Presentation of Financial Statements: Problem 37-1: True or False

Chapter 37
Presentation of Financial Statements
PROBLEM 37-1: TRUE OR FALSE

1. FALSE 6. FALSE
2. FALSE 7. TRUE
3. TRUE 8. TRUE
4. FALSE 9. TRUE
5. TRUE 10. FALSE
PROBLEM 37-2: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. FALSE
3. FALSE 8. TRUE
4. TRUE 9. FALSE
5. FALSE 10. FALSE
PROBLEM 37-3: MULTIPLE CHOICE – THEORY

1
D 6. D B
. 11. 16. C 21. C
2
C 7. B B
. 12. 17. C 22. B
3
D 8. B D
. 13. 18. A 23. D
4
C 9. D A
. 14. 19. D 24. D
5
C 10. A B
. 15. 20. B 25. D

1. B 6. C
2. D 7. C
3. B 8. D
1
4. D 9. C
5. D 10. D

1. D 6. D
2. A 7. E
3. C 8. D
4. D 9. A
5. A 10. C
PROBLEM 37-6: THEORY & COMPUTATIONAL
1. A
2. A
3. A
4. C
5. C
6. C
7. C
8. C
9. A
10. C
11. D
12. D
13. B
14. D
15. D
16. D
17. D
2
18. B
19. D
20. B
21. Solutions:
Requirement (a):
Morning Co.
Statement of financial position
As of December 31, 20x1
ASSETS Notes
Current assets:
Cash and cash equivalents 6 ₱1,060,000
Trade and other receivables 7 1,770,000
Inventories 1,200,000
Held for trading securities 800,000
Total current assets 4,830,000
Noncurrent assets:
Investment in FVOCI securities 300,000
Investment property 900,000
Property, plant and equipment 8 4,900,000
Total noncurrent assets 6,100,000
TOTAL ASSETS ₱10,930,000
LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 9 ₱1,140,000
Income tax payable 500,000
Provisions 430,000
Total current liabilities 2,070,000
Noncurrent liabilities:
Loans payable - net 10 2,260,000
Deferred tax liability 300,000
Total noncurrent liabilities 2,560,000
3
TOTAL LIABILTIES 4,630,000
Equity:
Ordinary share capital 4,000,000
Share premium 600,000
Retained earnings 1,640,000
Other components of equity 11 60,000
TOTAL EQUITY 6,300,000

TOTAL LIABILITIES & EQUITY ₱10,930,000
Requirement (b):
Note 6: Cash and cash equivalents

This line item consists of the following:
Cash on hand 60,000
Cash in bank 1,000,000
Cash and cash equivalents 1,060,000
Note 7: Trade and other receivables

Accounts receivable 2,000,000
Allowance for doubtful accounts (300,000)
Advances to employees 40,000
Advances to suppliers 30,000
Trade and other receivables 1,770,000
Note 8: Property, plant and equipment

Land 2,200,000
Building 3,400,000
Accumulated depreciation - Bldg. (700,000)
Property, plant and equipment 4,900,000
Note 9: Trade and other payables

Accounts payable 720,000
Accrued liabilities 80,000
Interest payable 340,000
4
Trade and other payables 1,140,000
Note 10: Loans payable - net

Loans payable 3,000,000
Discount on loan payable (740,000)
Loans payable - net 2,260,000
Note 11: Other components of equity

Revaluation surplus 90,000
Translation loss on foreign operation (30,000)
Other components of equity 60,000
22. Solutions:
Requirement (a):
Lunch Co.
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1
Note
s
22,000,00
Sales 0
(6,000,000
Cost of goods sold 12 )
16,000,00
Gross profit 0
(2,230,000
Distribution costs 13 )
(3,050,000
Administrative expenses 14 )
Impairment loss on financial assets (190,000)
Finance costs (340,000)
10,190,00
Profit before tax 0
(2,000,000
Income tax expense )
Profit for the year 8,190,000
Other comprehensive income
Items that will not be reclassified subsequently:
5
Investments in equity instruments 200,000
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges 30,000
Other comprehensive income for the yr., net of
tax 230,000
TOTAL COMPREHENSIVE INCOME FOR THE

YR. 8,420,000
Requirement (b):
Note 12: Cost of goods sold

Beginning inventory 1,700,000

Purchases 5,600,000
Purchase returns (500,000)
Freight in 400,000
Total goods available for sale 7,200,000
Ending inventory (1,200,000)
Cost of goods sold 6,000,000
Note 13: Distribution costs

Salaries of sales personnel 670,000
Advertising expense 320,000
Rent expense (280,000 x ½) 140,000
Commission expense 1,100,000
Distribution costs 2,230,000
Note 14: Administrative expenses

Research and development expense 180,000

Directors' remuneration 2,000,000
Salaries of administrative personnel 520,000
Rent expense 140,000
Depreciation expense 160,000
Insurance expense 50,000
Administrative expenses 3,050,000
6
7
PROBLEM 37-7: MULTIPLE CHOICE – COMPUTATIONAL
1. C
Solution:
Cash 70,000
Accounts receivable (120,000 - 26,000) 94,000
Inventories [60,000 + (26,000 / 130%)] 80,000
Total current assets 244,000
2. A
Solution:
Bonds payable, due 20x4 25,000
Discount on bonds payable, due 20x4 (3,000)
Dividends payable 1/31/x4 8,000
Total current liabilities 45,000
3. B
Solution:
Earnings from long-term contracts 6,680,000
(5,180,000
Costs and expenses
)
Profit before tax 1,500,000
(450,000
Income tax expense (1,500,000 x 30%) )
Profit after tax 1,050,000
Retained earnings - unappropriated (Jan. 1) 900,000
Retained earnings - restricted for note payable (Jan.
160,000
1)
Total retained earnings (Dec. 31) 2,110,000
4. A – Note payable - noncurrent
5. C
Solution:
The year-end adjustment to record income tax expense is as follows:
Dec. Income tax expense (see solution 450,000
31, above) 450,000
20x3
Prepaid taxes
8
Cash
600,000
Accounts receivable, net
3,500,000
1,600,00
Cost in excess of billings on longterm contracts
0
Prepaid taxes -
6. A
Solution:
875,00
Unadjusted net assets 0
Treasury share of Mont erroneously included in
assets (24,000)
Adjusted net assets 851,000
7. D 25,000 gross of tax – 10,000 tax effect = 15,000 net of tax

reclassification adjustment
8. A - Reclassification adjustment of cumulative unrealized gains

(losses) on FVOCI securities is prohibited. The cumulative
unrealized gains (losses) on FVOCI securities are transferred
directly in equity when the FVOCI securities are derecognized.
9. A
Solution:
Actuarial gain or loss on defined benefit plan (6,000)
Unrealized gain on FVOCI securities 30,000
Reclassification adjustment for cumulative gain on
translation of foreign operation included in profit or loss (5,000)
154,00
Profit for the year
0
173,00
Total comprehensive income 0
10. C
9
Solution:
Unadjusted bal. of advertising expense 146,000
Prepaid advertising (15,000)

Accrued advertising 9,000
Adjusted advertising expense 140,000
11. A
Solution:
250,00
Contribution to youth and educational programs 0
140,00
Contribution to health and human-service organizations 0
(80,000
Contribution shouldered by employees )
310,00
Charitable contributions expense 0
12. A
Solution:
Finished goods
Jan. 1 400,000
Cost of
COGM (squeeze) 200,000 240,000 sales
360,000 Dec. 31
13. A 600,000 total credit in trial balance – 420,000 total debit =

180,000 profit before tax x 70% net of income tax rate = 126,000
profit after tax
14. A
Solution:
Advertising 150,000
Freight-out
10
80,000
Rent for office space (220,000 x 1/2) 110,000
Sales salaries and commissions 140,000
Total selling expenses
480,000
15. A
Solution:
Accounting and legal fees 25,000
Officers’ salaries
150,000
Insurance 85,000
Total general and administrative expenses 260,000
11
PROBLEM 37-8: EXERCISES – COMPUTATIONAL
1. Solutions:
Requirement (a):
Evening Co.
Statement of financial position
As of December 31, 20x1
ASSETS Notes
Current assets:
Cash and cash equivalents 6 1,100,000
Inventories 200,000
Noncurrent assets:
Biological assets 1,200,000
Investment property 900,000
Intangible assets 9 560,000
Other noncurrent assets 10 800,000
TOTAL ASSETS 10,930,000

Trade and other payables 11 920,000
Provisions 430,000
Net defined benefit liability 13 1,700,000
Equity:
12
Share premium 14 970,000
Retained earnings 15 1,220,000
Treasury shares (100,000)

TOTAL LIABILITIES & EQUITY 10,930,000
Requirement (b):

Cash on hand 120,000
Cash in bank 980,000


Land 1,200,000
Building 4,800,000
Accumulated depreciation - Bldg. (1,600,000)
Note 9: Intangible assets

Patent 440,000
Accumulated amortization - Patent (80,000)
Web site costs 250,000
Accumulated amortization - Web site (50,000)
13
Intangible assets 560,000
Note 10: Other noncurrent assets

Advances to officers 130,000
Advances to affiliates 670,000
Other noncurrent assets 800,000

Utilities payable 80,000
Deposit liability for returnable containers 120,000
Trade and other payables 920,000

Note 13: Net defined benefit liability

Present value of defined benefit obligation 2,700,000
Fair value of plan assets (1,000,000)
Net defined benefit liability 1,700,000
Note 14: Share premium

Share premium - Share warrants outstanding 300,000
Share premium - Treasury shares 70,000
Note 14: Retained earnings

Reserves for contingencies 190,000
14
2. Solutions:
Requirement (a):
Dinner Co.
Note
s
16,800,00
Sales 0
(8,390,000
Cost of goods sold 12 )
Gross profit 8,410,000
(3,090,000
Distribution costs 13 )
(2,910,000
Administrative expenses 14 )
Impairment of property, plant and equipment (290,000)
Income tax expense (552,000)
Other comprehensive income
Revaluation decrease during the period (120,000)
Items that may be reclassified subsequently to profit or loss:
Translation gain on foreign operation 25,000
Other comprehensive income for the yr., net of
tax (95,000)

YR. 1,193,000
Requirement (b):
Note 12: Cost of goods sold

Beginning inventory 2,100,000

Purchases 6,800,000
Purchase returns (480,000)
Freight in 350,000
Total goods available for sale 8,770,000
15
Ending inventory (380,000)
Cost of goods sold 8,390,000

Freight out 870,000

Sales commissions 480,000
Marketing expense 320,000

Salaries of administrative personnel 2,520,000

16
PROBLEM 37-9: CLASSROOM ACTIVITIES – COMPUTATIONAL
1. Solutions:
Requirement (a):
FRIENDSHIPS CO.
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20X1
ASSETS Notes
Current assets:
Cash and cash equivalents 4 4,240,975
Inventories 6 22,117,615
Held for trading securities 2,834,079
Prepaid income tax 234,125
Prepaid supplies 890,239
Noncurrent assets:
Loans receivable - net 7 8,592,522
Investment in FVOCI securities 987,234
Investment in associate 1,290,347
Deferred tax asset 1,092,387

Trade and other payables 9 10,302,733
Income tax payable 721,346
Provision for warranty obligations 432,187
Deferred tax liability 918,732
Deferred credits 712,788
17
Equity:
Share premium 6,000,000
Retained earnings 11 16,344,664
Other components of equity 12 997,396

Requirement (b):

Cash on hand 62,350

Cash in bank - BPI (Savings) 1,720,500
Cash in bank - BPI (Current) 1,890,234
Cash in bank - BDO (Current) 567,891


Interest receivable (due on Mar. 1, 20x2) 946,013
Note 6: Inventories
Raw materials inventory 1,237,398

Work in process inventory 7,987,908
Finished goods inventory 12,892,309
Note 7: Loans receivable - net
18
Loans receivable 9,827,341

Unearned interest income (1,234,819)
Loans receivable - net 8,592,522

Land 8,980,751
Building 3,419,877
Equipment 917,387
Accumulated depreciation - Equipt. (234,125)

Accounts payable 9,071,239

Interest payable 341,782


Note 11: Retained earnings

Retained earnings - unrestricted 15,144,664

Retained earnings - appropriated 1,200,000
Note 12: Other components of equity
19
Revaluation surplus 873,984

Unrealized gains on FVOCI 123,412
2. Solutions:
Requirement (a):
(a) Inventory – end. 386,000

{370,000 + [320K x (370K/7.4M)]}
Income summary 386,000
(b) Loss on inventory write-down 116,000
(386,000 – 270,000)
Inventory – end. 116,000
(c) Bad debts expense 50,000
Allowance for bad debts 50,000
Allowance for bad debts

280,000 beg.
Write-offs 120,000 28,000 Recoveries
50,000 Bad debts
end. (4.76M x 5%) 238,000
(d) Loss on reclassification (1M – 800K) 200,000

Held for trading securities 200,000
(d) Held for trading securities 180,000
Unrealized gain (980K – 800K) 180,000
(e) Income tax expense 1,572,00
Income tax payable 0 1,572,000
20
Requirement (b):
Best Friends Co.

22,800,00
Sales 0
(9,664,000
Cost of sales )
13,136,00
Gross profit 0
(1,470,000
Distribution costs )
(6,400,000
Administrative expenses )
Gain on impairment recovery of property, plant and
equipment 720,000
Loss on inventory write-down (116,000)
Bad debts expense (50,000)
Reclassification of financial asset (200,000)
Unrealized gains on financial assets 180,000
(1,572,000
Income tax expense )
Other comprehensive income:
Revaluation increase during the period 130,000
Items that may be reclassified subsequently to profit or loss: -
Other comprehensive income for the year, net of tax 130,000
TOTAL COMPREHENSIVE INCOME FOR THE YR. 3,798,000
3. Solutions:
Requirement (a):
(a) Investment in bonds (950K – 800K) 150,000

Gain on derecognition of 150,000
financial asset
(b) Unrealized loss [2.8M – (2.640M – 300,000
140M)] 300,000
Biological assets
(c) Investment in associate 46,000
21
Dividend income 90,000
Sh. in the profit of associate 100,000
(1M x 30% x 4/12)
Sh. in revaluation increase 36,000
(120,000 x 30%)
(d) Retirement benefits expense 588,000

(336K + 252K)
Remeasurements to the net defined 252,000
benefit liability (asset)
Defined benefit cost 840,000
(e) Income tax expense 1,104,60
Income tax payable 0 1,104,600
Requirement (b):
Buddies Co.
Revenue from service fees 12,000,000
Contract costs (4,000,000)
Employee benefits (3,000,000)
Advertising expense (680,000)
Gain on derecognition of financial asset measured at cost 150,000
Unrealized losses on biological assets (300,000)
Share in profit of associate 100,000
Retirement benefits expense (588,000)

Income tax expense (1,104,600)

Share in revaluation increase of associate 36,000
Remeasurements to net defined benefit liability (asset) (252,000)

Items that may be reclassified subsequently to profit or -
22
loss:
Other comprehensive income for the year, net of tax (216,000)
TOTAL COMPREHENSIVE INCOME FOR THE YR. 2,361,400
4. Solutions:
Requirement (a):
(a) No entry
(DIT and OC are bank reconciling items;
not book)
(The money market placements will be

included in ‘Cash and cash equivalents’)
(b) No entry
(c) Inventory 200,000

(d) Investment property (2.9M – 2.8M) 100,000
Unrealized gain 100,000
(e) Depreciation expense – Bldg. 405,000(1
)
Accumulated depreciation – 405,000
Bldg.
(1)
Double declining balance rate = (450K ÷ 4.5M) = 10%
Depreciation, 20x1 = (4.5M – 450K) x 10% = 405,000
(f) Depreciation – Equipment 320,000(2)

Accumulated depreciation – 320,000
Equipt.
(2)
Using trial and error, the depreciation method used for the equipment is the
SYD method.
23
Proof:
SYD denominator = 5 x [(5+1) ÷ 2] = 15
Depreciation, 20x0 = (1.4M – 200K) x 5/15 = 400,000
Depreciation, 20x1 = (1.4M – 200K) x 4/15 = 320,000
(g) Amortization expense 30,000(3)

Accumulated amortization 30,000
(3)
Estimated useful life = 17 yrs.
Remaining legal life = 20 yrs. – 5 yrs. = 15 yrs. (shorter)
Amortization expense = 900,000 ÷ 15 x 6/12 = 30,000
(h) Inventory 108,000(4

)
Interest expense 108,000
(4)
The borrowing costs eligible for capitalization are computed as follows:
(1.8M ÷ 2) x 12% = 108,000
(i) Discount on bonds payable 932,392

(8M – 7,067,608)
Cash 932,392
to correct the initial recording of the bond
issue
(5)
The issue price of the bonds is computed as follows:
Cash flows PVF PV
4,736,64
P: 8,000,000 PV of 1 @14%, n=4 0.59208 0
PV ord. annuity @14%, 2,330,96
i: 800,000 n=4 2.91371 8
7,067,60
8
(i) Interest expense 189,465

Discount on bonds payable 189,465
to amortize the discount on bonds payable
(6)
Partial amortization table:
Payment Int. Amort
Date s expense . Present value
1/1/x1 7,067,608
12/31/x 189,46
1 800,000 989,465 5 7,257,073
24
The balance of the “interest payable” on the trial balance is tested for its
Nominal
Face amount rate Interest payable
Note payable 2,000,000 12% 240,000
Bonds payable 8,000,000 10% 800,000
Required balance 1,040,000
Carrying amount 1,040,000
Adjustment -
The adjusted “interest expense” is computed as follows:

Present Effective Interest
value int. rate expense
Notes payable 2,000,000 12% 240,000
Capitalizable b. costs
(h) (108,000)
Total 132,000
Bonds payable 7,067,608 14% 989,465
Adj. interest expense 1,121,465
(j) Utilities expense 360,000

(k) Income tax expense 719,861

Current tax asset 719,861
Requirement (b):
COLLEAGUES CO.
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20X1
Note
ASSETS s
Current assets:
25
4
5
Current tax asset 30,140
Noncurrent assets:
Investment in FVOCI securities 1,600,000
Investment property 2,900,000

6
7
8
Other noncurrent assets 1,660,000

Trade and other payables 9
2,850,000
Current portion of loans payable - net 10
400,000
11
Noncurrent portion of loans payable - net 1,600,000
12
Bonds payable - net 7,257,073
TOTAL LIABILTIES
26
12,107,073
Equity:
Retained earnings (1) 6,223,675

(1)
Ret. earnings unadjusted bal. 4.544M + adjusted profit after tax 1,679,675
= 6,223,675
Requirement (c):
COLLEAGUES CO.
STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED DECEMBER 31, 20X1
NOTE
S
Sales 16,800,000
Cost of sales (7,200,000)
Gross profit 9,600,000
Distribution costs 13 (2,424,000)
Administrative expenses 14 (3,755,000)
Finance costs (1,121,465)
Unrealized gain on investment property 100,000
Income tax expense (719,861)
COLLEAGUES CO.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 20X1
NOTE
S
27
Investment in equity securities 260,000
Items that may be reclassified subsequently to profit or
loss: -
Other comprehensive income for the year, net of tax 260,000

YR. 1,939,675
Requirement (d):

Cash on hand 450,000

Cash in bank 3,867,608
Money market placements 1,700,000


Allowance for bad debts (920,000)

Land 1,600,000
Building 4,500,000
Equipment 1,400,000
Accumulated depreciation - Equipt. (720,000)
Note 7: Intangible assets

Patent 900,000
Accumulated amortization (30,000)
28
Note 8: Other noncurrent assets
Cash surrender value 860,000

Bond sinking fund 800,000
Other noncurrent assets 1,660,000

Accounts payable (890K + 200K adj.) 1,090,000

Interest payable 1,040,000
Accrued liabilities (360K + 360K adj.) 720,000
Note 10: Loans payable

Current portion (2M x 1/5) 400,000

Non-current portion (2M x 4/5) 1,600,000
Total loans payable 2,000,000
Note 11: Bonds payable - net

Bonds payable 8,000,000

Discount on bonds payable (742,927)
Bonds payable - net 7,257,073

Freight out 870,000

Sales commissions 504,000
Utilities expense (360K x 1/2) 180,000
29
Salaries of administrative personnel 2,820,000

Depreciation expense - Bldg. 405,000
Depreciation expense - Equipt. 320,000
Amortization expense 30,000
Utilities expense (360K x 1/2) 180,000
30

Presentation of Financial Statements: Problem 37-1: True or False

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Presentation of Financial Statements: Problem 37-1: True or False

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Chapter 37

Presentation of Financial Statements

PROBLEM 37-1: TRUE OR FALSE

PROBLEM 37-2: TRUE OR FALSE

PROBLEM 37-3: MULTIPLE CHOICE – THEORY

PROBLEM 37-4: MULTIPLE CHOICE – THEORY

PROBLEM 37-5: MULTIPLE CHOICE – THEORY

PROBLEM 37-6: THEORY & COMPUTATIONAL

TOTAL ASSETS ₱10,930,000

LIABILITIES AND EQUITY

Note 6: Cash and cash equivalents

Note 7: Trade and other receivables

Note 8: Property, plant and equipment

Note 9: Trade and other payables

Note 10: Loans payable - net

Note 11: Other components of equity

TOTAL COMPREHENSIVE INCOME FOR THE

Note 12: Cost of goods sold

Beginning inventory 1,700,000

Note 13: Distribution costs

Note 14: Administrative expenses

Research and development expense 180,000

4. A – Note payable - noncurrent

Total current assets 5,700,000

7. D 25,000 gross of tax – 10,000 tax effect = 15,000 net of tax

8. A - Reclassification adjustment of cumulative unrealized gains

Unadjusted bal. of advertising expense 146,000

Prepaid advertising (15,000)

13. A 600,000 total credit in trial balance – 420,000 total debit =

Total general and administrative expenses 260,000

TOTAL ASSETS 10,930,000

LIABILITIES AND EQUITY

TOTAL LIABILTIES 4,810,000

Note 6: Cash and cash equivalents

Note 7: Trade and other receivables

Note 8: Property, plant and equipment

Note 9: Intangible assets

Note 10: Other noncurrent assets

Note 11: Trade and other payables

Note 12: Loans payable - net

Note 13: Net defined benefit liability

Note 14: Share premium

Note 14: Retained earnings

TOTAL COMPREHENSIVE INCOME FOR THE

Note 12: Cost of goods sold

Beginning inventory 2,100,000

Note 13: Distribution costs

Freight out 870,000

Note 14: Administrative expenses

Salaries of administrative personnel 2,520,000

TOTAL ASSETS 63,683,594

LIABILITIES AND EQUITY

Note 4: Cash and cash equivalents

Cash on hand 62,350

Note 5: Trade and other receivables

Accounts receivable 8,341,689

Raw materials inventory 1,237,398

Note 7: Loans receivable - net

Loans receivable 9,827,341

Note 8: Property, plant and equipment

Note 9: Trade and other payables

Accounts payable 9,071,239

Note 10: Loans payable - net