FINANCIAL ACCOUNTING PROBLEMS
Problem I (Current assets)
An entity provided the following trial balance on June 30, 2015:
Cash overdraft
Accounts receivable, net
Inventory
Prepaid expenses
Land held for resale
( 200,000)
700,000
1,200,000
200,000
2,000,000
Property, plant and equipment, net
Accounts payable and accrued expenses
Share capital
Share premium
Retained earnings
1,900,000
640,000
3,000,000
500,000
1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash
overdraft of P200,000. The checks were mailed on July 9. Land held for resale was sold for cash on
July 15. The financial statements were issued on July 31. On June 30, 2015, what total amount should
be reported as current assets?
a. 4,500,000
b. 4,100,000
c. 4,300,000
d. 2,500,000
Problem 2 (Total assets)
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?
a.
b.
c.
d.
8,850,000
8,820,000
7,870,000
8,750,000
Problem 3 (Current liabilities)
An entity had the following liabilities on December 31, 2015:
Accounts payable
Unsecured notes, 8% due 7/1/2016
Accrued expenses
Contingent liability
Deferred tax liability
Senior bonds, 7%, due 3/31/2016
55,000
400,000
35,000
450,000
25,000
1,000,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the entity.
The legal counsel expects the suit to be settled in 2016 and has estimated that the entity will be liable
for damages in the range of P450,000 to P750,000. The deferred tax liability is expected to reverse in
2016. What amount should be reported on December 31, 2015 for current liabilities?
a.
515,000
b.
940,000
c. 1,490,000
d. 1,515,000
Page
2
Problem 4 (Net income)
An entity reported net income of P7,410,000 for the current year. The auditor raised questions about
the following amounts that had been included in net income:
Unrealized loss on equity investments at fair value through other
comprehensive
income
( 540,000 )
Gain on early retirement of bonds payable
2,200,000
Adjustment of profit of prior year for error in depreciation, net of tax effect
( 750,000 )
Loss from fire
( 1,400,000 )
Gain from change in fair value attributable to the credit risk of financial
liability designated at fair value through profit or loss
500,000
What amount should be reported as adjusted net income?
a.
b.
c.
d.
6,500,000
7,200,000
8,200,000
8,700,000
Problem 5 (Retained earnings)
An entity provided the following information on December 31, 2015:
Total reported income since incorporation
Total cash dividends paid
Unrealized holding loss on trading investment
Total share dividends distributed
Prior period adjustment recorded January 1, 2015 - credit
1,700,000
( 800,000)
( 120,000)
( 200,000)
75,000
What amount should be reported as retained earnings on December 31, 2015?
a.
b.
c.
d.
655,000
700,000
580,000
775,000
Problem 6 (Cash computation)
An entity reported the checkbook balance on December 31, 2015 at P8,000,000. In addition, the
entity held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2016 in payment of a
sale,
not included in December 31 check book balance
Check payable to the entity, deposited December 15 and included
in
December 31 checkbook balance, but returned by bank on
December 30 stamped “NSF”. The check was redeposited on
January 2, 2016 and cleared on January 5, 2016
Check drawn on the entity’s account, dated and recorded on
December 31, 2015 but not mailed until January 15, 2016
Coins and currencies on hand
Three-month money market instruments
1,000,000
3,000,000
2,500,000
800,000
1,500,000
What is the correct amount of “cash” on December 31, 2015?
a. 7,500,000
b. 9,300,000
c. 8,300,000
d. 9,800,000
Page 3
Problem 7 (Impairment of accounts receivable)
An entity reported the following accounts receivable on December 31, 2015:
Customer A
Customer B
Customer C
Customer D
All other accounts receivable not individually significant
1,000,000
1,500,000
2,000,000
2,500,000
3,500,000
The entity determined that Customer A receivable is totally impaired and Customer B receivable is
impaired by P700,000. The other receivables from Customers C and D are not considered impaired.
The entity determined that a composite rate of 10% is appropriate to measure impairment on the
remaining accounts receivable. What is the total impairment loss of accounts receivable for 2015?
a. 2,500,000
b. 2,050,000
c. 1,050,000
d. 2,750,000
Problem 8 (Current net receivables)
An entity reported current receivables on December 31, 2015 which consisted of the following:
Trade accounts receivable
Allowance for uncollectible accounts
Claim against shipper for goods lost in transit in November 2015
Selling price of unsold goods sent by the entity on consignment at 130% of
and not included in the ending inventory
Security deposit on lease of warehouse used for storing inventories
930,000
20,000
30,000
cost
260,000
300,000
What is the correct total of current net receivables on December 31, 2015?
a. 1,500,000
b. 1,200,000
c. 1,240,000
d. 940,000
Problem 9 (Measurement of notes receivables)
On December 31, 2015, an entity received two P2,000,000 notes receivable from customers. On both
notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable
at maturity. The first note, made under customary trade terms, is due in nine months and the second
note is due in five years. The market interest rate for similar notes on December 31, 2015 was 8%.
The PV of 1 at 8% due in nine months is .944, and the PV of 1 at 8% due in 5 years is .68. On
December 31, 2015, what total carrying amount should be reported for the two notes receivable?
a. 3,248,000
b. 3,494,400
c. 3,360,000
d. 3,564,000
Page 4
Problem 10 (Measurement of loan receivable)
A bank granted a 10-year loan to a borrower in the amount of P1,500,000 with stated interest rate of
6%. Payments are due monthly and are computed to be P16,650. The bank incurred P40,000 of direct
loan origination cost and P20,000 of indirect loan origination cost. In addition, the bank charged the
borrower a 4-point nonrefundable loan origination fee. What is the carrying amount of the loan
receivable to be reported initially by the bank?
a.
b.
c.
d.
1,440,000
1,480,000
1,500,000
1,520,000
Problem 11 (Cost of inventory)
An entity reported inventory on December 31, 2015 at P6,000,000 based on a physical count at cost
and before any 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, 2015. These goods had a cost of P125,000 and were picked up by the carrier on January 7,
2016.
•
Goods shipped FOB shipping point on December 28, 2015 from a vendor to the entity were
received on January 4, 2016. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2015?
a.
b.
c.
d.
5,875,000
6,000,000
6,175,000
6,300,000
Problem 12 (Computation of accounts payable)
An entity reported accounts payable on December 31, 2015 at P4,500,000 before any necessary yearend adjustments relating to the following transactions:
•
On December 27, 2015, the entity wrote and recorded checks to creditors totaling P2,000,000
causing an overdraft of P500,000 in the entity’s bank account on December 31, 2015. The checks
were mailed on January 10, 2016.
•
On December 28, 2015, the entity purchased and received goods for P750,000, terms 2/10, n/30.
The entity recorded purchases and accounts payable at net amount. The invoice was recorded and
paid January 3, 2016.
•
Goods shipped FOB destination on December 20, 2015 from a vendor to the entity were received
January 2, 2016, The invoice cost was P325,000.
On December 31, 2015, what amount should be reported as accounts payable?
a.
b.
c.
d.
7,575,000
7,250,000
7,235,000
7,553,500
Page 5
Problem 13 (Retail inventory method)
On December 31, 2015, an entity provided the following information:
Inventory, January 1
Purchases
Additional markup
Cost
Retail
735,000
4,165,000
1,015,000
5,775,000
210,000
Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the approximate
lower of average cost or NRV retail method, what is the inventory on December 31, 2015?
a. 1,050,000
b. 1,400,000
c.
994,000
d.
980,000
Problem 14 (Gross profit method)
An entity budgeted the following sales.
Sales on account
Cash sales
June
July
August
1,800,000
180,000
1,840,000
200,000
1,900,000
260,000
All merchandise is marked up to sell at invoice cost plus 20%. Merchandise inventory at the beginning
of each month is 30% of that month's projected cost of goods sold. What is the amount of anticipated
purchases for July?
a.
b.
c.
d.
1,632,000
2,076,000
1,700,000
1,730,000
Problem 15 (Biological assets)
An entity provided the following information about assets in forest plantation:
Freestanding trees
Land under trees
Roads in forest
Animals related to recreational activities
Rubber trees and grape vines
5,000,000
900,000
500,000
2,000,000
1,500,000
What total amount should be reported as biological assets?
a.
b.
c.
d.
5,000,000
8,500,000
6,500,000
9,900,000
Problem 16 (Machinery)
On September 1, 2015, an entity purchased a new machine on a deferred payment basis. A down
payment of P200,000 was made and 4 annual installments of P600,000 each are to be made beginning
on September 1, 2016. The cash equivalent price of the machine was P2,300,000. Due to an employee
strike, the entity could not install the machine immediately and thus incurred P30,000 of storage cost.
Cost of installation excluding the storage cost amounted to P80,000. What is the total cost of the
machine?
a.
b.
c.
d.
2,300,000
2,380,000
2,410,000
2,600,000
Page 6
Problem 17 (Borrowing cost)
During 2015, an entity constructed an asset costing P10,000,000. The weighted average accumulated
expenditures on the asset during the year totaled P6,000,000. To help pay for construction, P4,400,000
was borrowed at 10% on January 1, 2015, and funds not needed for construction were temporarily
invested in short-term securities, yielding P90,000 in interest revenue. Other than the construction
funds borrowed, the only other debt outstanding during the year was a P5,000,000, 10-year, 9% note
payable dated January 1, 2012. What is the amount of interest that should be capitalized during 2015?
a.
b.
c.
d.
600,000
300,000
494,000
944,000
Problem 18 (Depletion)
In 2015, an entity purchased property with natural resources for P28,000,000. The property had a
residual value of P5,000,000. However, the entity is required to restore the property to the original
condition at a discounted amount of P2,000,000. In 2015, the entity spent P1,000,000 in development
cost and P3,000,000 in building. In 2016, an amount of P4,000,000 was spent for additional
development on the mine. Production began in 2016 and the tons extracted totaled 3,000,000 in 2016
and 2,500,000 in 2017. The remaining tons totaled 7,000,000 and 3,500,000, respectively on
December 31, 2016 and December 31, 2017. What amount of depletion should recognized in 2017?
a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000
Problem 19 (Revaluation)
On June 30, 2015, an entity reported the following information:
Equipment at cost
Accumulated depreciation
30,000,000
10,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over 10year period. On December 31, 2015, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model. The equipment was revalued to the fair
value of P27,000,000 with remaining useful life of 5 years. The income tax rate is 30%. What amount
should be reported as revaluation surplus on December 31, 2015?
a.
b.
c.
d.
7,500,000
5,250,000
6,300,000
9,000,000
Page 7
Problem 20 (Computer software)
During the current year, an entity incurred the following costs to develop and produce a routine,
low-risk computer software product:
Completion of detailed program design or working model
Cost incurred for coding and testing to establish technological feasibility
Other coding costs after establishment of technological feasibility
Other testing costs after establishment of technological feasibility
Costs of producing product masters for training materials
Duplication of computer software and training materials from product master
Packaging product
1,300,000
1,000,000
2,400,000
2,000,000
1,500,000
2,500,000
900,000
What amount should be capitalized initially as software cost?
a.
b.
c.
d.
5,400,000
3,700,000
5,900,000
6,900,000
Problem 21 (Start up costs)
An entity, a major winery, begins construction of a new facility in Mindanao. The following costs are
incurred in conjunction with the start-up activities of the new facility:
Production equipment
Travel costs of salaried employees
License fees
Training of local employees for production and maintenance operations
Advertising costs
8,150,000
400,000
140,000
1,200,000
850,000
What amount of start up costs should be expensed?
a. 9,750,000
b. 1,600,000
c. 1,390,000
d.
0
Problem 22 (Intangible assets)
On January 1, 2013, an entity purchased patent at a cost of P1,920,000 at which date the remaining
legal life was 16 years. On January 1, 2015, the useful life of the patent was determined to be only 8
years from the date of acquisition. On January 1, 2015, the entity paid P800,000, of which threefourths was for a trademark, and one-fourth was for the other entity’s agreement not to compete for a
5-year period in the line of business covered by the trademark. The entity considered the life of the
trademark indefinite. Moreover, the entity agreed to pay P50,000 to the other entity as consulting fee
each year for 5 years payable every January 1. What is the amortization of intangible assets for 2015?
a.
b.
c.
d.
320,000
280,000
250,000
370,000
Page 8
Problem 23 (Goodwill)
On December 31, 2015, an entity purchased for P40,000,000 cash all of the outstanding ordinary
shares of another entity when the subsidiary’s statement of financial position showed net assets of
P32,000,000. The subsidiary’s assets and liabilities had fair value different from the carrying amount
as follows:
Property, plant and equipment, net
Other assets
Long-term debt
Carrying amount
50,000,000
5,000,000
30,000,000
Fair value
57,500,000
0
28,000,000
What amount should be reported as goodwill in the December 31, 2015 consolidated statement of
financial position of the acquirer and its wholly-owned subsidiary?
a.
b.
c.
d.
3,500,000
2,500,000
7,500,000
8,000,000
Problem 24 (Financial asset at fair value through other comprehensive income)
On January 1, 2015, an entity purchased nontrading equity securities which are irrevocably
designated at fair value through other comprehensive income:
Purchase price
Security A
Security B
Security C
1,000,000
2,000,000
4,000,000
Transaction cost
Market – 12/31/2015
100,000
200,000
400,000
1,500,000
2,400,000
4,700,000
On July 1, 2016, the entity sold Security C for P5,200,000. What amount should be credited to
retained earnings as a result of the sale of the investment in 2016?
a. 800,000
b. 500,000
c. 300,000
d.
0
Problem 25 (Interest on loans)
An entity frequently borrowed from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate with interest payable at maturity. The entity repaid each
loan on scheduled maturity date.
Date of loan
November 1, 2014
February 1, 2015
May
1, 2015
Amount
500,000
1,500,000
800,000
Maturity date
October 31, 2015
July
31, 2015
January 31, 2016
Term of loan
1 year
6 months
9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2015. If no correction is made, by what amount would interest expense be
understated for 2015?
a.
b.
c.
d.
54,000
62,000
64,000
72,000
Page 9
Problem 26 (Compensated absences)
An entity has 35 employees who work 8-hour days and are paid hourly. On January 1, 2013, the entity
began a program of granting the employees 10 days of paid vacation each year. Vacation days earned
in 2013 may first be taken on January 1, 2014.
Year
Hourly
Wages
2013
2014
2015
25.80
27.00
28.50
Vacation Days Earned Vacation Days Used
by Each Employee
by Each Employee
10
10
10
0
8
10
The entity has chosen to accrue the liability for compensated absences at the current rate of pay in
effect when the compensated time is earned. What is the accrued liability for compensated absences
on December 31, 2015?
a.
b.
c.
d.
94,920
90,720
79,800
95,760
Problem 27 (Finance lease - lessee)
An entity leased equipment for the entire nine-year useful life, agreeing to pay P1,000,000 at the start
of the lease term on January 1, 2015, and P1,000,000 annually on each January 1 for the next eight
years. The present value on January 1, 2015 of the nine lease payments over the lease term using the
rate implicit in the lease which the lessor knows to be 10% was P6,330,000. The January 1, 2015
present value of the lease payments using the incremental borrowing rate of 12% was P5,970,000.
The entity made a timely second lease payment. What amount should be reported as finance lease
liability on December 31, 2016?
a.
b.
c.
d.
5,330,000
4,863,000
4,970,000
4,467,000
Problem 28 (Finance lease - lessor)
An entity leased equipment to an unrelated party on July 1, 2015 for an eight-year period expiring
June 30, 2023. 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, 2015. The implicit rate of interest contemplated is 10%. The cash
selling price of the equipment is P3,500,000 and the carrying amount is P2,800,000. The lease is
appropriately recorded as a sales type lease. What total amount of income should be recorded for the
year ended December 31, 2015?
a.
b.
c.
d.
700,000
525,000
990,000
845,000
Page 10
Problem 29 (Sale and leaseback)
On January 1, 2015, an entity sold a machine for P5,000,000. The fair value of the machine was
P6,500,000 on the date of sale. The machine had a carrying amount of P7,000,000 and remaining life
of 15 years. The entity immediately leased back the machine for 5 years at an annual rental that was
determined to be sufficiently lower than the market rent. What total amount of loss should be
recognized immediately in 2015?
a. 400,000
b. 800,000
c. 500,000
d.
0
Problem 30 (Employee benefit – IFRS 19R)
An entity provided the following information for the current year:
Current service cost
Interest on projected benefit obligation
Interest income on plan assets
Loss on plan settlement
Past service cost during the year
Actual return on plan assets
Actuarial loss during the year
Contribution to the plan
500,000
600,000
350,000
250,000
300,000
850,000
200,000
1,500,000
What is the employee benefit expense for the current year?
a.
b.
c.
d.
1,300,000
1,050,000
1,500,000
1,100,000
Problem 31 (Actual return on plan assets)
An entity provided the following data related to the pension plan.
December 31, 2015
Defined benefit obligation
Plan assets at fair value
Net actuarial loss
Discount rate
Expected rate of return
8,400,000
9,000,000
1,440,000
10%
8%
December 31, 2016
11,100,000
9,900,000
1,500,000
9%
7%
The contribution was P1,260,000 in 2016 and benefits paid totaled P1,125,000. What was the actual
return on plan assets in 2016?
a.
b.
c.
d.
900,000
765,000
600,000
465,000
Page 11
Problem 32 (Vacation pay expense)
An entity grants all employees two weeks of paid vacation for each full year of employment. Unused
vacation time can be accumulated and carried forward to succeeding years and will be paid at the
salaries in effect when vacations are taken or when employment is terminated. There was no employee
turnover in 2015. Additional information relating to the year ended December 31, 2015 is as follows:
Liability for accumulated vacations on January 1, 2015
Pre-2015 accrued vacations taken from January 1, 2015 to September 30, 2015
(the authorized period for vacations)
Vacations earned for work in 2015 adjusted to current rate
350,000
200,000
300,000
The entity granted a 10% salary increase to all employees on October 1, 2015, the annual salary
increase date. What amount should be reported as vacation pay expense for 2015?
a.
b.
c.
d.
450,000
335,000
315,000
300,000
Problem 33 (Termination benefits IFRS 19R)
An entity is committed to close a factory in 10 months and shall terminate the employment of all the
remaining employees of the factory. Under the termination plan, an employee leaving before closure
of factory shall receive on termination date a cash payment of P20,000. However, an employee that
renders service until closure of the factory shall receive P60,000. There are 120 employees at the
factory. The entity expects 20 employees to leave before closure and 100 employees to render service
until closure. What amount should be recognized as termination benefit?
a.
b.
c.
d.
2,400,000
6,400,000
2,000,000
4,000,000
Problem 34 (Income tax)
An entity reported P9,000,000 income before provision for income tax. The following data are
provided for the current year:
Rent received in advance
1,600,000
Income from exempt municipal bonds
2,000,000
Depreciation deduction for income tax purposes in excess of depreciation
reported for financial reporting purposes
1,000,000
Tax payment during the current year
500,000
Income tax rate
30%
What amount of current income tax liability should be reported at year-end?
a.
b.
c.
d.
1,780,000
2,280,000
2,580,000
2,880,000
Page 12
Problem 35 (Bonds payable)
An entity has outstanding a 7%, ten-year P100,000 facevalue bond. The bonds was originally sold to
yield 6% annual interest. The entity uses the effective interest method to amortize bond premium and
does not elect the fair value option for reporting financial liabilities. On June 30, 2015, the carrying
amount of the outstanding bond was P105,000. What amount of unamortized premium on bond
should be reported on June 30, 2016?
a.
b.
c.
d.
1,050
3,950
4,300
4,500
Problem 36 (Share-based compensation)
On January 1, 2015, an entity granted to employees 10,000 share options. On January 1, 2016, the
entity granted to employees an additional 20,000 share options.
Date
January 1, 2015
December 31, 2015
January 1, 2016
December 31, 2016
Fair value of share
20
22
25
30
The shares vest at the end of a four-year period. There are no forfeitures. What amount should be
recorded as compensation expense for 2016?
a.
b.
c.
d.
175,000
205,000
225,000
500,000
Problem 37 (Retained earnings)
An entity provided the following data for the year ended December 31, 2015:
Retained earnings unappropriated, January 1
Overdepreciation of 2014 due to prior period error
Net income for 2015
R Retained earnings appropriated for treasury shares (original balance is P500,000
but reduced by P200,000 by reason of reissuance of the treasury shares)
Retained earnings appropriated for contingencies (beginning balance P700,000.
but increased by current appropriation of P100,000)
Cash dividends paid to shareholders
Change in accounting policy from FIFO to average – credit adjustment
200,000
100,000
1,300,000
300,000
800,000
500,000
150,000
What is the balance of unappropriated retained earnings on December 31, 2015?
a.
b.
c.
d.
1,150,000
1,350,000
1,950,000
1,750,000
Page 13
Problem 38 (Diluted earnings per share)
An entity reported the following capital structure:
2015
2016
Outstanding shares:
Ordinary shares
Convertible preference shares
110,000
10,000
110,000
10,000
During 2015, the entity paid preference dividends of P3 per share. The preference shares are
convertible into 20,000 ordinary shares. Net income for 2015 was P850,000. The income tax rate is
30%. What amount should be reported as diluted earnings per share for 2015?
a.
b.
c.
d.
6.31
6.54
7.08
7.45
Problem 39 (Cash basis)
An entity had the following beginning and ending balances in prepaid expenses and accrued liabilities
for the current year:
Beginning balance
Ending balance
Prepaid expenses
5,000
10,000
Accrued liabilities
8,000
20,000
Debits to operating expenses totaled P100,000. What amount was paid for operating expenses during
the current year?
a. 83,000
b. 93,000
c. 107,000
d. 117,000
Problem 40 (Current cost)
An entity disclosed supplemental information on the effects of changing prices. The entity computed
the increase in current cost of inventory as follows:
Increase in current cost (nominal peso)
Increase in current cost (constant peso)
1,500,000
1,200,000
What amount should be disclosed as the inflation component of the increase in current cost?
a. 2,700,000
b. 1,500,000
c. 1,200,000
d.
300,000
Page 14
Problem 41 (Accrual basis)
An entity acquired rights to a patent under a licensing agreement that required an advance royalty
payment when the agreement was signed. The entity remitted royalties earned and due under the
agreement on October 31 each year. Additionally, on the same date, the entity paid, in advance,
estimated royalties for the next year. The entity adjusted prepaid royalties at year-end. The entity
provided the following information for the year ended December 31, 2015:
January 1
October 31
December 31
Prepaid royalties
Royalty payment charged to royalty expense
Year-end credit adjustment to expense
650,000
1,100,000
250,000
On December 31, 2015, what amount should be reported as prepaid royalties?
a.
b.
c.
d.
250,000
400,000
850,000
900,000
Problem 42 (Accrual basis)
An entity had a balance of P820,000 in the professional fees expense account on December 31, 2015,
before considering year-end adjustments relating to the following:
•
Consultants were hired for a special project at a total fee not to exceed P650,000. The entity had
recorded P550,000 of this fee based on billings for work performed in 2015.
•
The attorney’s letter requested by the auditors dated January 31, 2016, indicated that legal fees of
P60,000 were billed on January 15, 2016 for work performed in November 2015, and unbilled
fees for December 2015 were P70,000.
What amount should be reported for professional fees expense for 2015?
a. 1,050,000
b.
950,000
c.
880,000
d.
820,000
Problem 43 (Disclosures)
An entity reported the following information in the year-end financial statements:
Capital expenditures
Finance lease payments
Income taxes paid
Dividends paid
Interest payments
1,000,000
125,000
325,000
200,000
220,000
What total amount should be reported as supplemental disclosures in the statement of cash flows
prepared using the indirect method?
a.
545,000
b.
745,000
c. 1,125,000
d. 1,870,000
Page 15
Problem 44 (Operating activities)
An entity reported net income of P3,000,000 for the current year. Changes occurred in certain
accounts as follows:
Equipment
Accumulated depreciation
Note payable
250,000
400,000
300,000
increase
increase
increase
During the year, the entity sold equipment costing P250,000 with accumulated depreciation of
P150,000 for a gain of P50,000. In December of the current year, the entity purchased equipment
costing P500,000 with P200,000 cash and a 12% note payable of P300,000. What amount should be
reported as net cash provided by operating activities?
a.
b.
c.
d.
3,400,000
3,500,000
3,550,000
3,600,000
Problem 45 (Operating activities)
An entity reported net income of P5,000,000 for the current year. Depreciation expense was
P1,900,000. The following working capital accounts changed:
Accounts receivable
Nontrading equity investment
Inventory
Nontrade note payable
Accounts payable
1,100,000 increase
1,600,000 increase
730,000 increase
1,500,000 increase
1,220,000 increase
Under the indirect method, what net amount of adjustments is required to reconcile net income to
net cash provided by operating activities?
a. 4,950,000
b. 1,050,000
c. 1,290,000
d.
310,000
Page 16
SOLUTIONS
Problem 1 Answer A
Cash (600,000 -200,000 overdraft)
Accounts receivable
400,000
700,000
Inventory
Prepaid expenses
Land held for resale
Total current assets
1,200,000
200,000
2,000,000
4,500,000
Problem 2 Answer A
Liabilities
Share capital
Retained earnings
Total liabilities and equity
Revenue from sales and consulting
Operating costs and expenses
Net income
Dividend declared
Retained earnings
1,200,000
7,500,000
150,000
8,850,000
820,000
( 640,000)
180,000
( 30,000)
150,000
Problem 3 Answer C
Accounts payable
Unsecured notes
Accrued expenses
Serial bonds
Total current liabilities
55,000
400,000
35,000
1,000,000
1,490,000
The contingent liability is only disclosed.
Under IFRS, the deferred tax liability is noncurrent regardless of the reversal period.
Problem 4 Answer C
Net income per book
Unrealized loss- other comprehensive income erroneously deducted
Prior period error erroneously deducted
Gain on credit risk – other comprehensive income erroneously added
Adjusted net income
7,410,000
540,000
750,000
( 500,000)
8,200,000
The gain on early retirement of bonds payable and the loss from fire are properly included in net
income.
Problem 5 Answer D
Total reported income
Total cash dividends paid
Total share dividends distributed
Prior period adjustment – credit
Retained earnings – December 31, 2015
1,700,000
( 800,000)
( 200,000)
75,000
775,000
The unrealized holding loss on trading investment is ignored because it is already included in the
reported income since incorporation.
Page 17
Problem 6 Answer C
Checkbook balance
NSF check
Undelivered check drawn
8,000,000
(3,000,000)
2,500,000
Coins and currencies
Total cash
800,000
8,300,000
The check payable to the entity is properly not included because it is postdated January 2, 2016.
Technically, the three-month money market instruments are cash equivalents but not cash.
Problem 7 Answer A
Customer A
Customer B
Total other receivables
Total impairment loss
1,000,000
700,000
800,000
2,500,000
Customer C
Customer D
Other accounts receivable
Total other receivables for collective assessment of impairment
2,000,000
2,500,000
3,500,000
8,000,000
Under IFRS significant accounts receivable not impaired should be combined with other accounts
receivable not individually significant for collective assessment of impairment.
Problem 8 Answer D
Trade accounts receivable
Allowance for uncollectible accounts
Claim against shipper
Total current net receivables
930,000
( 20,000)
30,000
940,000
The selling price of unsold goods on consignment should be excluded from accounts receivable but
the cost should be included in inventory.
The security deposit is classified as noncurrent.
Problem 9 Answer D
Long-term note receivable – second note
Interest on note (2,000,000 x 3% x 5 years)
Total maturity
Multiply by PV factor
Present value of note receivable
Short-term note receivable – first note
Total carrying amount of notes receivable
2,000,000
300,000
2,300,000
.68
1,564,000
2,000,000
3,564,000
The long-term note receivable should be discounted even if is interest-bearing because the interest
rate is unreasonably low compared to the market rate.
The short-term note receivable is reported at face amount because the discount is usually not
material.
Page 18
Problem 10 Answer B
Face amount
Direct origination cost
Origination fee charged against borrower (4% x 1,500,000)
1,500,000
40,000
( 60,000)
Initial carrying amount
1,480,000
The direct origination cost is a deferred charge and the origination fee received from the borrower
is unearned income and the two should be included in the measurement of loan receivable.
The indirect origination cost is an outright expense.
Problem 11 Answer D
Physical count
Good in transit purchased FOB shipping point
Total inventory
6,000,000
300,000
6,300,000
The goods billed to a customer are properly included in inventory because the term is FOB shipping
point and the goods are delivered January 7, 2016.
Problem 12 Answer C
Accounts payable per book
Reversal of undelivered checks
Goods purchased, received and recognized at net amount (750,000 x 98%)
Accounts payable to be reported
4,500,000
2,000,000
735,000
7,235,000
The undelivered checks should be restored to the cash balance and accounts payable.
The goods purchased and received on January 2, 2016 should be excluded from accounts payable
because the term is FOB destination.
Problem 13 Answer D
Inventory – January 1
Purchases
Additional markup
Goods available for sale
Conservative cost ratio (4,900,000 / 7,000,000)
Sales
Markdown
Ending inventory at retail
At cost (70% x 1,400,000)
Cost
735,000
4,165,000
________
4,900,000
70%
Retail
1,015,000
5,775,000
210,000
7,000,000
(5,500,000)
( 100,000)
1,400,000
980,000
The lower of average cost or NRV retail method is the same as the conservative or conventional
method. Thus, the markdown is ignored in computing the cost ratio.
Page 19
Problem 14 Answer D
Cost of goods sold:
June
July
(1,980,000 / 120%)
(2, 040,000 / 120%)
1,650,000
1,700,000
August (2,160,000 / 120%)
Inventory – July 1 (30% x 1,700,000)
Purchases (SQUEEZE)
Goods available for sale
Inventory – July 31 (30% x 1,800,000)
Cost of goods sold - July
1,800,000
510,000
1,730,000
2,240,000
( 540,000)
1,700,000
The amount of purchases for July is computed by working back from the cost of goods sold.
Problem 15 Answer A
Freestanding trees
5,000,000
The land under trees and roads in forest should be included in property, plant and equipment.
Under IFRS, animals related to recreational activities as in game parks, and bearer plants, such as
rubber trees and grape vines should be accounted for as property, plant and equipment.
Problem 16 Answer B
Cash equivalent price
Installation cost
Total cost of machine
2,300,000
80,000
2,380,000
The storage cost is an outright expense.
Problem 17 Answer C
Average expenditures
Specific borrowing
General borrowing
Interest on specific borrowing (4,400,000 x 10%)
Interest income on temporary investment of specific borrowing
Interest on general borrowing (1,600,000 x 9%)
Total capitalized interest
6,000,000
(4,400,000)
1,600,000
440,000
( 90,000)
144,000
494,000
Page 20
Problem 18 Answer D
Purchase price
Development cost – 2015
Development cost – 2016
Estimated restoration cost
28,000,000
1,000,000
4,000,000
2,000,000
Total cost
Residual value
Depletable amount
Production in 2016
Remaining estimate – December 31, 2016
Total estimate – January 1, 2016
35,000,000
( 5,000,000)
30,000,000
3,000,000
7,000,000
10,000,000
Rate per unit (30,000,000 / 10,000,000)
Depletion for 2016 (3,000,000 x 3)
3.00
9,000,000
Production in 2017
Remaining estimate – December 31, 2017
Total estimate – January 1, 2017
2,500,000
3,500,000
6,000,000
Depletable amount
Depletion 2016
Remaining depletable amount
30,000,000
( 9,000,000)
21,000,000
New rate (21,000,000 / 6,000,000)
3.50
Depletion 2017 (2,500,000 x 3.50)
8,750,000
Problem 19 Answer C
Accumulated depreciation – 6/30/2015
Depreciation from July 1 to December 31, 2015 (30,000,000 / 10 x 6/12)
Accumulated depreciation – 12/31/2015
10,500,000
1,500,000
12,000,000
Cost
Accumulated depreciation
Carrying amount
Fair value
Revaluation surplus
Deferred tax liability (30% x 9,000,000)
Net revaluation surplus
30,000,000
( 12,000,000)
18,000,000
27,000,000
9,000,000
( 2,700,000)
6,300,000
Problem 20 Answer C
Other coding cost after establishment of technological feasibility
Other testing costs after establishment of technological feasibility
Costs of producing product masters
Total capitalized cost of computer software
2,400,000
2,000,000
1,500,000
5,900,000
The completion of detailed program design and the cost incurred to establish technological
feasibility should be expensed immediately.
The duplication of computer software and packaging product should be charged to inventory.
Page 21
Problem 21 Answer B
Travel costs of employees
Training of local employees
Total start up costs to be expensed
The production equipment should be capitalized.
400,000
1,200,000
1,600,000
The license fees and advertising costs should be expensed but not within the purview of start up
costs.
Problem 22 Answer A
Patent - January 1, 2013
Amortization for 2013 and 2014 (1,920,000 / 16 x 2)
Carrying amount – January 1, 2015
1,920,000
( 240,000)
1,680,000
Purchase price
Trademark (3/4 x 800,000)
Noncompetition agreement
800,000
( 600,000)
200,000
Patent (1,680,000 / 6 years remaining)
Noncompetition agreement (200,000 / 5 years)
Total amortization for 2015
280,000
40,000
320,000
The patent has a remaining life of 6 years because the revised life is 8 years from the date of
acquisition and two years already expired.
The trademark is not amortized because the life is indefinite.
The annual consulting fee is an outright expense.
Problem 23 Answer A
Net assets per book
Fair value of property, plant and equipment greater
Fair value of other assets zero
Fair value of long-term debt lower
Net assets at fair value
Acquisition cost
Goodwill
32,000,000
7,500,000
( 5,000,000)
2,000,000
36,500,000
40,000,000
3,500,000
The net assets should be recognized at fair value in a business combination.
Problem 24 Answer A
Purchase price of security C
Transaction cost
Total cost
4,000,000
400,000
4,400,000
If the equity investment is measured at fair value through other comprehensive income (FVOCI),
the transaction cost is capitalized
Market value of security C 12/31/2015
Historical cost
Unrealized gain – OCI 12/31/20015
4,700,000
4,400,000
300,000
Journal entry on July 1, 2016
Cash
Unrealized gain – OCI
Financial asset – FVOCI
Retained earnings
5,200,000
300,000
4,700,000
800,000
Under the final version of IFRS 9, any change in fair value of an equity investment measured at
FVOCI is permanently excluded from profit or loss under all circumstances but may transferred to
equity or retained earnings.
Page 22
Problem 25 Answer A
January 1, 2015 to October 31, 2015 (500,000 x 12% x 10/12)
February 1, 2015 to July 31, 2015 (1,500,000 x 12% x 6/12)
May 1, 2015 to December 31, 2015 (800,000 x 12% x 8/12)
50,000
90,000
64,000
Correct interest expense
Recorded interest expense
Interest expense understated
204,000
150,000
54,000
Problem 26 Answer A
Total vacation days – 2013, 2014 and 2015
Total vacation days used (8 + 10)
Unused vacation days
30
18
12
From 2014
From 2015
Total unused vacation days - FIFO
2
10
12
2014 (35 employees x 8 hours x 2 x P27)
2015 (35 x 8 x 10 x P28.50)
Accrued liability – 12/31/2015
15,120
79,800
94,920
Problem 27 Answer B
Date
1/1/2015
1/1/2015
1/1/2016
Payment
10% interest
Principal
1,000,000
1,000,000
533,000
1,000,000
467,000
Present value
6,330,000
5,330,000
4,863,000
The relevant present value is the amount computed using the 10% implicit rate.
The first payment on January 1, 2015 is applied all to principal
Problem 28 Answer D
Present value – 7/1/2015 (cash price)
Payment on
7/1/2015 – all applicable to principal
Present value – 7/1/2015
Interest income from July 1, 2015 to June 30, 2016 (10% x 2,900,000)
Cash price
Carrying amount
Gain on sale
Interest income 7/1/2015 to 12/31/2015 (290,000 x 6/12)
Total income
3,500,000
( 600,000)
2,900,000
290,000
3,500,000
2,800,000
700,000
145,000
845,000
Page 23
Problem 29 Answer B
Fair value of machine
Carrying amount
Impairment loss
6,500,000
7,000,000
( 500,000)
Sale price
Fair value
Deferred loss
Impairment loss
Amortization of deferred loss (1,500,000 / 5 years)
Total loss to be recognized in 2015
5,000,000
6,500,000
( 1,500,000)
500,000
300,000
800,000
If the leaseback is an operating lease and the sale price is below fair value of the asset compensated
by below market rent:
a. The difference between the sale price and the fair value is a deferred loss to be amortized over
the lease term.
b. If the fair value is below the carrying amount, the carrying amount is written down to fair value
and the writedown is recognized immediately as an impairment loss.
Problem 30 Answer A
Current service cost
Interest on projected benefit obligation
Interest income on plan assets
Loss on plan settlement
Past service cost during the year
Total employee benefit expense
500,000
600,000
( 350,000)
250,000
300,000
1,300,000
Problem 31 Answer B
Plan assets at fair value – 12/21/2015
Contribution to plan 2016
Actual return on plan assets (SQUEEZE)
Total
Benefits paid in 2016
Plan assets at fair value – 12/31/2016
9,000,000
1,260,000
765,000
11,025,000
( 1,125,000)
9,900,000
The actual return or plan assets is “squeezed” by working back from ending plan assets at fair
value.
Problem 32 Answer C
Accumulated vacations – 1/1/2015
Vacation taken in 2015
Liability balance – 1/1/2015
350,000
200,000
150,000
Vacations earned in 2015
Adjustment of accumulated vacations – 1/1/2015 (10% x 150,000)
Total vacation pay expense
300,000
15,000
315,000
Page 24
Problem 33 Answer A
Termination benefit (120 employee x P20,000)
Total payment until closure
2,400,000
60,000
Termination benefit
Additional benefit considered as short-term benefit
Short-term benefit (100 employees x 40,000)
(
20,000)
40,000
4,000,000
Under IFRS, the additional amount paid to employees who render service until closure is no longer
a termination benefit but short-term benefit.
Problem 34 Answer A
Financial income
Rent received in advance
Tax exempt income
Tax depreciation in excess of financial depreciation
Taxable income
9,000,000
1,600,000
( 2,000,000)
(1,000,000)
7,600,000
Current tax expense (30% x 7,600,000)
Tax payment during the year
Current tax liability
2,280,000
( 500,000)
1,780,000
Problem 35 Answer C
Interest paid (7% x 100,000)
Interest expense (6% x 105,000)
Premium amortization
Carrying amount – 6/30/2015
Face amount
Premium on bonds payable – 6/30/2015
Amortization 7/1/2015 to 6/30/2016
Unamortized premium – 6/30/2016
7,000
6,300
700
105,000
100,000
5,000
(
700)
4,300
Problem 36 Answer A
Share options on January 1, 2015 (10,000 x 20)
Share options on January 1, 2016 (20,000 x 25)
200,000
500,000
The share options are measured at fair value on the date of grant and allocated over the vesting
period.
Share options on January 1, 2015 (200,000 /4 years)
Share options on January 1, 2016 (500,000 / 4 years)
Total compensation expense for 2016
50,000
125,000
175,000
Page 25
Problem 37 Answer B
Retained earnings – January 1
Prior period error – overdepreciation
Net income
200,000
100,000
1,300,000
Retained earnings appropriated for treasury shares reverted to unappropriated balance
Increase in retained earnings appropriated for contengencies
Cash dividends paid
Change in accounting policy - credit
Retained earnings unappropriated - December 31
200,000
( 100,000)
( 500,000)
150,000
1,350,000
Problem 38 Answer B
Ordinary shares outstanding
Potential ordinary shares from convertible preference shares
Total ordinary shares
Diluted EPS (850,000 net income / 130,000)
110,000
20,000
130,000
6.54
Problem 39 Answer B
Operating expenses
Beginning prepaid expenses
Ending prepaid expenses
Beginning accrued liabilities
Ending accrued liabilities
Operating expenses paid
100,000
( 5,000)
10,000
8,000
( 20,000)
93,000
Problem 40 Answer D
Increase in current cost – nominal
Increase in current cost – constant
Increase in current cost due to inflation
1,500,000
1,200,000
300,000
Problem 41 Answer D
Prepaid royalties – January 1
Increase in prepaid royalties credited to expense
Prepaid royalties – December 31
650,000
250,000
900,000
Page 26
Problem 42 Answer B
Professional fees expense per book
Accrued legal fees – November
Accrued legal fees – December
820,000
60,000
70,000
Adjusted professional fees expense
950,000
The entity already recorded P550,000 out of total consultants’ fee of P650,000. The balance of
P100,000 is not recognized because no work has been performed as yet.
Problem 43 Answer A
IFRS requires the following disclosures when preparing the statement of cash flows:
Income taxes paid
Interest payments
Total
325,000
220,000
545,000
Problem 44 Answer B
Increase in accumulated depreciation
Add : Accumulated depreciation of equipment sold
Depreciation for the year
Net income
Depreciation for the year
Gain on sale of equipment
Net cash flows - operating
400,000
150,000
550,000
3,000,000
550,000
( 50,000)
3,500,000
Problem 45 Answer C
Depreciation
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Net adjustment to net income as an addition
1,900,000
(1,100,000)
( 730,000)
1,220,000
1,290,000
The increase in nontrading equity investment is an investing activity.
The increase in nontrade note payable is a financing activity.
Page 27
SITUATION PROBLEM I – BANK RECONCILIATION
An entity had the following bank reconciliation on June 30, 2015:
Balance per bank statement, June 30
3,000,000
Deposit transit
Total
Outstanding checks
Balance per book, June 30
400,000
3,400,000
( 900,000)
2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for the depositor entity)
Disbursements (including P140,000 NSF check and P10,000 service charge)
9,000,000
7,000,000
All reconciling items on June 30 cleared through the bank in July. The deposit in transit amounted
to P1,000,000 and the outstanding checks totaled P600,000 on July 31.
1. What is the amount of cash in bank that should be reported on July 31, 2015?
a.
b.
c.
d.
5,000,000
5,400,000
4,550,000
4,900,000
2. What is the cash balance per ledger on July 31, 2015?
a.
b.
c.
d.
5,350,000
5,550,000
4,500,000
5,400,000
3. What is the amount of cash receipts for book for the month of July?
a.
b.
c.
d.
9,800,000
8,600,000
9,400,000
9,600,000
4. What is the amount of cash disbursements per book for the month of July?
a.
b.
c.
d.
7,300,000
6,700,000
6,850,000
6,550,000
Page 28
SOLUTION – SITUATION PROBLEM I
Question 1 Answer B
Balance per bank – June 30
3,000,000
July bank deposits
July bank disbursements
Balance per bank – July 31
July deposits in transit
July outstanding checks
Adjusted bank balance
9,000,000
( 7,000,000)
5,000,000
1,000,000
( 600,000)
5,400,000
Question 2 Answer A
Balance per ledger – July 31 (SQUEEZE)
Note collected by bank in July
NSF check in July
Service charge in July
Adjusted book balance
5,350,000
200,000
( 140,000)
( 10,000)
5,400,000
The balance per book on July 31 is “squeezed” by working back from the adjusted balance.
Question 3 Answer C
Deposits per bank statement for July
Note collected by bank in July
Deposit in transit – June 30
Deposit in transit – July 31
Cash receipts per book for July
9,000,000
( 200,000)
( 400,000)
1,000,000
9,400,000
Question 4 Answer D
Disbursements per bank statement for July
NSF check in July
Service charge in July
Outstanding checks – June 30
Outstanding checks – July 31
Cash disbursements per book for July
7,000,000
( 140,000)
( 10,000)
( 900,000)
600,000
6,550,000
Page 29
SITUATION PROBLEM 2 – ACCOUNTS RECEIVABLE
From inception of operations, an entity provided for uncollectible accounts expense under the
allowance method and provisions were made monthly at 2% of credit sales. No year-end adjustments
to the allowance account were made. The balance in the allowance for doubtful accounts was
P1,000,000 on January 1, 2015. During 2015, credit sales totaled P20,000,000, interim provisions for
doubtful accounts were made at 2% of credit sales, P200,000 of bad debts were written off, and
recoveries of accounts previously written off amounted to P50,000. An aging of accounts receivable
was made for the first time on December 31, 2015 as follows:
Classification
November – December
July
– October
January – June
Prior to January 1, 2015
Balance
6,000,000
2,000,000
1,500,000
500,000
Uncolletible
10%
20%
30%
50%
Based on the review of collectibility of the account balances in the “prior to January 1 2015” aging
category, additional accounts totaling P100,000 are to be written off on December 31, 2015. Effective
December 31, 2015, the entity adopted the aging method for estimating the allowance for doubtful
accounts.
1. What is the required allowance for doubtful accounts on December 31, 2015?
a.
b.
c.
d.
1,650,000
1,950,000
1,700,000
1,450,000
2. What amount should be reported as doubtful accounts expense in the income statement for 2015?
a. 1,200,000
b. 1,650,000
c. 900,000
d. 950,000
3. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2015?
a.
b.
c.
d.
900,000
900,000
500,000
500,000
debit
credit
debit
credit
4. What is the net realizable value of accounts receivable on December 31, 2015?
a.
b.
c.
d.
9,900,000
8,250,000
8,350,000
8,200,000
Page 30
SOLUTION – SITUATION PROBLEM 2
Question 1 Answer A
6,000,000 x 10%
2,000,000 x 20%
600,000
400,000
1,500,000 x 30%
500,000 – 100,000 x 50%
Required allowance – December 31, 2015
450,000
200,000
1,650,000
Question 2 Answer C
Allowance for doubtful accounts – January 1
Recoveries of accounts written off
Doubtful accounts expense (SQUEEZE)
Total
Accounts written off (200,000 + 100,000)
Allowance for doubtful accounts – December 31
1,000,000
50,000
900,000
1,950,000
( 300,000)
1,650,000
The doubtful accounts expense is squeezed by working back from the ending allowance for
doubtful accounts.
Question 3 Answer D
Correct doubtful accounts expense
Recorded doubtful accounts expense (2%) x 20,000,000 sales)
Increase in allowance - credit
900,000
400,000
500,000
Question 4 Answer B
November – December
July
– October
January
– June
Prior January 1, 2015 (500,000 – 100,000)
Accounts receivable – December 31, 2015
Allowance for doubtful accounts
Net realizable value
6,000,000
2,000,000
1,500,000
400,000
9,900,000
( 1,650,000)
8,250,000
Page 31
SITUATION PROBLEM 3 – GROSS PROFIT METHOD
On December 31, 2015, a fire damaged the warehouse and factory of an entity completely destroying
the goods in process inventory. There was no damage to the raw materials, finished goods and factory
supplies The physical inventory revealed the following.
January 1
December 31
Raw materials
Goods in process
Finished goods
Factory supplies
1,700,000
4,300,000
6,000.000
500,000
2,000,000
0
4,500,000
400,000
The gross profit margin historically approximated 30% of sales. The sales for the year amounted to
P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year amounted to
P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
1. What is the cost of raw materials used?
a. 5,700,000
b. 3,700,000
c. 3,800,000
d. 3,600,000
2. What is the total manufacturing cost?
a. 13,000,000
b. 11,800,000
c. 11,700,000
d. 11,600,000
3. What is the cost of goods sold?
a. 12,000,000
b. 16,000,000
c. 13,000,000
d. 14,000,000
4. What is the cost of goods in process inventory destroyed by fire?
a. 3,500,000
b. 3,800,000
c. 2,500,000
d. 1,500,000
Page 32
SOLUTION – SITUATION PROBLEM 3
Question 1 Answer B
Raw materials – January 1
Purchases
1,700,000
4,000,000
Raw materials available for use
Raw materials – December 31
Raw materials used
5,700,000
( 2,000,000)
3,700,000
Question 2 Answer C
Raw materials used
Direct labor
Manufacturing overhead (60% x 5,000,000)
Total manufacturing cost
3,700,000
5,000,000
3,000,000
11,700,000
The change in the factory supplies is no longer considered because it is already part of the
manufacturing overhead applied.
Question 3 Answer D
Cost of goods sold (70% x 20,000,000)
14,000,000
The cost ratio is 70% because the gross profit rate is 30% on sales.
Question 4 Answer A
Total manufacturing cost
Goods in process – January 1
Total goods in process
Goods in process – December 31 (SQUEEZE)
Cost of goods manufactured
Finished goods – January 1
Goods available for sale
Finished goods – December 31
Cost of goods sold
11,700,000
4,300,000
16,000,000
( 3,500,000)
12,500,000
6,000,000
18,500,000
( 4,500,000)
14,000,000
The cost of ending goods in process is computed by working back from the cost of goods sold.
Page 33
SITUATION PROBLEM 4 – INVESTMENT IN ASSOCIATE
On January 1, 2015, an entity acquired a 10% interest in an investee for P3,000,000. The investment
was accounted for under the cost method. During 2015, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000. On January 1, 2016, the entity acquired a further 15%
interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the
investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000. The fair
value of the net assets of the investee is equal to carrying amount except for an equipment whose fair
value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years.
The investee reported net income of P8,000,000 for 2016 and paid dividend of P5,000,000 on
December 31, 2016.
1. What amount of investment income should be recognized in 2015?
a.
b.
c.
d.
400,000
100,000
500,000
300,000
2. What is the goodwill arising from the acquisition on January 1, 2016?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d.
0
3. What total amount of income should be recognized by the investor in 2016?
a.
b.
c.
d.
2,000,000
2,500,000
2,300,000
1,800,000
4. What is the carrying amount of the investment in associate on December 31, 2015?
a.
b.
c.
d.
12,550,000
12,350,000
11,950,000
12,750,000
Page 34
SOLUTION – SITUATION PROBLEM 4
Question 1 Answer B
Dividend income (10% x 1,000,000)
100,000
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Existing 10% interest remeasured at fair value
New 15% interest
Total cost – January 1, 2016
Net assets acquired (25% x 36,000,000)
Excess of cost over carrying amount
Excess attributable to equipment whose fair value is greater than carrying
amount
(25% x 4,000,000)
Goodwill
3,500,000
8,500,000
12,000,000
( 9,000,000)
3,000,000
( 1,000,000)
2,000,000
Question 3 Answer C
Share in net income (25% x 8,000,000)
Amortization of excess attributable to equipment (1,000,000 / 5 years)
Net investment income
Fair value of 10% interest
Historical cost
Remeasurement gain
Net investment income
Total income in 2016
2,000,000
( 200,000)
1,800,000
3,500,000
3,000,000
500,000
1,800,000
2,300,000
If the investment in associate is achieved in stages the old interest is remeasured at fair value
through profit or loss.
Question 4 Answer A
Total cost 1/1/2016
Net investment income
Share in cash dividend (25% x 5,000,000)
Carrying amount – 12/31/2016
12,000,000
1,800,000
( 1,250,000)
12,550,000
Page 35
SITUATION PROBLEM 5 – PROPERTY, PLANT AND EQUIPMENT
January 1, 2015, an entity disclosed the following balances:
Land
Land improvements
Buildings
4,000,000
1,300,000
20,000,000
Machinery and equipment
8,000,000
During the current year, the following transactions occurred:
* A tract of land was acquired for P2,000,000 cash as a building site.
*
A plant facility consisting of land and building was acquired in exchange for 200,000 shares of
the entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The
plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for the
building at the exchange date. Current appraised values for the land and the building, respectively,
are P2,000,000 and P8,000,000. The building has an expected life of forty years with a P200,000
residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs
incurred were freight and unloading P100,000 and installation P300,000. The equipment has a
useful life of ten years with no residual value.
*
Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the
entity’s various plant locations. These expenditures had an estimated useful life of fifteen years.
* Research and development costs were P1,100,000 for the year.
*
A machine costing P200,000 on January 1, 2008 was scrapped on June 30, 2015. Straight line
depreciation had been recorded on the basis of a 10-year life with no residual value. A machine
was sold for P500,000 on July 1, 2015. Original cost of the machine sold was P700,000 on January
1, 2012, and it was depreciated on the straight line basis over an estimated useful life of eight
years and a residual value of P50,000.
1. What is the total cost of land on December 31, 2015?
a.
b.
c.
d.
7,800,000
7,600,000
8,000,000
6,800,000
2. What is the total cost of land improvements on December 31, 2015?
a.
b.
c.
d.
1,200,000
3,600,000
1,300,000
2,500,000
3. What is the total cost of buildings on December 31, 2015?
a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000
4. What is total cost of machinery and equipment on December 31, 2015?
a.
b.
c.
d.
12,400,000
11,500,000
11,000,000
11,700,000
Page 36
SOLUTION – SITUATION PROBLEM 5
Question 1 Answer A
Land – January 1
Land acquired for cash
4,000,000
2,000,000
Land acquired by issuing shares (2/10 x 9,000,000)
Land – December 31
1,800,000
7,800,000
Quoted price of shares issued for land and building (200,000 x P45)
9,000,000
Current appraized value :
Land
Building
Total
2,000,000
8,000,000
10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated
prorata to the land and building based on the current appraised value.
Question 2 Answer D
Land improvements – January 1
Expenditures for parking lot, street and sidewalks
Balance – December 31
1,300,000
1,200,000
2,500,000
Question 3 Answer C
Buildings – January 1
Building acquired by issuing shares (8/10 x 9,000,000)
Balance – December 31
20,000,000
7,200,000
27,200,000
Question 4 Answer B
Machinery and equipment - January 1
Machinery and equipment purchased
Freight and unloading
Installation
Machinery scrapped
Machinery sold
Machinery equipment – December 31
8,000,000
4,000,000
100,000
300,000
( 200,000)
( 700,000)
11,500,000
END