ARTS CPA Review

(Academic Review and Training School, Inc.)

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Tel No.: (054) 472-9104; E-mail: artscparev@yahoo.com.

PREWEEK MATERIALS

PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

A. INCOME AND EXPENSE RECOGNITION

1. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on July
31 for oil sold between the previous December 1 and May 31. Production reports show
the following oil sales:

June 1, 1993-November 30, 1993 $300,000

December 1, 1993-December 31, 1993 50,000
December 1, 1993-May 31, 1994 400,000
June 1, 1994-November 30, 1994 325,000
December 1, 1994-December 31, 1994 70,000

What amount should Rill report as royalty revenue for 1994?

a. $140,000 c. $149,000
b. $144,000 d. $159,000

Explanation:

Choice "c" is correct. Royalty revenue accrued for 1994 is based on 20% of production in
1994.

Production, Jan. 1 thru May 31 [$400,000 − $50,000] $350,000

June 1 through November 30 production 325,000
Production for December 70,000
Total 1994 production $745,000

Royalty revenue on this production equals $149,000 [20% × $745,000].

2. During 1993, Orr Co. incurred the following costs:

Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000

In its 1993 income statement, what should Orr report as research and development
expense?

a. $150,000 c. $350,000
b. $200,000 d. $525,000
Explanation:

Choice "d" is correct. R&D contracted out to a third party, preproduction prototypes and
models costs, and, costs for searching for new products or new process alternatives are
reported as R&D expense.

3. Frame Co. has an 8% note receivable dated June 30, 1991, in the original amount of
$150,000. Payments of $50,000 in principal plus accrued interest are due annually on
July 1, 1992, 1993, and 1994. In its June 30, 1993, balance sheet, what amount should
Frame report as a current asset for interest on the note receivable?

a. $0 c. $8,000
b. $4,000 d. $12,000

Explanation:

Choice "c" is correct. The current asset for interest receivable on June 30, 1993, is the
interest to be received within one year. Interest to be received on July 1, 1993 is: $100,000
balance of note × 8% = $8,000.

4. Dunne Co. sells equipment service contracts that cover a two-year period. The sales
price of each contract is $600. Dunne's past experience is that, of the total dollars spent
for repairs on service contracts, 40% is incurred evenly during the first contract year
and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly
throughout 1992. In its December 31, 1992, balance sheet, what amount should Dunne
report as deferred service contract revenue?

a. $540,000 c. $360,000
b. $480,000 d. $300,000

Explanation:

Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as
deferred revenue. Revenue is recognized, and deferral reduced as the service is performed.
Since repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be
in 1992.

1992 deferral ($600 × 1,000) $600,000

Earned in 1992 (600,000 × 40% × 1/2) (120,000)
Deferral 12-31-92 $480,000

5. Class Corp. maintains its accounting records on the cash basis but restates its financial
statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax
income for 1992. The following information pertains to Class's operations for the years
ended December 31, 1992 and 1991:
1992 1991
Accounts receivable $40,000 $20,000
Accounts payable 15,000 30,000

Under the accrual method, what amount of income before taxes should Class report in its
December 31, 1992, income statement?
 a. $25,000 c. $65,000
b. $55,000 d. $95,000
Explanation:

Choice "d" is correct. $95,000 accrual income before taxes in the December 31, 1992,
income statement.

Cash-basis pretax income for 1992 $60,000

Increase in accts rec. ($40,000 − $20,000) 20,000
(Cash not received for amounts "receivable")
Reduction in accts pay. ($30,000 − $15,000) 15,000
(Cash used to pay down prior payables)
Accrual-basis pretax income for 1992 $95,000

6. Dana Co.'s officers' compensation expense account had a balance of $224,000 at

December 31, 1992, before any appropriate year-end adjustment relating to the
following:

• No salary accrual was made for December 30-31, 1992. Salaries for the two-day period
totaled $3,500.
• 1992 officers' bonuses of $62,500 were paid on January 31, 1993.

In its 1992 income statement, what amount should Dana report as officers' compensation
expense?
a. $290,000 c. $227,500
b. $286,500 d. $224,000

Explanation:
Choice "a" is correct. $290,000 compensation expense for 1992.

Compensation Expense:

Compensation exp before year-end adjustments 224,000

Add: Salary accrual for Dec. 30-31, 1992 3,500
Add: 1992 bonuses not paid until Jan. 31, 1993 62,500
Compensation exp after year-end adjustments 290,000

7. Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax
return for the year ended November 30, 1990. Additional information is as follows:

Rents receivable - November 30, 1990 $1,060,000

Rents receivable - November 30, 1989 800,000
Uncollectible rents written off during the fiscal year 30,000

Under the accrual basis, Marr should report rental revenue of:

a. $1,920,000 c. $2,440,000
b. $1,980,000 d. $2,500,000
Explanation:

Choice "d" is correct. $2,500,000 rental revenue under the accrual basis.

Rents receivable at begin 11/30/89 $ 800,000

Add: Billings accrued 2,500,000
Subtotal 3,300,000
Less: Cash collections (2,210,000)
Write-offs (30,000)
Rents receivable at end 11/30/90 $ 1,060,000

8. At December 31, 1988, a $1,200,000 note payable was included in Cobb Corp.'s liability
account balances. The note is dated October 1, 1988, bears interest at 15%, and is
payable in three equal annual payments of $400,000. The first interest and principal
payment was made on October 1, 1989. In its December 31, 1989 balance sheet, what
amount should Cobb report as accrued interest payable for this note?

a. $135,000 c. $45,000
b. $90,000 d. $30,000

Explanation:

Choice "d" is correct. $30,000 accrued interest payable at Dec. 31, 1989.
Note Payable:

Note payable balance at Dec. 31, 1988 $1,200,000

Less: First payment made Oct. 1, 1989 (400,000)
Note payable balance at Oct. 1, 1989 800,000
Annual interest rate 15%
Annual interest 120,000
Adjustment factor for 3 mos. From 10-1-89 to 12-31-89 × 3/12
Accrued interest payable at Dec. 31, 1989 $ 30,000

9. Haft Construction Co. has consistently used the percentage-of-completion method. On

January 10, 1991, Haft began work on a $3,000,000 construction contract. At the
inception date, the estimated cost of construction was $2,250,000. The following data
relate to the progress of the contract:

Income recognized at 12/31/91 $ 300,000

Costs incurred 1/10/91 through 12/31/92 1,800,000
Estimated cost to complete at 12/31/92 600,000

In its income statement for the year ended December 31, 1992, what amount of gross profit
should Haft report?
a. $450,000 c. $262,500
b. $300,000 d. $150,000

Explanation:

Choice "d" is correct. The gross profit for the percentage-of-completion method is as
follows:
Contract price $3,000,000
Cost to date 1,800,000
Est. cost to complete 600,000
Total cost 2,400,000
Expected gross profit 600,000
Percentage complete (18/24) 75%
Profit to date 450,000
Profit previously recognized (300,000)
1992 profit $ 150,000

10. During 1988, Mitchell Corp. started a construction job with a total contract price of
$600,000. The job was completed on December 15, 1989. Additional data are as
follows:
1988 1989
Actual costs incurred $225,000 $255,000
Estimated remaining costs 225,000 -
Billed to customer 240,000 360,000
Received from customer 200,000 400,000

Under the completed contract method, what amount should Mitchell recognize as gross
profit for 1989?
a. $45,000 c. $80,000
b. $72,000 d. $120,000

Explanation:

Choice "d" is correct. $120,000 gross profit recognized for 1989 under the completed
contract method.

Completed contract method:

Total contract sales price $600,000
Less total cost of contract (225,000 + 255,000) = 480,000
Gross profit recognized when contract is completed $120,000

B. FINANCIAL STATEMENT PRESENTATION

1. For a given year, beginning and ending total liabilities were $8,400 and $10,000,
respectively. At year-end, owners' equity was $26,000 and total assets were $2,000
larger than at the beginning of the year. If new capital stock issued exceeded dividends
by $2,400, net income (loss) for the year was apparently:

a. ($2,800). c. $400.
b. ($2,000). d. $2,800.

ANS: B

2. The following balances have been excerpted from Edwards' balance sheets:

December 31, December 31,

2008 2007
Prepaid Insurance $ 6,000 $ 7,500
Interest Receivable 3,700 14,500
 Salaries Payable 61,500 53,000

Edwards Company paid or collected during 2004 the following items:

Insurance premiums paid $ 41,500

Interest collected 123,500
Salaries paid 481,000

The insurance expense on the income statement for 2008 was:

a. $28,000. c. $43,000.
b. $40,000. d. $55,000.

ANS: C PTS: 1

3. HYSTG Company has sustained heavy losses over a period of time and conditions
warrant that HYSTG undergo quasi-reorganization on December 31, 2011.

 Inventory with cost of P 6,500,000 was recorded on December 31, 20122 at its
market value of P 6,000,000.
 Property, plant and equipment were recorded on December 31, 2011 at P
12,000,000 net of accumulated depreciation. The sound value was P 8,000,000.
 On December 31, 2011, the share capital is P 7,000,000 consisting of 700,000
shares with par value of P 10, the share premium is P 1,600,000, and the deficit in
retained earnings is P 900,000.
 The par value of the share is to be reduces from P 10 to P5.

Immediately, after the quasi-reorganization, what is the total shareholder’s equity?

a. P 3,300,000 c. P 3,900,000
b. P 3,500,000 d. P 3,700,000

Explanation: Answer D

To reduce the property, plant and equipment to sound value:

Retained Earnings P 4,500,000
Accumulated Depreciation P 4,500,000

To reduce the par value of the share:

Share Capital (700,000X5) P 3,500,000
Share Premium P 3,500,000

To eliminate the deficit:

Share Premium P 4,900,000
Retained Earnings P 4,900,000

The inventory is not adjusted anymore because it is already recorded at its market value.
After adjustment, the resulting balances are:

Share Capital P3,500,000

Share Premium 200,000
Total Shareholder’s Equity P3,700,000

4. On January 1, 2011, PAASA.COM Company classified as held for sale a noncurrent asset
with a carrying amount of P 5,000,000. On this date, the asset is expected to be sold
for P 4,600,000. Reasonable disposal cost to be incurred on sale is expected at P
200,000. By December 31, 2011, the asset had not been sold and management after
considering its options decided to place back the noncurrent asset into operations. On
that date, the entity estimated that the noncurrent asset is expected to be sold at P
4,300,000 with disposal cost of P 50,000. The carrying amount of the noncurrent asset
is P 4,000,000 on December 31, 2011 if the noncurrent asset is not classified as held for
sale.

What is the carrying amount of the asset that should be reported in the Statement of
Financial Position on December 31, 2011?
a. P 5,000,000 c. P 4,400,000
b. P 4,000,000 d. P 4,250,000

Explanation: Answer B

Carrying amount- December 31, 2011 P 4,000,000

Fair value less cost to sell- December 31, 2011 P 4,250,000

Under PFRS 5, paragraph 27, an entity shall measure a noncurrent asset that ceases to be
classified as held for sale at the lower of the carrying amount on the basis that the asset
had never been classified as held for sale, and its recoverable amount on the date of
decision not to sell.

5. On January 1, 2009, the capital of console company was P1 700 000 and on December
31, 2009, the capital was P2 400 000. During the current year, console withdrew
merchandise costing P100 000 and with sales value of P180 000, and paid a P1 000 000
note payable of the business with interest of 12% for six months with check drawn on
personal checking account. What was the net income or lose on 2009?

a. 260 000 income c. 180 000 income

b. 260 000 loss d. 180 000 loss

Explanation: Answer B

Capital – December 31 2 400 000

Add: withdrawals at cost 100 000
Total 2 500 000
Less: capital-January 1 1 700 000
Additional investment 1 060 000 2 760 000
Net loss (260 000)

The additional investment is determined as follows:

Payment of note payable out of personal checking account 1 000 000

Interest (1 000 000 x 12% x 6/ 12) 60 000
Total 1 060 000
6. Aubrey Company provided the following data:
12/31/2008 12/31/2009
Share capital (P100 par value) 5 000 000 7 000 000
Share premium 500 000 1 500 000
Retained earnings 3 500 000 4 500 000
During 2009, the entity declared and paid cash dividend of P1 000 000 and also declared
and issued a stock dividend. There were no other changes in shares issued and outstanding
during 2009. Net income for 2009 was?

a.5 000 000 c.1 000 000

b.2000 000 d.4 000 000

Explanation: ANSWER A

Increase in share capital (7 000 000-5 000 000) 2 000 000

Increase in share premium (1 500 000-500 000) 1 000 000
Stock dividend 3 000 000
Retained earnings-12/31/2009 4 500 000
Stock dividend 3 000 000
Cash dividend 1 000 000
Total 8 500 000
Retained earnings-12/31/2008 (3 500 000)
Net income 5 000 000

7. Presented below are changes in the accounts of Java Company for the current year.
Increase
(Decrease)
Cash 1 500 000
Accounts receivable (net) 3 500 000
Inventory 3 900 000
Equipment (1 000 000)
Accounts payable (800 000)
Bonds payable 2 000 000
During the year, java sold P100 000 shares with P20 par value for P30 per share and
received cash in full. Dividend of P4 500 000was paid in cash during the year. Java
borrowed P4 000 000 from the bank and maid interest payment of P600 000. Java had no
other loan payable. Interest of P400 000 was payable at December 31. Interest payable at
January 1 was P100 000. Equipment of P2 000 000 was donated by a shareholder during
the year. What was the net income for the current year?
a.9 200 000 c.4 900 000
b.4 800 000 d.4 300 000

Explanation: ANSWER C
Effect on equity
Increase in cash 1 500 000
Increase in A/R 3 500 000
Increase in inventory 3 900 000
Decrease in investment (1 000 000)
Increase in equipment 3 000 000
Decrease in A/P 800 000
Increase in bonds payable (2 000 000)
Increase in bank loan payable (4 000 000)
 Increase in accrued interest payable (300 000)
Net increase in equity 5 400 000
Add: dividend paid 4 500 000
Less: increase in share capital (3 000 000)
Increase in donated capital (2 000 000)
Net income 4 900 000

8. Oakwood Company provided the following data for the current year:

Cash balance, beginning of the year 1,300,000

Cash flow from financing activities 1,000,000
Total shareholders’ equity, end of year 2,300,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of year 2,000,000

What is the cash balance at the end of current year?

a. 1,200,000 c. 1,400,000
b. 1,600,000 d. 1,700,000

Explanation: ANSWER A

Cash balance, beginning 1,300,000

Cash flow from financing activities 1,000,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)

Cash balance, ending P1,200,000

9. Charade Company uses the direct method to prepare its statement of flows. Charade
has the following cash flow during 2011:

Cash receipt from issuance of ordinary shares 800,000

Cash receipt from customer 400,000
Cash receipt from dividends on long term investment 60,000
Cash receipt from repayment of loan made
to another entity 440,000
Cash payment for wages and other operating expenses 240,000
Cash payment for insurance 20,000
Cash payment for dividends 40,000
Cash payment for taxes 80,000
Cash payment to purchase land 160,000

What is the net cash provided (used) from operating activities?

a. (40,000) c. 80,000
b. 60,000 d. 120,000

Explanation: ANSWER D

Cash receipt from customer 400,000

Cash receipt from dividends 60,000

Total 460,000
Less: cash payment for:
Wages and other operating expenses 240,000
Insurance 20,000
Taxes 80,000
340,000
Net cash provided by operating activities P120,000

10. Pale Company uses the direct method to prepare its statement of cash flow.

Pale had the following cash flows during 2011:

Cash receipt from issuance of bonds 800,000

Cash receipt from issuance of ordinary shares 1,400,000
Cash receipt from customers 700,000
Cash receipt from dividends on
long term investment 105,000
Cash receipt from repayment of loans made
To another company 660,000
Cash payment for wages and other
operating expenses 420,000
Cash payment for reacquisition of treasury shares 250,000
Cash payments for dividends 70,000
Cash payment for taxes 140,000
Cash payment to purchase land 280,000

What is the net cash provided (used) from financing activities?

a. 1,530,000 c. 1,880,000
b. 1,670,000 d. 1,950,000

Explanation: ANSWER C

Cash receipt from issuance of bonds 800,000

Cash receipt from issuance of ordinary shares 1,400,000
Total 2,200,000
Less: cash payment for:
Reacquisition of treasury shares 250,000
Dividends 70,000 320,000

Net cash provided from financing activities P1,800,000

11. The electricity account of Velvet Company for the year ended June 30, 2015 was as the
following:

Opening balances for the electricity accrual of July 1, 2014 P 30, 000
Payments made during the year:
08/01/14- for three months to July 31, 2014 60, 000
 11/01/14- for three months to October 31, 2014 72, 000
02/01/15- for three months to January 31, 2015 90, 000
06/30/15- for three months to April 30, 2015 84, 000

What amount of electricity expense should Velvet Company report in its June 30, 2015
Statement of Comprehensive Income?

a. 306, 000 c. 332, 000

b. 324, 000 d. 342, 000

Explanation: ANSWER C

Total payment made P 306, 000

Accrued electricity, end balance (84,000x2/3) 56, 000
Total P 362, 000
Accrued electricity, beginning balance 30, 000
Electricity Expense P 332, 000

12. Mix Company, a toy retailer sells toy for P 100. A voucher entitling the bearer to a
discount of P50 on a subsequent purchase of the same type of toy is issued with each
sale. The retailer has a historical experience that for every two vouchers issued, one is
redeemed. Mix Company has sold 1, 000 toys and has 1, 000 vouchers as of December
31, 2014. Using the residual method of allocating the proceeds, what of amount revenue
from sale of toys should Mix Company report in its December 31, 2014 profit or loss?

a. 25, 000 c. 75, 000

b. 50, 000 d. 100, 000

Explanation: ANSWER C

Residual Method:
Total Proceed (1,000x100) P 100, 000
Less: Fair Value of Vouchers (1,000x1/2x50) 25, 000
Fair Value of toys P 75, 000

13. The accounts and balances shown below were gathered from Paynter Corporation's trial
balance on December 31, 2007. All adjusting entries have been made.

Wages Payable ........................................... $ 25,600

Cash .................................................... 17,700
Mortgage Payable ........................................ 151,600
Dividends Payable ....................................... 14,000
Prepaid Rent ............................................ 13,600
Inventory ............................................... 81,800
Sinking Fund Assets ..................................... 52,400
Short-Term Investments .................................. 15,200
Premium on Bonds Payable ................................ 4,600
Stock Investment in Subsidiary .......................... 102,400
Taxes Payable ........................................... 22,800
 Accounts Payable ........................................ 24,800
Accounts Receivable ..................................... 36,600

The amount that should be reported as current assets on Paynter Corporation's balance
sheet is
a. $151,300. c. $217,300.
b. $164,900. d. $267,300.

ANS: B PTS:

14. The December 31, 2007, balance sheet of Madden Inc., reported total assets of
$1,050,000 and total liabilities of $680,000. The following information relates to the
year 2008:

• Madden Inc. issued an additional 5,000 shares of common stock at $25

per share on July 1, 2008.
• Madden Inc. paid dividends totaling $80,000.
• Net income for 2008 was $110,000.
• No other changes occurred in stockholders' equity during 2008.

The stockholders' equity section of the December 31, 2008, balance sheet would report a
balance of:

a. $400,000. c. $685,000.
b. $525,000. d. $835,000.

ANS: B

15. The financial statements of Cresent Corporation for 204 and 2009 contained the
following errors:

2008 2009
Ending Inventory $14,000 overstated $20,000 understated
Rent Expense $4,800 understated $6,600 overstated

Assuming that none of the errors were detected or corrected, by what amount will 2008
operating income be overstated or understated?
a. $9,200 overstated c. $18,800 understated
b. $9,200 understated d. $18,800 overstated

ANS: D

C. ACCOUNTING FOR ASSETS

1. On December 31, 2011, the cash account of Roel Company showed the following details:

Undeposited collections 60,000

Cash in bank – PCIB checking account 500,000
Cash in bank – PNB (overdraft) ( 50,000)
Undeposited NSF check receive from customer,
dated December 1, 2011 15,000
Undeposited check from a customer, dated January 15, 2012 25,000
Cash in bank – PCIB (fund for payroll) 150,000
Cash in bank – PCIB (saving deposit) 100,000
Cash in bank –PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed share held as trading investment 120,000

On December 31, 2011, what total amount should be reported as “cash and cash
equivalents”?

a. 2,810,000 c. 2,910,000
b. 2,760,000 d. 2,930,000

ANS: A

Undeposited collections 60,000

PCIB checking account 500,000
PCIB payroll fund 150,000
PCIB saving deposit 100,000
PCIB money market 2,000,000
Total cash and cash equivalents 2,810,000

2. The postdated customer check of P70,000 should be reverted to accounts receivable.

The outstanding check of P40,000 is deducted from the cash in Allied bank because the cash
balance is per bank statement.
 The bond sinking fund is shown as a noncurrent investment.
 The vouchers paid should be recorded as expenses.
 The IOUs should be shown as advance to employees.
Islander Company provided the following information with respect to its cash and cash
equivalents on December 31, 2011

Checking account at First Bank (200,000)

Checking account at Second Bank 3,500,000
Treasury bounds 1,000,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account – restricted (in equivalent pesos) 2,000,000
Postage stamps 50,000
Employee’s postdated check 300,000
IOUs from president’s brother 300,000
Credit memo from a vendor for a purchase return 80,000
Traveler’s check 300,000
Not – sufficient – fund check 150,000
Petty cash fund (P20,000) in currency and expenses
receipt for (P30,000) 50,000
money order 180,000

What amount should be reported as unrestricted cash on December 31, 2011?

 a. 4,800,000 c. 4,090,000
b. 4,900,000 d. 4,930,000

ANS: B

Solution:
Checking account at second bank 3,500,000
Payroll account 500,000
Value added tax account 400,000
Traveller’s check 300,000
Petty cash fund 20,000
Money order 180,000
Total unrestricted cash 4,900,000

3. The following data pertain to the cash transactions and bank account of McBride
Company for May of the current year:

Cash balance per accounting record 1,719,000

Cash balance per bank statement 3,195,000
Bank service charge 10,000
Debit memo for the cost of printed checks delivered
By the bank; the charge has not been recorded in
The accounting record 12,000
Outstanding checks 685,000
Deposit of May 30 not recorded by bank until June 1 500,000
Proceeds of a bank loan on May 30, not recorded in
The accounting record, net of interest of P30,000 570,000
Proceeds from a customer’s promissory note, principal
Amount P800,000 collected by the bank not taken
Up in the accounting record with interest 810,000
Check No. 1086 issued to a supplier entered in yhe
Accounting records as P210,000 but deducted in the
Bank statement at an erroneous amount of 120,000
Stolen check lacking an authorized signature deducted
From Mcbride’s account by the bank in error 80,000
Customer check returned by the bank marked NSF,
Indicating that the customer’s balance was not
Adequate to cover the check; no entry has been
Made in the accounting record to record the
Returned check 77,000

What is the adjusted cash in bank?

a. 2,820,000 c. 3,195,000
b. 3,200,000 d. 3,000,000

ANS: D

Solution:
 Balance per book 1,719,000
Service charge ( 10,000)
Debit memo for printed checks ( 12,000)
Proceeds of bank loan 570,000
Proceeds of customer’s note 810,000
NSF check ( 77,000)

Adjusted book balance 3,000,000

Balance per bank 3,195,000

Outstanding checks ( 685,000)
Deposit in transit 500,000
Bank error in recording check ( 90,000)
Stolen check deducted by bank in error 80,000

Adjusted bank balance 3,000,000

4. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50%
of Delta's customers take advantage of the discount. Delta uses the gross method of
recording sales and trade receivables. An analysis of Delta's trade receivables balances at
December 31, 1993, revealed the following:

Age Amount Collectible

0-15 days $100,000 100%
16-30 days 60,000 95%
31-60 days 5,000 90%
Over 60 days 2,500 $500
$167,500
In its December 31, 1993, balance sheet, what amount should Delta report for allowance for
discounts?
a. $1,000 c. $1,675
b. $1,620 d. $2,000

ANS: A

$1,000 allowance for discounts at 12/31/93.

Accounts receivable - 0-15 days $100,000

50% of customers take 2% discount × 1%
Allowance for discounts at 12/31/93 $ 1,000

5. Foster Co. adjusted its allowance for uncollectible accounts at year-end. The general ledger
balances for the accounts receivable and the related allowance account were $1,000,000
and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its
allowance for uncollectible accounts. Accounts receivable were estimated to be 5%
uncollectible. What amount should Foster record as an adjustment to its allowance for
uncollectible accounts at year-end?
a. $10,000 decrease. c. $50,000 decrease.
b. $10,000 increase. d. $50,000 increase.

ANS: B
Under the percentage-of-receivables method the ending balance in the allowance account is
equal to the total estimated uncollectible amount. Foster Co. would have a balance of
 $50,000 ($1,000,000 x 5%) in its allowance for uncollectible accounts at year end. Using
the BASE format the adjustment would equal;

Allowance for uncollectible accounts:

Beginning balance (given) $40,000
Add expense (squeezed) 10,000
Subtotal (added up) 50,000
Subtract write offs (none given) 0
Ending balance (calculated) $50,000

JE for above:

Bad debt expense $10,000

Allowance for uncollectible accounts $10,000

6. On December 31, 2012, Chang Company sold a machine to Door Company in exchange for
noninterest bearing note requiring ten annual payment of P100,000. Door made the first
payment on December 31,2012The market interest rate for similar notes at date of issuance
was 8%. information on present value factor is :

Period Present value of 1 at 8% Present value of ordinary annuity of 1at 8%

9 0.50 6.25
10 0.46 6.71

In its December 31,2012 statement of financial position, what amount should Chang report
as notes receivable?

a. 625,000 c. 460,000
b. 400,000 d. 671,000
ANS: A

Present value of notes receivable (P100, 000 x 6.25) P625, 000

7. Appari Bank granted loan to a borrower on January 1, 2012. The interest rate on the loan is
10% payable annually starting December 31, 2012. The loan matures in five years on
December 31, 2016. The data related to the loan are:

Principal amount 4,000,000

Direct origination cost 61,500
Origination fee received from borrower 350,000

The effective rate on the loan after considering the direct origination cost and origination fee
received is 12%. What is the carrying amount of the loan receivable on January 1, 2012?

a. 4,000,000 c. 4,411,500
b. 4,650,000 d. 3,711,500

ANS: D
 Origination fee received 350,000
Direct origination cost ( 61,500)
Unearned interest income 288,500

Note receivable 4,000,000

Unearned interest income ( 288,500)
Carrying amount-January 1,2012 3,711,500

8. Easy Company sells directly to retail customers. On Jan. 1, 2009, the balance of the account
receivable was P2,070,000 while the allowance for doubtful accounts was credit off P78,000.
The following data are gathered.

Credit sales Writeoffs Recoveries

2006 11,100,000 260,000 22,000
2007 12,250,000 295,000 37,000
2008 14,650,000 300,000 36,000
2009 15,000,000 310,000 42,000

Easy Company should record doubtful accounts expense for 2009 at:

a. 268,000 c. 300,000
b. 310,000 d. 222,000

ANS: C
Credit sales Writeoffs Recoveries
2006 11,100,000 260,000 22,000
2007 12,250,000 295,000 37,000
2008 14,650,000 300,000 36,000
38,000,000 855,000 95,000

9. During 1994, Kam Co. began offering its goods to selected retailers on a consignment basis.
The following information was derived from Kam's 1994 accounting records:

Beginning inventory $122,000

Purchases 540,000
Freight in 10,000
Transportation to consignees 5,000
Freight out 35,000
Ending inventory-held by Kam 145,000
Ending inventory-held by consignees 20,000

In its 1994 income statement, what amount should Kam report as cost of goods sold?
a. $507,000 c. $527,000
b. $512,000 d. $547,000

ANS: B

Rule: Consignor must include consigned goods (in the hands of the consignee) in his own
inventory, at his cost plus warehousing costs of consignor before goods are transferred to
consignee plus shipping costs to consignee.
 Beginning inventory $ 122,000
Add:
Purchases 540,000
Freight in 10,000
Transportation to consignees 5,000
Cost of goods available for sale 677,000
Less: ending inventory
Held by Kam (145,000)
Held by consignees (20,000)
Cost of goods sold $ 512,000

10. Moss Co. has determined its December 31, 1992, inventory on a FIFO basis to be $400,000.
Information pertaining to that inventory follows:

Estimated selling price $408,000

Estimated cost of disposal 20,000
Normal profit margin 60,000
Current replacement cost 360,000
Moss records losses that result from applying the lower of cost or market rule. At December
31, 1992, what should be the subsequent valuation of Moss' inventory?
a. $400,000 c. $360,000
b. $388,000 d. $328,000

ANS: D

LOWER OF NRV OR COST PRINCIPLE.

Cost (FIFO) $ 400,000

NRV:

Est. Selling Price $408,000

Less: Cost of Disposal (20,000)
Floor: Net Selling Price (ceiling) 388,000
Less: Normal profit margin (60,000)
328,000

11. A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's
accounting records showed the following:

Inventory, January 1 $ 35,000

Purchases, January 1 through May 1 200,000
Sales, January 1 through May 1 250,000
Inventory not damaged by flood 30,000
Gross profit percentage on sales 40%
What amount of inventory was lost in the flood?
a. $55,000 c. $120,000
b. $85,000 d. $150,000

ANS: A

Choice "a" is correct. The amount of inventory lost in the flood is calculated as
follows: Inventory = Beg inventory + Purchases - Sales reduced to a cost basis
 Inventory = $35,000 + $200,000 - ($250,000 x (1-.40)) = $235,000 - $150,000 =
$85,000: Inventory lost in the flood = $85,000 - $30,000 = $55,000

Choice "b" is incorrect. This answer is the total inventory, not the amount of inventory lost
in the flood. Choice "c" is incorrect. This answer is the sales reduced to a cost basis minus
the inventory not lost in the flood, not the amount of inventory lost in the flood. Choice "d"
is incorrect. This answer is the sales reduced to a cost basis, not the amount of inventory
lost in the flood.

12. Gracia Comp. uses the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below:

MARKERS PENS HIGHLIGHTERS

Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a
Percentage of selling price 25% 25% 10%

What is the measurement of the work in process inventory?

a. 720,000 c. 676,000
b. 728,000 d. 694,000

ANS: A
HISTORICAL COST NRV SALE
Markers 240,000 312,000
240,000
Pens 188,000 200,000
188,000
Highlighters 300,000 292,000
292,000
720,000
The measurement at the lower at cost or net realizable value shall be applied on an
individual basis or item by item.

13. Aman Company provides the following data with respect to its inventory:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated per sale contract 100,000
Items in receiving department, returned by
the customer, in good condition 50,000
Items ordered and in the receiving department, invoice not receive 400,000
Items ordered, invoice received but goods not received.
Freight is on account of seller 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused by
Aman Company because of damage 180,000
Items include in count, damage and unsalable 50,000
Items in the shipping department 250,000

What is the correct amount of inventory?

 a. 5,700,000 c. 5,800,000
b. 6,000,000 d. 5,150,000

ANS: A

Items counted in the bodega 4,000,000

Items included in the count specifically segregated per sale contract (100,000)
Items in receiving department, returned
by the customer, in good condition 50,000
Items ordered and in the receiving department, invoice not receive 400,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items include in count, damage and unsalable (50,000)
Items in the shipping department 250,000
5,700,000
14. Steven Company began operations in 2011. For the year ended December 31, 2011, Steven
made available the following information:

Total merchandise purchases for the year 7,000,000

Merchandise inventory on December 31 1,400,000
Collection from customers 4,000,000

All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all
receivables are collectible. What is the balance of accounts receivable on December 31,
2011?
a. 1,000,000 c. 5,000,000
b. 3,840,000 d. 5,800,000

ANS: B

Purchases 7,000,000
Inventory – December 31 (1,400,000)
Cost of goods sold 5,600,000
Markup on cost (40% × 5,600,000) 2,240,000
Sales (140% × 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts receivable 3,840,000

15. Union Company uses the FIFO retail method of inventory valuation. The following
information is available:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdown 1,000,000
Sales revenue 4,500,000
What is the estimated cost of ending inventory?
a. 1,200,000 c. 1,000,000
b. 1,040,000 d. 960,000

ANS: A
Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000

Sales ( 4,500,000)
Ending inventory 2,000,000

FIFO cost (2,000,000 × 60%) 1,200,000

16. The following data pertains to Tyne Co.'s investments in marketable equity securities:

Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000

What amount should Tyne report as unrealized gain (loss) in its 20X2 income statement?
a. $55,000 c. $60,000
b. $50,000 d. $65,000

ANS: A

Choice "a" is correct, $55,000 unrealized holding gain on trading securities reported in 1995
income statement:
Trading Portfolio Fair Value
12/31/X2 $155,000
12/31/X1 (100,000)
Unrealized gain, reflected in income $ 55,000

17. The following data pertains to Tyne Co.'s investments in marketable equity securities:
Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000

What amount should Tyne report as net unrealized loss on available-for-sale marketable
equity securities at December 31, 20X2, in accumulated other comprehensive income on the
balance sheet?
 a. $0 c. $15,000
b. $10,000 d. $20,000

ANS: D

Choice "d" is correct, $20,000 net unrealized loss on available-for-sale securities reported as
a separate component of other comprehensive income on the statement of comprehensive
income and as a separate component of accumulated other comprehensive income on the
balance sheet:
Available-for-Sale Portfolio
Cost $150,000
12/31/X2 fair value (130,000)
Net unrealized loss at 12/31/X2 $ 20,000

18. At year-end, Rim Co. held several investments with the intent of selling them in the near
term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000,
and equity securities purchased for $35,000. At year-end, the bonds were selling on the
open market for $105,000 and the equity securities had a market value of $50,000. What
amount should Rim report as trading securities in its year-end balance sheet?
a. $50,000 c. $142,000
b. $127,000 d. $155,000

ANS: D

Trading securities, both debt and equity, are to be reported at fair value at the end of the
current reporting period.

Bonds FMV at year end $105,000

Equities FMV at year end 50,000
Total reportable amount $155,000

19. Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993.
Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies. During 1993, South earned $80,000 and paid
dividends of $50,000. South reported earnings of $100,000 for the six months ended June
30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant
sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on
October 1, 1994. In Grant's December 31, 1993, balance sheet, what should be the
carrying amount of this investment?
a. $200,000 c. $224,000
b. $209,000 d. $230,000

ANS: B
Equity interest 100% × 30% = 30%

Purchase price 1/2/93 $ 200,000

Add: 1993 income 80,000 × 30% = 24,000
Less: 1993 dividends
50,000 × 30% = (15,000)
Balance at 12/31/93 209,000
Add: 1994 income - 1/2 yr 100,000 × 30% = 30,000
Balance at 6/30/94 239,000
Percentage sold 50%
 Cost of half sold 119,500
Selling price 150,000
Gain on sale $ 30,500

20. Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock.
Dubro's stock outstanding at December 31, 1993, is as follows:

10% cumulative preferred stock $100,000

Common stock 700,000

Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred
shareholders for the year ended December 31, 1993. How much total revenue should Moss
record due to its investment in Dubro?
a. $22,000
b. $20,000
c. $70,000
d. $50,000
 ANS: A
Since Moss owns 40% of Dubro's common stock, the equity method is appropriate.
Preferred Stock:
$100,000 x 10% = $10,000 dividends x 20% ownership = $2,000 dividends received
Common Stock:
net income $60,000
less pref’d dividends (10,000)
net income available to common shareholders 50,000
Moss' percentage owned x 40% = $20,000 equity in earnings

Choice "a" is correct, $20,000 from equity in earnings plus $2,000 from dividend revenue.

21. Pear Co.'s income statement for the year ended December 31, 1992, as prepared by Pear's
controller, reported income before taxes of $125,000. The auditor questioned the following
amounts that had been included in income before taxes:

Equity in earnings of Cinn Co. $ 40,000

Dividends received from Cinn 8,000
Adjustments to profits of prior years for arithmetical errors in depreciation (35,000)

Pear owns 40% of Cinn's common stock. Pear's December 31, 1992, income statement
should report income before taxes of:
a. $85,000 c. $120,000
b. $117,000 d. $152,000

ANS: D

The $40,000 equity in earnings of Cinn is properly included in income. Pear owns 40% of
Cinn and uses the equity method. Thus, equity in earnings is included in the income
statement while dividends received are not. The $35,000 is a prior period adjustment and
should be reported as an adjustment to the opening balance of retained earnings, not on
the current period income.

Income as reported $ 125,000

Dividends received (8,000)
Prior period adjustment 35,000
Income before taxes $ 152,000

22. In 1990, Neil Co. held the following investments in common stock:
• 25,000 shares of B & K, Inc.'s 100,000 outstanding shares. Neil's level of ownership gives
it the ability to exercise significant influence over the financial and operating policies of B &
K.
• 6,000 shares of Amal Corp.'s 309,000 outstanding shares.

During 1990, Neil received the following distributions from its common stock investments:

November 6 − $30,000 cash dividend from B & K.

November 11 − $1,500 cash dividend from Amal.
December 26 − 3% common stock dividend from Amal.

The closing price of this stock on a national exchange was $15 per share. What amount of
dividend revenue should Neil report for 1990?
a. $1,500 c. $31,500
b. $4,200 d. $34,200

ANS: A

Choice "a" is correct, $1,500 dividend revenue should be reported for 1990, representing
the cash dividend from Amal. The $30,000 cash dividend from B & K is a return of capital as
is any dividend under the equity method, since the investment account is reduced. The 3%
stock dividend from Amal means more shares, representing the same proportional piece of
the pie. It is not income.
23. On January 1, 2011, Alaindog company purchased as a long-terminvestment P5,000,000 face
value of Gaspitoy company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10%
interest. The bonds mature on January 1, 2016 and pay interest annually on December 31.
Alaindog uses the interest method of amortization. What is the carrying amount of the
investment (rounded to nearest P100) on December 31, 2012?
a. 4,680,000 c. 4,618,000
b. 4,662,000 d. 4,562,000
ANS: A

C a r r y in g a m o u n t - J a n u a r y 1 , 2 0 1 1 4 ,5 6 2 ,0 0 0

A m o r t iz a t io n o f d is c o u n t f o r 2 0 1 1

I n t e r e s t in c o m e ( 4 , 5 6 2 , 0 0 0 x 1 0 % ) 4 5 6 ,2 0 0

I n t e r e s t r e c ie v e d ( 5 , 0 0 0 , 0 0 0 x 8 % ) 4 0 0 ,0 0 0 5 6 ,2 0 0

C a r r y in g a m o u n t - D e c e m b e r 3 1 , 2 0 1 1 4 ,6 1 8 ,2 0 0

A m o r t iz a t io n o f d is c o u n t f o r 2 0 1 2

I n t e r e s t in c o m e ( 4 , 6 1 8 , 2 0 0 x 1 0 % ) 4 6 1 ,8 0 0

I n t e r e s t r e c ie v e d ( 5 , 0 0 0 , 0 0 0 x 8 % ) 4 0 0 ,0 0 0 6 1 ,8 2 0
C a r r y in g a m o u n t - D e c e m b e r 3 1 , 2 0 1 2 4 ,6 8 0 ,0 2 0

24. On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000
plus transaction cost of P101,500 with a yield rate of 8%. The bonds mature on December
31, 2015. And pay interest annually on December 31. The carrying amount of the
investment on December 31, 2011 using the effective interest method is P5,333,620. What
is the initial acquisition cost of the bond investment?
a. 5,401,500 c. 5,198,500
b. 5,300,000 d. 5,398,500
ANS: A

Carrying amount – December 31, 2011 5,333,620

Add: Nominal interest (5,000,000 x 10%) 500,000
Total 5,833,000
Divide by (100+8%) 108%
Total acquisition cost 5,401,500

25. Cart Co. purchased an office building and the land on which it is located for $750,000 cash
and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at
$960,000, 60% of which is allocated to the building. At what amount should Cart record the
building?
a. $500,000 c. $600,000
b. $576,000 d. $960,000

ANS: C

The $1,000,000 total cost ($750,000 cash + $250,000 mortgage) should be allocated to the
building and the land separately. There is no other information with which to perform this
allocation other than the property tax assessment. So, 60% of the $1,000,000, or
$600,000, is allocated to the building.

Choice "a" is incorrect. This answer is the $750,000 cash price less the $250,000 mortgage.
Choice "b" is incorrect. This answer is computed as 60% of the assessed value of $960,000.
The cost that should be allocated is the total purchase price of the land and building, not
the assessed value.
Choice "d" is incorrect. This answer is the assessed value. Even if the assessed value were
to be allocated, the full assessed value is not allocated to the building. The land has to be
worth something.

26. Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related
to a newly constructed building. The depreciation was computed correctly for tax purposes.
 The tax rate for the current year was 40%. What was the impact of the error on Miller's
financial statements for the prior year?

a. Understatement of accumulated depreciation of $24,000.

b. Understatement of accumulated depreciation of $40,000.
c. Understatement of depreciation expense of $24,000.
d. Understatement of net income of $24,000.

ANS:B

An understatement (failure to report) of depreciation (expense) would certainly understate

accumulated depreciation by the same amount, gross of tax. [Note that three of the
answers listed are net of tax and that only one of them is gross of tax. Because there can
be only one correct answer, an initial thought would be that the "odd man out" answer is
probably correct.

27. Oak Co., a newly formed corporation, incurred the following expenditures related to land
and building:

County assessment for sewer lines $ 2,500

Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000

At what amount should Oak record the land?

a. $138,125 c. $154,125
b. $153,500 d. $175,625

ANS: C

The cost of land includes all costs to acquire the land and get it ready for use:
Cash paid for land $135,000
+ Title search fees 625
+ County assessment 2,500
+ Removal of building 16,000
Total cost of land $154,125

28. In January 1994, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law
to restore the land to its original condition at an estimated cost of $180,000. Vorst believes
it will be able to sell the property afterwards for $300,000. During 1994, Vorst incurred
$360,000 of development costs preparing the mine for production and removed and sold
60,000 tons of ore. In its 1994 income statement, what amount should Vorst report as
depletion?
a. $135,000 c. $150,000
b. $144,000 d. $159,000

ANS: B

The depletion base equals the purchase price ($2,640,000) plus the development costs
($360,000) plus the estimated restoration costs ($180,000) less the expected salvage value
($300,000). Depletion is $2.40 per ton ($2,880,000 / 1,200,000 tons). Depletion expense is
$144,000 ($2.40 per ton × 60,000 tons sold).

29. Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated
at cost, consisted of the following:
12/31/92 12/31/91
Land $ 25,000 $ 25,000
Buildings 195,000 195,000
Machinery & equipment 695,000 650,000
915,000 870,000
Less accumulated depreciation 400,000 370,000
$515,000 $500,000
 Weir's depreciation expense for 1992 and 1991 was $55,000 and $50,000, respectively.
What amount was debited to accumulated depreciation during 1992 because of property,
plant, and equipment retirements?
a. $40,000 c. $20,000
b. $25,000 d. $10,000

ANS: B

Debits to accumulated depreciation can be determined as follows:

Balance 12/31/91 $370,000
Depreciation for 1992 55,000
Balance before retirements 425,000
Balance 12/31/92 (after retirements) 400,000
Debit for retirements $ 25,000

30. On January 1, 2012, Hamlet Company borrowed P6, 000, 000.00 at an annual interest rate
of 10% to finance specifically the cost of building an electric generating plant. Construction
commenced on January 1, 2012 with a cost of 6, 000, 000.00. Not all the cash borrowed
was used immediately, so interest income of P80, 000.00 was generated by temporarily
investing some of the borrowed funds prior to use. The project was completed on November
30, 2012. What is the carrying amount of the plant on November 30, 2012?

a. 6, 000, 000 c. 6, 520, 000

b. 6, 470, 000 d. 6, 550, 000

ANS: B

Construction Cost 6, 000, 000

Interest (6, 000, 000x10%x10/12) ( 200, 000)
1, 800, 000
31. In 2004, Horton company purchased a tract of land as a possible future plant site. In
January, 2012, valuable sulphur deposits were discovered on adjoining property and Horton
company immediately began explorations on its property. In December, 2012 after incurring
P400, 000 in explorations costs, which were accumulated in an expense account, Horton
discovered sulphur deposits appraised at P2, 250, 000 more than the value of the land. To
record the discovery of the deposists, Horton should
a) Make no entry.

b) Debit P400,000 to an asset account

c) Debit P2,250,000 to an asset account

d) Debit P2,650,000 to an asset account

ANS: B

Discovery value is generally not recognized.

32. Cool Company owns an equipment costing P5,200,000 with original residual value of
P400,000. The life of the asset is 10 years and was depreciated using the straight line
method. The equipment has a replacement cost of P8,000,000 with residual value of
200,000. The age of the asset is 4 years. The appraisal of the equipment showed a total
revised useful life of 12 years and the entity decided to carry the equipment at revalued
amount. Ignoring the income tax, what amount should Cool Company initially report as
revaluation surplus:
a. 1,600,000 c. 1,680,000
b. 2,600,000 d. 6,680,000

ANS: A
Cost Replacement Cost Appreciation
Equipment 5,200,000 8,000,000 2,800,000
Residual value ( 250,000) ( 200,000)
-

Depreciable amount 5,000,000 7,800,000 2,800,000

Accumulated depreciation
 (40% x 4,800,000) 1,920,000
(40% x 7,800,000) 3,120,000 1,200,000
Balance 3,080,000 4,680,000 1,600,000

Percentage of accumulated depreciation

(4 years expired / 20 years) 40%

Subsequent annual depreciation (4,680,000/8 years)

585,000

Revised useful life 12 years

Age of asset 4
Remaining revised life 8
years

33. Gei Company determined that, due to obsolescence, equipment with an original cost of
P9,000,000 and accumulated depreciation on January 1, 2011, of P4,200,000 had
suffered permanent impairment, and as a result should have a carrying amount of only
P3,000,000 as of the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 8 years to 3. In its December 31, 2011 statement of
financial position, what amount should Gei report as accumulated depreciation?
a. 1,000,000 c. 6,000,000
b. 5,200,000 d. 7,000,000

ANS: D

Cost 9,000,000
Accumulated depreciation – January 1, 2011 4,200,000

Carrying amount – January 1, 2011 4,800,000

Expected recoverable amount 3,000,000

Impairment loss 1,800,000

Impairment loss 1,800,000

Accumulated depreciation 1,800,000

Adjusted accumulated depreciation,

January 1, 2011 (4,200,000 + 1,800,000) 6,000,000
Depreciation for 2011 (3,000,000/3) 1,000,000

Accumulated depreciation – December 31, 2011 7,000,000

34. On January 02, 2009. Wind company bought a trademark for P500,000. The remaining legal
life at the time of acquisition is 20 years. The company made a reasonable and reliable
estimated that that this trademark will provide additional cash flows to the enterprise for an
indefinite period. During 2012, Wind company’s net cash flows related to the trademark
have been on a decreasing trend. A as a result of this, the company decided to evaluate the
trademark for possible impairment. On December 31, 2012, reliable estimate showed that
the present value of expected net cash inflows related to the trademark is P240,000. What
amount of impairment loss should the company recognize in 2012?

a. none c. P260,000
b. P240,000 d. P500,000

ANS: C

Historical cost of the asset P500,000

Fair value on December31, 2012 240,000
Impairment Loss P260,000
 35.Galaxy Company purchased a patent for P357,000 on January 2,2011. The
patent was being amortized over its remaining legal life of fifteen years expiring
on January 2, 2026. Early on January 2, 2014, Galaxy determined that the
economic benefits of the patent would not last longer than ten years from the
date of acquisition.

What amount should be charged to patent amortization expense for the year ended
December 31, 2014?
a. 21,000 c. 40,800
b. 35,700 d. 71,400

ANS: C

Original cost P357,000

Less: Amortization from Jan.2, 2011 to Jan.2, 2014
(357,000 × 3/15) 71,400
Carrying value as of January 2, 2014
÷ Remaining new life:
New life 10 years
Expired life-date of change from
Jan.2011 to Jan. 2014 3 years 7 years
Amortization expense per year starting
From the year of change P 40,800

D. ACCOUNTING FOR LIABILITIES

1. Tom Byers sells televisions with a 2-year warranty. Past experience indicates that 2% of
the units sold will be returned during the warranty period for repairs. The average cost of
repairs under warranty is estimated to be $50 per unit. During 2002, 6,000 units were sold
at an average price of $400. During the year, repairs were made on 35 units at a cost of
$2,000. Compute the amount of warranty expense.
a. 6,000 c. 8,000
b. 4,000 d. 0

ANS: A
Estimated Warranty Liability 2,000
Repair Parts/Wages Payable 2,000
(To record cost of honoring 35 warranties)

Warranty Expense 6,000

Estimated Warranty Liability 6,000
(To accrue estimated warranty costs on 120 warranty contracts)
Number of units sold 6,000
Estimated rate of defective units × 2%
Total estimated defective units 120
Average warranty repair costs $ 50
Estimated Warranty Expense $6,000

2. December 31st is a Friday. The employees of the company have been paid on Monday,
December 27th for the previous week which ended on Friday, December 24th. The
company employs 20 people who earn $100 per day and 10 people who earn $120 per day.
All employees work 5-day weeks. Based from the information given, compute the amount
of wages payable as of December 31.
a. 16,000 c. 15,000
b. 10,000 d. 6,000

ANS: A

Wages Expense 16,000

Wages Payable 16,000
 20 × $100 × 5 = $10,000
10 × $120 × 5 = 6,000
$16,000

3. Marr Company sells its products in reusable containers. The costumer is charged a deposit
for each container delivered and receives a refund for each container returned within two
years after the year of delivery. Marr accounts for the container not returned within the time
limit as being retired by sale at the deposit amount. Information for 2011 is as follows:
Container deposits at December 31, 2011 from delivers in:
2009 150,000
2010 430,000 580,000
Deposits for containers delivered in 2011 780,000
Deposits for containers returned in 2011 from deliveries in:
2009 90,000
2010 250,000
2011 286,000 626,000

In Marr’s December 31, 2011 statement of financial position, the liability for deposits on
returnable containers should be:
a. 734,000 c. 430,000
b. 674,000 d. 824,000

ANS: B

Container deposits on December 31,2010

From deliveries in 2010 430,000

Deposits for containers delivered in 2011 780,000

Total 1,210,000

Less: deposits for container returned in 2011 from delivers in:

2010 250,000
2011 286,000 536,000
Liability for container deposits, December 31, 2011 674,000

Containers deposits on December 31, 2011

From deliveries in 2009 150,000
Less: Deposits for containers returned in 2011
From deliveries in 2009 90,000
Expired and no longer refundable 60,000

4. On September 1, 1988, Cobb Co. issued a note payable to National Bank in the amount of
$900,000, bearing interest at 12%, and payable in three equal annual principal payments of
$300,000. On this date, the bank's prime rate was 11%. The first payment for interest and
principal was made on September 1, 1989. At December 31, 1989, Cobb should record
accrued interest payable of:
a. 20,000 c. 24,000
b. 14,000 d. none

ANS: C

$24,000 accrued interest payable at 12-31-89.

Original note amount at 9-1-88 $900,000
Principal payment on 9-1-89 (300,000)
Balance 600,000
Interest rate and time (12% 4/12) 4%
 Accrued interest payable at 12-31-89 $ 24,000

5. On August 1, 1991, Vann Corp.'s $500,000, one year, noninterest-bearing note due July
31,1992, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method
of amortizing bond discount. What amount should Vann report for notes payable in its
December 31, 1991, balance sheet?
a. $500,000 c. $468,500
b. $477,500 d. $446,000

ANS: Choice "c" is correct. $468,500 carrying value of notes payable on the December
31,1991, balance

Face amount of note $500,000

Discount (500,000 10.8% 12/12) (54,000)
Proceeds at 8/1/91 when discounted 446,000
S.L. Amortization of discount for Aug 91 - Dec 91 ($54,000 5/12) 22,500
Carrying amount at 12/31/91 $468,500

6. Gar, Inc.'s trial balance reflected the following liability account balances at December 31,
1990:

Accounts payable $19,000

Bonds payable, due 1991 34,000
Deferred income tax payable 4,000
Discount on bonds payable 2,000
Dividends payable on 2/15/91 5,000
Income tax payable 9,000
Notes payable, due 1/19/92 6,000
The deferred income tax payable is based on temporary differences that will reverse in 1992
and 1993. In Gar's December 31, 1990, balance sheet, the current liabilities total was:
a. $71,000 c. $67,000
b. $69,000 d. $65,000

ANS: Choice "d" is correct. $65,000 total current liabilities.

The current liabilities consist of all payables due within one year.
Accounts payable $19,000
Bonds payable, due 1991 34,000
Discount on bonds payable (2,000) Tricky!!
Dividends payable, due 2/15/91 5,000 D
Income tax payable 9,000
Total current liabilities $65,000
The "deferred income tax payable" of $4,000 is a separate "deferred category" on the
balance sheet, and is not considered a current item. The "notes payable" due 1/19/92 are
due after one year and are considered a long-term liability.

7. Howell Corporation purchased $400,000 of its bonds on June 30, 2002, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$367,200. The bonds pay semiannual interest and the interest payment due on June 30,
2002, has been made and recorded. How much is the gain or loss on redemption?
a. 40,800 loss c. 32,800 loss
b. 40,800 gain d. 32,800 gain

ANS: A

June 30 Bonds Payable 400,000

Loss on Redemption 40,800
Discount on Bonds Payable 32,800
Cash 408,000
($400,000 – $367,200 = $32,800)
($400,000 × 102% = $408,000)

8. On January 1,2011, Dome Company issued P4,000,000,8% serial bonds to be repaid in the
amount of P 800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. Dome amortizes the bond discount by the interest
 method. The bond proceeds totaled P 3,805,600 based on the present value on Jan. 1,2011
of five annual payments as follows:
Due date Principal Interest PV at 1/1/2011
12/31/2011 800,000 320,000 1,018,000
12/31/2012 800,000 256,000 872,200
12/31/2013 800,000 192,000 745,000
12/31/2014 800,000 128,000 633,800
12/31/2015 800,000 64,000 536,600

In December 31,2011 statement of Financial Position, what should be reported as the

carrying amount of the bonds payable?
a. 3,200,000 c. 4,000,000
b. 3,606,160 d. 3,066,160

AND: D

Discount on bonds payable(Jan.1,2011) P194,400

Amortization for 2011 60,560
Discount on bonds payable(Dec.31,2011) 133,840
Bonds Payable 4,000,000
Annual Payment(Dec. 31,2011) (800,000)

Face Value-Dec.31,2011 3,200,000

Discount on bonds payable (133,840)
Carrying Amount-Dec.31,2011 P 3,066,160

9. Brite Company is indebted to Scotch Company under a P1,000,000, 12%, three-year note
dated December 31,2011. Because of Brite’s financial difficulties developing in 2014, Brite
owed accrued interest of P120,000 on the note at December 31,2014. Scotch agreed to
settle the note and accrued interest for a tract of land having a fair market value of
P900,000. Brite’s acquisition cost of land is P950,000. Ignoring income taxes, in its 2014
profit or loss, how much should Brite report as gain or loss on debt extinguishment as a
result of the settlement using US GAAP?
a. 220,000 gain c. 220,000 loss
b. 50,000 loss d. 50,000 gain

ANS: A

Book value of liability

Face value P1,000,000
Accrued interest 120,000 P1,120,000
Less: Fair value of land 900,000
Gain on derecognition of liability P 220,000

The gain on the extinguishment of debt would be recorded in the profit or loss under the
finance income, the loss on the disposal of the property would be charged against operating
profits. It would not be appropriate to show a net gain of P170,000 in finance income. The
difference between the carrying amount of a financial liability (or part of a financial liability)
extinguished or transferred to another party and the consideration paid, including any non-
cash asset transferred or liabilities assumed, shall be recognized in profit or loss (PAS 39
paragraph 41).

Journal Entry:
Notes payable P1,000,000
Accrued interest payable 120,000
Loss on disposal of land 50,000
Land P950,000
Gain on extinguishment 220,000

10. In 2011, Bunny Corporation acquired land by paying P300,000 and signing a note with a
maturity value of P4,000,000, on the note’s due date, December 31, 2011. Bunny owed
P320,000 of accrued interest and P4,000,000 principal on the note. Bunny was in financial
difficulty and was unable to make any payments. Bunny and the bank agreed to amend the
note as follows:
A. The P320,000 interest due on December 31, 2011 was forgiven.
 B. The principal of the note was reduced by P200,000 and the maturity date was made
payable December 31, 2012.
C. Bunny would be required to make one interest payment totaling P342,000 on
December 31, 2012.

On December 31, 2011, the prevailing rate of interest for a similar debt instrument is 9%.
As a result of the restructuring of debt, how much should Bunny report as gain, before
income taxes in its 2011 profit or loss?
a. 448,508 c. 463,805
b. 484,508 d. 0

ANS: B

Carrying value of liability:

Face value P4,000,000
Accrued interest 320,000 P4,320,000
Less: Restructured liability
New principal P3,800,000
Future interest 342,000
Total P4,142,000
X PV of 8% after 1 year .926 3,835,492
Gain on restructuring P 484,508

Journal Entry:
Notes payable P 4,000,000
Accrued interest payable 320,000
Notes payable – new P 3,835,492
Gain on restructuring 484,508

11. Millcroft Inc. computed a pretax financial income of $40,000 for the first year of its
operations ended December 31, 2008. Analysis of the tax and book basis of its liabilities
disclosed $360,000 in unearned rent revenue on the books that had been recognized as
taxable income in 2008 when the cash was received.

The unearned rent is expected to be recognized on the books in the following pattern:

2009 .................................................... $ 90,000

2010 .................................................... 160,000
2011 .................................................... 70,000
2012 .................................................... 40,000
$360,000

The enacted tax rates for this year and the next four years are as follows:

2008 .................................................... 40%

2009 .................................................... 36%
2010 .................................................... 33%
2011 .................................................... 30%
2012 .................................................... 32%

Compute the income tax payable and tax expense.

a. 160,000;41,000 c. 40,000;160,000
b. 160,000;160,000 d. 40,000;40,000

ANS: A

(1)
Reversal Years
2008 2009 2010 2011 2012
Taxable financial
income $40,000 $ 0 $ 0 $ 0 $ 0
 Temporary difference:
Unearned rent 360,000
revenue
Rent revenue earned 0 (90,000) (160,000) (70,000) (40,000)
Taxable income (loss) $400,000 $(90,000) $(160,000) $(70,000) $(40,000)

Enacted tax rate 0.4 0.36 0.33 0.30 0.32

Income taxes payable 160,000
Reversal of dta (32,400) (52,800) (21,000) (12,800)
current dta noncurr. noncurr. noncurr.
dta dta dta

(2)
Income Tax Expense......................... 41,000
Deferred Tax Asset--Current ............... 32,400
Deferred Tax Asset--Noncurrent ............ 86,600
IncomeTaxPayable................ 160,000

(3)
2008 Income Statement Presentation:
Income from continuing operations before
income taxes ............................... $40,000
Less income taxes:
Current provision ........................... 160,000
Deferred benefit ............................ 119,000 41,000
Income from continuing operations ........... $(1,000)

12. The 2014 tax return of Harmony Company indicates taxable income of P950,000, on which
a tax liability of P304,000 has been recognized (tax rate is 32%). The company is
determining the amount of its pretax financial income for 2014 by making adjustments to
taxable income from its 2014 income tax return. The list of items that may be required to
determine taxable financial income from the amount of taxable income follows: Accelerated
depreciation for income tax purposes was P335,000; straight line depreciation on these
assets is p200,000. The P112,500 goodwill impairment was excluded as a deduction in the
tax return, but may be deducted in the income statement. Several expenses were included
in the income tax return on an estimated basis. These items will be shown in the income
statement at the same amount but are subject to change if new information in the future
indicates that the original estimates were inaccurate. Interest on treasury bills was excluded
in the tax return. During the year, P61,750 was received on these investments. How should
Harmony’s taxable financial income?
a. 950,000 c. 1,085,000
b. 1,034,250 d. 1,285,000

ANS: C
Financial
Taxation
Net income before timing & permanent
differences P1,285,000 P1,285,000
Timing differences depreciation ( 200,000) ( 335,000)
Net income before permanent differences P1,085,000 950,000
Permanent differences
Interest income 61,750
Goodwill impairment ( 112,500) __________
Reported net income P1,034,250 P 950,000

13. Easter Company leased equipment to Faye Company on January 1, 2011. The lease is for an
eight-year period expiring December 31, 2018. The first of eight equal annual payments of
P900,000 was made on January 1, 2011. Easter had purchased the equipment on December
29, 2010 for P4,800,000. The lease is appropriately accounted for as a sales type lease by
Easter. The present value at January 1, 2011 of all rent payments over the lease term
discounted at a 10% interest rate was P5,280,000. What is the gross profit on sale for
2011?
a. 400,000 b. 320,000
 c. 380,000 d. 480,000
ANS: D

Present value of rentals- sales revenue 5,280,000

Cost of sales 4,800,000
Gross profit on sale 480,000
Final answer: P480, 000

14. On January 1, 2011, Gallant Company entered into a lease agreement with Blacksheep
Company or a machine which was carried on the accounting records of Gallant of
P2,000,000. Total payments under the lease which expires on December 31, 2020,
aggregate P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep.
The interest rate of 10% which was stipulated in the lease is considered fair and adequate
compensation to Gallant for the use of its funds. Blacksheep expects the machine to have a
10year life, no residual value and be depreciated on a straight line basis. The lease is
conceived as sales type lease. What should be the total income before income tax derived
by Gallant from the lease for the year ended December 31, 2011?
a. 604,492 c. 204,492
b. 400,000 d. none
ANS: A

Present value of rentals 2,400,000

First payments on January 1, 2011 all
applicable to principal 355,080
Lease receivable- January 1, 2011 2,044,920
Interest income for 2011 (2,044,920x 10%) 204,492
Present value of rentals- cost to blacksheep (lessee) 2,400,000
Cost of asset to Gallant (lessor) 2,000,000
Gross profit on sale 400,000
Interest income for 2011 204,492
Total income of Gallant for 2011 604,492

15. On January 1, 2003, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and
a remaining useful life of ten years, to Maco Drilling for $150,000. Hooks immediately
leased the equipment back under a ten-year capital lease with a present value of $150,000
and will depreciate the equipment using the straight-line method. Hooks made vthe first
annual lease payment of $24,412 in December 2003. In Hooks’ December 31, 2003 balance
sheet, the unearned gain on equipment sale should be
a. $50,000 c. $25,588
b. $45,000 d. $0

ANS: B

Sale-leaseback transactions are treated as though two transactions were a single financing
transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and
amortized over the lease term (if possession reverts to the lessor) or the economic life
(if ownership transfers to the lessee); both are ten years in this case. Since this is a capital
lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/03. At 12/31/03,
an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x
$50,000 = $5,000), because the lease covers ten years. Therefore, the unearned gain at
12/31/03 is $45,000 ($50,000 – $5,000).

E. ACCOUNTING FOR STOCKHOLDERS’ EQUITY

1. The corporate charter of Gordon Corporation allows the issuance of a maximum of

2,000,000 shares of $1 par value common stock. During its first three years of operation,
Gordon issued 1,200,000 shares at $15 per share. It later acquired 30,000 of these shares
as treasury stock for $20 per share.
Based on the above information, answer the following questions:
(a) How many shares were authorized?
(b) How many shares were issued?
(c) How many shares are outstanding?
 (d) What is the balance of the Common Stock account?
(e) What is the balance of the Treasury Stock account?

ANSWERS:

(a) 2,000,000 shares are authorized.

(b) 1,200,000 shares were issued.
(c) 1,170,000 shares are outstanding (1,200,000 issued less 30,000 in treasury).
(d) The balance of the Common Stock account is $1,200,000 ($1 × 1,200,000 shares =
$1,200,000).
(e) The balance of the Treasury Stock account is $600,000 ($20 × 30,000 shares =
$600,000).

2. The N Corporation is authorized to issue 100,000 ordinary shares, P17 par value. At the
beginning of 2010, 18,000 ordinary shares were issued and outstanding. These shares had
been issued at P24. During 2010, the company entered into the following transactions:
Jan. 16 - Issued 1,300 ordinary shares at P25 per share.
Mar. 21 - Exchanged 12,000 ordinary shares for a building. The ordinary shares were
selling at P27 per share.
May 7 - Reacquired 500 ordinary shares at P26 per share to be held in treasury.
July 1 - Accepted subscriptions to 1,000 ordinary shares at P28 per share. The contract
called for 10% down payment with the balance due on December 1.
Sept. 20 - Sold 500 treasury shares at P29 per share.
Dec. 1 - Collected the balance due on July 1 subscriptions and issued the shares.

Total contributed capital for December 31, 2010 is:

a. P615,000 c. P613,500
b. P818,000 d. P816,500

ANS: B:
Contributed capital, 1/1
(18,000 x P24) P432,000
January 16 (1,300 x P25) 32,500
March 21 (12,000 x P27) 324,000
May 7 -
July1/Dec. 1 (1,000 x P28) 28,000
Sept. 20 [500 x (P29-P26)] 1,500
Contributed capital, 12/31 P818,000

3. Cerritos Corporation began operations on January 1, 2007. During its first three years of
operations, Cerritos reported net income and declared dividends as follows:

Net income Dividends

declared
2007 P 80,000 P 0
2008 250,000 100,000
2009 300,000 100,000

The following information related to 2010:

Income before income tax P480,000

Prior period adjustment: understatement of 2008
depreciation expense (before taxes)
40,000
Cumulative decrease in income from change in
inventory methods (before taxes)
70,000
Dividends declared (of this amount, P50,000 will be
paid on January 15, 2011)
200,000
Effective tax rate 35%

As at December 31, 2010, the retained earnings of Cerritos Corporation is:

 a. P520,500 c. P430,000
b. P484,500 d. P470,500

ANS: D

Net income (2007-2009) P630,000

Dividends declared (2007-2009) (200,000)
Retained earnings, 12/31/09 430,000
Net income – 2010
(P480,000 x .65) 312,000
Prior period error
(P40,000 x .65) ( 26,000)
Change in policy effect
(P70,000 x .65) ( 45,500)
Dividends declared-2010 ( 200,000)
Retained earnings, 12/31/10 P470,500

4. At December 31, 2010, the equity accounts of Batch Corporation were as follows:

Preference share capital (P100 par, 12% participating and cumulative,

100,000 shares)
P10,000,000
Preference share capital (P100 par, 10% nonparticipating,
noncumulative, 50,000 shares)
5,000,000
Ordinary share capital (P10 par, 1,000,000 shares)
10,000,000
Retained earnings 9,500,000

Batch has never paid cash or share dividend. The capital accounts have not changed since
Batch began operations on January 1, 2006. If the maximum amount available for cash
dividend is declared on December 31, 2010, how much dividend is payable to the ordinary
shareholders?
a. P2,100,000 c. P1,200,000
b. P1,920,000 d. P4,500,000

ANS: A

12%PS 10%PS OS Total

Basic 6M .5M 1.2M 7.7M

Participation .9M 1.8M

Total 2.1M 9.5M

5. Maria Lourdes, controller at Garcia Pharmaceutical Industries, a public company, is

currently preparing the calculation for basic and diluted earnings per share and the related
disclosure for Garcia's external financial statements. Below is selected financial information
for the year ended December 31, 2010.

Long-term debt
Notes payable, 10% P
1,000,000
7% convertible bonds payable 5,000,000
10% bonds payable 6,000,000
Total long-term debt P12,000,000
Shareholders' equity
Preference share capital, 8.5%
cumulative, P50 par value,
100,000 shares authorized,
25,000 shares issued and
 outstanding P 1,250,000
Ordinary share capital, P1 par,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding 1,000,000
Share premium 4,000,000
Retained earnings 6,000,000
Total shareholders' equity P12,250,000

The following transactions have also occurred at Garcia.

A. Options were granted in 2008 to purchase 100,000 shares at P15 per share.
Although no options were exercised during 2010, the average price per ordinary
share during year 2010 was P20 per share. The market price per ordinary share on
December 31, 2010 was P25.
B. Each bond was issued at face value. The 7% convertible debenture will convert into
50 ordinary shares per P1,000 bond. It is exercisable after 5 years and was issued
in 2009.
C. The 8.5% preference shares were issued in 2008.
D. No preference share dividends were declared in 2009 and 2010.
E. The 1,000,000 ordinary shares were outstanding for the during 2010.
F. Profit for the year 2010 was P1,500,000, and the average income tax rate is 40%.

For the year ended December 31, 2010, calculate the diluted earnings per share for Garcia
Pharmaceutical Industries.
a. P1.37 c. P1.26
b. P1.32 d. P1.24

ANS: C
Profit to OS WA Outs. OS EPS

Basic P1,393,750 1,000,000 P1.39

Exercise of
options - 25,000

1,393,750 1,025,000 1.36

Bond 210,000 250,000

conversion

1,603,750 1,275,000 1.26

6. Younger Corporation has the following stockholders' equity accounts on January 1, 2002:

Common Stock, $10 par value $1,500,000

Paid-in Capital in Excess of Par 200,000
Retained Earnings 500,000
Total Stockholders' Equity $2,200,000

The company uses the cost method to account for treasury stock transactions. During 2002,
the following treasury stock transactions occurred:
April 1 Purchased 6,000 shares at $14 per share.
August 1 Sold 2,000 shares at $18 per share.
October 1 Sold 2,000 shares at $13 per share.

Instructions
(a) Journalize the treasury stock transactions for 2002.
(b) Prepare the Stockholders' Equity section of the balance sheet for Younger
Corporation at December 31, 2002. Assume net income was $80,000 for 2002.

ANSWERS:

(a) Apr. 1 Treasury Stock 84,000

Cash 84,000
 (To record purchase of treasury stock)

Aug. 1 Cash 36,000

Treasury Stock (2,000 × $14) 28,000
Paid-in Capital from Treasury Stock (2,000 × $4)
8,000
(To record sale of treasury stock)

Oct. 1 Cash 26,000

Paid-in Capital from Treasury Stock (2,000 × $1) 2,000
Treasury Stock (2,000 × $14) 28,000
(To record sale of treasury stock)

(b) Stockholders' equity

Paid-in capital
Capital Stock
Common stock, $10 par $1,500,000
Additional paid-in capital
In excess of par value $200,000
From treasury stock 3,000 203,000
Total paid-in capital 1,703,000
Retained earnings ($500,000 + $80,000) 580,000
Total paid-in capital and retained earnings
2,283,000
Less: Treasury stock (2,000 shares) (28,000)
Total stockholders' equity $2,255,000

7. An inexperienced accountant for Lane Corporation made the following entries.

July 1 Cash 180,000

Common Stock 180,000
(Issued 12,000 shares of no-par common stock,
stated value $10 per share)

Sept. 1 Common Stock 45,000

Retained Earnings 9,000
Cash 54,000
(Purchased 3,000 shares issued on July 1 for the
treasury at $18 per share)

Dec. 1 Cash 20,000

Common Stock 15,000
Gain on Sale of Stock 5,000
(Sold 1,000 shares of the treasury stock at $20 per
share)

Instructions
(a) On the basis of the explanation for each entry, prepare the entry that should have
been made for the transactions. (Omit explanations.)
(b) Prepare the correcting entries that should be made to correct the accounts of Lane
Corporation. (Do not reverse the original entry.)

ANSWERS:

(a) July 1 Cash 180,000

Common Stock 120,000
Paid-in Capital in Excess of Stated Value 60,000

Sept. 1 Treasury Stock 54,000

Cash 54,000

Dec. 1 Cash 20,000

Treasury Stock 18,000
Paid-in Capital from Treasury Stock 2,000
 (b) July 1 Common Stock 60,000
Paid-in Capital in Excess of Stated Value
60,000

Sept. 1 Treasury Stock 54,000

Common Stock 45,000
Retained Earnings 9,000

Dec. 1 Common Stock 15,000

Gain on Sale of Stock 5,000
Treasury Stock 18,000
Paid-in Capital from Treasury Stock 2,000

8. The stockholders' equity section of Dole Corporation at December 31, 2001, included the
following:

6% preferred stock, $100 par value, cumulative,

10,000 shares authorized, 8,000 shares issued and outstanding $ 800,000

Common stock, $10 par value, 250,000 shares authorized,

200,000 shares issued and outstanding $2,000,000

Dividends were not declared on the preferred stock in 2001 and are in arrears. On
September 15, 2002, the board of directors of Dole Corporation declared dividends on the
preferred stock for 2001 and 2002, to stockholders of record on October 1, 2002, payable
on October 15, 2002. On November 1, 2002, the board of directors declared a $1.00 per
share dividend on the common stock, payable November 30, 2002, to stockholders of
record on November 15, 2002.

Instructions
Prepare the journal entries that should be made by Dole Corporation on the dates indicated
below:
September 15, 2002 November 1, 2002
October 1, 2002 November 15, 2002
October 15, 2002 November 30, 2002

ANSWERS:

9/15/02 Retained Earnings 96,000

Preferred Dividends Payable 96,000
(To record declaration of dividends in arrears and
the current year's preferred dividend)

10/1/02 (No entry required.)

10/15/02 Preferred Dividends Payable 96,000

Cash 96,000
(To record payment of cash preferred dividend)

11/1/02 Retained Earnings 200,000

Common Dividends Payable 200,000
(To record declaration of cash dividend on common
stock)

11/15/02 (No entry required.)

11/30/02 Common Dividends Payable 200,000

Cash 200,000
(To record payment of common cash dividends)