Cfas Pfa 01

PFA 1
CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

Elaiza Denise P. Adia
Problem 1-1 (IFRS)

Darwin Company provided the following information at year-end:
Cash 1,500,000
Accounts receivable 1,200,000
Inventory, including inventory expected in the ordinary course of
operations to be sold beyond 12 months amounting to P700,000 1,000,000
Financial asset held for trading 300,000
Equity investment at fair value through other comprehensive income 800,000
Equipment held for sale 2,000,000
Deferred tax asset 150,000
What amount should be reported as total current assets at year-end?

a. 6,000,000
b. 4,000,000
c. 6,800,000
d. 4,800,000
Solution:
Cash 1,500,000
Inventory 1,000,000
Financial asset held for trading 300,000
Equipment held for sale 2,000,000
Total current assets 6,000,000

In the absence of statement to the contrary, equity investment at a fair value through other
comprehensive income shall be classified as noncurrent asset.
Under the IFRS, deferred tax asset is a noncurrent asset.
Under the IFRS, noncurrent asset held for sale is a current asset.
Problem 1-2 (AICPA Adapted)
Petite Company reported the following current assets at year-end.
Cash 5,000,000
Inventory, including inventory goods received on consignment
P200,000 800,000
Bond investment at fair value through other comprehensive income 1,000,000
Prepaid expenses, including a deposit of P50,000 made on inventory to
be delivered in 18 months 150,000
Cash in general checking account 3,500,000

Cash fund to retire 5-year old bonds payable 1,000,000
Cash held to pay value added taxes 500,000
Total cash 5,000,000
What total amount of current assets should be reported at year-end?

a. 6,750,000
b. 6,700,000
c. 7,700,000
d. 7,750,000
Solution:
Cash (3,500,000 + 500,000) 4,000,000

Inventory ( 800,000 - 200,000) 600,000
Prepaid expenses ( 150,000 - 50,000) 100,000
6,750,0
Total current assets 00
The goods received on consignment should be excluded from inventory.

The cash fund to be used to retire bonds payable in 2021 should be classified as noncurrent
because the bond mature in more than one year.
The bond investment at fair value through other comprehensive income is a noncurrent asset.
Rice Company was incorporated on January 1, 2019, with P5,000,000 from the issuance of share
capital and borrowed funds of P1,500,000. During the first year, net income was P2,500,000.
On December 15, the entity paid a P500,000 cash dividend. On December 31, 2019, the
liabilities had increased to P1,800,000.
On December 31, 2019, what amount should be reported as total assets?
a. 6,500,000
b. 9,300,000
c. 8,800,000
d. 6,800,000
Solution:
Liabilities 1,800,000
Share capital 5,000,000
Retained earnings (P2,500,000 less dividend P500,000) 2,000,000
8,800,0
Mirr Company was incorporated on January 1, 2019 with proceeds from the issuance of
P7,500,000 in share capital and borrowed funds of P1,100,000.
During the first year, revenue from sales and consulting amounted to P8,200,000, and operating
costs and expenses totaled P6,400,000.
On December 15, 2019, the entity declared a P300,000 dividend, payable to shareholders on
January 15, 2020. The liabilities increased to P2,000,000. By December 31, 2019.
On December 31, 2019, what amount should be reported as total assets?
a. 11,000,000
b. 11,300,000
c. 10,100,000
d. 12,100,000
Solution:
Liabilities 2,000,000
Retained earnings (P2,500,000 less dividend P500,000) 1,500,000
11,000,
Arabian Company reported the following current assets as year-end:
Cash 4,500,000
Notes receivable, net of discount note P500,000 2,000,000
Inventory 1,000,000
Deferred charges 1,000,000
19,400,000
Accounts receivable comprised the following:
Trade accounts receivable 5,000,000

Allowance for doubtful accounts ( 500,000)
Claim against shipper for goods lost in transit 400,000
Selling price of Arabian Company’s unsold goods sent to tar Company
on consignment at 150% of cost and excluded from Arabian’s ending
inventory 3,000,000
7,900,000
What amount should be reported as total current assets at year-end?
a. 17,400,000
b. 17,000,000
c. 18,400,000
d. 15,400,000
Solution:
Cash 4,500,000
Notes receivable 2,000,000
Claim receivable 400,000
Inventory (4,000,000 + 2,000,000) 6,000,000
The selling price of the unsold goods out on consignment is excluded from accounts receivable
but the cost of the goods should be included in inventory.
The cost of goods out on consignment is P3,000,000 divided by 150% or P2,000,000.
The discounted note receivable is properly netted against the total notes receivable.
The deferred charges are noncurrent because technically they expire in more than one year after
the reporting period.
Rayan L. Aminodin

East Company reported the following current assets at year-end:
Cash 3,500,000
Inventory 2,800,000
Prepaid insurance 200,000
The accounts receivable consisted of the following:
Customer’s accounts 1,400,000

Employees' accounts collectible currently 200,000
Advances to subsidiary 500,000
Subscription receivables, not collectible currently 500,000
Total accounts receivable 3,000,000
What total amount should be reported as current assets at year-end?

a. 8,000,000
b. 9,500,000
c. 8,500,000
d. 9,000,000
Solution:
Cash 3,500,000
Receivables from employees 200,000
Inventory 2,800,000
Prepaid insurance 200,000
The advances to subsidiary should be classified as noncurrent.

The subscription receivable should be reported as a deduction from subscribed share capital
because it is not collectible currently.
Ivan Company showed the following current assets at the year-end:
Cash 3,200,000
Inventory 2,000,000
Cash on hand, including customer postdated check P100,000 and

employee IOU P50,000 500,000
Cash in bank per bank statement (outstanding check at year-end
P200,000) 2,700,000
What total amount should be reported as current assets?

a. 7,700,000
b. 7,450,000
c. 7,400,000
d. 7,500,000
Solution:
Cash on hand ( 500,000 – 100,000 – 50,000 ) 350,000

Cash in bank 2,500,000
Advance to employee 50,000
Inventory 2,000,000

2,700,000
Cash in bank per bank statement
Outstanding check ( 200,000)
Adjusted cash in bank 2,500,000

Customer postdated check 100,000
Adjusted balance 2,600,000
The customer check should be reverted to account receivable.

Gar Company reported the following liability account balances on December 31, 2019:
Bonds payable, due December 31,2020 3,400,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2021 600,000
On December 31, 2019, what total amount should be reported as current liabilities?
a. 7,100,000
b. 6,700,000
c. 6,500,000
d. 6,900,000
Solution:
Accounts payable 1,900,000

Dividends payable 500,000
Bonds payable 3,400,000
Discount on bonds payable ( 200,000)
Total current liabilities 6,500,000
Under IFRS, a deferred tax liability is classified as noncurrent.

The bonds payable minus the discount on bonds payable should be classified as current because
the bonds are due within one year.
The dividends payable and income tax payable are normally classified as current.
The note payable is classified as noncurrent because it matures in more than one year from the
end of the reporting period.
Brite Company provided the following information on December 31, 2019:
Note payable, 8% unsecured, due July 1, 2020 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Bonds payable, 7%, due March 31, 2020 5,000,000
Premium on bonds payable 500,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the
entity.
The legal counsel expects the suit to be settled in 2020 and has estimated that the entity will be
liable for damages in the range of P450,000 to P750,000.
The deferred tax liability is not related to an asset for financial reporting and is expected to
reverse in 2020.
What total amount should be reported as current liabilities on December 31, 2019.
a. 10,350,000
b. 10,150,000
c. 10,400,000
d. 10,950,000
Solution:
Accounts payable 550,000

The contingent liability is only disclosed because it is a possible loss.
Under IFRS, the deferred tax liability is classified as noncurrent regardless of the reversal
period.
The bonds payable plus the premium on bonds payable should be classified as current because
the bonds are due within one year from the end of reporting period.
Problem 1-10 (PHILCPA Adapted)
Burma Company disclosed the following information:
Accounts payable, after deducting debit balances in the suppliers'
accounts amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Share dividend payable 1,000,000
Claims for increase in wages and allowance by employees of the
entity, covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons 600,000
What amount should be reported as total current liabilities?

a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000
Solution:
Accounts payable (4,000,000 + 100,000) 4,100,000

Credit balances in customers' accounts 500,000
Estimated liability for coupons 600,000

Debit balances in suppliers’ accounts 100,000
Adjusted accounts payable 4,100,000

The debit balances in suppliers’ accounts are not “netted” against accounts payable but should
be reported as current asset.
The share dividend payable is not an accounting liability but presented as part of shareholders'
equity as an addition to share capital.
The claims for increase in wages and allowance should be disclosed as contingent liability.
Aleli M. Arcoirez
Mazda Company reported the following liability balances on December 31, 2019:
10% note payable issued on October 1, 2018, maturing October 1, 2020 2,000,000
12% note payable issued on March I, 2018, maturing on March 1, 2020 4,000,000
The 2019 financial statements were issued on March 31, 2020.
Under the loan agreement, the entity has the discretion to refinance the 10% note payable for at
least twelve months after December 31, 2019.
On March 1, 2020, the entire P4,000,000 balance of the 12% note payable was refinanced
through issuance of a long-term obligation payable lump sum.
What amount of the notes payable should be classified as current on December 31, 2019?
a. 6,000,000
b. 4,000,000
c. 2,000,000
d. 0
Solution:
The 10% note payable is classified as noncurrent.
PAS I, paragraph 73, provides that if an entity has the discretion to refinance or roll over an
obligation for at least twelve months after the reporting period under an existing loan facility, the
obligation shall be classified as noncurrent, even if it would otherwise be due within a shorter
period.
The 12% note payable is classified as current.
PAS I, paragraph 72, provides that an obligation that matures within one year from the end of
reporting period is classified as current even if it is refinanced on a long-term basis after the
reporting period and before issuance of the financial statements.
The 12% note payable is refinanced on March 1, 2020 after the end of reporting period on
December 31, 2019 and therefore classified as current.
Willem Company reported the following liabilities on December 31, 2019:

Short-term borrowings 1,500,000
Bonds payable due December 31, 2021 3,000,000
Mortgage payable, current portion P500,000 3,500,000
Bank loan, due June 30, 2020 1.000.000
The P1,000,000 bank loan was refinanced with a 5-year loanon December 31, 2019. The
financial statements were issued March 1, 2020.
What total amount should be reported as current liabilities on December 31, 2019?
a. 7,500,000
b. 5,000,000
c. 8,500,000
d. 4,000,000
Solution:

Short-term borrowings 1,500,000
Mortgage payable — current portion 500,000
The bank loan is classified as noncurrent because it is refinanced on December 31, 2019, the
end of reporting period.
The bonds payable plus the premium on bonds payable should be classified as noncurrent
because the bonds are due in more than one year from the end of reporting period.
Ronny Company provided the following information on December 31, 2019:
Accounts payable, net of creditors' debit balances P200,000 2,000,000

Bonds payable due December 31, 2021 4,500,000
Income tax payable 1,100,000
Cash dividend payable 600,000
Share dividend payable 400,000
Note payable — 6%, due March 1, 2020 1,500,000
Note payable — 8%, due October 1, 2020 1,000,000
The financial statements for 2019 were issued on March 31,2020.
On December 31, 2019, the 6% note payable was refinanced on a long-term basis.
Under the loan agreement, the entity has the discretion to refinance the 8% note payable for at
least twelve months after December 31, 2019.
1. Who amount should be reported as total current liabilities?
a. 7,200,000
b. 4,700,000
c. 6,200,000
d. 5,100,000
2. What amount should be reported as total noncurrent liabilities?
a. 8,400,000
b. 5,500,000
c. 8,000,000
d. 7,500,000
Solutions:
Question 1

Accrued Expenses 800,000
Cash dividend payable 600,000

Debit balances of creditors 200,000
Adjusted accounts payable 2,200,000
The creditors' debit balances are not netted against accounts payable but should be reported as
current asset.
The share dividend payable is part of shareholders' equity as an addition to share capital.
Question 2

Note payable — 6% 1,500,000
Note payable — 8% 1,000,000
Total noncurrent liabilities 8,000,000
The 6% note payable is classified as noncurrent because it is refinanced at the end of reporting
period on December 31, 2019.
The 8% note payable is also classified as noncurrent because the entity has discretion to
refinance.
The bonds payable plus the premium on bonds payable should be classified as noncurrent
because the bonds mature in more than one year from the end of reporting period.
Problem 1-14 (IAA)
Manchester Company provided the following information on December 31, 2019:

Employee income texts withheld 900,000
Cash balance of First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Deferred serial bonds, issued at par and bearing interest at 12%, payable
in semiannual installments of P500,000 due April 1 and October 1 of each
year, the last bond to be paid on October 1, 2025. Interest is also
paid semiannually. 5,000,000
Who amount should be reported as total current liabilities on December 31, 2019?
a. 8,100,000
b. 7,950,000
c. 9,100,000
d. 7,350,000
Solution:
Employee income taxes withheld 900,000

Cash overdraft 1,300,000
Accounts receivable with credit balance 750,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accrued interest on bonds payable from October 1 to
December 31, 2019 (5,000,000 x 12% x 3/12) 150,000
The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last
bond will be paid on October 1, 2025, the first bond will be paid on April 1, 2021.
Accordingly, there is no currently maturing bond in 2019.

Charice Company provided the following information on December 31, 2019:
• Accounts payable amounted to P500,000 and accrued expenses totaled P300,000 on

December 31, 2019.
• On December 15, 2019, the entity declared a rash dividend of P7 per share on 100,000
outstanding shares, payable on January 15,2020.
• On July 1, 2019, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%.
The bonds mature on June 30, 2024, and pay interest annually every June 30.
• The pretax financial income was P8,500.000 and taxable income was P6,000,000. The
difference is due to P1,000,000 permanent difference and P1,500,000 of taxable
temporary difference to reverse in 2020.
The income tax rate is 30%. The entity made estimated income tax payments during the
year of P1.000,000.
What amount should be reported as total current liabilities on December 31, 2019?
a. 3,500,000
b. 2,700,000
c. 2,300,000
d. 2,500,000
Solution:

Dividends payable (100,000 shares*7) 700,000
Accrued interest payable (5,000,000 x 8% x 6/12) 200,000
Current tax expense (6,000,000 x 30%) 1,800,000

Estimated tax payment (1,000,000)
The interest on the bonds payable is payable annually on June 30. Thus, there is an accrued
interest payable from July to December 31, 2019 or six months.
Esterh A. Asilo
United Company provided the following current assets and shareholders' equity at year-end:
Cash 600,000
Financial assets at fair value through profit or loss,
including cost of P300,000 of United Company
shares 1,000,000
Inventory 1,500,000
Share premium 2,000,000
Retained earnings 500,000
Total shareholders' equity 7,500,000
What amount should be reported as total shareholders' equity?

a. 7,200,000
b. 7,500,000
c. 7,800,000
d. 5,200,000
Solution:

Treasury shares, at cost (300,000)
The treasury shares are excluded from financial assets at fair value through profit or loss but
should be reported as a deduction from shareholders' equity.
Cash 600,000
Financial at assets at fair value (1,000,000 – 300,000) 700,000
Inventory 1,500,000
Kalinga Company the following information at year-end:

Treasury shares, at cost 2,000,000
Actuarial loss on defined benefit plan 1,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment — credit 1,500,000
What amount should be reported as total shareholders ' equity?

a. 31,500,000
b. 32,500,000
c. 28,500,000
d. 25,500,000
Solution:

Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Cumulative translation adjustment — credit 1,500,000
Actuarial loss on defined benefit plan (1,000,000)
Treasury shares, at cost (2,000,000)
The actuarial loss on defined benefit plan is reported as component of other comprehensive
income.
The credit in the cumulative translation adjustment account is a translation gain reported as
component of other comprehensive income.
If the cumulative translation adjustment account has a debit balance, it is a translation loss.
Problem 1-18 (IAA)
Silver Company provided the following information at year-end:

Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares at cost – ordinary 500,000
Dividends 700,000
Retained earnings — beginning 1,000,000
What amount should be reported as total shareholders' equity at year-end?

a. 8,000,000
b. 8,500,000
c. 5,800,000
d. 8,700,000
Solution:
Sales 10,000,000
Total expenses (7,800,000)
Net income 2,200,000
Retained earnings — beginning 1,000,000
Dividends (700,000)
Retained earnings — ending 2,500,000
Preference share capital 2,000,000
Ordinary share capital 3,000,000
Retained earnings 2,500,000
Treasury shares at cost (500,000)
Mont Company reported net assets totaling P8,750,000 at year-end which included the
following:
Treasury shares of Mont Company at cost 250,000

Idle machinery 100,000
Trademark 150,000
Allowance for inventory writedown 200,000
What amount should be reported as net assets at year-end?

a. 8,500,000
b. 8,400,000
c. 8,300,000
d. 8,200,000
Solution:
Reported net assets 8,750,000

Treasury shares (250,000)
Adjusted net assets 8,500,000
The treasury shares are not assets but should be deducted from total shareholders' equity.
The idle machinery, trademark and allowance for inventory writedown are properly included in
the computation of net assets.
Problem 1-20 (AICPA Updated)
Puzzle Company provided the following information at year-end:
Cash and cash equivalents 500,000

Accounts receivable, net of allowance P100,000 2,000,000
Inventory 6,000,000
Property, plant, and equipment at carrying amount 12,000,000
Wages payable 1,500,000
The only asset not listed is short-term investment.
The only liabilities not listed are a P3,000,000 note payable due in two years and related accrued
interest of P100,000 due in four months.
The current ratio at year-end is 1.5 to 1.00.
1. What is the amount of current liabilities?

a. 5,900,000
b. 6,000,000
c. 9,000,000
d. 8,900,000
2. What is the amount of short-term investment?

a. 700,000
b. 400,000
c. 500,000
d. 0
3. What is the balance of retained earnings at year-end?

a. 2,000,000
b. 6,000,000
c. 5,000,000
d. 1,500,000
Solutions:
Question 1

Wages payable 1,500,000
Accrued interest payable 100,000
Question 2
Current liabilities 6,000,000

Multiply by current ratio 1.50
Cash and cash equivalents (500,000)
Accounts receivable (2,000,000)
Inventory (6,000,000)
Short-term investment 500,000
Question 3
Current assets 9,000,000

Property, plant and equipment 12,000,000
Total assets 21,000,000
Current liabilities (6,000,000)
Note payable — noncurrent (3,000,000)
Share capital (6,000,000)
Share premium (4,000,000)
PFA 1
CHAPTER 2- STATEMENT OF FINANCIAL POSITION

Jerlyn S. Bautro
Kenya Company provided the following information on December 31, 2019:
Cash in bank, net of bank overdraft ₱500,000 5,000,000

Petty cash, unreplenished petty cash expenses ₱10,000 50,000
Accounts receivable, net of customers’ accounts with credit balances ₱
1,500,000 6,000,000
Inventory 3,000,000
Bond sinking fund 3,000,000
Accounts payable, net of suppliers’ accounts with debit balances of ₱

1,000,000 7,000,000
Notes payable 4,000,000
Bond payable due June 30,2020 3,000,000
1. What amount should be reported as total current assets on December 31, 2019?
a. 19,040,000
b. 20,040,000
c. 20,050,000
d. 24,040,000
2. What amount should be reported as total current liabilities on December 31, 2019?
a. 19,000,000
b. 16,000,000
c. 15,500,000
d. 15,000,000
Solution:
Question 1
5,500,000
Cash in bank ( 5,000,000 + 500, 000)
40,000
Petty cash ( 50,000 – 10, 000) 4,000,000
3,000,000
Accounts receivable (6,000,000 + 1,500,000)
3,000,000
Inventory
1,000,000
Bond sinking fund
Debit balances in accounts payable
24,040,000
Total current assets
The bank overdraft is not netted against the cash in bank but should be classified as current liability.
The customers’ credit balances are not netted against accounts receivable but should be classified as
current liability.
The bond sinking fund is classified as current asset because the bond payable is already classified as
current liability.
The classification of the bond sinking fund should parallel the classification of the related liability.
Question 2
500,000
Bank overdraft
1,500,000
Credit balances in accounts receivable 8,000,000
Accounts payable ( 7,000,000 + 1,000,00 ) 4,000,000
3,000,000
Notes payable
2,000,000
Bond payable
Accrued expenses
19,000,000
Total current liabilities
The debit balances in suppliers’ accounts are not netted against accounts payable but should be
classified as current asset.
Gold Company provided the following trial balance on December 31, 2019:
Cash overdraft 100,000

Accounts receivable 350,000
Inventory 600,000
Prepaid expenses 100,000
Land held for sale 1,000,000
Property, plant and equipment 950,000
Share premium 250,000
3,000,000 3,000,000
Checks amounting to ₱300,000 were written to vendors and recorded on December 29, 2019 resulting
in a cash overdraft of ₱100,000. The checks were mailed on January 15, 2020.
Land held for sale was sold for cash on January 31, 2020.
The entity issued the financial statements on March 31, 2020.
1. What total amount should be reported as current assets?
a. 2,250,000
b. 2,050,000
c. 1,950,000
d. 1,250,000
2. What total amount should be reported as current liabilities?
a. 650,000
b. 500,000
c. 350,000
d. 300,000
3. What is the total shareholders’ equity?
a. 2,550,000
b. 1,750,000
c. 1,500,000
d. 2,300,000
Solutions:
Question 1
200,000
Cash
350,000
Accounts receivable
600,000
Inventory
100,000
Prepaid expense
1,000,000
Land held for sale
2,250,000
Total current assets
The undelivered checks should be adjusted as follows:
Cash 300,000
Cash (overdraft) (100,000)

Debit adjustment 300,000
Adjusted cash balance 200,000
Under PFRS 5, the land held for sale should be reported as current asset.
Question 2

Total current liabilities 650,000

Undelivered checks 300,000
Adjusted accounts payable 500,000
Question 3

Total shareholders’ equity 2,550,000
Problem 2-3 (AICPA Adopted)
Trey Company provided the following trial balance at year-end which had been adjusted except for
income tax expense:
1,250,000
Cash
Prepaid taxes 500,000
Retained earnings-beginning 1,500,000
Foreign currency translation adjustment 800,000
Revenue 4,000,000
Expenses 3,000,000
7,200,000 7,200,000
During the current year, estimated tax payments of ₱500,000 due from customer were charged to
prepaid taxes. The entity has not yet recorded income tax expense.
There were no differences between financial and taxable income. The tax rate is 30%.
Included in accounts receivable is ₱500,000 due from customer. Special terms granted to this customer
require payment in equal semiannual installments of ₱125,000 every April 1 and October 1.
1. What amount should be reported as total current assets at year-end?
a. 2,850,000
b. 2,650,000
c. 2,900,000
d. 3,100,000
2. What amount should be reported as retained earnings at year-end?
a. 3,500,000
b. 2,000,000
c. 2,200,000
d. 1,400,000
Solutions:
Question 1
Cash 1,250,000

Noncurrent portion ( 125,000 + 125,000 ) (250,000)
Current portion 1,400,000
Entry made
Cash 500,000
Adjusting entry
Income tax expense 300,000

Prepaid of income taxes 500,000

Prepaid taxes – year-end 200,000
Question 2
Revenue 4,000,000
Expenses (3,000,000)
Income before income tax 1,000,000
Income tax expense ( 30% * 1,000,000 ) (300,000)
Net income 700,000
Retained earnings – beginning 1,500,000
Retained earnings - ending 2,200,000
The debit balances in the foreign currency translation adjustment is a component of other
comprehensive income and a deduction from total shareholders’ equity because it is a translation loss.
Mint Company provided the following account balances at year-end which had been adjusted except for
income tax expense:
Cash 600,000
Cost in excess of billings on long-term contracts 1,600,000
Billing in excess of cost on long-term contracts 700,000
Property, plant, and equipment, at carrying amount 1,510,000
Note payable – noncurrent 1,620,000
Share capital 750,000
Retained earnings unappropriated 900,000
Retained earnings restricted for note payable 160,000
Earnings from long-term contracts 6,680,000
Costs and expenses 5,180,000
All receivables on long-term contracts are considered to be collectible within 12 months. During the
year, estimated tax payments of ₱450,000 were charged to prepaid taxes. The entity has not recorded
income tax expense. The tax rate is 30%.
At year-end, what amount should be reported as
1. Total retained earnings?
a. 1,950,000
b. 2,110,000
c. 2,400,000
d. 2,560,000
2. Total noncurrent liabilities?
a. 1,620,000
b. 1,780,000
c. 2,320,000
d. 2,480,000
3. Total current assets?
a. 5,000,000
b. 4,100,000
c. 5,700,000
d. 6,150,000
4. Total shareholders’ equity?
a. 2,940,000
b. 2,780,000
c. 4,890,000
d. 4,730,000
Solutions:
Question 1
Earnings from long-term contracts 6,680,000

Cost and expenses (5,180,000)

Income tax expense ( 30% * 1,500,000 ) (450,000)
Retained earnings unappropriated 900,000
Retained earnings restricted 160,000
Total retained earnings 2,110,000
Question 2
Note payable-noncurrent 1,620,000
The billings in excess of cost on long term contracts account is a current liability.
Question 3
Cash 600,000
Cost in excess of billings on long term contracts 1,600,000
The prepaid taxes of ₱450,000 represent the actual income tax expense for the current year. Thus, there
is no prepayment.
Question 4
Share capital 750,000

Total shareholders’ equity 4,890,000
]
Shaw Company provided the following trial balance on December 31, 2019 which had been adjusted
except for income tax expense:
Cash 600,000
Inventory 2,000,000
Property, plant and equipment (net) 10,500,000
Accounts payable and accrued liabilities 1,800,000
Retained earnings, January 1 3,500,000
Net sales and other revenue 15,000,000
Costs and expenses 10,000,000
Income tax expense 2,100,000
28,000,000 28,000,000
The accounts receivable included ₱1,000,000 due from a customer and payable in quarterly installments
of ₱125,000. The last payment is due December 30, 2021.
During the year, estimated tax payment of ₱600,000 was charged to income tax expense. The income
tax rate is 30%.
On December 31, 2019, what amount should be reported as
1. Total current assets?
a. 3,400,000
b. 4,400,000
c. 5,400,000
d. 4,900,000
2. Total current liabilities?
a. 2,700,000
b. 3,300,000
c. 4,050,000
d. 3,450,000
3. Retained earnings?
a. 8,500,000
b. 6,400,000
c. 7,000,000
d. 3,500,000
Solutions:
Question 1
Cash 600,000
Inventory 2,000,000

Noncurrent portion ( 125,000 * 4 ) ( 500,000)
Adjusted current portion 2,300,000
Question 2
Accounts payable and accrued liabilities 1,800,000

Income tax payable ( 1,500,000 – 600,000) 900,000

Entries made
Cash 600,000

Adjusting entry

Question 3
Net sales and other revenue 15,000,000

Cost and expenses (10,000,000)
Income tax expense ( 30% * 5,000,000 ) (1,500,000)
Retained earnings – January 1 3,500,000
Retained earnings- December 31 7,000,000
Irish Joy D. Bituin
PROBLEM 2-6 (AICPA Adapted)
Cara Company provided the following information for the current year:
January 1 December 31
Current Assets 700,000 ?
Property, plant, and equipment 3,000,000 4,000,000
Current liabilities ? 300,000
Noncurrent 1,000,000 ?
Working capital P600,000 remained unchanged.
Net income for the current year was P400,000
No dividends were declared during the year and there were no other changes in shareholder's equity.
1. What is the amount of current assets on December 31?

a 900,000
b 300,000
c 600,000
d 450,000
2. What is the shareholder’s equity on December 31?

a 3,000,00
b 2,600,000
c 2,700,000
d 3,700,000
3. What is the amount of noncurrent liabilities on December 31?

a. 2,200,00
b. 1,100,000
c. 1,600,000
d. 1,900,000
Solution:
Question 1
Current assets - December 31 (SQUEEZE) 900,000

Current liabilities - December 31 300,000
Working capital - December 31 600,000
Question 2
Current assets - January 1 700,000

Property, plant, and equipment - January 1 3,000,000
Total assets - January 1 3,700,000
Current liabilities (300,000)
Noncurrent liabilities (1,000,00)
Shareholder's equity - January 1 2,600,000
Net income for current year 400,000
Shareholders' equity - December 31 3,000,000
Current assets - January 1 700,000
Current liabilities - January 1 (SQUEEZE) 100,000
Working capital - January 1 600,000
Question 3
Current assets - December 31 900,000

Property, plant, and equipment - December 31 4,000,000
Total Assets - December 31 4,900,000
Current liabilities - December 31 (300,000)
Noncurrent liabilities - December 31 (SQUEEZE) (1,600,00)
Shareholders' equity - December 31 3,000,000
PROBLEM 2-7 (IAA)
Goodrich Company provided the following information on December 31, 2019:

Bank note payable - 10% 3,000,000
Bank note payable - 11% 5,000,000
Mortgage note payable - 10% 2,000,000
●
● The P3,000,000, 10% note was issued March 1, 2019, payable on demand. Interest is payable every
six months.
● The one-year P5,000,000, 11% note was issued January 15, 2019.
On December 31, 2019, the entity negotiated a written agreement with the bank to replace the note
with a 2-year, P5,000,000, 10% note to be issued January 15, 2020.
● The 10% mortgage note was issued October 1, 2016, with a term of 10 years. Terms of the note give
the holder the right to demand immediate payment if the entity fails to make a monthly interest
payment within 10 days from the date the payment is due.
On December 31, 2019, the entity used three months behind in making the required interest
payment.
● The bonds payable are ten-year, 8% bonds, issued June 30,2010. Interest is payable semiannually on
June 30 and December 31.
1. What amount should be reported as total current liabilities?

a 15,650,000
b 11,650,000
c 20,650,000
d 13,650,000
2. What amount should be reported as total noncurrent liabilities?

a. 8,000,000
b. 7,000,000
c. 5,000,000
d. 0
Solution:
Question 1

Bank note payable – 10% 3,000,000
Accrued interest payable 150,000
Mortgage note payable 2,000,000
Bonds payable – due June 30, 2020 4,000,000
The mortgage note payable becomes payable on demand because of failure to make the required
interest payment for three months.
The bonds mature on June 30, 2020 which is within one year from the end of reporting period.
Since the 10% bank note payable was issued on March 1, 2019 with interest payable semiannually, the
interest payment dates are March 1 and September 1.
Interest accrued on the 10% bank note payable

from September 1 to December 31, 2019
(3,000,000 x 10% x 4/12) 100,000
Interest accrued on the mortgage note payable
(2,000,000 x 10% x 3/12) 50,000
Accrued interest payable – December 31, 2019 150,000
There is no accrued interest on the bonds payable because the interest is payable June 30 and December 31.
Question 2
Bank note payable – 11% 5,000,000
The 11% bank note payable is classified as noncurrent because it was refinanced on a long-term basis on
December 31, 2019.
PROBLEM 2-8 (IAA)
Aroma Company provided the following information on December 31, 2019:
Cash 300,000
Inventory 1,650,000
Property, plant, and equipment 8,800,000
Accumulated depreciation 800,000
A P500,000 note payable to bank, due on June 30, 2020, was deducted from the balance on deposit in
the same bank.
The entity recorded checks of P200,000 in payment of accounts payable on December 31, 2019. These
checks were still on hand on January 20, 2020.
An advance payment P100,000 from a customer for goods to be delivered in 2020 was deducted from
accounts receivable.
1. What total amount should be reported as current assets on December 31, 2019?
a 3,800,000
b 3,600,000
c 3,700,000
d 3,900,000
2. What total amount should be reported as current liabilities on December 31, 2019?
a 2,100,000
b 2,300,000
c 1,900,000
d 2,200,000
Solutions:
Question 1
Cash 1,000,000
Inventory 1,650,000
Cash 300,000
Note payable deducted from cash in bank 500,000
Adjusted cash balance 1,000,000
The note payable due June 30, 2020 should be known as current liability.
The undelivered checks should be adjusted by debiting cash and crediting accounts payable

Advance payment from erroneously deducted
from accounts receivable 100,000
Adjusted carrying amount 900,000
Accounts Receivable 100,000

Advances from customer 100,000
The cash advance from the customer is shown as current liability.
Question 2

Note payable-bank 500,000
Advances from customers 100,000
Daet Company provided the following accounts balances and related information at year-end:
Cash 3,700,000
Allowance for doubtful accounts 200,000
Inventory 2,000,000
Prepaid Insurance 300,000
Analysis of cash

Bank overdraft in another bank (300,000)
Cash set aside for plant addition 2,000,000
Petty cash fund 10,000
Cash withheld from wages 190,000
General cash 500,000
The accounts receivable included past due account in the amount of P100,000. The account is deemed
uncollectible and should be written off.
The inventory included goods held on consignment amounting to P150,000 and goods of P200,000
purchased and received at year-end.
Neither of these items have been recorded as a purchase.
The prepaid insurance included cash surrender value of life insurance of P50,000.
1. What is the adjusted cash balance?

a 2,000,000
b 1,700,000
c 4,000,000
d 2,300,000
2. What is the adjusted balance of accounts receivable?
a. 1,200,000
b. 1,400,000
c. 1,300,000
d. 1,500,000
3. What is the adjusted inventory?
a 2,200,000
b 2,000,000
c 1,850,000
d 1,600,000
4. What total amount should be reported as current assets at year-end?

a 5,400,000
b 5,100,000
c 5,300,000
d 5,200,000
Solutions:
Question 1
Petty cash fund 10,000
Cash withheld from wages 190,000
General cash 500,000
The bank overdraft is not "netted" but reported as current liability.

The cash set aside from plant addition is shown as noncurrent asset,
Question 2

Account to be written off (100,000)
Question 3
Inventory 2,000,000
Goods held on consignment (150,000)
The goods of P200,000 purchased and received are properly included inventory.
Question 4
Cash 2,000,000
Allowance for doubtful accounts (100,000)
Inventory 1,850,000
Prepaid insurance (300,000 - 50,000) 250,000
The cash surrender value is shown as noncurrent asset.

PROBLEM 2-10 (PHILCPA Adapted)
Icarus Company provided the following data at year-end:

Cash 2,000,000
Inventory 1,900,000
Interest payable 150,000
Money claim of the union pending final decision 500,000
Mortgage payable, due in four annual installments 2,000,000
Analysis of cash

Customer check marked NSF 100,000
Employee IOU 50,000
Deposit with court for case under litigation 200,000
Analysis of accounts receivable
Customers' debit balances 1,600,000

Advances to subsidiary 400,000
Advances to suppliers 200,000
Advances to officers due currently 300,000
Selling price of merchandise invoiced at 120%
of cost undelivered and excluded from inventory 600,000
Total accounts receivable 3,000,000
1. What amount should be reported as total current assets?

a 6,600,000
b 6,300,000
c 6,800,000
d 6,400,000
2. What amount should be reported as total current liabilities?
a 3,450,000
b 3,400,000
c 3,950,000
d 3,700,000
Solutions:
Question 1

Allowance to employee – IOU 50,000
Advances to officers currently due 300,000
Advances to suppliers 200,000
Inventory 2,400,000
Customer check marked NSF 100,000
The customer check marked NSF should be reverted to accounts receivable.
The cash deposit with court is classified as noncurrent.
Inventory 1,900,000
Cost undelivered inventory (600,000/120) 500,000
The selling price of undelivered inventory is excluded from accounts receivable, but the cost should be
included in inventory.
Question 2
Interest payable 150,000
Mortgage payable - current portion (2,000,000/4) 500,000
The money claim of the union pending the final decision should be disclosed as contingent liability.
Chapter 3 - Notes To Financial Statements
Events after reporting period
Graceanne D. Cueto
Dean Company acquired 100% of Morey Company in the prior year. During the current year, the
individual entities included in their financial statements the following:
Dean Morey
Key officers' salaries 750,000 500,000
Officers' expenses 200,000 100,000
Loans to officers 1,250,000 500,000
Intercompany sales 1,500,00
What total amount should be reported as related party disclosures in the notes to Dean
Company's consolidated financial statements for the current year?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000
Solution 3-1 Answer d

Loans to officers:
Dean 1,250,000
Morey 500,000
Key officers' salaries:

Dean 750,000
Morey 500,000
Total 3,000,000
Intercompany sales are no longer disclosed when consolidated financial statements are prepared.
Problem 3.2(AICPA Adapted)
During the current year, Jane Company engaged in the following transactions:
Key management personnel compensation 2,000,000

Sales to affiliated entities 3,000,000
What total amount should be included as related party disclosures in Jane Company's separate
financial statements for the current year?
a. 5,000,000
b. 3,000,000
C. 2,000,000
d. 0
Solution 3-2 Answer a 5,000,000
PAS 24, paragraph 16, requires disclosure of key management personnel compensation.
The sales to affiliated entities shall be disclosed in Jane Company's separate financial statements
but eliminated in consolidated financial statements.
Problem 3-3 (IFRS)
Gibson Company reported that remuneration and other payments made to entity's chief executive
officer during the current year were:
Annual salary 2,000,000

Share options and other share-based payments 1,000,000
Contributions to retirement benefit plan 500,000
Reimbursement of travel expenses for business trips 1,200,000
What total amount should be disclosed as "compensation" to key management personnel?
a. 3,500,000
b. 4,700,000
c. 3,000,000
d. 2,500,000
Solution 3-3 Answer a

All, except reimbursement of travel expenses.
Problem 3-4 (IFRS)
The audit of Anne Company for the year ended December 31, 2019 was completed on March 1,
2020.
The financial statements were signed by the managing director on March 15, 2020 and approved
by the shareholders on March 31, 2020.
* On January 1 5, 2020, a customer owing P900, 000 to Anne Company filed for
bankruptcy.
The financial statements included an allowance for doubtful accounts pertaining to this
customer of P100, 000.
* Anne Company's issued share capital comprised 100,000 ordinary shares with P100 par
value.
The entity issued additional 25,000 shares on March 1, 2020 at par value.
* Equipment with carrying amount of P525, 000 was destroyed by fire on December 15, 2019.
Anne Company had booked a receivable ofP400, 000 from the insurance entity on December
31, 2019.
After the insurance entity completed an investigation on February 1, 2020, it was discovered that
the fire took place due to negligence of the machine operator. As a result, the insurer's liability
was zero on this claim.
What total amount should be reported as "adjusting events" on December 31, 2019?
a. 1,300,000
b. 1,200,000
c. 3,800,000
d. 3,700,000
Solution 3-4 Answer b

Doubtful accounts (900,000 minus allowance 100,000) 800,000
Loss on claim receivable 400,000
Total adjusting events 1,200,000
Problem 3-5 (IFRS)
The end of reporting period of Norway Company is December 31, 2019 and the financial
statements for 2019 are authorized for issue on March 15, 2020.
* On December 31, 2019, Norway Company had a receivable of P 400,000 from a

customer that is due 60 days after the end of reporting period. On January 15, 2020, a receiver
was appointed for the said customer. The receiver informed Norway that the P 400,000 would
be paid in full by June 30, 2020.
* Norway Company had equity investments held for trading. On December 31, 2019, these
investments were recorded at the fair value of P 5,000,000. During the period up to February
15, 2020, there was a steady decline in the fair value of all the shares in the portfolio, and on
February 15, 2020, the fair value had fallen to P 2,000,000.
* Norway Company had reported a contingent liability On December 31, 2019 related to a
court case in which Norway Company was the defendant. The case was not heard until the
first week of February 2020. On February 15, 2020, the judge handed down a decision against
Norway Company. The judge determined that Norway Company was liable to pay damages
totaling P 3,000,000.
* On December 31, 2019, Norway Company had a receivable from a large customer in the
amount of P 3,500,000. On January 31, 2020, Norway Company was advised in writing by the
liquidator of the said customer that the customer was insolvent and only 10% of the receivable
will be paid on April 30, 2020.
What total amount should be reported as "adjusting events" on December 31, 2019?
a. 6,150,000
b. 9,150,000
c. 9,550,000
d. 6,500,000

Litigation loss 3,000,000
Doubtful accounts expense (3,500,000 x 90%) 3,150,000
Total amount of adjusting events 6,150,000
The financial assets held for trading are measured at fair value which must be determined at the
end of each reporting period.
Problem 3-6 (IFRS)
Ginger Company is completing preparation of the financial statements for the year ended
December 31, 2019. The financial statements are authorized for issue on March 31, 2020.
* On March 15, 2020, a dividend was declared and a contractual profit share payment of P
1,000,000 was made, based on the profit for the year ended December 31, 2019.
* February 1, 2020, a customer went into liquidation having owed the entity P 500,000 for
the past 5 months.
No allowance had been made against this account in the financial statements.
* On March 20, 2020, a manufacturing plant was destroyed by fire resulting in a financial
loss of P 2,500,000.
What total amount should be recognized in profit or loss for 2019 to reflect adjusting events after
the end of reporting period?
a. 4,000,000
b. 3,000,000
c. 2,500,000
d. 1,500,000

Contractual profit share payment 1,000,000
Doubtful accounts expense 500,000
The dividend declaration is not recognized in profit or loss but a deduction from retained
earnings on March 15, 2020.
The manufacturing plant destroyed by fire on March 20, 2020 is a non-adjusting event requiring
disclosure only in the financial statements for 2019.
The fire loss should be recognized in 2020.

Events after reporting period
Ejay Kaye Delos Reyes
Problem 3-7 (IFRS)

During 2019, Marian company was sued by a competitor for P5,000,000 for infringement of a
patent.
Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a provision
on December 31, 2019.
Subsequently, on March 15, 2020, the Supreme Court decided in favor of the party alleging
infringement of the patent and ordered the defendant to pay the aggrieved party a sum of
P3,500,000.
The financial statements were prepared by management on February 15, 2020 and approved by
the board of directors on March 31, 2020.
1. What amount should be recognized as accrued liability on December 31, 2019?

a. 5,000,000
b. 3,500,000
c. 3,000,000
d. 1,500,000
2. What amount should be adjusted on December 31, 2019 in relation to this event?
a. 1,000,000
b. 3,000,000
c. 500,000
d. 0
Solution 3-7:
Question 1:
Accrued liability – December 31, 2019 3,500,000
The actual amount of P3,500,000 should be accrued as liability because the suit was decided on
March 15.2020 which is prior to the issuance of the financial statements on March 31, 2020.
Question 2:
Accrued liability – December 31, 2019 3,500,000
Provision already accrued 3,000,000
Increase in accrued liability 500,000
Problem 3-8 (IFRS)
Caroline Company provided the following events that occurred after December 31, 2019:
Jan. 15, 2020 P3,000,000 of accounts receivable was written off due to the bankruptcy of a
major due to the bankruptcy of a major customer.
Feb. 15, 2020 A shipping vessel of the entity with carrying amount of P5,000,000 was
completely lost at sea because of a hurricane.
Mar. 10, 2020 A court case involving the entity as the defendant was settled and the entity
was obligated to pay the plaintiff P1,500,000. The entity previously has not
recognized a liability for the suit because management deemed it possible that
the entity would lose the case.
Mar. 15, 2020 A factory with a carrying of P4,000,000 was completely razed by forest fire
that erupted in the vicinity.
The management completed the draft of the financial statements for 2019 on February 10, 2020.
On March 31, 2020, the board of directors authorized the financial statements for issue.
The entity announced the profit and other selected information on March 22, 2020.
The financial statements were approved by shareholders on April 2, 2020 and filed with the
regulatory agency the very next day.
What total amount should be reported as adjusting events on December 31, 2019?
a. 9,500,000
b. 8,500,000
c. 9,000,000
d. 4,500,000
Solution 3-8:
Accounts written off 3,000,000

Loss from lawsuit 1,500,000
The loss on the shipping vessel and the fire loss should be recognized in 2020 and not in 2019.
PFA 1
Chapter 4 – Statement of Comprehensive
Income
Ma. Nicole H. Buisan

Brock Company reported operating expenses in two categories, namely distribution and general
and administrative.
The adjusted trial balance at year-end included the following expense and loss accounts for
current year:
Accounting and legal fees 1,200,000

Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000
One-half of the rented premises is occupied by the sales department.
What amount should be reported as total distribution costs?
a. 4,800,000
b. 4,000,000
c. 3,700,000
d. 3,600,000
Solution:
Advertising 1,500,000
Freight out 800,000
Rent (2,200,000 x ½) 1,100,000
Sales salaries and commissions 1,400,000
Total distribution costs 4,800,000

Lee Company reported the following data for the current year:
Legal and audit fees 1,700,000

Interest on inventory loan 2,100,000
Loss on abandoned data processing equipment 350,000
Freight in 1,750,000
Freight out 1,600,000
Officers’ salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000
Research and development expense 1,000,000
The office space is used equally by the sales and accounting departments.
What amount should be classified as general and administrative expenses?
a. 5,250,000
b. 6,450,000
c. 5,600,000
d. 6,250,000
Solution:
Legal and audit fees 1,700,000

Officers’ salaries (2,400,000 x ½) 1,500,000
Insurance 850,000
Total general and administrative expenses 5,250,000

Vigor Company provided the following information for the current year:
Net accounts receivable at January 1 900,000

Net accounts receivable at December 31 1,000,000
Account receivable turnover 5 to 1
Inventory at January 1 1,100,000
Inventory at December 31 1,200,000
Inventory turnover 4 to 1
What is the gross income for the current year?
a. 150,000
b. 200,000
c. 300,000
d. 400,000
Solution:
Net sales = Average accounts receivable x accounts receivable turnover

= 950,000 x 5
= 4,750,000
Cost of goods sold = Average inventory x inventory turnover

= 1,150,000 x 4
= 4,600,000
Gross income = 4,750,000 – 4,600,000

= 150,000

Hiligaynon Company provided the following information for the current year:
Beginning inventory 400,000

Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000
The cost of goods sold is six times the selling expense.
What is the amount of gross purchases?
a. 6,500,000
b. 6,700,000
c. 8,000,000
d. 8,200,000
Solution:
Beginning Inventory 400,000

Gross purchases (SQUEEZE) 8,200,000
Freight in 300,000
Purchase returns (900,000)
Goods available for sale 8,000,000

Ending inventory (500,000,)
Cost of goods sold (1,250,000 x 6) 7,500,000


Bicolano Company provided the following data for the current year:
Inventory January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances 500,000
Sales returns and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate 20%
1. What is the cost of goods sold?
a. 6,700,000
b. 6,200,000
c. 7,200,000
d. 9,000,000
2. What is the amount of gross sales for the current year?
a. 7,750,000
b. 8,500,000
c. 7,000,000
d. 9,125,000
Solutions:
Question 1
Inventory January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances (500,000)
Inventory December 31 (2,800,000)
Cost of goods sold 6,200,000

Question 2
Net Sales (6,200,000 / 80%) 7,750,000

Sales returns and allowances 750,000
Gross sales 8,500,000
Cost ratio (100% minus 20%) 80%
In the absence of any statement to the contrary, the gross profit rate is based on sales.
Kyna Raissa S. Cayabyab

Kay Company provided the following information for the current year:
Increase in raw materials inventory 150,000

Decrease in goods in process inventory 200,000
Decrease in finished goods inventory 350,000
Raw materials purchased 4,300,000
Direct labor payroll 2,000,000
Factory overhead 3,000,000
Freight out 450,000
Freight in 250,000
What is the cost of goods sold for the current year?
a. 9,950,000
b. 9,550,000
c. 9,250,000
d. 9,150,000
Raw materials purchased 4,300,000

Freight in 250,000
Increase in raw materials (150,000)
Raw materials used 4,400,000
Direct labor 2,000,000
Factory overhead 3,000,000
Total Manufacturing Cost 9,400,000
Decrease in goods in process 200,000
Cost of Goods Manufactured 9,600,000
Decrease in finished goods 350,000
Any increase in inventory decreases cost of goods sold and any decrease in inventory increases
cost of goods sold.
Argentina Company incurred the following costs and expenses during the current year:
Raw material purchases 4,000,000

Indirect labor — factory 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Taxes on salesroom and general office 150,000
Depreciation — sales equipment 50,000
Advertising 400,000
Sales salaries 500,000
Office salaries 700,000
Utilities — 60% applicable to factory 500,000
Beginning Ending
Raw materials 300,000 450,000
Work in process 400,000 350,000
Finished goods 500,000 700,000
1. What is the cost of raw materials used?
a. 3,850,000
b. 4,000,000
c. 4,150,000
d. 4,750,000
2. What is the cost of goods manufactured for the current year?
a. 7,450,000
b. 7,200,000
c. 7,100,000
d. 7,300,000
3. What is the cost of goods sold for the current year?
a. 7,300,000
b. 6,900,000
c. 7,600,000
d. 8,300,000
Solution 4-7
Question 1 Answer a
Beginning raw materials 300,000

Raw material purchases 4,000,000
Raw materials available for use 4,300,000
Ending raw materials (450,000)
Question 2 Answer c

Factory overhead:
Indirect labor 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Utilities (60% x 500,000) 300,000 1,700,000
Total manufacturing cost 7,050,000
Beginning work in process 400,000
Ending work in process (350,000)
Cost of goods manufactured 7,100,000
Question 3 Answer b
Beginning finished goods 500,000

Cost of goods manufactured 7,100,000
Ending finished goods (700,000)
Mercury Company showed cost of goods sold of P4,320,000 in the statement of comprehensive
income after the first year of operations.
The total manufacturing cost comprised the following:
Materials used 50%

Direct labor incurred 30%
Manufacturing overhead 30%
Goods in process at year-end amounted to 10% of the total manufacturing cost.
Finished goods at year-end amounted to 20% of the cost of goods manufactured.
What is the amount of the direct labor cost incurred?
a. 1,800,000
b. 2,400,000
c. 3,000,000
d. 5,400,000
Total manufacturing cost 100% 6,000,000

Goods in process — end 10% (600,000)
Cost of goods manufactured 90% 5,400,000

Finished goods — end (20% x 90%) 18% (1,080,000)
Cost of goods sold 72% 4,320,000

Total manufacturing cost (4,320,000 / 72%) 6,000,000
Direct labor cost (30% x 6,000,000) 1,800,000
Problem 4-9 (IAA)
Tanzania Company reported operating expenses other than interest expense for the year at 40%
of cost of goods sold but only 20% of sales. Interest expense is 5% of sales.
The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as
the beginning inventory.
The net income for the year is P2,100,000. The income tax rate is 30%.
1. What is the amount of sales for the year?
a. 10,000,000
b. 15,000,000
c. 18,000,000
d. 12,000,000
2. What is the amount of purchases?
a. 6,000,000
b. 7,200,000
c. 3,000,000
d. 3,600,000
Solution 4-9
Question 1 Answer d
Income before income tax (2,100,000 / 70%) 3,000,000

Sales (3,000,000 / 25%) 12,000,000
Sales 100%
Cost of goods sold ( 50%)
Operating expenses ( 20%)
Interest expense ( 5%)
Income before income tax 25%
Percentage of cost of goods sold (20% divided by 40%) 50%
Question 2 Answer b
Cost of Goods Sold (50% of 12,000,000) 6,000,000

Multiply by 120%
Purchases 7,200,000
Ronalyn Company reported that the financial records were destroyed by fire at the end of the
current year.
However, certain statistical data related to the income statement are available.
Interest expense 200,000

Sales discount 300,000
The beginning inventory was P500,000 and decreased 20% during the year.
Administrative expenses are 25% of cost of goods sold but only 10% of gross sales.
Distribution costs represent 70% of the operating expenses.
1. What is the amount of gross sales?
a. 7,500,000
b. 8,000,000
c. 4,500,000
d. 5,000,000
2. What is the total amount of operating expenses?
a. 1,750,000
b. 2,500,000
c. 3,000,000
d. 2,700,000
3. What is the income before tax for the current year?
a. 1,500,000
b. 1,000,000
c. 1,800,000
d. 1,750,000
Solution 4-10
Question 1 Answer a
Cost of goods sold ( 10% / 25%) 40%

Divide by cost ratio 40%
Gross sales 7,500,000
Question 2 Answer b
Administrative expenses (10% x 7,500,000) 750,000

Operating expenses ( 750,000 / 30%) 2,500,000
Administrative expenses (750,000)
Distribution costs 1,750,000
Question 3 Answer a
Sales 7,500,000
Sales discount (300,000)
Net sales 7,200,000
Cost of goods sold (3,000,000)
Gross income 4,200,000
Administrative expenses (750,000)
Distribution costs (1,750,000)
Interest expense (200,000)
PFA 1
CHAPTER 5 – STATEMENT OF COMPREHENSIVE
INCOME
Mel E. Cruz
Thorpe Company reported net income of P7,500,000 for the net current year which included the
following amounts:
Unrealized loss on foreign currency translation (500,000)

Gain on early retirement of bonds payable 2,200,000
Adjustment of profit of prior year for error in depreciation, net of tax effect (750,000)
Loss from fire (1,400,000)
What amount should be reported as adjusted net income?
a. 6,250,000
b. 9,500,000
c. 8,000,000
d. 8,750,000
Solution:
Net income per book 7,500,000

Add: Unrealized loss as component of other
comprehensive income 500,000
Adjustment of profit of prior year 750,000 1,250,000
Adjusted net income 8,750,000
The gain on early retirement of bonds payable and the loss from fire are properly included in
the computation of net income.
Pearl company reported income before tax of P5,000,000 for the current year which included the
following amounts:
Equity in earnings of Cinn Company – 40% interest 1,600,000

Dividend received from Cinn Company 400,000
Adjustment of profit of prior year for arithmetical error in depreciation (500,000)
Gain on sale of equity investment at FVOCI 1,000,000
What amount should be reported as income before tax?

a. 4,100,000
b. 4,600,000
c. 5,500,000
d. 5,100,000
Solution:
Reported income before tax 5,000,000

Add: Adjustment of profit of prior year 500,000
Total 5,500,000
Less: Dividend received from Cinn 400,000
Gain on sale of equity investment 1,000,000 1,400,000
Corrected income before tax 4,100,000
The prior period error is added back to income because it is shown as a deduction in the
statement of retained earnings.
The dividend received from Cinn is incorrectly included in income because it is treated as a
return of investment since the interest is 40% and therefore the equity method is used.
The equity in earnings of Cinn Company is properly part of income because the entity is
applying the equity method.
The gain on sale of equity investment is not included in profit or loss but recognized directly in
retained earnings.
Problem 5-3 (IAA)
Remy Company had the following events and transactions during 2019:
● Depreciation for 2018 was discovered to be understated by P300,000.

● A litigation settlement resulted in a loss of P250,000.
● The inventory on December 31, 2017 was overstated by P200,000.
● The entity disposed of a recreational division at a loss of P600,000
● The income tax rate is 30%
1. What is the effect of these events on the income from continuing operations for 2019?
a. 175,000
b. 385,000
c. 665,000
d. 750,000
2. What is the effect of these events on net income for 2019?
a. 245,000
b. 595,000
c. 420,000
d. 850,000
Solutions:
Question 1
After-tax effect of litigation loss (250,000 x 70%) 175,000

The depreciation error is treated retrospectively as a correction of retained earnings.
The inventory error is counterbalancing.
The loss on disposition of the recreational division is part of discontinued operations.
Question 2
After-tax effect of litigation loss 175,000

After-tax effect of litigation loss on discontinued division (600,000 x 70%) 420,000
Total effect on net income 595,000
Problem 5-4 (IFRS)
Divina Company provided the following information for the current year:
Income from continuing operations 4,000,000

Income from discontinued operations 500,000
Unrealized gain on financial asset – FVPL 800,000
Unrealized loss on equity investment – FVOCI 1,000,000
Unrealized gain on debt investment – FVOCI 1,200,000
Unrealized gain on futures contract designated as a cash flow hedge 400,000
Transaction loss on foreign operations 200,000
Net “remeasurement” gain on defined benefit plan 600,000
Loss on credit risk of a financial liability at FVPL 300,000
Revaluation surplus during the year 2,500,000
1. What amount should be reported as net income for the current year?
a. 4,000,000
b. 4,500,000
c. 5,300,000
d. 4,800,000
2. What net amount should be reported as OCI for the current year?
a. 4,000,000
b. 3,500,000
c. 3,200,000
d. 700,000
3. What amount should be reported as comprehensive income for the current year?
a. 5,200,000
b. 7,700,000
c. 8,500,000
d. 7,200,000
Solutions:
Question 1

Income from discontinued operation 500,000
The unrealized gain on financial asset at FVPL is already included in income from continuing
operations.
Question 2
Unrealized loss on equity investment at FVOCI (1,000,000)

Unrealized gain on debt investment at FVPL 1,200,000
Unrealized gain on futures contract designated as a cash flow hedge 400,000
Transaction loss on foreign operations (200,000)
Net “remeasurement” gain on defined benefit plan 600,000
Loss on credit risk of a financial liability at FVPL (300,000)
Net amount of OCI – gain 3,200,000
Question 3

Other comprehensive income 3,200,000
Comprehensive income 7,700,000
Problem 5-5 (IAA)
Bangladesh Company provided the following information for the current year:
Sales 50,000,000
General and administrative expenses 4,000,000
Interest expense 2,000,000
Gain on early extinguishment of long-term debt 500,000
Correction of inventory error, net of income tax – credit 1,000,000
Investment income – equity method 3,000,000
Gain on expropriation 2,000,000
Dividends declared 2,500,000
What is the income from continuing operations?
a. 9,000,000
b. 8,000,000
c. 9,500,000
d. 7,000,000
Solution 5-5 Answer c
Sales 50,000,000
Gain on expropriation 2,000,000
Investment income 3,000,000
Total income 25,000,000
Expenses:
General and administrative 4,000,000
Finance Cost 1,500,000 10,500,000
Income before tax 14,500,000
Income tax expense (5,000,000)
Interest expense 2,000,000
Gain on early extinguishment (500,000)
Finance cost 1,500,000
Monica M. Garcia
Problem 5-6 (IAA)
Rosebud Company provided the following information for the current year:
Sales 5,000,000
Foreign translation adjustment – credit 400,000
Selling expenses 700,000
Unusual and infrequent gain 400,000
Correction of inventory error 200,000
General and administrative expenses 600,000
Gain on sale of investment 50,000
Proceeds from sale of land at cost 800,000
Dividends 300,000
What amount should be reported as income from continuing operations?
a. 1,200,000
b. 1,350,000
c. 1,600,000
d. 2,000,000
Solution:
Sales 5,000,000
Costs of goods (2,800,000)
sold

Other income 450,000
Expenses:
Selling 700,000
expenses
General and 600,000 (1,300,000)
administrative
expenses
Income before 1,350,000

income tax
Income tax ( 150,000)
expense
Income from 1,200,000

continuing
operations
Unusual and 400,000

infrequent gain
Gain on sale of 50,000
investment
The credit balance in the foreign translation adjustment account is a component of other
comprehensive income
Vane Company provided the following information for the current year:
Debit Credit
Sales 5,750,000
Administrative
expenses 700,000
Sales commissions 500,000
Interest revenue 250,000
Freight out 150,000
Uncollectible
accounts expense 150,000
Loss on sale of
equipment 100,000
Loss on early
retirement of long-
term debt 200,000
4,200,000 6,000,000
Finished goods inventory:
January 1 4,000,000
December 31 3,600,000
Income tax rate 30%
1. What amount should be reported as cost of goods manufactured?
a. 2,000,000
b. 2,150,000
c. 2,800,000
d. 2,950,000
2. What amount should be reported as income from continuing operations?
a. 1,260,000
b. 1,295,000
c. 1,400,000
d. 1,470,000
Solutions:
Finished Goods Inventory - January 1 4,000,000

Cost of goods manufactured (SQUEEZE) 2,000,000

Finished goods inventory - December 31 (3,600,000)
Question 1
The cost of goods manufactured is “squeezed” by working back from the cost of goods sold.
Question 2
Sales 5,750,000
Cost of goods
sold (2,400,000)
Gross Income 3,350,000

Total Income 3,600,000
Expenses:
Administrative
expenses 700,000
Sales
commissions 500,000
Freight out 150,000
Uncollectible 150,000
accounts
expense
Loss on sale
of equipment 100,000
Loss on early (1,800,000
retirement 200,000 )
Income before
income tax 1,800,000
Income tax
expense (30% × (540,000
1,800,000) )
Net Income 1,260,000

Problem 5-8 (IFRS)
Dahlia Company provided the following information for the current year:
Sales 9,500,000
Gain sale of equipment 100,000
Share of profit of associate 350,000
Finance cost 150,000
Distribution costs 500,000
Administrative expenses 300,000
Translation loss on foreign operation 200,000
What is the net income for the current year?
a. 2,300,000
b. 3,300,000
c. 4,200,000
d. 2,100,000
Solution:
Sales 9,500,000
Cost of goods
sold 6,000,000

Other Income
(250,000 +
100,000) 350,000
Share of profit
of associate 350,000
Total Income 4,200,000
Expenses:
Distribution
costs 500,000
Administrative
expenses 300,000
Finance cost 150,000 950,000
Income before
income tax 3,250,000
Income tax (950,000
expense )
Net Income 2,300,000
Revaluation
surplus during
the year 1,200,000
Translation loss
on foreign (200,000
operation )
Other
comprehensive
income 1,000,000
Comprehensive
income
(2,300,000 +
1,000,000) 3,300,000
Problem 5-9 (IFRS)
Rose Company, an investment entity, provided the following income and expenses for the
current year:
Dividend income from investments 9,200,000

Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
Unrealized gain on derivative contract as cash
flow hedge 400,000
Income from dealing in securities and
derivatives held for trading 600,000
Writedown of securities and derivatives held
for trading 150,000
Administrative staff costs 3,800,000
Sundry administrative costs 1,200,000
1. What is the total income before tax?
a. 11,200,000
b. 11,350,000
c. 10,700,000
d. 10,750,000
2. What is the total amount of expenses before tax?
a. 5,450,000
b. 5,300,000
c. 5,000,000
d. 5,150,000
3. What is the net income for the current year?
a. 5,900,000
b. 3,700,000
c. 4,200,000
d. 5,500,000
4. What is the comprehensive income for the current year?
a. 4,200,000
b. 4,600,000
c. 3,800,000
d. 9,200,000
Solutions:
Question 1:
Dividend income from investments 9,200,000

Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
450,000
derivatives held for trading - net amount

600,000
derivatives held for trading
Writedown of securities and derivatives held
(150,000)
for trading
Net amount 450,000

Question 2
Administrative staff costs 3,800,000

Sundry administrative costs 1,200,000
Question 3


Income tax expense (1,700,000)
Question 4

Other comprehensive income:
Unrealized gain on
derivative contract 400,000
Comprehensive income 4,600,000

Problem 5-10 (IAA)
Empress Company provided the following

data for the current year:
Retained earnings, January 1 3,000,000

Dividends declared 1,000,000
Sales 8,400,000
Dividend income 100,000
Inventory, January 1 1,000,000
Purchases 3,700,000
Salaries 1,540,000
Contribution to employees' pension fund 300,000
Delivery 200,000
Miscellaneous expense 120,000
Doubtful accounts expense 10,000
Depreciation expense 80,000
Loss on sale of investment 100,000
Income from discontinued operation, net of
tax 500,000
Inventory on December 31 at cost 850,000
Net realizable value of inventory 700,000
1. What is the cost of goods sold?
a. 3,850,000
b. 4,000,000
c. 4,150,000
d. 4,700,000
2. What is the total amount of expenses before income tax?

a. 2,350,000
b. 2,500,000
c. 2,250,000
d. 2,050,000
3. What is the net income for the current year?
a. 2,000,000
b. 2,500,000
c. 1,500,000
d. 2,650,000
4. What is the balance of retained earnings on December 31?
a. 4,000,000
b. 4,500,000
c. 3,500,000
d. 4,650,000
Solutions:
Question 1:
Inventory, January 1 1,000,000

Purchases 3,700,000

Inventory on December 31 at NRV (700,000)
Cost of goods sold after inventory writedown 4,000,000
Question 2:
Salaries 1,540,000
Contribution 300,000
Delivery 200,000
Miscellaneous expense 120,000
Doubtful accounts 10,000
Depreciation 80,000
Loss on sale of investment 100,000
Total expenses before tax 2,350,000
Question 3
Sales 8,400,000

Dividend income 100,000


Income tax expense (150,000)

Income from discontinued operation 500,000
Question 4
Retained earnings - January 1 3,000,000

Total 5,500,000
Dividends declared (1,000,000)
Retained earnings - December 31 4,500,000
Chapter 6 – Noncurrent Asset Held for Sale

Ejay Kaye Delos Reyes
Problem 6-1 (IFRS)

Dana Company accounted for noncurrent assets using the cost model. On October 1, 2019, the
entity classified a noncurrent asset as held for sale.
At that date, the carrying amount was P3,200,000, the fair value was estimated at P2,000,000 and
the cost of disposal at P200,000.
On December 31, 2019, the asset was sold for net proceeds of P1,850,000.
What amount should be recognized as impairment loss for 2019?

a. 1,000,000
b. 1,200,000
c. 1,350,000
d. 0
Solution: 6-1
Carrying amount 3,200,000

Fair value less cost of disposal (2,200,000 – 200,000) 2,000,000
Impairment loss 1,200,000
PFRS 5, paragraph 15, provides that an entity shall measure a noncurrent asset or disposal group
classified as held for sale at the lower of carrying amount and fair value less cost of disposal.
Sale price 1,850,000

Carrying amount - December 31, 2019 2,000,000
Loss on disposal (150,000)
Problem 6-2 (IFRS)
Arlene Company accounted for noncurrent assets using cost model. On October 30, 2019, the
entity classified a noncurrent asset as held for sale.
At that date, the carrying amount was P1,500,000, the fair value was estimated at P1,100,000 and
the cost at P150,000.
On December 31, 2019, the asset was sold for net proceeds of P800,000.
1. What amount should be reported as impairment loss for 2019?

a. 550,000
b. 400,000
c. 700,000
d. 0
2. What amount should be recognized as loss on disposal for 2019?

a. 550,000
b. 700,000
c. 150,000
d. 0
Solution: 6-2
Question 1:

Fair value less cost of disposal (1,100,000 - 150,000) 950,000
Impairment loss 550,000
Question 2:
Sale price 800,000

Carrying amount on December 31, 2019, date of sale 950,000
Loss on disposal (150,000)
Problem 6-3 (IFRS)
On January 1, 2019, Racelle Company purchased land at a cost of P6,000,000. The entity used
the revaluation model for this asset.
The fair value of the land was P7,000,000 on December 31, 2019 and P8,500,000 on December
31,2020.
On July I, 2021, the entity decided to sell the land and therefore classified the asset as held for
sale.
The fair value of the land on this date is P7,600,000. The estimated cost of disposal is very
minimal.
On December 31, 2021, the land was sold for P8,000,000.
1. What amount in OCI should be recognized in the statement of comprehensive income for the
year ended December 31, 2020?
a. 2,500,000
b. 1,500,000
c. 400,000
d. 900,000
2. What amount should be recognized as gain or loss on sale of land in 2021?

a. 2,000,000 gain
b. 1,000,000 gain
c. 400,000 gain
d. 500,000 loss
3. What amount of OCI is recycled to retained earnings in 2021?

a. 1,000,000
b. 1,600,000
c. 2,500,000
d. 2,000,000
Solution: 6-3
Question 1:
Fair value - December 31, 2020 8,500,000

Fair value - December 31, 2019 7,000,000
Revaluation surplus in 2020 - OCI 1,500,000
Question 2:
Sale price 8,000,000

Carrying amount equal to fair value on July 1, 2021 7,600,000
Gain on sale of land 400,000
Question 3:
2019
Jan. 1 Land 6,000,000
Cash 6,000,000
Dec. 31 Land 1,000,000

2020
Dec. 31 Land 1,500,000
2021
July 1 Revaluation surplus 900,000
Land (8,500,000 – 7,600,000) 900,000
1 Land held for sale 7,600,000

Land 7,600,000
Dec. 31 Cash 8,000,000

Land held for sale 7,600,000
31 Revaluation surplus 1,600,000
Retained Earnings 1,600,000
(2,500,000 – 900,000)
Kate Ann Eje
Problem 6-4 (IFRS)

Surreal Company accounted for noncurrent assets using the revaluation model. On October 1,
2019, the entity classified a land as held for sale.
At that date. the carrying amount of the land was P5,000,000 and the balance in the revaluation
surplus was P1,500,000.
At same date, the fair value of the land was estimated at P5,500,000 and the cost of disposal at
P100,000.
On December 31 ,2019, the fair value less cost of disposal of the land did not change. The land
was sold on January 31, 2020 for P6,000,000.
l. What amount should be recognized as impairment loss in 2019?
a. 100,000
b. 500,000
c. 400,000
d. 0
2. What is the adjusted carrying amount of the land on December 31, 2019?
a. 5,000,000
b. 5,500,000
c. 5,400,000
d. 3,500,000
3. What amount should be reported as gain on disposal of land in 2020?
a. 1,000,000
b. 2,600,000
c. 500,000
d. 600,000
4. What amount of OCI is reclassified to retained earnings in 2020?
a. 1,500,000
b. 2,600,000
c. 500,000
d. 0
Solution:
Question 1
Carrying amount equal to fair value P 5,500,000

Fair value loss cost of disposal (5,500,000-100,000) 5,400,000
Impairment loss for 2019 P 100,000
Question 2
Adjusted carrying amount on December 31, 2019 5,400,000
Question 3
Sale price P 5,500,000

Carrying Amount 5,400,000
Gain on sale P 100,000
Question 4
Revaluation surplus — October 1, 2019 P 1,500,000

Increase in fair value (5,500,000—5,000,000) 500,000
Revaluation surplus reclassified to retained earnings P 2,000,000
2019
Oct 1 Land 500,000
Revaluation surplus 500,000
1 Land held for sale 5,500,000

Land 5,500,000
1 Impairment Loss 100,000

Land held for sale 100,000
2020
Jan 31 Cash 6,000,000
31 Revaluation surplus 2,000,000
Retained Earnings 2,000,000
Problem 6-5 (IFRS)

Affable Company purchased an equipment for P5,000,000 on January 1, 2019. The equipment
has a useful life of 5 years with no residual value.
On December 31, 2019, the entity classified the equipment as held for sale. On such date, the fair
value less cost of disposal of the equipment was P3,500,00.
On December 31, 2020, the entity believed that the criteria for classification as held for sale can
no longer be met.
Accordingly, the entity decided not to sell the equipment but to continue to use it.
On December 31, 2020, the fair value less cost of disposal of the equipment was P2,700,000.
1. What is the carrying amount of the equipment on December 31, 2019 before classification as
held for sale??
a. 5,000,000
b. 4,000,000
c. 3,500,000
d. 4,500,000
2. What amount of impairment loss should be recognized in 2019?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
3. What amount should be included in profit or loss in 2020 as a result of the reclassification of
the equipment to property, plant and equipment?
a. 800,000 gain
b. 800,000 loss
c. 300,000 gain
d. 300,000 loss
4. What is the adjusted carrying amount of the equipment on December 31, 2021?
a. 2,700,000
b. 1,800,000
c. 2,000,000
d. 3,000,000
Solution:
Question 1
Answer B
Question 2
Cost - January 1, 2019 P 5,000,000

Accumulated depreciation (5,000,000/5) (1,000,000)
Carrying amount before classification — December 31, 2019 4,000,000
Fair value less cost of disposal 3,500,000
Question 3
Cost - January 1, 2019 P 5,000,000

Accumulated depreciation (5,000,000/5 x 2 years) (2,000,000)
Carrying amount — no classification as held for sale 3,000,000
Measurement of equipment as PPE P 2,700,000
Under PFRS 5, paragraph 27, an entity shall measure a noncurrent asset that ceases to be
classified as held for sale at the lower between:
a. The carrying amount on the basis that the asset had never been classified as held for sale.
b. The recoverable amount on the date of the decision not to sell. The recoverable amount is the
higher between fair value less cost of disposal and value in use.
Carrying amount per book P 3,500,000

Measurement of equipment as PPE (2,700,000)
Loss on reclassification P 800,000
Question 4
Measurement of equipment — December 31, 2020 P 2,700,000
Depreciation for 2021 (2,700,000 / 3 years remaining) (900,000)
Carrying amount — December 31, 2021 P 1,800,000
Problem 6-6 (IFRS)

Clara Company purchased equipment for P5,000,000 on January 1, 2019 with a life of 10 years
and no residual value.
On December 31, 2020, the entity classified the equipment as held for sale. The fair value of the
equipment on December 31, 2020 was P3,000,000 and the cost of disposal P100,000.
On December 31, 2021, fair value of the equipment was P3,800,000 and the cost of dismissal
P200,000. The value in use was determined to be P3,300,000.
On December 31, 2021. the entity believed that the criteria for classification as held for sale can
no longer be met.
l. What amount of impairment loss should be recognized for 2020?
a. 300,000
b. 800,000
c. 700,000
d. 0
2. What is the measurement of the equipment that ceases as held for sale on December 31,
2021?
a. 3,200,000
b. 4.000,000
c. 3,500,000
d. 3,600,000
3. What amount should be recognized as gain as a result of the reclassification in 2021?
a. 800,000
b. 300,000
c. 400,000
d. 0
Solution:
Question 1
Cost - January 1, 2019 P 5,000,000

Accumulated depreciation — December 31, 2020 (1,000,000)
5,000,000/10 x 2 years)
Carrying amount — December 31, 2020 4,000,000
Fair value less cost of disposal — December 31, 2020 3,200,000
(3,300,000 - 100,000 cost of disposal)
Question 2
Carrying amount — December 31, 2020 P 4,000,000

Depreciation that would have been recognized in 2021
(5,000,000/10) (500,000)
Carrying amount — December 31, 2021 3,500,000
Fair value — December 31, 2021 3,800,000

Cost of disposal (200,000)
Recoverable amount — December 31, 2021 3,600,000
The fair value less cost of disposal is the recoverable amount because it is higher than the value
in use of P3,300,000.
The measurement of the equipment as PPE on December 31, 2021 is equal to the carrying
amount of P3,500,000 on the basis that there was no classification as held for sale because this is
lower than the recoverable amount of P3,600,000.
Question 3
Measurement of equipment as PPE P 3,500,000

Carrying amount per book — December 31, 2021 (3,200,000)
Gain on reclassification 300,000
PFA 1
Chapter 07–Discounted Operation

Nikka Mae M. Evangelista
Problem 7-1 (IFRS)

On September 30, 2019, when the carrying amount of the net assets of a business segment was
P70,000,000, Young Company signed a legally binding contract to sell the business segment.
The sale is expected to be completed by January 31, 2020 at a sale price of P60,000,000.
In addition, prior to January 31, 2020, the sale contract obliged Young Company to terminate the
employment of certain employees of the business segment incurring an expected termination cost
of P5,000,000 to be paid on June 30, 2020.
The segment revenue and expenses for 2019 were P40,000,000 and P45,000,000, respectively.
The income tax rate is 30%.
What amount should be reported as loss from discontinued operation for 2019?
a. 14,000,000
b. 20,000,000
c. 15,000,000
d. 10,500,000
Solution:
Revenue 40,000,000
Expenses (45,000,000)
Impairment loss (10,000,000)
Termination Cost ( 5,000,000)
Loss from discontinued operation (20,000,000)

Tax Effect (30% x 20,000,000) 6,000,000
Net loss from discontinued operation 14,000,000
Selling price 60,000,000

Carrying amount (70,000,000)

Problem 7-2 (IFRS)

Xavier Company has three segments. A, B and C. Segment C, the closing division, is deemed
inconsistent with the long-term direction of the entity. Management has decided to dispose of
Segment C.
On November 15, 2019, the board of directors of Xavier Company voted to approve the disposal
and an announcement was made.
On that date the carrying amount of Segment C's net assets was P90,000,000 and the fair value
less cost of disposal was P70,000,000.
Segment C’s revenue and expenses for 2019, respectively, were and P50,000,000 and
P45,000,000, including an interest of P5,000,000 attributable to Segment C.
There was no further impairment of assets between November 15 and December 31, 2019. The
income tax rate is 30%.
What amount of loss from discontinued operation should be reported for 2019?
a. 15,000,000
b. 10,500,000
c. 7,000,000
d. 5,000,000
Solution:
Revenue 50,000,000
Expenses (45,000,000)
Loss after tax (15,000,000 x 70%) 10,500,000
Impairment loss 20,000,000

Problem 7-3 (IFRS)

Zebra Company is a diversified entity with nationwide interests in commercial real estate
development, banking. mining and food distribution. The food distribution division was deemed
to be inconsistent with the long-term direction of the entity.
On October l, 2019 the board of directors voted to approve the disposal of this division. The sale
is expected to occur in August 2020.
The food distribution had revenue of P35,000,000 and expenses of P27,000.000 for the period
January 1 to September 30, and revenue of P15,000,000 and expenses of P10,000,000 for the
period October I to December 31.
The carrying amount of the division's net assets on December 31, 2019 was P55,000,000 and the
fair value less cost of disposal was P60,000,000.
The sale contract required Zebra to terminate certain employees incurring an expected
termination cost of P4,000,000 to be paid by December 15, 2020. The income tax rate is 30%.
What amount should be reported as income from discontinued operation for 2019?
a. 7,700,000
b. 8,300,000
c. 9,000,000
d. 6,300,000
Solution:
Revenue – January 1 to December 31 50,000,000

Expenses – January 1 to December 31 (37,000,000)
Termination Cost ( 4,000,000)

Income tax expenses (30% x 9,000,000) 2,700,000
Income from discontinued operation 6,300,000

Carrying amount of net assets 55,000,000
Expected gain – not recognized 5,000,000

Problem 7-4 (IFRS)

Vernon Company had two operating divisions, one manufacturing farm equipment and the other
office supplies. Both divisions are considered separate components.
The farm equipment component had been unprofitable and on September 1, 2019, the entity
adopted a plan to sell the assets of the division.
The actual sale was effected on December 15, 2019 at a price of P3,000,000. The carrying
amount of the division's assets was P5,000,000.
The farm equipment division incurred before-tax operating loss of P1,500,000 from the
beginning year through December 15, 2019.
The entity's after-tax income from continuing operations is P9,000,000. The income tax rate is
30%.
1. What amount should be reported as net income for the current year?
a. 5,500,000
b. 6,550,000
c. 6,300,000
d. 7,600,000
Solutions:
Income from discontinued operations 9,000,000
Sale price of division assets 3,000,000

Carrying amount of assets 5,000,000
Loss on disposal December 15, 2019 (2,000,000)

Farm equipment division operating loss for 2019 (1,500,000)
Total loss from discontinued operation (3,500,000)
Loss after tax (3,500,000 x 70%) (2,450,000)

Problem 7-5 (IFRS)

Dublin Company had two operating divisions, one manufacturing machinery and the other
breeds and sells horses. Both divisions are considered separate components.
The horse division has been unprofitable and on November 15, 2019, the entity adopted a formal
plan to sell the division. At December 31, 2019, the component was considered held for sale.
The sale was completed on April 30, 2020.
On December 31, 2019, the carrying amount of the assets of the horse division was P5,000,000.
On that date, the fair value of the assets less cost of disposal was P4,000,000.
The before-tax operating loss of the horse division for the year was P1,500,000.
The after-tax income from continuing operations of the entity for 2019 was P8,000,000. The
1. What is the net income for 2019?
a. 4,500,000
b. 5,600,000
c. 3,850,000
d. 6,250,000
Solutions:
Income from discontinued operations 8,000,000
Fair value of assets of horse division 4,000,000

Carrying amount of assets 5,000,000
Impairment loss on December 31, 2019 (1,000,000)

Operating loss of horse division for the year (1,500,000)
Total loss (2,500,000)

Tax effect (70% x 2,500,000) ( 750,000)

Problem 7-6 (IAA)
In 2019, Isuzu Company decided to discontinue the Electronics Division,
a separately identifiable component of Isuzu's business. On December 31, 2019, the division had
not been completely sold.
However, negotiations for the final and complete sale are progressing in a positive manner and it
is probable that the disposal will be within a year.
Analysis of the records for the year disclosed the following relative to
the Electronics Division:
Operating loss for 2019 8,000,000

Loss on disposal of some Electronics Division assets
during 2019 500,000
Expected operating loss in 2020 preceding final disposal 1,000,000
Expected gain in 2020 on disposal of division 2,000,000
What amount should be reported as pretax loss from discontinued

operation in 2019?
a. 8,000,000
b. 8,500,000
c. 9,500,000
d. 7,500,000
Operating loss for 2019 8,000,000

Loss on disposal in 2019 500,000
Pretax loss from discontinued operation 8,500,000
The expected operating loss in 2020 and expected gain on disposal in 2020 are not recognized
in 2019.
Gwyneth Kaye Flores

On December 31, 2019, Max Company committed to a plan to discontinue the operations of
Underwear Division.

The fair value of the facilities was P1,000,000 less than carrying amount on December 31, 2019.

The division's operating loss for 2019 was P2,000,000 and the division was actually sold for
P1,200,000 less than carrying amount in 2020.

The entity estimated that the division's operating loss for 2020 would be P500,000.

What amount should be reported as pretax loss from discontinued operation in 2019?

a. 3,000,000
b. 2,000,000
c. 1,000,000
d. 3,200,000


Operating loss in 2019 2,000,000
Impairment loss in 2019 1,000,000
Loss from discontinued operation 3,000,000
Problem 7-8 (IAA)

Flame Company has two divisions, North and South. Both qualify as business components.
In 2019, the entity decided to dispose of the assets and liabilities of division South and it is
probable that the disposal will be completed early next year.

The revenue and expenses of Flame Company are as follows:

2019 2018
Sales-North 5,000,000 4,600,000
Total nontax expenses-North 4,400,000 4,100,000
Sales-South 3,500,000 5,100,000
Total nontax expenses-South 3,900,000 4,500,000

During the later part of 2019, the entity disposed of a portion of division South and recognized a
pretax loss of P2,000,000 on the disposal.

What amount should be reported as pretax loss from discontinued operation in 2019?

a. 2,000,000
b. 2,400,000
c. 1,400,000
d. 1,600,000


Sales — South 2019 3,500,000
Expenses — South 2019 3,900,000
Operating loss ( 400,000)
Loss on disposal (2,000,000)
Total pretax loss for 2019 (2,400,000)
Problem 7-9 (IAA)

Jazz Company operates two restaurants, one in Boracay and one in Dakak. The operations and
cash flows of each of the two restaurants are clearly distinguishable.

During 2019, the decided to close the restaurant in sell the property. It is probable that the
disposal will be completed early next year.

The revenue and expenses for 2019 and for the preceding two years are as follows:
2019 2018 2017
Sales-Boracay 60,000 48,000 40,000
Cost of goods sold-Boracay 26,000 22,000 18,000
Other expenses-Boracay 14,000 13,000 12,000
Sales-Dakak 23,000 30,000 52,000
Cost of goods sold-Dakak 14,000 19,000 20,000
Other expenses-Dakak 17,000 16,000 15,000

The other expenses do not include income tax expense. During the later part of 2019, the entity
sold some of the kitchen equipment of the Dakak restaurant and recognized a pretax gain of
P1,5,000 on the
disposal.

What amount should be reported as pretax income or loss from discontinued operation for 2019?
a. 8,000 loss
b. 7,000 gain
c. 5,600 loss
d. 1,000 gain


Sales — Dakak 2019 23,000
Cost of goods sold Dakak 2019 (14,000)
Other expenses — Dakak 2019 (17,000)
Gain on disposal 15,000
Income from discontinued operation before tax 7,000
Problem 7-10 (IFRS)

Marquee Company, a parent entity, approved on December 1, 2019 a plan to sell a subsidiary.
The sale is expected to be completed on March 31, 2020.

The year-end is December 31, 2019 and the financial statements were approved on March 1,
2020.

The subsidiary had net assets with carrying amount of P 15,000,000 including goodwill of P
1,500,000 on December 31 , 2019.
The subsidiary made a loss of P3,000,000 from January 1 to March 1, 2020 and is expected to
make a further loss of P2,000,000 up to the date of sale.

At the date of approval of the financial statements, the entity was in negotiation for the sale of
the subsidiary but no contract had been signed.

The entity expected to sell the subsidiary for P9,000,000 and to incur cost of disposal of
P500,000.

The value in use of the subsidiary was estimated to be P10,000,000.

On December 31, 2019, what is the measurement of the subsidiary which is considered as a
disposal group classified as held for sale?
a. 15,000,000
b. 10,000,000
c. 9,000,000
d. 8,500,000


Fair value 9,000,000

Cost of disposal ( 500,000)

A noncurrent asset or disposal group classified as held for sale shall be measured at the lower of
carrying amount and fair value less cost of disposal. The value in use is ignored.
Chapter 08 – Change in Accounting Policy
Evangeline T. de Vera, Jeremy U. Del Carmen, Lea Mae R. Delos Reyes, Charmaine Estoye,
Glydel Kyle A. Falqueza
During 2019, Orca Company decided to change from the FIFO inventory valuation to the
weighted average method. The income tax rate is 30%.
FIFO Weighted average
January 1 inventory 7,100,000 7,700,000
December 31 inventory 7,900,000 8,200,000
What amount should be reported as the cumulative effect of the accounting change for
2019?
a. 420,000 increase
b. 420,000 increase
c. 600,000 increase
d. 600,000 decrease
FIFO inventory – January 1 7,100,000

Weighted average inventory – January 1 7,700,000
Cumulative effect 600,000
Cumulative effect after tax (70% x 600,000) 420,000
The change from FIFO to weighted average is a change in accounting policy. The cumulative
effect of the change accounting policy is an adjustment of retained earnings.
Inventory 600,000
Retained Earnings 420,000
Increase tax payable 180,000
Goddard Company had used the FIFO method of inventory valuation since it began operation in
2016. The entity decided to change the weighted average method for measuring inventory at the
beginning of the 2019. The income tax rate is 30%.
The following schedule shows year-end inventory balances.

Year FIFO Weighted Average
2016 4,500,000 5,400,000
2017 7,800,000 7,100,000
2018 8,300,000 7,800,000
What amount should be reported for 2019 as the cumulative effect of change in accountancy
policy?
a. 500,000 decrease
b. 350,000 decrease
c. 500,000 increase
d. 350,000 increase
Inventory, December 31, 2018

FIFO 8,300,000
Weighted Average 7,800,000
Decrease in inventory 500,000
The adjustment on January 1, 2019 to reflect the change in inventory method is:
Retained earnings (70% x 500,000) 350,000
Income tax payable (30% x 500,000) 150,000
Inventory 500,000
Since the retained earning account is a debit, it is shown as a deduction.
Note that the cumulative effect of a change in inventory method is determined by considering
only the existing inventory of the immediately preceding year which in this case is 2018.
The inventory balances in 2016 and 2017 are ignored because of the effect on net income is
counterbalancing.
QUESTION 8-3 Multiple Choice (IAA)

Bangko Company used the cost recovery method of an accounting since it began operations in
2016. In 2019, management adopt the percentage of completion method.
2016 2017 2018

Revenue from completed contracts 25,000,000 42,000,000 40,000,000
Cost of completed contracts 18,000,000 29,000,000 28,000,000
Income from operations 7,000,000 13,000,000 12,000,000
Casualty Loss 0 0 (2,000,000)
Income 7,000,000 13,000,000 10,000,000
Analysis of the accounting records disclosed the following income by contracts using the
percentage of completion method.
2016 2017 2018
Contract 1 7,000,000
Contract2 5,000,000 8,000,000
Contract 3 3,000,000 7,000,000 2,000,000
Contract 4 1,000,000 6,000,000
Contract 5 (1,000,000)
What amount of pretax cumulative effect of change in accounting policy should be reported in
the statement of retained earnings for 2019?
a. 6,000,000
b. 8,000,000
c. 7,000,000
d. 0
QUESTION 8-4 Multiple Choice (IAA)
During 2019, Build Company changed from the cost recovery method to the percentage of completion
method. The tax rate is 30%.
The entity revealed the following gross income under the cost recovery and percentage of completion
method:
2017 2018 2019
Cost recovery method 950,000 1,250,000 1,400,000
Percentage of completion 1,600,000 1,900,000 2,100,000
How should this accounting change be reported in 2019?

a. 1,400,000 increase in income
b. 1,400,000 increase in retained earnings
c. 910,000 increase in income
d. 910,000 increase in retained earnings
Solution:
Cumulative gross income for 2017 and 2018 – percentage of completion 3,500,000
Cumulative gross income for 2017 and 2018 – cost recovery (2,200,000)
Cumulative increase 1,300,000
Tax effect (1,300,000 x 30%) ( 390,000)
Addition to retained earnings on January 1, 2019 910,000
Journal entry on January 1, 2019
Construction in progress 1,300,000

ABC Company provided the following net income and inventory:

2019 2020
Net income using LIFO 2,750,000 3,000,000
Year-end inventory – LIFO 1,400,000 2,000,000
Year-end inventory - LIFO 900,000 1,600,000
What amount should be reported as net income for 2020 using the FIFO cost flow?
a. 2,900,000
b. 2,600,000
c. 3,500,000
d. 3,100,000
2019 2020
Net income - LIFO 2,750,000 3,000,000
Understatement of inventory
2019 (1,400,000 – 900,000) 500,000 (500,000)
2020 (2,000,000 – 1,600,000) -- 400,000
Net Income - FIFO 3,250,000 2,900,000
PFA 1
Chapter 09 – Change in Accounting Estimate

Yanni Lourisse A. Villasin; Aphol Joyce B. Mortel; Gelyn F. Nuestro; Veia G. Saldua; John Christopher
O. Supnet; Katherine Shane M. Mauleon
Problem 9-1 (IAA)

Blue Company purchased a machine on January 1, 2016 for P6,000,000. At the date of
acquisition, the machine had a life of six years with no residual value. The machine was
depreciated on a straight line basis.
On January 1, 2019, the entity determined that the machine had a useful life of eight years from
the date of acquisition with no residual value.
What is the depreciation of the machine for 2019?
a. 750,000
b. 600,000
c. 375,000
d. 500,000
Solution:
Cost 6,000,000
Accumulated depreciation (6,000,000 / 6 x 3) 3,000,000
Carrying amount – January 1, 2019 3,000,000
Depreciation for 2019 (3,000,000 / 5 years) 600,000
Revised life 8 years
Years expired 3
Remaining revised life 5 years
This is a change in accounting estimate.

The procedure is to allocate the remaining depreciable amount over the remaining revised life.

On January 1, 2016, Flax Company purchased a machine for P5,280,000 and depreciated it by
the straight line method using an estimated useful life of eight years with no residual value.
On January 1, 2019, the entity determined that the machine had a useful life of six years from the
date of acquisition and the residual value was P480,000
An accounting change was made in 2019 to reflect this additional information.
What amount should be reported as accumulated depreciation for the machine on December 31,
2019?
a. 2,920,000
b. 3,080,000
c. 3,200,000
d. 3,520,000
Solution:
Acquisition cost – January 1, 2016 5,280,000

Accumulated depreciation for 2016, 2017 and 2018
(5,280,000 / 8 x 3) 1,980,000
Accumulated depreciation – January 1, 2019 1,980,000

Depreciation for 2019 (2,820,000 / 3years) 940,000
Accumulated depreciation – December 31, 2019 2,920,000

Residual Value
(480,000)
Depreciable amount – January 1, 2019 2,820,000
Revised life 6years

Years expired 3
Remaining revised life 3 years
Problem 9-3 (IFRS)
On January 1, 2015, Roma Company purchased equipment for P4,000,000. The equipment has a
useful life of 10 years and a residual value of P400,000.
On January 1, 2019, the entity determined that the useful life of the equipment was 12 years from
the date of acquisition and the residual value was P480,000.
1. What is the carrying amount of the equipment on January 1, 2019?
a. 2,560,000
b. 2,920,000
c. 2,400,000
d. 2,800,000
2. What is the depreciation of the equipment for 2019?

a. 175,000
b. 260,000
c. 360,000
d. 300,000
Solutions:
Question 1
Cost – January 1, 2015 4,000,000
Accumulated depreciation – January 1, 2019
(4,000,000 – 400,000 / 10 x 4) 1,440,000
Question 2
Residual value (480,000)
Depreciable amount 2,080,000
Depreciation for 2019 (2,080,000 / 8 years) 260,000
Revised useful life 12 years
Expired (4)
Remaining useful life 8 years
Problem 9-4 (IFRS)
Acute Company was incorporated on January 1, 2016. In preparing the financial statements for
the year ended December 31, 2018, the entity used the following original cost and useful life for
the property, plant and equipment:
Original Cost Useful Life

Building 15,000,000 15 years
Machinery 10,500,000 10 years
Furniture 3,500,000 7 years
On January 1, 2019, the entity determined that the remaining useful life is 10 years for the
building, 7 years for the machinery and 5 years for the furniture.
The entity used the straight line method of depreciation with no residual value.
What amount should be reported as total depreciation for 2019?
a. 2,650,000
b. 3,700,000
c. 2,550,000
d. 3,500,000
Solution:
Building Machinery Furniture

Cost – January 1, 2016 15,000,000 10,500,000 3,500,000
Accumulated depreciation:
(15,000,000 / 15 x 3) 3,000,000
(10,500,000 / 10 x 3) 3,150,000
(3,500,000 / 7 x 3) _________ _________ 1,500,000
Carrying amount –
January 1, 2019 12,000,000 7,350,000 2,000,000
Depreciation for 2019
Building (12,000,000 /10) 1,200,000
Machinery (7,350,000 / 7) 1,050,000
Furniture (2,000,000 / 5) 400,000
Total depreciation for 2019 2,650,000
Problem 9-5 (IAA)
On January 1, 2019, Canyon Company decided to decrease the estimated useful life of an
existing patent from 10 years to 8 years.
The patent was purchased on January 1, 2014 for P3,000,000. The estimated residual value is
zero.
The entity decided on January 1, 2019 to change the depreciation method from an accelerated
method to straight line method.
On January 1, 2019, the cost of an equipment is P8,000,000 and the accumulated depreciation is
P3,400,000.
The remaining useful life of the equipment on January 1, 2019 is 10 years and the residual value
is P200,000
What is the total charge against income for 2019 as a result of the accounting changes?
a. 940,000
b. 960,000
c. 627,500
d. 647,500
Solutions:
Patent - January 1, 2014 3,000,000
Accumulated amortization (3,000,000 / 10 x 5) 1,500,000
Amortization of patent for 2019 (1,500,000 / 3) 500,000
Depreciation for 2019 (4,600,000 – 200,000 / 10) 440,000
Total charge against income for 2019 940,000
Revised estimated life of patent 8 years

Years expired (5)years
Remaining life of patent 3 years
Problem 9-6 (IFRS)

On January 1, 2017, Brazilia Company purchased for P4,800,000 a machine with a useful life of
ten years and a residual value of P200,000.
The machine was depreciated by the double declining balance and the carrying amount of the
machine was P3,072,000 on December 31, 2018.
The entity changed to the straight line method on January 1, 2019. The residual value did not
change.
What is the depreciation expense on this machine for 2019?
a. 287,200
b. 384,000
c. 460,000
d. 359,000
Solution:
Depreciation for 2019 (2,872,000 / 8 years remaining) 359,000

Straight line rate (100% / 10) 10%
Double declining rate (10% x 2) 20%
Acquisition cost – January 1, 2017 4,800,000
Accumulated Depreciation – January 1, 2019
2017 (20% x 4,800,000) 960,000
2018 (20% x 3,840,000) 768,000 1,728,000
Under PAS 16, paragraph 61, a change in depreciation method is accounted for as a change in
accounting estimate.
PFA 1
Chapter 10 – Prior Period Errors
Ma. Ruby A. Bagsit
Problem 10-1 (IAA)

Effective January 1, 2019, King Company adopted the accounting policy of expensing
advertising and promotion costs when incurred.
Previously, advertising and promotion costs applicable to future periods were recorded in
prepaid expenses.
The entity can justify the change which was made for both financial statement and income tax
reporting purposes.
The prepaid advertising and promotion costs totaled P600,000 on December 31 , 2019. The
What is the net charge against income for 2019 as a result of the change?
a. 600,000
b. 180,000
c. 420,000
d. 0
Solution:
The entity committed an error of deferring advertising and promotion costs
A prior period error is not included in profit or loss but treated as an adjustment of the beginning
balance of retained earnings.
Problem 10-2 (IFRS)

Harbor Company events during 2019:
• It was decided to write from inventory which was over two years old as it was obsolete.
• sales of P1,500,000 had been omitted from the financial statements for the year ended
December 31, 2018.
What pretax amount should be reported as prior period error in the financial statements for
2019?
a. 2,500,000
b. 1,500,000
c. 1,000,000
d. 0
Solution:
Only the unrecorded sale of P1,500,000 on December 31 , 2018 is treated as prior period error in
the financial statements for 2019.
The write off of the inventory of Pl,000,000 is included in profit or loss for 2019 because this is a
change in accounting estimate.

Universal Company failed to accrue warranty cost ofP500,000 on December 31, 2018.
In addition, a change from straight line to accelerated depreciation made at the beginning of 2019
resulted in a cumulative effect of P400,000 on retained earnings.
What pretax amount should be reported as prior period error in 2019?
a. 500,000
b. 900,000
c. 400,000
d. 0
Solution:
Only the unrecorded warranty cost of P500,000 on December 31, 2018 should be accounted for
as a prior period error.
The change in depreciation method in accounting estimate.
Problem 10-4 (IFRS)

Extracts from the statement of financial position of Animus Company showed the following:
December 31, 2020 December 31, 2019

Development costs 8,000,000 5,800,000
Amortization (1,800,000) (1,200,000)
The capitalized development costs relate to a single project that commenced in 2017.
It has now been discovered that one of the criteria for capitalization has never been met.
1. What amount of pretax adjustment is required to restate retained earnings on January 1, 2020?
a. 6,200,000
b. 1,600,000
c. 4,600,000
d. 0
2. What amount of the development costs should be expensed in 2020?
a. 5,800,000
b. 6,200,000
c. 1,600,000
d. 0
Solutions:
Question 1:
Development costs December 31, 2019 5,800,000
Amortization (1,200,000)
Carrying amount December 31, 2019 4,600,000
The entity committed and error in capitalizing the development costs

Thus, the carrying amount of P4,200,000 on December 31, 2019 is treated as prior period error in
the statement of retained earnings for 2020.
Question 2:
The remainder of the carrying amount of development costs on December 31, 2019 should be
expensed in 2020.
Development costs December 31, 2020 8,000,000

Amortization (1,800,000)
Carrying amount December 31, 2020 6,200,000
Carrying amount December 31, 2019 (4,200,000)
Remaining Carrying amount December 31, 2019 1,600,000
Problem 10-5 (IFRS)

In reviewing the draft financial statements for the year ended December 31 , 2020, Bituin
Company decided that market conditions were such that the provision for inventory obsolescence
on December 31 , 2020 should be increased by P3,000,000.
If the same basis of calculating inventory obsolescence been applied on December 31 , 2019, the
provision would have been PI higher than the amount recognized in the statement of
comprehensive income
1. What adjustment should be made to the net income of 2020?
a. 6,200,000 decrease
b. 1,600,000 increase
c. 4,600,000 decrease
d. 0 increase
2. What adjustment should be made to the net income of 2019 presented as a comparative figure
in the 2020 financial statements?
a. 1,800,000 decrease
b. 3,000,000 increase
c. 3,000,000 decrease
d. 0
Solutions:
Question 1:
The increase in the provision for inventory obsolescence on December 31, 2020 is deducted from
the net income of 2020.
Question 2:
The increase in the provision for inventory obsolescence in 2019 is ignored because this is
considered a change in accounting estimate.
Problem 10-6 (IFRS)

Samar Company reported the following events during the year ended December 31, 2020:
● A counting error relating to the inventory on December 31, 2019 was discovered.
This required a reduction in the carrying amount of inventory at that date of P2,000,000
● The provision for uncollectible accounts receivable on December 31, 2019 P500,000.
During 2020, P800,000 was written off related to the' December 31, 2019 accounts
receivable.
● The income tax rate is 30%.
What adjustment is required to restate retained earnings on January l, 2020?
a. 1,400,000
b. 2,000,000
c. 2,500,000
d. 0
Solution:
The reduction in the carrying amount of inventory on December 31, 2019 of is a prior period
error to be presented net of tax in the statement of retained earnings for 2020.
Prior period error 2,000,000

Income Tax 30% c 2,000,000 (600,000)
Net adjustment to retained earnings 1,400,000
The provision for uncollectible accounts receivable is a change in accounting estimate and
therefore has no effect on the retained earnings.
The change in accounting estimate should be currently and prospectively.


After the issuance of the 2019 financial statements, Narra Company discovered a computational
error of P150,000 in the calculation of the December 31, 2019 inventory.
The error resulted in a PI 50,000 overstatement in the cost of goods sold for the year ended
December 31, 2019.
In October 2020, the entity paid the amount ofP500,000 in settlement of litigation instituted
against it during 2020.
The income tax rate is 30%.
In the financial statements for 2020, what is the adjustment of the retained earnings on January
I , 2020?
a. 150,000 credit
b. 105,000 credit
c. 350,000 debit
d. 245,000 debit
Solution:
The inventory on December 31 , 2019 was understated resulting to overstatement of cost of

goods sold and understatement of net income for 2019.
Thus, the retained eamings should be kicreased and credited directly.
Prior period error January 1, 2020 150,000

Income tax payable 30% 45,000
The settlement of the litigation in 2020 is included in the profit or loss of 2020.
Litigation loss 500,000

Cash 500,000
Problem 10-8 (IFRS)

Natasha Company reported net income ofP700,000 for 2020. The entity declared and paid
dividend of P 150,000 in 2020.
In the financial statements for the year ended December 31, 2019, entity reported retained
earnings of P1,100,000 on January 1, 2019.
net income for 2019 was P600,000 and the entity declared and paid dividend ofP300,000 in2019.
In 2020, after the 2019 financial statements were approved for is-AE, the entity discovered an
error in the December 3 1, 2018 financial
The net effect of the error was a P650,000 overstatement of net income for the year ended
December 31, 2018 due to underdepreciation.
What amount should be reported as retained earnings on December
a. 1,300,000
b. 1,400,000
c. 1,650,000
d. 1,950,000
Solution:
Retained earnings January 1, 2019 1,100,000

Net income for 2019 600,000
Dividend declared and paid in 2019 (300,000)
Retained earnings December 31, 2019 1,400,00
Prior period error in 2018 due to underdepreciation (650,000)
Dividend declared and paid in 2020 (150,000)

While preparing the 2019 financial statements, Dek Company discovered computational errors in
the 2017 and 2018 depreciation expense.
These errors resulted in overstatement of each year's income by P100,000, net of income tax.
The following amounts were in the previously issued financial statements:
2017 2018
Retained earnings, January 1 2,000,000 2,800,000
Net Income 800,000 600,000
Retained earnings, December 31 2,800,000 3,400,000
The net income for 2019 is correctly reported at P700,000.
What amount should be reported as retained earnings on December 31, 2019?
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000
Solution:
Retained earnings January 1, 2019 3,400,000

Prior period error:
Underdepreciation in 2017 and 2018 100,000 x 2 (200,000)
Corrected beginning balance 3,200,00

On January 1, 2019, Raven Company discovered that it had incorrectly expensed a P2,100,000
machine purchased on January 1, 2016.
The entity estimated the machine's original useful life to be 10 years ai the residual value at
P100,000.
The entity. Used the straight-line method of depreciation and is subject to a 30% income tax
missed.
In the 2019 financial statements, what amount should be reported as a prior period error?
a. 1,659,000
b. 1,029,000
c. 1,050,000
d. 1,680,000
Solution:
Machine incorrectly expensed 2,100,000

Unrecorded depreciation for 2016, 2017 and 2018 2,000,000 / 10 x 3 years (600,000)
Net overstatement of expense 1,500,000
Tax effect 30% x 1,500,000 (450,000)
Net understatement of retained earnings 1,050,000
Cost 2,100,000
The amount of P I is a prior period error directly credited to retained earnings because net
income of prior years was understated.
Journal entry on January I, 2019

Machinery 2,100,000
Accumulated depreciation 600,000
PFA 1
Chapter 11 – Operating Segment

Bhea B. Gutierrez
Problem 11-1 (ACP)

Aroma Company and its divisions are engaged solely in manufacturing operations. The entity
reported the following segment profit (loss) for the current year:
V 3,400,000
W 1,000,000
X (2,000,000)
Y 400,000
Z (200,000)
2,600,000
In the segment information for the current year, what are the reportable segments?
a. V, W, X and Y
b. V, W and X
c. V and W
d. V, W, X, Y and Z
Solution: 11-1
Segment Profit Segment Loss
2,000,000
200,000
2,200,000
The total profit figure is the basis for identifying the reportable segments because it is higher
than the total loss figure.

Accordingly those segments with a profit or loss of at least 10% of P 4,800,000 or P 480,000 are
reportable. Thus, V, W and X are reportable.
Correyy Company and its division are engaged solely in manufacturing operations. The
following data pertain to the industries in which operations were conducted for the current year:

Industry Revenue Profit Assets
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
32,750,000 5,800,000 67,500,000

How many reportable segments does Correyy have?
a. Three
2. Four
3. Five
4. Six
Solution: 11-2
Under PFRS 8, an entity shall disclose information about an operating segment that meets any of
the following quantitative thresholds:

1. The segment revenue, including both sales to external customers and intersegment sales
or transfers, is 10% or more of the combined revenue, internal and external, of all
operating segments.
2. The segment profit or loss is 10% or more of the greater of the fo11owing in absolute
amount:
a. The combined profit of all operating segments with profit.
b. The combined loss of all operating segments with loss.
3. The assets of the segment are 10% or more of the combined assets of all operating
segments.

Accordingly, A. B, C, D and E are reportable segments because their revenue or profit or asset is
at least 10% of the combined amount.
Problem 11-3 (IFRS)
Macbeth Company, an entity listed on a recognized stock exchange, reports operating results
from its North American division to the chief operating decision maker.
The entity revealed the following segment information for the current year:

Revenue 3,800,000
Profit 1,200,000
Assets 1,800,000
Number of employees 2,500
The results for all of the operating segments in total are:

Revenue 40,000,000
Profit 10,000,000
Assets 20,000,000
Number of employees 25,000

Which piece of information determines that the North American division is a reportable
segment?

a. Revenue
b. Profit
c. Assets
d. Number of employees

Solution: 11-3
Profit threshold (1,200,000/10,000,000) 12%

The revenue of the North American segment of P 3,800,000 is less than 10% of the total revenue
of P 40,000,000 of all operating segments.

The assets of the North American segment of P 1,800,000 are less than 10% of the total assets of
P 20,000,000 of all operating segments.

The number of employees is not a criterion in determining reportable segment.

Aria Company and its divisions provided the following information for the current year:

Sales to unaffiliated customers 20,000,000
Intersegments sales of products similar to those
sold to unaffiliated customers 6,000,000
Interest earned on loans to other operating
segments 400,000
Aria Company and all of its divisions are engaged solely in manufacturing operations.

What is the minimum amount of segment revenue in order that a division can be considered a
reportable segment?

a. 2,640,000
b. 2,600,000
c. 2,040,000
d. 2,000,000

Solutions: 11-4
Sales to unaffiliated customers 20,000,000

Intersegment sales 6,000,000
Combined revenue 26,000,000
Test of reportable segment (10% of 2,600,000

26,000,000)

Under PFRS 8, paragraph 13, segment revenue includes sales to external customers and
intersegment sales of operating segments engaged solely in manufacturing.
Cora J. Javier

Timmy Company provided the following information pertaining to revenue earned by operating
segments for the current year:
Sales to Intersegment Total

Segment unaffiliated sales revenue
customers
Alo 5,000 3,000 8,000
Bix 8,000 4,000 12,000
Cee 4,000 - 4,000
Dil 43,000 16,000 59,000
Combined 60,000 23,000 83,000
Elimination - (23,000) (23,000)
Consolidated 60,000 - 60,000
In conformity with the revenue test, what is the total revenue of the reportable segments?
a. 83,000
b. 71,000
c. 51,000
d. 60,000
Solution:
Total revenue
Alo 8,000
Bix (reportable) 12,000
Cee 4,000
Dil (reportable) 59,000
83,000
Revenue threshold (10% x 83,000) 8,300

Only Bix and Dil have a revenue of 10% or more of the combine revenue and therefore are
considered reportable segments.
Note that the revenue includes both sales to unaffiliated customers and intersegment sales.
Problem 11-6 (AICPA Adopted)

In the income statement for the current year, Grum Company reported revenue P50,000,000,
excluding intersegment sales P10,000,000, expenses P47,000,000 and net income P3,000,000.
Expenses include payroll costs of P15,000,000.
The combined identifiable assets of all operating segments at year-end totaled P40,000,000.
l. What is the minimum amount of sales to a major customer?

a. 5,000,000
b. 4,000,000
c. 6,000,000
d. 4,700,000
2. What is the minimum amount of external revenue to be disclosed by reportable segments?

a. 22,500,000
b. 30,000,000
c. 33,750,000
d. 37,500,000
Solution:
Question 1
10% x 50,000,000 5,000,000
PFRS 8, paragraph 34, provides that a major customer disclosure is required if an entity derives
10% or more of its external revenue from a single customer or group of entities under common
control.
Question 2
75% x 50,000,000 37,500,000
Under PFRS 8, paragraph 15, the total external revenue attributable to reportable operating
segments must be at least of the total entity external revenue.

Graf Company discloses supplemental operating segment information. The following
information is available for the current year:
Segment Sales Traceable expenses

X 5,000,000 3,000,000
Y 4,000,000 2,500,000
Z 3,000,000 1,500 000
12,000,000 7,000,000
Additional expenses are as follows:
Indirect expenses 1,800,000

General corporate expenses 1,200,000
Interest expense 600,000
The interest expense and income tax expense are regularly reviewed by the chief operating
decision maker as a measure of profit or loss.
Appropriate common expenses are allocated to segments based on the ratio of a segment's sales
to total sales.
What is Segment Z's profit for the current year?

a. 900,000
b. 950,000
c. 800,000
d. 500,000
Solution:
Sales - Segment Z 3,000,000

Expenses:
Traceable expenses 1,500,000
Indirect expenses (3/12 x 1,800,000) 450,000
Interest expense (3/12 x 600,000) 150,000
Income tax (3/12x 400,000) 100,000 2,200,000
Segment profit 800,000
General corporate expenses are not allocated to operating segments as a measure of profit or
loss.

Clay lines has three lines of business, each of which was determined to be reportable segment.
The entity sales aggregated P7,500,000 in the current year, of which Segment No. 1 contributed
40%.
Traceable costs were P1,750,000 for Segment No. I out of a total of P5,000,000 for the entity as
a whole.
For external reporting, the entity allocated common costs of P 1,500,000 based on the ratio of a
segment's income before common costs to the total income before common costs.
In the financial statements for the current year, what amount should be reported as profit for
Segment No. 1?
a. 1,250,000
b. 1,000,000
c. 650,000
d. 500,000
Solutions:
Segment 1 Total
Sales (40% x 7,500,000) 3,000,000 7,500,000
Traceable costs 1,750,000 5,000,000
Segment profit before common cost 1,250,000 2,500,000
Common cost
(1,250,000/2,500,000 x 1,500,000) 750,000 1,500,000
Segment profit 500,000 1,000,000

Colt Company has four manufacturing divisions, each of which has been determined to be a
reportable segment.
Common costs are appropriately allocated on the basis of each division's sales in relation to
Colt's aggregate sales.
Colt's Delta division accounted for 40% of Colt's total sales in the current year.
For the current year, Delta division had sales of P8,000,000 and traceable costs of P4,800,000. In
addition, the Delta division incurred interest expense of P 680,000.
In the current year, Colt incurred costs of P800,000 that were not directly traceable to any of the
divisions.
It is an entity policy that interest expense is included in the measure of profit or loss that is
reviewed by the chief operating decision maker.
What amount should be disclosed as Delta's profit for the current year?
a. 3,200,000
b. 3,000,000
c. 2,880,000
d. 2,200,000
Solutions:
Sales - Delta division 8,000,000

Expenses:
Traceable costs 4,800,000
Allocated indirect costs (40% x 800,000) 320,000
Interest expense 680,000 5,800,000
Segment profit 2,200,000
Note that the interest expense is included in the measure of profit or loss that is reviewed by the
chief operating decision maker.
Sairell R. Lat
Problem 11-10 (IAA)

Eagle Company operates in several different industries. Total sales for Eagle Company totaled
P14,000,000, and total common costs amounted to for the current year.
For internal reporting purposes. Eagle Company allocated common costs based on the ration of a
segment’s sales to total sales.
Segment A contributed 25 % to the total sales and incurred specific costs of P1,100,000.
What is the profit of Segment A?
a. 3,500,000
b. 1,875,000
c. 2,400,000
d. 775,00
Solution:

Sales — Segment A (25% x 14,000,000) 3,500,000
Specific costs (1,100,000)
Allocated common costs (25% x 6,500,000) (1,625,000)
Segment profit 775,000

Tay lor Company, a publicly owned entity, assesses performance and makes operating decisions
using the following information for the reportable segments:
Total segment revenue 7,700,000
Total segment profit 500,000
The total segment profit included intersegment profit of P50,000. In addition, the entity has
P10,000 of common costs for reportable segments are not allocated in reports reviewed by the
chief operating decision marker.
What amount should be reported segment profit?

a. 550,000
b. 450,000
c. 510,000
d. 500,000
Solution:
An entity shall report a measure of profit and loss based on the measure
reported to the chief operating decision maker.
Common costs are not allocated to segments when assessing

performance.
Problem 11-12 (IAA)

Congo Company provided the following data for the current year:
Sales 60,000,000
Cost Of goods sold 28,000,000
Expenses 14,000,000
Depreciation 4,000,000
The entity has two major reportable segments, X and Y. An analysis revealed that P1,000,000 of
the total depreciation expense and P2,000,000 of the expenses are related to general corporate
activities.
The remaining expenses and sales are directly allocable to segment activities according to the
following percentages:
Segment X Segment Y Others
Sales 40% 45% 15%
Cost of goods sold 35 50 15
Expenses 40 40 20
Depreciation 40 45 15
What amount should be reported as profit of Segment X?

a. 8,200,000
b. 6,600,000
c. 7,000,000
d. 5,400,000
Solution:
Sales (40%x60,000,000) 24,000,000

Cost of Goods Sold (35%x28,000,000) ( 9,800,000)
Expenses (40%x12,000,000) (4,800,000)
Depreciation (40%x3,000,000) (1,200,000)
Segment Profit – Segment X 8,200,000
Problem 11-13 (IAA)

Revlon Company had no intersegment sales and provided the following data for the current year:
Segment Revenue Profit (Loss) Assets

1 620,000 200,000 400,000
2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 (30,000) 140,000
5 180,000 (25,000) 180,000
6 70,000 10,000 120,000
7 120,000 (20,000) 140,000
Others 380,000 (25,000) 140,000
 The "others" category includes five operating segments, none of which has revenue or
assets greater than P 80,000 and none with an operating profit.
 Operating Segments I and 2 produce very similar products and use very similar
production processes, but serve different customer types and use quite different product
distribution system.
These differences are due in part to the fact that Segment 2 operates in a regulated
environment while Segment 1 does not.
 Operating Segments 6 and 7 have very similar products, production processes, product
distribution systems, but are organized as separate divisions since they serve substantially
different types of customers.
Neither Segments 6 and 7 operate in a regulated environment.
What are the reportable segments for the current year?
a. Segments l, 3, 4 and 5
b. Segments l, 3, 4, 5 and 7
c. Segments l, 2, 3, 4 and 5
d. Segments l. 3, 4, 5 and Segments6and 7 combined as one segment
Solutions:
Segment Revenue Profit (Loss) Assets
1 620,000 200,000 400,000
2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 (30,000) 140,000
5 180,000 (25,000) 180,000
6 70,000 10,000 120,000
7 120,000 (20,000) 140,000
Others 380,000 (25,000) 140,000
Total 2,000,000 200,000 1,500,000
1. The information above shows that any operating segment with revenue equal to or greater
than P200,000 is a reportable segment (segments 1 and 3).
Any segment with assets equal to or greater than P150,000 is a reportable segment (segments 1,
3 and 5).
The total profit for all segments with profit totals P300,000. As a result, any segment with profit
or loss equal to or greater than an absolute amount of P30,000 is a reportable segment (segments
1, 3 and 4).
Thus, Segments 1, 3, 4 and 5 are reportable segments.
2. The revenue of the reportable segments is as follows:

Segment 1 640,000
3 340,000
4 190,000
5 180,000
Total Revenue 1,330,000
Percentage (1,330,000/2,000,000) 65%
If the total external revenue attributable to reportable segments constitutes less than 75% of the
entity external revenue, additional segments shall be identified even if they do not meet the
10% quantitative thresholds until at least 75% of the entity external revenue is included in
reportable segments.
Moreover, reportable segments that are below the 10% threshold can be aggregated as one
segment if they have similar economic characteristics and share a majority of the five
aggregation criteria as follows:
a. Nature of product
b. Nature of production process
c. Class of customer
d. Method of distributing product
e. Regulated environment
Since Segments 6 and 7 are similar in four of the five criteria, these segments can be aggregated
as one reportable segment.
Segment 6 Segment 7 Total

Revenue 70,000 120,000 190,000
Profit (loss) 10,000 (20,000) (10,000)
Segment Assets 120,000 140,000 260,000
With Segments 6 and 7 considered as one reportable segment, the total segment revenue
increases to P1520,000 or 76% of the total. The 75% requirement has been met.
Revenue of reportable segments before aggregation 1,330,000

Revenue of additional reportable segments 190,000
Total 1,520,000
Percentage (1,520,000/2,000,000) 76%
3. In conclusion, Segments 1, 3, 4. 5 and Segments 6 and 7 (combined) shall be considered

reportable segments.
CHAPTER 12 - INTERIM REPORTING

Maevelyn Garcia

Farr Company had the following transactions during the first quarter:
Loss from typhoon 700,000

Loss from inventory writedown 500,000
Loss from disposal of a business segment 1,000,000
Payment of fire insurance premium for calendar year 100,000
What total amount of expenses should be included in the income statement for the first quarter?
a. 1,300,000
b. 2,225,000
c. 1,475,000
d. 2,300,000

Loss from typhoon 700,000
Loss from inventory writedown 500,000
Loss from disposal of a business segment 1,000,000
Insurance expense (100,000 / 4) 25 000
Under PAS 34, paragraph 28, the general rule in preparing interim financial statements is that
costs and expenses that clearly benefit more than one interim period are allocated to the interim
periods affected.
Thus, the insurance premium of P100,000 is allocated over four quarterly interim periods.
Gains and losses are not allocated over the interim periods. Thus, the loss from typhoon, loss
from inventory writedown and loss from disposal of business segment are reported in the
quarter when incurred.
Inventories shall be measured at the lower of cost and net realizable value even for interim
purposes.
Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown shall be
recognized regardless of whether the writedown is temporary or nontemporary.
Problem 12-2 (IAA)
Everest Company has historically reported bad debt expense of 5% sales in each quarter. For the
current year, the entity followed the same procedure in the three quarters of the year.
However, in the fourth quarter, the entity determined that bad debt expense for the entire year
should be P450,000.
Sales in each quarter of the year were first quarter P2,000,000, second quarter P1,500,000, third
quarter P2,500,000 and fourth quarter P4,000,000.
What amount of bad debt expense should be recognized for the fourth quarter?
a. 200,000
b. 150,000
c. 300,000
d. 400,000

Bad debt expense for the entire year 450,000
Bad debt expense:
First quarter (5% x 2,000,000) 100,000
Second quarter (5% x 1,500,000) 75,000
Third quarter (5% x 2,500,000) 125,000 300,000
Bad debt expense for fourth quarter 150,000
Problem 12-3 (IFRS)
Davao Company prepares quarterly interim financial reports. The entity sells electrical goods
and normally 5% of customers claim on their warranty.
The provision in the first quarter was calculated at 5% of sales to date which amounted to
P10,000,000.
However, in the second quarter, a design fault was found, and warranty claims were expected to
be 10% for the whole year. Sales for the second quarter amounted to P15,000,000.
1. What amount of warranty expense should be reported in the interim income statement for
the first quarter?
a. 1,000,000
b. 750,000
c. 500,000
d. 250,000
2. What amount of warranty expense should be reported in the interim income statement for
the second quarter?
a. 2,000,000
b. 1,250,000
c. 1,500,000
d. 750,000
Solution 12-3
Question 1 Answer c
Warranty expense for first quarter (5% x 10,000,000) 500,000
Question 2 Answer a
Total warranty expense - first and second quarter

(10% x 25,000,000) 2,500,000
Warranty expense recognized in first quarter
(5% x 10,000,000) 500,000
Warranty expense - second quarter 2,000,000
Kell Company reported P950,000 net income for the quarter ended September 30,2019 which
included the following after tax items:
 A P600,000 expropriation gain, realized on April 30, 2019, was allocated equally to the
second, third, and fourth quarters of 2019.
 A P150,000 cumulative-effect loss resulting from a change in inventory valuation method
was recognized on August 1, 2019.
In addition, the entity paid P480,000 on February 1, 2019, for 2019 calendar-year property taxes.
Of this amount, P 120,000 was allocated to the third quarter of 2019.
For the quarter ended September 30, 2019, what amount should be reported as net income?
a. 1,100,000
b. 1,020,000
c. 950,000
d. 900,000
Net income per book 950,000

Expropriation gain incorrectly included (600,000 / 3) (200,000)
Balance 750,000
Add back — Cumulative effect loss 150,000
Adjusted net income 900 000
Gains should be recognized in the interim period when realized. Thus, the gain realized on April
30, 2019 should be fully recognized in second quarter.
The cumulative effect of a change in accounting policy is shown in the statement of retained
earnings, not in the income statement.
Problem 12-5 (IFRS)
Mount Company operates in the travel industry and incurs costs unevenly throughout the year.
Advertising costs of P2,000,000 were incurred on March l, 2019 and staff bonuses are paid at
year-end based on sales.
Staff year-end bonuses are expected to be around P20,000,000 for the year.
What total amount of expenses should be included in the quarterly financial report ending March
31, 2019?
a. 7,000,000
b. 5,500,000
c. 5,000,000
d. 3,500,000
Solution 12-5 Answer a (2,000,000 + 5,000,000) 7,000,000
Advertising P2,000,000 is reported in the interim period when incurred.
Year-end bonuses are allocated over the entire year or P20,000,000 divided by four or
P5,000,000 every quarter.
Problem 12-6 (IFRS)
The terms and conditions of employment with Pauline Company include entitlement to share in
the staff bonus system, under which 5% of the profit for the year before charging the bonus is
allocated to the bonus pool, provided the annual profit exceeds P50,000,000.
The profit before accrual of any bonus for the first half of the current year amounted to
P40,000,000 and the latest estimate of the profit before accrual of any bonus for the year as a
whole is P60,000,000.
What amount should be recognized in profit or loss as bonus expense for the half year ended
June 30?
a. 1,500,000
b. 3,000,000
c. 2,000,000
d. 0
Solution 12-6 Answer c
Bonus for half year ended June 30

(5% x 40,000,000) 2,000,000
Angelo Guiriba
Problem 12-7 (IAA)
Snider Company is preparing interim financial statements for the first quarter ended March 31.
Expenses in the first quarter totaled P4,000,000 of which 25% was variable.
The fixed expenses included television advertising expense of P1,600,000 representing air time
to be incurred evenly during the current year and depreciation expense of P600,000 for the year
for an equipment that was available for use on January 1.
What amount should be reported as total expenses for the first quarter ended March 31?
a. 4,000,000
b. 2,800,000
c. 4,150,000
d. 2,350,000

Variable expenses (4,000,000 x 25%) 1,000,000
Fixed expenses, excluding advertising and depreciation
(3,000,000 - 1,600,000 - 600,000) 800,000
Advertising allocated to the first quarter (1,600,000/4) 400,000
Depreciation from January 1 to March 31 (600,000 x 3/12) 150,000
Total expenses to be reported in the first quarter 2,350,000
Expenses for first quarter 4,000,000

Variable expenses (25% x 4,000,000) (1,000,000)
Fixed expenses 3,000,000
At the beginning of current year, Builder Company entered into a P20,000,000 long-term fixed
price contract to construct a factory building.
The entity accounted for this contract under the percentage of completion at the end of each
quarter for the current year.
Quarter Percentage of completion Estimated cost
1 10% 15,000,000
2 10% 15,000,000
3 25% 19,200,000
4 25% 19,200,000
No work was performed in the second and fourth quarters.

1. What amount of income should be reported in the first quarter?
a. 2,000,000
b. 200,000
c. 500,000
d. 0
2. What amount of income should be reported in the second quarter?
a. 500,000
b. 250,000
c. 750,000
d. 0
3. What amount of income or loss should be reported in the third quarter?
a. 200,000 income
b. 200,000 loss
c. 300,000 income
d. 300,000 loss
4. What amount of income should be reported in the fourth quarter?
a. 800,000
b. 400,000
c. 200,000
d. 0
Solution 12-8
Question 1 Answer c
Quarter 1
Contract price 20,000,000
Estimated cost 15,000,000
Multiply by percentage of completion 10%
Contract revenue 500,000
Question 2 Answer d
Quarter 2
No income is reported because the estimated cost and percentage of completion are the
same as Quarter 1 and therefore no work was done in Quarter 2.
Question 3 Answer d
Quarter 3
Contract price 20,000,000
Estimated cost 19,200,000
Gross income 800,000
Multiply by percentage of completion 25%
Cumulative contract revenue 200,000
Contract revenue in Quarter 1 (500,000)
Realized loss in Quarter 3 (300,000)
Question 4 Answer d
Quarter 4
No income is reported because the estimated cost and percentage of completion are the
same as Quarter 3 and therefore no work was done in Quarter 4.
Bailar Company, a calendar-year entity, reported the following income before income tax and
effective tax rate for the first three quarters of the current year:
Income before tax Effective tax rate

First quarter 6,000,000 30%
Second quarter 7,000,000 30%
Third quarter 8,000,000 25%
1. What is the income tax expense for the first quarter?

a. 1,500,000
b. 1,800,000
c. 1,200,000
d. 2,400,000
2. What is the income tax expense for the second quarter?
a. 1,750,000
b. 2,800,000
c. 2,100,000
d. 1,400,000
3. What is the income tax expense for the third quarter?
a. 5,250,000
b. 1,350,000
c. 2,400,000
d. 2,000,000
Solution 12-9
Question 1 Answer b
Question 2 Answer c
Question 3 Answer b
Cumulative income tax (25% x 21,000,000) 5,250,000

First quarter (30% x 6,000,000) (1,800,000)
Second quarter (30% x 7,000,000) (2,100,000)
Third quarter income tax expense 1,350,000
Problem 12-10 (IAA)
Hyper Company prepared the following income statement for then current year:
Sales 6,000,000
Gain on sale of equipment 100,000
Operating expenses ( 500,000)
Casualty loss ( 300,000)
Income tax - 30% 750,000
* Third quarter sales were 30% of total sales.

* For interim reporting purposes, a gross profit rate of 40% can be justified.
* Variable operating expenses are allocated in the same proportion as sales.
* Fixed operating expenses are allocated based on the expiration of time.
* Of the total operating expenses, P400,000 relate to variable expenses and P100,000 relate to
fixed expenses.
* The equipment was sold on June 1.
* The casualty loss occurred on September 1.
What amount should be reported as income before tax for the third quarter ended September 30?
a. 275,000
b. 375,000
c. 500,000
d. 300,000
Solution: 12-10
Sales (30% X 6,000,000) 1,800,000

Cost of goods sold (60% x 1,800,000) (1,080,000)
Gross income 720,000
Variable expenses (30% X 400,000) (120,000)
Fixed Expenses (100,000 / 4) (25,000)
Casualty loss (300,000)
Income before tax 275,000
The gain on sale of equipment is reported in the second quarter, not in the third quarter, because
the equipment is sold on June 1. The casualty loss is reported in the third quarter when
incurred.

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PFA 1

CHAPTER 1 – STATEMENT OF FINANCIAL POSITION

Problem 1-1 (IFRS)

What amount should be reported as total current assets at year-end?

Total current assets 6,000,000

Total current assets 8,950,000

Cash in general checking account 3,500,000

Total cash 5,000,000

What total amount of current assets should be reported at year-end?

Cash (3,500,000 + 500,000) 4,000,000

The goods received on consignment should be excluded from inventory.

Trade accounts receivable 5,000,000

Total current assets 17,400,000

Problem 1-6 (AICPA Adapted)

Total current assets 9,050,000

The accounts receivable consisted of the following:

Customer’s accounts 1,400,000

Total accounts receivable 3,000,000

What total amount should be reported as current assets at year-end?

Total current assets 8,000,000

The advances to subsidiary should be classified as noncurrent.

Total current assets 7,700,000

Cash on hand, including customer postdated check P100,000 and

Total cash 3,200,000

What total amount should be reported as current assets?

Cash on hand ( 500,000 – 100,000 – 50,000 ) 350,000

Total current assets 7,500,000

Adjusted cash in bank 2,500,000

Accounts receivable 2,500,000

Adjusted balance 2,600,000

The customer check should be reverted to account receivable.

Accounts payable 1,900,000

Total current liabilities 6,500,000

Under IFRS, a deferred tax liability is classified as noncurrent.

Accounts payable 550,000

What amount should be reported as total current liabilities?

Accounts payable (4,000,000 + 100,000) 4,100,000

Total current liabilities 7,700,000

Accounts payable 4,000,000

Adjusted accounts payable 4,100,000

Problem 1-11 (AICPA Adapted)

The 2019 financial statements were issued on March 31, 2020.

The 10% note payable is classified as noncurrent.

The 12% note payable is classified as current.

Willem Company reported the following liabilities on December 31, 2019:

Accounts payable 2,000,000

Ronny Company provided the following information on December 31, 2019:

Accounts payable, net of creditors' debit balances P200,000 2,000,000

The financial statements for 2019 were issued on March 31,2020.

1. Who amount should be reported as total current liabilities?

2. What amount should be reported as total noncurrent liabilities?

Accounts payable 2,200,000

Accounts payable 2,000,000

Adjusted accounts payable 2,200,000

Bonds payable 4,500,000

Total noncurrent liabilities 8,000,000

Manchester Company provided the following information on December 31, 2019:

Employee income taxes withheld 900,000

Total current liabilities 8,100,000

Accordingly, there is no currently maturing bond in 2019.

Charice Company provided the following information on December 31, 2019:

• Accounts payable amounted to P500,000 and accrued expenses totaled P300,000 on

Accounts payable 500,000