as an operating system for the hardware or as an integral part of a
computer controlled machine tool that cannot operate without the specific software shall be treated as
= Property plant and equipment
According to IAS 38 Intangibles, in order to be able to capitalise ‘development’ outlays an entity must
be able to demonstrate the following:
I.
Technical feasibility and intention of completing the asset so it will be
available for use or sale.
II.
Its ability to reliably measure the expenditure on the development of the
asset.
III.
Ability to use or sell the asset.
How the asset will generate probable future economic benefits.
= I, II, III and IV;
According to the definition provided in IAS 38 Intangibles, activities undertaken in the ‘research’ phase of
the generation of an asset may include:
= original and planned investigation with the prospect of gaining new scientific knowledge;
The proper accounting for the cost incurred in creating computer software product is
= To charged research and development expense when incurred until technological
feasibility has been established for the product
Cavinti Company provided the following information relevant to the research and development
expenditures for the year 2009:
Current period depreciation on the building housing R and D activities
P1,500,000
Cost of market research study
1,000,000
Current period depreciation on a machine used in R and D activities
500,000
Salary of R and D director
1,200,000
Salary of Vice-President who spends ¼ of his time overseeing R and D activities 2,400,000
Pension costs for salary of R and D director
50,000
Pension costs for salary of Vice-President
100,000
The R and D expense for the current period should be
= P3,875,000
Solution:
Current period depreciation on building housing R&D activities
Current period depreciation on machine used in R&D activities
Salary of R&D director
Salary of VP, apportioned (P2.4M x 1/4)
Pension cost for salary of R&D director
Pension cost for salary of VP, apportioned (P100,000 x 1/4)
1,500,000.00
500,000.00
1,200,000.00
600,000.00
50,000.00
25,000.00
Research and development expense
3,875,000.00
Which of the following research and development related cost should be capitalized and amortized over
current and future periods ?
= Cost of testing equipment that will also be used in another separate research and
development project scheduled to begin next year?
During 2009, Pagsanjan Company incurred costs to develop and produce a routine, low-risk computer
software product as follows:
Completion of detail program design
P1,500,000
Cost incurred for coding and testing to establish technological feasibility
500,000
Other coding costs after establishment of technological feasibility
2,500,000
Other testing costs after establishment of technological feasibility
2,000,000
Costs of producing product masters for training materials
3,000,000
Duplication of computer software and training materials from product master
4,000,000
Packaging product
1,000,000
In the December 31, 2009 balance sheet, what amount should be capitalized as software cost subject to
amortization?
= P7,500,000
Solution:
Other coding costs after establishment of technological feasibility
Other testing costs after establishment of technological feasibility
Cost of producing product masters for training materials
2,500,000.00
2,000,000.00
3,000,000.00
Capitalizable cost of software
7,500,000.00
A newly set up dot- com entity has engaged you as its financial advisor. The entity has
recently completed one of its highly publicized research and development project and seeks your advised
on the accuracy of the following statement made by one of its stakeholder . Which one is the most accurate?
= Cost incurred during the ‘’ development phase ‘’ can be capitalized if criteria such a
technical feasibility of the project being established are met
Legal cost for filing of patent
150,000
Fees paid to patent office
50,000
Drawing required by patent office
40,000
Total cost required by patent office
240,000
How much research and development cost should be expensed in the current year?
= 2,250,000
Solution:
Purchase of special equipment
Research salaries and fringe benefits
Cost testing prototype
Research and development expense
1,800,000
200,000
250,000
2,250,000
Cubs Company reported the following expenditures in relation to Patent “Hugs” which it has created
during 2018.
Research Phase
January 1, 2018 – May 30, 2018
P 250,000
§ Costs incurred in obtaining new knowledge in relation to new hydraulics process
§ Costs incurred in searching alternative devices and processes related to the new hydraulics
process
240,000
§ Formulation, design and final selections of possible alternatives for improved hydraulics
150,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
450,000
Development Phase
June 1, 2018 – August 31, 2018
210,000
§ Costs for designing and constructing pre-use prototypes
§ Costs for construction and testing of chosen alternative
330,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
345,000
September 1 : Technical feasibility in relation to project “Hugs” was achieved
§ Costs for the construction of jigs, molds and dies applying the new “Hugs” technology
360,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
260,000
December 15, 2018: Completion of Project Hugs
§ Fees paid to register patent “Hugs” (initial legal life 20 years)
120,000
§ Cost of staff training in relation to operating Patent “Hugs”
240,000
Cubs Company expects that the useful life of Patent “Hugs” would be for 12 years with no
residual value. Amortization commenced in 2019
The total amount of expenditures to be recognized immediately as an expense in 2018 is
= 2,215,000
Solution:
Cost in obtaining new knowledge
Cost in searching alternative devices and processes
Formulation, design and final selections
Salary costs, 1/1/2018-5/30/2018
Cost for designing and constructing pre-use prototypes
Costs for construction and testing
Salary costs, 6/1/2018-8/31/2018
Cost of staff training
250,000.00
240,000.00
150,000.00
450,000.00
210,000.00
330,000.00
345,000.00
240,000.00
Total R&D Expense
2,215,000.00
Are the following statement true or false ?
Statement 1 Expenditures during the research phase of a project may sometimes be capitalized as an
intangible assets
Statement 2 Expenditures during the development phase of a project may sometimes be capitalized
as an intangible assets .
Statement 1, Statement 2
= False, True
A research and development activity for which the cost would be expensed as incurred is
= Design, construction and testing of preproduction prototypes and models
At the beginning of the current year, an entity had capitalized cost for a new computer software product with
an economic life of four years. Sales for current year were ten percent of expected total sales of the
software. The pattern of future sales cannot be measured reliably. At year end , the software had a net
realizable value equal to eighty percent of the capitalized cost. The an amortized cost reported in the year
–end statement of financial position should be
= Seventy five percent of capitalized cost
The following is information related to the development of a particular software package in the first year
of product life:
Development costs prior to reaching technological feasibility
P 4,000
Development costs after reaching technological feasibility
6,000
Costs of duplicating salable product
9,000*
Estimated revenues over 3 year total product life
300,000
Revenue in the first year of product life
150,000
*This represents the entire inventory expected to be sold over the 3-year period.
What is the total expense related to this software package to be recognized in its first-year?
= P11,500
Solution:
Development costs after reaching technological feasibility
Costs of duplicating salable product
6,000.00
9,000.00
Capitalized software cost
Multiply by: Ratio of revenue
15,000.00
150/300
Amortization of capitalized software cost
Development costs prior to reaching technological feasibility
7,500.00
4,000.00
Total expenses, year 1
11,500.00
At the beginning of the current year , an entity purchased equipment for used in developing a new product
. The entity uses the straight line depreciation method. The equipment could provide benefits over a 10
year period. However , the new product development is expected to take five years , and the equipment
can be used only for this project . The entity’s expensed for the current year equal
=
The total cost of the equipment
Betterword Company is engaged in developing computer software. The following costs were incurred
during 2009:
Salaries of programmers doing research
P235,000
Expenses related to projects prior to establishment of technological feasibility
78,400
Expenses related to projects after technological feasibility has been established but
before software is available for production
49,500
Amortization of capitalized software development costs
26,750
Costs to produce and prepare software for sale
56,300
Additional data for 2009:
Sales of products for the year
Beginning inventory
Portion of goods available for sale sold during the year
P515,000
142,000
60%
Determine the company’s profit for 2009. Income tax rate is 35%.
= P43,270
Research is
I.
Original and planned investigation undertaken with the prospect of gaining scientific or technical
knowledge
II.
Application of research finding or other knowledge to a plan or design for the production of a new
product prior to commencement of commercial production.
= I only
Which is not considered a research and development activity?
= Routine on going effort to refined , enrich or improved quality of existing product
Biñan Company incurred the following costs during 2009:
Design of tools, jigs, molds and dies involving new technology
P2,500,000
Modification of the formulation of a process
3,200,000
Trouble shooting in connection of breakdowns during commercial 2,000,000
production
Adaptation of an existing capability to a particular customer’s 2,200,000
need as part of a continuing commercial activity
In its 2009 income statement, Biñan should report research and development expense of
= P5,700,000
Solution:
Design of tools, jigs, molds and dies involving new technology
Modification of the formulation of a process
2,500,000.00
3,200,000.00
Research and development expense
5,700,000.00
Nasugbu Company incurred the following costs during 2009:
Quality control during commercial production, including routine testing of products
P58,000
Laboratory research aimed at discovery of new knowledge
68,000
Testing for evaluation of new products
24,000
Modification of the formulation of a plastic product
26,000
Engineering follow-through in an early phase of commercial production
15,000
Adaptation of an existing capability to a particular requirement or customer's need as 13,000
a part of continuing commercial activity
Trouble-shooting in connection with breakdowns during commercial production
29,000
Searching for applications of new research findings
19,000
What is the total amount Nasugbu should report as research and development expense for 2009?
= P137,000
Solution:
Laboratory research aimed at discovery of new knowledge
Testing for evaluation of new products
Modification of the formulation of a plastic product
Searching for applications of new research findings
68,000.00
24,000.00
26,000.00
19,000.00
Research and development expense
137,000.00
Which of the following research and development related cost should be capitalized and amortized over
current and future periods?
= Research and development general laboratory building
CRC Company reported the following expenditures in relation to Patent Q which it created during the
year.
Research Phase
January 1, 2010 – April 30, 2010
§ Costs incurred in obtaining new knowledge in relation to new hydraulics process
§ Costs incurred in searching alternative materials, devices and processes related to the new
hydraulics process
P 250,000
240,000
§ Formulation, design and final selections of possible alternatives for improved hydraulics
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
150,000
450,000
Development Phase
May 1, 2010 – June 30, 2010
210,000
§ Costs for designing and constructing pre-use prototypes
§ Costs for construction and testing of chosen alternative
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
330,000
345,000
July 1 : Technical feasibility in relation to project “Q” was achieved
§ Costs for the construction of jigs, molds and dies applying the new “Q” technology
§ Salary costs (and other employee benefits) of personnel involved in project “Q”
360,000
260,000
CRC Company expects that the useful life of Patent Q would be for 10 years with no
residual
value. Amortization commences in 2011.
Amortization expense to be reported in CRC Company’s 2011 financial statement is
= 62,000
Solution:
Construction of jigs, molds and dies
Salary costs, 7/1/2010
360,000.00
260,000.00
Initial cost of patent
Divide by: Useful life
620,000.00
10 yrs
Annual amortization
62,000.00
The following statement relate to development ‘’ Which statement is true ?
I.
The product being developed should have already been put into commercial production or use.
Development involves the application of research findings .
= II only
Cubs Company reported the following expenditures in relation to Patent “Hugs” which it has created
during 2018.
Research Phase
January 1, 2018 – May 30, 2018
P 250,000
§ Costs incurred in obtaining new knowledge in relation to new hydraulics process
§ Costs incurred in searching alternative devices and processes related to the new hydraulics
process
240,000
§ Formulation, design and final selections of possible alternatives for improved hydraulics
150,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
450,000
Development Phase
June 1, 2018 – August 31, 2018
210,000
§ Costs for designing and constructing pre-use prototypes
§ Costs for construction and testing of chosen alternative
330,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
345,000
September 1 : Technical feasibility in relation to project “Hugs” was achieved
§ Costs for the construction of jigs, molds and dies applying the new “Hugs” technology
360,000
§ Salary costs (and other employee benefits) of personnel involved in project “Hugs”
260,000
December 15, 2018: Completion of Project Hugs
§ Fees paid to register patent “Hugs” (initial legal life 20 years)
120,000
§ Cost of staff training in relation to operating Patent “Hugs”
240,000
Cubs Company expects that the useful life of Patent “Hugs” would be for 12 years with no
residual value. Amortization commenced in 2019
Amortization expense in 2019 is
= 61,667
Solution:
Cost for construction of jigs, molds and dies
Salary costs, 9/1/2018
Fees paid to register patent
360,000.00
260,000.00
120,000.00
Initial cost of patent
Divide by: Useful life
740,000.00
12 yrs
Annual registration
61,666.67
Research and development costs, under prevailing practice, may be accounted for as follows:
= R and D costs should be expensed as incurred
Gooden Enterprises Inc. developed a new machine for manufacturing baseballs. Because
the machine is considered very valuable, the company had it patented. The following expenditures
were incurred in developing and patenting the machine.
Purchases of special equipment to be used solely for P1,820,000
development of the new machine
Research salaries and fringe benefits for engineers and
scientists
171,000
Cost of testing prototype
236,000
Legal costs for filing for patent
127,000
Fees paid to government patent office
25,000
Gooden elected to amortize the patent over its legal life. At the beginning of the second year, Gooden
Enterprises paid P240,000 to successfully defend the patent in an infringement suit. At the beginning of
the fourth year Gooden determined that the remaining estimated useful life of the patent was five years.
The carrying amount of the patent at the end of fourth year is
= P135,320
A purchased patent with a remaining legal life of 15 years should be
= Amortized over its useful life if less than 15 years
During 20CY, Balayan Corporation developed a patent. Expenditures related to the patent were legal fees
for patent registration, P70,000; tests to perfect the use of the patent for production processes, P60,000;
research costs in the research laboratory, P210,000; and depreciation on equipment (that has alternative
future uses) used in developing the patent, P40,000. Assuming amortization of the patent costs over the
legal life of the patent, the annual patent amortization would be
= P3,500
Which of the following should be expensed as incurred by the franchisee for a franchise with an estimated
useful life of ten years?
= Periodic payment to the franchisor base on the franchisee’s revenue
Alaminos Company acquired three patents in January 20Y1. The patents have
different lives as indicated in the following schedule:
Patent
A
B
C
Cost
P2,000,000
3,000,000
6,000,000
Remaining
useful life
10
5
Indefinite
Remaining legal life
8
10
15
Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June
2009, the company successfully defended its right to Patent B. Legal fees of P800,000 were incurred
in this action. The company’s policy is to amortize intangible assets by the straight-line method to the
nearest half year. The company reports on a calendar-year basis. The amount of amortization that
should be recognized for 20Y1 is
= P1,250,000
The cost of purchasing rights for a product that might otherwise have seriously competed with one of the
purchaser patented products shall be
= Amortized over the remaining estimated life of the patent for the product whose market
would have been impaired by competition from the newly patented product.
Tommy, Inc. embarked on a new venture in Northern Luzon in 2016. It expects to glean 2,000,000 ounces
of a precious ore from its holdings there, over several years. Relevant data follow:
Cost of the Mineral Rights - P 500,000
Exploration Cost, 2016 (1/3 successful) - 1,500,000
Extraction Cost, 2016 - 2,000,000
Ore extracted, 2016 - 500,000 oz.
Ore sold, 2016 - 300,000 oz.
What is the depletion for 2016, using the full cost method of accounting for exploration costs?
= P500,000
Solution:
Cost of mineral rights
Exploration costs
500,000.00
1,500,000.00
Capitalizable wasting asset
Divide by: Estimated reserves
2,000,000.00
2,000,000.00
Depletion rate
Multiply by: Ounces extracted, 2016
1.00
500,000.00
Depletion, 2016
500,000.00
What is an entity required to considered in developing accounting policies for exploration and evaluation
activities?
= Whether the accounting policy results in information that is relevant and reliable
PFRS 6 applies to expenditures incurred
= When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resources are not yet demonstrable
Which measurement model applies to exploration and evaluation assets subsequent to initial recognition?
= Either the cost model or the revaluation model
Does PFRS 6 require an entity to recognize exploration and evaluation expenditures as assets?
= Yes, but only to the extent required by the entity's accounting policy for recognizing
exploration and evaluation assets
Yin-Yang Company is involved in the exploration for and extraction of mineral resources. The
Company’s accounting policy for recognition purpose for these types of activities is the “successful
effort” method. On January 1, 2010 YinYang Company acquired two quarrying rights. A schedule of the expenditures made with respect to the
quarrying sites is provided as follows:
Site O
Site X
Quarrying rights
2,000,000
1,000,000
Topographical studies
1,200,000
400,000
Exploratory drilling
1,500,000
1,000,000
Trenching and sampling
1,200,000
800,000
Development costs (road construction to access site) 1,000,000
700,000
Depreciation of drilling rigs used for exploration
300,000
120,000
At the end of 2010 Yin-Yang Company had decided to continue exploration and extraction activities in
site O (technically and commercial viable). Unfortunately, further exploratory and development plans
on site X would be abandoned (not technically feasible and viable)
On January 1, 2011 Yin-Yang started extracting the mineral reserves from site O. It was expected that
a total of 10,000,000 tons of mineral ore would be extracted from the site and it would be totally
extracted within 8 years. Yin-Yang Company acquired an extraction equipment for P600,000. The
equipment which Yin-Yang Company intends to use in another mining site was estimated to have a
useful life of 12 years with salvage value of P5,000. Fixed installations were likewise completed at the
start of 2011. The total cost incurred was P800,000. The installations expected useful life is 10 years
with no expected salvage value. Yin-Yang Company uses the straight-line method as its depreciation
policy for its long-lived assets.
Furthermore, the quarrying rights contained a clause that at the end of the quarrying, Yin-Yang
Company shall restore the area. The expected restoration cost was P1,000,000. The market rate
throughout 2011 was 10%. The PVF of P1 @ 10% for 8 periods was 0.467
Total tons extracted in 2011 and 2012 were 1,200,000 and 1,600,000 respectively.
On March 1, 2013 Yin-Yang Company changes its total estimated number of tons at 7,000,000 as of
the beginning of the year. Eventually 1,800,000 tons were extracted for the period.
Carrying amount of the fixed installations at December 31, 2013
= 427,885
Solution:
Original cost
Less: Accumulated depreciation
Depreciation rate
Multiply by: Cumulative tons extracted
(1,200,000+1,600,000)
Carrying amount, 12/31/2012
Less: Depreciation, 2013
New depreciation rate
(P576,000/7,000,000)
Multiply by: Tons extracted, 2013
800,000.00
0.08
2,800,000.00
224,000.00
576,000.00
0.082
1,800,000.00
Carrying amount, 12/31/2013
148,114.29
427,885.71
Which of the following expenditures would never qualify as an exploration and evaluation asset?
= Expenditures related to the development of mineral resources
Sweet Company is involved in the exploration for mineral resources. The accounting policy is to
recognize exploration assets and measure them initially at cost. At the end of the current year, the
following amounts were extracted from the financial statements:
Trenching and sampling expenditure
1,000,000
Drilling rigs used for exploration, carrying amount
2,000,000
Drilling rigs used for exploration, depreciation
expense
300,000
What amo an entity ever required or permitted to change its accounting policy for exploration and
evaluation expenditures?
= 1,300,000
Which of the following is not disclosure required by PFRS 6
= Information about commercial reserve quantities
An oil company using the successful-efforts method drilled two wells. The first, a dry hole, cost
P50,000. The second cost P100,000 and had estimated recoverable reserves of 25,000 barrels, of which
10,000 were sold this year. What will be the total expense for the year related to the exploration and
production from these two wells?
= P 90,000
Is an entity ever required or permitted to change its accounting policy for exploration and evaluation
expenditures?
= Yes, but only if the change makes the financial statements more relevant to the economic
decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs
Natural, Incorporated embarked on a new venture in Northern Luzon in 2019. It expects to glean
2,000,000 ounces of a precious ore from its holdings there, over several years. Relevant data follow:
Cost of the Mineral Rights
Exploration
(1/3 successful)
Extraction Cost, 2019
Ore extracted, 2019
Ore sold, 2019
P 500,000
Cost,
2019
1,500,000
2,000,000
500,000 oz.
300,000 oz.
What is the depletion for 2019, using the successful efforts method of accounting for exploration costs?
= P250,000
Yin-Yang Company is involved in the exploration for and extraction of mineral resources. The
Company’s accounting policy for recognition purpose for these types of activities is the “successful
effort” method. On January 1, 2010 YinYang Company acquired two quarrying rights. A schedule of the expenditures made with respect to the
quarrying sites is provided as follows:
Quarrying rights
Topographical studies
Exploratory drilling
Trenching and sampling
Development costs (road construction to access site)
Depreciation of drilling rigs used for exploration
Site O
2,000,000
1,200,000
1,500,000
1,200,000
1,000,000
300,000
Site X
1,000,000
400,000
1,000,000
800,000
700,000
120,000
At the end of 2010 Yin-Yang Company had decided to continue exploration and extraction activities in
site O (technically and commercial viable). Unfortunately, further exploratory and development plans
on site X would be abandoned (not technically feasible and viable)
On January 1, 2011 Yin-Yang started extracting the mineral reserves from site O. It was expected that
a total of 10,000,000 tons of mineral ore would be extracted from the site and it would be totally
extracted within 8 years. Yin-Yang Company acquired an extraction equipment for P600,000. The
equipment which Yin-Yang Company intends to use in another mining site was estimated to have a
useful life of 12 years with salvage value of P5,000. Fixed installations were likewise completed at the
start of 2011. The total cost incurred was P800,000. The installations expected useful life is 10 years
with no expected salvage value. Yin-Yang Company uses the straight-line method as its depreciation
policy for its long-lived assets.
Furthermore, the quarrying rights contained a clause that at the end of the quarrying, Yin-Yang
Company shall restore the area. The expected restoration cost was P1,000,000. The market rate
throughout 2011 was 10%. The PVF of P1 @ 10% for 8 periods was 0.467
Total tons extracted in 2011 and 2012 were 1,200,000 and 1,600,000 respectively.
On March 1, 2013 Yin-Yang Company changes its total estimated number of tons at 7,000,000 as of
the beginning of the year. Eventually 1,800,000 tons were extracted for the period.
The exploration and evaluation assets to be reported in the 2010 statement of financial position is
= 6,200,000
Solution:
Quarrying rights
Topographical studies
Exploratory drilling
Trenching and sampling
Depreciation of drilling rigs
2,000,000.00
1,200,000.00
1,500,000.00
1,200,000.00
300,000.00
Exploration and evaluation assets
6,200,000.00
Sweet Company is involved in the exploration for mineral resources. The accounting policy is to
recognize exploration assets and measure them initially at cost. At the end of the current year, the
following amounts were extracted from the financial statements:
Trenching and sampling expenditure
1,000,000
Drilling rigs used for exploration, carrying amount
2,000,000
Drilling rigs used for exploration, depreciation
expense
300,000
What amount of intangible exploration assets should be recognized in the financial statements?
= 1,300,000
CERTS Exploration Co. purchased in 2014 a property that contained mineral deposit for
P4,500,000. Estimated recovery was P1,000,000 metric tons of deposits. Development costs P150,000
were also incurred in the same year. The mining property was expected to be worth P600,000 after the
mineral deposits had all be removed. During 2015, the company extracted and sold 100,000 metric tons
of minerals. Further development costs of P75,000 were incurred in 2016, and the estimate of total
recoverable deposits (including the amount extracted in 2015) was revised to 925,000 metric tons. During
2016, the company recovered 150,000 metric tons. The depletion for the year 2009 is
= P676,500
Yin-Yang Company is involved in the exploration for and extraction of mineral resources. The
Company’s accounting policy for recognition purpose for these types of activities is the “successful
effort” method. On January 1, 2010 YinYang Company acquired two quarrying rights. A schedule of the expenditures made with respect to the
quarrying sites is provided as follows:
Site O
Site X
Quarrying rights
2,000,000
1,000,000
Topographical studies
1,200,000
400,000
Exploratory drilling
1,500,000
1,000,000
Trenching and sampling
1,200,000
800,000
Development costs (road construction to access site) 1,000,000
700,000
Depreciation of drilling rigs used for exploration
300,000
120,000
At the end of 2010 Yin-Yang Company had decided to continue exploration and extraction activities in
site O (technically and commercial viable). Unfortunately, further exploratory and development plans
on site X would be abandoned (not technically feasible and viable)
On January 1, 2011 Yin-Yang started extracting the mineral reserves from site O. It was expected that
a total of 10,000,000 tons of mineral ore would be extracted from the site and it would be totally
extracted within 8 years. Yin-Yang Company acquired an extraction equipment for P600,000. The
equipment which Yin-Yang Company intends to use in another mining site was estimated to have a
useful life of 12 years with salvage value of P5,000. Fixed installations were likewise completed at the
start of 2011. The total cost incurred was P800,000. The installations expected useful life is 10 years
with no expected salvage value. Yin-Yang Company uses the straight-line method as its depreciation
policy for its long-lived assets.
Furthermore, the quarrying rights contained a clause that at the end of the quarrying, Yin-Yang
Company shall restore the area. The expected restoration cost was P1,000,000. The market rate
throughout 2011 was 10%. The PVF of P1 @ 10% for 8 periods was 0.467
Total tons extracted in 2011 and 2012 were 1,200,000 and 1,600,000 respectively.
On March 1, 2013 Yin-Yang Company changes its total estimated number of tons at 7,000,000 as of
the beginning of the year. Eventually 1,800,000 tons were extracted for the period.
Depletion for 2011
= 800,040
Solution:
Exploration and evaluation assets
PV of estimated restoration cost
(P1,000,000 x 0.467)
6,200,000.00
Depletable amount
Divide by: Estimated reserves (tons)
6,667,000.00
10,000,000.00
Depletion rate
Multiply by: Tons extracted, 2011
0.6667
1,200,000.00
Depletion, 2012
800,040.00
467,000.00
Zambales Company acquired property in 2019 which contains mineral deposit. The acquisition cost of
the property was P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for P5,000,000 following mineral
extraction. For P2,000,000, Zambales is legally required to restore the land to a condition appropriate
for resale. After acquisition, the following costs were incurred:
Exploration cost
Development cost related to drilling of wells
Development cost related to production equipment
P13,000,000
10,000,000
15,000,000
The company extracted 600,000 tons of the mineral in 2019 and sold 450,000 tons. In the 2019 income
statement, what amount of depletion is
= P3,600,000
On January 1, 2019, Major Company purchased a uranium mine for P800,000. On that date,
Major estimated that the mine contained 1,000 tons of ore. At the end of the productive years of the mine,
Major Company will be required to spend P4,200,000 to clean up the mine site. The appropriate discount
rate is 8%, and it is estimated that it will take approximately 14 years to mine all of the ore. Major uses the
productive-output method of depreciation. During 2019, Major extracted 100 tons of ore from the
mine. Compute the amount of depletion for 2019
= P223,000
Nestle Corporation, one of the largest mining company, paid P20, 000, 000 to the local government for the
right explore and extract mineral reserves in an area of interests. The following costs were also incurred
related to the exploration costs, P7, 000, 000 and evaluation costs of P3, 000, 000. Results of the study
revealed that the total estimated mineral reserve is 10, 000, 000. Nestle Company started its commercial
production in year 20CY. The company produced 1, 200, 000 tons in 20CY. What is the amount of
amortization/depletion on the capitalized intangible exploration and evaluation costs for the year 20CY?
Select one:
= P3, 600, 000
Solution:
Cost of exploration rights
20,000,000.00
Exploration costs
7,000,000.00
Evaluation costs
3,000,000.00
Total wasting asset
30,000,000.00
Divide by: Estimated tons of mineral reserve
10,000,000.00
Depletion rate
3.00
Multiply by: Ton extracted, 20CY
1,200,000.00
Depletion expense, 20CY
3,600,000.00
Mister Company has the following information pertaining to its mining operations:
Estimated cost of restoring property, after mining is completed
Number of tons mined during the current year
Cost of land
Estimated number of tons of ore to be mined
Sales value of land after mining
Development costs incurred
Number of tons sold during the current year
Cost of production (excluding depletion)
The company already recognized the estimated restoration cost immediately
was acquired. How much would be the company’s cost of goods sold?
Select one:
P400,000
50,000 tons
P6,000,000
400,000 tons
P300,000
P500,000
35,000 tons
P7.00
after the resource property
= P822,500
Solution:
Cost of land
6,000,000.00
Development cost
500,000.00
Estimated restoration cost
400,000.00
Total cost of wasting asset
6,900,000.00
Less: Residual value
300,000.00
Depletable amount
6,600,000.00
Divide by: Estimated tons of ore to be mined
400,000.00
Depletion rate
16.50
Cost of production
7.00
Total cost of product
23.50
Multiply by: Tons sold
35,000.00
Cost of goods sold
822,500.00
On July 1, 2016 Macar Company purchased rights to a mine. The total purchase price was P50,000,000
of which P5,000,000 was allocated to the land. Estimated reserves were 6,000,000. Macar expects to
extract and sell 100,000 tons per month. Macar Company purchased new equipment on July 1, 2016 for
P21,000,000 with estimated life of 8 years. However, after all the resource is removed, the equipment will
be of no use and will be sold for P3,000,000. What is the depreciation of the equipment for 2016?
=
P1,800,000
CERTS Company acquired property in 20CY which contains mineral deposit. The acquisition cost of the
property was P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for P5,000,000 following mineral
extraction. For P2,000,000, Certs is legally required to restore the land to a condition appropriate for
resale. After acquisition, the following costs were incurred:
Exploration cost
13,000,000
Development cost related to drilling of wells
10,000,000
Development cost related to production equipment
15,000,000
The company extracted 600,000 tons of the mineral in 20CY and sold 450,000 tons. In the 20CY income
statement, what amount of depletion is included in cost of sales?
Select one:
Solution:
= 3,600,000
Acquisition cost
20,000,000.00
Estimated restoration cost
2,000,000.00
Exploration cost
13,000,000.00
Development cost related to drilling of wells
10,000,000.00
Total cost of wasting asset
45,000,000.00
Less: Estimated residual value
5,000,000.00
Depletable amount
40,000,000.00
Divide by: Estimated tons of mineral reserve
5,000,000.00
Depletion rate
8.00
Multiply by: Ton sold, 20CY
450,000.00
Cost of mineral sold, 20CY
3,600,000.00
ABC Company provides the following balances at the end of 2019:
Wasting asset, at cost
Accumulated depletion
Retained earnings
Capital liquidated
Depletion based on 100,000 units extracted at P50 per unit
P80,000,000
20,000,000
10,000,000
15,000,000
5,000,000
Inventory
(20,000 units)
of
resource
deposit
2,000,000
Compute for the maximum amount of dividend that ABC can declare on December 31, 2019
= P14,000,000
Tommy Mining Company constructed a building costing P800,000 on the mine property. Its estimated
residual value will not benefit the company and will be ignored for purposes of computing depreciation. The
building has an estimated life of 6 years. The total estimated recoverable units from the mine are 50,000
tons. The company's production of the first four years of operations was:
First year
10,000 tons
Second year
20,000 tons
Third year
Shut down, no output
Fourth year
15,000 tons
What is the depreciation for the fourth year?
=
P180,000
Yin-Yang Company is involved in the exploration for and extraction of mineral resources. The
Company’s accounting policy for recognition purpose for these types of activities is the “successful
effort” method. On January 1, 2010 YinYang Company acquired two quarrying rights. A schedule of the expenditures made with respect to the
quarrying sites is provided as follows:
Site O
Site X
Quarrying rights
2,000,000
1,000,000
Topographical studies
1,200,000
400,000
Exploratory drilling
1,500,000
1,000,000
Trenching and sampling
1,200,000
800,000
Development costs (road construction to access site) 1,000,000
700,000
Depreciation of drilling rigs used for exploration
300,000
120,000
At the end of 2010 Yin-Yang Company had decided to continue exploration and extraction activities in
site O (technically and commercial viable). Unfortunately, further exploratory and development plans
on site X would be abandoned (not technically feasible and viable)
On January 1, 2011 Yin-Yang started extracting the mineral reserves from site O. It was expected that
a total of 10,000,000 tons of mineral ore would be extracted from the site and it would be totally
extracted within 8 years. Yin-Yang Company acquired an extraction equipment for P600,000. The
equipment which Yin-Yang Company intends to use in another mining site was estimated to have a
useful life of 12 years with salvage value of P5,000. Fixed installations were likewise completed at the
start of 2011. The total cost incurred was P800,000. The installations expected useful life is 10 years
with no expected salvage value. Yin-Yang Company uses the straight-line method as its depreciation
policy for its long-lived assets.
Furthermore, the quarrying rights contained a clause that at the end of the quarrying, Yin-Yang
Company shall restore the area. The expected restoration cost was P1,000,000. The market rate
throughout 2011 was 10%. The PVF of P1 @ 10% for 8 periods was 0.467
Total tons extracted in 2011 and 2012 were 1,200,000 and 1,600,000 respectively.
On March 1, 2013 Yin-Yang Company changes its total estimated number of tons at 7,000,000 as of
the beginning of the year. Eventually 1,800,000 tons were extracted for the period.
Depletion for 2013
= 1,234,347
Solution:
Exploration and evaluation assets
PV of estimated restoration cost
(P1,000,000 x 0.467)
6,200,000.00
Depletable amount
Less: Accumulated depletion
Depletion rate
Multiply by: Cumulative tons extracted
(1,200,000+1,600,000)
6,667,000.00
467,000.00
0.6667
2,800,000.00
1,866,760.00
Carrying amount, 12/31/2012
Divide by: Revised estimated reserves (tons)
4,800,240.00
7,000,000.00
Revised depletion rate
Multiply by: Tons extracted, 2013
0.6857
1,800,000.00
Depletion, 2013
1,234,347.43
Zambales Company acquired property in 2019 which contains mineral deposit. The acquisition cost of
the property was P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for P5,000,000 following mineral
extraction. For P2,000,000, Zambales is legally required to restore the land to a condition appropriate
for resale. After acquisition, the following costs were incurred:
Exploration cost
Development cost related to drilling of wells
Development cost related to production equipment
P13,000,000
10,000,000
15,000,000
The company extracted 600,000 tons of the mineral in 2019 and sold 450,000 tons. In the 2019 income
statement, what amount of depletion is included in cost of sales?
= P3,600,000
Botolan Company quaries limestone, crushes it and sells it to be used in road building. Botolan paid
P20,000,000 for a certain quarry on January 1, 2018. The property can be sold for P4,000,000 after
production ceases. The original total estimated reserves totaled 5,000,000 tons. Botolan quarried 500,000
tons in 2018 and 1,500,000 tons in 2019. An engineering study performed in 2019 indicated that as of
December 31, 2019, 4,500,000 tons were available. Botolan Company should record 2019 depletion at
= P3,600,000
In January, 20CY, DNL Corporation purchased a mineral mine for 3,400,000 with removable ore estimated
by geological surveys at 2,000,000 tons. The property has an estimated value of 200,000 after the ore has
been extracted. The company incurred 1,000,000 of development costs preparing the mine for production.
During 20CY, 500,000 tons were removed and 400,000 tons were sold. What is the amount of depletion
that DNL should expense for 20CY?
Select one:
Solution:
= 840,000
Cost of mineral mine
3,400,000.00
Development costs
1,000,000.00
Total cost of wasting asset
4,400,000.00
Less: Estimated residual value
200,000.00
Depletable amount
4,200,000.00
Divide by: Estimated tons of removable ore
2,000,000.00
Depletion rate
2.10
Multiply by: Ton sold, 20CY
400,000.00
Cost of mineral sold, 20CY
840,000.00
Leyte Company constructed a building costing P15,000,000 on a mine property. The building has
an estimated life of 6 years with no salvage value. After all the resource is removed expectedly over 5
years, the building will be of no use. The estimated recoverable output from the mine is 1,000,000 tons.
During the first year, Leyte produced 200,000 tons but there was shut down and no output in the second
year. In the third year, Leyte resumed operations and produced 300,000 tons. Leyte Company should
record depreciation of the building in the third year at
= P3,600,000
Current Corporation acquired a coal mine at a cost of P5,000,000. Intangible development costs total
P1,200,000. After extraction has occurred. Current must restore the property (estimated fair value of the
obligations is P600,000) after which it can be sold for P1,700,000. Current estimates that 50,000 tons of
coal can be extracted.
If 9,000 tons were extracted during the first year, which of the following would be included in the journal
entry to record depletion?
=
Debit to Inventory for P918,000
Icon Company provided the following balances at the end of the current year:
Wasting asset, at cost
Accumulated depletion, beg
Share capital
Capital liquidated
Retained earnings
Depletion for the current year based on 50,000 units extracted at P20
per unit
Inventory of resource deposit (5,000 units)
20,000
2,500
50,000
1,800
1,500
1,000
400
Entry to record the declaration of P1,500 dividend includes:
= Credit to Dividends payable for 1,500
BAGUIO Company provides the following balances at the end of 2016:
Wasting asset, at cost - P80,000,000
Accumulated depletion - 20,000,000
Retained earnings - 10,000,000
Capital liquidated - 15,000,000
Depletion based on 100,000 units extracted at P50 per unit - 5,000,000
Inventory of resource deposit (20,000 units) - 2,000,000
Compute for the maximum amount of dividend that BAGUIO can declare on December 31, 2016.
= P14,000,000
PAS 36 applies to which of the following assets?
= Property, plant, and equipment
It is a fall in the market value of an asset so that its recoverable amount is now less than its carrying amount
in the balance sheet.
= Impairment
What is the recoverable amount of an asset?
= Fair value less cost to sell or value in use, whichever is higher
IAS 36 Impairment of Assets contains a number of examples of internal and external events which may
indicate the impairment of an asset. In accordance with IAS 36, which of the following would definitely NOT
be an indicator of the potential impairment of an asset (or group of assets)?
Select one:
capitalization
= The carrying amount of an entity’s net assets being below the entity’s market
An impairment loss occurs when:
recoverable amount;
= the carrying amount of an asset exceeds the
The internal sources of information indicating possible impairment include all of the following, except
= Significant decrease or decline in the market value of the asset
Value in use
Select one:
= is the present value of the future cash flows expected to
be derived from an asset
If the fair value less costs to sell cannot be determined
= The recoverable amount is the value-in-use
Which statement is incorrect concerning the estimation of future cash flows?
= The discount rate used in estimating future cash flows should be the current rate after
tax.
Value in use of an asset is equal to the
= Discounted future net cash flows from the use and eventual disposition of the asset
Nguyen Limited estimated that it would receive future cash flows from the use of Equipment:



End of Year 1 P10 00
End of Year 2 P50 000
End of Year 3 P20 000
The discount rate was determined as 8%. The ‘value in use’ of the Equipment is:
= P68 000;
If assets are to be disposed of
= The recoverable amount is the fair value less costs to sell
Costs of disposal are deducted in determining fair value less cost to sell. Examples of disposal costs include
all of the following, except
= Finance costs
On January 1, 20Y1, Rowan Company acquired all the assets and liabilities of another entity. The acquiree
has a number of operating divisions, including one whose major industry is the manufacture of toy train.
The toy train division is regarded as a cash generating unit. On December 31, 20Y2, the carrying amounts
of the assets of the toy train division were:
Building
5,000,000
Inventory
3,000,000
Trademark
1,000,000
Goodwill
1,000,000
There is a declining interest in toy train because of the aggressive marketing of computer-based toys.
Management of Rowan Company measured the value in use of the toy train division on December 31, 20Y2
at P7,200,000. The fair value less cost of disposal of inventory is greater than carrying amount. What is the
impairment loss to be allocated to the building?
Select one:
= 1,500,000
Solution:
Building
5,000,000.00
Inventory
3,000,000.00
Trademark
1,000,000.00
Goodwill
1,000,000.00
Carrying amount of CGU
10,000,000.00
Value in use of CGU
(7,200,000.00)
Impairment loss
2,800,000.00
Goodwill
(1,000,000.00)
Remaining
1,800,000.00
Building
5,000,000.00
(1,500,000.00)
3,500,000.00
Trademark
1,000,000.00
(300,000.00)
700,000.00
6,000,000.00
(1,800,000.00)
4,200,000.00
Childish Company has determined that its electronics division is a cash generating unit. The entity
calculated the value in use of the division to be P8,000,000. The assets of the cash generating unit at
carrying amount are as follows:
Building
5,000,000
Equipment
3,000,000
Inventory
2,000,000
10,000,000
The entity also determined that the fair value less cost of disposal of the building is P4,500,000. What is
the impairment loss to be allocated to the equipment?
Select one:
= 900,000
Solution:
Value in use of CGU
8,000,000.00
Less: Carrying amount of CGU
10,000,000.00
Impairment loss
(2,000,000.00)
Building
5,000,000.00
(1,250,000.00)
3,750,000.00
750,000.00
4,500,000.00
Equipment
3,000,000.00
(750,000.00)
2,250,000.00
(750,000.00)
1,500,000.00
8,000,000.00
(2,000,000.00)
6,000,000.00
0.00
6,000,000.00
Total impairment loss allocated to equipment (750,000 + 750,000)
1,500,000.00
It is the smallest identifiable group of assets that generate cash inflows from continuing use that are largely
independent of the cash inflows from other assets or group of assets.
= Cash generating unit
A part of a cash-generating unit which had recognised goodwill, was sold for P20 000. The recoverable
amount of the remaining part of the unit is P60 000. How much of the goodwill is included in the carrying
amount of the operation that is disposed of?
= 25%
Ernel Company has determined that its fine china division is a cash-generating unit. The carrying amounts
of the assets at December 31, 20CY are as follows:
Factory
476,000
Land
204,000
Equipment
170,000
Goodwill
50,000
Ernel Company calculated the value in use of the division to be 710,000. The fair value less cost to sell the
land is P180,000
The initial amount of the impairment loss initially to be allocated to the land account is
= 33,600
Entity M has performed an impairment test for a cash-generating unit, which includes goodwill. In
recognising the impairment loss, Entity M
= first reduces the carrying amount of goodwill allocated to the cash-generating unit and
then allocates the remaining impairment loss to the other assets of the cash-generating unit on a pro rata
basis in proportion to their carrying amounts
Ernel Company has determined that its fine china division is a cash-generating unit. The carrying amounts
of the assets at December 31, 20CY are as follows:
Factory
476,000
Land
204,000
Equipment
170,000
Goodwill
50,000
Ernel Company calculated the value in use of the division to be 710,000. The fair value less cost to sell the
land is P180,000
The total amount of impairment loss absorbed by the Equipment account is
= 30,526
At reporting date, the carrying amount of a cash-generating unit was considered to be have been impaired
by P800,000. The unit included the following assets: Land P4,000,000; Plant P3,000,000; Goodwill
P1,000,000. The carrying amount of Goodwill after the impairment loss is allocated, is:
= P200,000
Transfer from investment property to property, plant, and equipment are appropriate
= When there is change of use
On January 1, 2011 Violet Company acquired a building which it classified as an investment
property. Violet Company paid 4,000,000 to the seller, as well as, P200,000 for taxes, legal and
professional fees. The fair value of the building was 3,900,000
The building has a useful life of 20 years and a residual amount of P400,000.
The fair value of the building at December 31, 2011 was P4,120,000 while the estimated transaction
cost on sale was 80,000.
The fair value of the building on December 31, 2012 was P3,750,000 while the estimated transaction
cost on sale was P110,000
On July 1, 2011 Maroon Company transferred a property classified as inventory to investment property
(commencement of an operating lease to another entity). The carrying amount of the property before
the change in use was P2,400,000.
The corresponding fair value of the property at the time of transfer was P2,900,000.
The amount included in profit or loss as a result of the transfer under the cost model and fair value
model are
Cost model
Fair value model
Cost model
Fair value model
=
a.
0
500,000
Solution:
Cost model = P0
Fair value model = P2,900,000-P2,400,000 = P500,000
for a transfer from inventories to investment property at fair value, any difference between the fair value at
the date of transfer and it previous carrying amount should be recognised in profit or loss [IAS 40.63]
Paradise Company's accounting policy with respect to investment properties is to measure them at fair
value at the end of each reporting period. One of its investment properties was measured at P8,000,000
on December 31,20CY.
The property had been acquired on January 1, 20CY for a total of P7,600,000, made up of P6,900,000
paid to the vendor, P300,000 paid to the local authority as a property transfer tax and P400,000 paid to
professional advisers. The useful life of the property is 40 years. The amount of gain to be recognized in
profit or loss in the year ended December 31, 20CY in respect of the investment property is
= 400,000
Solution
Fair value
Acquisition cost
Gain from change in fair value
8,000,000
7,600,000
__400,000
On July 1, 2011 Beige Company transferred a property classified as owner-occupied to investment
property (end of owner occupation). The carrying amount of the property before the change in use was
P1,200,000.
The corresponding fair value of the property at the time of transfer was P1,500,000.
The amount included in profit or loss as a result of the transfer under the cost model and fair value
model are
Cost model
Fair value model
Cost model
Fair value model
=
a.
0
0
Solution:
Cost model = P0
Fair value model = P0
for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be
applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16
at that date and the fair value is dealt with as a revaluation under IAS 16 [IAS 40.61]
Note: Revaluation surplus is an item of other comprehensive income, thus not reflected in the profit or loss
for the period.
Soriano Company’s accounting policy for investment properties is the fair value model. One of its
investment properties was measured at P80,000,000 on December 31, 20CY. The property has been
acquired on January 1, 20CY for a total of P76,000,000. Made up of P69,000,000 paid to the vendor.
P3,000,000 paid to the local authority as a property transfer tax and P4,000,000 paid to professional
advisers. The useful life of the property is 40 years. What is the amount of gain to be recognized in profit or
loss for the year ended December 31, 20CY?
Select one:
= P4, 000, 000
Solution:
Fair value, Dec 31, 20CY
80,000,000.00
Initial measurement
(76,000,000.00)
Gain on change in fair value
4,000,000.00
On January 2, 20Y1, Havan Corporation acquired a track of land that is to be sold in the ordinary conduct
of business. The purchase price of the property of P50, 000, 000 was paid in cash and a total transaction
costs of P500, 000 related to the acquisition of the property was also paid at a later date. The land was
subdivided into 2, 000 lots (200 square meters for every lot) for an additional costs of P5, 500, 000. On
December 31, 20Y1, the market value of the lot was P1, 500 per square meter.
As of December 31, 20Y2, only 20, 000 square meters are still unsold and market value of the lot had
increased to P1, 600 per square meter. On this date, Haven Corporation decided to transfer the remaining
lots into investment property that is to be carried under the fair value models. There was no additional cost
incurred on the change of intention on the property. What amount of gain should Haven Corporation
recognize as a result of the transfer?
Select one:
= 29, 200, 000
Solution:
Market value, Dec 31, 20Y2 (P1,600 x 20,000 sqm)
32,000,000.00
Less: Inventoriable cost
Purchase price
50,000,000.00
Transaction cost
500,000.00
Additional costs
5,500,000.00
Total product cost
56,000,000.00
Divide by: Total land area (2,000 x 200 sqm)
400,000.00
Cost per sqm
140.00
Multiply by: Sqm unsold & reclassified
20,000.00
Gain on reclassification
2,800,000.00
29,200,000.00
Crosswind Company has a single investment property which had an original cost of P5,800,000 on January
1,20Y1. At December 31, 20Y3, its fair value was P6,000,000 and at December 31, 20Y4, it had a fair value
of P5,900,000. On acquisition, the property had a useful life of 40 years.
What should be the expense recognized in Crosswind's profit or loss for the year ended December 31,
20Y4 under the fair value model and cost model?
Fair value
model
Cost model
= 100,000
145,000
Solution
Fair value model
Fair value-12/31/20Y4
Fair value-12/31/20Y3
Loss from change in fair value
Cost model
Depreciation expense for 20Y4 (5,800,000/40)
5,900,000
6,000,000
( 100,000)
145,000
PAS 41 shall be applied to account for the following when they relate to agricultural activity:
I.
Biological assets
II.
Agricultural produce at the point of harvest
III. Processing of agricultural produce after harvest
IV. Government grants related to biological assets
= I, II and IV only
Agricultural activity
= is the management of the biological transformation of biological assets for sale, into
agricultural produce, or into additional biological assets.
Pumba Company has a herd of 8, 2 - year old animals as of January 1, 2013. On July 1, 2013 one
animal was born and one animal (age 2.5 years) was purchased for P18,500. No animals were sold
or disposed during the year.
Per unit fair values less estimated point-of-sale costs were as follows:
January 1, 2013
December 31, 2013
2 - year old animal
P 16,500
New born animal
0.5 - year old animal
July 1, 2013
2 - year old animal
New born animal
P 8,000
2.5 - year old animal
2.5 year old animal
20,500
3 - year old animal
P 8,300
8,700
19,500
21,900
26,700
Th nt of the biological asset reported in the December 31, 2011 statement of financial position is
= 70,800
Solution:
3-year-old animals, 12/31/2013 (8 x P26,700)
Less: 2-year-old animals, 12/31/2013 (8 x P19,500)
213,600.00
156,000.00
57,600.00
3-year-old animal, 12/31/2013
Less: 2.5-year-old animal, 12/31/2013
26,700.00
21,900.00
4,800.00
0.5-year-old animal, 12/31/2013
Less: Newborn animal, 12/31/2013
8,700.00
8,300.00
400.00
Newborn animal, 7/1/2013
8,000.00
Gain (loss) on change in fair value - physical change
70,800.00
Pumba Company has a herd of 8, 2 - year old animals as of January 1, 2013. On July 1, 2013 one
animal was born and one animal (age 2.5 years) was purchased for P18,500. No animals were sold
or disposed during the year.
Per unit fair values less estimated point-of-sale costs were as follows:
January 1, 2013
December 31, 2013
2 - year old animal
P 16,500
New born animal
0.5 - year old animal
July 1, 2013
2 - year old animal
New born animal
P 8,000
2.5 - year old animal
2.5 year old animal
20,500
3 - year old animal
P 8,300
8,700
19,500
21,900
26,700
The total effect to net income included in the 2013 income statement as a result of the above-mentioned
transactions
= 98,500
Solution:
Carrying amount, 12/31/2013
Less: Previous carrying amount/initial measurements
2-year-old animals, 1/1/2013 (8 x P16,500) 132,000.00
2.5-year-old animal, 7/1/2013 (1 x P18,500) 18,500.00
249,000.00
Gain (loss) on change in fair value
98,500.00
150,500.00
Lumiere Company has the following balances in its financial records at December 31, 2012
Value of biological at December 31, 2011
P 600,000
Fair valuation surplus on initial recognition at fair value at December 31, 2012
700,000
Change in fair value to December 31, 2012 due to growth and price fluctuations
100,000
Decrease in fair value due to harvest
90,000
The carrying amount of the biological assets to be presented in the 2012 balance sheet is
= 1,310,000
Solution:
Value of biological at December 31, 2011
Fair valuation surplus on initial recognition at fair value at December 31, 2012
Change in fair value to December 31, 2012 due to growth and price fluctuations
Decrease in fair value due to harvest
600,000.00
700,000.00
100,000.00
-90,000.00
Carrying amount, December 31, 2012
1,310,000.00
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
The gain (loss) recognize in profit or loss as a result of the reclassification on July 1, 2012 is
=
10,000
Solution:
Fair value less cost to sell at point of harvest, 7/1/2012
Less: Fair value less cost to sell, 12/31/2011
485,000.00
475,000.00
Gain (Loss) on harvest
10,000.00
Biological assets should be measured on initial recognition and at subsequent reporting dates
=
at fair value less estimated point-of-sale costs
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
The amount reported in the profit or loss section of the 2011 comprehensive income statement in relation
to the biological asset is
= 30,000
Solution:
Fair value less cost to sell, 12/31/2011
Less: Fair value less cost to sell, 10/1/2011
475,000.00
445,000.00
Gain (Loss) on change in fair value
30,000.00
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
The initial measurement of the biological asset is
= 445,000
Solution:
P445,000
Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting
dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
1.
Maurice Company is engaged in raising poultry. Information regarding its activities relating to
the poultry is as follows:
Carrying amount on January 1, 2012
500,000
Increase due to purchases
200,000
Gain arising from change in fair value less cost to sell – due to price change
40,000
Gain arising from change in fair value less cost to sell – due to physical change 60,000
Decrease due to sales
85,000
Decrease due to harvest
20,000
The carrying amount of the biological asset on December 31 is
= 695,000
Solution:
Carrying amount on January 1, 2012
Increase due to purchases
Gain arising from change in fair value less cost to sell - due to price change
Gain arising from change in fair value less cost to sell - due to physical change
Decrease due to sales
Decrease due to harvest
500,000.00
200,000.00
40,000.00
60,000.00
-85,000.00
-20,000.00
Carrying amount, December 31, 2012
695,000.00
A public limited company, Lambino Dairy Products, produces milk on its farms. As of January 1, 2013
Lambino has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average age, 1 year
old). Lambino purchased 375 heifers, average age 1 year old, on July 1, 2013. No animals were born or
sold during the year. The unit values less estimated point-of-sale costs were
1 - year old animal at December 31, 2013 - P3,200
2 - year old animal at December 31, 2013 - 4,500
1.5 - year old animal at December 31, 2013 - 3,600
3 - year old animal at December 31, 2013 - 5,000
1 - year old animal at Jan. 1, 2013 and July 1, 2013 - 3,000
2 - year old animal at January 1, 2013 - 4,000
The carrying amount of the biological assets as of December 31, 2013 is
= P7,275,000
Solution:
3-year-old animal at 12/31/2013 (P5,000 x 1,050)
2-year-old animal at 12/31/2013 (P4,500 x 150)
1.5-year-old animal at 12/31/2013 (P3,600 x 375)
Carrying amount, 12/31/2013
5,250,000.00
675,000.00
1,350,000.00
7,275,000.00
Timon’s Dairy Farm provided the following balances for the year ended December 31, 2012
Fair value of milk produced
300,000
Gain from change in fair value
25,000
Inventories used
70,000
Staff costs
60,000
Depreciation expense
7,500
Other operating expenses
95,000
Income tax expense
27,500
The net income of Timon’s Dairy Farm for the year ended December 31, 2012 is
= 65,000
Solution:
Fair value of milk produced
Gain from change in fair value
300,000.00
25,000.00
Total income
325,000.00
Less: Expenses
Inventories used
Staff costs
Depreciation expense
Other operating expenses
Income tax expense
70,000.00
60,000.00
7,500.00
95,000.00
27,500.00
Net income
260,000.00
65,000.00
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
The carrying amount of inventory (biological asset harvested in July 1, 2012) at December 31, 2012
= 480,000
Solution:
P480,000
Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is
considered the cost of the produce at that time (for the purposes of IAS 2 Inventories or any other applicable
standard). [IAS 41.13]
Subsequent measurement of inventory shall be governed by IAS 2 inventories—lower of cost and net
realizable value
A public limited company, Lambino Dairy Products, produces milk on its farms. As of January 1, 2013
Lambino has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average age, 1 year
old). Lambino purchased 375 heifers, average age 1 year old, on July 1, 2013. No animals were born or
sold during the year. The unit values less estimated point-of-sale costs were
1 - year old animal at December 31, 2013 - P3,200
2 - year old animal at December 31, 2013 - 4,500
1.5 - year old animal at December 31, 2013 - 3,600
3 - year old animal at December 31, 2013 - 5,000
1 - year old animal at Jan. 1, 2013 and July 1, 2013 - 3,000
2 - year old animal at January 1, 2013 - 4,000
The increase in value of biological assets in 2013 due to price changes is
= P630,000
Solution:
2-year-old animal at 12/31/2013 (P4,500 x 1,050)
1-year-old animal at 12/31/2013 (P3,200 x 525)
Total
Less: 2-year-old animal at 1/1/2013 (P4,000 x 1,050)
1-year-old animal at 1/1/2012 (P3,000 x 150)
1-year-old animal at 7/1/2013 (P3,000 x 375)
Change in fair value-Price change
4,725,000.00
1,680,000.00
6,405,000.00
4,200,000.00
450,000.00
1,125,000.00
5,775,000.00
630,000.00
On October 1, 2011 Simba Company acquired a biological asset and paid P450,000. The fair value
less cost to sell of the biological asset at the time of acquisition was P445,000. On December 31, 2011
the fair value less cost to sell of the biological asset was P475,000.
On July 1, 2012 Simba Company harvested the biological asset and eventually reclassified it as
inventory. The fair value less cost to sell at point of harvest was P485,000. On December 31, 2011
the harvested biological asset was still on hand. The fair value less cost to sell of a biological asset
similar to the one harvested in July 1, 2011 was P481,000. The net realizable value of the harvested
biological asset was P480,000
The amount of the biological asset reported in the December 31, 2011 statement of financial position is
= 475,000
Solution:
P475,000
Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting
dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]
Point of sale costs do not include
= Transport and other costs necessary to get assets to a market
Colombia Company is a producer of coffee. The entity is considering the valuation of its harvested coffee
beans. Industry practice is to value the coffee beans at market value and uses as reference a local
publication "Accounting for Successful Farms".
On December 31, 2015, the entity has harvested coffee beans costing P3,000,000 and with fair value less
cost to sell of P3,500,000 at the point harvest.
Because of long aging and maturation process after harvest, the harvested coffee beans were still on hand
on December 31,2016. On such date, the fair value less cost to sell is P3,900,000 and the net realizable
value is P3,200,000.
The coffee beans inventory shall be measured at
= 3,200,000
Solution
Fair value measurement stops at the point of harvest and PAS 2 on inventory applies after such date.
Accordingly, the coffee beans inventory shall be measured at the lower of cost and net realizable value on
December 31,2010.
The fair value less cost to sell of P3,500,000 at the point of harvest is the initial cost of coffee beans inventory
for purposes of applying PAS 2. The net realizable value of P3,200,000 is the measurement on December
31,2010 because this is lower than the deemed cost ofP3,500,000.
The following are agricultural produce harvested from biological assets, excep
= Lumber
Inventories comprising agricultural produce that an entity has harvested from its biological assets are
measured on initial recognition at
= Fair value less estimated point-of-sale costs at the point of harvest.
The following are examples of agricultural produce, except
= Wine
When agricultural produce is harvested , the harvest shall be accounted for by using Pas 2 Inventories , or
another applicable PFRS . for the purposed of that standard , cost at the date of harvest is deemed to be
= The fair value less cost to sell at the point of harvest
An unconditional government grant related to a biological asset that has been measured at fair value less
point of sale costs should be recognized as
= income when the grant becomes receivable
If a government grant related to a biological asset is condition on certain events , the grant shall
be recognized as
= Income when the condition attaching to the grant are met
On July 1, 2014, Blazers co. has a building with a cost of P4,000,000 and accumulated depreciation of
P1,600,000. On the same date, Blazers co. commits to a plan to sell the building by February 1, 2015. The
building has a fair value of P2,000,000 and it is estimated that the selling cost of the building will be
P150,000. As of July 1, 2014, the building has a remaining life of 15 years. What is the amount to be
reported as the carrying value of the building held for sale as of December 31, 2014?
= 1,850,000
How should the assets and liabilities of a disposal group classified as held for sale be shown in the balance
sheet?
= The assets of the disposal group should be shown separately from other assets in the
balance sheet, and the liabilities of the disposal group should be shown separately from other liabilities in
the balance sheet
While an asset is ‘held for sale’ PFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
prohibits:
= the asset from being depreciated
On December 31,2014, Charmaine co. committed to a plan to sell a manufacturing facility in its present
condition and classifies the facility as held for sale at this date. After a firm purchase commitment is
obtained, the buyer’s inspection of the property identifies environmental damage not previously known to
exist. Charmaine is required by the buyer to make good the damage, which will extend the period required
to complete the sale beyond one year. However, the entity has initiated actions to make good the damage,
and satisfactory rectification of the damage is highly probable. On December 31,2014, the carrying value
of the facility is P4,000,000 and its fair market value is P3,600,000
In its December 31, 2014 balance sheet, Charmaine co. should properly report this manufacturing facility
as:
= 400,000
An entity is planning to dispose of a collections of assets. The entity designate these assets as a disposal
group . The carrying amount of these asset immediately before classifications as held for sale was P 20
million . Upon being classified as held for sale , the asset were revalued to P 18 million . The entity feels
that it would cost P 1 million to sell the disposal group in the entity statements of financial positions after its
classifications as held for sale?
= 17 million
Any gain on a subsequent increase in the fair value less cost to sell of a noncurrent asset classified as held
for sale should be treated as follows:
= The gain should be recognized but not in excess of the cumulative impairment loss
On December 31,2014, Charmaine co. committed to a plan to sell a manufacturing facility in its present
condition and classifies the facility as held for sale at this date. After a firm purchase commitment is
obtained, the buyer’s inspection of the property identifies environmental damage not previously known to
exist. Charmaine is required by the buyer to make good the damage, which will extend the period required
to complete the sale beyond one year. However, the entity has initiated actions to make good the damage,
and satisfactory rectification of the damage is highly probable. On December 31,2014, the carrying value
of the facility is P4,000,000 and its fair market value is P3,600,000
In its December 31, 2014 balance sheet, Charmaine co. should properly report this manufacturing facility
as:
= 220,000
An entity has an asset that was classified as held for sale. However , the criteria for it to remain as held for
sale no longer apply . The entity shall
= Measure the non current asset at the lower of its carrying amounts before the
assets was classified as held for sale (adjusted for subsequent depreciations , amortizations or
revaluations) and its recoverable amount at the date of the decisions not to sell
An entity classified noncurrent asset accounted for under the cost model as held for sale on December 31,
2009.because no offers were received at an acceptable price , the entity decided on July 1, 2010 not to
sell the asset but to continue to used it. In accordance with PFRS 5, The asset shall be measured on July
1, 2010 at
= The lower of its carrying amounts on the basis that it had never been classified as held
for sale and its recoverable amounts
On July 1, 2014, Blazers co. has a building with a cost of P4,000,000 and accumulated depreciation of
P1,600,000. On the same date, Blazers co. commits to a plan to sell the building by February 1, 2015. The
building has a fair value of P2,000,000 and it is estimated that the selling cost of the building will be
P150,000. As of July 1, 2014, the building has a remaining life of 15 years. What is the amount of loss to
be recognized by Blazers co. in its income statement as a result of reclassification?
= 550,000
On December 31,2014, Charmaine co. committed to a plan to sell a manufacturing facility in its present
condition and classifies the facility as held for sale at this date. After a firm purchase commitment is
obtained, the buyer’s inspection of the property identifies environmental damage not previously known to
exist. Charmaine is required by the buyer to make good the damage, which will extend the period required
to complete the sale beyond one year. However, the entity has initiated actions to make good the damage,
and satisfactory rectification of the damage is highly probable. On December 31,2014, the carrying value
of
the
facility
is
P4,000,000
and
its
fair
market
value
is
P3,600,000
In its December 31, 2014 balance sheet, Charmaine co. should properly report this manufacturing facility
as:
= should be reported separately as non-current asset held for disposal and valued at
P3,600,000
Your audit client, CHILDISH Company, plans to dispose of a group of its assets with the following carrying
amounts:
Goodwill
1,500,000
Property and equipment
1,050,000
Intangible assets other than goodwill
2,450,000
Inventory
2,340,000
Available for sale financial assets
1,210,000
Childish Company estimates that fair value of the disposal group amounts to P6,500,000 while cost to sell
is estimated to be P150,000. Assuming that the group of assets meets the criteria to be classified as held
for sale under PFRS 5. What is the total impairment loss that should be recognized by CHILDISH at the
time of reclassification of the group of assets to held for sale category?
= P 2,200,000
An entity is planning to dispose of a collections of assets. The entity designates these assets as a disposal
group, and the carrying amount of these asset immediately before classifications as held for sale was P
5,000,000 . Upon being classified as held for sale , the asset were revalued to P 4,000,000 . The Fair value
less cost to sell of the disposal group is P 3,500,000 at current year – end. How would the reductions in the
value of the assets on classifications as held for sale be treated in the financial statements?
=
The entity recognized a loss of P 1,000,000 Immediately before classification as held for
sale and then recognized an impairment loss P 500,000
On January 2, 2014, X co. is committed to a plan to sell a manufacturing facility and has initiated action to
locate a buyer. Any uncompleted customers’ orders will be transferred to the buyer. The fair value of the
facility is P6,000,000 and its carrying value as of January 2, 2014 is P5,600,000. On January 2, 2014, X
co. sold classify the building as
= Non-current asset held for sale valued at P5,600,000
Are the following statements about the requirements of PFRS 5 true or false?
Statement 1: An asset that meets the criteria for classifications as held for sale after the end of the reporting
period but before the authorizations of the financial statements shall be measured in the statement of
financial positions at the lower of carrying amount and fair value less cost to sell.
Statement 2: To be classified as an asset held for sale , the sale must be expected to be completed within
12 months from the end of the financial year
Statement 1, Statement 2
= False , False
PFRS 5 states that a noncurrent asset that is to be abandoned should not be classified as held for sale.
The reason for this is because
= Its carrying amount will be recovered principally through continuing use
On April 1, 2019, Brandy Company has a machine with a cost of P1, 000,000 and accumulated depreciation
of P750, 000. On April 1, Brandy classified the machine as “held for sale” and decided to sell the machine
within 1 year. As of April 1, 2019, the machine had an estimated selling price of P100, 000 and remaining
useful life of 2 years. IT is estimated that selling cost associated with disposal of the machine will be P10,
000. On December 31, 2019, the estimated selling price of the machine had increased to P150, 000 with
estimated selling cost of P20, 000.
How much should be recognized as gain on several of impairment on December 31,2019?
= 40,000
In Order for a non current asset to be classified as held for sale , the sale must be highly probable means
that
= The probability is higher than more likely than not
On October 1, 2014, Jerome Co. has a building with a cost of P4,000,000 and accumulated depreciation
of P3,100,000. The Co. commits a plan to sell the building by February 1, 2015. On October 1, 2014, the
building has an estimated selling price of P800,000 and it is estimated that selling cost associated with the
disposal of the building will be P120,000. On December 31, 2014, the estimated selling price of the building
has increased to P1,200,000 with estimated selling cost remaining at P120,000. At the time of
reclassification as held for sale, what amount should the non-current asset held for sale be recognized?
= 680,000
How should the asset and liabilities of a disposal group classified as held for sale be shown in the statement
of financial positions?
= The asset of the disposal group shall be shown separately from other asset in
the statement of financial positions , and the liabilities , of the disposal group shall be shown separately
from other liabilities in the statement of financial positions
An entity has an asset that was classified as held for sale. However, the criteria for it to remain as held for
sale no longer apply. The entity should therefore
= Measure the noncurrent asset at the lower of its carrying amount before the asset was
classified as held for sale (as adjusted for subsequent depreciation, amortization, or revaluations) and its
recoverable amount at the date of the decision not to sell
An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the criteria to be
classified as held for sale. At the balance sheet date, the subsidiary has not yet been sold, and six months
have passed since its acquisition. How will the subsidiary be valued in the balance sheet at the date of the
first financial statements after acquisition?
= At the lower of its cost and fair value less cost to sell
When assets are ‘held for sale’ they must be measured, under PFRS 5 Non-current Assets Held for Sale
and Discontinued Operations, using which of the following approaches?
=
Lower of carrying amount, and fair value less costs to sell
The following criteria are used to determine whether an asset should be categorized as ‘held for sale’:
I. The asset should be available for immediate sale.
II. The asset should be available for sale at a future date yet to be determined.
III. The sale of the asset should be highly probable.
IV. The sale of the asset is a possibility.
V. There should be an active program to locate a buyer.
VI. There need not be an active marketing program for the asset
= I, III and V only
In order for a noncurrent asset to be classified as held for sale, the sale must be highly probable. “Highly
probable” means that
= The probability is higher than more likely than not
Your audit client, CHILDISH Company, plans to dispose of a group of its assets with the following carrying
amounts:
Goodwill
1,500,000
Property and equipment
1,050,000
Intangible assets other than goodwill
2,450,000
Inventory
2,340,000
Available for sale financial assets
1,210,000
Childish Company estimates that fair value of the disposal group amounts to P6,500,000 while cost to sell
is estimated to be P150,000. Assuming that the group of assets meets the criteria to be classified as held
for sale under PFRS 5. What is the carrying value of the intangible assets immediately after the
reclassification?
= P1,960,000
Dana Company accounts for noncurrent assets using the cost model. On October 1, 2019, Dana classified
a noncurrent asset as held for sale. At that date, the asset’s carrying amount was P3, 200,000, its fair value
was estimated at P2, 200,000 and the cost to sell at P200,000. ON December 15, 2019, the asset was sold
for net proceeds of P1, 850,000. What amount should be included as an impairment loss in Dana’s
statement of comprehensive income for the year ended December 31, 2019?
= 1,200,000
The key characteristic for the classification of an asset as ‘held for sale’ is that the carrying amount of the
asset must:
= principally be recovered through a sale transaction;
In relation to assets that have been sold during the reporting period, PFRS 5 Non-current Assets Held
for Sale and Discontinued Operations, requires disclosure of the following items:
I. A description of the non-current asset or disposal group.
II. The gain or loss recognized in profit or loss.
III. A description of the facts or circumstances of the sale.
IV. The segment in which the non-current asset is reported
= I, II, III and IV
To which type of asset do the measurement provisions of PFRS 5 apply?
= Intangible development asset
PFRS 5 states that a noncurrent asset that is to be abandoned should not be classified as held for sale the
reason for this is because
= Its carrying amount will be recovered principally through continuing use
Coral Company accounts for noncurrent assets using the cost model. On July 31, 2019, Coral classified a
noncurrent asset as held for sale. At that date , the asset’s carrying amount was P1,450,000, its fair value
was estimated at P2,150,000 and the cost to sell at P150,000. The asset was sold on January 31, 2020 for
P2, 120,000. At what amount should the asset be measured in Coral’s statement of financial position at
December 31, 2019?
= 1,450,000
On July 2014, Vince Carter is committed to a plan to sell a disposal group that represents a significant
portion of its regulated operations. The sale requires regulatory approval, which could extend the period
required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated
until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase
commitment is highly probable within one year. The non- current assets of disposal group have a carrying
value of P5,000,000 and liabilities of P1,000,000. The assets total fair value as of December 31,2014 of the
disposal group is P4,800,000. If the sale is completed within one year, the estimated cost to sell is
P200,000, but if the sale will exited beyond one year, the present value of the estimated cost to sell is
P180,000. If the sale will extend beyond one year, what amount of non-current asset should Vince Carter
report its held for sale property at December 31, 2014?
= 4,620,000
Under PFRS 5 Non-current Assets Held for Sale and Discontinued Operations, when an asset is acquired
in a business combination and is ‘held for sale’, it is initially recorded at:
= fair value less costs to sell
An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the criteria to be
classified as held for sale. At the end of the reporting period , the subsidiary has not yet been sold , and six
months have passed since its acquisitions . How will the subsidiary be valued in the statement of financial
positions at the date of the first financial statement after acquisition?
= At the lower of its cost and fair value less cost to sell
Where assets are removed from the classification of ‘held for sale’, PFRS 5 Non-current Assets Held for
Sale and Discontinued Operations, requires disclosure of the effects of the decision on the results of
operations for the period, in the:
= notes
Arlene Company accounts for noncurrent assets using the cost model. On October 30, 2019, Arlene
classified a noncurrent asset as held for sale. At the date, the asset’s carrying amount was P1, 500,000; its
fair value was estimated at P1, 100,000 and the cost to sell at P150, 000. On November 20, 2019, the asset
was sold for net proceeds of P800, 000. What amount should be included as loss on disposal in Arlene’s
statement of comprehensive income for the year ended December 31, 2019?
= 150,000
Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In
addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the
exchange, Sable recognizes
= A gain equal to the difference between the fair value and carrying amount of the truck
given up.
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:
Cost
Land
Building
Warehouse
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
Machine
Delivery truck
640,000
800,000
256,000
380,000
Proceeds
Fair value
Mode
2,480,000
288,000
5,920,000
2,480,000
5,920,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car
= 120,000
Gains and losses arising from the retirement or disposal of an item of property, plant and equipment should
be determined as the difference between:
= net disposal proceeds and the carrying amount of the asset
Weir Company uses straight line depreciation for its property, plant and equipment, which, stated at cost,
consisted of the following:
2012
2011
250,000
250,000
1,950,000
1,950,000
6,950,000
6,500,000
9,150,000
8,700,000
4,000,000
3,700,000
5,150,000
5,000,000
Depreciation expense for 2012 and 2011 was P550,000 and P500,000 respectively.
The amount debited to accumulated depreciation during 2012 because of property, plant, and
equipment retirements is?
Land
Buildings
Machinery and equipment
Total
Less: Accumulated depreciation
= 250,000
Solution:
Accumulated depreciation, 12/31/2011
Depreciation expense, 2012
3,700,000.00
550,000.00
Total credits
Less: Accumulated depreciation, 12/31/2012
4,250,000.00
4,000,000.00
Accumulated depreciation - retirement
250,000.00
Philip Company’s depreciation policy on machinery and equipment:
·
A full year’s depreciation is taken in the asset’s acquisition year
·
No depreciation is taken in the year of an asset’s disposition.
·
The estimated useful life is five years.
·
The straight-line method is used.
On June 30, 2011, Philip sold for P 2,300,000 a machine acquired in 2009 for P4,200,000. The
estimated residual value was P 600,000.
The gain on the disposal that Philip Company should record in 2011 is?
= 460,000
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:
Cost
Land
Building
Warehouse
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
Machine
Delivery truck
640,000
800,000
256,000
380,000
Proceeds
Fair value
Mode
2,480,000
288,000
5,920,000
2,480,000
5,920,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
= 44,000
Sony Company purchased machinery for 160,000 on January 1, 2012. Straight-line depreciation has been
recorded based on a 10,000 salvage value and a 5-year useful life. The machinery was sold on May 1,
2016 at a gain of 3,000. How much cash did Sony receive from the sale of the machinery?
= 33,000
Solution:
Original cost
Less: Accumulated depreciation, 5/1/2016
Depreciable amount
150,000.00
Divide by: Estimated useful life 5 yrs
Annual depreciation
Multiply by: Age
30,000.00
4 yrs & 4 mos
160,000.00
130,000.00
Carrying amount, 5/1/2016
Gain on sale
30,000.00
3,000.00
Proceeds
33,000.00
SEASON’S INC. acquired an asset that had a cost of P130,000. The asset is being depreciated over a 5year period using the sum-of-the-years’ digit method. It has a salvage value estimated at P10,000. The
loss/gain if the asset is sold for P38,000 at the end of the third year is?
= P4,000 gain
Solution:
Depreciation base (5yrs x (5+1)/2)
15.00
Original cost
Less: Accumulated depreciation
Depreciable amount (P130,000-P10,000)
Multiply by: Age
130,000.00
120,000.00
12/15
96,000.00
Carrying amount, end of Y3
34,000.00
Proceeds from sale
Less: Carrying amount
38,000.00
34,000.00
Gain (loss) from sale
4,000.00
S
Pumba Company has a herd of 8, 2 - year old animals as of January 1, 2013. On July 1, 2013 one
animal was born and one animal (age 2.5 years) was purchased for P18,500. No animals were sold
or disposed during the year.
Per unit fair values less estimated point-of-sale costs were as follows:
January 1, 2013
December 31, 2013
2 - year old animal
P 16,500
New born animal
0.5 - year old animal
July 1, 2013
2 - year old animal
New born animal
P 8,000
2.5 - year old animal
2.5 year old animal
20,500
3 - year old animal
P 8,300
8,700
19,500
21,900
26,700
The gain from change in fair value due to physical change
=70,800
Solution:
3-year-old animals, 12/31/2013 (8 x P26,700)
Less: 2-year-old animals, 12/31/2013 (8 x P19,500)
213,600.00
156,000.00
57,600.00
3-year-old animal, 12/31/2013
Less: 2.5-year-old animal, 12/31/2013
26,700.00
21,900.00
4,800.00
0.5-year-old animal, 12/31/2013
Less: Newborn animal, 12/31/2013
8,700.00
8,300.00
400.00
Newborn animal, 7/1/2013
8,000.00
Gain (loss) on change in fair value - physical change
70,800.00
Pumba Company has a herd of 8, 2 - year old animals as of January 1, 2013. On July 1, 2013 one
animal was born and one animal (age 2.5 years) was purchased for P18,500. No animals were sold
or disposed during the year.
Per unit fair values less estimated point-of-sale costs were as follows:
January 1, 2013
December 31, 2013
2 - year old animal
P 16,500
New born animal
0.5 - year old animal
July 1, 2013
2 - year old animal
New born animal
P 8,000
2.5 - year old animal
2.5 year old animal
20,500
3 - year old animal
P 8,300
8,700
19,500
21,900
26,700
The amount reported under biological assets in the December 31, 2013 statement of financial position
=249,000
Solution:
3-year-old animals (9 x P26,700)
0.5-year-old animal (1 x P8,700)
240,300.00
8,700.00
Carrying amount, Dec 31, 2013
249,000.00
Macar Company provided the following information on December 31, 2015.
Preference share
Subscribed
capital, P100 par
ordinary
share
2,300,000 capital
50,000
Share premium –
Retained
preference share
805,000
earnings
1,900,000
Ordinary
share
Note payable
capital, P10 par
5,250,000
4,000,000
Share premium –
Subscription
ordinary share
receivable
–
2,750,000 ordinary
400,000
What is the amount of legal capital?
=7,600,000
On December 31, 20CY, Tiangsing Corp.’s board of directors canceled 50,000 shares of P2.50 par
value common stock held in treasury at an average cost of P13 per share. Before recording the
cancellation of the treasury shares, Tiangsing had the following balances in its shareholders’ equity
accounts:
Ordinary shares
P540,000
Share premium
Retained earnings
Treasury shares, at cost
750,000
900,000
650,000
In its statement of financial position at December 31, 20cy, Tiangsing should report at ordinary share
balance
of
=P415,000
Solution:
Ordinary share capital, beginning
540,000.00
Less: Ordinary share capital retired (50,000 x P2.50)
125,000.00
Ordinary share capital, ending
415,000.00
On January 1, 2014, Gilas
treasury
January 1
through
October 31
November 1
December 1
Corp had 125,000 shares issued which included 25,000 shares held as
13,000 treasury shares were distributed to officers as part of a
share compensation plan
A 3 for 1 share split took effect
The entity purchased 5,000 of its own shares to discourage an
unfriendtly takeover. These shares were not retired.
On December 31, 2014, how many shares were issued and outstanding, respectively?
=375,000 and 334,000
Tommy Company was incorporated on January 1, 2016 with the following authorized capitalization:
Ordinary share capital, 200,000 shares, no par,
P100 stated value
20,000,000
Preference share capital, 200,000 shares, 10%
fixed rate, P50 par value
10,000,000
During 2016, the entity issued 150,000 ordinary shares for a total of P18,000,000 and 50,000 preference
shares at P60 per share. In addition, on December 15, 2016, subscriptions for 20,000 preference shares
were taken at a purchase price of P100. These subscribed shares were paid for on January 15, 2017. Net
income for 2016 was P5,000,000. What amount should be reported as total contributed capital on
December 31, 2016?
=23,000,000
On July 1, 20Y1, the Beauty Corporation was registered with the SEC. Its authorized share capital
consists of 100,000 ordinary shares with par value P20.00 per share.
On July 15, 20Y1, it issued 10,000 shares at P23 per share. On October 15, 20Y1, the Beauty Corp.
paid to the majority shareholder the sum of P80,000 for a certain parcel of land; and issued 5,000
ordinary shares for the building on the land. The land was appraised at P130,000. The building has a
cost of P150,000 and its depreciated value is P90,000. It was appraised at P120,000.
On April 15, 20Y2, the corporation purchased 5,000 of its own ordinary shares for P100,000. On June
15, 20Y2, 2,000 of the treasury shares were sold at P24 per share.
How much is the total share premium of Beauty Corp. on June 30, 20Y2?
=P 58,000
Solution :
Jul 15 (10,000 x 3)
30,000.00
Oct 15 (120,000 - (5,000 x 20))
20,000.00
Jun 15 ((24 - (P100,000 / 5,000)) x 2,000)
8,000.00
Share premium
58,000.00
Common shares issued would exceed common shares outstanding as a result of
Select one:
=Purchase of treasury stock
TBB Company was organized on January 1, 2016 with authorized capital of 100,000 shares of P200
par value.
January 10 Issued 25,000 shares at P220 a share
March 25
Issued 1,000 shares for legal services when the fair value was P240 a share
September
Issued 5,000 shares for a tract of land when the fair value was P260 a share
30
What amount should be reported for share premium?
=840,000
Helu Corporation was organized on January 1, 20CY, with an authorization of 1,000,000 ordinary
shares with a par value of P5 per share.
During 20CY, the corporation had the following equity transactions:
Jan. 4
- Issued 200,000 shares @ P5 per share.
April 8
- Issued 100,000 shares @ P7 per share.
June 9
- Issued 30,000 shares @ P10 per share
July 29
- Purchased 50,000 shares @ P4 per share.
Dec. 31
- Sold 50,000 shares held in treasury @ P8 per share.
What should be the balance in the Share Premium account as of December 31, 20CY?
=P550,000
Solution :
Jan 4 (200,000 x P0)
0.00
Apr 8 (100,000 x P2)
200,000.00
Jun 9 (30,000 x P5)
150,000.00
Dec 31 (50,000 x P4)
200,000.00
Share premium, Dec 31, 20CY
550,000.00
Hiro Corp. issues 1,000 5 par value ordinary shares and 1,000 20 par value preference shares for a lump
sum of 60,000. At the issue date, the ordinary shares were selling for 36 and the preference shares were
selling for 28. The Share Premium—Ordinary account will be credited for
=28,750
On July 1, year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of 60,000,
together with 1,000 shares of its 5 par value ordinary share, for a combined cash amount of 110,000. The
market value of Cove’s stock cannot be ascertained. If the bonds were issued separately, they would have
sold for 40,000 on an 8% yield to maturity basis.
What amount should Cove report for share premium on the issuance of the stock?
=65,000
When collectability is reasonably assured, the excess of the subscription price over the stated value
of the no-par subscribed share capita shall be reported as
Select one:
=Share premium when the subscription is recorded
On December 1, 20CY, Gates Corp. received a donation of 2,000 shares of its P5 par value
ordinary shares from a shareholder. On that date, the share’s fair value was P35 per share. The
share was originally issued for P25 per share. By what amount would this donation cause total
shareholders’ equity to decrease?
=P
0
Solution:
Receipt of donated shares shall be recorded as a memorandum entry only, thus total shareholders equity
will not be affected.
The analysis of shareholders’ equity of CPA Company at January 1, 2016 showed the following:
Ordinary share, par value P20, authorized 200,000 shares issued and
outstanding, 120,000 shares
P2,400,000
Share premium
480,000
Accumulated profits or losses
1,540,000
The company uses the cost method of accounting for treasury share and the following transactions
took place:
·
Acquired 2,000 shares of its shares for P70,000.
·
Sold 1,200 treasury shares at P40 per share.
·
Retired the remaining treasury shares.
What is the amount of the Share Premium at the end of the accounting period?
=P476,800
Day Company holds 10,000 shares of P10 par value as treasury reacquired in 2008 for P120,000. On
December 31, 2009, Day issued all 10,000 shares for P190,000. Under the cost method of accounting for
treasury shares, the reissuance would result in a credit to
=Share premium of P70,000
In 2016, Tax Company issued 50,000 shares of P10 par value for P100 per share. In 2015, the company
reacquired 2,000 shares at P150 per share and immediately canceled these 2,000 shares. In connection
with the retirement of these shares, what amount should be debited to share premium and retained
earnings, respectively?
=180,000 and 100,000
At the start of the current year, Lyn Company’s stockholders equity accounts appeared as follows:
Common stock, P15 par value; authorized 200, 000 share; issued
and outstanding, 150, 000 shares
P2, 250, 000
Paid-in-Capital in excess of par
300, 000
Retained earnings
5, 00,0 000
Total
P7, 550, 000
During the year, Lyn Company entered into the following transactions:
·
May 1 Acquired 30, 000 shares of its stock for P1, 600, 000
·
June 1 Reissued 15, 000 treasury shares at P19 per share
·
July 1 Declared a cash dividend of P1.50 for holders on record on July 30 to be
distributed on January of next year.
·
October 1 Reissued 10,000 treasury shares at P16 per share
·
Retired the remaining treasury shares
The total stockholder’s equity reported in the current year statement of financial position is
=6,192,500
Solution:
Stockholders' equity, beginning
7,550,000.00
May 1 Treasury shares acquired
(1,600,000.00)
June 1 Treasury shares reissued (15,000 x P19)
285,000.00
July 1 Cash dividend declared ((150,000 - 30,000 + 15,000) x P1.50)
(202,500.00)
October 1 Treasury shares reissued (10,000 x P16)
160,000.00
Shareholders' equity, ending
6,192,500.00
Pointer Company issued all of its outstanding shares for P390 per share in 2009. On January 1, 2010,
Pointer acquired 200,000 shares at P360 per share and retired them. The shareholders’ equity
accounts as at December 31, 2009 follows:
Retained earnings
75,000,000
Share premium
162,000,000
Share capital, P300 par value, 2,000,000 shares
Authorized, 1,800,000 shares issued and 540,000,000
outstanding
What should be the balance in the share premium account immediately after the retirement of the
shares?
=150,000,000
Anil Company was organized on January 1, 20Y1. On that date it issued 500,000, P10 par value, ordinary
shares at P15 per share. During the period January 1, 20Y1 through December 31, 20Y3, Anil reported
profit of P3,000,000 and paid cash dividends of P500,000. On January 5, 20Y3, Anil purchased 50,000
ordinary shares at P20 per share. On December 31, 20Y3, 45,000 treasury shares were sold at P30 per
share and retired the remaining treasury shares. What is the total shareholders’ equity on December 31,
20Y3?
=P10,350,000
Solution:
Issuance of shares (500,000 x P15)
7,500,000.00
Profit
3,000,000.00
Dividends
(500,000.00)
Treasury shares (50,000 x P20)
(1,000,000.00)
Treasury shares reissued (45,000 x P30)
1,350,000.00
Shareholders' equity, Dec 31, 20Y3
10,350,000.00
An entity declared a cash dividend on a certain date payable on another date. What would be the effect on
retained earnings?
=Not be affected on the date of payment
Quadrant Corporation paid dividends of P2,000,000 and P3,000,000 at the end of 20Y1 and 20Y2,
respectively. The corporation has not paid any other dividends since its organization on January 1,
20Y1. The outstanding shares are 200,000, 12% preference shares, par P100 and 300,000 ordinary
shares, par P100. If the preference shares are cumulative but nonparticipating, ordinary shareholders will
receive in 20Y2
=P200,000
Solution:
20Y1
Preference
Ordinary
Total dividends
Total
2,000,000.00
Preference dividends (200,000 x P100 x 12%)
2,400,000.00
Available dividend
(2,000,000.00)
(2,000,000.00)
Dividend in arrears
400,000.00
0.00
20Y2
Preference
Ordinary
Total dividends
Total
3,000,000.00
Preference dividends
2,400,000.00
(2,400,000.00)
Dividend in arrears
400,000.00
(400,000.00)
Remaining balance
200,000.00
Dividends to ordinary sharehodlers
Totals
2,800,000.00
200,000.00
(200,000.00)
200,000.00
0.00
Macar Corp.’s outstanding share capital at December 15, 20CY consisted of the following:
·
30,000 shares of 5% cumulative preference shares, par value P10 per share, fully
participating as to dividends. No dividends were in arrears.
·
200,000 shares of ordinary shares, par value P1 per share.
On December 15, 20CY, Macar declared dividends of P100,000.
What was the amount of dividends payable to Macar’s ordinary shareholders?
=P40,000
Solution:
Preference
Ordinary
Dividends declared
Balance
100,000.00
Preference dividend (30,000 x P10 x 5%)
15,000.00
Preference dividend to ordinary (200.000 x P1 x 5%)
(15,000.00)
10,000.00
Remainder
(10,000.00)
75,000.00
Preference participating (75,000 x 300K/500K)
45,000.00
Ordinary participating (75,000 x 200K/500K)
Balances
60,000.00
(45,000.00)
30,000.00
(30,000.00)
40,000.00
0.00
Chupachups Company had the following classes of shares outstanding as of December 31, 2016:
Ordinary shares, P20 par value, 20,000 shares outstanding; Preference shares, 6%, P100 par value,
cumulative and fully participating, 1,000 shares were outstanding.
The last payment of preference dividend was on December 31, 2013. On December 31, 2016, a total cash
dividend of P90,000 was declared. What are the amounts of dividends payable on both the ordinary and
preference shares, respectively?
=P62,400 and P27,600
An entity declared a cash dividend on a certain date payable on another date. What would be the
effect on retained earnings?
Select one:
=Not be affected on the date of payment
Bristol Corp.’s outstanding capital stock at December 15, 2011 consisted of the following:
·
30,000 shares of 5% cumulative preferred stock, par value P10 per share, fully participating
as to dividends. No dividends were in arrears.
·
200,000 shares of common stock, par value P1 per share.
On December 15, 2011, Bristol declared dividends of P100,000. The amount of dividends payable
to Bristol’s common stockholders is
=P40,000
Solution:
Total dividends
Preference dividends
(P300,000 x 5%)
Ordinary dividends at preference rate
(P200,000 x 5%)
Balance for participation
Preference share (P75,000 x 3/5)
Ordinary share (P75,000 x 2/5)
Dividends
100,000.00
Preference
-15,000.00
15,000.00
-10,000.00
75,000.00
-45,000.00
-30,000.00
Ordinary
10,000.00
45,000.00
30,000.00
Total dividends/class
0.00
60,000.00
40,000.00
On May 1, 2014 Lett Corp. declared and issued a 15% share dividend. Prior to this dividend, Lett had
100,000, P1 par value, ordinary shares issued and outstanding. The fair value of Lett's ordinary share was
P20 per share on May 1, 2014. As a result of this share dividend, Lett's retained earnings
=decreased by P300,000.
At what amount per share should retained earnings be reduced for a 20% stock dividend?
Select one:
=Par value
Salvatore Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of P20 par value
common stock, which had a fair value of P50 per share before the stock dividend was declared. This stock
dividend was distributed 60 days after the declaration date. Salvatore’s current liabilities increase as a result
of the stock dividend declaration by
=P0
Solution:
Stock dividends distributable is an item of equity, since it failed to qualify as a liability, there being no outflow
of economic resources when the said distributable will be settled.
The directors of Reno Corp., whose P50 par value ordinary share is currently selling at P70 per share, have
decided to issue a share dividend. Reno has an authorization for 250,000 ordinary shares, has issued
100,000 shares of which 10,000 shares are now held in treasury, and desires to capitalize P630,000 of the
Retained Earnings balance. To accomplish this, the percentage of share dividend that the directors should
declare is
=10%.
On January 2, 2015, Regina Co. declared and distributed its only investment in available for sale security
as dividend. At the time of declaration, the available for sale security has a carrying value of P500,000 and
a related unrealized loss of P100,000.
By what amount should Regina Co. charge its Accumulated Profits and Losses as a result of the property
dividend declaration?
=500,000
On November 1, 2014, Grande Company declared a property dividend of equipment payable on March
1, 2015. The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on
November 1, 2014.
However, the fair value less cost to distribute the equipment is P2,200,000 on December 31, 2014 and
P2,000,000 on March 1, 2015.
What is the dividend payable on December 31, 2014?
=2,200,000
Dooku Corp., a calendar-year company, had sufficient retained earnings in 2015 as a basis for dividends,
but was temporarily short of cash. Dooku declared a dividend of P100,000 on April 1, 2015, and issued
promissory notes to its shareholders in lieu of cash. The notes, which were dated April 1, 2015, had a
maturity date of March 31, 2016, and a 10% interest rate. How should Dooku account for the scrip dividend
and related interest?
=Debit retained earnings for P 100,000 on April 1, 2015, and debit interest expense for
P7,500 on December 31, 2016.
On January 2, 2014, Simpson Co.'s board of directors declared a cash dividend of P400,000 to
shareholders of record on January 18, 2014, payable on February 10, 2014. Selected data from
Simpson's December 31, 2013 statement of financial position are as follows:
Accumulated depletion
P100,000
Share capital
500,000
Share premium
150,000
Retained earnings
300,000
The P400,000 dividend includes a liquidating dividend of
=P100,000
Sagana Corp. declared and paid a liquidating dividend of P100,000. This distribution resulted in a decrease
in Sagana’s Paid-in Capital and Retained Earnings
=Yes, No
The December 31, 20Y2 balance sheet of Macar Corp. showed shareholders’ equity of
P448,700. Transactions during 20Y2 which affected the shareholders’ equity were: (1) an
adjustment to Retained Earnings for an overstatement of depreciation in 20Y1 P10,000; (2) gain
on the sale of treasury shares, P9,000; (3) declared dividends of P60,000 of which P40,000 were
paid during the year; and (4) profit after tax of P75,500. The share capital balance of P300,000
remain unchanged during the year.
The
retained
Select one:
=P114,200
earnings
balance
on
January
1,
Solution:
Shareholders' equity, Dec 31, 20Y2
448,700.00
20Y2
was
Less: Share capital
300,000.00
Other equity accounts, Dec 31, 20Y2
148,700.00
Retained earnings adjustment
(10,000.00)
Share premium-treasury shares
(9,000.00)
Dividend declared
60,000.00
Profit
(75,500.00)
Retained earnings, Jan 1, 20Y2
114,200.00
Mount Company provided the following account balances on December 31, 20CY:
Retained earnings, January 1
Dividends declared
Sales
Dividend income
Merchandise Inventory, January 1
Purchases
Salaries
Contribution to employee's pension fund
Distribution cost
Miscellaneous expense
Doubtful accounts expense
Depreciation expense
Loss on sale of securities
Loss from write down of obsolete inventory
Income tax
3, 000, 000
1, 000, 000
8, 350, 000
100, 000
1, 040, 000
3, 720, 000
1, 540, 000
280, 000
205, 000
125, 000
10, 000
85, 000
40, 000
150, 000
105, 000
Inventory on December 31, 20CY was valued at P700, 000 (P850, 000 less P150, 000 write down
of obsolete inventory). What is the balance of retained earnings on December 31, 20CY?
Select one:
=4, 000, 000
Solution:
Sales
8,350,000.00
Less: Cost of sales
Purchases
3,720,000.00
Merchandise inventory, Jan 1
1,040,000.00
Goods available for sales
4,760,000.00
Less: Merchandise inventory, Dec 31
700,000.00
4,060,000.00
Gross income from sales
4,290,000.00
Dividend income
100,000.00
Total income
4,390,000.00
Less: Expenses
Salaries
1,540,000.00
Contribution to pension fund
280,000.00
Distribution cost
205,000.00
Miscellaneous expense
125,000.00
Doubtful accounts expense
10,000.00
Depreciation expense
85,000.00
Loss on sale of securities
40,000.00
Income tax
Net
income
105,000.00
2,390,000.00
2,000,000.00
Retained earnings, Jan 1
3,000,000.00
Total
5,000,000.00
Less: Dividends declared
1,000,000.00
Retained earnings, Dec 31
4,000,000.00
Angel Company had the following information in relation to its inventory accounts in 2012
Increase in Raw materials:
P 14,000
Increase in Work in process: P 24,000
Decrease in Finished goods: P 33,500
Likewise the following costs & expenses were incurred in 2012
Raw materials purchased
P
150,000
Direct labor cost
60,000
Indirect factory labor
Taxes and depreciation on factory building
Taxes and depreciation on sales room and office
Freight-out
Freight-in
Sales salaries
Office salaries
Utilities (60% applicable to factory, 20% to sales room, and 20% to office)
Angel Company’s cost of goods sold for the year is
=P264,500
30,000
10,000
7,500
3,000
4,000
20,000
12,000
25,000
Solution:
Raw materials purchased
Add: Freight in
150,000.00
4,000.00
Net cost of material purchases
Less: Increase in raw materials
154,000.00
14,000.00
Raw materials used
Direct labor cost
Overhead costs
Indirect factory labor
Taxes & depreciation on factory building
Utilities (P25,000 x 60%)
140,000.00
60,000.00
30,000.00
10,000.00
15,000.00
55,000.00
Total manufacturing costs
Less: Increase in work in process
255,000.00
24,000.00
Cost of goods manufactured
Add: Decrease in finished goods
231,000.00
33,500.00
Cost of goods sold
264,500.00
Kitty Company provided the following information for the year ended December 31, 2016:
Retained earnings – unappropriated, January
1
200,000
Overdepreciation of 2015 due to prior period
error
100,000
Net income for 2016
1,300,000
Retained earnings appropriated for treasury
shares (original balance is P500,000. It is
reduced by P200,000 by reason of
reissuance of the treasury shares)
300,000
Retained
earnings
appropriated
for
contingencies
(beginning
balance,
P700,000. It is increased by current
appropriation of P100,000)
800,000
Cash dividends paid to shareholders
500,000
Change in accounting policy from FIFO to
weighted average method – credit adjustment 150,000
What amount should be reported as unappropriated retained earnings on December 31, 2016?
=1,350,000
The December 31, 20Y2 balance sheet of Macar Corp. showed shareholders’ equity of
P448,700. Transactions during 20Y2 which affected the shareholders’ equity were: (1) an
adjustment to Retained Earnings for an overstatement of depreciation in 20Y1 P10,000; (2) gain
on the sale of treasury shares, P9,000; (3) declared dividends of P60,000 of which P40,000 were
paid during the year; and (4) profit after tax of P75,500. The share capital balance of P300,000
remain unchanged during the year.
The
retained
earnings
=P114,200
balance
on
January
1,
Solution:
Shareholders' equity, Dec 31, 20Y2
448,700.00
Less: Share capital
300,000.00
Other equity accounts, Dec 31, 20Y2
148,700.00
Retained earnings adjustment
(10,000.00)
Share premium-treasury shares
(9,000.00)
Dividend declared
60,000.00
Profit
(75,500.00)
20Y2
was
Retained earnings, Jan 1, 20Y2
114,200.00
Cerritos Corporation began operations on January 1, 20Y1. During its first three years of operations,
Cerritos reported net income and declared dividends as follows:
Net income
Dividends declared
20Y1
P 80,000
P
20Y2
250,000
100,000
20Y3
300,000
100,000
0
The following information related to 20Y4:
Income before income tax
P480,000
Prior period adjustment: understatement
of 20Y2 depreciation expense (before
taxes)
40,000
Cumulative decrease in income from
change in inventory methods (before
taxes)
70,000
Dividends declared (of this amount,
P50,000 will be paid on January 15,
20Y5)
200,000
Effective tax rate
35%
As at December 31, 20Y4, the retained earnings of Cerritos Corporation is
=P470,500
Solution:
20Y1 Net income
80,000.00
20Y2 Net income
250,000.00
20Y2 Dividends declared
(100,000.00)
20Y3 Net income
300,000.00
20Y3 Dividends declared
(100,000.00)
20Y4 Net income (480,000 x 65%)
312,000.00
Understatement of depreciation (40,000 x 65%)
(26,000.00)
Cumulative decrease in income (70,000 x 65%)
(45,500.00)
20Y4 Dividends declared
(200,000.00)
Retained earnings, Dec 31, 20Y4
470,500.00
On December 31, 2014, the statement of financial position of Legend Corporation shows a total equity
of P1,260,000. During 2014, the shareholders’ equity was affected by:
Adjustment to retained earnings for the P17,500
overstatement of 2013 net income
Cash dividend declared and paid in 2014
10%
Net income of 2014
P65,000
The share capital of P1,000,000 remained unchanged during the year.
What is the balance of retained earnings on January 1, 2014?
=P312,500
The following changes in Spiderman Company’s assets and liabilities during the year are as follows:
Cash and cash equivalents
Increase
(Decrease)
P 300,000
Accounts payable
Increase
(Decrease)
80,000
Accounts receivables
Allowance for bad debts
Inventory
Allowance
for
inventory
decline
Trading securities
Available-for-sale securities
Land
Building
(190,000)
(30,000)
170,000
20,000
Salaries payable
Utilities payable
Notes payable
Deferred tax liability
(90,000)
70,000
110,000
(50,000)
100,000
120,000
(60,000)
130,000
Bonds payable
Discount on bonds payable
Ordinary shares
Premium
on
ordinary
shares
Treasury shares
Revaluation surplus
Retained
earningsappropriated
(200,000)
(40,000)
120,000
40,000
Accm. Depreciation – Building
25,000
Equipment
(40,000)
Accm.
Depreciation
–
(5,000)
Equipment
The net income for the year is
=350,000
50,000
100,000
(80,000)
Solution:
Increase in cash and cash equivalents
Decrease in accounts receivables
Decrease in allowance for bad debts
Increase in inventory
Increase in allowance for inventory decline
Increase in trading securities
Increase in available-for-sale securities
Decrease in land
Increase in building
Increase in Accm depreciation-building
Decrease in equipment
Decrease in Accm depreciation-equipment
Increase in accounts payable
Decrease in salaries payable
Increase in utilities payable
Increase in notes payable
Decrease in deferred tax liability
Decrease in bonds payable
Decrease in discount on bonds payable
Increase in ordinary shares
Increase in premium on ordinary shares
Increase in treasury shares
Increase in revaluation surplus
300,000.00
-190,000.00
30,000.00
170,000.00
-20,000.00
100,000.00
120,000.00
-60,000.00
130,000.00
-25,000.00
-40,000.00
5,000.00
-80,000.00
90,000.00
-70,000.00
-110,000.00
50,000.00
200,000.00
-40,000.00
-120,000.00
-40,000.00
50,000.00
-100,000.00
Net income for the year
350,000.00
The following information pertains to Columbia Corp.:
·
No dividend declaration or payment for 3 years on its 2,000 shares of 6%, P30 par value
cumulative preferred stock
·
Gain on disposal of Columbia’s computer division of P90,000.
·
Treasury stock, costing P100,000 were issued for P30,000.
The amount of retained earnings that should be restricted as a result of these items is
=P0
Solution:
None of the mentioned transactions require an appropriation of retained earnings.
At December 31, 20Y1, Afro Corp. reported P1,750,000 of appropriated retained earnings for the
construction of a new office building, which was completed in 20Y2 at a total cost of P1,500,000. In 20Y2,
Afro appropriated P1,200,000 of retained earnings for the construction of a new plant. Also, P2,000,000 of
cash was restricted for the retirement of bonds due in 20Y3. In its 20Y2 balance sheet, Afro should report
what amount of appropriated retained earnings?
=P1,200,000
Solution:
Since the purpose for appropriated retained earnings for construction of a new office building was fulfilled,
it shall then be reallocated back to unappropriated, thus the remaining appropriated retained earnings shall
be the P1,200,000 appropriated for the construction of a new plant.
On December 30, 2013, Super Corp. paid P400,000 cash and issued 80,000, P1 par value, ordinary shares
to its unsecured creditors on a pro rata basis pursuant to a reorganization plan. Super owed these
unsecured creditors a total of P1.2 million. Super’s ordinary share was trading at P1.25 per share on
December 30, 2013. As a result of this transaction, Super’s total shareholder’s equity had a net increase
of
=P 800,000
Solution:
Carrying amount of debt
Less: Cash payment
Net increase in equity
1,200,000.00
400,000.00
800,000.00
Leyte Corporation has incurred losses from operations for several years. At the recommendation of
the newly hired president, the board of directors voted to implement a quasi-reorganization, subject to
shareholder approval. Immediately prior to the restatement, on June 30, Leyte's balance sheet was as
follows:
Current assets
Property, plant, and equipment (net)
Other assets
Total liabilities
Share capital
Share premium
Retained earnings (deficit)
P 550,000
1,350,000
200,000
P2,100,000
P 600,000
1,600,000
300,000
(400,000)
P2,100,000
The shareholders approved the quasi-reorganization effective July 1, to be accomplished by a reduction
in other assets of P150,000; a reduction in property, plant, and equipment (net) of P350,000; and
appropriate adjustment to the capital structure. To implement the quasi-reorganization, Leyte should
reduce the share capital account in the amount of
=P600,000
Solution:
Retained earnings (deficit)
-400,000.00
Impairment of other assets
(150,000.00)
Impairment of PPE (net)
(350,000.00)
Total
(900,000.00)
Absorption from share premium
300,000.00
Balance - to be absorbed by share capital
(600,000.00)
The Bagumbayan Company has sustained heavy losses over a period of time and conditions
warrant that Bagumbayan undergo a quasi-organization at December 31, 20CY.
Selected statement of financial position items prior to the quasi-reorganization are as follows:
·
Inventory was recorded in the accounting records at December 31, 20CY, at its
net realizable value of P6,000,000. Cost was P6,500,000.
·
Property, plant and equipment were recorded in the accounting records at
December 31, 20CY at P12,000,000, net of accumulated depreciation. The fair value is
P9,000,000 (cost to sell is P1,500,000). The expected discounted net future cash inflows
from the continued use and eventual disposal is P8,000,000.
·
Shareholders’ equity on December 31, 20CY, was as follows:
Share capital, par value P10 per share; authorized, issued
and outstanding, 700,000 shares
P7,000,000
Share premium
1,600,000
Retained earnings (deficit)
(900,000)
P7,700,000
Under the terms of the quasi-reorganization, the par value of the ordinary share is to be reduced
from P10 per share to P5 per share.
Immediately after the quasi-reorganization has been accomplished, retained earnings (deficit) should be
=P0
Solution:
Retained earnings (deficit), unadjusted
(900,000.00)
(4,000,000.00
)
(4,900,000.00
)
Adjustment of PPE to net realizable value (8,000,000 - 12,000,000)
Balance after asset adjustment
Share capital adjustment ((P10 - P5)-700,000)
Balance after share capital adjustment
3,500,000.00
(1,400,000.00
)
Share premium adjustment
1,400,000.00
Balance after share premium adjustment
0.00
Rica Corporation is under protection of the bankruptcy court and has the following account balances at
June 30, 20CY:
Cash
Accounts receivable
Inventory
Equipment
Accum. Depreciation
Intangible
Total
P (5,000)
320,000
450,000
860,000
(525,000)
80,000
P1,180,000
Accounts payable
Notes payable
Taxes and wages
Mortgage payable
Ordinary shares
Accumulated profits
Total
P450,000
605,000
60,000
150,000
50,000
(135,000)
P1,180,000
The court has accepted the following proposed settlement of the company’s affairs:
Write down the assets by the following amounts:
Accounts receivable
Inventory
Intangibles
P40,000
160,000
80,000
The trade creditors (accounts payable) will reduce their claim by 30%, will accept one-year notes for 50%,
and retain their current claim for the remaining 20%. The tax, wage, and mortgage claims will remain
unchanged. The current ordinary shares will be surrendered to the corporation and cancelled. In
consideration thereof, the current shareholders shall be held harmless from any possible personal liability.
The current holder of the note payable shall receive 1,000 shares of no par ordinary shares in full
satisfaction of the note payable. After these adjustments have been made, the Accumulated Profits and
Losses shall be raised to zero by a change against invested capital.
How much is the total shareholders’ equity after the quasi-reorganization?
Select one:
=P375,000
Solution:
Cash
(5,000.00)
Accounts receivable (320,000 - 40,000)
280,000.00
Inventory (450,000 - 160,000)
290,000.00
Equipment
860,000.00
Accumulated depreciation
(525,000.00)
Intangible (80,000 - 80,000)
0.00
Total assets
900,000.00
Less: Total liabilities
Accounts payable (450,000 x 20%)
90,000.00
Note payable (605,000 - 605,000 + (450,000 x 50%))
225,000.00
Taxes and wages
60,000.00
Mortgage payable
150,000.00
Shareholders' equity
525,000.00
375,000.00
Other comprehensive income includes all of the following excepts
=Share premium
Merlita Company accounts for noncurrent assets using the cost model. On October 30, 20CY, Merlita
classified a noncurrent asset as held for sale. At the date, the asset’s carrying amount was P1, 500,000; its
fair value was estimated at P1, 100,000 and the cost to sell at P150, 000. On November 20, 20CY, the
asset was sold for net proceeds of P800, 000. What amount should be included as loss on disposal in
Merlita’s statement of comprehensive income for the year ended December 31, 20CY?
=150,000
Solution:
Proceeds
800,000.00
Less: Fair value less cost to sell (1,100,000 - 150,000)
950,000.00
Loss on disposal
(150,000.00)
A company buys ten shares of securities at P1,000 each on January 15, year 1. The securities are classified
as available for- sale. The fair value of the securities increases to P1,250 per share as of December 31,
year 1. The company does not elect to use the fair value option for reporting available for-sale securities.
Assume no dividends are paid and that the company has a 30% tax rate. What is the amount of the holding
gain arising during the period that is classified in other comprehensive income for the period ending
December 31, year 1?
=P1,750
Which of the following is not included as components of other comprehensive income?
Select one:
=The ineffective portion of gains and losses on hedging instruments in a cash flow
hedge
On January 2, 20CY, Power Company, a medium size entity, purchased 20% of Plant Corporation’s
200,000 ordinary shares for P3,000,000 including a P50,000 transaction cost. This investment gives Power
the ability to exercise significant influence over Plant Corporation. During 20CY, plant reported profit of
P1,750,000 and paid cash dividends of P1,000,000 on its ordinary shares. As of December 31, 20CY, the
shares of Plant Corporation are traded and are currently selling at is the amount of the holding gain arising
during the period that is classified in other comprehensive income for the period ending December 31, year
1?
=P300,000
Solution:
Fair value, Dec 31, 20CY (200,000 x 20% x P81.25)
3,250,000.00
Less: Initial measurement, Jan 2, 20CY (3,000,000 - 50,000)
2,950,000.00
Unrealized gain
300,000.00
Madsen Company reported the following information for 2014:
Sales revenue
510,000
Cost of goods sold
350,000
Operating expenses
55,000
Unrealized holding gain on available-for-sale securities
40,000
Cash dividends received on the securities
2,000
For 2014, Madsen would report other comprehensive income of
=40,000
During year 1, the “other revenues and gains” section of Totman Company’s Statement of Earnings and
Comprehensive Income contains P5,000 in interest revenue, P15,000 equity in Harpo Co. earnings, and
P25,000 gain on sale of available-for sale securities. Assuming the sale of the securities increased the
current portion of income tax expense by P10,000, determine the amount of Totman’s reclassification
adjustment to other comprehensive income.
=P15,000
A company buys ten shares of securities at P2,000 each on December 31, year 1. The securities are
classified as available for sale. The company does not elect to use the fair value option for reporting its
available-for-sale securities. The fair value of the securities increases to P2,500 on December 31, year 2,
and to P2,750 on December 31, year 3. On December 31, year 3, the company sells the securities. Assume
no dividends are paid and that the company has a tax rate of 30%. What is the amount of the reclassification
adjustment for other comprehensive income on December 31, year 3?
=P (5,250)
The equity of Simplex Company on December 31, 2019 consists of the folowing capital balance:
Preference share capital, 10% cumulative and nonparticipating, 2,000,000
P100 par, 20,000 shares
Ordinary share capital, P100 par, 40,000 shares
4,000,000
Subscribed ordinary share capital, 20,000 shares
2,000,000
Subscription receivable
500,000
Share premium
1,000,000
Retained earnings
2,400,000
Treasury ordinary shares, 10,000 at cost
800,000
The preference dividends are in arrears for 2007, 2008 and 2009. The book value per ordinary share on
December 31, 2009 should be
=160
For an entity that has only ordinary shares outstanding total shareholder equity dividend by the number of
shares outstanding represent the
=Book value per share
Space Corporation’s current balance sheet reports the following shareholders’ equity:
5% cumulative preference share, par value, P100 per share; 25,000 shares issued and
outstanding, P2,500,000; Ordinary share, par value P35 per share; 100,000 shares issued
and outstanding, P3,500,000; Share premium in excess of par value of ordinary share,
P1,250,000; Accumulated profits and losses, P3,000,000.
Dividends in arrears on the preference share amount to P250,000. If Space were to be liquidated,
the preference shareholders would receive par value plus a premium of P500,000.
How much would be the book value per share of ordinary share?
=P70.00
Solution:
Excess
Preference
Ordinary
Balances
4,250,000.00
2,500,000.00
3,500,000.00
Liquidation premium
(500,000.00)
500,000.00
Preference dividends
(250,000.00)
250,000.00
Remaining balance
3,500,000.00
Ordinary dividends
(3,500,000.00)
Balances
0.00
3,500,000.00
3,250,000.00
7,000,000.00
Divide by: Number of shares
25,000.00
100,000.00
Book values per share
130.00
70.00
Cyril Co. had the following equity balances at the end of its first fiscal year:
Preference share capital, P50 par, 6% cumulative, liquidation value P55
Ordinary share capital, P10 par
Retained earnings
If no dividends are declared, the book value of a share of a preference share is
=P 58
Fantasy Company has the following capital structure at the beginning of 2011
6% Cumulative, fully-participating preferred stock, P50 par value, 50,000 shares
authorized, 12,000 shares issued and outstanding
Common stock, P10 par value, 200,000 authorized; 147,500 issued and
outstanding
Additional paid-in capital in excess of par – preferred
Additional paid-in capital in excess of par – common
Retained earnings (P2,500,000 appropriated for plant expansion)
P100,000
200,000
256,000
P 600,000
1,475,000
180,000
1,180,000
4,500,000
7,935,000
During 2011 the following transactions occurred:
February 11
Fantasy Company acquired 6,000 preferred shares at P70 per share and 40,000
common shares at P22 per share. Fantasy Company is using the cost-method in
recording treasury shares
March 31
Issued 2,000 preferred treasury shares at P73 per share
April 7
Issued 15,000 common shares at P25 per share
July 1
Issued 1,500 preferred treasury shares at P68 per share & 20,000 common shares
at P19 per share
August 15
Retired the remaining preferred and common treasury shares
September 1
Plant expansion was completed
November
22
Board of directors appropriated P2,000,000 for plant expansion in Mactan,
Cebu. Likewise, the Board issued a 3-year, 10% P1,500,000 face value bonds to
partially fund the construction. A sinking fund was set-up for the extinguishment of
the bonds at their maturity
December
31
Net income for the period P1,400,000. Total cash dividend declared and paid
P500,000. No dividends have been declared in 2010. A property dividend was
likewise declared, the distribution of which is on January 6, 2012. The carrying
amount of the property declared as dividend was P800,000; the fair value of which
was P1,000,000
The total stockholders’ equity at December 31, 2011 is
=7,538,000
Solution:
6% Cumulative, fully participating, preferred stock
Common stock
Additional paid-in capital in excess of par - preferred
Additional paid-in capital in excess of par - common
Retained earnings - unappropriated
475,000.00
1,425,000.00
142,500.00
1,245,000.00
2,250,500.00
Retained earnings - appropriated
2,000,000.00
Total shareholders' equity
7,538,000.00
The shareholders’ equity of Kristine Company on December 31, 2013 consisted of the following:
Preference share capital, P100 par value, 12% annual dividend
P 5,000,000
Ordinary share capital, P100 par
15,000,000
Share premium
3,000,000
Retained earnings
4,000,000
The preference share is noncumulative and nonparticipating with a liquidation value of P120 per
share. Preference dividends have been paid up to December 31, 2013. What is the book value per share
of ordinary?
=P140.00
Which of the following shareholder rights is most commonly enhanced in an issue of preference shares?
=The right to received a full cash dividend before dividend are paid to other classes of
share capital
The equity balances of Simon Company as of the end of the reporting period are:
Ordinary share capital, P100 par, 360,000 shares
P36,000,000
Subscribed ordinary share capital, 60,000 shares
6,000,000
Subscription receivable
2,000,000
Treasury shares, 20,000 shares, at cost
3,000,000
Retained earnings
10,000,000
The book value per share of ordinary is
=122.50
Tarr Company’s shareholders’ equity at December 31, 2019 consisited of the following:
Preference share capital – 12%, P50 par, 20,000 shares issued
1,000,000
Ordinary share capital, P25 par, 100,000 shares issued
2,500,000
Share premium
200,000
Retained earnings
400,000
Retained earnings appropriated
100,000
Revaluation surpuls
300,000
Dividends on preference share have not been paid since 2017. The preference share has a liquidating
value of P55 and a call price of P58. What is the book value per preference share?
=61
Edgar Company reported shareholders’ equity on December 31, 20Y2 which comprised the
following capital balances:
Preference share capital, 12% cumulative and participating up to
16%, P100 par, 25,000 shares
2,500,000
Ordinary share capital, P50 par, 100,000 shares
5,000,000
Share premium-preference
500,000
Share premium-ordinary
1,000,000
Retained earnings
2,100,000
The preference dividends are in arrears for 20Y1 and 20Y2 and the preference share has a call
price and liquidation value of P120 and P110, respectively. What is the book value per ordinary
share
on
December
31,
20Y2?
Select one:
=76.50
Solution:
Excess
Preference
Ordinary
Balances
3,600,000.00
2,500,000.00
5,000,000.00
Liquidation premium (P10 x 25,000)
(250,000.00)
250,000.00
Cumulative preference dividends (2,500,000 x 12% x 2yrs)
(600,000.00)
600,000.00
Ordinary dividends at preference rate (5,000,000 x 12%)
(600,000.00)
Remaining balance
2,150,000.00
Participating dividend-preference (2,500,000 x 4%)
(100,000.00)
Participating dividend-ordinary (2,150,000 - 100,000)
(2,050,000.00)
Balances
0.00
600,000.00
100,000.00
2,050,000.00
3,450,000.00
7,650,000.00
Divide by: Number of shares
25,000.00
100,000.00
Book value per share
138.00
76.50
The shareholders’ equity for the Analyn Foods, Inc. on December 31, 2013 follows:
12% Preference share capital, P100 par, 20,000 shares
P2,000,000
Ordinary share capital, P25 par, 200,000 shares
5,000,000
Share premium
500,000
Retained earnings
750,000
Total shareholders’ equity
P8,250,000
Preference shares have a liquidation value of P110; shares are cumulative, with dividends in arrears for 3
years including the current year and fully payable in the event of liquidation. The book value of an ordinary
share is
=P26.65
The equity section of the statement of financial position of the Guts Company on December 31, 2013 shows
following items:
6% Cumulative preference share capital, P100 par value (liquidation value, P115 per
share); Authorized, 6,000 shares; issued, 4,000 shares; in treasury, 600 shares
Ordinary share capital, P100 par value, authorized, 20,000 shares; issued and
outstanding, 8,000 shares
Share premium – preference shares
Share premium – ordinary shares
Retained earnings
Reserve for bond retirement
Treasury shares - preference, at cost
P400,000
800,000
150,000
165,000
458,600
320,000
84,000
Assuming the preference share is participating, the book value per share of ordinary is
=P189.35
Baker Company had 5,000 ordinary shares of P500 par value outstanding and 500 preference shares of
P1,000 par value outstanding. The current market price of the ordinary share is P1,200 and total equity
amounts to P3,600,000. The preference shareholders’ have a liquidation preference of P1,400 per share
and no dividends are in arrears. What is the book value per ordinary share?
=580
The equity section of the statement of financial position of the Guts Company on December 31, 2013 shows
following items:
6% Cumulative preference share capital, P100 par value (liquidation value, P115 per share);
Authorized, 6,000 shares; issued, 4,000 shares; in treasury, 600 shares
Ordinary share capital, P100 par value, authorized, 20,000 shares; issued and outstanding, 8,000
shares
Share premium – preference shares
Share premium – ordinary shares
Retained earnings
Reserve for bond retirement
Treasury shares - preference, at cost
The book value per share of ordinary is
=P224.78
As of December 31, 2013, the shareholders’ equity of Grace Co. follows:
Authorized share capital, 500,000 shares at P10 par value
P5,000,000
Unissued share capital (50,000 shares)
500,000
Share premium
130,000
Treasury shares, 15,000 shares at cost
150,000
Deficit
277,000
The book value per share is
=P9.66
The effect of recording a 100% stock dividend would be to
=Leave working capital unaffected ,decrease earnings per share and decrease book value
for share
Trojan Company was organized on January 1, 2019 with the following capital structure:]
10% cumulative preference share capital, par value P10, liquidation value P12, authorized, issied and
outstanding 100,000 share P1,000,000
Ordinary share capital, par value P100, authorized 40,000 shares, issued and outstanding 30,000
shaires, P3,000,000.
The net income for the year ended December 31, 2019 was P6,000,000 and no dividends were declared.
What is the December 31, 2019 book value per ordinary share?
=290
Equity balances of Honey Company as of the end of the reporting period follow:
12% preference share capital, 200,000 shares, par P20,000,000
P100
Ordinary share capital, 500,000 shares, par P100
50,000,000
Share premium
10,000,000
Retained earnings
15,000,000
The preference shares have a call price of 130, a liquidation price of 115 and dividends have not been paid
for 3 years. The book value per share of preference shares should be
=P127
On December 31, 2013 Hanani Company had 50,000, P50 par value, ordinary shares outstanding and
30,000, P100 par value, 10% noncumulative preference shares. The current market price of the ordinary
share is P80 per share and total shareholders’ equity amounted to P10,000,000. The preference
P400,000
800,000
150,000
165,000
458,600
320,000
84,000
shareholders have a liquidation preference of P150 per share. No dividends on preference shares were
declared on December 31, 2013. The book value per share of ordinary should be
=P110
Katrina Co. had 5,000, P500 par value, ordinary shares outstanding and 500, P1,000 par, preference
shares outstanding. The current market price of the ordinary share is P1,200 per share and total
shareholders’ equity amounts to P3,600,000. The preference shareholders have a liquidation preference
of P1,400 per share and for dividends that are in arrears. The book value per ordinary share is currently
=P580
The shareholders’ equity of Windy Company on December 31, 20CY, consists of the following capital
balances:
Preference
share
capital,
10%
cumulative, 3 years in arrears, P100
par, P110 liquidation price 150,000
shares
Ordinary share capital, P100 par,
200,000 shares
Subscribed ordinary share capital, net of
subscription receivable of P4,000,000
P15,000,000
20,000,000
6,000,000
Treasury
shares-ordinary,
shares at cost
Share premium
Retained earnings
50,000
4,000,000
3,000,000
20,000,000
The book value per share of ordinary is
=P172.00
Solution:
Preference
Issued
Ordinary
Amount
Shares
Amount
Shares
15,000,000.00
150,000.00
20,000,000.00
200,000.00
10,000,000.00
100,000.00
30,000,000.00
300,000.00
(5,000,000.00)
(50,000.00)
25,000,000.00
250,000.00
Subscribed
Total
15,000,000.00
150,000.00
Treasury
Balance
15,000,000.00
150,000.00
Share premium, unadjusted
3,000,000.00
Add: Share premium on retirement of shares
Treasury shares at original par (50,000 x P100)
5,000,000.00
Treasury shares at cost
(4,000,000.00)
1,000,000.00
Share premium, adjusted
4,000,000.00
Retained earnings
20,000,000.00
Total excess of par
24,000,000.00
Excess
Preference
Ordinary
Balances
24,000,000.00
15,000,000.00
25,000,000.00
Liquidation premium (P10 x 150,000)
(1,500,000.00)
1,500,000.00
Preference dividends in arrears (P15M x 10% x 3)
(4,500,000.00)
4,500,000.00
Remaining balance
18,000,000.00
Ordinary shareholders
(18,000,000.00)
Totals
0.00
18,000,000.00
21,000,000.00
43,000,000.00
Divide by: Number of shares
150,000.00
250,000.00
Book value per share
140.00
172.00
Jacqueline Company’s equity balances on December 31, 2013 are:
10% noncumulative preference share capital, P100 par, 100,000 P10,000,000
shares
Ordinary share capital, P100 par value, 500,000 shares
50,000,000
Retained earnings
15,000,000
Dividends in arrears on the preference shares are for 5 years. If the company were to be liquidated, the
preference shareholders would receive par plus a premium of P1,000,000. The book value per share of
ordinary shares is
=P126
An entity has not declared or paid dividends on its cumulative preference shares in the last three years.
These dividend shall be reported
=In a note to the financial statement
Nova Company has an authorized capital of 10,000 8% cumulative preference shares of P100 par value
and 20,000 ordinary shares of P100 par value. The equity account balances at December 31, 2019 are as
follows:
Cumulative preference share capital
500,000
Ordinary share capital
1,100,000
Share premium
200,000
Retained earnings
260,000
Treasury ordinary shares – 1,000 at cost (150,000)
1,910,000
Dividends on preference share are in arrears for 2018 and 2019. The book value of an ordinary share at
December 31, 2019 should be
=
133
Boe Company’s shareholders’ equity at December 31, 2019 was as follows:
6% noncumulative preference share capital, P100 1,000,000
par, liquidation value of P105 per share
Ordinary share capital, P100 par
3,000,000
Retained earnings
950,000
Preference dividends have been paid up to December 31, 2019. At December 31, 2009, Boe’s book value
per ordinary share was
=130.00
Which of the following features of preference share would most likely be opposed by ordinary
shareholder?
=Participating
Dix Company’s equity at December 31, 2019 consisted of the following:
8% cumulative preference share capital, P50 par; liquidating value 1,000,000
P55 per share; authorized, issued and outstanding 20,000 shares
Ordinary share capital, P25 par; 200,000 shares authorized; 100,000 2,500,000
shares issued and outstanding
Retained earnings
400,000
Divideds on preference share have been paid through 2017 but have not been declared for 2018 and 2019.
At December 31, 2019, Dix’s book value per ordinary share was
=26.40
The shareholders’ equity of Retro Company on December 31, 2019 includes the following:
12% Preference share capital, 20,000 shares, P100 par value
2,000,000
14% Preference share capital, 10,000 shares, P300 par value
3,000,000
Ordinary share capital, 50,000 shares, P100 par value
5,000,000
Retained earnings
2,240,000
Share premium
1,500,000
The 12% preference share is cumulative and fully participating. The 14% preference share is noncumulative
and fully participating. Dividends have not been paid for 3 years. What is the book value per ordinary share?
=132
Information concerning the capital structure of Marc Corporation is as follows:
December 31
20Y3
20Y2
Common stock
150,000 shares
150,000 shares
Convertible preferred stock
15,000 shares
15,000 shares
6% convertible bonds
P2,400,000
P2,400,000
During 20Y3, Marc paid dividends of P0.80 per share on its common stock and P2.00 per share on
its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6%
convertible bonds are convertible into 75,000 shares of common stock. The profit for the year ended
December 31, 20Y1, was P400,000. Assume that the income tax rate was 30%.
What should be the diluted earnings per share for the year ended December 31, 20Y3, rounded to
the
nearest
peso?
Select one:
=P1.96
Solution:
Profit
400,000.00
Less: Preference dividends declared (15,000 x P2.00)
30,000.00
Profit attributable to ordinary shareholders
370,000.00
Divide by: Average ordinary shares
150,000.00
Basic EPS
2.47
Test for dilution-convertible preference shares
Preference dividends
30,000.00
Divide by: Potential ordinary shares
30,000.00
Incremental EPS-convertible preference share
1.00
Test for dilution-convertible bonds
Interest after tax (P2,400,000 x 6% x 70%)
100,800.00
Divide by: Potential ordinary shares
75,000.00
Incremental EPS-convertible bonds
1.34
Attributed profit
Ordinary shares
EPS
Basic
370,000.00
150,000.00
2.47
Convertible preference shares
30,000.00
30,000.00
Diluted EPS-1
400,000.00
180,000.00
Convertible bonds
100,800.00
75,000.00
Diluted EPS-2
500,800.00
255,000.00
2.22
1.96
Urdaneta Company reported the following capital structure at year-end.
2015
2016
Ordinary shares
500,000
500,000
Convertible
preference 100,000
100,000
shares
10%
convertible
bonds P3,000,000 P3,000,000
payable
During 2016, the entity paid the annual dividend of P5 per share on the preference share. The preference
shares are convertible into 200,000 ordinary shares and the 10% bonds are convertible into 100,000
ordinary shares. Net income for 2016 was P5,000,000. The tax rate is 30%. What amount should be
reported as diluted earnings per share?
=6.51
Which of the following is incorrect in relation to earnings per share?
=In computing for diluted earnings per share, current year dividends on cumulative, nonconvertible preference shares are not deducted from profit.
Faith Co. had 200,000 ordinary shares, 20,000 convertible preference shares, and P1,000,000 of 10%
convertible bonds outstanding during 2009. The preference share is convertible into 40,000 ordinary
shares. During 2009, Faith paid dividends of P1.20 per share on ordinary shares and P4.00 per share on
preference shares. Each P1,000 bond is convertible into 45 ordinary shares if converted before 2011 and
40 shares if converted after 2011. The profit for 2009 was P800,000 and the income tax rate was 30%.
Diluted earnings per share for 2009 is
=P3.05
On January 1, 20Y1, TB Co had P2·5 million of equity share capital (shares of 50 cents each) in issue. No
new shares were issued during the year ended December 31, 20Y2, but on that date there were outstanding
share options which had a dilutive effect equivalent to issuing 1·2 million shares for no consideration. TB’s
profit after tax for the year ended December 31, 20Y2 was P1,550,000. In accordance with IAS 33 Earnings
Per Share, what is TB’s diluted earnings per share for the year ended December 31, 20Y2?
=P0·25
Solution:
Profit after tax
1,550,000.00
Divide by: Ordinary shares outstanding (P2,500,000 / P0.50)
5,000,000.00
Basic EPS
0.31
Profit after tax
1,550,000.00
Divide by: Ordinary shares outstanding (5,000,000 + 1,200,000)
6,200,000.00
Diluted EPS
0.25
Crossroad Corp. had 300,000 shares of common stock issued and outstanding at December 31, 2012. On
July 1, 2013, an additional 50,000 shares of common stock were issued for cash, Crossroad also had
unexercised stock options to purchase 40,000 shares of common stock at P15 per share outstanding at the
beginning and end of 2013. The average market price of Crossroad’s common stock was P20 during
2013. The number of shares that should be used in computing diluted earnings per share for the year
ended December 31, 2013 is
=335,000
Solution:
Maximum shares from options
40,000.00
Less: Expected shares to be reacquired
(40,000 x P15/P20)
30,000.00
Incremental shares
10,000.00
Jan 1 300,000 x 12/12
Jul 1 50,000 x 6/12
Incremental shares 10,000 x 12/12
300,000.00
25,000.00
10,000.00
Average outstanding shares
335,000.00
Are the following statements about share options granted to employees in exchange for their services true
or false, according to IFRS2 Share-based payment?
(1) The services received should be measured at the fair value of the employees' services.
(2) Fair value should be measured at the date the options vest.
Statement (1) Statement (2)
=False False
For transactions with employees and others providing similar services, the measurement date of the equitysettled share-based payment transactions is the
=Grant date
JOHN Company granted 10,000 share options to each of its five directors on January 1, 2013. The options
vest on January 1, 2017. The fair value of each option on January 1, 2013 is P 50 and it is anticipated that
all of the share options will vest on January 1, 2017. What will be the increase in expense and equity for
the year ended December 31, 2013?
=625,000
For transactions with employees and others providing similar services, the measurement date of the equitysettled share-based payment transactions is the
Select one:
=Grant date
The Palau Company has issued a range of share options to employees. In accordance with PFRS2 Sharebased payment, what type of share-based payment transaction does this represent?
=Equity-settled share-based payment transaction
Jay, a public limited company, has granted 20 share appreciation rights to each of its 500 employees
on January 1, 20Y1. The rights are due to vest on December 31, 20Y4 with payment being made on
December 31, 20Y5. Assume that 80% of the awards vest. Share prices are:
January 1, 20Y1
P15
December 31, 20Y1
18
December 31, 20Y4
21
December 31, 20Y5
19
How should the settlement of the transaction be accounted for on December 31, 20Y5?
=Payment to employees of P32,000, gain of P16,000 is recorded
Solution:
Number of employees
500.00
Multiply by: Share appreciation rights/employee
20.00
Total appreciation rights
10,000.00
Multiply by: Expected vest percentage
80%
Expected appreciation rights vest
8,000.00
Multiply by: (P21 - P15)
6.00
Liability for share appreciation rights, Dec 31, 20Y4
48,000.00
Less: Payment to employees ((P19-P15)x8,000)
32,000.00
Gain on settlement
16,000.00
In connection with a share option plan for the benefit of key employees, WALTER Company intends to
distribute treasury shares when the options are exercised. These shares were bought in 2012 at P 42 per
share. On January 1, 2013, Walter granted share options of 100,000 shares at an option price of P 38 per
share as additional compensation for services to be rendered over the next three years. The options are
exercisable during a 2-year period beginning January 1, 2016, by grantee still employed by Walter. Market
price of Walter’s share was P 47, at the grant date. The fair value of the share option is P 12 on grant date.
No share options were terminated during 2013. In Walter’s 2013 income statement, what amount should
be reported as compensation expense pertaining to the options?
=400,000
Jay, a public limited company, has granted 20 share appreciation rights to each of its 500 employees
on January 1, 20Y1. The rights are due to vest on December 31, 20Y4 with payment being made on
December 31, 20Y5. Assume that 80% of the awards vest. Share prices are:
January 1, 20Y1
P15
December 31, 20Y1
18
December 31, 20Y4
21
December 31, 20Y5
19
What liability will be recognized on December 31, 20Y4, for the share appreciation rights?
=P 48,000
Solution:
Number of employees
500.00
Multiply by: Share appreciation rights/employee
20.00
Total appreciation rights
10,000.00
Multiply by: Expected vest percentage
80%
Expected appreciation rights vest
8,000.00
Multiply by: (P21 - P15)
6.00
Liability for share appreciation rights
48,000.00
In accordance with IFRS2 Share-based payment, how, if at all, should an entity recognise the change in
the fair value of the liability in respect of a cash-settled share-based payment transaction?
=Should recognise in profit or loss
The TBB Company has entered into a contract with The Galilee Company. Galilee will supply TBB with a
range of services. The payment for those services will be in cash and based upon the price of TBB's ordinary
shares on completion of the contract. In accordance with IFRS2 Share-based payment, what type of sharebased payment transaction does this represent?
=Cash-settled share-based payment transaction
In connection with a stock option plan for the benefit of key employees, Tawilis Corp. intends to distribute
treasury shares when the options are exercised. These shares were bought in 2015 at P42 per share. On
January 1, 20Y1, Tawilis granted stock options for 10,000 shares at P38 per share as additional
compensation for services to be rendered over the next three years. The options are exercisable during a
four-year period beginning January 1, 20Y6, by grantees still employed by Tawilis. Market price of Tawilis’s
stock was P47 per share at the grant date. The fair value of a similar stock option with the same terms was
P12 at the grant date. No stock options were terminated during 20Y1In Tawilis’s December 31, 20Y1
income statement, what amount should be reported as compensation expense pertaining to the options?
=P40,000
Solution:
P12 fair value of option x 10,000 stock options x 1 year / 3 years = P40,000
In accordance with PFRS 2 Share-based payment, how, if at all, should an entity recognize the change in
the fair value of the liability in respect of a cash-settled share-based payment transaction?
=Should recognize in profit or loss
Under IFRS2 Share-based payment, in which ONE of the following will a cash-settled share-based payment
give rise to an increase?
=A liability
On January 1, 2013, MARS Company purchased an equipment for the cash price of P 5,000,000. The
supplier can choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P 50 in one year’s time, or a cash payment equal to the
market value of 40,000 shares on December 31, 2013.
At grant date on January 1, 2013, the market price of each share is P 110 and on the date of settlement on
December 31, 2013, the market price of each share is P 130.
What is the interest expense to be recognized on December 31, 2013 if the supplier has chose the “cash
alternative”?
=800,000
On January 1, 20Y1, MIT Corporation granted Silicon Valley, its president a compensatory stock option
plan to purchase 8, 000 shares of MIT’s P10 par common stock. The option price is P25 per share and the
option has a fair value of P7 per option, which is exercisable on January 1, 20Y5, after four years of service.
How much compensation expense should MIT recognize on December 31, 20Y1?
=P14, 000
Solution:
P7 fair value of option x 8,000 shares x 1 year / 4 years = P14,000
On January 1, 2013, MARS Company purchased an equipment for the cash price of P 5,000,000. The
supplier can choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P 50 in one year’s time, or a cash payment equal to the
market value of 40,000 shares on December 31, 2013.
At grant date on January 1, 2013, the market price of each share is P 110 and on the date of settlement on
December 31, 2013, the market price of each share is P 130.
What is the equity component arising from the purchase of equipment with share and cash alternative?
=600,000
Under PFRS 2, which of the following valuation techniques should not be used as a firstinstance measure of fair value for shares and share options not traded in an active market?
=Intrinsic model
On December 31, 2012, Bedrock, Inc. had 300,000 shares of common stock issued and
outstanding. Bedrock issued a 10% stock dividend on July 1, 2013. On October 1, 2013, Bedrock
purchased 24,000 shares of its common stock. The number of shares that should be used in computing
earnings per share for the year ended December 31, 2013 is
=324,000
Solution:
Jan 1 300,000 x 1.1 x 12/12
330,000.00
Oct 1 -24,000 x 3/12
-6,000.00
Average outstanding shares
324,000.00
Lapasan Company had the following capital during 20Y1 and 20Y2:
Preference share capital, P100
par,
10%
cumulative,
100,000 shares
Ordinary share capital, P100 par,
400,000 shares
P10,000,000
40,000,000
Lapasan reported profit of P8,000,000 for the year ended December 31, 20Y2. Lapasan paid no
preference share dividends during 20Y1 and paid P1,500,000 preference share dividends during
20Y2. On January 31, 20Y3, prior to the date that the financial statements are authorized for issue,
Lapasan distributed 10% ordinary share dividend.
In its 20Y2 income statement, what amount should Lapasan report as basic earnings per share?
=P15.91
Solution:
Profit
8,000,000.00
Preference dividends (P10,000,000 x 10%)
(1,000,000.00)
Profit attributable to ordinary shareholders
7,000,000.00
Divide by: Number of shares (400,000 x 110%)
440,000.00
Basic earnings per share
15.91
On January 1, 20CY, Hope Corporation had 240,000 shares of common stock outstanding) on April
1, it reacquired 24,000 shares; on July 1, it issued 108,000 shares; On October 1, it issued another
96,000 shares; and on December 1, it reacquired 6,000 shares. The weighted average number of
common shares outstanding for 20CY was
Select one:
=299, 500
Solution:
Jan 1, 20CY
240,000.00
12 mos/12 mos
240,000.00
Apr 1, 20CY
Jul
1,
20CY
(24,000.00)
9 mos/12 mos
(18,000.00)
108,000.00
6 mos/12 mos
54,000.00
Oct 1, 20CY
96,000.00
3 mos/12 mos
24,000.00
Dec 1, 20CY
(6,000.00)
1 mo/12 mos
(500.00)
Weighted average of common shares outstanding
299,500.00
When earnings per share is computed, dividends on preferred stock are
=Subtracted because they represent earnings to the preferred stockholders
The following information pertains to Astoria Corp.’s outstanding stock for 2013:
Common stock, P5 par value
Shares outstanding, 1/1/2013
40,000
2-for-1 stock split, 4/1/2013
40,000
Shares issued, 7/1/2013
20,000
Preferred stock, P10 par value, 5% cumulative
Shares outstanding, 1/1/2013
8,000
The number of shares Astoria should use to calculate 2013 basic earnings per share is
=90,000
Solution:
Jan 1 40,000 x 2 x 12/12
80,000.00
Jul 1 20,000 x 6/12
10,000.00
Average outstanding shares
90,000.00
Davao Corp.’s accounts payable at December 31, 20Y1, totaled P800,000 before any necessary
year-end adjustments relating to the following transactions:
·
On December 27, 20Y1, Davao Corp. wrote and recorded checks to creditors
totaling P350,000 causing an overdraft of P100,000 in Davao Corp.’s bank account at
December 31, 2016. The checks were mailed on January 10, 20Y2.
·
On December 28, 20Y1, Davao Corp. purchased and received goods for
P200,000, terms 2/10, n/30. Davao Corp. records purchases and accounts payable at net
amounts. The invoice was recorded and paid January 3, 20Y2.
·
Goods shipped FOB destination on December 20, 20Y1 from a vendor to Davao
Corp were received January 2, 20Y2. The invoice cost was P65,000.
At December 31, 20Y1, what amount should Davao Corp report as total accounts payable?
Select one:
=P1,346,000
Solution:
Accounts payable, unadjusted
800,000.00
Undelivered check
350,000.00
Unrecorded purchases, net of discount (200,000 x 98%)
196,000.00
Accounts payable, adjusted
1,346,000.00
IAS 39 was felt to work well as regards the accounting for financial liabilities; therefore the IASB felt that
there was little need for change. As a result of the lack of change in IFRS 9, how are most financial liabilities
likely to be measured?
=Amortised cost
Financial liabilities include
=Bank overdraft.
Company A, a listed company, has an obligation to deliver to Company B as many of company A’s own
ordinary shares as will equal P1,000,000. Company A’s financial instrument will be classified as
=Financial liability.
Macar Corporation had accounts payable of P5,000,000 recorded in the general ledger as of December
31, 2016 before consideration of the following unrecorded transactions:
Invoice
Date
Date
date
Amount shipped
received
FOB terms
1-3-17
P400,000 12-22-16 12-24-16
Destination
1-2-17
650,000 12-28-16 1-2-17
Shipping point
12-26-16 600,000 1-2-17
1-3-17
Shipping point
1-10-17 450,000 12-31-16 1-5-17
Destination
In the December 31, 2016 statement of financial position, the accounts payable should be reported in the
amount of
=P6,050,000
Math Inc. signed a P200,000 noninterest-bearing note due in five years from a production company eager
to do business. Comparable borrowings have carried an 11% interest rate. At what amount should this
debt be carried at its inception?
=P118,690
Solution:
Face amount of note
200,000.00
Multiply by: PV of 1 at 11% for 5 periods
0.59345
Initial measurement of note
118,690.00
R is preparing its financial statements for the year ended December 31, 2006. Accounts payable
amounted to P360,000 before any necessary year-end adjustment related to the following:
a. At December 31, 2006, R has a P50,000 debit balance in its account payable to C, a supplier,
resulting from a P50,000 advance payment for goods to be manufactured to R’s specifications.
b. Checks in the amount of P100,000 were written to vendors and recorded on December 29,
2006. The checks were mailed on January 5, 2007.
R should report as accounts payable in its December 31, 2006 balance sheet?
=P 510,000
Onshing Industries purchases new specialized manufacturing equipment on July 1, 2012. The equipment
cash price is P79,000. Onshing signs a deferred payment contract that provides for a down payment of
P10,000 and an 8-year note for P103,472. The note is to be paid in 8 equal annual payments of
P12,934. The payments include 10% interest and are made on June 30 of each year, beginning June 30,
2013.
The carrying amount of the note payable on December 31, 2013 is
=P66,115
Solution:
Annual payments
Multiply by: PVF of OA of P1 at 10% for 8 periods
Initial measurement, 7/1/2012
Less: Amortization of note
2013 Payment
Less: Interest expense
(P69,001.60 x 10%)
12,934.00
5.3349
69,001.60
12,934.00
6,900.16
6,033.84
Carrying amount, 7/1/2013
Add: Interest expense, 7/1 to 12/31/2013
(P62,967.76 x 10% x 6/12)
62,967.76
Carrying amount, 12/31/2013
66,116.14
3,148.39
On January 1, 20Y1, Benham Company issued 10% bonds in the face amount of P5,000,000
that mature on December 31, 20Y10. The bonds were issued for P4,430,000 to yield 12%, resulting in bond
discount of P570,000. The entity used the interest method of amortizing bond discount. Interest is payable
on June 30 and December 31. What is the interest expense for 20Y1?
=532,548
Solution
Carrying amount, Jan 1, 2Y01
4,430,000.00
Add: Amortization of discount, June 30
Effective interest (4,430,000 x 6%)
265,800.00
Nominal interest (5,000,000 x 5%)
250,000.00
15,800.00
Carrying amount, Jun 30, 2Y01
4,445,800.00
Multiply by: Effective interest
6%
Interest expense, Jul 1 to Dec 31, 2Y01
266,748.00
Interest expense, Jan 1 to Jun 30, 2Y01
265,800.00
Total interest expense, 2Y01
532,548.00
On August 1, 2013 Sampaloc Corp.’s P2,000,000, one-year non-interest-bearing note due July 31, 2013,
was discounted at Manila Bank at 10.8%. Sampaloc uses the straight-line method of amortizing
discount. What amount should Sampaloc report for notes payable in its December 31, 2013 statement of
financial positiP1,200,000on?
=P1,874,000
Solution:
Face amount of note
Less: Discount on notes payable, 12/31/2013
Discount at issuance
(P2,000,000 x 10.8%)
216,000.00
Less: Amortization
(P216,000 x 5/12)
90,000.00
Carrying amount of note, 12/31/2013
2,000,000.00
126,000.00
1,874,000.00
Due to adverse economic circumstances and poor management, Zubic Company has negotiated a
restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank has agreed to reduce the face
value of the note from P5,000,000 to P4,000,000, reduce the interest rate from 15% to 10%, and extend
the due date three years from the date of restructuring. The restructuring will occur on December 31, 2013,
the last day of Zubic’s annual reporting period. The unpaid interest on the restructured loan at this time is
P750,000 which is forgiven. The tax rate is 35%. (Round off present value factors to four decimal places)
How much is the on gain on extinguishment of debt for the year 2013?
=P2,206,720
Face amount of old note
Accrued interest
5,000,000.00
750,000.00
Carrying amount of debt
Less: Fair value of new debt
PV of Principal (P4,000,000 x 0.6575)
PV of Interests (P4,000,000 x 10% x 2.2832)
5,750,000.00
2,630,000.00
913,280.00
Gain on extinguishment of debt
3,543,280.00
2,206,720.00
Onshing Industries purchases new specialized manufacturing equipment on July 1, 2012. The equipment
cash price is P79,000. Onshing signs a deferred payment contract that provides for a down payment of
P10,000 and an 8-year note for P103,472. The note is to be paid in 8 equal annual payments of
P12,934. The payments include 10% interest and are made on June 30 of each year, beginning June 30,
2013.
The total interest expense for the year ended December 31, 2013 is
=P6,599
Solution:
Jan 1-Jun 30 Interest (P69,001.60 x 10% x 6/12)
Jul 1-Dec 31 Interest (P62,967.76 x 10% x 6/12)
Interest expense, 2013
3,450.08
3,148.39
6,598.47
On September 1, 2012, Nagtahan Co. borrowed on a P1,350,000 note payable from Dilly Bank. The note
bears interest at 12% and is payable in three equal annual principal payments of P450,000. On this date,
the bank’s prime rate was 11%. The first annual payment for interest and principal was made on September
1, 2013. At December 31, 2013, what amount should Nagtahan report as accrued interest payable.
=P36,000
Solution:
Face amount of loan, 12/31/2013
(P1,350,000-P450,000)
900,000.00
Multiply by: Nominal interest rate 12%
Total interest payable
Multiply by: Sep 1-Dec 31, 2013
108,000.00
4/12
Accrued interest payable
36,000.00
On December 30, 2016, Jeepney, Inc. purchased a machine from Abiss Corp. in exchange for a
noninterest-bearing note requiring eight payments of P20,000. The first payment was made on
December 30, 2016, and the others are due annually on December 30. At date of issuance, the
prevailing rate of interest for this type of note was 11%. Present value factors are as follows:
Present value of
Present value of
Periods
ordinary annuity of 1
annuity in advance
at 11%
of 1 at 11%
7
4.712
5.231
8
5.146
5.712
On Jeepney’s December 31, 2016 statement of financial position, the note payable to Abiss was
=P 94,240
On December 31, 2013, Quirino Company purchased equipment from Ott Corp. and issued a
noninterest-bearing note requiring payment of P50,000 annually for ten years. The first payment is due
December 31, 2013, and the prevailing rate of interest for this type of note at date of issuance is
12%. Present value factors are as follows:
Present value of 1 at 12% for 10 periods
Present value of ordinary annuity of 1 at 12% for 10
periods
Present value of annuity due of 1 at 12% for 10 periods
0.3220
5.6502
6.3282
The interest expense to be reported by Park in its 2014 income statement is
=P31,969
Solution:
Annual payment
Multiply by: PVF of AD of P1 at 12% for 10 periods
50,000.00
6.3282
Initial measurement of note
Less: 12/31/2013 Payment
316,410.00
50,000.00
Carrying amount, 1/1/2014
266,410.00
Multiply by: Interest rate
12%
Interest expense
31,969.20
PonyTail Corp. has an outstanding 10% note payable dated October 1, 2011 and is payable in three equal
annual payments of P600,000 plus interest. The first interest and principal payment was made on October
1, 2012. In PonyTail 's June 30, 2013 statement of financial position, what amount should be reported as
accrued interest payable for this note?
=90,000
Silver Company purchased merchandise for resale on January 1, 2013, for P5,000 cash plus a P20,000,
two-year note payable. The principal is due on December 31, 2014. The note specified 8 percent interest
payable each December 31. Silver's going rate of interest for this type of debt was 15 percent. How much
is the carrying amount of the note payable on December 31, 2013?
=P18,781
Solution:
PV of Principal (P20,000 x 0.7561)
PV of Interest (P20,000 x 8% x 1.6257)
15,122.00
2,601.12
Initial measurement, 1/1/2013
Add: Amortization of discount
Interest expense
(P17,723.12 x 15%)
2,658.47
Less: Interest payable
(P20,000 x 8%)
1,600.00
17,723.12
Carrying amount, 12/31/2013
18,781.59
1,058.47
On December 30, 20CY, Jeepney, Inc. purchased a machine from Abiss Corp. in exchange for a
noninterest-bearing note requiring eight payments of P20,000. The first payment was made on
December 30, 20CY, and the others are due annually on December 30. At date of issuance, the
prevailing rate of interest for this type of note was 11%. Present value factors are as follows:
Present value of ordinaryPresent value of annuity in
Periods annuity of 1 at 11%
advance of 1 at 11%
7
4.712
5.231
8
5.146
5.712
On Jeepney’s December 31, 20CY statement of financial position, the note payable to Abiss was
=P 94,240
Solution
Annuity payments
20,000.00
Multiply by: PV of AD of 1 at 11% for 8 periods
5.712
Present value of note
114,240.00
Less: First annuity due payment
20,000.00
Carrying amount of note, Dec 31, 20CY
94,240.00
On January 1, 2016, Philippines Company received P1,077,200 for P1,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The entity
has elected the fair value option for valuing financial liabilities. On December 31, 2016, the fair value of the
bonds is determined to be P1,064,600. On the basis above, compute for the following:
1)
Carrying amount – 1/1/16
2)
Interest expense – 2016
3)
Gain from change in fair value – 2016
Carrying amount – 12/31/16
=1) 1,077,200 2) 120,000 3) 12,600 gain 4) 1,064,600
On January 1, 20Y1, Benham Company issued 10% bonds in the face amount of P5,000,000
that mature on December 31, 20Y10. The bonds were issued for P4,430,000 to yield 12%, resulting in bond
discount of P570,000. The entity used the interest method of amortizing bond discount. Interest is payable
on June 30 and December 31. What is the carrying amount of the bonds payable at December 31, 20Y1?
=4,462,548
4)
Solution
Carrying amount, Jan 1, 2Y01
4,430,000.00
Add: Amortization of discount, June 30
Effective interest (4,430,000 x 6%)
265,800.00
Nominal interest (5,000,000 x 5%)
250,000.00
15,800.00
Carrying amount, Jun 30, 2Y01
4,445,800.00
Add: Amortization of discount, Dec 31
Effective interest (4,445,800 x 6%)
266,748.00
Nominal interest (5,000,000 x 5%)
250,000.00
16,748.00
Carrying amount, Dec 31, 2Y01
4,462,548.00
On June 30, 2014, Jerome Company issued at 99, five thousand of its 8%, P1,000 face value bonds. The
bonds were issued through an underwriter to whom Jerome paid bond issue cost of P425,000. On June
30, 2014, Jerome should report the bond liability at
=4,525,000
On January 1, 2011 Lassie Company issued a 5-year, 10% convertible bond with a face amount of
P1,000,000. The bonds were issued for P995,002. Transaction costs were likewise incurred
amounting to P18,260. The fair value of a similar instrument with no conversion feature is quoted at
P945,252 which was effectively at 11.5%.
Interest expense for 2011
=108,704
Solution:
Fair value of bonds without conversion option
Multiply by: Effective interest
945,252.00
11.5%
Interest expense, 2011
108,703.98
Pulilio Company’s December 31, 2013 statement of financial position contained the following items in
the long-term liabilities section:
10% registered bonds, callable in 2014, due 2016,
secured by machinery
11% bonds, convertible into ordinary shares
beginning in 2014, due in 2018, secured by realty
12% collateral trust bonds (P500,000 maturing
annually)
P3,000,000
5,000,000
7,000,000
What is the total amount of Pulilio’s term bonds and debenture bonds, respectively?
=P 8,000,000 and P 0
Solution:
10% registered bonds
11% convertible bonds
12% collateral trust bonds
Totals
Term
Serial
Secured
Debentures
bonds
3,000,000.00
5,000,000.00
bonds
bonds
7,000,000.00
bonds
3,000,000.00
5,000,000.00
7,000,000.00
7,000,000.00
15,000,000.00
0.00
8,000,000.00
On January 1, 2016, Watch Company issued 3-year bonds with face value of P5,000,000 at 99. The nominal
rate is 10% and the interest is payable annually on December 31. Additionally, the entity aid bond issue
cost of P150,000. What is the interest expense for 2016 using the effective interest method?
=559,680
On January 1, 20CY, Tudor Company issued its 10%, 5-year convertible debt instrument with a
face amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each year.
The debt instrument is convertible into 90,000 ordinary shares with a par value of P100. When the
debt instruments were issued, they were selling at 97% without conversion option. Tudor Company
incurred P80,000 transaction costs on the issue of the debt instruments.
How
much
of
the
=P 9,622,400
net
proceeds
represent
the
debt
Solution
Selling price of compound financial instrument
10,000,000.00
Less: Transaction costs
80,000.00
Total proceeds
9,920,000.00
Multiply by:
0.97
component?
Debt component
9,622,400.00
On 1 January 2Y01, Entity A issued a 10 per cent convertible debenture with a face value of P1,000,000
maturing on 31 December 2Y10. The debenture is convertible into ordinary shares of Entity A at a
conversion price of P25 per share. Interest is payable half-yearly in cash. At the date of issue, Entity
A could have issued nonconvertible debt with a ten-year term bearing a coupon interest rate of 11 per
cent.
On 1 January 2Y06, to induce the holder to convert the convertible debenture promptly, Entity A
reduces the conversion price to P20 if the debenture is converted before 1 March 2Y06 (ie within 60
days). The market price of Entity A’s ordinary shares on the date the terms are amended is P40 per
share.
Compute the amount to be recognized in profit or loss as a result of the amendment of the terms.
=P400,000
Company A issues 2,000 convertible notes on July 1, 2005. The notes have a three-year term and are
issued at par. The notes pay interest at 12% annually in arrears. The holder of each note is entitled to
convert the note into 250 ordinary shares of Company A at any time up to maturity. Company A’s financial
instrument will be classified as
=Compound financial instrument.
On January 1, 2016, NinePM Company issued its 10%, 5-year convertible debt instrument with a face
amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 90,000 ordinary shares with par value of P100. When the debt instrument was
issued, they were selling at 97% without conversion option. NinePM Company incurred P80,000 transaction
costs on the issue of the debt instruments. How much of the net proceeds represent the equity component?
=P 297,600
Which statement is incorrect regarding convertible bonds?
=The proceeds from issuance of convertible bonds must be allocated to the liability
and equity components pro rata based on fair values.
January 1, 20CY, Entity A issues convertible bonds with a maturity of five years. The issue is for a total of
1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate is 5% per year, and
is convertible into 5 ordinary shares of Entity A. The convertible bonds were issued to Entity O at par. The
per-share price for an Entity A share is P15. Quotes for similar bonds issued by Entity A without a
conversion option (i.e., bonds with similar principal and interest cash flows) suggest that they can be sold
for P900,000.
The issuance of convertible bonds increased Entity A’s equity by
=P100,000
Solution:
Issue price of bonds (P1,000 x 1,000 x 1.0)
1,000,000.00
Less: Fair value of bonds ex-warrants
900,000.00
Equity component
100,000.00
On January 1, 2014, Icar Company issued convertible bonds with a face value of P5,000,000 for
P6,000,000. The bonds are convertible into 50,000 shares with P100 par value. the bonds have a 5-year
life with 10% stated interest rate payable annually every December 31. The fair value of the convertible
bonds without conversion option is computed at P5,399,300 n January 1, 2014. On December 31, 2016,
the convertible bonds were not fully converted but fully paid for P5,550,000. On such date, the fair value of
the bonds without conversion privilege is P5,400,000 and the carrying amount is P5,178,300. What is the
loss on the extinguishment of the convertible bonds on December 31, 2016?
=221,700
On December 31, 20CY, Atimonan Company issued 8,000 of its 8%, 10-year P1,000 face value bonds with
detachable share warrants at 120. Each bond carried a detachable warrant for two shares of Atimonan’s
P100 par value ordinary shares at a specified option price of P150. Immediately after issuance, the market
value of the bonds ex-warrants was P8,100,000 and the market value of the warrants was P900,000. The
issuance of the bonds increased Atimonan’s equity by
=P1,500,000
Solution:
Issue price of bonds (P1,000 x 8,000 x 1.2)
9,600,000.00
Less: Fair value of bonds ex-warrants
8,100,000.00
Equity component
1,500,000.00
On January 1, 20Y1, Jumbo Corporation issued a P3 million 6% convertible bonds at par. The bonds are
redeemable at a premium of 10% on December 31, 20Y4 or it may be converted into ordinary shares on
the basis of 50 shares for each P1,000 bond at the option of the holder. The interest rate for an equivalent
bond without the conversion rights would have been 10%. (Round-off present value factors to four decimal
places)
The issuance of convertible bonds on January 1, 20Y1 increased the entity’s equity by
=P380,418
Solution:
Issue price of bonds
3,000,000.00
Less: PV of bonds without conversion
PV of principal (P3,000,000 x 0.6830)
2,049,000.00
PV of interest (P3,000,000 x 6% x 3.1699)
570,582.00
Equity component
2,619,582.00
380,418.00
An entity issues 2,000 convertible bonds at the beginning on January 1, 20CY. The bonds have a threeyear term, and are issued at par with a face value of P1,000 per bond. Interest is payable annually in
arrears at a nominal annual interest rate of 6 percent. Each bond is convertible at any time up to maturity
into 250 ordinary shares. The entity has an option to settle the principal amount of the convertible bonds
in ordinary shares or in cash. When the bonds are issued, the prevailing market interest rate for similar
debt without a conversion option is 9 percent. At the issue date, the market price of one ordinary share is
P3. The issuance of convertible bonds increased the entity’s equity by
=P151,878
Solution
Total proceeds (P1,000 x 2,000)
2,000,000.00
Less: Present value of bonds without conversion option
PV of Principal (2,000,000 x 0.77218)
1,544,367.00
PV of Interest (2,000,000 x 6% x 2.53129)
303,755.00
Equity portion
1,848,122.00
151,878.00
Under IAS 39, is a derivative (e.g., an equity conversion option) that is embedded in another con tract (e.g.,
a convertible bond) accounted for separately from that other contract?
=It depends. IAS 39 requires embedded derivatives to be accounted for separately if, and
only if, the economic characteristics and risks of the embedded derivative and the host contract are not
closely related and the combined contract is not measured at fair value with changes in fair value recognized
in profit or loss.
Bass Company issued 2,000 convertible bonds on January 1, 2011. The bonds have a three-year term
and are issued at 110 with a face value of P1,000 each. Interest is payable annually in arrears at a
nominal 6% interest rate. Each bond is convertible at anytime up to maturity into 100 ordinary shares
with a par value of P5. The prevailing rate for a similar debt instrument without any conversion option
at the time of issuance is 9%
The present value of P1 @ 9% for three periods is 0.77 and the present value of an ordinary annuity at
9% for three periods is 2.53
The equity component of the issuance is
=356, 400
Solution:
Fair value of compound financial instrument
(P1000 x 2,000 x 110%)
Less: Bonds without conversion option
PV of Principal (P2,000,000 x 0.77) 1,540,000.00
PV of Interests (P2M x 6% x 2.53)
303,600.00
Equity component
2,200,000.00
1,843,600.00
356,400.00
On January 1, 20CY, Entity A issues convertible bonds with a maturity of five years. The issue is for a total
of 1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate is 5% per year,
and is convertible into 5 ordinary shares of Entity A. The convertible bonds were issued to Entity O at
par. The per-share price for an Entity A share is P15. Quotes for similar bonds issued by Entity A without
a conversion option (i.e., bonds with similar principal and interest cash flows) suggest that they can be sold
for P900,000.
The carrying amount of bonds payable on Entity A’s books as of December 31, 20CY is
=P 917,320
Solution:
New effective rate
7.47%
Carrying amount of bonds, Jan 1, 20CY
900,000.00
Add: Amortization of discount
Interest expense (P900,000 x 7.47%)
67,230.00
Interest paid (P1,000,000 x 5%)
(50,000.00)
17,230.00
Carrying amount of bonds, Dec 31, 20CY
917,230.00
In a debt restructuring that is considered an asset swap, the gain on extinguishment is equal to the
=Excess of the carrying amount of the debt over the carrying amount of the asset.
Sun Company, after having experienced financial difficulties in 2012, negotiated with a major creditor
and arrived at an agreement to restructure its loan on December 31, 2012. Principal loan balance is
P7,200,000 interest of P800,000. The creditor accepted an equipment with a fair value of P1,400,000
and a note receivable from Sun Company’s customer with a carrying amount of P5,400,000. The
equipment’s original cost was P1,800,000 and its related depreciation was P600,000.
The amount of gain recognized arising from the debt restructuring by way of an “asset swap” is
=1,400,000
Solution:
Principal loan balance
Accrued interest
7,200,000.00
800,000.00
Carrying amount of liability
Less: Consideration transferred
Carrying amount of equipment
(P1,800,000-P600,000)
Carrying amount of note receivable
8,000,000.00
Gain (loss) on asset swap
1,200,000.00
5,400,000.00
6,600,000.00
1,400,000.00
Island Company owes P2, 000, 000 plus P180,000 of accrued interests to First State Bank. The debt is a
10-year, 10% notes. During 20Y1, Island’s business deteriorated due to a faltering regional economy. On
December 31, 20Y4, First State Bank agrees to accept an old machine and cancel the entire debt. The
machine has a cost of P3,900,000, accumulated depreciation of P2, 210,000, and a fair market value of
P1, 900,000.
How much should Island Company recognize as a finance income in its profit or loss as a result of the
financial
liability
derecognition?
Select one:
=P490, 000
Solution
Principal amount of debt
2,000,000.00
Accrued interest
180,000.00
Carrying amount of obligation
2,180,000.00
Less: Carrying amount of machine
Cost
3,900,000.00
Accumulated depreciation
(2,210,000.00)
Gain on extinguishment of debt
1,690,000.00
490,000.00
On December 31, 2016, Kotse Co. is in financial difficulty and cannot pay a note due that day. It is a 600,000
note with 60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Kotse a building that
has a fair value of 590,000, an original cost of 530,000, and accumulated depreciation of 130,000. Kotse
should recognize a gain on the settlement of the debt of
=260,000
Island Company owes P2, 000, 000 plus P180,000 of accrued interests to First State Bank. The
debt is a 10-year, 10% notes. During 20Y1, Island’s business deteriorated due to a faltering regional
economy. On December 31, 20Y4, First State Bank agrees to accept an old machine and cancel
the entire debt. The machine has a cost of P3,900,000, accumulated depreciation of P2, 210,000,
and a fair market value of P1, 900,000.
How much should Island Company recognize as a finance income in its profit or loss as a result of the
financial
liability
derecognition?
=P490, 000
Solution
Principal amount of debt
2,000,000.00
Accrued interest
180,000.00
Carrying amount of obligation
2,180,000.00
Less: Carrying amount of machine
Cost
3,900,000.00
Accumulated depreciation
(2,210,000.00)
Gain on extinguishment of debt
1,690,000.00
490,000.00
Misamis Company is indebted to Occidental Company under a P5,000,000, 10% three-year note dated
December 31, 20Y1. Because of financial difficulties, Misamis owed accrued interest of P500,000 on the
note at December 31, 20Y1 Under a debt restructuring on December 31, 20Y4, Occidental Company
agreed to settle the note and accrued interest for a tract of land having a fair value of P3,500,000. The
acquisition cost of the land is P1,000,000. The income tax rate is 35%. In its 20Y4 income statement
Misamis should report gain on extinguishment of debt at
=P4,500,000
Solution
Principal amount of debt
5,000,000.00
Accrued interest
500,000.00
Carrying amount of obligation
5,500,000.00
Less: Carrying amount of asset
1,000,000.00
Gain on extinguishment of debt
4,500,000.00
Jeffrey Company is indebted to Apex under a P5,000,000, 12% three-year note date December 31,
2012. Because of Jeffrey’s financial difficulties developing in 2014, Jeffrey owed accrued interest of
P600,000 on the note at December 31, 2014. Under a debt restructuring on December 31, 2014, Apex
agreed to settle the note and accrued interest for a tract of land having a fair value of P4,500,000. Jeffrey’s
acquisition cost of the land is P3,600,000. Ignoring income tax in its 2014 income statement, what amount
of gain on extinguishment should Jeffrey report as component of income from continuing operations?
=2,000,000
Moon Company is experiencing financial difficulty and is negotiating a debt restructuring with its
creditor. Moon Company has an outstanding financial liability of P5,000,000.
Stars Financing Company accepted an equity interest in Moon Company in the form of 500,000, P9
par value ordinary shares which at the time of restructuring was quoted at P9.80 per share. The fair
value of the obligation at the time of the restructuring was P4,800,000
The amount of gain to be recognized arising from the debt restructuring by way of an “equity swap” is
=100,000
Solution:
Carrying amount of liability
Less: Fair value of shares issued
(P9.80 x 500,000)
5,000,000.00
Gain (loss) on equity swap
100,000.00
4,900,000.00
Due to adverse economic circumstances and poor management, Compostela Company has negotiated a
restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank has agreed to reduce the face
value of the note from P5,000,000 to P4,000,000, reduce the interest rate from 15% to 10%, and extend
the due date three years from the date of restructuring. The restructuring will occur on December 31, 20CY,
the last day of Compostela’s annual reporting period. The unpaid interest on the restructured loan at this
time is P750,000 which is forgiven. The tax rate is 35%. (Round off present value factors to four decimal
places)
How much is the on gain on extinguishment of debt for the year 20CY?
=P2,206,720
Solution:
Face amount of note
5,000,000.00
Accrued interest payable
750,000.00
Carrying amount of debt
5,750,000.00
Less: PV of new obligation
PV of principal (P4,000,000 x 0.6575)
2,630,000.00
PV of interest (P4,000,000 x 10% x 2.2832)
913,280.00
Gain on extinguishment of debt
3,543,280.00
2,206,720.00
There is substantial modification of terms of an old financial liability if the gain or loss on extinguishment is
=At least 10% of the carrying amount of the old liability.
Due to adverse economic circumstances and poor management, Library Company had negotiated a
restructuring of its 9% P6,000,000 note payable to Banco de Oro due on January 1, 2016. There is no
accrued interest on the note. The bank has reduced the principal obligation from P6,000,000 to P5,000,000
and extend the maturity to 3 years on December 31, 2018. However, the new interest rate is 13% payable
annually every December 31. The present value of 1 at 9% for three periods is 0.77 and the present value
of an ordinary annuity of 1 at 9% for three periods is 2.53. What is the gain on extinguishment of debt to be
recognized for 2016?
=0
On December 31, 20Y1, Merciful Bank entered into a debt restructuring agreement with Miserable Corp.,
which was experiencing financial difficulties. A note for P1,000,000 and one year's accrued interest was
due on this date from Miserable. The note receivable from Miserable was restructured as follows:




reduced the principal obligation to P700,000.
forgave the P120,000 of accrued interest for 20Y1.
extended the maturity date to December 31, 20Y4.
reduced the interest rate to 8%.
Interest is payable annually on December 31, beginning 20Y2. In accordance with the agreement,
Miserable made payments to Merciful Bank on December 31, 20Y2, 20Y3 and 20Y4. (Round off present
value factors to four decimal places)
How much interest expense should Miserable report for the year ended December 31, 20Y2?
=P75,931
Solution:
PV of principal (P700,000 x 0.7118)
498,260.00
PV of interest (P700,000 x 8% x 2.4018)
134,501.00
PV of new obligation
632,761.00
Multiply by: Old interest rate
12%
Interest expense, 20Y2
75,931.00
Due to adverse economic circumstances and poor management, Compostela Company has negotiated a
restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank has agreed to reduce the face
value of the note from P5,000,000 to P4,000,000, reduce the interest rate from 15% to 10%, and extend
the due date three years from the date of restructuring. The restructuring will occur on December 31, 20Y1,
the last day of Compostela’s annual reporting period. The unpaid interest on the restructured loan at this
time is P750,000 which is forgiven. The tax rate is 35%. (Round off present value factors to four decimal
places)
How much is the interest expense in 20Y2?
=P531,492
Solution:
PV of principal (P4,000,000 x 0.6575)
2,630,000.00
PV of interest (P4,000,000 x 10% x 2.2832)
913,280.00
PV of new obligation
3,543,280.00
Multiply by: Old interest rate
15%
Interest expense, 20Y2
531,492.00
Due to adverse economic circumstances and poor management, Sultan Company has negotiated a
restructuring of its P10,000,000 note payable to Kudarat Bank. Kudarat Bank has agreed to reduce the
face value of the note to P8,000,000 and extend the due date three years from the date of
restructuring. However, the interest rate was increased from 15% to 21%. The restructuring will occur on
December 31, 20CY. There is no unpaid interest on the restructured loan at this time. The tax rate is
35%. How much is the gain on extinguishment of debt for the year 20CY? (Round off present value factors
to four decimal places)
=P904,224
Solution:
Face amount of note
10,000,000.00
Less: PV of new obligation
PV of principal (P8,000,000 x 0.6575)
5,260,000.00
PV of interest (P8,000,000 x 21% x 2.2832)
3,835,776.00
Gain on extinguishment of debt
9,095,776.00
904,224.00
On December 31, 20Y1, Merciful Bank entered into a debt restructuring agreement with Miserable Corp.,
which was experiencing financial difficulties. A note for P1,000,000 and one year's accrued interest was
due on this date from Miserable. The note receivable from Miserable was restructured as follows:




reduced the principal obligation to P700,000.
forgave the P120,000 of accrued interest for 20Y1.
extended the maturity date to December 31, 20Y4.
reduced the interest rate to 8%.
Interest is payable annually on December 31, beginning 20Y2. In accordance with the agreement,
Miserable made payments to Merciful Bank on December 31, 20Y2, 20Y3 and 20Y4. (Round off present
value factors to four decimal places)
The gain on extinguishment of debt to be recognized in Miserable’s 2008 profit or loss is
=P487,239
Solution:
Face amount of note
1,000,000.00
Accrued interest payable
120,000.00
Carrying amount of obligation
1,120,000.00
Less: PV of new obligation
PV of principal (P700,000 x 0.7118)
498,260.00
PV of interest (P700,000 x 8% x 2.4018)
134,501.00
Gain on extinguishment of debt
632,761.00
487,239.00
Due to adverse economic circumstances and poor management, Depressed Company has negotiated a
restructuring of its P5,000,000 note payable to Benevolent Bank. Benevolent Bank has agreed to reduce
the face value of the note to P4,000,000 and extend the due date three years from the date of
restructuring. However, the interest rate was increased from 15% to 21%. The restructuring will occur on
December 31, 20Y1. There is no unpaid interest on the restructured loan at this time. The tax rate is
35%. (Round off present value factors to four decimal places)
The gain on extinguishment of debt to be recognized in Depressed Company’s 20Y1 profit or loss is
=P452,112
Solution:
Face amount of note
5,000,000.00
Less: PV of new obligation
PV of principal (P4,000,000 x 0.6575)
2,630,000.00
PV of interest (P4,000,000 x 21% x 2.2832)
1,917,888.00
Gain on extinguishment of debt
4,547,888.00
452,112.00
Due to extreme financial difficulties Cloud Company negotiated to restructure its 10%, P5,000,000 note
obligation maturing on December 31, 2010. The following modifications are to be applied in relation to
the debt restructuring agreement as approved by Nimbus Financing.

Waiver of the unpaid interest amounting to P500,000



Reduction of the principal amount to P4,000,000
Reduction of the original interest rate to 8%
Extension of the due date three years from December 31, 2010
Present value of P1 @ 10% for three periods is 0.75;
Present value of an ordinary annuity of P1 @ 10% for three periods 2.49
The amount of gain to be recognized arising from the debt restructuring by way of a “modification of
terms” is
=1,703,200
Solution:
Original face amount of note
Accrued interest
5,000,000.00
500,000.00
Carrying amount of liability
Less: Fair value of new liability
PV of new principal (P4,000,000 x 0.75)
PV of new interest (P4M x 8% x 2.49)
5,500,000.00
Gain (loss) on debt restructuring
3,000,000.00
796,800.00
3,796,800.00
1,703,200.00
Due to adverse economic circumstances and poor management, Depressed Company has negotiated a
restructuring of its P5,000,000 note payable to Benevolent Bank. Benevolent Bank has agreed to reduce
the face value of the note to P4,000,000 and extend the due date three years from the date of
restructuring. However, the interest rate was increased from 15% to 21%. The restructuring will occur on
December 31, 20Y1. There is no unpaid interest on the restructured loan at this time. The tax rate is
35%. (Round off present value factors to four decimal places)
How much is the carrying amount of the note on December 31, 20Y2?
=P4,700,500
Solution:
PV of principal (P4,000,000 x 0.6575)
2,630,000.00
PV of interest (P4,000,000 x 21% x 2.2832)
1,917,888.00
PV of new obligation
4,547,888.00
Add: Amortization of note
Interest paid (P4,000,000 x 21%)
840,000.00
Interest expense (P4,547,888 x 15%)
(682,183.00)
Carrying amount, Dec 31, 20Y2
157,817.00
4,705,705.00
On December 31, 20CY, X Corp. was indebted to Zyland Co. on a P1,000,000, 10% note. Only interest
had been paid to date, and the remaining life of the note was 2 years. Because X Corp. was in financial
difficulties, the parties agreed that X Corp. would settle the debt on the following terms:



Settle one-half of the note by transferring land with a recorded value of P400,000 and a fair value
of P450,000.
Settle one-fourth of the note by transferring 10,000, P1 par, ordinary shares with a fair market
value of P15 per share.
Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5% for the
remaining 2 years and reducing the principal to P150,000.
What total gains should X Corp. record in 20CY from this troubled debt restructuring?
=P213,024
Solution:
Carrying amount of debt (P1,000,000 x 1/2)
500,000.00
Less: Carrying amount of land
400,000.00
Gain on settlment of debt (asset swap)
100,000.00
Carrying amount of debt (P1,000,000 x 1/4)
250,000.00
Less: Par value of share capital issued (10,000 x P1)
10,000.00
Share premium
240,000.00
Carrying amount of debt (P1,000,000 x 1/4)
250,000.00
Less: PV of new obligation
PV of principal (P150,000 x 0.8264)
123,960.00
PV of interest (P150,000 x 5% x 1.7355)
13,016.00
136,976.00
Gain on debt restructuring
113,024.00
Gain from asset swap
100,000.00
Gain from modification of terms
113,024.00
Total gain on debt restructuring
213,024.00
An entity measures a provision at the best estimate of the amount required to settle the obligation at the
reporting date. When the provision involves a large population of items, the estimate of the amount
=reflects the weighting of all possible outcomes by their associated probabilities
An entity measures a provision at the best estimate of the amount required to settle the obligation at the
reporting date. When the provision arises from a single obligation, the estimate of the amount
=is determined as the individual most likely outcome
A manufacturer sells goods to an intermediary at P90. The intermediary purchases the goods for
resale to others. Only the intermediary has the right to return any defective units to the
manufacturer. The intermediary wishes to make a P10 margin on its sales and so it sells the goods
at P100 per unit to customers. If goods are found to be defective, the customers must return the
goods to the intermediary for repair or replacement. In this arrangement
Select one:
=The manufacturer must recognize a warranty provision (liability) for the limited right of
return.
A customer of DL Sharpeners alleges that DL’ new razor sharpener had a defect that resulted in serious
injury to the customer. DL believes the customer has a 51% chance of winning the case, and that if the
customer wins the case, there is a range of losses of between P1,000,000 and P3,000,000 in which any
number is equally likely to occur. DL should accrue a liability in the amount of:
=P2,000,000
Solution:
Probability of lowest amount of damage (P1,000,000 x 50%)
500,000.00
Probability of highest amount of damage (P3,000,000 x 50%)
1,500,000.00
Estimated liability
2,000,000.00
Icar Co. offers a three-year warranty on its products. Icar previously estimated warranty costs to be 2% of
sales. Due to a technological advance in production at the beginning of year 3, Icar now believes 1% of
sales to be a better estimate of warranty costs. Warranty costs of 80,000 and 96,000 were reported in year
1 and year 2, respectively. Sales for year 3 were 5,000,000. What amount should be presented in Icar’s
year 3 financial statements as warranty expense?
=50,000
Draft income statement of Raffles Inc. showed profit of P100,000 before considering the following:
(1) Closing inventory includes goods costing P20,000 which are expected to realize P19,000.
(2) A customer has taken legal action for damages of P50,000 against Raffles. The lawyer of
Raffles has advised the customer that he has a 25% chance of success.
(3) After the balance sheet date, a vehicle was damaged in an accident. The carrying amount of
the vehicle was P6,000. It was not insured.
(4) Raffles has sued one of its competitors for P60,000. The chances Raffles winning the case
are 75%. The outcome will be known in three months.
What is the correct profit after considering the foregoing adjustments?
=P99,000
Solution:
Profit, unadjusted
100,000.00
Inventory writedown (P20,000 - P19,000)
(1,000.00)
Profit, adjusted
99,000.00
During 2016, Isaiah Company guaranteed a supplier’s P750,000 loan from a bank. On October 1, 2016,
Isaiah was notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel
believes Isaiah will probably have to pay between P375,000 and P675,000 under its guarantee. As a result
of the supplier’s bankruptcy, Isaiah entered into a contract in December 2016 to retool its machines so that
Isaiah could accept parts from other suppliers. Retooling costs are estimated to be P450,000. What
amount should Isaiah report as a liability in its December 31, 2016, balance sheet?
=P525,000
Purcell Limited is a manufacturer of swimming pools and provides its customers with warranties at the time
of sale. The warranty applies for three years from the date of sale. Past experience shows that there will
be some claims under the warranties. The appropriate treatment of this items under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets, is to:
=recognise the best estimate of costs as a provision;
JayJay Limited estimated that the future cash outflows relating to settlement of warranty obligations would
be as follows:
Ø In 1 year
Ø In 2 years
Ø In 3 years.
$40 000
$50 000
$60 000.
A government rate for bonds with similar terms, is 6%. What is the present value of the total expected
future cash outflow?
=$132 510;
Solution:
PV of year 1 CF (40,000 x 0.943)
37,720.00
PV of year 2 CF (50,000 x 0.890)
44,450.00
PV of year 3 CF (60,000 x 0.839)
50,340.00
PV of expected cash flow
132,510.00
A customer of DL Sharpeners alleges that DL’ new razor sharpener had a defect that resulted in
serious injury to the customer. DL believes the customer has a 51% chance of winning the case,
and that if the customer wins the case, there is a range of losses of between P1,000,000 and
P3,000,000 in which any number is equally likely to occur. DL should accrue a liability in the amount
of:
Select one:
=P2,000,000
Solution:
Probability of lowest amount of damage (P1,000,000 x 50%)
500,000.00
Probability of highest amount of damage (P3,000,000 x 50%)
1,500,000.00
Estimated liability
2,000,000.00
The Ian Supply Corporation has the following uncertain liabilities at December 31, 20Y2:
a.
In January 20Y1, Ian Supply was sued by a customer for breach of contract. In
November 20Y2, a judgment for P400,000 was assessed against Ian Supply by the court. The
lawyers of Ian feel that it is probable than they can reduce the court's assessment by 50% on
appeal. Thus, no entries were made by the company pending completion of the appeal
process which is expected to take at least a year.
b.
In February 20Y2, a group of environmentalists brought action against the company due
to chemical wastes dumped in a nearby town. It is reasonably possible that the group will be
successful. It is estimated though that the damage that Ian Supply might have to pay should
not exceed the amount of P100,000. No entry was made to reflect the possible loss.
c.
Ian Supply signed as guarantor for a P100,000 loan by United Bank to Limitless
Materials, Inc. Because of financial problems of Limitless, it is possible that Ian Supply will
have to pay the P100,000 loan with only a 60% recovery anticipated from Limitless. No entry
was made in the company's records.
What amount should be reported as liability on the December 31, 20Y2 balance sheet of Ian Supply?
=P400,000
Solution:
a. Liability against from breach of contract (P400,000 x 50%)
200,000.00
b. Liability against chemical wastes
100,000.00
c. Liability against guarantee loan
100,000.00
Total liabilities
400,000.00
Beginning 2016, June Company began marketing a new beer called “Unsweetened Coke”. To help
promote the product, the management is offering a special mug to each customer for every 20 specially
marked bottle caps of Unsweetened Coke. June estimates that out of the 300,000 bottles of Unsweetened
Coke sold during 2016, only 50% of the marked bottle caps will be redeemed. For the year 2016, 8,000
mugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs were already
distributed to customers. What is the amount of the liability that June Company should report on its
December 31, 2016 statement of financial position?
=P135,000
Which of the following is not a contingent liability?
=A possible obligation that arises from past events and whose likelihood of existence is
probable and the amount of obligation can be reasonably estimated
At balance sheet date, Raschella Limited was awaiting the final details of a court case for damages awarded
in its favour. The amount and possible receipt of damages is unknown and will not be decided until the
court sits again in several months time. How is this event dealt with in the preparation of the financial
statements?
=disclose in the notes to the financial statements as it is possible that the entity will receive the
damages and the court decision is out of its control;
The Kuma Company is being sued for damages. When preparing its 20X4 financial statements the directors
took the view that the likelihood of any payments having to be made to the claimant was remote. In
preparing the 20X5 financial statements their view was that it was possible that such payments would have
to be made and in preparing the 2012 statements their view was that such payments were probable. For
the 2013 statements there was virtual certainty that the payments would have to be made. The payments
were made in the 2014 accounting period. Under IAS37 Provisions, contingent liabilities and contingent
assets, in which set of financial statements should a contingent liability first be disclosed?
=20X5
The Cullen Company is finalising its annual financial statements. According to IAS37 Provisions, contingent
liabilities and contingent assets, which ONE of the following should be disclosed in the financial statements
as a contingent liability?
=The company is involved in a legal case which it may possibly lose, although this is not
probable
Melva Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which
consumers claim that one of Melva’s best-selling drugs caused severe health problems. It is reasonably
possible that Melva will lose the suit and have to pay 20 million in damages. Melva is suing another company
for false advertising and false claims against Melva. It is probable that Melva will win the suit and be
awarded 5 million in damages. What amount should Melva report on its financial statements as a result of
these two lawsuits?
=0
In respect to a contingent liability, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, requires
disclosure of
=an estimate of its financial effect;
The following statement, contained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets,
defines
=a contingent asset.
A court case decided on 21 December 2016 awarded damages against CR. The judge has announced
that the amount of damages will be set at a future date, expected to be in March 2017. CR has received
advice from its lawyers that the amount of the damages could be anything between P20,000 and
P7,000,000. As of December 31, 2016, how much should be recognized in the balance sheet regarding
this court case?
=P0
A factory owned by TAXI Inc. was destroyed by fire, and TAXI lodged an insurance claim for the value of
the factory building, and amount equal to one year’s net profit. After several meetings with the
representatives of the insurance company, it was decided, before year-end, that TAXI would receive
compensation equal to 90% of the claim. TAXI received a letter that the settlement check for the amount
had been mailed but it was not received before year-end. How should TAXI treat this in its financial
statements?
=Record 90% of the claim as a receivable as it is virtually certain that the contingent asset
will be received
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate treatment for
a contingent asset in the financial statements of en entity is:
=disclosure of information in the notes, but do not recognise in the financial statements;
Baguio Company includes in packages of its products, coupons that may be presented to retail
stocks to obtain discounts on other Baguio Company products. Retailers are reimbursed for the
face amount of coupons redeemed plus 10% of that amount handling costs. The company honors
request for coupon redemption by retailers up to three months after the coupon expiration date, the
company estimates that 70% of all coupons issued will ultimately be redeemed. Information relating
to coupons issued by the company during 20CY is as follows:
Consumer expiration date
December 31, 20CY
Total face amount of coupons issued
P600,000
Total payments to retailers as of December 31, 2016 P220,000
What amount should Baguio Company report as a liability for unredeemed coupons
=P242,000
Solution:
Total face amount of coupons issued
600,000.00
Multiply by: Estimated % to be redeemed
70%
Estimated amount of coupons to be redeemed
420,000.00
Add: Handling cost (P420,000 x 10%)
42,000.00
Total amount to be paid
462,000.00
Less: Total payments
220,000.00
Estimated liability for unredeemed coupons
242,000.00
Patent Company sells subscriptions to a specialized directory that is published semiannually and
shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and
September 30 cut-off dates are held for the next publication. Cash from subscribers is received evenly
during the year and is credited to deferred revenues from subscriptions. Data relating to 2014 are as
follows:
Deferred revenue from subscriptions, 1,500,000
12/31/13
Cash receipts from subscribers
7,200,000
In its December 31, 2014 statement of financial position, how much should Patent report as deferred
revenue from subscriptions?
=1,800,000
A manufacturer sells goods to an intermediary at P90. The intermediary purchases the goods for resale to
others. Only the intermediary has the right to return any defective units to the manufacturer. The
intermediary wishes to make a P10 margin on its sales and so it sells the goods at P100 per unit to
customers. If goods are found to be defective, the customers must return the goods to the intermediary for
repair or replacement. In this arrangement
=The manufacturer must recognize a warranty provision (liability) for the limited right of
return.
Garner Food Company distributes to consumers coupons which may be presented (on or before a
stated expiration date) to grocers for discounts on certain products of Garner. The grocers are
reimbursed when they send the coupons to Garner. In Garner's experience, 50% of such coupons are
redeemed, and generally one month elapses between the date a grocer receives a coupon from a
consumer and the date Garner receives it. During 20CY Garner issued two separate series of coupons
as follows:
Issued
On
Consumer
Expiration
Date
Amount
Disbursed
as
of
12/31/CY
Total Value
1/1/CY
P500,000
06/30/CY
P236,000
7/1/CY
720,000
12/31/CY
300,000
The only journal entries to date recorded debits to coupon expense and credits to cash of
P536,000. The December 31, 20CY balance sheet should include a liability for unredeemed coupons
of
=P60,000
Solution:
Coupons issued, 7/1/CY
720,000.00
Multiply by:
50%
Expected redemption value
360,000.00
Less: Actual disbursement
300,000.00
Liability for unredeemed coupons
60,000.00
Maricar Company sells gift certificates redeemable only when merchandise is purchased. The certificates
have an expiration date two years after issuance date. Upon redemption or expiration, Maricar recognizes
the unearned revenue as realized. Data for 20CY are as follows:
Unearned revenue, 1/1/20CY
1,000,000
Gift certificates sold
5,000,000
Gift certificates redeemed
4,000,000
Expired gift certificates
Cost of goods sold
500,000
60%
At December 31, 20CY, Maricar report unearned revenue of
Select one:
=P1,500,000
Solution:
Unearned revenue, 1/1/CY
1,000,000.00
Less: Expired gift certificates
500,000.00
Add: Additional unredeemed gift certificates
Gift certificates sold
5,000,000.00
Gift certificates redeemed
(4,000,000.00)
Unearned revenue, 12/31/CY
1,000,000.00
1,500,000.00
RDS Company sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have an expiration date of two years after issuance date. Upon redemption or expiration,
RDS Company recognizes the unearned revenue as realized.
Information for the current year is as follows:
Unearned revenue, January 1, 2012
Gift certificates sold
Gift certificates redeemed
Expired gift certificates
Cost of goods sold
650,000
2,250,000
1,950,000
100,000
60%
The unearned revenue as of December 31, 2012
=P850,000
Brand, Inc. provides incentive compensation plan under which its president receives a bonus equal to 10%
of the corporation’s income in excess of P600,000 before income tax but after deduction of the bonus. If
income before income tax and bonus is P1,920,000 and the tax rate is 32%, the amount of the bonus would
be
=120,000
Lovely Co. requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Information for year 2 is as follows:
Customer advances—balance 12/31/Y1
118,000
Advances received with orders in year 2
184,000
Advances applied to orders shipped in year 2
164,000
Advances applicable to orders cancelled in year 2
50,000
In Lovely’s December 31, Year 2 balance sheet, what amount should be reported as a current
liability for advances from customer?
=88,000
Solution:
Customer advances, 12/31/Y1
118,000.00
Advances received with orders in year 2
184,000.00
Advances applied to orders shipped in year 2
(164,000.00)
Advabces applicable to orders cancelled in year 2
(50,000.00)
Customer advances, 12/31/Y2
88,000.00
Atlanta Co. sells its products in reusable containers. The customer is charged a deposit for each container
delivered and receives a refund for each container returned within two years after the year of
delivery. Atlanta accounts for the containers not returned within the time limit as being retired by the sale
at the deposit amount. Information for 20Y3 is as follows:
Container
deposits
at
December 31, 20Y2, from
deliveries in
20Y1
P150,000
20Y2
430,000
Deposits
for
containers
delivered in 20Y3
P580,000
780,000
Deposits for containers returned
in 20Y3 from deliveries in
20Y1
P 90,000
20Y2
250,000
20Y3
286,000
626,000
In Atlanta’s December 31, 20Y3 balance sheet, the liability for deposits on returnable containers should be
=P674,000
Container deposits at Dec 31, 20Y2
580,000.00
Deposits for containers delivered in 20Y3
780,000.00
Total credits
1,360,000.00
Less: Debit transactions
Deposits for containers returned in 20Y3
626,000.00
Deposits from 20Y1 retired (150,000 - 90,000)
60,000.00
Liability for deposits on returnable containers, Dec 31, 20Y3
686,000.00
674,000.00
In 2012, Beast Hypermarket awards loyalty points to customers who use Beast Hypermarket’s own
credit card to pay for purchases. The award is at the rate of one point for every P250 charged to the
card and each point entitles the customer to a certain credit against future purchases, without time
limit. Beast Hypermarket estimates the fair value of each point at P4 and in 2012, P250,000,000 is
charged to the Beast Hypermarket’s credit card. None of the customers have claimed their
corresponding credit points during 2012.
The amouly’s December 31, Year 2 balance sheet, what amount should be reported as a current liability
for advances from customer?
=P246,000,000
Solution:
Product sales
Points - stand-alone selling price
(P250,000,000/P250 x P4)
250,000,000.00
Total
254,000,000.00
Product sales (P250M x P250M/P254M)
Points (P250M x P4M/P254M)
246,062,992.13
3,937,007.87
Total transaction price
250,000,000.00
Total revenue
246,062,992.13
4,000,000.00
April Company sells appliance service contracts to repair appliances for a two-year period. April's past
experience is that, of the total amount spent for repairs on service contracts, 40 percent is incurred evenly
during the first contract year and 60% is incurred evenly during the second contract year. Receipts from
service contract sales for the two years ended December 31, 2009, are P250,000 in 2008 and P300,000 in
2009. Receipts from contract are credited to unearned service contract revenue. Assume that all contract
sales are made evenly during the year. What amount should April report as unearned service contract
revenue at December 31, 2009?
=P315,000
Lovely Co. requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Information for year 2 is as follows:
Customer advances—balance 12/31/Y1
118,000
Advances received with orders in year 2
184,000
Advances applied to orders shipped in year 2
164,000
Advances applicable to orders cancelled in year 2
50,000
In Lovely’s December 31, Year 2 balance sheet, what amount should be reported as a current
liability for advances from customer?
=88,000
Solution:
Customer advances, 12/31/Y1
118,000.00
Advances received with orders in year 2
184,000.00
Advances applied to orders shipped in year 2
(164,000.00)
Advabces applicable to orders cancelled in year 2
(50,000.00)
Customer advances, 12/31/Y2
88,000.00
Marc Co. sells major household appliance service contracts for cash. The service contracts are for a
one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service
contract revenues. This account had a balance of P600,000 at December 31, 2016 before year-end
adjustment. Service contract costs are charged as incurred to the service contract expense account,
which had a balance of P150,000 at December 31, 2016. Outstanding service contracts at December
31, 2016 expire as follows:
During 2017
During 2018
During 2019
P125,000
P200,000
P90,000
What amount should be reported as unearned service contract revenues in Marc's December 31, 2016
balance sheet?
=P415,000
Dob Company sells appliance service contracts to repair appliances for a two-year period. Dob's past
experience is that, of the total amount spent for repairs on service contracts, 40 percent is incurred evenly
during the first contract year and 60% is incurred evenly during the second contract year. Receipts from
service contract sales for the two years ended December 31, 20Y2, are P250,000 in 20Y1 and P300,000
in 20Y2. Receipts from contract are credited to unearned service contract revenue. Assume that all
contract sales are made evenly during the year. What amount should Dob report as unearned service
contract revenue at December 31, 20Y2?
=P247,500
Solution:
20Y1 Sales, 2nd half, contract year 2 (P250,000 x 1/2 x 60% x 50%)
37,500.00
20Y2 Sales, 1st half, contract year 2 (P300,000 x 1/2 x 60% x 100%)
90,000.00
20Y2 Sales, 2nd half, contract year 1 (P300,000 x 1/2 x 40% x 50%)
30,000.00
20Y2 Sales, 2nd half, contract year 2 (P300,000 x 1/2 x 60% x 100%)
90,000.00
Unearned revenue, Dec 31, 20Y2
247,500.00
PAS 23 defines qualifying assets as assets that necessarily take a substantial period of time to get it ready
for its intended use or sale. Which of the following is not a qualifying asset?
=Machinery that is purchased under a four-year instalment period
Bautista Company is constructing a building. Construction began on January 1 and was completed on
December 31. Expenditures were 2,400,000 on March 1, 1,980,000 on June 1, and 3,000,000 on
December 31. Bautista Company borrowed 1,200,000 on January 1 on a 5-year, 12% note to help finance
construction of the building. In addition, the company had outstanding all year a 10%, 3-year, 2,400,000
note payable and an 11%, 4-year, 4,500,000 note payable.
What are the weighted-average accumulated expenditures?
=3,155,000
Bautista Company is constructing a building. Construction began on January 1 and was completed on
December 31. Expenditures were 2,400,000 on March 1, 1,980,000 on June 1, and 3,000,000 on
December 31. Bautista Company borrowed 1,200,000 on January 1 on a 5-year, 12% note to help finance
construction of the building. In addition, the company had outstanding all year a 10%, 3-year, 2,400,000
note payable and an 11%, 4-year, 4,500,000 note payable.
What is the weighted-average interest rate used for interest capitalization purposes?
=10.65%
PAS 23 defines qualifying assets as assets that necessarily takes a substantial period of time to get it ready
for its intended use or sale. Which of the following is not a qualifying asset?
=Machinery that is purchased under a three-year installment period
Which of the following may not be considered a “qualifying asset” under PAS 23?
=An expensive private jet that can be purchased from a local vendor
AD Company lease office premises to JL Company for a 5-year term starting January 2, 20CY.
Under the terms of the operating leases, rent for the first year is P200, 000 and rent for years 2
through 5 is P300,000 per annum. In addition, as an inducement to enter the lease. AD Company
granted JL Company the first six months of the lease rent-free, a contingent rent equal to 2% of
sales in excess of P12, 000, 000 will be paid by JL Company. In 20CY JL Company reported sales
of P14, 500, 000.
Rent revenue to be reported by AD Company for 20CY is
=310, 000
Solution:
Rental payments, year 1 (P200,000 x 6 mos/12 mos)
100,000.00
Rental payments, year 2-5 (P300,000 x 4 yrs)
1,200,000.00
Total rental payments
1,300,000.00
Divide by: Lease term
5 years
Annual rent revenue
260,000.00
Add: Contingent rent
Reported sales
14,500,000.00
Minimum sales
(12,000,000.00)
Excess
2,500,000.00
Multiply by: Contingent rent rate
2%
50,000.00
Rent revenue, 20CY
310,000.00
Wall Company leased office premises to Fox Company for a five-year term beginning January 1, 2009.
Under the terms of the operating lease, rent for the first year is P800,000 and rent for years 2 through 5 is
PI,250,000 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months
of the lease rent-free. In its 2009 income statement, what amount should Wall report as rental income?
=1,080,000
On July 1, 2009, Kemp Company leased office space for five years at P150,000 a month. On that date,
Kemp paid the lessor the following amounts:
Rent security deposit
350,000
First month's rent
150,000
Last month's rent
150,000
Nonrefundable reimbursement to lessor for
modification to the leased premises
900,000
1,550,000
Kemp made timely rental payments from August 1 through December 1, 2009. What portion of payments
to the lessor should Kemp have recognized as deferred to years beyond 2009?
=1,310,000
On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it
was interested to lease its construction equipment. The carrying amount of the construction equipment
was P12,400,000 which approximates its fair value at this time. Because of the offer Sunshine
Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would
like to have a 9% return rate over the term of the lease. Initial direct costs for this contract was
computed at P80,000. At the end of the lease term, Sunshine Company estimates the residual value
of the equipment to be P200,000.
On November 26, 2012 Moonlight Company sent a proposal in which it agrees with the conditions
initially conveyed by Sunshine Company. Moonlight Company suggested that the commencement date
be on January 1, 2013 and that the annual rentals be scheduled every December 31, starting on
December 31, 2013. Furthermore Moonlight Company communicated that it will only guarantee 70%
of the residual value computed by Sunshine Company.
On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company
was signed.
PVF of P1 @ 9% for 6 periods
PVF of OA @ 9% for 6 periods
PVF of an AD @ 9% for 6 periods
0.596
4.486
4.890
Interest income in 2014 to be recognized by Sunshine Company is
=976,300
Solution:
Net investment in the lease
Less: 2013 Rental
2,755,417.00
Interest, 2013
(P12,480,000 x 9%) -1,123,200.00
12,480,000.00
Carrying amount, 1/1/2014
Multiply by: Interest rate
10,847,783.00
9%
Interest income, 2014
976,300.47
1,632,217.00
On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it
was interested to lease its construction equipment. The carrying amount of the construction equipment
was P12,400,000 which approximates its fair value at this time. Because of the offer Sunshine
Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would
like to have a 9% return rate over the term of the lease. Initial direct costs for this contract was
computed at P80,000. At the end of the lease term, Sunshine Company estimates the residual value
of the equipment to be P200,000.
On November 26, 2012 Moonlight Company sent a proposal in which it agrees with the conditions
initially conveyed by Sunshine Company. Moonlight Company suggested that the commencement date
be on January 1, 2013 and that the annual rentals be scheduled every December 31, starting on
December 31, 2013. Furthermore Moonlight Company communicated that it will only guarantee 70%
of the residual value computed by Sunshine Company.
On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company
was signed.
PVF of P1 @ 9% for 6 periods
0.596
PVF of OA @ 9% for 6 periods
4.486
PVF of an AD @ 9% for 6 periods
4.890
The annual rentals to be received by Sunshine Company is
=2,755,417
Solution:
Fair value of equipment
Initial direct cost
12,400,000.00
80,000.00
Total present value
Less: PV of residual value
(P200,000 x 0.596)
12,480,000.00
PV of lease payments
Divide by: PV of OA of P1 at 9% for 6 periods
12,360,800.00
4.486
Annual rentals
2,755,416.85
119,200.00
On December 1,2009, Tell Company leased office space for five years at a monthly rental of P600,000. On
the same date, Tell paid the lessor the following amounts:
Bonus to obtain lease
300,000
First month's rent
600,000
Last month's rent
600,000
Security deposit (refundable at lease expiration)
800,000
Installation of new walls and offices
3,600,000
Tell's 2009 expense relating to utilization of the office space should be
=665,000
AD Company lease office premises to JL Company for a 5-year term starting January 2, 20CY. Under the
terms of the operating leases, rent for the first year is P200, 000 and rent for years 2 through 5 is P300,000
per annum. In addition, as an inducement to enter the lease. AD Company granted JL Company the first
six months of the lease rent-free, a contingent rent equal to 2% of sales in excess of P12, 000, 000 will be
paid by JL Company. In 20CY JL Company reported sales of P14, 500, 000.
Rent revenue to be reported by AD Company for 20CY is
Select one:
=310, 000
Solution:
Rental payments, year 1 (P200,000 x 6 mos/12 mos)
100,000.00
Rental payments, year 2-5 (P300,000 x 4 yrs)
1,200,000.00
Total rental payments
1,300,000.00
Divide by: Lease term
5 years
Annual rent revenue
260,000.00
Add: Contingent rent
Reported sales
14,500,000.00
Minimum sales
(12,000,000.00)
Excess
2,500,000.00
Multiply by: Contingent rent rate
2%
Rent revenue, 20CY
50,000.00
310,000.00
On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it
was interested to lease its construction equipment. The carrying amount of the construction equipment
was P12,400,000 which approximates its fair value at this time. Because of the offer Sunshine
Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would
like to have a 9% return rate over the term of the lease. Initial direct costs for this contract was
computed at P80,000. At the end of the lease term, Sunshine Company estimates the residual value
of the equipment to be P200,000.
On November 26, 2012 Moonlight Company sent a proposal in which it agrees with the conditions
initially conveyed by Sunshine Company. Moonlight Company suggested that the commencement date
be on January 1, 2013 and that the annual rentals be scheduled every December 31, starting on
December 31, 2013. Furthermore Moonlight Company communicated that it will only guarantee 70%
of the residual value computed by Sunshine Company.
On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company
was signed.
PVF of P1 @ 9% for 6 periods
PVF of OA @ 9% for 6 periods
PVF of an AD @ 9% for 6 periods
0.596
4.486
4.890
The lease liability reported by Moonlight Company December 31, 2014 is
=9,026,181
Solution:
Lease liability, 1/1/2013
Less: 2013 Lease payment
Interest expense
Lease liability, 12/31/2013
Less: 2014 Lease payment
Interest expense
(P10,808,805.32 x 9%)
Lease liability, 12/31/2014
12,444,240.66
2,755,417.00
-1,119,981.66
1,635,435.34
10,808,805.32
2,755,417.00
-972,792.48
1,782,624.52
9,026,180.80
Amanda Company leased office premises to Julius Company for a 5-year term starting January 2,
2012. Under the terms of the operating lease, rent for the first year is P200,000 and rent for years 2
through 5 is P300,000 per annum. In addition, as an inducement to enter the lease, Amanda granted
Julius Company the first six months of the lease rent-free. Julius Company likewise paid a P70,000
security deposit of which 80% is refundable at the end of the lease term. However, a contingent rent
equal to 2% of sales in excess of P12,000,000 will be paid by Julius Company. Amanda Company paid
its agent P40,000 while Julius Company paid its agent P30,000 for services rendered in relation to the
lease. In 2008, Julius Company reported sales of P14,500,000. Amanda Company incurred repairs and
maintenance costs of P35,000.
Gross rental income to be reported by Amanda Company for 2012 is
=312,800
Solution:
Year 1 Rent (P200,000 x 6/12)
Years 2-5 Rent (P300,000 x 4 yrs)
Nonrefundable portion of security deposit (P70,000 x 20%)
100,000.00
1,200,000.00
14,000.00
Total gross rentals
Divide by: Lease term
1,314,000.00
5 yrs
Annual rental revenue
Add: Contingent rent
Lessee's reported sales
Less: Threshold
262,800.00
Excess
Multiply by:
Gross rental income, 2012
14,500,000.00
12,000,000.00
2,500,000.00
2%
50,000.00
312,800.00
Mindoro Company purchased a new machine on January 1, 20Y1 at a cost of P2,000,000 for the purpose
of leasing it. The machine is estimated to have a useful life of ten years with a residual value of
P200,000. Depreciation is computed by Mindoro on a straight line basis. On January 2, 20Y1, Mindoro
entered into a lease contract with Oriental Company for a term of up to four years until December 31,
20Y4. The lease fee is P1,000,000 per year and was paid in advance by Oriental. Mindoro paid P120,000
commissions associated with negotiating the lease and receive an additional P400,000 as lease
bonus. Mindoro Company should report net rental income for 20Y1 at
=P890,000
On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it
was interested to lease its construction equipment. The carrying amount of the construction equipment
was P12,400,000 which approximates its fair value at this time. Because of the offer Sunshine
Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would
like to have a 9% return rate over the term of the lease. Initial direct costs for this contract was
computed at P80,000. At the end of the lease term, Sunshine Company estimates the residual value
of the equipment to be P200,000.
On November 26, 2012 Moonlight Company sent a proposal in which it agrees with the conditions
initially conveyed by Sunshine Company. Moonlight Company suggested that the commencement date
be on January 1, 2013 and that the annual rentals be scheduled every December 31, starting on
December 31, 2013. Furthermore Moonlight Company communicated that it will only guarantee 70%
of the residual value computed by Sunshine Company.
On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company
was signed.
PVF of P1 @ 9% for 6 periods
PVF of OA @ 9% for 6 periods
PVF of an AD @ 9% for 6 periods
0.596
4.486
4.890
Depreciation expense for 2013 is
=2,050,707
Solution:
Lease liability/Right of use asset
Less: Residual value (P200,000 x 70%)
12,444,240.66
140,000.00
Depreciable amount
Divide by: Useful life/lease term
12,304,240.66
6 yrs
Annual depreciation/Depreciation, 2013
2,050,706.78
On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it
was interested to lease its construction equipment. The carrying amount of the construction equipment
was P12,400,000 which approximates its fair value at this time. Because of the offer Sunshine
Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would
like to have a 9% return rate over the term of the lease. Initial direct costs for this contract was
computed at P80,000. At the end of the lease term, Sunshine Company estimates the residual value
of the equipment to be P200,000.
On November 26, 2012 Moonlight Company sent a proposal in which it agrees with the conditions
initially conveyed by Sunshine Company. Moonlight Company suggested that the commencement date
be on January 1, 2013 and that the annual rentals be scheduled every December 31, starting on
December 31, 2013. Furthermore Moonlight Company communicated that it will only guarantee 70%
of the residual value computed by Sunshine Company.
On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company
was signed.
PVF of P1 @ 9% for 6 periods
PVF of OA @ 9% for 6 periods
PVF of an AD @ 9% for 6 periods
0.596
4.486
4.890
Interest expense in 2013 to be reported by Moonlight Company is
=1,119,982
Solution:
PV of annual lease payment
(P2,755,417 x 4.486)
PV of guaranteed residual value
(P200,000 x 70% x 0.596)
Initial measurement of lease liability
12,360,800.66
83,440.00
12,444,240.66
Multiply by: Interest rate
9%
Interest expense, 2013
1,119,981.66
Tim Company leased office premises to Mac Inc. for a 5-year term beginning January 2, 20CY. Under the
terms of the operating lease, rent for the first year is P150,000 and rent for years 2 through 5 is P187,500
per annum. However, as an inducement to enter the lease, Tim granted Mac the first 6 months of the lease
rent-free and provided an allowance of P8,000 as an additional incentive. In its December 31, 20CY profit
or loss, what amount should Tim report as rental income?
Select one:
=P163,400
Solution:
Rental payments, year 1 (P150,000 x 6 mos/12 mos)
75,000.00
Rental payments, year 2-5 (P187,500 x 4 yrs)
750,000.00
Allowance
(8,000.00)
Total rental payments
817,000.00
Divide by: Lease term
5 years
Annual rent revenue
163,400.00
Burgess Limited accepts a lease incentive to enter into a 3-year operating lease for a building. The
incentive is a cash amount of P5,000 received on signing of the lease agreement. The lessee initially
records this transaction as follows:
=DR Cash
CR Lease incentive from lessor
P5,000
P5,000
On December 25, 2012, FWE Company entered into an 8 –year, non-cancelable lease arrangement
with PBR Company to start on January 1, 2013. PBR Company agrees to pay FWE Company’s
relocation costs as an incentive to FWE Company for entering into the new lease. The relocation cost
amounted to P90,000. The rent would be P340,000 annually for the first three years, P375,000 for the
next three years and finally at P410,000 for the remainder of the contract. PBR Company waived 30%
of the initial year’s rent. Upon execution of the lease, FWE Company paid its agent P40,000. The
lease also includes a provision for additional rent of 6% of annual company sales in excess of
P4,500,000. FWE Company’s sales in 2013 and 2014 were P5,800,00 and P6,900,000 respectively.
Rent expense to be reported in 2014 by FEW Company is
=495,625
Solution:
Year 1 Rent (P340,000 x 70%)
Year 2-3 Rent (P340,000 x 2 yrs)
Year 4-6 Rent (P375,000 x 3 yrs)
Year 7-8 Rent (P410,000 x 2 yrs)
Reimbursement on relocation cost
Commission to agent
238,000.00
680,000.00
1,125,000.00
820,000.00
-90,000.00
40,000.00
Total expenditures on lease contract
Divide by: Lease term
2,813,000.00
8 yrs
Annual rental expense
Add: Contingent rent
2014 Sales
6,900,000.00
Less: Threshold
4,500,000.00
351,625.00
Excess
Multiply by:
Rent expense, 2014
2,400,000.00
6%
144,000.00
495,625.00
Rainbow Company prepares the following lease payment schedule for the lease of a machine from
Spectrum Company. The machine has an economic life of 6 years. The lease agreement requires four
annual payments of P33,000 and the machine will be returned to Spectrum Company at the end of the
lease term.
Minimum
lease Interest
Liability
Liability
payment
expense
reduction
balance
July
1,
98,512
2011
July
1, 30,000
9,851
20,149
2012
July
1, 30,000
7,836
22,164
2013
July
1, 30,000
5,620
24,380
2014
July
1, 35,000
3,181
31,819
2015
The annual depreciation expense in relation to the leased asset is
=23,378
78,363
56,199
31,819
-
Solution:
Right of use asset, 7/1/2011
Less: Guaranteed residual value
(P35,000-P30,000, 7/1/2015)
98,512.00
Depreciable amount
Divide by: Lease term
93,512.00
4 yrs
Annual depreciation
23,378.00
5,000.00
On 1 July 2009, Jenny Ltd leases a machine with a fair value of P109,445 to Rose Ltd for five years at an
annual rental (in advance) of P25,000, and Rose Ltd guarantees in full the estimated residual value of
P15,000 on return of the asset. What would be the interest rate implicit in the lease?
=12%
Solution:
At 14%
PV of annual rental (P25,000 x 3.91371)
97,843.00
PV of guaranteed residual value (P15,000 x 0.51937)
7,791.00
Lease liability
105,634.00
At 12%
PV of annual rental (P25,000 x 4.03735)
100,934.00
PV of guaranteed residual value (P15,000 x 0.56743)
8,511.00
Lease liability
109,445.00
The Maconie Company is a car dealer. On 1 January 20CY it entered into a finance lease with a customer
under which the customer would pay CU20,000 on 1 January each year for 5 years, commencing in 20CY.
The car cost Maconie CU60,000 and its normal cash selling price was CU75,000. Maconie paid legal fees
of CU2,000 to a law firm in connection with the arrangement of the lease.
Ignoring finance income, what net amount should Maconie recognise in profit or loss in the year ended 31
December 2013, according to IAS17 Leases?
=Net income of CU13,000
Solution:
Net investment in the lease/sales
75,000.00
Less: Cost of sales (P60,000 + P2,000)
62,000.00
Gross income on sale
13,000.00
On December 31, 2008, Sawyer Co. leased a machine from Bass, Inc. for its entire economic life of five
years. Equal annual payments under the lease are P525,000 (including P25,000 annual executory costs)
and are due on December 31 of each year. The first payment was made on December 31, 2008, and the
second payment was made on December 31, 2009. The interest rate implicit in the lease is 10%. Sawyer
learned that a third party guaranteed to pay Bass, Inc. a residual value of P200,000 at the end of the lease
term. In its December 31, 2009 balance sheet, Sawyer should report a lease liability of
=P 1,243,445
On January 1, 20Y1, Belkor entered into a 10-year finance lease for equipment. On December 31, 20Y4,
Belkor terminates the finance lease and incurs a P200,000 loss. How should Belkor recognize the lease
termination on its financial statements?
=Recognize a P200,000 loss from continuing operations in 20Y4
Good Company, a dealer in machinery and equipment, leased equipment to Luck, Inc., on July 1,
2Y01. The lease is appropriately accounted for as a sale by Good and as a purchase by Luck. The lease
is for a 10-year period (the useful life of the asset) expiring June 30, 2Y11. The first of 10 equal annual
payments of P828,000 was made on July 1, 2Y01. Good had purchased the equipment for P5,200,000 on
January 1, 2Y01, and established a list selling price of P7,200,000 on the equipment. Assume that the
present value at July 1, 2Y01, of the rent payments over the lease term discounted at 8% (the appropriate
interest rate) was P6,000,000.
Assuming that Luck, Inc. uses straight-line depreciation, what is the amount of depreciation and interest
expense that Luck should record for the year ended December 31, 2Y01?
=P300,000 and P206,880.
Solution:
Right of use asset
6,000,000.00
Divide by: Estimated useful life
10 years
Annual depreciation
600,000.00
Multiply by: Coverage (Jul 1 to Dec 31, 2Y01)
6 mos/12 mos
Depreciation expense, 2Y01
300,000.00
Lease liability, Jul 1, 2Y01
6,000,000.00
Less: First lease payment
828,000.00
Balance
5,172,000.00
Multiply by: Implicit interest rate
8%
Total interest incurred
413,760.00
Multiply by: Coverage (Jul 1 to Dec 31m 2Y01)
6 mos/12 mos
Interest expense
206,880.00
Camarines Company is a dealer in machinery. On January 1, 2009, a machine was leased to another
enterprise with the following provisions:
Annual rental payable at the end of each year
P2,000,000
Lease term and useful life of machinery
5 years
Cost of machinery
P5,000,000
Residual value-unguaranteed
P1,000,000
Implicit interest rate
10%
PV of an ordinary annuity of 1 for 5 periods at 10%
3.79
PV of 1 for 5 periods at 10%
0.62
At the end of the lease term on December 31, 2013, the machinery will revert to Camarines. The perpetual
inventory system is used. Camarines incurred initial direct costs of P200,000 in finalizing the lease
agreement.
How much is the total financeincome from the lease to be recognized by Camarines over the lease
term?
=P2,800,000
Camarines Company is a dealer in machinery. On January 1, 2009, a machine was leased to another
enterprise with the following provisions:
Annual rental payable at the end of each year
P2,000,000
Lease term and useful life of machinery
5 years
Cost of machinery
P5,000,000
Residual value-unguaranteed
P1,000,000
Implicit interest rate
10%
PV of an ordinary annuity of 1 for 5 periods at 10%
3.79
PV of 1 for 5 periods at 10%
0.62
At the end of the lease term on December 31, 2013, the machinery will revert to Camarines. The perpetual
inventory system is used. Camarines incurred initial direct costs of P200,000 in finalizing the lease
agreement.
Camarines Company will recognize profit on the sale at
=P3,000,000
On November 20, 2011 Rogue Company received an inquiry from Psylocke Company asking if it is
interested to lease its construction equipment. The carrying amount of the construction equipment was
P8,400,000 which approximates its fair value at this time.
Rogue Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and
would like to have a 9% return rate over the term of the lease. At the end of the lease term, Rogue Company
estimates the residual value of the equipment to be P200,000. Initial direct cost was estimated at P80,000.
On November 26, 2011 Psylocke Company sent a proposal in which it agrees with the conditions initially
conveyed by Rogue Company adding further that the commencement date be on January 1, 2012; that the
annual rentals be scheduled at the end of the year; and that it will only guarantee 70% of the residual value
provided by Rogue Company. Psylocke Company incurred costs totaling P120,000
On December 8, 2011, the lease agreement between Rogue Company and Psylocke Company was signed
wherein the commencement date was set on January 1, 2012.
PVF of P1 @ 9% for 6 periods
PVF of an ordinary annuity of P1 @ 9% for 6 periods
PVF of an annuity in advance of P1 @ 9% for 6 periods
0.596
4.486
4.890
Interest income in 2013 to be recognized by Rogue Company is
=664,150
Solution:
Fair value of lease receivable, 1/1/2012
Less: 2012 lease payment 1,863,754.00
Interest income
(P8,480,000 x 9%)
-763,200.00
8,480,000.00
Carrying amount, 12/31/2012
Multiply by: Interest rate
7,379,446.00
9%
Interest income, 2013
664,150.14
1,100,554.00
On January 1, 2Y01, Belkor entered into a 10-year finance lease for equipment. On December 31, 2Y04,
Belkor terminates the finance lease and incurs a P200,000 loss. How should Belkor recognize the lease
termination on its financial statements?
=Recognize a P200,000 loss from continuing operations in 2Y04.
On November 20, 2011 Rogue Company received an inquiry from Psylocke Company asking if it is
interested to lease its construction equipment. The carrying amount of the construction equipment was
P8,400,000 which approximates its fair value at this time.
Rogue Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and
would like to have a 9% return rate over the term of the lease. At the end of the lease term, Rogue Company
estimates the residual value of the equipment to be P200,000. Initial direct cost was estimated at P80,000.
On November 26, 2011 Psylocke Company sent a proposal in which it agrees with the conditions initially
conveyed by Rogue Company adding further that the commencement date be on January 1, 2012; that the
annual rentals be scheduled at the end of the year; and that it will only guarantee 70% of the residual value
provided by Rogue Company. Psylocke Company incurred costs totaling P120,000
On December 8, 2011, the lease agreement between Rogue Company and Psylocke Company was signed
wherein the commencement date was set on January 1, 2012.
PVF of P1 @ 9% for 6 periods
PVF of an ordinary annuity of P1 @ 9% for 6 periods
PVF of an annuity in advance of P1 @ 9% for 6 periods
0.596
4.486
4.890
The annual rentals to be received by Rogue Company is
=1,863,754
Solution:
Carrying amount of construction equipment
Initial direct cost
8,400,000.00
80,000.00
Fair value of the lease
Less: PV of residual value (P200,000 x 0.596)
8,480,000.00
119,200.00
PV of lease payments
Divide by: PVF of OA of P1 at 9% for 6 periods
8,360,800.00
4.486
Annual rentals
1,863,753.90
Bailey Co. leased equipment to Greco, Inc. on January 1, 20Y2. The lease is for an 8-year period expiring
December 31, 20Y9. The first eight equal annual payments of P600,000 was made on January 1,
20Y2. Bailey had purchased the equipment on December 29, 20Y1 for P3,200,000. The lease is
appropriately accounted for as a sales-type lease by Bailey. Assume that the present value at January 1,
20Y2 of all rent payments over the lease term discounted at a 10% interest rate was P3,520,000. What
amount of interest income should Bailey record in 20Y3 as a result of the lease?
=P261,200
Solution:
Net investment in the lease, Jan 1, 20Y2
3,520,000.00
Less: 20Y2 Lease collection
600,000.00
Net investment in the lease, Dec 31, 20Y2
2,920,000.00
Less: 20Y2 Amortization
20Y3 Lease collection
600,000.00
Less: Interest income, 20Y2 (2,920,000 x 10%)
292,000.00
308,000.00
Net investment in the lease, Jan 1, 20Y3
2,612,000.00
Multiply by: Interest rate
10%
Interest income, 20Y3
261,200.00
On 1 January 20CY The Hammond Company leased a van with a fair value of CU37,000 under a finance
lease. The lease term is 6 years, and the present value of the minimum lease payments is CU35,520. The
useful life of the van to the business was estimated at 7 years with no final residual value. The company
operates a policy of straight line depreciation. Under PFRS 16 Leases, what is the depreciation charge on
the van in 20CY?
=CU5,920
Solution:
Right of use asset
35,520.00
Divide by: Lease term (shorter)
6 years
Annual depreciation
5,920.00
On January 1, 2011, Captain America Company leased a photocopier from Hawk Eye Company, a
company that manufacturers, retails and leases copiers. The photocopier had cost Hawk Eye
Company P50,000 to make but had a fair value on January 1, 2011 of P65,650. The lease agreement
contained the following provisions:
Lease term
5 years
Annual payment, payable in advance on January 1, 2011 each year
P
17,500
Economic life of the copier
6 years
Estimated residual value (end of the lease term)
P
5,000
Residual value guaranteed by Captain America Company
P
3,000
Interest rate implicit in the lease
10%
The lease is cancelable, provided another lease is immediately entered into.
The annual payment included an amount of P2,500 per annum to reimburse Hawk Eye Company
for the cost of paper and toner supplied to Captain America Company.
Interest expense for 2011 is
=4,941
Solution:
Lease payment (P17,500-P2,500)
Multiply by: PVF of AD of P1 at 10% at 5 periods
15,000.00
4.1699
PV of lease payment
PV of guaranteed residual value
(P3,000 x 0.6209)
62,548.50
Initial measurement of lease liability
Less: 2011 Lease payment
64,411.20
15,000.00
Carrying amount, 1/1/2011
Multiply by: Interest rate
49,411.20
10%
Interest expense
4,941.12
1,862.70
On November 20, 2011 Rogue Company received an inquiry from Psylocke Company asking if it is
interested to lease its construction equipment. The carrying amount of the construction equipment was
P8,400,000 which approximates its fair value at this time.
Rogue Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and
would like to have a 9% return rate over the term of the lease. At the end of the lease term, Rogue Company
estimates the residual value of the equipment to be P200,000. Initial direct cost was estimated at P80,000.
On November 26, 2011 Psylocke Company sent a proposal in which it agrees with the conditions initially
conveyed by Rogue Company adding further that the commencement date be on January 1, 2012; that the
annual rentals be scheduled at the end of the year; and that it will only guarantee 70% of the residual value
provided by Rogue Company. Psylocke Company incurred costs totaling P120,000
On December 8, 2011, the lease agreement between Rogue Company and Psylocke Company was signed
wherein the commencement date was set on January 1, 2012.
PVF of P1 @ 9% for 6 periods
PVF of an ordinary annuity of P1 @ 9% for 6 periods
PVF of an annuity in advance of P1 @ 9% for 6 periods
0.596
4.486
4.890
The lease liability initially recorded by Psylocke Company at commencement date
=8,444,240
Solution:
PV of rentals (P1,863,754 x 4.486)
PV of guaranteed residual value (P200,000 x 70% x 0.596)
8,360,800.44
83,440.00
Initial measurement of lease liability
8,444,240.44
On January 1, 2Y01, Quezon Company entered into a lease agreement with Batangas Company for a
machine which was carried on its accounting records at P3,000,000. Total payments under the lease which
expires on December 31, 2Y10 aggregate P5,000,000 of which P3,380,000 represents the fair value and
cost of the machine to Batangas. Payments of P500,000 are due on January 1 each year starting January
1, 2Y01. The interest rate of 10% which was stipulated in the lease is considered fair and adequate
compensation to Quezon for the use of its funds. Batangas expects the machine to have a 10-year life, no
residual value and be depreciated on a straight line basis. The lease is appropriately classified as a sales
type lease by Quezon. What should be the total income before tax that is derived by Quezon from this
lease for the year ended December 31, 2Y01?
=P668,000
Solution:
Net investment in the lease
3,380,000.00
Less: Cost of sales
3,000,000.00
Gross profit on sale
380,000.00
Add: Interest income
Net investment in the lease, Jan 1, 2Y01
3,380,000.00
Less: First lease collection
500,000.00
Balance
2,880,000.00
Multiply by: Effective interest rate
10%
Total income
288,000.00
668,000.00
Kay Company, a lessor of office machines, purchased a new machine for P600,000 on January 1, 20Y1,
which was leased the same day to Lee. The machine will be depreciated P55,000 per year. The lease is
for a four-year period expiring January 1, 20Y5, and provides for annual rental payments of P100,000
beginning January 1, 20Y1. Additionally, Lee paid P64,000 to Kay as a lease bonus. In its 20Y1 income
statement, what amount of revenue and expense should Kay report on this leased asset?
Revenue
Expense
=
P116,000
P55,000
Solution:
Total lease payments (P400,000 x 4 yrs)
400,000.00
Lease bonus
64,000.00
Total lease
464,000.00
Divide by: Lease term
4 years
Annual lease income
116,000.00
Total expenses (Depreciation)
55,000.00
The excess of the fair value of leased property at the inception of the lease over its cost or carrying amount
should be classified by the lessor as
=Manufacturer’s or dealer’s profit from a sales-type lease.
The Caspian Company leased a warehouse with adjoining land for a period of 15 years. The fair values of
the leasehold interests in the land and of the warehouse are CU502,000 and CU251,000 respectively. The
land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land
is
not
expected
to
pass
at
the
end
of
the
lease.
What amount should the asset(s) in relation to finance leases be recognised in the financial statements of
Caspian?
=CU251,000
Tommy Co. leased equipment from Maricar Corp. on July 1, 20Y1 for an eight-year period expiring June
30, 20Y9. Equal payments under the lease are P600,000 and are due on July 1 of each year. The first
payment was made on July 1, 20Y1. The rate of interest contemplated by Tommy and Maricar is 10%. The
cash selling price of the equipment is P3,520,000, and the cost of the equipment on Maricar’s accounting
records is P2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of
profit on the sale and interest revenue that Maricar should record for the year ended December 31, 20Y1?
Select
one
Profit on sale; Interest revenue
=P720,000
P146,000
Solution:
Selling price/net investment
3,520,000.00
Less: Cost of sales
2,800,000.00
Gross profit on sale
720,000.00
Carrying amount of receivable
3,520,000.00
Less: Payment, Jul 1, 20Y1
600,000.00
Balance
2,920,000.00
Multiply by: Effective interest rate
10%
Annual effective interest
292,000.00
Multiply by: Coverage (Jul 1 to Dec 31, 20Y1)
6 mos/12 mos
Interest revenue
146,000.00
On November 20, 2011 Rogue Company received an inquiry from Psylocke Company asking if it is
interested to lease its construction equipment. The carrying amount of the construction equipment was
P8,400,000 which approximates its fair value at this time.
Rogue Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and
would like to have a 9% return rate over the term of the lease. At the end of the lease term, Rogue Company
estimates the residual value of the equipment to be P200,000. Initial direct cost was estimated at P80,000.
On November 26, 2011 Psylocke Company sent a proposal in which it agrees with the conditions initially
conveyed by Rogue Company adding further that the commencement date be on January 1, 2012; that the
annual rentals be scheduled at the end of the year; and that it will only guarantee 70% of the residual value
provided by Rogue Company. Psylocke Company incurred costs totaling P120,000
On December 8, 2011, the lease agreement between Rogue Company and Psylocke Company was signed
wherein the commencement date was set on January 1, 2012.
PVF of P1 @ 9% for 6 periods
PVF of an ordinary annuity of P1 @ 9% for 6 periods
PVF of an annuity in advance of P1 @ 9% for 6 periods
0.596
4.486
4.890
Depreciation expense for 2013 is
=1,404,040
Solution:
Initial measurement of lease liability
Initial direct cost
8,444,240.00
120,000.00
Cost of right of use asset
Less: Guaranteed residual value (P200,000 x 70%)
8,564,240.00
140,000.00
Depreciable amount
Divide by: Useful life
8,424,240.00
6 yrs
Annual depreciation
1,404,040.00
Adam Limited and Davies Limited enter into a finance lease agreement with the following terms:





lease term is 3 years
estimated economic life of the leased asset is 6 years
3 x annual rental payments of P23,000; each payment is one year in arrears
residual value at the end of the lease term is not guaranteed by the lessee
interest rate implicit in the lease is 7%
On inception date, the present value of the fixed payments is:
=P60,359
Solution:
Fixed payments
23,000.00
Multiply by: PV of OA of 1 at 7% for 3 periods
2.6243
Present value of fixed payments
60,359.00
On December 27, 2011, Gambit Company leases its airplane to Jubilee Company. The airplane which
was constructed for P7,500,000 has a fair value of P9,800,000 and an expected useful life of 12
years. Under the 8-year lease agreement, Jubilee Company will pay an annual rent in advance
starting on January 1, 2012 at an implicit rate of 12%. At the end of the lease, Jubilee Company is
given an option to purchase the airplane at P100,000; which is substantially low compared to the
airplane’s expected resale value of P650,000. Jubilee Company has indicated that it will make use of
the purchase option. Gambit Company incurred cost of P125,000 to have the contract completed.
The net effect of the lease transaction included in Gambit Company’s 2012 income statement is
=3,140,503
Solution:
Sales
Less: Cost of sales
Cost of airplane
9,800,000.00
7,500,000.00
Initial direct cost
125,000.00
Gross profit on sale
Add: Interest income from lease
Initial measurement of lease 9,800,000.00
Less: 1/1/2012 Payment
1,754,061.83
Carrying amount, 1/1/2012
Multiply by: Interest rate
8,045,938.17
12%
Total net effect in income statement
7,625,000.00
2,175,000.00
965,512.58
3,140,512.58
Good Company, a dealer in machinery and equipment, leased equipment to Luck, Inc., on July 1,
2Y01. The lease is appropriately accounted for as a sale by Good and as a purchase by Luck. The lease
is for a 10-year period (the useful life of the asset) expiring June 30, 2Y11. The first of 10 equal annual
payments of P828,000 was made on July 1, 2Y01. Good had purchased the equipment for P5,200,000 on
January 1, 2Y01, and established a list selling price of P7,200,000 on the equipment. Assume that the
present value at July 1, 2Y01, of the rent payments over the lease term discounted at 8% (the appropriate
interest rate) was P6,000,000.
What is the amount of profit on the sale and the amount of interest income that Good should record for the
year ended December 31, 2Y01?
=P 800,000 and P206,880
Solution:
Net investment in the lease/sales
6,000,000.00
Less: Cost of sales
5,200,000.00
Gross profit on sale
800,000.00
Net investment in the lease, Jul 1, 2Y01
6,000,000.00
Less: First lease collection
828,000.00
Balance
5,172,000.00
Multiply by: Implicit interest rate
8%
Total interest earned
413,760.00
Multiply by: Coverage (Jul 1 to Dec 31m 2Y01)
6 mos/12 mos
Interest income
206,880.00
Occidental Company leased an equipment from Mindoro Company on January 1, 2Y01 for a 10 year period,
which will expire on January 1, 2Y11. Equal payments under the lease are P2,000,000 and are due on
January 1 of each year beginning January 1, 2Y01. The rate of interest contemplated is 10%. The present
value of the minimum lease payments discounted at 10% is P13,518,000. The cost of the equipment on
Mindoro’s accounting records is P12,000,000. The equipment will revert to Mindoro at the end of the lease
term and its unguaranteed residual value is P1,000,000 with a present value of P386,000. Mindoro
incurred direct costs of P250,000 in negotiating the lease. The finance lease is appropriately recorded as
a sales type lease. What is the total finance income to be earned by Mindoro Company during the lease
term?
=P7,096,000
Solution:
Total lease payments (P2,000,000 x 10 years)
20,000,000.00
Unguaranteed residual value
1,000,000.00
Gross investment in the lease
21,000,000.00
Less: Net investment in the lease
PV of lease payments
13,518,000.00
PV of unguaranteed residual value
386,000.00
Total financial income
13,904,000.00
7,096,000.00
Baxter Company leased equipment to Fritz Inc. on January 1, 20Y2. The lease is for an eight-year period
expiring December 31, 20Y9. The first of eight equal annual payments of P900,000 was made on January
1, 20Y2. Baxter had purchased the equipment on December 29, 20Y1, for P4,800,000. The lease is
appropriately accounted for as a sales-type lease by Baxter. Assume that the present value at January 1,
20Y2, of all rent payments over the lease term discounted at a 10 percent interest rate was
P5,280,000. What amount of interest income should Baxter record in 20Y3 as a result of the lease?
=P391,800
Solution:
Net investment in the lease, Jan 1, 20Y2
5,280,000.00
Less: 20Y2 Lease collection
900,000.00
Carrying amount, Dec 31, 20Y2
4,380,000.00
Less: 20Y2 Amortization
20Y3 Lease collection
900,000.00
Less: Interest income, 20Y2 (4,380,000 x 10%)
438,000.00
462,000.00
Carrying amount, Jan 1, 20Y3
3,918,000.00
Multiply by: Interest rate
10%
Interest income, 20Y3
391,800.00
Thunder Bay Ltd sells land that originally cost P150,000 to Victoria Ltd for P230,000, and then enters into
a cancellable lease agreement to use the land for two years at an annual rental of P20,000, for 30 years at
a discount rate of 10%. In the current year, how much profit would Thunder Bay Ltd record on the sale of
the land?
=P14,421
Solution:
Fixed payments
20,000.00
Multiply by" PVF of OA of 1 at 10% for 30 periods
9.427
Lease liability
188,540.00
Fair value
230,000.00
Less: Carrying amount
150,000.00
Total gain
80,000.00
Multiply by: ((230,000 - 188,540)/230,000)
0.1803
Gain on sale
14,421.00
On January 1, 2015 Jerome Company Company sold John Company an equipment with a remaining useful
life of 10 years. At the same time, Jerome Company leased back the equipment for 4 years. The leaseback
is an operating lease data. Data related to the sale and leaseback are:
Sales price - 1,200,000
Fair value of equipment on the date of sale - 1,000,000
Carrying amount of equipment - 700,000
In Jerome Company's income statement, how much gain from the sale and leaseback should be reported?
=300,000
Kay Company, a lessor of office machines, purchased a new machine for P600,000 on January 1,
20Y1, which was leased the same day to Lee. The machine will be depreciated P55,000 per year. The
lease is for a four-year period expiring January 1, 20Y5, and provides for annual rental payments of
P100,000 beginning January 1, 20Y1. Additionally, Lee paid P64,000 to Kay as a lease bonus. In its
20Y1 income statement, what amount of revenue and expense should Kay report on this leased asset?
Revenue
Expense
=
P116,000
P55,000
Solution:
Total lease payments (P400,000 x 4 yrs)
400,000.00
Lease bonus
64,000.00
Total lease
464,000.00
Divide by: Lease term
4 years
Annual lease income
116,000.00
Total expenses (Depreciation)
55,000.00
Thunder Bay Ltd sells land that originally cost P150,000 to Victoria Ltd for P230,000, and then enters into
a cancellable lease agreement to use the land for two years at an annual rental of P20,000, for 30 years at
a discount rate of 10%. In the current year, how much profit would Thunder Bay Ltd record on the sale of
the land?
=P14,421
Solution:
Fixed payments
20,000.00
Multiply by" PVF of OA of 1 at 10% for 30 periods
9.427
Lease liability
188,540.00
Fair value
230,000.00
Less: Carrying amount
150,000.00
Total gain
80,000.00
Multiply by: ((230,000 - 188,540)/230,000)
0.1803
Gain on sale
14,421.00
On December 31, 2015, Ivan Company sold equipment to Kristine and simultaneously leased it back for 12
years. Pertinent information on this date is as follows:
Sales price - 480,000
Carrying amount - 360,000
Estimated remaining economic life - 15 years
At December 31, 2015 how much should Ivan report as deferred revenue from the sale of the equipment?
=120,000
r an eight-year period expiring December 31, 20Y9. The first of eight equal annual payments of P900,000
was made on January 1, 20Y2. Baxter had purchased the equipment on December 29, 20Y1, for
P4,800,000. The lease is appropriately accounted for as a sales-type lease by Baxter. Assume that the
present value at January 1, 20Y2, of all rent payments over the lease term discounted at a 10 percent
interest rate was P5,280,000. What amount of interest income should Baxter record in 20Y3 as a result of
the lease?
=P391,800
Solution:
Net investment in the lease, Jan 1, 20Y2
5,280,000.00
Less: 20Y2 Lease collection
900,000.00
Carrying amount, Dec 31, 20Y2
4,380,000.00
Less: 20Y2 Amortization
20Y3 Lease collection
900,000.00
Less: Interest income, 20Y2 (4,380,000 x 10%)
438,000.00
462,000.00
Carrying amount, Jan 1, 20Y3
3,918,000.00
Multiply by: Interest rate
10%
Interest income, 20Y3
391,800.00
On December 31, 20CY, Svetlana Corp. sold Kenyatta Co. two airplanes and simultaneously leased
them back. Additional information pertaining to the sale-leasebacks follows:
Sales price
Carrying amount,
12/31/CY
Remaining useful
life, 12/31/CY
Lease term
Annual
lease
payments
Plane #1
P600,000
Plane #2
P1,000,000
P100,000
P550,000
10 years
8 years
35 years
3 years
P100,000
P200,000
Interest rate
10%
In its December 31, 20CY balance sheet, what amount should Svetlana report as gain on sale on these
transactions?
=P281,587
Solution:
Plane # 1
Fixed payments
100,000.00
Multiply by: PVF of OA of 1 at 10% for 8 periods
5.335
Lease liability
533,500.00
Fair value
600,000.00
Less: Carrying amount
100,000.00
Total gain
500,000.00
Multiply by: ((600,000 - 533,500)/600,000)
0.1108
Gain on sale, Plane # 1
55,417.00
Plane # 2
Fixed payments
200,000.00
Multiply by: PVF of OA of 1 at 10% for 3 periods
2.487
Lease liability
497,400.00
Fair value
1,000,000.00
Less: Carrying amount
550,000.00
Total gain
450,000.00
Multiply by: ((1,000,000 - 497,400)/1,000,000)
0.5026
Gain on sale, Plane # 2
226,170.00
Gain on sale, Plane # 1
55,417.00
Gain on sale, Plane # 2
226,170.00
Total gain on sale
281,587.00
In 2015, The Worf Company, reported pretax financial income of 500,000. Included in that pretax financial
income was 90,000 of nontaxable life insurance proceeds received as a result of the death of an officer;
120,000 of warranty expenses accrued but unpaid as of December 31, 2015; and 20,000 of life insurance
premiums for a policy for an officer. Assuming that no income taxes were previously paid during the year
and assuming an income tax rate of 40 percent, the amount of income taxes payable on December 31,
2015, would be
=220,000
Farrugia Limited has an asset which cost P300,000 and against which depreciation of P100,000 has
accumulated. The accumulated depreciation for tax purposes is P180,000 and the company tax rate is
30%. The tax base of this asset is:
=P120,000
Solution:
Cost
300,000.00
Less: Accumulated depreciation - tax basis
180,000.00
Tax base
120,000.00
In Year 2, Ajax, Inc. reported taxable income of 400,000 and pretax financial statement income of 300,000.
The difference resulted from 60,000 of nondeductible premiums on Ajax's officers' life insurance
and 40,000 of rental income received in advance. Rental income is taxable when received. Ajax's effective
tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expensecurrent portion?
=120,000
Dunn Co.’s year 1 income statement reported 90,000 income before provision for income taxes. To
compute the provision for federal income taxes, the following year 1 data are provided:Rent received in
advance 16,000 Income from exempt municipal bonds 20,000 Depreciation deducted for income tax
purposes in excess of depreciation reported for financial statements purposes 10,000 Enacted corporate
income tax rate 30% If the alternative minimum tax provisions are ignored, what amount of current federal
income tax liability should be reported in Dunn’s December 31, year 1 balance sheet?
=22,800
The following information was provided by Pete Company for 20Y2
December. 31,20Y2 December. 31, 20Y1
Deferred tax asset
45, 000
30, 000
Income taxes payable
375, 000
310, 000
Deferred tax liability
60, 000
40, 000
Total income taxes paid by Pete Company for P200, 000 Current and future tax rate 30%.
The Total income tax expense in Pete Company’s 20Y2 income statement is
=270, 000
Solution:
Current tax expense:
Income tax payable, Dec 31, 20Y2
375,000.00
Income tax paid, 20Y2
200,000.00
Total debits
575,000.00
Less: Income tax payable, Dec 31, 20Y1
310,000.00
265,000.00
Deferred tax expense:
Deferred tax liability, Dec 31, 20Y2
60,000.00
Less: Deferred tax liability, Dec 31, 20Y1
40,000.00
20,000.00
Deferred tax benefit
Deferred tax asset, Dec 31, 20Y2
45,000.00
Less: Deferred tax asset, Dec 31, 20Y1
30,000.00
(15,000.00)
Total income tax expense
270,000.00
Globe, Inc. made an accounting profit before tax of P40,000 for the year ended June 30, 20CY. Included in
the accounting profit were the following items of revenue and expense.
Donations to political parties (non-deductible)
Depreciation- machinery (20%)
Annual leave expense
Rent revenue
For
tax
purposes
the
Depreciation rate for machinery
Annual leave paid
Rent received
Income tax rate
5,000
15,000
5,600
12,000
following
applied:
25%
6,500
10,000
30%
How much should be reported as current tax expense?
Select one:
=11,505
Solution:
Accounting income
40,000.00
Add: Donations to political parties
5,000.00
Accounting income subject to income tax
45,000.00
Less: Taxable temporary difference
Difference in depreciation ((15,000 x 25%/20%) - 15,000)
3,750.00
Difference in annual leave (6,500 - 5,600)
900.00
Difference in rent (12,000 - 10,000)
2,000.00
Taxable income
6,650.00
38,350.00
Multiply by: Income tax rate
30%
Current tax expense
The Giggs Company has interest receivable which has a carrying amount of CU55,000 in its statement of
financial position at 31 December 20Y1. The related interest revenue will be taxed on a cash basis in 20Y2.
Giggs has trade receivables that have a carrying amount of CU100,000 in its statement of financial position
at 31 December 20Y1. The related revenue
has been recognised in profit or loss for the year to 31 December 20Y1. According to IAS12 Income taxes,
what is the total tax base of interest receivable and trade receivables for Giggs at 31 December 20Y1?
===Nil
The current liabilities of an entity include fines and penalties for environmental damage. The fines and
penalties are stated at P10 million. The fines and penalties are not deductible for tax purposes. What is
the tax base of the fines and penalties?
=P 0
Solution:
Non-deductible expenses for tax purposes are considered permanent differences.
Salisbury Ltd made an accounting profit before tax of P40,000 for the year ended 30 June 20CY.
Included in the accounting profit were the following items of revenue and expense.
Donations to political parties (nondeductible)
P 5,000
Depreciation - machinery (20%)
15,000
Annual leave expense
5,600
Rent revenue
12,000
For tax purposes the following applied:
Annual leave paid
P 6,500
Rent received
10,000
Depreciation rate for machinery
25%
Income tax rate
35%
Calculate the current tax liability for the year ended 30 June 20CY.
=P13,423
Solution:
Accounting income
40,000.00
Add: Donations to political parties
5,000.00
Accounting income subject to income tax
45,000.00
Less: Taxable temporary difference
Difference in depreciation ((15,000 x 25%/20%) - 15,000)
3,750.00
Difference in annual leave (6,500 - 5,600)
900.00
Difference in rent (12,000 - 10,000)
2,000.00
6,650.00
Taxable income
38,350.00
Multiply by: Income tax rate
35%
Current tax expense
13,423.00
Are the following statements regarding the classification of items under IAS12 Income taxes true or false?
(1) Interest expense accrued but included in taxable profit on a cash basis should be classified under
deductible
temporary
differences.
(2) Where accumulated depreciation on an asset is greater than accumulated tax depreciation, the amount
should
be
classified
under
deductible
temporary
differences.
Statement (1) Statement (2)
=True True
D’Silva Limited has a product warranty liability amounting to P10,000. The product warranty costs are not
tax deductible until paid out to customers. The company tax rate is 30%. The company has:
=a deductible temporary difference of P10,000;
In arriving at its profit before tax for the year ended 31 December 20CY The Ryan Company has accrued
royalties receivable of CU200,000 and interest payable of CU250,000. Both royalties and interest are dealt
with on a cash basis in tax computations. What are Ryan's net temporary differences at 31 December
20CY, according to IAS12 Income taxes?
=Deductible temporary differences of CU50,000
Solution:
Deductble temporary difference
250,000.00
Taxable temporary difference
(200,000.00)
Net deductible temporary difference
50,000.00
An entity has spent P600,000 in developing a new product. These costs meet the definition of an intangible
asset under PAS 38 and have been recognized in the balance sheet. These costs have been recognized
as an expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by
P50,000. The tax base of the intangible asset at year-end is
=P 0
Solution:
The tax base of such asset shall be P0 since it is already accelerated as an expense for tax purposes.
Are the following statements in relation to deferred tax true or false? (1) Deferred tax liabilities are the
amounts of income taxes payable in future periods in respect of taxable temporary differences.
(2) Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of
deductible
permanent
differences.
Statement (1) Statement (2)
=True False
An entity has the following assets and liabilities in its balance sheet at December 31, 20Y1:
Property
Plant and equipment
Inventory
Trade receivables
Trade payables
Cash
P10,000,000
5,000,000
4,000,000
3,000,000
6,000,000
2,000,000
The value for tax purposes of property and for plant and equipment are P7 million and P4 million
respectively. The entity has made a provision for inventory obsolescence of P2 million, which is not
allowable for tax purposes until the inventory is sold. Further, an impairment charge against trade
receivables of P1 million has been made. This charge does not relate to any specific trade receivable but
to the entity’s collective assessment of the overall collectibility of the amount. This charge will not be
allowed in the current year for tax purposes but will be allowed in the future. Income tax paid is at 35%.
he deferred tax provision at December 31, 20Y1 is
=P 350,000
Solution:
Deductible temporary difference on property (10,000,000 - 7,000,000)
3,000,000.00
Deductible temporary difference on plant & equipment (5,000,000 - 4,000,000)
1,000,000.00
Taxable temporary difference on inventory
(2,000,000.00)
Taxable temporary difference on trade receivables
(1,000,000.00)
Net deductible temporary difference
1,000,000.00
Multiply by: Tax rate
35%
Deferred tax benefit
350,000.00
he accounting profit before tax for the year ended December 31, 20Y2 for Regiel Ltd amounted to P18,500
and included:
Depreciation - motor vehicle (25%)
Depreciation - equipment (20%)
Rent revenue
Royalty revenue (exempt from tax)
Doubtful debts expense
P 4,500
20,000
16,000
5,000
2,300
Entertainment expense (non-deductible)
Proceeds on sale of equipment
Carrying amount of equipment sold
Annual leave expense
1,500
19,000
18,000
5,000
The draft balance sheet at December 31, 2008 contained the following assets and liabilities:
20Y2
20Y1
Assets
Cash
Receivables
Allowance for doubtful debts
Inventory
Rent receivable
Motor vehicle
Accumulated depreciation - motor vehicle
Equipment
Accumulated depreciation - equipment
Deferred tax asset
P 11,500
12,000
(3,000)
19,000
2,800
18,000
(15,750)
100,000
(60,000)
?
P 9,500
14,000
(2,500)
21,500
2,400
18,000
(11,250)
130,000
(52,000)
5,550
P135,200
Liabilities
Accounts payable
Provision for annual leave
Current tax liability
Deferred tax liability
15,655
4,500
?
?
21,500
6,000
7,600
2,745
37,845
Additional information
·
The company can claim a deduction of P15,000 (15%) for depreciation on equipment, but
the motor vehicle is fully depreciated for tax purposes.
·
The equipment sold during the year had been purchased for P30,000 two years before the
date of sale.
·
The company tax rate is 30%.
The current tax expense for 20Y2 is
=P6,030
Solution:
Accounting profit
18,500.00
Nondeductible expense (entertainment expense)
1,500.00
Nontaxable income (royalty revenue)
(5,000.00)
Accounting profit subject to tax
15,000.00
Add: Deductible temporary difference
Depreciation - motor vehicle
4,500.00
Depreciation - equipment (20,000 - (20,000 x 15%/20%))
5,000.00
Doubtful accounts expense (3,000 - 2,500)
500.00
Total
10,000.00
25,000.00
Less: Taxable temporary difference
Rent revenue (2,800 - 2,400)
400.00
Annual leave expense (6,000 - 4,500)
1,500.00
Reversal of depreciation ((30,000 x 20% x 2)-(30,000 x 15% x 2))
3,000.00
4,900.00
Taxable income
20,100.00
Multiply by:
30%
Current tax expense
6,030.00
D Company had the following deferred tax balances at reporting date - Deferred tax assets, P1,200,000;
Deferred tax liabilities, P3,000,000. Effective from the first day of the next financial period, the company
rate of income tax was reduced from 40% to 30%. The adjustment to income tax expense to recognize the
impact of the tax rate change is:
=CR P450,000
Solution:
Deferred tax asset, unadjusted
1,200,000.00
Less: Deferred tax asset, adjusted (1,200,000 x 30%/40%)
900,000.00
Increase in income tax expense
300,000.00
Deferred tax liability, unadjusted
3,000,000.00
Less: Deferred tax liability, adjusted (3,000,000 x 30%/40%)
2,250,000.00
Decrease in income tax expense
750,000.00
Increase in income tax expense - DR
300,000.00
Decrease in income tax expense - CR
(750,000.00)
Net decrease in income tax expense - CR
(450,000.00)
Which TWO of the following are examples of deferred tax assets? Deferred tax assets are the amount of
income taxes recoverable in future periods in respect of
=1 and 3
1.
the carryforward of unused tax losses
2.
taxable temporary differences
3.
deductible temporary differences
4.
permanent differences
The Huang Company has a non-current asset which had a carrying amount in the financial statements of
CU18,000 at 31 December 20CY. Its tax written down value (the tax base) at that date was CU9,000. The
tax rate is 30%. In accordance with IAS12 Income taxes, what is the
deferred tax balance in respect of this asset at 31 December 20CY?
=CU2,700 liability
Solution:
Carrying amount
18,000.00
Less: Tax base
9,000.00
Taxable temporary difference
9,000.00
Multiply by: Tax rate
30%
Deferred tax liability
2,700.00
Jenkins Limited acquired an item of Property at a cost of P50,000. At reporting date accumulated
depreciation amounted to P15,000. The asset was revalued on reporting date to P45,000. If the company
rate of tax is 30%, the deferred tax item that must be recognized at reporting date is:
=deferred tax liability
P3,000;
Solution:
Revalued amount (CA)
45,000.00
Less: Tax base (50,000 - 15,000)
35,000.00
Taxable temporary difference
10,000.00
Multiply by: Tax rate
30%
Deferred tax liability
3,000.00
The Winston Company has a policy of using non-current assets until they can no longer be operated and
are worthless. On 1 January 20CY it acquired an items of plant and machinery for P1, 000, 000. It is being
depreciated over 10 year on a straight-line basis. For tax purposes there is an allowance of 20% per annum
on a reducing balance basis. There are two rates of tax: 15% on trading profit and 25% on gains on
disposals. What deferred tax balance should Winston recognize at 31 December 20CY, according to IAS
12 income taxes?
Select one:
=Deferred tax liability of P25, 000
Solution:
Accounting depreciation (1,000,000 / 10 yrs)
100,000.00
Tax basis depreciation (1,000,000 x 20%)
200,000.00
Taxable temporary difference (Acctg Income > Taxable Income)
100,000.00
Multiply by: Future tax rate
25%
Deferred tax liability
25,000.00
The Winston Company has a policy of using non-current assets until they can no longer be operated and
are worthless. On 1 January 20CY it acquired an items of plant and machinery for P1, 000, 000. It is being
depreciated over 10 year on a straight-line basis. For tax purposes there is an allowance of 20% per annum
on a reducing balance basis. There are two rates of tax: 15% on trading profit and 25% on gains on
disposals. What deferred tax balance should Winston recognize at 31 December 20CY, according to IAS
12 income taxes?
=Deferred tax liability of P25, 000
Solution:
Accounting depreciation (1,000,000 / 10 yrs)
100,000.00
Tax basis depreciation (1,000,000 x 20%)
200,000.00
Taxable temporary difference (Acctg Income > Taxable Income)
100,000.00
Multiply by: Future tax rate
25%
Deferred tax liability
25,000.00
Entity Y Company started to manufacture in 20Y1 copy machines that are sold on the installment
basis. Entity Y recognizes revenue when equipment is sold for financial reporting purposes, and when
installment payments are received for tax purposes. In 20Y1, Entity Y recognized gross profit of P6,000,000
for financial reporting purposes, and P1,500,000 for tax purposes. The amounts of gross profit expected
to be recognized for tax purposes in 20Y2 and 20Y3 are P2,500,000 and P2,000,000, respectively. Entity
Y guarantees the copy machines for two years. Warranty costs are recognized on the accrual basis for
financial accounting purposes and when paid for tax purposes. Warranty expense accrued in 20Y1 is
P2,500,000, but only P500,000 of warranty cost is paid in 20Y1. It is expected that in 20Y2 and 20Y3,
P1,000,000 and P1,000,000, respectively, of warranty costs will be paid. In addition during 20Y1, P500,000
interest, net of 20% final income tax, was received and earned, and P200,000 insurance premium on life
insurance policies that covered the life of Entity Y’s president was paid. Entity Y is the beneficiary for this
policy. The tax rate is 35%. Pretax accounting income in 20Y1 was P2,000,000.
Assuming any 20Y1 net loss will be carried to 20Y2, how much is the deferred tax asset to be recognized
as
of
December
31,
20Y1?
=P980,000
Solution:
Accounting income
2,000,000.00
Nondeductibe expense (insurance premium)
200,000.00
Nontaxable income (interest income)
(500,000.00)
Accounting income subject to tax
1,700,000.00
Add: Deductibe temporary difference
Warranty costs (P2,500,000 - P500,000)
2,000,000.00
Total
3,700,000.00
Less: Taxable temporary difference
Gross profit on sale (6,000,000 - 1,500,000)
4,500,000.00
Net operating loss
(800,000.00)
Deductibe temporary difference on warranty costs
2,000,000.00
Deductible temporary expense on net operating loss
800,000.00
Total deductible temporary difference
2,800,000.00
Multiply by: Tax rate
35%
Deferred tax asset
980,000.00
The accounting profit before tax for the year ended December 31, 20Y2 for Regiel Ltd amounted to P18,500
and included:
Depreciation - motor vehicle (25%)
Depreciation - equipment (20%)
Rent revenue
Royalty revenue (exempt from tax)
Doubtful debts expense
Entertainment expense (non-deductible)
Proceeds on sale of equipment
Carrying amount of equipment sold
Annual leave expense
P 4,500
20,000
16,000
5,000
2,300
1,500
19,000
18,000
5,000
The draft balance sheet at December 31, 20Y2 contained the following assets and liabilities:
Assets
Cash
Receivables
20Y2
20Y1
P 11,500
12,000
P 9,500
14,000
Allowance for doubtful debts
Inventory
Rent receivable
Motor vehicle
Accumulated depreciation - motor vehicle
Equipment
Accumulated depreciation - equipment
Deferred tax asset
20Y2
(3,000)
19,000
2,800
18,000
(15,750)
100,000
(60,000)
?
20Y1
(2,500)
21,500
2,400
18,000
(11,250)
130,000
(52,000)
5,550
P135,200
Liabilities
Accounts payable
Provision for annual leave
Current tax liability
Deferred tax liability
15,655
4,500
?
?
21,500
6,000
7,600
2,745
37,845
Additional information



The company can claim a deduction of P15,000 (15%) for depreciation on equipment, but the motor
vehicle is fully depreciated for tax purposes.
The equipment sold during the year had been purchased for P30,000 two years before the date of
sale.
The company tax rate is 30%.
The
deferred
tax
expense
(benefit)
for
20Y2
=(P2,430)
Solution:
Deferred tax expense
Rent revenue (2,800 - 2,400)
400.00
Annual leave expense (6,000 - 4,500)
1,500.00
Taxable temporary difference
1,900.00
Multiply by: Tax rate
30%
570.00
Less: Deferred tax benefit
Depreciation - motor vehicle
4,500.00
Depreciation - equipment (20,000 - (20,000 x 15%/20%))
5,000.00
Doubtful accounts expense (3,000 - 2,500)
500.00
Deductible temporary difference
10,000.00
Multiply by: Tax rate
30%
Deferred tax expense (benefit)
3,000.00
(2,430.00)
The following information was provided to you by Willow Company
Receivable
Building – net
Machinery and equipment - net
Book value
150,000
300,000
500,000
Tax base
200,000
100,000
550,000
Unearned revenue
Estimated warranty obligation
100,000
80,000
-
Current and future tax rate 30%. Taxable income for the year P300,000.
Deferred tax asset
=84,000
Solution:
Receivable (Excess tax base) (P200,000-P150,000)
Machinery & equipment - net (Excess tax base) (P550,000-P500,000)
Unearned revenue
Estimated warranty obligation
50,000.00
50,000.00
100,000.00
80,000.00
is
Future deductible amounts
Multiply by: Tax rate
280,000.00
30%
Deferred tax asset
84,000.00
On 1 April 20Y2, the company rate of income tax was changed from 35% to 30%. At the previous reporting
date (30 June 20Y1) Montgomery Limited had the following tax balances:
·
·
Deferred tax assets
Deferred tax liabilities
P26,250
P21,000
What is the impact of the tax rate change on income tax expense?
=increase P750
Solution:
Deferred tax asset, unadjusted
26,250.00
Less: Deferred tax asset, adjusted (26,250 x 30%/35%)
22,500.00
Increase in income tax expense
3,750.00
Deferred tax liability, unadjusted
21,000.00
Less: Deferred tax liability, adjusted (21,000 x 30%/35%)
18,000.00
Decrease in income tax expense
3,000.00
Increase in income tax expense
3,750.00
Decrease in income tax expense
-3,000.00
Net increase in income tax expense
750.00
Jam Company prepared the following reconciliation of income per books with income per tax return for
its first year of operations the year ended December 31, 2012
Book income before income taxes
Add: Future deductible amounts
_____________________
_____________________
______
______
( 1 )
Less: Future taxable amounts
_____________________
_____________________
______
______
(
Taxable income
P 50,000
2 )
_____
·
Jam Company acquired an equipment at a cost of P500,000 on January 1,
2012. Depreciation was recorded using the straight-line method with no expected residual value
for an estimated useful life of 5 years. For tax purposes, the double-declining balance method was
used.
·
Sales, cost of sales, operating expenses are recognized under the accrual method for both
financial and tax reporting purposes, except for the following items:
·
Rent income is recognized for financial reporting is recognized under accrual, for tax
purposes rent is recognized when collected. In 2012, Jam Company reported rent income of
P140,000, while rent collected totaled to P90,000
·
Warranty costs are recognized for financial reporting purposes under the accrual method
and provide an expense equal to 5% of selling price. For tax purposes, warranty costs are
recognized when actual payment is made. Total warranty expenditures for 2012 was
P320,000. At year end, Jam Company reported an estimated warranty obligation of P40,000.
·
Bad debts expense reported during the year for financial reporting was P65,000. For tax
purposes, bad debts are recognized as deductions only upon write-off which amounted to P30,000
during the year.
·
Jam Company is under a tax jurisdiction that allows operating losses to be carried over in
the future. The current and future tax rate is at 30%
The deferred tax asset reported in the December 31, 2012 statement of financial position is
=30,000
Solution:
Tax depreciation
Cost
Multiply by:
(100%/5 yrs x 2)
Book depreciation
Cost
Divide by: Useful life
500,000.00
40%
200,000.00
500,000.00
5 yrs
100,000.00
Future taxable amount (AExp < TExp, AI > TI)
100,000.00
Accounting rent income
Taxable rent income
140,000.00
90,000.00
Future taxable amount (AI > TI)
50,000.00
Estimated warranty obligation (AExp > TExp)
40,000.00
Future deductible amount (AI < TI)
40,000.00
Bad debts expense
Accounts written off
65,000.00
30,000.00
Future deductible amount (AExp > TExp, AI < TI)
35,000.00
Excess acctg warranty over tax warranty
Excess acctg bad debts over tax bad debts
40,000.00
35,000.00
Total future deductible amounts
75,000.00
Excess tax depreciation over acctg depreciation
Excess acctg rent income over tax rent income
100,000.00
50,000.00
Future taxable amounts
150,000.00
Future taxable amount
Multiply by: Tax rate
150,000.00
30%
Deferred tax liability
45,000.00
Future deductible amount
Multiply by: Tax rate
75,000.00
30%
Deferred tax assets
22,500.00
(13)
(14)
(15)
(16)
AI = Accounting Income; TI = Taxable Income; AExp = Accounting Expense; TExp = Tax Expense
(Allowable Deduction)
The Waloneke Company has a policy of using non-current assets until they can no longer be operated and
are worthless. On 1 January 20CY it acquired an item of plant and machinery for CU100,000. It is being
depreciated over 10 years on a straight-line basis. For tax purposes there is an allowance of 20% per
annum on a reducing balance basis. There are two rates of tax: 15% on trading profits and 25% on gains
on disposals.
What deferred tax balance should Waloneke recognise at 31 December 20CY, according to IAS12 Income
taxes?
=Deferred tax liability of CU2,500
Solution:
Accounting depreciation (100,000 / 10 yrs)
10,000.00
Tax basis depreciation (100,000 x 20%)
20,000.00
Taxable temporary difference (Acctg Income > Taxable Income)
10,000.00
Multiply by: Future tax rate
25%
Deferred tax liability
2,500.00
According to IAS12 Income taxes, are the following statements in relation to deferred tax liabilities true or
false?
(1) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable
temporary differences.
(2) Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of
deductible temporary differences.
Statement (1) Statement (2)
=True True
Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements were bad debt
expenses of 1,400 and profit from an installment sale of 2,600. For tax purposes, the bad debts will be
deducted and the profit from the installment sale will be recognized in year 2. The enacted tax rates are
30% in year 1 and 25% in year 2. In its year 1 income statement, what amount should Shear report as
deferred income tax expense?
=650
Cowboy Corporation reported depreciation of 450,000 on its 2015 tax return. However, in its 2015
income statement, Cowboy reported depreciation of 300,000--as well as 30,000 interest revenue on
tax-free bonds. The difference in depreciation is only a temporary difference, and it will reverse equally
over the next three years. Cowboy's enacted income tax rates are as follows:
2015
35%
2016
30%
2017
25%
2018
20%
What amount should be included in the deferred income tax liability in Cowboy's December 31, 2015,
balance sheet?
=37,500
Jostine company lease office premises to Fox Inc. for a 4-year term beginning January 2, 2015.Under the
terms of the operating lease, rent for the first year is P216,000 and rent for years 2 through 4 is P337,500
per annum. However, as an inducement to enter the lease, Fox was allowed to use the lease asset rentfree for the first three months. Tax rate is 32%.In its December 31, 2015 balance sheet of Jostine company,
what amount should be reported as deferred tax asset?In its December 31, 2015 balance sheet of Jostine
company, what amount should be reported as deferred tax asset?
=42,120
The following information was provided to you by Willow Company
Receivable
Building – net
Machinery and equipment - net
Book value
150,000
300,000
500,000
Tax base
200,000
100,000
550,000
Unearned revenue
Estimated warranty obligation
100,000
80,000
-
Current and future tax rate 30%. Taxable income for the year P300,000.
Deferred tax liability
=60,000
Solution:
Building - net (Excess carrying amount)
(P300,000-P100,000)
Multiply by: Tax rate
200,000.00
30%
Deferred tax liability
60,000.00
Palawan Corporation which is subject to a 35% tax rate reported current tax expense of P4,000,000 for the
year ended December 31, 20Y1, its first year in operations. The following items were also recognized in
the balance sheet during the year. Deferred tax asset in the amount of P560,000 arising from an installment
sale expected to be collected equally in 20Y2 and 20Y3. And a deferred tax liability of P1,440,000, caused
by accelerated depreciated methods used in tax reporting. P440,000 of the deferred tax liability is expected
to reverse with in 20Y2 while the balance in later years. The 20Y1 total income tax expense is
=P4,880,000
Solution:
Current tax expense
4,000,000.00
Deferred tax expense
1,440,000.00
Deferred tax benefit
(560,000.00)
Total income tax expense
4,880,000.00
The following facts relate to Whammy Corporation for the year 20CY:





Deferred tax liability, January 1, P48,000.
Deferred tax asset, January 1, P16,000.
Taxable income for the year, P430,000.
Cumulative temporary difference at December 31, giving rise to future taxable amounts, P230,000.
Cumulative temporary difference at December 31, giving rise to the future deductible amounts,
P95,000.

Tax rate for all years, 35%.
No permanent differences exist. The company is expected to operate profitably in the future. What is
the total tax expense?
=P165,750
Solution:
Taxable income
430,000.00
Multiply by: Income tax rate
35%
Current tax expense
150,500.00
Add: Deferred tax expense
Cumulative taxable temporary difference
230,000.00
Multiply by: Income tax rate
35%
Deferred tax liability, Dec 31, 20CY
80,500.00
Deferred tax liability, Jan 1, 20CY
(48,000.00)
32,500.00
Less: Deferred tax benefit
Cumulative deductibe temporary difference
95,000.00
Multiply by: Income tax rate
Deferred tax asset, Dec 31,
20CY
35%
Deferred tax asset, Jan 1, 20CY
(16,000.00)
33,250.00
17,250.00
Total income tax expense
165,750.00
Schaeffer Products, Inc., reported an excess of warranty expense over warranty deductions of 72,000
for the year ended December 31, 2015. This temporary difference will reverse in equal amounts over
the years 2016 to 2018. The enacted tax rates are as follows:
2015
40%
2016
35%
2017
30%
2018
25%
The reporting for this temporary difference at December 31, 2015, would be
=a noncurrent deferred tax asset of 21,600.
The Kolpa Company purchased a building in January 20Y1 for CU150,000. The accounting depreciation
charge is 5% straight-line. For tax purposes, depreciation of 2% straight-line is deducted annually. The
remaining cost will be deducted in future periods, either as depreciation or through a deduction on disposal.
The tax rate is 25%.
According to IAS12 Income taxes, what should be the deferred tax balance at 31 December 20Y4?
=CU4,500 deferred tax asset
Solution:
Accounting depreciation (150,000 x 5%)
7,500.00
Less: Tax depreciation (150,000 x 2%)
3,000.00
Deductible temporary difference
4,500.00
Multiply by:
4 years
Cumulative deductible temporary difference
18,000.00
Multiply by: Tax rate
25%
Deferred tax asset
4,500.00
Jam Company prepared the following reconciliation of income per books with income per tax return for
its first year of operations the year ended December 31, 2012
Book income before income taxes
Add: Future deductible amounts
_____________________
_____________________
______
______
( 1 )
Less: Future taxable amounts
_____________________
_____________________
______
______
(
Taxable income
P 50,000
2 )
_____
·
Jam Company acquired an equipment at a cost of P500,000 on January 1,
2012. Depreciation was recorded using the straight-line method with no expected residual value
for an estimated useful life of 5 years. For tax purposes, the double-declining balance method was
used.
·
Sales, cost of sales, operating expenses are recognized under the accrual method for both
financial and tax reporting purposes, except for the following items:
·
Rent income is recognized for financial reporting is recognized under accrual, for tax
purposes rent is recognized when collected. In 2012, Jam Company reported rent income of
P140,000, while rent collected totaled to P90,000
·
Warranty costs are recognized for financial reporting purposes under the accrual method
and provide an expense equal to 5% of selling price. For tax purposes, warranty costs are
recognized when actual payment is made. Total warranty expenditures for 2012 was
P320,000. At year end, Jam Company reported an estimated warranty obligation of P40,000.
·
Bad debts expense reported during the year for financial reporting was P65,000. For tax
purposes, bad debts are recognized as deductions only upon write-off which amounted to P30,000
during the year.
·
Jam Company is under a tax jurisdiction that allows operating losses to be carried over in
the future. The current and future tax rate is at 30%
The deferred tax liability reported in the December 31, 2012 statement of financial position is
=45,000
Solution:
Tax depreciation
Cost
Multiply by:
(100%/5 yrs x 2)
Book depreciation
Cost
Divide by: Useful life
500,000.00
40%
200,000.00
500,000.00
5 yrs
100,000.00
Future taxable amount (AExp < TExp, AI > TI)
100,000.00
Accounting rent income
Taxable rent income
140,000.00
90,000.00
Future taxable amount (AI > TI)
50,000.00
Estimated warranty obligation (AExp > TExp)
40,000.00
Future deductible amount (AI < TI)
40,000.00
Bad debts expense
Accounts written off
65,000.00
30,000.00
Future deductible amount (AExp > TExp, AI < TI)
35,000.00
Excess acctg warranty over tax warranty
Excess acctg bad debts over tax bad debts
40,000.00
35,000.00
Total future deductible amounts
75,000.00
Excess tax depreciation over acctg depreciation
Excess acctg rent income over tax rent income
100,000.00
50,000.00
Future taxable amounts
150,000.00
Future taxable amount
Multiply by: Tax rate
150,000.00
30%
Deferred tax liability
45,000.00
Future deductible amount
Multiply by: Tax rate
75,000.00
30%
Deferred tax assets
22,500.00
(13)
(14)
(15)
(16)
AI = Accounting Income; TI = Taxable Income; AExp = Accounting Expense; TExp = Tax Expense
(Allowable Deduction)
Short-term employee benefits as defined in PAS 19R are:
=are employee benefits (other than termination benefits) that are expected to be settled
wholly before twelve months after the end of the annual reporting period in which the employees render the
related service.
Team K Company employs 5 people. Each employee is entitled to 2 weeks paid vacation every year
the employee works for the company. The conditions of the paid vacation are (a) for each full year of
work, an employee will receive two weeks of paid vacation (no vacation accrues for a portion of a year),
(b) each employee will receive the same pay for vacation time as the regular pay-in the year taken, and
(c) unused vacation pay can be carried forward.
Employee Starting Date Cumulative Vacation Taken As of 12/31/2013 Weekly Salary
A
12/1/2007
10 weeks
P5,000
B
3/1/2012
2 weeks
4,000
C
8/1/2013
None
3,500
D
12/1/2012
3 weeks
3,000
E
3/31/2014
None
2,500
Team K Company should report liability for vacation pay on December 31, 2014 at
=P38,000
If the payment of employees’ compensation for future absences is probable, the amount can be reasonably
estimated, and the obligation relates to rights that accumulate, the compensation should be
=Accrued if attributable to employees’ services already rendered.
Should the following items be included in plan assets, according to IAS19 Employee benefits?
1) Assets held by a long-term employee benefit fund.
(2)
Qualifying
insurance
policies.
Item (1) Item (2)
=Yes Yes
The Wheat Company has a 12-month accounting period ending 31 December. On 1 April 20Y1 it introduced
a new contractual bonus scheme covering the year to 31 March each year. It is reasonably anticipated that
the bonuses for the year to 31 March 20Y2 will amount to CU9,000.
According to IAS19 Employee benefits, what liability for bonuses should be recorded at 31 December
20Y1?
=CU6,750
Solution:
Total expected bonus
9,000.00
Multiply by: Current year coverage (Apr 1 - Dec 31, 20Y1)
9 mos/12 mos
Accrued bonus expense, 20Y1
6,750.00
JR Company employs 5 people. Each employee is entitled to 2 weeks paid vacation every year the
employee works for the company. The conditions of the paid vacation are (a) for each full year of work,
an employee will receive two weeks of paid vacation (no vacation accrues for a portion of a year), (b)
each employee will receive the same pay for vacation time as the regular pay-in the year taken, and
(c) unused vacation pay can be carried forward.
Cumulative Vacation Taken As of 12/31/20Y8
Starting Date
Weekly Salary
Employee
A
12/1/20Y1
10 weeks
P5,000
B
3/1/20Y6
2 weeks
4,000
C
8/1/20Y7
None
3,500
D
12/1/20Y6
3 weeks
3,000
E
3/31/20Y8
None
2,500
JR Company should report liability for vacation pay on December 31, 20Y8 at
=P38,000
Solution:
Employee
Starting date
VL earned
VL claimed
VL balance
Weekly salary
Liability
A
12/1/Y1
14 weeks
10 weeks
4 weeks
5,000.00
20,000.00
B
3/1/Y6
4 weeks
2 weeks
2 weeks
4,000.00
8,000.00
C
8/1/Y7
2 weeks
None
2 weeks
3,500.00
7,000.00
D
12/1/Y6
4 weeks
3 weeks
1 week
3,000.00
3,000.00
E
3/31/Y8
None
None
None
2,500.00
0.00
Liability for vacation pay
38,000.00
Ultimate Company provided the following information for 2016:
January 1 December
31
Fair value of plan assets
2,600,000 3,000,000
Projected benefit obligation
2,000,000 2,100,000
Prepaid/accrued
benefit
cost600,000
900,000
surplus
Asset ceiling
200,000
300,000
Effect of asset ceiling
400,000
600,000
Current service cost
100,000
Contribution to the plan
350,000
Benefits paid
150,000
Discount rate
10%
What is the net remeasurement loss in 2016?
=170,000
The following information relates to the defined benefit pension plan of the Lupet Company for the year
ending December 31, 20CY:
Projected benefit obligation, January 1
P9,200,000
Projected benefit obligation, December 31
9,458,000
Fair value of plan assets, January 1
9,000,000
Expected return on plan assets
900,000
Actual return on plan assets
990,000
Employer contributions
850,000
Benefits paid to retirees
780,000
Settlement rate
10%
The amount to be recognized in 20CY profit or loss is
=P138,000
Solution:
Projected benefit obligation, Dec 31
9,458,000.00
Benefits paid to retirees
780,000.00
Total debits
10,238,000.00
Less: Credit transactions
Interest expense on PBO (9,200,000 x 10%)
920,000.00
Projected benefit obligation, Jan 1
9,200,000.00
10,120,000.00
Service cost
118,000.00
Add: Interest expense on PBO
920,000.00
Less: Interest income on FVPA (9,000,000 x 10%)
900,000.00
Employee benefit expense
138,000.00
On January 1, 2012 Rose Company instituted a lump-sum benefit payable to its new hedge fund
manager upon termination of service in December 31, 2021.
The benefit (annual service cost) shall be equal to 10% of the final salary for each year of service
compounded at the expected settlement rate of 8%. The salary for 2012 is P600,000 with a 5% annual
increase based on what was provided by Rose Company’s remuneration policy
Rose Company plans to fund the pension obligation by transferring to the pension fund an amount
equal to 45% of the annual service costs during the first three years; 60% of the annual service costs
for years four to six; 75% of annual service costs for years seven to ten. Funding shall be made at the
end of each year. The expected return rate of the plan asset portfolio is 10%
There were no actuarial gains or loss for the years 2012 and 2013.
At December 31, 2014, it was determined that the fair value of the pension obligation and plan assets
were P171,145 and P140,165
Future value of P1 @ 5%
Present value of P1 @ 8%
8 periods
9 periods
1.477
0.54
1.551
0.50
10
periods
1.629
0.46
Accrued pension cost at December 31, 2013
=12,563
Solution:
Contribution, 2012 (P93,060 x 45%)
Expected return, 2013 (P41,877 x 10%)
Contribution, 2013 (P93,060 x 45%)
41,877.00
4,187.70
41,877.00
Fair value of plan assets, 12/31/2013
Less: Projected benefit obligation, 12/31/2013
Current service cost, 2012
46,530.00
Interest expense, 2013
(P46,530 x 8%)
3,722.40
Current service cost, 2013
50,252.40
87,941.70
Prepaid (Accrued) Pension Cost, 12/31/2013
-12,563.10
100,504.80
The following information pertains to Maricar Co.’s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/CY
Assumed discount rate
Fair value of plan assets at 1/1/CY
Current service costs for 20CY
Past service cost (amendments in 20CY)
Actuarial estimate of projected benefit obligation at 12/31/CY
Fair value of plan assets at 12/31/CY
Pension benefits paid during 20CY
Contribution to the plan during 20CY
P72,000
10%
P70,000
P18,000
5,000
P93,200
P90,000
15,000
25,000
How much should Maricar Co. reports in its other comprehensive income for the year ended
December 31, 20CY?
=P3,000 unrealized loss
Solution:
PBO
FVPA
1/1/CY Balances
72,000.00
70,000.00
Interest expense on PBO (72,000 x 10%)
7,200.00
Interest income on FVPA (70,000 x 10%)
7,000.00
Current service costs
18,000.00
Past service cost
5,000.00
Contribution to the plan
25,000.00
Pension benefits paid
(15,000.00)
(15,000.00)
Unadjusted balances
87,200.00
87,000.00
Remeasurement-OCI
12/31/CY Balances
93,200.00
Actuarial loss
6,000.00
Excess of actual return over interest income
90,000.00
(6,000.00)
3,000.00
Unrealized loss-OCI
3,000.00
(3,000.00)
The following information relates to the defined benefit pension plan of the REVIEW Company for the year
ending December 31, 20CY:
Projected benefit obligation, January 1
P11,000,000
Projected benefit obligation, Dec. 31
11,600,000
Fair value of plan assets, January 1
9,800,000
Past service cost
80,000
Actuarial gain
50,000
Employer contributions
1,000,000
Benefits paid to retirees
800,000
Expected rate of return on plan assets
8%
Settlement rate
10%
The amount to be recognized in the company’s 20CY income statement related to the pension plan is
=P470,000
Solution:
Projected benefit obligation, Dec 31
11,600,000.00
Benefits paid to retirees
800,000.00
Actuarial gain
50,000.00
Total debits
12,450,000.00
Less: Credit transactions
Projected benefit obligation, Jan 1
11,000,000.00
Interest expense on PBO (11,000,000 x 10%)
1,100,000.00
Past service cost
80,000.00
12,180,000.00
Current service cost
270,000.00
Past service cost
80,000.00
Interest expense on PBO
1,100,000.00
Interest income on FVPA (9,800,000 x 10%)
(980,000.00)
Total employee benefits expense
470,000.00
The following information relates to the defined benefit pension plan for the Baguio Company for
the year ending December 31, 20CY:
PV of benefit obligation, January 1
PV of benefit obligation, December 31
Fair value of plan assets, January 1
Fair value of plant assets, December 31
Actuarial loss on benefit obligation
Employer contribution
Benefits paid to retirees
Discount rate
P6, 700, 000
7, 200, 000
6, 500, 000
6, 900, 000
150, 000
300, 000
600, 000
10%
How much would be the current service cost for the year?
=P280, 000
Solution:
PV of benefit obligation, Dec 31
7,200,000.00
Benefits paid to retirees
600,000.00
Total debits
7,800,000.00
Less: Credit transactions
Actuarial loss on benefit obligation
150,000.00
Interest expense (6,700,000 x 10%)
670,000.00
PV of benefit obligation, Jan 1
6,700,000.00
Current service cost
Ultimate Company provided the following information for 2016:
January 1 December
31
Fair value of plan assets
2,600,000 3,000,000
Projected benefit obligation
2,000,000 2,100,000
7,520,000.00
280,000.00
Prepaid/accrued
benefit
surplus
Asset ceiling
Effect of asset ceiling
Current service cost
Contribution to the plan
Benefits paid
Discount rate
cost-
600,000
900,000
200,000
400,000
300,000
600,000
100,000
350,000
150,000
10%
What is the actual return on plan assets for the current year?
=200,000
Venus Corp., a company whose stock is publicly traded, provides a noncontributory defined benefit
pension plan for its employees. The company's actuary has provided the following information for the
year ended December 31, 20CY:
Projected benefit obligation
P1,200,000
Accumulated benefit obligation
1,050,000
Fair value of plan assets
1,650,000
Service cost
480,000
Interest on projected benefit obligation
48,000
Prior service cost
Expected and actual return on plan
assets
120,000
165,000
The market-related asset value equals the fair value of plan assets. Prior contributions to the defined
benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year
end. No contributions have been made for 20CY pension cost. In its December 31, 20CY balance
sheet, Venus should report an accrued pension cost of
=P450,000
Solution:
Fair value of plan assets
1,650,000.00
Less: Projected benefit obligation
1,200,000.00
Prepaid/accrued benefit cost
450,000.00
The following information pertains to Maricar Co.’s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/CY
Assumed discount rate
Fair value of plan assets at 1/1/CY
Current service costs for 20CY
Past service cost (amendments in 20CY)
Actuarial estimate of projected benefit obligation at 12/31/CY
Fair value of plan assets at 12/31/CY
Pension benefits paid during 20CY
Contribution to the plan during 20CY
P72,000
10%
P70,000
P18,000
5,000
P93,200
P90,000
15,000
25,000
How much should Maricar Co. reports in its other comprehensive income for the year ended December 31,
20CY?
Select one:
=P3,000 unrealized loss
Solution:
PBO
FVPA
1/1/CY Balances
72,000.00
70,000.00
Interest expense on PBO (72,000 x 10%)
7,200.00
Interest income on FVPA (70,000 x 10%)
7,000.00
Current service costs
18,000.00
Past service cost
5,000.00
Remeasurement-OCI
Contribution to the plan
25,000.00
Pension benefits paid
(15,000.00)
(15,000.00)
Unadjusted balances
87,200.00
87,000.00
12/31/CY Balances
93,200.00
90,000.00
Actuarial loss
6,000.00
(6,000.00)
Excess of actual return over interest income
3,000.00
Unrealized loss-OCI
3,000.00
(3,000.00)
Bulls Corporation amends its pension plan on 1/1/CY. The following information is available:
1/1/CY before
amendment
Accumulated benefit
obligation
P 950,000
Projected
benefit
obligation
1,300,000
1/1/CY
after
amendment
P1,425,000
1,900,000
The total amount of unrecognized prior service cost to be recognized as a result of this amendment is
=P600,000
Solution:
PBO, after amendment
1,900,000.00
Less: PBO, before amendment
1,300,000.00
Past service cost
600,000.00
At its year end, The Parlour Company has the following balances in relation to a defined benefit postemployment plan:
Plan assets CU115,000
Plan liability CU190,000
Unrecognised actuarial loss CU20,000
Under IAS19R Employee benefits, what figure should be shown on Parlour's statement of financial position
for the plan deficit?
=CU75,000
Solution:
Plan
assets
115,000.00
Plan liability
(190,000.00)
Prepaid/accrued benefit cost
(75,000.00)
On January 2, 20CY, Arjam Co. established a noncontributory defined benefit plan covering all employees
and contributed P450,000 to the plan. At December 31, 20CY, Arjam determined that the 20CY service
and interest costs on the plan were P620,000. The expected and the actual rate of return on plan assets
for 20CY was 10%. There are no other components of Arjam's pension expense. What amount should
Arjam report in its December 31, 20CY balance sheet as accrued pension expense?
=P125,000
Solution:
Contribution to the plan
Actual return on plan assets (450,000 x 10%)
450,000.00
45,000.00
Fair value of plan assets, Dec 31, 20CY
495,000.00
Accrued pension liability
620,000.00
Accrued pension expense
(125,000.00)
The Umingan Company has a defined benefit pension plan for its employees. The following information
pertains to the pension plan:
Projected benefit obligation, December 31, 20Y2
Fair value of plant assets, December 31, 20Y2
Accrued/prepaid pension cost (asset), Dec. 31, 20Y1
The December 31, 20Y2 adjusting journal entries include a
Select one:
=Debit to accrued/prepaid pension cost for P7, 700
P1, 680, 000
1, 739, 000
51, 300
Solution:
Fair value of plan assets, Dec 31, 20Y2
1,739,000.00
Projected benefit obligation, Dec 31, 20Y2
(1,680,000.00)
Accrued/prepaid pension cost (asset), Dec 31, 20Y2
59,000.00
Less: Accrued/prepaid pension cost (asset), Dec 31, 20Y1
51,300.00
Net adjustment (debit)
7,700.00
On January 1, 2012 Rose Company instituted a lump-sum benefit payable to its new hedge fund
manager upon termination of service in December 31, 2021.
The benefit (annual service cost) shall be equal to 10% of the final salary for each year of service
compounded at the expected settlement rate of 8%. The salary for 2012 is P600,000 with a 5% annual
increase based on what was provided by Rose Company’s remuneration policy
Rose Company plans to fund the pension obligation by transferring to the pension fund an amount
equal to 45% of the annual service costs during the first three years; 60% of the annual service costs
for years four to six; 75% of annual service costs for years seven to ten. Funding shall be made at the
end of each year. The expected return rate of the plan asset portfolio is 10%
There were no actuarial gains or loss for the years 2012 and 2013.
At December 31, 2014, it was determined that the fair value of the pension obligation and plan assets
were P171,145 and P140,165
Future value of P1 @ 5%
Present value of P1 @ 8%
8
periods
1.477
0.54
9
periods
1.551
0.50
Net actuarial loss at the end of 2014
=6,748
Solution:
Projected benefit obligation, 12/31/2013
Current service cost, 2014
(P50,252.40 x 1.08)
Interest expense on PBO
(P100,504.80 x 8%)
100,504.80
54,272.59
8,040.38
Projected benefit obligation, unadj, 12/31/2014
Projected benefit obligation, adjusted, 12/31/2014
162,817.78
171,145.00
Actuarial gain (loss) on PBO
Fair value of plan assets, 12/31/2013
Contribution, 2014 (P93,060 x 45%)
Expected return on plan assets
(P87,941.70 x 10%)
Fair value of plan assets, unadj, 12/31/2014
Fair value of plan assets, adjusted, 12/31/2014
62,312.98
-8,327.22
87,941.70
41,877.00
8,794.17
50,671.17
138,612.87
140,165.00
Actuarial (gain) loss on FVPA
-1,552.13
Actuarial gain (loss) on PBO
Actuarial gain (loss) on FVPA
-8,327.22
1,552.13
10
periods
1.629
0.46
Net actuarial gain (loss)
-6,775.09
Under which category should the following items be accounted for according to IAS19R Employee benefits?
(1) Lump sum benefit of 1% of the final salary for each year of service.
(2) Actuarial gains.
=Lump sum benefit should be accounted for under defined benefit plans; Actuarial gains
should be accounted for under defined benefit plans
The following information relates to the defined benefit pension plan for the McDonald Company for the
year ending December 31, 20CY.
Projected benefit obligation, January 1
Projected benefit obligation, December 31
Fair value of plan assets, January 1
Fair value of plan assets, December 31
Actual return on plan assets
Employer contributions
Benefits paid to retirees
Settlement rate
P4,600,000
4,729,000
5,035,000
5,565,000
450,000
425,000
390,000
10%
Service cost for the year would be
=P59,000
Solution:
Projected benefit obligation, Dec 31
4,729,000.00
Benefits paid to retirees
390,000.00
Total debits
5,119,000.00
Less: Credit transactions
Projected benefit obligation, Jan 1
Interest expense on PBO (4,600,000 x 10%)
4,600,000.00
460,000.00
Service cost
5,060,000.00
59,000.00
Ultimate Company provided the following information for 2016:
January 1
December
31
Fair value of plan assets
2,600,000
3,000,000
Projected benefit obligation
2,000,000
2,100,000
Prepaid/accrued
benefit
cost600,000
900,000
surplus
Asset ceiling
200,000
300,000
Effect of asset ceiling
400,000
600,000
Current service cost
100,000
Contribution to the plan
350,000
Benefits paid
150,000
Discount rate
10%
What is the employee benefit expense for 2016?
=80,000
On January 1, 2012 Rose Company instituted a lump-sum benefit payable to its new hedge fund
manager upon termination of service in December 31, 2021.
The benefit (annual service cost) shall be equal to 10% of the final salary for each year of service
compounded at the expected settlement rate of 8%. The salary for 2012 is P600,000 with a 5% annual
increase based on what was provided by Rose Company’s remuneration policy
Rose Company plans to fund the pension obligation by transferring to the pension fund an amount
equal to 45% of the annual service costs during the first three years; 60% of the annual service costs
for years four to six; 75% of annual service costs for years seven to ten. Funding shall be made at the
end of each year. The expected return rate of the plan asset portfolio is 10%
There were no actuarial gains or loss for the years 2012 and 2013.
At December 31, 2014, it was determined that the fair value of the pension obligation and plan assets
were P171,145 and P140,165
8
periods
1.477
0.54
Future value of P1 @ 5%
Present value of P1 @ 8%
9
periods
1.551
0.50
10
periods
1.629
0.46
Current service for 2012 is
=46,530
Solution:
Current salary
Multiply by: FV of P1 at 5% for 9 periods
600,000.00
1.551
Expected final salary
Multiply by:
930,600.00
10%
Total
Multiply by: PV of P1 at 8% for 9 periods
93,060.00
0.50
Current service cost
46,530.00
A director of an entity receives a retirement benefit of 10% of his final salary per annum for his contractual
period of three years. The director does not contribute to the scheme. His anticipated salary over the
three years is Year 1 P100,000, Year 2 P120,000, and Year 3 P144,000. Assume a discount rate of
5%. The pension liability at the end of the second year is
=P27,439
Solution:
Final annual salary
Multiply by:
144,000.00
10%
Annual increase of total benefit
14,400.00
Current service cost, year 1 (14,400 x 0.91)
13,104.00
Interest expense, year 2 (13,104 x 5%)
655.00
Current service cost, year 2 (14,400 x 0.95)
13,680.00
Pension liability, end of year 2
27,439.00
On January 1, 2012 Rose Company instituted a lump-sum benefit payable to its new hedge fund
manager upon termination of service in December 31, 2021.
The benefit (annual service cost) shall be equal to 10% of the final salary for each year of service
compounded at the expected settlement rate of 8%. The salary for 2012 is P600,000 with a 5% annual
increase based on what was provided by Rose Company’s remuneration policy
Rose Company plans to fund the pension obligation by transferring to the pension fund an amount
equal to 45% of the annual service costs during the first three years; 60% of the annual service costs
for years four to six; 75% of annual service costs for years seven to ten. Funding shall be made at the
end of each year. The expected return rate of the plan asset portfolio is 10%
There were no actuarial gains or loss for the years 2012 and 2013.
At December 31, 2014, it was determined that the fair value of the pension obligation and plan assets
were P171,145 and P140,165
Future value of P1 @ 5%
Present value of P1 @ 8%
8
periods
1.477
0.54
9
periods
1.551
0.50
10
periods
1.629
0.46
Pension expense in 2013
=49,787
Solution:
Current service cost, 2013
Annual service cost
Multiply by: PV of P1 at 8% for 8 periods
93,060.00
0.54
50,252.40
Interest expense on PBO
PBO, 12/31/2012
Multiply by: Interest rate
46,530.00
8%
3,722.40
Totals
Less: Expected return on plan assets
Annual service cost
Multiply by:
93,060.00
45%
Contribution, 2012
Multiply by: Expected rate of return
41,877.00
10%
Pension expense, 2013
53,974.80
4,187.70
49,787.10
The following information pertains to Maricar Co.’s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/CY
Assumed discount rate
Fair value of plan assets at 1/1/CY
Current service costs for 20CY
Past service cost (amendments in 20CY)
Actuarial estimate of projected benefit obligation at 12/31/CY
Fair value of plan assets at 12/31/CY
Pension benefits paid during 20CY
Contribution to the plan during 20CY
P72,000
10%
P70,000
P18,000
5,000
P93,200
P90,000
15,000
25,000
How much should Maricar Co. reports as employee benefits expense in its income statement for the year
ended
December
31,
20CY?
Select
one:
=P23,200
Solution:
Current service costs
18,000.00
Past service cost
5,000.00
Interest expense on PBO (72,000 x 10%)
7,200.00
Interest income on FVPA (70,000 x 10%)
(7,000.00)
Employee benefits expense
23,200.00
On January 1, 20CY the memorandum records of Anne Company’s defined benefit plan showed the
following:
Fair value of plan assets
Projected benefit obligation
Prepaid/accrued benefit cost-credit
P7,500,000
(8,500,000)
(P1.000,000)
During 20CY, the enterprise determined that its current service cost was P1,000,000 and the interest
cost is 10%. The expected return on plan assets was 12% but the actual return during the year was
10%. Other related information is as follows:
Contribution to the plan
Benefits paid to retirees during 20CY
P1,200,000
1,500,000
Decrease in accrued benefit obligation
due to changes in actuarial
assumptions
200,000
Anne Company should report 20CY benefit expense at
=P1,100,000
Solution:
Current service cost
1,000,000.00
Interest expense on PBO (8,500,000 x 10%)
850,000.00
Interest income on FVPA (7,500,000 x 10%)
(750,000.00)
Employee benefit expense
1,100,000.00
Flu Company provided you with the following information in relation to its post-retirement benefit plan;
current service cost P100,000; expected return on plan assets P40,000; actual return on plan assets
P45,000.
Pension expense for the period
=60,000
Solution:
Current service cost
Expected return on plan assets
Pension expense
100,000.00
-40,000.00
60,000.00
The Makarangu Company operates a defined benefit post-employment plan. At 31 December 20CY the
present value of the defined benefit obligation was CU40 million, the fair value of the plan assets was
CU10 million, the unrecognised actuarial gains were CU8 million and the past service cost not recognised
was CU6 million. What is the defined benefit liability to be recognised by Makarangu at 31 December
20CY, according to IAS19R Employee benefits?
=CU30 million
Solution:
Fair value of plan assets
10,000,000.00
Projected benefit obligation
(40,000,000.00)
Prepaid/accrued benefit cost
(30,000,000.00)
Ultimate Company provided the following information for 2016:
January 1
December
31
Fair value of plan assets
2,600,000
3,000,000
Projected benefit obligation
2,000,000
2,100,000
Prepaid/accrued
benefit
cost600,000
900,000
surplus
Asset ceiling
200,000
300,000
Effect of asset ceiling
400,000
600,000
Current service cost
100,000
Contribution to the plan
350,000
Benefits paid
150,000
Discount rate
10%
What is the actual gain due to decrease in PBO?
=50,000
Flu Company provided you with the following information in relation to its post-retirement benefit plan;
current service cost P100,000; expected return on plan assets P40,000; actual return on plan assets
P45,000.
Pension expense for the period assuming further that Flu Company was classified as an SME
=55,000
Solution:
Current service cost
Actual return on plan assets
Pension expense
100,000.00
-45,000.00
55,000.00
The White Company set up a defined benefit post-employment plan with effect from 1 January 20CY. In
the first year the expected return on plan assets was CU5,000, the actual return on plan assets was
CU4,000, the current service cost was CU12,000 and White's contributions paid into the plan were
CU7,500. What is the net expense to be recognised in profit or loss for the year ended 31 December
20CY, according to IAS19R Employee benefits?
=CU7,000
Solution:
Current service cost
12,000.00
Expected return on plan assets
(5,000.00)
Employee benefit expense
7,000.00
The following information relates to the defined benefit pension plan of the Lupet Company for the year
ending December 31, 20CY:
Projected benefit obligation, January 1
P9,200,000
Projected benefit obligation, December 31
9,458,000
Fair value of plan assets, January 1
9,000,000
Expected return on plan assets
900,000
Actual return on plan assets
990,000
Employer contributions
850,000
Benefits paid to retirees
780,000
Settlement rate
10%
The amount to be recognized in the balance sheet as of December 31, 20CY is
=P602,000
Solution:
Fair value of plan asset, Jan 1
9,000,000.00
Actual return on plan assets
990,000.00
Employer contributions
850,000.00
Benefits paid to retirees
(780,000.00)
Fair value of plan asset, Dec 31
10,060,000.00
Less: Projected benefit obligation, Dec 31
9,458,000.00
Prepaid/accrued benefit cost, Dec 31
602,000.00
According to IAS19R Employee benefits, which ONE of the following statements best describes 'other
long-term employee benefits'?
=Benefits not falling due wholly within twelve months of the end of the period in which the
service is rendered.
January 1, 2012, SBT Company grants to its employees rights to choose either 1,200 phantom shares
(cash payment equal to the value of 1,200 shares) or 1,500 shares. The grant is conditional upon the
completion of three years of service. If the employee chooses the share alternative, the shares must
be held for three years after the vesting date
At grant date, the SBT Company’s share price was P62 per share. At the end of 2012, 2013 and 2014
the share prices were P64, P63 and P66 respectively. After taking into account the post-vesting
transfer restrictions, SBT Company estimates that the fair value at grant date of the share alternative
was P53.
The amount reported as compensation expense in SBT Company’s 2012 income statement is
=27,300
Solution:
Fair value of share alternative (P53 x 1,500)
Fair value of liability on 1/1/2012 (P62 x 1,200)
79,500.00
74,400.00
Equity component
5,100.00
Share basis
1,200.00
Multiply by: FV of shares at 12/31/2012
64.00
Total liability
Divide by: Vesting period
76,800.00
3 yrs
Compensation - cash alternative
Add: Compensation - share alternative
Equity component
5,100.00
Divide by: Vesting period
3 yrs
25,600.00
Total compensation expense, 2012
27,300.00
1,700.00
An entity closes down its subsidiary, and the employees of that subsidiary will earn no further pension
benefits. The entity has a defined benefit obligation with a net present value of P20,000,000. The plan
assets have a fair value of P16,000,000. The entity had adopted PAS 19R two years previously. The
curtailment reduces the net present value of the obligation by P2,000,000 to P18,000,000. The net
liability to be recognized in the balance sheet after the curtailment is
=P2,000,000
Solution:
Fair value of plan assets
Projected benefit obligation, adjusted
Prepaid/accrued benefit cost
16,000,000.00
(18,000,000.00)
(2,000,000.00)
On September 1, 20Y1, D. Lion Corp. offered special termination benefits to employees who had
reached the early retirement age specified in the company’s pension plan. The termination benefits
consisted of lump-sum and periodic future payments. Additionally, the employees accepting the
company offer receive the usual early retirement pension benefits. The offer expired on November 30,
20Y1. Actual or reasonably estimated amounts at December 31, 20Y1 relating to the employees
accepting the offer are as follows:



Lump-sum payments totaling P475,000 were made on January 1, 20Y2.
Periodic payments of P60,000 annually for 3 years will begin January 1, 20Y3. The present value
at December 31, 20Y1 of these payments was P155,000.
Reduction of accrued pension costs at December 31, 20Y1 for the terminating employees was
P45,000.
At December 31, 20Y1, D. Lion should report a total liability for special termination benefits of
=P630,000
Solution:
Lump sum payments
475,000.00
Present value of periodic payments
155,000.00
Liability on termination benefits
630,000.00
An entity closes down its subsidiary, and the employees of that subsidiary will earn no further pension
benefits. The entity has a defined benefit obligation with a net present value of P20,000,000. The plan
assets have a fair value of P16,000,000. The entity had adopted PAS 19R two years previously. The
curtailment reduces the net present value of the obligation by P2,000,000 to P18,000,000. The gain on
curtailment to be recognized in the current year’s profit or loss is
=P 0
Solution:
Changes in the projected benefit obligation related to estimated future settlements are considered
actuarial gains or losses and are to recognized under Other Comprehensive Income.
According to IAS19R Employee benefits, which ONE of the following terms best describes benefits which
are payable as a result of an entity's decision to end an employee's employment before the normal
retirement date?
=Termination benefits
All of the following are included in short-term employee benefits except
=Termination benefits and post-employment benefits
According to PAS19R Employee benefits, which ONE of the following terms best describes benefits
which are payable as a result of an entity's decision to end an employee's employment before the normal
retirement date?
=Termination benefits
Interim reports shall include interim financial statements (condensed or complete) for periods as follows
(choose the exception):
=For an entity whose business is highly seasonal, financial information for the twelve
months up to the end of the interim period and comparative information for the prior twelve-month period
The IASB encourages publicly traded entities to provide interim financial reports
=At least at the end of the half-year and within 60 days of the end of the interim period
Interim financial reports should include as a minimum
=A condensed set of financial statements and selected notes
Under PAS 34, interim financial reports should be published
=Whenever the entity wishes
Interim reports shall include interim financial statements (condensed or complete) for periods as follows
(choose the exception):
Select one:
=For an entity whose business is highly seasonal, financial information for the twelve
months up to the end of the interim period and comparative information for the prior twelve-month period
If an entity does not prepare interim financial reports, then
=The year-end financial statements’ compliance with PFRS is not affected
Amelia Company incurred an inventory loss from market decline of P800,000 on March 31, 2012. The
market decline is expected to recover during the year. What amount of inventory loss should be reported
in the quarterly income statement ending March 31, 2012?
=800,000
Jocelyn Company prepares quarterly interim financial reports. The entity sells electrical goods and
normally 5% of customers claim on their warranty. The provision in the first quarter was calculated as 5%
of sales to date, which was P10 million. However, in the second quarter, a design fault was found and
warranty claims were expected to be 10% for the whole year. Sales in the second quarter were P15
million. What would be the provision charged in the second quarter’s interim financial statements?
=2,000,000
Head Company prepared quarterly interim financial statements and used the percentage of credit sales
method in computing doubtful accounts. The credit sales for the first, second, third and fourth quarters
totalled P2,000,000, P1,500,000, P3,500,000 and P4,000,000 respectively. The doubtful accounts
percentage for the first, second, third and fourth quarters effective for the entire year are 2%, 2%, 4% and
5% respectively. What amount of doubtful accounts expense should be recognized in the fourth quarter
income statements?
=270, 000
Solution:
Total sales for the year (2,000,000 + 1,500,000 + 3,500,000 + 4,000,000)
11,000,000.00
Multiply by: Doubtful accounts percentage, Q4
5%
Doubtful accounts expense, total
550,000.00
Less: Doubtful accounts expense, Year to Q3
Sales, year to Q3 (2,000,000 + 1,500,000 + 3,500,000)
Multiply by: Doubtful accounts percentage, Q3
Doubtful accounts expense, Q4
7,000,000.00
4%
280,000.00
270,000.00
Karen Company has historically reported bad debt expense of 10% of sales in each quarter. For the
current year, the entity followed the same procedure in the three quarters of the year. However, in the
fourth quarter, the entity in consultation with its external auditor determined that bad debt expense for the
entire year should be P900,000. Sales were P2,000,000 for the first quarter, P1,500,000 for the second
quarter, P2,500,000 for the third quarter and P4,000,000 for the fourth quarter. How much bad debt
expense should be recognized for the fourth quarter?
=300,000
Grum Corp., a publicly owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 2010, Grum reported revenues of 50,000,000,
operating expenses of 47,000,000, and net income of 3,000,000. Operating expenses include payroll
costs of 15,000,000. Grum’s combined idenfiable assets of all industry segments at December 31, 2010,
were 40,000,000. Reported revenues include 30,000,000 of sales to external customers.
In its 2010 financial statements, Grum should disclose major customer data if sales to any single
customer amount to at least
=5,000,000
Hunger Games Company provided you the following:
Unit
External Internal Total Profit Assets
(Loss)
Luxury
180
20
200
32
194
Mining
110
15
125
(4)
24
Explosives
120
130
250
192
192
Seafood
60
5
65
116
116
Total
470
170
640
336
526
The number of reportable segments
=4
Solution:
Unit
1. Luxury
2. Mining
3. Explosives
Revenues
200.00
125.00
250.00
Profit
32.00
Loss
4.00
192.00
Assets
194.00
24.00
192.00
Catching Fire Company divides its business in 9 operating units for internal reporting and
you the following:
Unit
1
2
3
4
5
6
7
8
9
Revenu
69,00 37,00 27,50 32,20 35,00 36,50 85,300 57,80 25,000
es
0
0
0
0
0
0
0
Profit
21,50 24,50
(8,00 2,300 10,00 7,500
3,500 35,00
(23,25
(loss)
0
0
0)
0
0
0)
Assets
12,25 77,80 2,300 24,00 40,00 7,730 145,00 55,00
4,300
0
0
0
0
0
0
provided
Total
405,50
0
73,050
391,08
0
Applying the quantitative thresholds provided under operating segments the reportable segments are
=1,2,5,7,8 and 9
Solution:
Unit
1
2
3
4
5
6
7
8
9
Totals
10% Threshold
Revenues
69,000.00
37,000.00
27,500.00
32,200.00
35,000.00
36,500.00
85,300.00
57,800.00
25,000.00
Profit
21,500.00
24,500.00
405,300.00
104,300.00
40,530.00
10,430.00
1st Test
1, 7, 8
Total reportable segments
Loss
23,250.00
Assets
12,250.00
77,800.00
2,300.00
24,000.00
40,000.00
7,730.00
145,000.00
55,000.00
4,300.00
31,250.00
368,380.00
8,000.00
2,300.00
10,000.00
7,500.00
3,500.00
35,000.00
1, 2, 8, 9
1, 2, 5, 7, 8, 9
36,838.00
2, 5, 7, 8
Grum Corp., a publicly owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 2010, Grum reported revenues of 50,000,000,
operating expenses of 47,000,000, and net income of 3,000,000. Operating expenses include payroll
costs of 15,000,000. Grum’s combined idenfiable assets of all industry segments at December 31, 2010,
were 40,000,000. Reported revenues include 30,000,000 of sales to external customers.
External revenue reported by operating segments must be at least
=22,500,000
Revolution Company has expanded rapidly and segment reporting is now required. The entity has no
intersegment sales. The following data are for the year ended December 31, 2013:
Operating segment
Segment revenue
Operating profit (loss)
Identifiable assets
1
620,000
200,000
400,000
2
100,000
20,000
80,000
3
340,000
70,000
300,000
4
190,000
(30,000)
140,000
5
180,000
(25,000)
180,000
6
70,000
10,000
120,000
7
120,000
(20,000)
140,000
Others
380,000
(25,000)
140,000
·
The “others” category includes five operating segments, none of which has revenue or
assets greater than P80,000 and none with an operating profit.
·
Operating Segments 1 and 2 produce very similar products and use very similar
production processes, but serve different product distribution system. These differences are
due to the fact that Segment 2 operates in a regulated environment while Segment 1 does not.
·
Operating Segments 6 and 7 have very similar products, production processes, product
distribution systems, but are organized as separate divisions since they serve substantially
different types of customers. NeitherSegments 6 and 7 operate in a regulated environment.
What are the reportable segments for the year ended December 31, 2013?
=Segments 1, 3, 4, 5 and Segments 6 and 7 combined as one segment
Which of the following entities is required to use full PFRS in its financial statements?
=ABC Rural Bank with total assets of P100M
Which of the following entities is required to apply the PFRS for SMEs in Philippine financial reporting?
Select one:
=Art Enterprises with total assets of P 30 M and total liabilities of P5 M and submits
financial statements to creditors, suppliers, and regulatory bodies.
Under SEC rules, a company is classified as a “Small & Medium Entity” (SME) when its total assets are
between
=P 3 million and P350 million
Which of the following entities is required to apply the PFRS for SMEs in Philippine financial reporting?
=Art Enterprises with total assets of P 30 M and total liabilities of P5 M and submits
financial statements to creditors, suppliers, and regulatory bodies.
SMEs are entities that (choose the exception)
=Do not have public accountability or publish general purpose financial statements for
external users
On January 1, 20Y1 TBB Company started construction of its own warehouse. TBB Company specifically
borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred during the
construction amounted to P120,000 while the income derived from its temporary investment amounted to
P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. TBB Company
depreciates similar assets using the straight-line method. On January 1, 20Y3 TBB Company adopted the
revalued model. The sound value of the warehouse was P1,510,000. The depreciation expense in 20Y1,
assuming that TBB Company for reporting purposes was considered an SME
Select one:
=140,000
Solution:
Cost
1,400,000.00
Divide by: Estimated useful life
Annual depreciation
10 years
140,000.00
Which of the following entities is required to apply the PFRS for SMEs in Philippine financial reporting?
Select one:
=Garden Enterprises with total assets of P 36 M and total liabilities of P5 M and submits
financial statements to creditors, suppliers, and regulatory bodies.
On January 1, 20Y1 TBB Company started construction of its own warehouse. TBB Company
specifically borrowed P1,000,000 to finance the construction of the warehouse. Interest incurred
during the construction amounted to P120,000 while the income derived from its temporary
investment amounted to P30,000. Total construction cost was P1,400,000.
The warehouse expected useful life was 10 years with no expected residual value. TBB Company
depreciates similar assets using the straight-line method. On January 1, 20Y3 TBB Company
adopted the revalued model. The sound value of the warehouse was P1,510,000. The depreciation
expense in 20Y1, assuming that TBB Company for reporting purposes was considered an SME
=140,000
Solution:
Cost
Divide by: Estimated useful life
Annual depreciation
1,400,000.00
10 years
140,000.00
Which of the following statements is incorrect?
=Banks, credit unions, insurance companies, securities brokers/dealers, mutual funds,
investment houses and travel/real estate agents are required to use full PFRS.
Per SEC definition, the size criterion to qualify as an SME is
=Liabilities: P 3M – P 250M
The PFRS for SMEs contain simplifications to the recognition and measurement principles in full IFRSs
including the following, except:
=Borrowing costs must be capitalized
Case 1. A privately-held subsidiary may use PFRS for SMEs in its own financial statements even if its
parent prepares consolidated financial statements using full PFRS.
Case 2. A privately-held parent entity may use PFRS for SMEs in consolidated financial statements
even if one of its subsidiaries uses full PFRS in its own financial statements.
Which of the above cases is/are true?
=Case 1 only
An SME whose accounting period begins on a date other than January 1, 2010, for the purpose of
adopting PFRS for SMEs in its financial statements, shall apply the size criteria using the entity’s audited
financial statements
=For the immediately preceding fiscal year
Statement 1. If a publicly accountable entity uses PFRS for SMEs, its financial statements shall not be
described as conforming to the PFRS for SMEs
Statement 2. Per SEC Memo, an entity that qualifies as an SME is required to use PFRS for SMEs.
=True True
A public utility company should apply. What financial reporting framework?
=Full PFRS
All of the following items do not have an equivalent section in PFRS for SMEs. Choose the exception.
=Prepaid Insurance
The PFRS for SMEs contain simplifications to the recognition and measurement principles in full IFRSs
including the following, except:
Select one:
=Borrowing costs must be capitalized
Denver Company acquired 100% of Nuggets Company prior to 2013. During 2013, the individual
entities included in their financial statements the following:
Denver
Nuggets
Key officers’ salaries
750,000
500,000
Officers’ expenses
200,000
100,000
Loans to officers
1,250,000
500,000
Intercompany sales
1,500,000
What total amount should be reported as related party disclosures in the notes to Denver Company’s
2013 consolidated financial statements?
=1,750,000
To enable financial statement users to form a view about the effects of the related-party transactions,
PAS 24 requires certain disclosures to be made. Which of the following disclosures is not a mandated
disclosure under PAS 24?
=Names of all the “associates” that an entity has dealt with during the year
Ephesians Company is known to accurately disclose related party disclosures in its financial
statements prepared under IFRS. Ephesians Company is seeking your advice on whether the
following transactions need to be reported under IAS 24 and, if so, to what extent

Sales made during 2011 to
o
o

Hosea Company, parent company: P30,000,000
Malachi Company, associate company: P25,000,000
Trade receivables at December 31, 2011
o Due from Hosea Company: P7,000,000
o Due from Malachi Company: P15,000,000
The total amount included as related party disclosures in Ephesians Company’s December 31, 2011
financial statements is
=77,000,000
Solution:
Sales to Hosea Company
Sales to Malachi Company
Trade receivables from Hosea
Trade receivables from Malachi
30,000,000.00
25,000,000.00
7,000,000.00
15,000,000.00
Total amount, related party disclosures
77,000,000.00
Which of the following is not a related party as envisaged by PAS 24?
=A shareholder of the entity that holds 1% stake in the entity
PAS 24 requires disclosure of compensation of key management personnel. Which of the following would
not be considered “compensation” for this purpose?
=Reimbursement of out-of-pocket expenses
Galatians Company is a major industrial group of companies and was seeking your advice on whether
the following transactions need to reported under IAS 24 and, if so, to what extent.

Remuneration and other payments made to Galatians Company’s chief executive officer during
2011:
o Salary for 2011, P2,000,000
o Share options and other share-based payments, P1,000,000
o Contributions to retirement benefit plan for 2011, P1,500,000
o Reimbursements of travel expenses for business trips, P1,600,000
The total amount included as related party disclosures in Galatians Company’s December 31, 2011
financial statements is
=4,500,000
Solution:
Salary
Share options and other share-based payments
Contributions to retirement benefit plan
2,000,000.00
1,000,000.00
1,500,000.00
Total amount, related party disclosures
4,500,000.00
Management compensation. Disclose key management personnel compensation in total and for each of
the following categories: [IAS 24.17]




short-term employee benefits
post-employment benefits
other long-term benefits
termination benefits
share-based payment benefits
The beginning accumulated depreciation per record was P100,000. During the year, the firm sold
one of its machines recorded as follows:
Cash
270,000
Accumulated depreciation - machine
30,000
Machine
300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
=DR: Cash 30,000; CR: Gain on Sale of Machine 30,000
Solution:
Correct entry should be:
Dr: Cash, P300,000
Dr: Accumulated depreciation – machine, P30,000
Cr: Machine, P300,000
Cr: Gain on Sale of Machine, P30,000
On October 1, 20Y1, Yuri Retailers signed a 4-month, 16% note payable to finance the purchase of
holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the
note’s market rate of interest was 11%. Yuri recorded the purchase at the note’s face amount. All of the
merchandise was sold by December 1, 20Y1. Yuri’s 20Y1 financial statements reported interest payable
and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February
1, 20Y2. Yuri’s 20Y1 cost of goods sold for the holiday merchandise was
=Overstated by the difference between the note’s face amount and the note’s October 1,
20Y1 present value.
Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts payable and cr
edit to cash for P23,000. The working capital
=Has no effect
Solution:
The P500 interest should be credited separately to Interest Income/Revenue. The erroneous entry resulted
to understated revenue by P500, as well as understated asset by P500, due to overcharging against notes
receivable account.
The following information appeared on Blight Inc.’s December 31 financial statements:
20Y1
20Y2
Assets
P 1,000,000
P 1,200,000
Liabilities
750,000
800,000
Contributed capital
120,000
120,000
Dividends paid
100,000
60,000
1.
In preparing its 20Y2 financial statements, Blight discovered that it had misplaced a decimal in
calculating depreciation for 20Y1. This error overstated 20Y1 depreciation by P10,000. In addition,
changing technology had significantly shortened the useful life of Blight’s computers. Based on this
information, Blight determined that depreciation should be P30,000 higher in 20Y2 financial
statements.
Assuming that no correcting or adjusting entries have been made and ignoring income taxes, how much
should Blight report as 20Y2 net income?
=P 180,000
Under the periodic inventory system, the ending inventory of P65,000 was erroneously recorded as
P56,000. The error had been discovered when all nominal and temporary accounts were already closed
to the real account. The correcting entry would require a
=Credit to cost of sale
An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries expense. The error
had been discovered when all temporary accounts were already closed to the capital account. The
correcting entry will require a
=No correcting entry is necessary
On January 1, 2013, Aker Company acquired a machine at a cost of P2, 000,000. The machine is
depreciated on the straight line method over a five-year period with no residual value. Because of a
bookkeeping error, no depreciation was recognized in Aker’s 2013 financial statements. Depreciation
expense on this machine for 2014 should be
=400,000
Solution:
Cost
Divide by: Estimated useful life
Annual depreciation/depreciation expense, 2014
2,000,000.00
5 yrs
400,000.00
The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of
its machines recorded as follows:
Cash
Accumulated depreciation - machine
Machine
270,000
30,000
300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
=DR: Cash 30,000; CR: Gain on Sale of Machine 30,000
An audit of Angelina Company has revealed the following four errors that have occurred but have not
been corrected:




Inventory at December 31, 20Y1-P40,000, understated
Inventory at December 31, 20Y2-P15,000, overstated
Depreciation for 20Y1-P7,000, understated
Accrued expenses at December 31, 20Y2-P10,000, understated
The errors cause the reported Profit for the year ending December 31, 20Y2 to be
=Overstated by P65,000
Solution
Effect on profit
Inventory, beginning - understated
40,000.00
O
Inventory, ending - overstated
15,000.00
O
Y1 Depreciation - understated
0.00
No effect
Y2 Accrued expenses - understated
10,000.00
O
Net effect on 20Y2 Profit
65,000.00
O
Universal Company failed to accrue warranty cost of P100, 000 in its December 31, 2013 financial
statements. In addition, a change from straight line or accelerated depreciation made at the beginning of
2014 resulted in a cumulative effect of P60, 000 on Universal’s retained earnings. What amount before
tax should Universal report as prior period error in 2014?
=
100,000
Solution:
Only the P100,000 unrecorded accrued warranty shall be reflected as a prior period error, since changes
in depreciation method is considered a change in accounting estimate, and thus the effect is recorded
currently and prospectively.
A cash collection of P5,000 from customer’s open account was recorded as P500. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
=P4,500 debit to cash
Solution:
Correcting entry:
Dr: Cash, P4,500
Cr: Accounts receivable, P4,500
An audit of Angelina Company has revealed the following four errors that have occurred but have not
been corrected:
·
Inventory at December 31, 20Y1-P40,000, understated
·
Inventory at December 31, 20Y2-P15,000, overstated
·
Depreciation for 20Y1-P7,000, understated
·
Accrued expenses at December 31, 20Y2-P10,000, understated
The errors cause the reported net income for the year ending December 31, 20Y2 to be
=Overstated by P65,000
Solution:
Understated Inventory, 12/31/Y1
Overstated inventory, 12/31/Y2
Understated accrued expense, 12/31/Y2
40,000.00
15,000.00
10,000.00
O
O
O
Net misstatement in net income
65,000.00
O
A return of merchandise amounting to P4,500 which was previously purchased on account was
recorded as
Accounts payable
Purchases
5,400
5,400
If the error had been discovered when the nominal accounts were still open, the correcting entry would
require a
=P900 credit to accounts payable
Solution:
P5,400 – P4,500 = P900 Overstatement
Correcting entry:
Dr: Purchases, P5,400
Cr: Purchases Returns & Allowances, P4,500
Cr: Accounts Payable, P900
Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to cash of P50,500
and notes receivable of P50,500. This error will
=Understate assets by P500 and understate revenue by P500
Solution
The P500 interest collected shall be credited to interest income (revenue account), instead of notes
receivable (asset account), making the both the asset and revenue understated by P500.
Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts payable and credit
to cash for P23,000. The working capital.
=Has no effect
A payment of P20,000 rent was recorded as a debit to rent income. The error had been discovered when
nominal accounts were already closed. The correcting entry would require a
=No adjustment entry is necessary
Solution:
Erroneous entry recorded in any nominal account produces no effect on the net income, when the nominal
accounts are closed, the same net income will be produced, thus no adjustment entry is necessary.
A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit to cash P5,500
and credit to notes receivable P5,500. The error had been discovered when nominal accounts were still
open. The correcting entry would require a
=P500 debit to accounts receivable
Solution:
The P500 interest should be credited separately to Interest Income/Revenue. The erroneous entry resulted
to understated revenue by P500, as well as understated asset by P500, due to overcharging against notes
receivable account.
The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of
its machines recorded as follows:
Cash
270,000
Accumulated depreciation - machine
30,000
Machine
300,000
The actual cash proceeds is P300,000. Assume that the nominal accounts had been closed. The effect of
the error to the accounting elements, if not corrected, is
=P30,000 understatement of asset and P30,000 understatement of owner’s equity.
At the end of 2015, Ritzcar Co. failed to accrue sales commissions earned during 2015 but paid in 2016.
The error was not repeated in 2016. What was the effect of this error on 2015 ending working capital and
on the 2016 ending retained earnings balance? (2015 ending working capital, 2016 ending retained
earnings)
=Overstated, No effect
On October 1, 20Y1, Yuri Retailers signed a 4-month, 16% note payable to finance the purchase of
holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the
note’s market rate of interest was 11%. Yuri recorded the purchase at the note’s face amount. All of the
merchandise was sold by December 1, 20Y1. Yuri’s 20Y1 financial statements reported interest payable
and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February
1, 20Y2. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which of the
following items was reported correctly? Retained Earnings 12/31/Y1, Interest Payable 12/31/Y1
=No, Yes
Edcelle Company reported a retained earnings balance of P400,000 at December 31, 20Y1. In August
20Y2, Edcelle determined that insurance premiums of P60,000 for the 3-year period beginning January 1,
20Y1 had been paid and fully expensed in 20Y1. Edcelle has a 30% income tax rate. What amount
should Edcelle report as adjusted beginning retained earnings in its 20Y2 statement of retained earnings?
=P 428,000
The 20Y1 financial statements of Hershey Company reported net income for the year ended December
31, 20Y1 of 2 million. On July 1, 20Y2, subsequent to the issuance of the 20Y1 financial statements,
Hershey changed from an accounting principle that is not generally accepted to one that is generally
accepted. If the generally accepted accounting principle had been used in 20Y1, net income for the year
ended December 31, 20Y1 would have been decreased by 1 million. On August 1, 20Y2, Hershey
discovered a mathematical error relating to its 20Y1 financial statements. If this error had been
discovered in 20Y1, net income for the year ended would have been increased by P500,000. What
amount, if any, should be included in net income for the year ended December 31, 20Y2 because of the
items noted above?
=P 1,000,000 decrease
A sales discount of P5,000 was recorded as purchase discount. The error had been discovered when
nominal accounts were still open. The correcting entry would require a
=P5,000 credit to purchase discount
Solution:
Assets, 20Y1
Less: Liabilities, 20Y1
Contributed capital, 20Y1
1,000,000.00
750,000.00
120,000.00
870,000.00
Retained earnings, 20Y1
Overstated depreciation
130,000.00
10,000.00
Retained earnings, 20Y1, adjusted
140,000.00
Assets, 20Y2, adjusted (1,200,000+10,000)
Less: Liabilities, 20Y2
800,000.00
Contributed capital, 20Y2 120,000.00
1,210,000.00
920,000.00
Retained earnings, 20Y2
Dividends
290,000.00
60,000.00
Total debits
Less: Retained earnings, 20Y1
350,000.00
140,000.00
Net income, 20Y2
Less: Additional depreciation
210,000.00
30,000.00
Net income, 20Y2, adjusted
180,000.00
A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when nominal
accounts were already closed to income summary, but not yet closed to the capital account. The
correcting entry will require a
=P2,700 debit to purchases
Solution:
P5,200 – P2,500 = P2,700 Understated
Correcting entry:
Dr: Income Summary, P2,700
Cr: Cash, P2,700
Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation
computation when using the (Straight-line method, Production or use method)
=Yes, Yes
For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by workers
during the last week of the year. The amounts omitted, which are considered material, were as fol
lows:
December 31, 20Y1
P56,000
December 31, 20Y2
51,000
December 31, 20Y3
64,000
The entry on December 31, 20Y3 to correct for these omissions would include a
=Debit to wage expense for P13,000
Solution:
Non-recording of Gain on Sale results to understatement in owner’s equity, and the under-recording of
P30,000 cash short results to understatement in asset.
A sale of merchandise on account of P3,200 was recorded as P2,300. The error had been discovered
when nominal accounts were already closed. The correcting would require a
=P900 debit to accounts receivable
Solution:
P3,200 – P2,300 = P900 understated
Correcting entry:
Dr: Accounts receivable, P900
Cr: Sales, P900
created internal auditing department. While reviewing the company’s records for 2010 and 2011, you
discover the errors that have occurred but have not been corrected:




Inventory at December 31, 2010: P 120,000 understated
Inventory at December 31, 2011: P 75,000 overstated
Depreciation for 2010: P 35,000 understated
Accrued expenses at December 31, 2011: P 50,000 understated
The errors will cause the retained earnings balance at December 31, 2011 to be
=P 160,000 over
Solution:
Overstated ending inventory
Understated depreciation
Understated accrued expense
75,000.00
35,000.00
50,000.00
O
O
O
Net effect in retained earnings
160,000.00
O
While preparing its 20Y3 financial statements, Falfact Corp. discovered computational errors in its
20Y2 and 20Y1 depreciation expense. These errors resulted in overstatement of each year’s income
by P25,000, net of income taxes. The following amounts were reported in the previously issued
financial statements:
20Y2
20Y1
Retained earnings, 1/1
P 700,000
P 500,000
Net income
150,000
200,000
Retained earnings, 12/31
P 850,000
P 700,000
Falfact’s 20Y3 net income is correctly reported at P180,000. Which of the following amounts should
be reported as prior-period adjustments and net income in Falfact’s 20Y3 and 20Y2 comparative
financial statements?
=Year
Prior period adjustment
Net Income
20Y2
20Y3
(25,000)
-
125,000
180,000
On December 31, 20Y1, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The terms of the sale
were net 30, FOB shipping point. The merchandise was shipped on December 31, 20Y1 and arrived at
Fineafle on January 5, 20Y2. Because of a clerical error, the sale was not recorded until January 20Y2,
and the merchandise, sold at 25% markup, was included in Excel’s inventory at December 31, 20Y1. As
a result, Excel’s cost of goods sold for the year ended December 31, 20Y1 was
=Understated by P 60,000
Solution:
Unrecorded unpaid wages, 2012
Unrecorded unpaid wages, 2013
-51,000.00
64,000.00
credit
debit
Net adjustment in wage expense
13,000.00
debit
An audit of Funny Co. for
20Y1,
its first year of operations, detected the
following errors made at December 31, 20Y1:
·
Failed to accrue P50,000 interest expense
·
Failed to record depreciation expense on office equipment of P80,000
·
Failed to amortize prepaid rent expense of P100,000
·
Failed to delay recognition of prepaid advertising expense of P60,000
The net effect of these errors was to overstate net income for 20Y1 by
=P 170,000
Solution:
Understated interest expense
Understated depreciation expense
Understated rent expense
Overstated advertising expense
50,000.00
80,000.00
100,000.00
-60,000.00
Net overstated net income
170,000.00
On December 31, 2011, Hadrianus Co. purchased equity securities and classified as financial assets
at fair value through profit or loss. Pertinent data are as follows:
C Company
P Company
A Company
Cost
P 900,000
1,100,000
2,000,000
Market
12/31/2012
12/31/2013
P 880,000 P 780,000
1,120,000
1,240,000
1,920,000
1,720,000
On December 31, 2013, Hadrianus transferred its investment in security A from financial asset at fair
value through profit or loss to financial assets at fair value through other comprehensive income
because Hadrianus intends to retain security A as a long-term investment. What total amount of gain
or loss on its securities should be included in Hadrianus' income statement for the year ended
December 31, 2013?
=P180,000 loss
Solution:
Fair value, 12/31/2013
(780,000+1,240,000+1,720,000)
Less: Fair value, 12/31/2012
(880,000+1,120,000+1,920,000)
3,740,000.00
3,920,000.00
Gain (Loss) in fair value
-180,000.00
On derecognition of a financial asset, the difference between the consideration received and the carrying
amount of the financial asset shall be
=Recognized in other comprehensive income for financial asset at amortized cost and profit or
loss for financial asset at fair value
During 20Y1, Mel Company purchased marketable equity securities as a trading investment. For the year
ended December 31, 20Y1, the entity recognized an unrealized loss of P150, 000. There were no
security transactions during 20Y2. The information on December 31, 20Y2 is as follows:
Security
A
B
Cost
3,000,000
2,000,000
Market value
2,000,000
2,500,000
In the 20Y2 income statement, what amount should be reported as unrealized gain or loss?
=Unrealized loss of P350, 000
Solution:
Carrying amount, Dec 31, 20Y2 (2,000,000 + 2,500,000)
4,500,000.00
Security A at cost
3,000,000.00
Security B at cost
2,000,000.00
Total securities at cost
5,000,000.00
20Y1 Unrealized loss
(150,000.00)
Carrying amount, Dec 31, 20Y1
4,850,000.00
Unrealized loss
(350,000.00)
On January 1, 20CY, Gelyka Company purchased 12% bonds with face amount of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 20CY and pay interest annually on December 31 of each year. The bonds
are quoted at 115 on December 31, 20CY. The entity has irrevocably elected to use the fair value option.
What amount of interest income should be reported for 20CY?
=600,000
Solution:
Face amount of bonds
5,000,000.00
Multiply by: Nominal interest rate
12%
Interest income
600,000.00
Changes in fair value of securities is reported in the income statement for which type of securities
=FVTPL securities
According to PFRS 9 Financial Instruments: Recognition and Measurement, unrealized gains and losses
on fair value through other comprehensive income financial assets are recognized:
=directly in equity;
Which of the following should be valued at fair value subsequent to initial recognition?
=Financial assets acquired or held for the purpose of selling in the short term
On January 1, 2014, Mae Company purchased marketable equity securities to be held as “trading” for
P3,700,000. The entity also paid commission, taxes and other transaction cost amounting to P250,
000. The securities had market value of 4,000,000 on December 31, 2014 and the transaction cost that
would be incurred on sale is estimated at 150,000. No securities were sold during 2014. What amount of
unrealized gain or loss on these securities should be reported in the 2014 income statement?
=P300,000
Solution:
Fair value, 12/31/2014
Less:
Fair value, 12/31/2013
Gain (Loss) on change in fair value
4,000,000.00
3,700,000.00
300,000.00
During 20Y1, A Company purchased marketable equity securities as a short-term investment. These
securities are classified as financial assets at fair value through other comprehensive income. The cost and
market value at December 31, 20Y1, were as follows:
Security
ABC—100 shares
DEF—1,000 shares
GHI—2,000 shares
Cost
P 2,800
17,000
31,500
P51,300
Market value
P 3,400
15,500
29,500
P48,200
A Company sold 1,000 shares of Company DEF stock on January 31, 20Y2, for P15 per share, incurring
P1,500 in brokerage commission and taxes. On the sale, Rex should report a realized loss of
Select
one:
=P2,000
Solution
Selling price (P15 x 1,000)
Less: Cost to sell
15,000.00
1,500.00
Net proceeds
13,500.00
Less: Market value, Dec 31, 2016
15,500.00
Realized loss
(2,000.00)
On January 1, 20CY, Gelyka Company purchased 12% bonds with face amount of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 20CY and pay interest annually on December 31 of each year. The bonds
are quoted at 115 on December 31, 20CY. The entity has irrevocably elected to use the fair vair value
option. What total amount of income from the investment should be reported in the income statement for
20CY?
=5,750,000
Solution:
Face amount of bonds
5,000,000.00
Multiply by:
1.15
Carrying amount of bonds, Dec 31, 20CY
5,750,000.00
Pamplona Company owns 1,000,000 shares of Penablanca Company’s 5,000,000 shares of P50 par,
10% cumulative, nonparticipating preference shares and 500,000 ordinary shares (2%) of
Penablanca. During 2013 Penablanca declared and paid dividends of P40,000,000 on preference
shares. No dividends had been declared or paid during 2012. In addition, Pamplona received a 15%
ordinary share dividend from Penablanca when the quoted market price of ordinary share was
P100. What amount should Pamplona report as dividend income in its 2013 income statement?
=P 8,000,000
Solution:
Total preference share capital (P50 x 5M)
Multiply by: Preference dividends rate
250,000,000.00
10%
Preference dividend
Multiply by: Arrears plus current
25,000,000.00
2.00
Total preference dividends
Actual dividends declared
50,000,000.00
40,000,000.00
Available preference dividend rate (40M/250M)
Multiply by: Preference share capital owned (P50 x 1M)
16%
50,000,000.00
Dividend income
8,000,000.00
All of the following financial assets shall be measured at fair value through profit or loss, except
=Financial assets at amortized cost
On January 1, 2012 Raine Company purchased 10,000 ordinary shares at P90 per share. On December
31, 2012, the entity received 4,000 shares of the investee in lieu of cash dividend of P10 per share. On
this date, the investee’s share has a quoted market price of P50 per share. What amount should be
reported as dividend income for 2012?
=200,000
Solution:
Number of shares received
Multiply by: Fair value of shares
Dividend income
4,000.00
50.00
200,000.00
Bear Co. purchased 500,000 of bonds at par. Bear management has an active trading business model for
this investment. At December 31, Bear received annual interest of 20,000, and the fair value of the bonds
was P470,400. In Bear Co.’s year-end statement of financial position what amount will be reported for the
bond investment and how much total income/loss will be reported on its income statement? (Statement of
financial position; Income statement)
=470,400; ( 9,600)
Solution:
Carrying amount, year-end
470,400.00
Initial measurement
500,000.00
Loss on fair value
(29,600.00)
Interest income
20,000.00
Total income related to investment
(9,600.00)
Changes in fair value of securities are reported in the shareholders’ equity section of the balance sheet
for which type of securities?
=FVTOCI securities
On January 1, 20CY, Gelyka Company purchased 12% bonds with face amount of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 20CY and pay interest annually on December 31 of each year. The bonds
are quoted at 115 on December 31, 20CY. The entity has irrevocably elected to use the fair value option.
What total amount of income from the investment should be reported in the income statement for 20CY?
=950,000
Solution:
Carrying amount of bonds, Dec 31, 20CY (5,000,000 x 1.15)
5,750,000.00
Less: Initial measurement of bonds (5,500,000 - 100,000)
5,400,000.00
Gain on change in fair value
350,000.00
Interest income (5,000,000 x 12%)
600,000.00
Total income related to investment
950,000.00
On January 1, 20CY, Gelyka Company purchased 12% bonds with face amount of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 20CY and pay interest annually on December 31 of each year. The bonds
are quoted at 115 on December 31, 20CY. The entity has irrevocably elected to use the fair value option.
What is the carrying amount of the bond investment on December 31, 20CY?
=5,750,000
Solution:
Face amount of bonds
Multiply by:
5,000,000.00
1.15
Carrying amount of bonds, Dec 31, 20CY
5,750,000.00
On January 1, 2013 Santos Company purchased 100,000 ordinary shares at P80 per share. On
September 30, 2013 the entity received 100,000 stock rights to purchase an additional 100,000 shares at
P90 per share. The stock rights had an expiration date of February 1, 2014. On September 30, 2013,
each share had a market value of P114 and the stock right had a market value of P8. What amount
should be reported on September 30, 2013 as investment in stock rights?
=
800,000
Solution:
P8 x 100,000 = P800,000
Angel Company purchased 50,000 shares on January 15, 2014 representing 5% ownership interest. The
entity received a stock dividend of 30% on March 31, 2014 when the market price of the share is 50. The
investee paid a cash dividend of 5 on December 15, 2014. What amount should be reported as dividend
income for 2014?
=
Solution:
325,000
Number of shares acquired
Stock dividend (50,000 x 30%)
50,000.00
15,000.00
Total number of shares
Multiply by: Dividend per share
65,000.00
5.00
Dividend income
325,000.00
Cardinals Company purchased a 2,000,000 life insurance policy for its chief executive officer. The
policy year and Cardinals Company’s accounting period coincide. Additional date are available for the
year ended December 31, 2013
Cash surrender value, 01/01/13
50,000
Cash surrender value, 12/31/13
58,500
Annual advance premium paid on 01/01/13
30,000
Dividend received 07/01/13
2,000
Cardinals Company is the beneficiary under the life insurance policy
The amount reported as insurance expense in Cardinals Company’s 2013 income statement
=19,500
Solution:
Annual advance premium paid
Less: Dividend received
Increase in cash surrender value
(P58,500-P50,000)
30,000.00
2,000.00
8,500.00
10,500.00
Insurance expense
19,500.00
Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In
addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the
exchange, Sable recognizes
=A gain equal to the difference between the fair value and carrying amount of the truck
given up.
On July 1, 2016, Rudd Company reported that a delivery van was destroyed in an accident. On that date,
the carrying amount was P2, 500,000. On July 15, 2016, Rudd received and recorded a P700, 000
invoice for a new engine installed in the van in May 2016, and another P500, 000 invoice for various
repairs. In August, Rudd received P3, 500,000 under an insurance policy on the van, which it plans to use
to replace the van. What, amount should be reported as gain or loss on disposal of the van?
=300,000 gain
Solution:
Proceeds from insurance
Less: Carrying amount, adjusted
Carrying amount, unadjusted
Cost of new engine
3,500,000.00
2,500,000.00
700,000.00
Gain (loss) on disposal
3,200,000.00
300,000.00
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:
Cost
Land
Building
Warehouse
Machine
Delivery truck
Proceeds
Fair value
Mode
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
2,480,000
288,000
5,920,000
2,480,000
5,920,000
640,000
800,000
256,000
380,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
=44,000
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:
Cost
Land
Building
Warehouse
Machine
Delivery truck
Proceeds
Fair value
Mode
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
2,480,000
288,000
5,920,000
2,480,000
5,920,000
640,000
800,000
256,000
380,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car
=120,000
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:]
Cost
Land
Building
Warehouse
Machine
Delivery truck
Proceeds
Fair value
Mode
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
2,480,000
288,000
5,920,000
2,480,000
5,920,000
640,000
800,000
256,000
380,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
Compute the gain or loss to be recognized for Land:
=720,000
Sony Company purchased machinery for 160,000 on January 1, 2012. Straight-line depreciation has
been recorded based on a 10,000 salvage value and a 5-year useful life. The machinery was sold on May
1, 2016 at a gain of 3,000. How much cash did Sony receive from the sale of the machinery?
=33,000
Solution:
Original cost
Less: Accumulated depreciation, 5/1/2016
Depreciable amount
150,000.00
Divide by: Estimated useful life
5 yrs
Annual depreciation
Multiply by: Age
30,000.00
4 yrs & 4 mos
160,000.00
130,000.00
Carrying amount, 5/1/2016
Gain on sale
30,000.00
3,000.00
Proceeds
33,000.00
A machine has a cost of P60,000, has an annual depreciation of P12,000, and has accumulated
depreciation of P30,000 on December 31, 2015. On April 1, 2016, when the machine has a fair value of
P24,000, it is exchanged for a similar machine with a fair value of P72,000 and the proper amount of cash
is paid. The loss to be recognized on exchange is
=P3,000
Solution:
Original cost
Less: Accumulated depreciation, 4/1/2016
Accumulated depreciation, 12/31/2015 30,000.00
Depreciation, Jan 1-Mar 31, 2016
(P12,000 x 3/12)
3,000.00
60,000.00
Carrying amount, 4/1/2016
27,000.00
Fair value of old machine
Less: Carrying amount
24,000.00
27,000.00
Gain (loss) on exchange
-3,000.00
33,000.00
SEASON’S INC. acquired an asset that had a cost of P130,000. The asset is being depreciated over a 5year period using the sum-of-the-years’ digit method. It has a salvage value estimated at P10,000. The
loss/gain if the asset is sold for P38,000 at the end of the third year is?
=P4,000 gain
Solution:
Depreciation base (5yrs x (5+1)/2)
15.00
Original cost
Less: Accumulated depreciation
Depreciable amount (P130,000-P10,000)
Multiply by: Age
130,000.00
120,000.00
12/15
96,000.00
Carrying amount, end of Y3
34,000.00
Proceeds from sale
Less: Carrying amount
38,000.00
34,000.00
Gain (loss) from sale
4,000.00
An item of property, plant and equipment that is retired from active use and held for disposal is carried at
its:
=carrying amount or net realizable value, whichever is lower
At the beginning of the current year, Winn Company traded in an old machine having a carrying amount
of P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash price of
P2,050,000. What amount of loss should Winn recognize on this exchange?
=
230,000
Solution:
Fair value of new machine
Less: Cash payment
2,050,000.00
600,000.00
Fair value of old machine
Less: Carrying amount of old machine
1,450,000.00
1,680,000.00
Gain (loss) on exchange
-230,000.00
The sale of a depreciable asset resulting in a gain indicates that the proceeds from the sale were
=greater than book value
The records of Teal Corporation for the year 2013 disclosed the following property dispositions:
Cost
Land
Building
Warehouse
Machine
Delivery truck
Proceeds
Fair value
Mode
P3,200,000
1,200,000
5,600,000
Acc.
Dep.
880,000
2,480,000
288,000
5,920,000
2,480,000
5,920,000
640,000
800,000
256,000
380,000
72,000
376,000
576,000
376,000
Condemnation
Demolition
Destruction
by
fire
Exchange
Sale
Land
On January 15, a condemnation award was received as consideration for the forced sale of the
company’s land and building, which stood in the path of a new highway.
Building
On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was
allocated to the building on the corporate books. The real estate was acquired with the intention of
demolishing the building, and this was accomplished during the month of August. Cash proceeds
received in September represent the net proceeds from demolition of building.
Warehouse
On July 4, the warehouse was destroyed by fire. On December 12, the insurance proceeds and other
funds were used to purchase a replacement warehouse at a cost of P4,800,000.
Machine
On December 15, the machine was exchanged for a similar machine having a fair value of P504,000
and cash of P72,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
Compute the gain or loss to be recognized for Warehouse:
=1,200,000
Solution:
Proceeds from insurance
Less: Carrying amount (P5,600,000-P880,000)
5,920,000.00
4,720,000.00
Gain (loss) on insurance settlement
1,200,000.00
On January 1, 20CY Lim Company had 300,000, P100 par, ordinary shares outstanding or a total par
value of P30,000,000. During 20CY, Lim issued rights to acquire one ordinary share at P100 in the ratio
of one share for every 5 shares held. The rights are exercised on March 31, 20CY. The market value of
each ordinary share immediately prior to March 31, 20CY was P160. The profit for 20CY was
P6,000,000. The 20CY income statement should report basic earnings per share at
=P17.14
Solution:
MV of share right-on
160.00
Less: Subscription price
100.00
Total
60.00
Divide by: # of rights to purchase 1 share + 1
Theoretical value of right
6.00
10.00
MV of share right-on
160.00
Theoretical value of right
(10.00)
MV of share ex-right
150.00
Adjustment factor (160/150)
1.0667
Jan 1 (300,000 x 1.0667 x 3 mos/12 mos)
80,000.00
Apr 1 ((300,000 + (300,000 / 5)) x 9 mos/12 mos)
270,000.00
Average number of shares
350,000.00
Basic earnings per share (6,000,000 / 350,000)
17.14
Faith Co. had 200,000 ordinary shares, 20,000 convertible preference shares, and P1,000,000 of 10%
convertible bonds outstanding during 2009. The preference share is convertible into 40,000 ordinary
shares. During 2009, Faith paid dividends of P1.20 per share on ordinary shares and P4.00 per share on
preference shares. Each P1,000 bond is convertible into 45 ordinary shares if converted before 2011 and
40 shares if converted after 2011. The profit for 2009 was P800,000 and the income tax rate was 30%.
Basic earnings per share for 2009 is
=P3.60
With respect to the computation of earnings per share, which of the following would be most indicative of
a simple capital structure?
=
Ownership interest consisting solely of common stock
Rockford Corp. had the following capital structure during 2012 and 2013:
Preferred stock, P10 par, 4%
cumulative, 25,000 shares issued and outstanding
Common stock, P5 par, 200,000 shares issued and outstanding
P
250,000
1,000,000
Rockford reported net income of P500,000 for the year ended December 31, 2013. Silver paid no
preferred dividends during 2012 and paid P16,000 in preferred dividends during 2013.
In its December 31, 2013, income statement, Rockford should report earnings per share of
=P2.45
Solution:
Net income
Less: Preference dividends
(P250,000 x 4%)
Net income attributable to ordinary shareholders
Divide by: Outstanding shares
500,000.00
10,000.00
490,000.00
200,000.00
Basic earnings per share
2.45
All of the following are represented in FRSC, except
= Department of Budget and Management.
IFRIC Interpretations
=All of these are correct regarding IFRIC Interpretations.
The IASB employs a "due process" system which
=enables interested parties to express their views on issues under consideration.
The office supplies account of Sick Company had a balance at the beginning of 2019 of P80, 000 before
the reversing entry. Payments for purchases of office supplies during 2019 amounted to P500, 000 and
were recorded as expenses. A physical count at the end of 2019 revealed office supplies costing P95,
000 were on hand. Reversing entries are recorded by sick. The required adjusting entry at the end of
2019 will include a debit to
=Office Supplies P95, 000
A deferred expense can best be described as an amount
=Paid and not currently matched with earnings
On January 2, 2019, Irene Company, a property developer, purchase a land and building which the
company will redevelop and sell. The cost of buying the land and buildings was P20,000,000. Additional
cost incurred in relation to the acquisition of the assets totalled P500,000. In the statement of cash flows,
how should the acquisition is disclosed?
=As an operating activity outflow of P20,500,00
SOLUTION
The property developer should classify the cash outflows in respect of purchase of land and buildings as
operating activity flows. A developer’s purchase of property is analogous to inventory acquired by a
manufacturer.
On September 30, 2019, when the carrying amount of the net assets of segment C has P 13,000,000, X
Company signed a binding contract to sell segment C for P 12,000,000. The sale is expected to be
completed by January 31, 2020. In addition, prior to January 31, 2020, the sale contract obliges X
Company to terminate certain employees of segment C incurring termination cost of P 2,000,000 to be
paid on June 30, 2020. The company continued to operate segment C throughout 2019. Revenue of
segment C throughout 2019 was P 8,000,000, operating cost was P 4,000,000. How much income should
be reported as income from ordinary activities of the discontinued segment for 2019, before tax?
=P1,000,000
SOLUTION
Revenue
Operating cost
Termination cost
Operating income
P 8,000,000
(4,000,000)
(2,000,000)
P 2,000,000
Recoverable amount (Selling price)
Carrying value
Loss
P12,000,000
13,000,000
P 1,000,000
Operating income
Loss
Net
P 2,000,000
P 1,000,000
P 1,000,000
Adler Company’s trial balance reflected the following accounts balance on December 31, 2019:
Accounts Receivable (net)
2, 400, 000
Financial assets at FVTOCI
600, 000
Accumulated depreciation on equipment and furniture
1, 500, 000
Cash
1, 100, 000
Inventory
3, 000, 000
Equipment
2, 500, 000
Patent
400, 000
Prepaid Insurance
200, 000
Land held for future business site
1, 800, 000
The inventory included goods held on consignment amounting to P500, 000. The patent was classified as
held for sale on December 31, 2019. What amount of total current assets should be reported on
December 31, 2019?
=6, 600, 000
Step Company reported the following information relating to liabilities on December 31, 2019:
Accounts payable for goods and services purchased on open account amounted to P600,000 and
accrued expenses totaled P500,000 on December 31, 2019.
On July 1, 2019, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The bonds
mature on June 30, 2024, and pay interest annually every June 30. On December 31, 2019, the bond
were trading in the open market at 86 to yield 12%. The effective interest method is used to amortize
bond discount.
The pretax financial income for 2019 was P10,500,000 and the taxable income was P9,000,000. The
difference is due to P1,000,000 permanent difference and P500,000 temporary difference which is
expected to reverse in 2020. The entity is subject to the income tax rate of 30% and made estimated
income tax payments during the year of P1,000,000. What amount of current liabilities should be reported
on December 31, 2019?
=3,000,000
Clarkie Company provided the following information for the current year:
Net income
6,000,000
Unrealized loss on FVTOCI investments
500,000
Translation reserve - credit
600,000
Revaluation reserve
2,000,000
Accumulated profits adjustment - debit
100,000
Appropriation reserve
200,000
Gain on sale of treasury shares
150,000
What amount of comprehensive income should be reported for the current year?
=8,100,000
The following limited information was made available from the cash record of Blackwood Company and
its bank statement for t