FINANCIAL ACCOUNTING AND REPORTING TEST BANK
8152017 – 1
PROBLEM 1 – STATEMENT OF FINANCIAL POSITION
The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax
expense.
Cash
Accounts receivable
Inventory
Property, plant and equipment
Accounts payable
Income tax payable
Preference share capital
Ordinary share capital
Share premium
Retained earnings – January 1
Net sales and other revenue
Cost of goods sold
Expenses
Income tax expense
6,000,000
14,000,000
10,000,000
25,000,000
9,000,000
6,000,000
3,000,000
15,000,000
4,000,000
9,000,000
80,000,000
48,000,000
12,000,000
11,000,000
126,000,000
__________
126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax
rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased in
transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing
P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on
December 31, 2018.
1. What amount should be reported as current assets on December 31, 2017?
a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000
2. What amount should be reported as current liabilities on December 31, 2017?
a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000
3. What is the net income for 2017?
a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000
4. What amount should be reported as total shareholders’ equity on December 31, 2017?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
Page
2
SOLUTION - PROBLEM 1
Question 1 Answer A
Cash
Accounts receivable
Inventory (10,000,000 - 500,000 - 300,000)
Total current assets
6,000,000
14,000,000
9,200,000
29,200,000
Question 2 Answer C
Net sales and other revenue
80,000,000
Cost of goods sold
Expenses
Income before tax
( 48,000,000)
( 12,000,000)
20,000,000
Tax expense (30% x 20,000,000)
Net income
( 6,000,000)
14,000,000
Tax expense
6,000,000
Payment during year
Income tax payable
(5,000,000)
1,000,000
Accounts payable
Income tax payable
Redeemable preference
Total current liabilities
8,200,000
1,000,000
3,000,000
12,200,000
Accounts payable per book
9,000,000
Goods in transit FOB destination
Goods held on consignment
Adjusted accounts payable
( 500,000)
( 300,000)
8,200,000
Question 3 Answer B
Net income
14,000,000
Question 4 Answer D
Ordinary share capital
Share premium
Retained earnings
Total shareholders’ equity
15,000,000
4,000,000
23,000,000
42,000,000
Retained earnings – January 1
Net income
Total retained earnings
9,000,000
14,000,000
23,000,000
Page 3
PROBLEM 2 - STATEMENT OF FINNACIAL POSITION
3. On December 31, 2017, an entity showed the following current assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
500,000
2,500,000
2,000,000
100,000
5,100,000
Cash on hand including customer postdated check of P20,000 and employee
IOU of P10,000
Cash in bank per bank statement (outstanding checks on December 31,
2017, P70,000)
Total cash
130,000
370,000
500,000
Customers’ debit balances, net of customer deposit of P50,000
Allowance for doubtful accounts
Sale price of goods invoiced to customers at 150% of cost on December 29,
2017 but delivered on January 5, 2018 and excluded from reported
inventory
Total accounts receivable
1. What is the adjusted cash balance?
a.
b.
c.
d.
500,000
470,000
430,000
400,000
2. What is the net realizable value of accounts receivable?
.
a.
b.
c.
d.
1,970,000
1,820,000
1,800,000
1,950,000
3. What is the adjusted inventory?
a.
b.
c.
d.
2,000,000
2,375,000
2,500,000
2,750,000
4. What total amount of current assets should be reported?
a.
b.
c.
d.
4,900,000
4,830,000
4,780,000
4,630,000
1,900,000
(
150,000)
750,000
2,500,000
Page 4
SOLUTION – PROBLEM 2
Question 1 Answer D
Cash on hand
130,000
Customer postdated check
Employee IOU
Adjusted cash on hand
( 20,000)
( 10,000)
100,000
Cash in bank per bank statement
370,000
Outstanding checks
( 70,000)
Adjusted cash balance
300,000
400,000
Question 2 Answer B
Customers’ debit balances
1,900,000
Customer deposit erroneously netted
50,000
Customer postdated check
20,000
Accounts receivable
1,970,000
Allowance for doubtful accounts
Net realizable value
( 150,000)
1,820,000
Question 3 Answer C
Inventory per book
Undelivered goods incorrectly excluded from inventory (750,000 / 150%)
Adjusted inventory
2,000,000
500,000
2,500,000
Question 4 Answer B
Cash
Accounts receivable, net of allowance
Advances to employee - IOU
Inventory
Prepaid expenses
Total current assets
400,000
1,820,000
10,000
2,500,000
100,000
4,830,000
Page 5
PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME
An entity reported the following data for the current year:
Net sales
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Gain from expropriation of land
Income tax
Income from discontinued operations
Unrealized gain on equity investment at FVOCI
Unrealized loss on futures contract designated as a cash flow hedge
Increase in projected benefit obligation due to actuarial assumptions
Foreign translation adjustment – debit
Revaluation surplus
9,500,000
4,000,000
1,000,000
1,200,000
700,000
500,000
800,000
600,000
900,000
400,000
300,000
100,000
2,500,000
1. What amount should be reported as income from continuing operations?
a. 3,100,000
b. 2,300,000
c. 1,800,000
d. 2,900,000
2. What net amount should recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000
3. What net amount in OCI should be presented as “may not be recycled to profit or loss?
a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000
4. What amount should be reported as net income?
a.
2,900,000
b. 2,300,000
c.
3,100,000
d. 2,400,000
5. What amount should be reported as comprehensive income?
a. 5,500,000
b. 2,900,000
c. 2,600,000
d.
6,100,000
Page 6
SOLUTION - PROBLEM 3
Question 1 Answer B
Net sales
9,500,000
Cost of goods sold
Gross income
(4,000,000)
5,500,000
Gain from expropriation of land
500,000
Total income
6,000,000
Selling expenses
1,000,000
Administrative expenses
1,200,000
Interest expense
700,000
2,900,000
Income before tax
3,100,000
Tax expense
Income from continuing operations
( 800,000)
2,300,000
Question 2 Answer A
Unrealized gain on equity investment at FVOCI
Unrealized loss – cash flow hedge
Actuarial loss – increase in PBO
Translation adjustment – debit
Revaluation surplus
Net gain - OCI
900,000
( 400,000)
( 300,000)
( 100,000)
2,500,000
2,600,000
Question 3 Answer D
Unrealized gain on equity investment at FVOCI
900,000
Actuarial loss on PBO
Revaluation surplus
( 300,000)
2,500,000
Net amount of OCI not reclassified to profit or loss
3,100,000
Question 4 Answer A
Income from continuing operations
Income from discontinued operations
2,300,000
600,000
Net income
2,900,000
Question 5 Answer A
Net income
Net gain – OCI
Comprehensive income
2,900,000
2,600,000
5,500,000
Page 7
PROBLEM 4 – INVESTMENT IN ASSOCIATE
On January 1, 2017, an entity acquired a 10% interest in an investee for P3,000,000. The investment
was accounted for under the cost method. During 2017, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000.
On January 1, 2018, the entity acquired a further 15% interest in the investee for P8,500,000. On such
date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the
10% existing interest was P3,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an equipment
whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of
5 years.
The investee reported net income of P8,000,000 for 2018 and paid dividend of P5,000,000 on
December 31, 2018.
1. What amount of investment income should be recognized in 2017?
a.
b.
c.
d.
400,000
100,000
500,000
300,000
2. What is the implied goodwill arising from the acquisition on January 1, 2018?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d.
0
3. What total amount of income should be recognized by the investor in 2018?
a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000
4. What is the carrying amount of the investment in associate on December 31, 2018?
a.
b.
c.
d.
12,550,000
12,350,000
11,950,000
12,750,000
Page 8
SOLUTION - PROBLEM 4
Question 1 Answer B
Dividend income (10% x 1,000,000)
100,000
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Existing 10% interest remeasured at fair value
3,500,000
New 15% interest
8,500,000
Total cost – January 1, 2018
12,000,000
Net assets acquired (25% x 36,000,000)
Excess of cost over carrying amount
( 9,000,000)
3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000)
Goodwill
( 1,000,000)
2,000,000
Question 3 Answer C
Share in net income (25% x 8,000,000)
2,000,000
Amortization of excess attributable to equipment (1,000,000 / 5 years)
Net investment income
( 200,000)
1,800,000
Fair value of 10% interest
3,500,000
Historical cost
3,000,000
Remeasurement gain
500,000
Net investment income
1,800,000
Total income in 2018
2,300,000
If the investment in associate is achieved in stages the old interest is remeasured at fair value through
profit or loss.
Question 4 Answer A
Total cost January 1, 2018
12,000,000
Net investment income
1,800,000
Share in cash dividend (25% x 5,000,000)
Carrying amount – December 31, 2018
( 1,250,000)
12,550,000
Page 9
PROBLEM 5 – INVESTMENT IN ASSOCIATE
An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s
assets and liabilities at that date were as follows:
Cash
Accounts receivable
Inventory – FIFO
Land
Plant and equipment – net
Liabilities
Carrying amount
Fair value
1,000,000
4,000,000
8,000,000
5,500,000
14,000,000
7,000,000
1,000,000
4,000,000
9,000,000
7,000,000
22,000,000
7,000,000
The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The
entity sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000.
The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid
P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018.
1. What is the implied a goodwill arising from the acquisition?
a. 200,000
b. 600,000
c. 800,000
d. 400,000
2. What is the investment income for 2017?
a.
b.
c.
d.
880,000
480,000
400,000
580,000
3. What is the investment income for 2018?
a.
b.
c.
d.
1,080,000
2,280,000
1,680,000
2,880,000
4. What is the carrying amount of the investment in associate on December 31, 2018?
a.
b.
c.
d.
15,360,000
15,000,000
16,560,000
13,800,000
Page 10
SOLUTION – PROBLEM 5
Question 1 Answer B
Cash
1,000,000
Accounts receivable
4,000,000
Inventory
8,000,000
Land
5,500,000
Plant and equipment
14,000,000
Liabilities
Net assets at carrying amount
( 7,000,000)
25,500,000
Acquisition cost
15,000,000
Net assets acquired (40% x 25,500,000)
Excess of cost
(10,200,000)
4,800,000
Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%)
(
400,000)
Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%)
Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%)
Implied goodwill
s
( 3,200,000)
( 600,000)
600,000
Question 2 Answer B
Share in net income for 2017(40% x 3,000,000)
1,200,000
Amortization of excess – inventory
Amortization of excess – plant and equipment (3,200,000 / 10 years)
Investment income for 2017
( 400,000)
( 320,000)
480,000
Question 3 Answer A
Share in net income for 2018 (40% x 5,000,000)
2,000,000
Amortization of excess – plant and equipment
Amortization of excess – land
Investment income for 2018
( 320,000)
( 600,000)
1,080,000
Question 4 Answer A
Acquisition cost
15,000,000
Investment income 2017
480,000
Cash dividend for 2017 (40% x 1,000,000)
Investment income for 2018
(
400,000)
1,080,000
Cash dividend for 2018 (40% 2,000,000)
Carrying amount – December 31, 2018
( 800,000)
15,360,000
Page 11
PROBLEM 6 – BOND INVESTMENT AT FVOCI
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June
30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at
an effective interest rate of 7%.
The business model for this investment is to collect contractual cash flows and sell the bonds in the
open market. On December 31, 2017, the bonds were quoted at 106.
1. What amount of interest income should be reported for 2017?
a.
b.
c.
d.
400,000
200,000
364,560
363,940
2. What is the adjusted carrying amount of the investment on December 31, 2017?
a.
b.
c.
d.
5,300,000
5,171,940
5,174,560
5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2017?
a. 300,000
b. 125,440
c. 128,060
d. 92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for
2017?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
Page 12
SOLUTION - PROBLEM 6
Date
Interest received
Jan. 1, 2017
Jan. 30, 2017
Dec. 31, 2017
Question 1 Answer D
200,000
200,000
Interest income
182,280
181,660
Amortization
17,720
18,340
Carrying amount
5,208,000
5,190,280
5,171,940
Interest January to June
Interest July to December
Interest income for 2017
182,280
181,660
363,940
Question 2 Answer A
Market value on December 31, 2017 (5,000,000 x 106)
5,300,000
Question 3 Answer C
Market value on December 31, 2017
Carrying amount December 31, 2017 (see table of amortization)
Unrealized gain - OCI
5,300,000
5,171,940
128,060
Question 4 Answer C
Market value on December 31, 2017
Acquisition cost, excluding transaction cost
Gain from change in fair value
Interest income (8% x 5,000,000)
Total income
5,300,000
5,100,000
200,000
400,000
600,000
Page 13
PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT
January 1, 2017, an entity disclosed the following balances:
Land
Land improvements
Buildings
Machinery and equipment
During the current year, the following transactions occurred:
4,000,000
1,300,000
20,000,000
8,000,000
* 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 sidewalk at the entity’s
various plant locations. These expenditures had an estimated useful life of fifteen years.
*
Research and development costs were P1,100,000 for the year.
*
A machine costing P200,000 on January 1, 2010 was scrapped on June 30, 2017. Straight line
depreciation had been recorded on the basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2017. Original cost of the machine sold was P700,000
on January 1, 2014, and it was depreciated on the straight line basis over an estimated useful life of
eight years and a residual value of P50,000.
1. What is the total cost of land on December 31, 2017?
b. 7,800,000
c. 7,600,000
d. 8,000,000
e. 6,800,000
2. What is the total cost of land improvements on December 31, 2017?
a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000
3. What is the total cost of buildings on December 31, 2017?
a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000
4. What is total cost of machinery and equipment on December 31, 2017?
a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000
Page 14
SOLUTION – PROBLEM 7
Question 1 Answer A
Land – January 1
Land acquired for cash
Land acquired by issuing shares (2/10 x 9,000,000)
Land – December 31
4,000,000
2,000,000
1,800,000
7,800,000
Quoted price of shares issued for land and building (200,000 x P45)
9,000,000
Current appraized value :
Land
2,000,000
Building
8,000,000
Total
10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated
prorata to the land and building based on the current appraised value.
Question 2 Answer D
Land improvements – January 1
Expenditures for parking lot, street and sidewalk
Balance – December 31
1,300,000
1,200,000
2,500,000
Question 3 Answer C
Buildings – January 1
Building acquired by issuing shares (8/10 x 9,000,000)
Balance – December 31
20,000,000
7,200,000
27,200,000
Question 4 Answer B
Machinery and equipment - January 1
8,000,000
Machinery and equipment purchased
4,000,000
Freight and unloading
100,000
Installation
300,000
Machinery scrapped
Machinery sold
Machinery equipment – December 31
( 200,000)
( 700,000)
11,500,000
Page 15
PROBLEM 8 - INCOME TAX
An entity had the following financial statement elements for which the December 31, 2017 carrying
amount is different from the December 31, 2017 tax basis:
Equipment
Accrued liability – health care
Carrying amount
Tax basis
Difference
5,500,000
500,000
4,000,000
0
1,500,000
500,000