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FINANCIAL ACCOUNTING AND REPORTING TEST BANK

80102016 - 3

PROBLEM 1 INVESTMENT IN ASSOCIATE

On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment
was accounted for under the cost method. During 2016, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000.

On January 1, 2017, 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 2017 and paid dividend of P5,000,000 on
December 31, 2017.

1. What amount of investment income should be recognized in 2016?


a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the implied goodwill arising from the acquisition on January 1, 2017?
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 2017?


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, 2017?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
Page 2

SOLUTION - PROBLEM 1

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, 2017 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000) ( 1,000,000)
Goodwill 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) ( 200,000)
Net investment income 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 2017 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 1/1/2017 12,000,000


Net investment income 1,800,000
Share in cash dividend (25% x 5,000,000) ( 1,250,000)
Carrying amount 12/31/2017 12,550,000
Page 3
PROBLEM 2 PROPERTY, PLANT AND EQUIPMENT
January 1, 2016, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 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 sellers 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
entitys 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, 2009 was scrapped on June 30, 2016. 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, 2016. Original cost of the machine sold was P700,000
on January 1, 2013, 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, 2016?


a. 7,800,000
b. 7,600,000
c. 8,000,000
d. 6,800,000

2. What is the total cost of land improvements on December 31, 2016?


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, 2016?


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, 2016?


a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000
Page 4

SOLUTION PROBLEM 5

Question 1 Answer A

Land January 1 4,000,000


Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land December 31 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 1,300,000


Expenditures for parking lot, street and sidewalks 1,200,000
Balance December 31 2,500,000

Question 3 Answer C

Buildings January 1 20,000,000


Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance December 31 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 ( 200,000)
Machinery sold ( 700,000)
Machinery equipment December 31 11,500,000
Page 5

PROBLEM 3 - INCOME TAX

An entity had the following financial statement elements for which the December 31, 2016 carrying
amount is different from the December 31, 2016 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000


Accrued liability health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated
depreciation for tax purposes.

The accrued liability is the estimated health care cost that was recognized as expense in 2016 but
deductible for tax purposes when actually paid.

In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical
feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes.
However, the total amount was expensed in 2016 for tax purposes.

The pretax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no
deferred taxes on January 1, 2016.

1. What amount should be reported as current tax expense for 2016?


a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

2. What amount should be reported as total tax expense for 2016?


a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2016?
a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000

4. What amount should be reported as deferred tax asset on December 31, 2016?
.

a. 750,000
b. 600,000
c. 150,000
d. 0
Page 6

SOLUTION PROBLEM 3

Question 1 Answer B

Accounting income 15,000,000


Future taxable amount:
Equipment
Computer software (1,500,000)
Future deductible amount: (2,000,000)
Accrued liability 500,000
Taxable income 12,000,000

Current tax expense (30% x 12,000,000) 3,600,000

Question 2 Answer A

Total tax expense (30% x 15,000,000) 4,500,000

Question 3 Answer A

Deferred tax liability (30% x 3,500,000) 1,050,000

Question 4 Answer C

Deferred tax asset (30% x 500,000) 150,000


Page 7

PROBLEM 4 - BENEFIT COST

An entity provided the following pension plan information:


Projected benefit obligation January 1, 2016 3,500,000
Fair value of plan assets January 1, 2016 2,800,000
Pension benefits paid during the year 250,000
Current service cost for 2016 1,750,000
Past service cost for 2016 (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%
1. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000

2. What is the net remeasurement loss for the current year?


a. 200,000
b. 100,000
c. 300,000
d. 400,000

3. What is the projected benefit obligation on December 31, 2016?


a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000

4. What is the fair value of plan assets on December 31, 2016?


a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 4,050,000

5. What amount should be reported as accrued benefit cost on December 31, 2016?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d. 700,000
Page 8

SOLUTION - PROBLEM 4

Question 1 Answer A

Current service cost 1,750,000


Past service cost 425,000
Interest expense (10% x 3,500,000) 350,000
Interest income (10% x 2,800,000) ( 280,000)
Employee benefit expense 2,245,000

Question 2 Answer C

Actual return 180,000


Interest income 280,000
Remeasurement loss on plan assets 100,000
Actuarial loss on PBO 200,000
Net remeasurement loss 300,000

Question 3 Answer D

PBO January 1 3,500,000


Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid ( 250,000)
PBO December 31 5,975,000

Question 4 Answer B

FVPA January 1 2,800,000


Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000)
FVPA December 31 4,230,000

Question 5 Answer A

FVPA December 31 4,230,000


PBO December 31 (5,975,000)
Prepaid/accrued benefit cost December 31 (1,745,000)
Page 9
PROBLEM 5 - SHARE OPTIONS

On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par for
P30 per share. The employees exercised the options on January 1, 2019.

Quoted market prices of shares are as follows.

2016 34
2017 39
2018 42
2019 44

The service period is for two years beginning January 1, 2016. The fair value of the share options
cannot be measured reliably.

1. What is the compensation expense for 2016?


a. 400,000
b. 200,000
c. 300,000
d. 800,000

2. What is the compensation expense for 2017?


a. 1,800,000
b. 1,000,000
c. 1,400,000
d. 400,000

3. What is the compensation expense for 2018?


a. 200,000
b. 600,000
c. 400,000
d. 0

4. What amount should be credited to share premium upon exercise of the share options on January 1,
2019?
a. 3,800,000
b. 4,400,000
c. 4,800,000
d. 0
Page 10

SOLUTION - PROBLEM 5

Question 1 Answer A

Question 2 Answer C

Question 3 Answer B

Quoted price Option price Intrinsic value


2016 34 30 4
2017 39 30 9

Cumulative Expense
2016 (200,000 x 4/2) 400,000 400,000
2017 (200,000 x 9) 1,800,000 1,400,000
2018 (200,000 x 3) 600,000
2,400,000

Quoted price - 2018 42


Quoted price - 2017 39
Increase in market price in 2018 3

Question 4 Answer B

Option price (200,000 x 30) 6,000,000


Share options outstanding 2,400,000
Total consideration 8,400,000
Par value (200,000 x 20) 4,000,000
Share premium 4,400,000
Page 11

PROBLEM 6 EARNINGS PER SHARE

An entity reported the following information on January 1, 2016:

Ordinary share capital, P10 par, 800,000 shares 8,000,000


Preference share capital, P50 par, 50,000 shares 2,500,000
12% Bonds payable 5,000,000

The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares.
Dividends on preference shares are in arrears for two years.

The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.

Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the
beginning and ending of 2016. The average market price of the ordinary share was P30 per share and
the market price on December 31, 2016 was P40 per share.

May 1 Issued 60,000 ordinary shares at P25 per share.


July 1 Purchased 100,000 ordinary shares at P15 to be held as treasury.
Oct. 1 Converted bonds with face amount of P2,000,000.
Dec. 31 The net income for 2016 was P5,000,000. The tax rate is 30%.

1. What is the amount of basic earnings per share?


a. 6.02
b. 5.26
c. 5.72
d. 5.42

2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a. 530,000
b. 500,000
c. 590,000
d. 560,000

3. What is the amount of diluted earnings per share?


a. 5.52
b. 4.20
c. 4.07
d. 3.97
Page 12

SOLUTION - PROBLEM 6

Question 1 Answer C

Net income 5,000,000


Preference dividend (10% x 2,500,000) ( 250,000)
Net income - ordinary 4,750,000

January 1 (800,000 x 12/12) 800,000


May 1 ( 60,000 x 8/12) 40,000
July 1 (100,000 x 6/12) ( 50,000)
October 1 ( 2,000 x 80 x 3/12) 40,000
Average shares outstanding 830,000

Basic EPS (4,750,000 / 830,000) 5.72

Question 2 Answer A

Share options 90,000


Treasury shares (1,800,000 / 30) ( 60,000)
Incremental ordinary shares from share options 30,000
Ordinary shares from conversion of preference shares 100,000
Ordinary shares from conversion of bonds payable (5,000 x 80) 400,000
Potential ordinary shares 530,000

Question 3 Answer C

Incremental EPS on Preference shares (250,000 / 100,000) 2.50

Interest on bonds not converted (3,000,000 x 12% x 70%) 252,000


Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) 126,000
Total interest expense 378,000

Incremental EPS on bonds (378,000 /400,000) .94

Net income Shares EPS


Basic EPS 4,750,000 830,000 5.72
Share options 30,000
Diluted EPS 4,750,000 860,000 5.52
Bonds payable 378,000 360,000
Diluted EPS 5,128,000 1,220,000 4.20
Preference shares 250,000 100,000
Diluted EPS 5,378,000 1,320,000 4.07

Potential ordinary shares bonds 400,000


Reported in basic EPS (40,000)
Reported in diluted EPS 360,000
Page 13

PROBLEM 7 STATEMENT OF CASH FLOWS

An entity presented the following comparative financial information:

2017 2016
Property, plant and equipment 2,190,000 1,440,000
Accumulated depreciation 450,000 270,000
Long-term investments 225,000 -
Prepaid expenses 351,000 315,000
Merchandise inventory 1,950,000 1,260,000
Accounts receivable, net of allowance 1,560,000 1,080,000
Cash 690,000 640,000
Share capital-ordinary 3,000,000 2,400,000
Retained earnings 906,000 688,000
Long-term note payable 1,275,000 1,095,000
Accounts payable 309,000 282,000
Dividend payable 201,000 -
Accrued expenses 825,000 -

2017 2016
Net credit sales 7,020,000 3,753,000
Cost of goods sold (3,915,000) (1,881,000)
Gross profit 3,105,000 1,872,000
Expenses, including income tax (2,586,000) (1,374,000)
Net income 519,000 498,000

Accounts receivable and accounts payable relate to merchandise for sale in the normal course of
business. The allowance for bad debts was the same at the end of 2017 and 2016 and no receivables
were charged against the allowance.

Accounts payable are recorded net of any discount and are always paid within the discount period.

The proceeds from the note payable were used to finance the acquisition of property, plant and
equipment. Ordinary shares were sold to provide additional working capital.

1. What amount should be reported as net cash provided by operating activities in 2017?
a. 345,000
b. 165,000
c. 546,000
d. 510,000

2. What amount should be reported as net cash used in investing activities in 2017?
a. 750,000
b. 225,000
c. 975,000
d. 750,000

3. What amount should be reported as net cash provided by financing activities in 2017?
a. 600,000
b. 780,000
c. 750,000
d. 680,000
Page 14

SOLUTION PROBLEM 7

Question 1 Answer A

Net income 519,000


Depreciation (450,000 - 27,000) 180,000
Increase in prepaid expenses ( 36,000)
Increase in inventory (690,000)
Increase in accounts receivable (480,000)
Increase in accounts payable 27,000
Increase in accrued expenses 825,000
Net cash provided - operating 345,000

Question 2 Answer C

Increase in PPE (750,000)


Increase in long-term investments (225,000)
Net cash used - investing (975,000)

Question 3 Answer D

Dividend paid in 2017 (100,000)


Proceeds from share capital 600,000
Proceeds from note payable 180,000
Net cash provides - financing 680,000

Retained earnings - 2016 688,000


Net income - 2017 519,000
Total 1,207,000
Retained earnings - 2017 ( 906,000)
Dividend declared in 2017 301,000
Dividend payable 2017 ( 201,000)
Dividend paid in 2017 100,000
Page 15

PROBLEM 8 ACCOUNTS RECEIVABLE

An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful
accounts based on 5% of annual credit sales. On January 1, 2016, the entity changed the method of
determining the allowance for doubtful accounts using an aging schedule.

In addition, the entity writes off all accounts receivable that are over 1 year old. The following
information relates to the years ended December 31, 2013, 2014, 2015 and 2016:

2016 2015 2014 2013


Credit sales 15,000,000 9,500,000 8,000,000 6,000,000
Collections excluding recovery 11,700,000 8,200,000 6,700,000 4,500,000
Accounts written off during year 200,000 120,000 80,000 None
Recovery of accounts written off 90,000 40,000 25,000 None

Days Account Outstanding Amount Probability of Collection


Less than 16 days 3,000,000 98%
Between 16 and 50 days 1,500,000 80%
Between 51 and 100 days 1,200,000 75%
Between 101 and 200 days 800,000 50%
Between 201 and 365 days 400,000 20%
Over 365 days to be written off 100,000 0%

1. What was the allowance for doubtful accounts on January 1, 2016?


a. 1,175,000
b. 1,040,000
c. 1,240,000
d. 975,000

2. What amount should be reported as allowance for doubtful accounts on December 31, 2016?
a. 1,380,000
b. 1,480,000
c. 2,420,000
d. 1,060,000

3. What amount should be reported as doubtful accounts expense for 2016?


a. 550,000
b. 750,000
c. 450,000
d. 200,000

4. What is the net realizable value of accounts receivable on December 31,2016?


a. 6,900,000
b. 7,000,000
c. 5,520,000
d. 5,620,000
Page 16

SOLUTION PROBLEM 8

Question 1 Answer B

Doubtful accounts expense 2013, 2014 and 2015 (5% x 23,500,000) 1,175,000
Accounts written off 2014 and 2015 ( 200,000)
Recovery of accounts written off 2014 and 2015 65,000
Allowance for doubtful accounts January 1, 2016 1,040,000

Question 2 Answer A

Less than 16 days ( 3,000,000 x 2%) 60,000


Between 16 and 50 (1,500,000 x 20%) 300,000
Between 51 and 100 (1,200,000 x 25%) 300,000
Between 101 and 200 ( 800,000 x 50%) 400,000
Between 201 and 365 ( 400,000 x 80%) 320,000
Allowance for doubtful accounts 12/31/2016 1,380,000

Question 3 Answer A

Allowance January 1, 2016 1,040,000


Recovery 2017 90,000
Doubtful accounts expense (SQUEEZE) 550,000
Total 1,680,000
Writeoffs (200,000 + 100,000) ( 300,000)
Allowance December 31, 2016 1,380,000

Question 4 Answer C

Accounts receivable December 31, 2016 6,900,000


Allowance for doubtful accounts December 31, 2016 (1,380,000)
Net realizable value 5,520,000
Page 17

PROBLEM 9 - SALES TYPE LEASE

An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects
a 12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2016, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000


Fair value of equipment 5,500,000
Residual value unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2016

1. What is the gross investment in the lease?

a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000

2. What is the net investment in the lease?

a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000

3. What is the total financial revenue?


a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000

4. What amount should be recognized as interest income for 2016?


a. 600,480
b. 492,480
c. 536,760
d. 521,280

5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
Page 18

SOLUTION PROBLEM 9

Question 1 Answer A

Gross rentals (900,000 x 8) 7,200,000


Residual value 600,000
Gross investment 7,800,000

Question 2 Answer B

PV of rentals (900,000 x 5.56) 5,004,000


PV of residual value (600,000 x .40) 240,000
Net investment 5,244,000

Question 3 Answer C

Gross investment 7,800,000


Not investment 5,244,000
Total financial revenue 2,556,000

Question 4 Answer D

Net investment 1/1/2016 5,244,000


Advance payment on 1/1/2016 ( 900,000)
Balance January 1, 2016 4,344,000

Interest income for 2016 (12% x 4,344,000) 521,280

Question 5 Answer D

Cost of equipment 3,500,000


PV of unguaranteed residual value ( 240,000)
Initial direct cost 200,000
Cost of goods sold 3,460,000

Sales, excluding present value of unguaranteed residual value 5,004,000


Cost of goods sold 3,460,000
Gross profit on sale 1,544,000
Page 19

PROBLEM 10 CASH AND SHARE ALTERNATIVE

On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can
choose how the purchase is to be settled.

The choices are 50,000 shares with par value of P100 in one years time, or a cash payment equal to
the market value of 40,000 shares on December 31, 2016.

At grant date on January 1, 2016, the market price of each share is P120 and on the date of settlement
on December 31, 2016, the market price of each share is P150.

1. What is the initial measurement of the building?


a. 8,000,000
b. 6,000,000
c. 7,000,000
d. 5,000,000

2. What is the equity component arising from the purchase of the building with share and cash
alternative?
a. 3,000,000
b. 3,200,000
c. 2,000,000
d. 1,000,000

3. What is the interest expense to be recognized on December 31, 2016 if the seller has chosen the
cash alternative?
a. 1,200,000
b. 2,700,000
c. 1,000,000
d. 0

4. What is the share premium on December 31, 2016 if the seller has chosen the share alternative?
a. 3,000,000
b. 1,500,000
c. 1,000,000
d. 2,500,000
Page 20

SOLUTION - PROBLEM 10

Question 1 Answer A

Cost of building equal to cash price 8,000,000

Question 2 Answer B

Cash price of building 8,000,000


Fair value of liability (40,000 shares x 120) (4,800,000)
Equity component 3,200,000

Question 3 Answer A

Fair value of liability 12/31/2016 (40,000 x 150) 6,000,000


Fair value of liability 1/1/2016 4,800,000
Interest expense 1,200,000

Question 4 Answer A

Fair value of compound instrument equal to cash price of building 8,000,000


Par value of shares (50,000 x 100) 5,000,000
Share premium 3,000,000
Page 21

PROBLEM 11 STATEMENT OF FINANCIAL POSITION

The following trial balance of an entity on December 31, 2016 has been adjusted except for income tax
expense.
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 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, 2017.

1. What amount should be reported as current assets on December 31, 2016?


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, 2016?


a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000

3. What is the net income for 2016?


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, 2016?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
Page 22

SOLUTION - PROBLEM 11

Question 1 Answer A

Cash 6,000,000
Accounts receivable 14,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000

Question 2 Answer C

Net sales and other revenue 80,000,000


Cost of goods sold ( 48,000,000)
Expenses ( 12,000,000)
Income before tax 20,000,000
Tax expense (30% x 20,000,000) ( 6,000,000)
Net income 14,000,000

Tax expense 6,000,000


Payment during year (5,000,000)
Income tax payable 1,000,000

Accounts payable 8,200,000


Income tax payable 1,000,000
Redeemable preference 3,000,000
Total current liabilities 12,200,000

Accounts payable per book 9,000,000


Goods in transit FOB destination ( 500,000)
Goods held on consignment ( 300,000)
Adjusted accounts payable 8,200,000

Question 3 Answer B

Net income 14,000,000

Question 4 Answer D

Ordinary share capital 15,000,000


Share premium 4,000,000
Retained earnings 23,000,000
Total shareholders equity 42,000,000

Retained earnings January 1 9,000,000


Net income 14,000,000
Total retained earnings 23,000,000
Page 23
PROBLEM 12 STATEMENT OF COMPREHENSIVE INCOME
An entity reported the following data for the current year:
Net sales 9,500,000
Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow hedge 400,000
Increase in projected benefit obligation due to actuarial assumptions 300,000
Foreign translation adjustment debit 100,000
Revaluation surplus 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 24

SOLUTION - PROBLEM 12

Question 1 Answer B

Net sales 9,500,000


Cost of goods sold (4,000,000)
Gross income 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 ( 800,000)
Income from continuing operations 2,300,000

Question 2 Answer A

Unrealized gain on equity investment at FVOCI 900,000


Unrealized loss cash flow hedge ( 400,000)
Actuarial loss increase in PBO ( 300,000)
Translation adjustment debit ( 100,000)
Revaluation surplus 2,500,000
Net gain - OCI 2,600,000

Question 3 Answer D

Unrealized gain on equity investment at FVOCI 900,000


Actuarial loss on PBO ( 300,000)
Revaluation surplus 2,500,000
Net amount of OCI not reclassified to profit or loss 3,100,000

Question 4 Answer A

Income from continuing operations 2,300,000


Income from discontinued operations 600,000
Net income 2,900,000

Question 5 Answer A

Net income 2,900,000


Net gain OCI 2,600,000
Comprehensive income 5,500,000
Page 25

PROBLEM 13 - INVENTORY

An entity sells a new product. During a move to a new location, the inventory records for the
product were misplaced. The bookkeeper has been able to gather some data for the purchases and
sales records. The July purchases are as follows:

Units Unit cost Total cost


July 5 10,000 65 650,000
10 12,000 70 840,000
15 15,000 60 900,000
25 14,000 55 770,000

On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units
at P100 per unit. Roshe Company has always used a perpetual FIFO inventory costing system.
Gross profit on sales for July was P2,400,000.

1. What was the cost of the inventory on July 31?


a. 3,600,000
b. 1,670,000
c. 770,000
d. 950,000

2. What was the cost of inventory on July 1?


a. 1,390,000
b. 2,400,000
c. 950,000
d. 760,000

3. What is the number of units available on July 1?


a. 34,000
b. 26,000
c. 10,000
d. 9,000
Page 26

SOLUTION - PROBLEM 13

Question 1 Answer D

July 15 ( 3,000 x 60) 180,000


25 (14,000 x 55) 770,000
Inventory July 31 950,000

Question 2 Answer A

Sales 6,000,000
Gross profit 2,400,000
Cost of goods sold 3,600,000

Inventory July 1 (SQUEEZE) 1,390,000


Purchases for July 3,160,000
Goods available for sale 4,550,000
Inventory July 31 ( 950,000)
Cost of goods sold 3,600,000

Question 3 Answer B

July 1 inventory (SQUEEZE) 26,000


July purchases 51,000
Total units available 77,000
July 31 inventory (17,000)
Units sold in July 60,000
Page 27

PROBLEM 14 BOND INVESTMENT AT FVOCI


An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2016 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, 2016, the bonds were quoted at 106.

1. What amount of interest income should be reported for 2016?


a. 400,000
b. 200,000
c. 364,560
d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2016?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2016?
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
2016?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
Page 28

SOLUTION - PROBLEM 13

Date Interest received Interest income Amortization Carrying amount


1/1/16 5,208,000
6/30/16 200,000 182,280 17,720 5,190,280
12/31/16 200,000 181,660 18,340 5,171,940

Question 1 Answer D

Interest January to June 182,280


Interest July to December 181,660
Interest income for 2016 363,940

Question 2 Answer A

Market value on December 31, 2016 (5,000,000 x 106) 5,300,000

Question 3 Answer C

Market value on December 31, 2016 5,300,000


Carrying amount December 31, 2016 (see table of amortization) 5,171,940
Unrealized gain - OCI 128,060

Question 4 Answer C

Market value on December 31, 2016 5,300,000


Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income 600,000
Page 29

PROBLEM 15 LAND AND BUILDING

An entity was incorporated on January 1, 2016 but was unable to begin manufacturing activities until
August 1, 2016 because new factory facilities were not completed until that date. The entity provided
the following information during the year:

2016
Jan. 31 Land and dilapidated building 2,000,000
Feb. 28 Cost of removing building 40,000
Apr. 1 Legal fees 60,000
May 1 Fire insurance premium payment 54,000
May 1 Special tax assessment for streets 45,000
May 1 Partial payment of new building construction 1,500,000
Aug. 1 Final payment on building construction upon completion 1,500,000
Aug. 1 General expenses 300,000
Dec. 31 Asset writeup 750,000

* To acquire the land and building, the entity paid P1,000,000 cash and 10,000 ordinary shares of
P100 par value share which are very actively traded at P170.

* When the old building was removed, the entity paid P40,000, but also received P15,000 from the
sale of salvaged material.

* Legal fees covered the following:


Cost of organization 25,000
Examination of title covering purchase of land 20,000
Legal work in connection with the building construction 15,000

* The fire insurance premium covered premiums for a three-year term beginning May 1, 2016.

* General expenses covered the following for the period January 1, 2016 to August 1, 2016:
President's salary 200,000
Plant superintendent covering supervision of new building 100,000

* Because of the rising land costs, the president was sure that the land was worth at least P750,000
more than what it cost the company.

1. What is the total cost of the land?

a. 2,700,000
b. 2,720,000
c. 2,065,000
d. 2,765,000

2. What is the total cost of the building?

a. 3,140,000
b. 3,144,500
c. 3,119,500
d. 3,000,000
Page 30

SOLUTION - PROBLEM 15

Question 1 Answer D

Cash 1,000,000
Ordinary shares issued at fair value (10,000 x 170) 1,700,000
Initial cost of land 2,700,000
Examination of title 20,000
Special tax assessment 45,000
Total cost of land 2,765,000

Question 2 Answer B

Cost of removing old building 40,000


Sale of salvaged material ( 15,000)
Legal work in connection with building construction 15,000
Fire insurance (54,000 / 3 x 3/12) 4,500
Plant superintendent 100,000
Partial payment on construction 1,500,000
Final payment on construction upon completion 1,500,000
Total cost of building 3,144,500
Page 11

30. Demsel Company provided the following data on December 31, 2016:
Checkbook balance 3,000,000
Bank statement balance 4,000,000
Check drawn on Demsels account, payable to supplier, dated and
recorded on December 31, 2016 but not mailed until January 15, 2017 300,000
Cash in sinking fund 1,500,000
Money market, 120 days due January 15, 2017 2,200,000
Investment in ordinary shares at FVPL 500,000
Deposit in bank closed by BSP 600,000
Investment in redeemable preference shares purchased on December 1, 2016
with redemption date on February 28, 2017 300,000
What amount should be reported as cash and cash equivalents on December 31, 2016?
a. 3,300,000
b. 3,600,000
c. 5,800,000
d. 4,600,000

31. On January 1, 2016, Nicole Company purchased equity securities to be held as available for sale.
On December 31, 2016, the cost and market value were:
Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 4,900,000

On July 1, 2017, the entity sold Security X for P2,500,000. What amount of gain on sale of AFS
securities should be reported in the 2017 income statement?
a. 500,000
b. 400,000
c. 100,000
d. 0

32. Carl Company purchased 10% of another entitys 500,000 outstanding shares on January 1, 2016
for P1,000,000. On December 31, 2016, the entity purchased additional 100,000 shares of the
entity for P3,000,000. There was no goodwill or excess fair value as a result of either acquisition.
The fair value of the 10% interest was P1,800,000 on December 31, 2016. The investee reported
earnings of P6,000,000 for 2016. What amount should be reported as investment in associate on
December 31, 2016?
a. 4,000,000
b. 4,800,000
c. 6,600,000
d. 5,800,000

33. Dianne Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new technology 2,000,000
Design of tools, jigs, molds and dies involving new technology 1,700,000
Modification of the formulation of a new process 1,000,000
Trouble shooting in connection with breakdowns during commercial Production 1,500,000
Seasonal and other periodic changes to existing product 1,300,000
What amount should Rosalie report as research and development expense?
a. 4,700,000
b. 3,700,000
c. 6,000,000
d. 5,000,000