Share Based Payments - Problems: Problem 1

SHARE BASED PAYMENTS – Problems
PROBLEM 1:
Irish Company granted 10,000 share options to each of its five directors on January
1, 2016. The options vest on January 1, 2020. The fair value of each option on
January 1. 2016 is 50 and it is anticipated that all of the share options will vest on
January 1, 2020.
What amount should be reported as increase in expense and equity for the year
ended December 31, 2016?
a. 750,000 c. 625,000
b. 500,000 d. 125,000
SOLUTION:
Fair Value of share options (10,000 x 5 x 50) 2,500,000
Compensation expense for 2016 (2,500,000/4) 625,000
PROBLEM 2:
On January 1, 2016, Oak Company granted share options to certain key employees
as additional compensation. The options were for 100,000 ordinary shares of 10 par
value at an option price of 15 per share. Market price of this share on January 1,
2016 was 20. The fair value of each share option on January 1, 2016 is 8. The
options were exercisable beginning January 1, 2016 and expire on December 31,
2016. On April 1, 2016, all share options were exercised.
What amount of compensation expense should be reported in 2016?
a. 800,000 c. 200,000
b. 500,000 d. 125,000
SOLUTION:
Fair Value of share options (100,000 x 8) 800,000
PROBLEM 3:
On January 1, 2016, Greece Company granted an employee an option to buy 20,000

shares for 40 per share, the option exercisable for three years from January 1, 2018.
Using the fair value option pricing model, total compensation expense is determined
to be 240,000. The employee exercised the option on September 1, 2018, and sold
the 20,000 shares on December 1, 2018. The service period is for two years
beginning January 1, 2016.
What amount should be recognized as compensation expense for 2016?
a. 240,000 c. 160,000
b. 120,000 d. 80,000
SOLUTION: 240,000/2 = 120,000
PROBLEM 4:
Esmeralda Company issued fully paid shares to 200 employees on December 31,
2016. Normally, shares issued to employees vest over a two-year period but these
shares have been given as a bonus to the employees because of their exceptional
performance during the year. The shares have a market value of 500,000 on
December 31, 2016 and an average fair value of 600,00 for the year.
What amount should be expensed for this share-based payment transaction?
a. 600,000 c. 300,000
b. 500,000 d. 250,00
SOLUTION:
Fair Value of share options, December 31, 2016 500,000
PROBLEM 5-6:
Roxanne Company has granted share options to the employees. The total
compensation expense to the vesting date of December 31, 2019 has been
calculated at 8,000,000.
The entity has decided to settle the award early on December 31, 2018.
The compensation expense charged since the date of grant on January 1, 2016 was
2,000,000 for 2016 and 2,100,000 for 2017.
The compensation expense that would have been charged in 2018 was 2,200,000.
PROBLEM 5: What is the compensation expense for 2018?
a. 2,200,000 c. 3,900,000
b. 8,000,000 d, 2,000,000
SOLUTION:
Total compensation 8,000,000
Compensation in 2016 (2,000,000)

COMPENSATION IN 2018 3,900,000
PROBLEM 6: What is the compensation expense for 2018 if the share

options are not exercised but instead the entity paid 7,500,000 to the
employees?
a. 2,200,000 c. 3,400,000
b. 3,900,000 d. 7,500,000
SOLUTION:
Cash payment 7,500,000
COMPENSATION IN 2018 3,400,000
PROBLEM 7:
Ivy Company, an unlisted entity, decided to issue 1,000 share options to an

employee in lieu of many years’ service. However, the fair value of the share
options cannot be reliably measured as the entity operates in a highly specialized
market where there are no comparable entities. The exercise price is 100 per share
and the options were granted on January 1, 2016 when the value of the shares was
also estimated at 100 per share. On December 31, 2016, the value of the shares
was estimated at 150 per share and the options vested on that date.
What value should be placed on the share options issued for the year ended
December 31, 2016?
a. 100,000 c. 50,000
b. 150,000 d. 25,000
SOLUTION:
(1,000 x 50) 50,000
Market Value of share, December 31, 2016 150
Option price 100
Intrinsic Value of the share option 50
PROBLEM 8:
Elizabeth Company granted 100 share appreciation rights to each of the 1,000
employees on January 2016. The entity estimated that 90% of the awards will vest
on December 31, 2018. The fair value of each share appreciation rights on
December 31, 2016 is 10.
What is the accrued liability on December 31, 2016?
a. 300,000 c. 100,000
b. 900,000 d. 90,000
SOLUTION:
Total compensation (100 x 1,000 x 10 x 90%) 900,000
Accrued compensation, December 31, 2016 (900,000/3) 300,000
The compensation is recognized as expense over the vesting period from

January 1, 2016 to December 31, 2018 or three years.
PROBLEM 9-11:
On January 1, 2016, Kristen Company established a share appreciation rights plan

for the executives. The plan entitled them to receive cash at any time during the
next four years for the difference between the market price of the ordinary share
and a pre-established price of 20 on 60,000 share appreciation rights. On December
31, 2018, 20,000 SARs are exercised by the executives.
Market price
January 1, 2016 25 per share
December 31, 2016 28 per share
PROBLEM 9: What amount of compensation expense should be

recognized for 2016?
a. 480,000 c. 300,000
b. 120,000 d. 180,000
SOLUTION:
Fair Value, December 31, 2016 (28-20) 8
Compensation expense for 2016 (60,000 x 8) 480,000

PROBLEM 10: What amount of compensation expense should be
recognized for 2017?
a. 900,000 c. 105,000
b. 420,000 d. 225,000
SOLUTION:
Accrued compensation (60,000 x 15) 900,000
Compensation expense in 2016 (480,000)
Compensation expense in 2017 420,000
PROBLEM 11: What amount should be recognized as accrued liability

for share appreciation rights on December 31, 2018?
a. 600,000 c. 400,000
b. 300,000 d. 200,000
SOLUTION:
Accrued compensation 12/31/18 (60,000 x 15) 600,000
Accrued compensation in 2017 (900,000)
Gain on reversal of SARs (300,000)
Accrued compensation 12/31/18 600,000
Payment for exercise of SARs (20,000 x 10) (200,000)
Adjusted accrued liability 400,000
PROBLEM 12:
On January 1, 2016, Morey Company granted Dean, the president, 20,000 share
appreciation rights for past services. These rights are exercisable immediately and
expire on January 1, 2018. On exercise, Dean is entitled to receive cash for the
excess for the share market price on the grant date. Dean did not exercise any of
the rights during 2016. The market price of Morey’s share was 30 on January 1,
2016 and 45 on December 31, 2016.
As a result of the share appreciation rights, what amount should be recognized as

compensation expense for 2016?
a. 0 c. 300,000
b. 100,000 d. 600,000
SOLUTION:
Market price, December 31, 2016 45
Predetermined price on January 1, 2016 30
Fair Value of share appreciation right 15
Compensation for 2016 (20,000 x 15) 300,000
The total compensation is recognized as expense entirely in 2016 because

the share appreciation rights are exercisable immediately.
PROBLEM 13:
Wolf Company granted 30,000 share appreciation rights which entitled key
employees to receive cash equal to the difference between 20 and the market price
of the share on the date each right is exercised. The service period is 2016 through
2018, and the rights are exercisable in 2019. The market price of the share was 25
and 28 on December 31, 2016 and 2017, respectively.
What amount should be reported as liability under the share appreciation rights on
December 31, 2017?
a. 0 c. 160,000
b. 130,000 d. 240,000
SOLUTION:
Fair value of share appreciation rights (28-20) 8
Accrued compensation 12/31/16 (30,000 x 8 = 240,000/3 x 2)

160,000
PROBLEM 14-15:
Sarah Company has granted share options to the employees. The total
compensation expense to the vesting date of December 31, 2019 has been
calculated at 5,000,000.
The entity has decided to settle the award early on December 3, 2018.
The compensation expense charge since the date of grant on January 1, 2016 was
1,000,000 for 2016 and 1,200,000 for 2017.
The compensation expense that would have been charged in 2018 was 1,800,000.
PROBLEM 14: What is the compensation expense for 2018?
a. 2,400,000 c. 2,600,000
b. 2,800,000 d. 2,500,000
SOLUTION:
Total compensation 5,000,000
Compensation in 2018 2,800,000
PROBLEM 15: What is the compensation expense for 2018 if the share
options are not exercised but instead the entity paid 4,500,000 to the
employees?
a. 2,000,000 c. 2,500,000
b. 2,900,000 d. 2,300,000
SOLUTION:
Cash payment 4,500,000
Compensation in 2018 2,300,000
SHARE-BASED PAYMENTS – Theories

1. It is the difference between the fair value of the shares to which the
counterparty has the right to subscribe and the price the counterparty is
required to pay for those shares.
a. Fair Value
b. Intrinsic Value
c. Market Value
d. Book Value
2. What is the date on which the entity and another party agree to a share-
based payment arrangement, being when the entity and the counterparty
have a shared understanding of the terms and conditions of the
arrangement?
a. Grant date
b. Measurement date
c. Exercise date
d. End of reporting period
3. What is the date on which the fair value of the equity instrument granted is
measured?
a. Measurement date
b. Grant date
c. End of reporting period
d. Exercise date
4. It is the contract that gives the holder the right, but not the obligation, to
subscribe to the entity’s shares at a fixed or determinable price for a
specified period of time.
a. Share option
b. Share warrant
c. Share appreciation right
d. Share split
5. If the entity has the choice of settlement in a “cash and share alternative”,
the entity shall account for the instrument initially as
a. Equity only
b. Liability only
c. Partly equity and partly liability
d. Either equity or liability but not both
6. A cash settled share-based payment transaction increases which of the

following?
a. A current asset
b. A non-current asset
c. Equity
d. A liability
7. What is the measurement date for a share-based payment to employees that

is classified as a liability?
a. The service inception date
b. The grant date
c. The settlement date
d. The end of the reporting period
8. These are transactions in which the entity receives goods or services as
consideration for equity instruments of the entity, including shares and share
options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions
9. If the share options do not vest until the employee completes a specified
service period, the compensation is
a. Not recognized as expense
b. Recognized as expense immediately
c. Recognized as expense over the service or vesting period
d. Recognized expense over a reasonable period not exceeding 10 years
10.The entity has issued a range of share options to employees. What type of
share-based payment transaction does this represent?
a. Asset settled share-based payment transactions
b. Equity settled share-based payment transactions
c. Cash settled share-based payment transactions
d. Liability settled share-based payment transactions
11.These are transactions in which the entity acquires goods or services by

incurring liabilities to the supplier of those goods or services for amounts that
are based on the price of the entity’s shares and other equity instruments
a. Equity transactions
b. Cash payment transactions
c. Purchase transactions
d. Cash settled share-based payment transactions
12.If the share-based payment transactions provides that the employees have
the right to choose the settlement whether in cash or shares, the entity is
deemed to have issued
a. A compound financial instrument
b. An equity instrument
c. A liability instrument
d. Either an equity instrument or a liability instrument but not both
13.An entity has entered into a contract with another entity which will supply a
range of services. The payment for those services will be in cash and based
upon the price of the entity’s ordinary shares on completion of the contract.
What type of share based payment transaction does this represent?
a. Asset settled share-based payment transactions
b. Liability settled share-based payment transactions
c. Cash settled share-based payment transactions
d. Equity settled share-based payment transactions
14.Which of the following statements in relation to the cash settled share-based
payment transactions is true?
I. The fair value of the liability shall be remeasured at the end of each
reporting period.
II. The fair value of the liability shall be remeasured at the date of
settlement.
a. I only
b. II only
c. Both I and II
d. Neither I and II
15.Which of the following statements in relation to share options granted to

employees in exchange for their services is true?
I. The services received shall be measured at the fair value of the
employees’ services.
II. Fair Value shall be measured at the date the options vest.
a. I only
b. II only
c. Both I and II
d. Neither I and II
EARNINGS PER SHARE – Problems

PROBLEM 1:
Loeb Co. had 600,000 shares of common stock outstanding on January 1, issued
126,000 shares on May 1, purchased 63,000 shares of treasury stock on September
1, and issued 54,000 shares on November 1. The weighted average shares
outstanding for the year is
a. 651,000. c. 693,000.
b. 672,000. d. 714,000.
SOLUTION:
Common stock outstanding, January 1 600,000
May 1 (126,000 x 8/12) 84,000
September 1 (63,000 x 4/12) (21,000)
November 1 (54,000 x 2/12) 9,000
WEIGHTED AVERAGE 672,000

PROBLEM 2:
The following information is available for Alley Corporation:
January 1, 2016 Shares outstanding 1,250,000
April 1, 2016 Shares issued 200,000
July 1, 2016 Treasury shares purchased 75,000
October 1, 2016 Shares issued in a 100% stock dividend 1,375,000
The number of shares to be used in computing earnings per common share

for 2016 is
a. 2,825,500.
b. 2,737,500.
d. 1,706,250.
SOLUTION:
1,250,000 × 3 × 2 = 7,500,000
1,450,000 × 3 × 2 = 8,700,000
1,375,000 × 3 × 2 = 8,250,000
2,750,000 × 3 =___ 8,250,000
32,700,000/12 = 2,725,000
PROBLEM 3:
Hoffman Corporation had net income for the year of 480,000 and a weighted
average number of common shares outstanding during the period of 200,000
shares. The company has a convertible bond issue outstanding. The bonds were
issued four years ago at par (2,000,000), carry a 7% interest rate, and are
convertible into 40,000 shares of common stock. The company has a 40% tax rate.
Diluted earnings per share are
a. 1.65 c. 2.35.
b. 2.23. d. 2.58.
SOLUTION:
Net Income 480,000
Bonds outstanding
(2,000,000 × .07 × .60) 84,000
564,000
Common shares outstanding
+ Convertible (200,000 + 40,000) /240,000
2.35
PROBLEM 4:
Kern Corporation purchased Goltra Inc. and agreed to give stockholders of Goltra
Inc. 50,000 additional shares in 2018 if Goltra Inc.’s net income in 2017 is 400,000
or more; in 2016 Goltra Inc.’s net income is 410,000. Kern has net income for 2016
of 800,000 and has an average number of common shares outstanding for 2016 of
500,000 shares. What should Kern report as earnings per share for 2016?
Basic Earnings Diluted Earnings

Per Share Per Share
a. 1.60 1.60
b. 1.45 1.60
c. 1.60 1.45
d. 1.45 1.45
SOLUTION:
Basic: 800,000 ÷ 500,000 = 1.60
Diluted: 800,000 ÷ (500,000 + 50,000) = 1.45
PROBLEM 5:
On January 2, 2016, Dino Co. issued at par 300,000 of 9% convertible bonds. Each
1,000 bond is convertible into 30 shares. No bonds were converted during 2016.
Dino had 50,000 shares of common stock outstanding during 2016. Dino's 2016 net
income was 160,000 and the income tax rate was 30%. Dino's diluted earnings per
share for 2016 would be (rounded to the nearest penny)
a. 2.71. c. 3.20.
b. 3.03. d. 3.58.
SOLUTION:
160,000 + (300,000 × .09 × .7)
______________________________ = 3.03
50,000 + [(300,000/1,000) x 30)]
PROBLEM 6-7:
Gilley Co. had 200,000 shares of common stock, 20,000 shares of convertible
preferred stock, and 1,000,000 of 10% convertible bonds outstanding during 2016.
The preferred stock is convertible into 40,000 shares of common stock. During
2016, Gilley paid dividends of .90 per share on the common stock and 3.00 per
share on the preferred stock. Each 1,000 bond is convertible into 45 shares of
common stock. The net income for 2016 was 600,000 and the income tax rate was
30%.
PROBLEM 6: Basic earnings per share for 2016 is (rounded to the

nearest peso)
a. 2.21. c. 2.51.
b. 2.42. d. 2.70.
SOLUTION:
600,000 – (20,000 × 3)
_______________________ = 2.70
200,000
PROBLEM 7: Diluted earnings per share for 2016 is (rounded to the

nearest peso)
a. 2.14. c. 2.35.
b. 2.25. d. 2.46.
SOLUTION:
600,000 + (1,000,000 × .10 × .7)
_______________________________ = 2.35
200,000 + 45,000 + 40,000
PROBLEM 8:
Werth. Incorporation, has 3,200,000 shares of common stock outstanding on
December 31, 2015. An additional 800,000 shares of common stock were issued on
April 1, 2016, and 400,000 more on July 1, 2016. On October 1, 2016, Werth issued
20,000, 1,000 face value, 8% convertible bonds. Each bond is convertible into 20
shares of common stock. No bonds were converted into common stock in 2016.
What is the number of shares to be used in computing basic earnings per share and
diluted earnings per share, respectively?
a. 4,000,000 and 4,000,000

b. 4,000,000 and 4,100,000
c. 4,000,000 and 4,400,000
d. 4,400,000 and 5,200,000
SOLUTION:
3,200,000 + (800,000 × 9/12) + (400,000 × 6/12) = 4,000,000
(BEPS)
4,000,000 + (20,000 × 20 × 3/12) = 4,100,000 (DEPS)

PROBLEM 9:
At December 31, 2015, Quirk Company had 2,000,000 shares of common stock
outstanding. On January 1, 2016, Quirk issued 500,000 shares of preferred stock
which were convertible into 1,000,000 shares of common stock. During 2016, Quirk
declared and paid 1,500,000 cash dividends on the common stock and 500,000
cash dividends on the preferred stock. Net income for the year ended December 31,
2016, was 5,000,000. Assuming an income tax rate of 30%, what should be diluted
earnings per share for the year ended December 31, 2016? (Round to the nearest
peso.)
a. 1.50 c. 2.50
b. 1.67 d. 2.08
SOLUTION:
5,000,000
_____________________ = 1.67
2,000,000 + 1,000,000
PROBLEM 10:
At December 31, 2015, Agler Company had 1,200,000 shares of common stock
outstanding. On September 1, 2016, an additional 400,000 shares of common stock
were issued. In addition, Agler had 12,000,000 of 6% convertible bonds outstanding
at December 31, 2016, which are convertible into 800,000 shares of common stock.
No bonds were converted into common stock in 2016. The net income for the year
ended December 31, 2016, was 4,500,000. Assuming the income tax rate was 30%,
what should be the diluted earnings per share for the year ended December 31,
2016, rounded to the nearest peso?
a. 2.11 c. 2.35
b. 3.38 d. 2.45
SOLUTION:
4,500,000 + (12,000,000 × .06 × .7)
___________________________________ = 2.35
1,200,000 + (400,000 x 4/12) + 800,000
PROBLEM 11:
Foley Company has 1,800,000 shares of common stock outstanding on December
31, 2015. An additional 150,000 shares of common stock were issued on July 1,
2016, and 300,000 more on October 1, 2016. On April 1, 2016, Foley issued 6,000,
1,000 face value, 8% convertible bonds. Each bond is convertible into 40 shares of
common stock. No bonds were converted into common stock in 2016. What is the
number of shares to be used in computing basic earnings per share and diluted
earnings per share, respectively, for the year ended December 31, 2016?
a. 1,950,000 and 2,130,000

b. 1,950,000 and 1,950,000
c. 1,950,000 and 2,190,000
d. 2,250,000 and 2,430,000
SOLUTION:
1,800,000 + (150,000 × 6/12) + (300,000 × 3/12) = 1,950,000
1,950,000 + (6,000 × 40 × 9/12) = 2,130,000
PROBLEM 12-13:
Information concerning the capital structure of Simot Corporation is as follows:
December 31,
2016 2015
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds 2,400,000 2,400,000
During 2016, Simot paid dividends of 1.20 per share on its common stock and 3.00
per share on its preferred stock. The preferred stock is convertible into 30,000
shares of common stock. The 9% convertible bonds are convertible into 75,000
shares of common stock. The net income for the year ended December 31, 2016,
was 600,000. Assume that the income tax rate was 30%.
PROBLEM 12: What should be the basic earnings per share for the year
ended December 31, 2016, rounded to the nearest peso?
a. 2.66 c. 3.70
b. 2.92 d. 4.00
SOLUTION:
600,000 – (15,000 × 3.00)
__________________________ = 3.70
150,000
PROBLEM 13: What should be the diluted earnings per share for the year
ended December 31, 2016, rounded to the nearest peso?
a. 3.20
b. 2.95
c. 2.83
d. 2.35
SOLUTION:
600,000 + (2,400,000 × .09 × .7)
________________________________= 2.95
150,000 + 75,000 + 30,000
PROBLEM 14:
Warrants exercisable at 20 each to obtain 30,000 shares of common stock were
outstanding during a period when the average market price of the common stock
was 25. Application of the treasury stock method for the assumed exercise of these
warrants in computing diluted earnings per share will increase the weighted
average number of outstanding shares by
a. 30,000.
b. 24,000.
c. 6,000.
d. 7,500.
SOLUTION:
30,000 × 20 ÷ 25 = 24,000
30,000 – 24,000 = 6,000
PROBLEM 15:
Ferry Corporation had 300,000 shares of common stock outstanding at December

31, 2016. In addition, it had 90,000 stock options outstanding, which had been
granted to certain executives, and which gave them the right to purchase shares of
Ferry's stock at an option price of 37 per share. The average market price of Ferry's
common stock for 2016 was 50. What is the number of shares that should be used
in computing diluted earnings per share for the year ended December 31, 2016?
a. 300,000
b. 331,622
c. 366,600
d. 323,400
SOLUTION:
90,000 – (90,000 × 37 ÷ 50) = 23,400
300,000 + 23,400 = 323,400
EARNINGS PER SHARE – Theories

1. With respect to the computation of earnings per share, which of the following
would be most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in

lots of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. None of these
2. In computing earnings per share for a simple capital structure, if the preferred
stock is cumulative, the amount that should be deducted as an adjustment to
the numerator (earnings) is the
a. preferred dividends in arrears.

b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.
3. In computations of weighted average of shares outstanding, when a stock

dividend or stock split occurs, the additional shares are
a. weighted by the number of days outstanding.

b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year
reported.
4. What effect will the acquisition of treasury stock have on stockholders' equity and
earnings per share, respectively?
a. Decrease and no effect

b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
5. Due to the importance of earnings per share information, it is required to be

reported by all
Public Companies Nonpublic Companies

a. Yes Yes
b. Yes No
c. No No
d. No Yes
6. A convertible bond issue should be included in the diluted earnings per share
computation as if the bonds had been converted into common stock, if the effect of
its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
8. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.

b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.
9. In computing earnings per share, the equivalent number of shares of convertible
preferred stock are added as an adjustment to the denominator (number of shares
outstanding). If the preferred stock is cumulative, which amount should then be
added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend

b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate
10. In the diluted earnings per share computation, the treasury stock method is
used for options and warrants to reflect assumed reacquisition of common stock at
the average market price during the period. If the exercise price of the options or
warrants exceeds the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.

b. fairly present the maximum potential dilution of diluted earnings per share
on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the
number of shares assumed reacquired as the potential dilution of earnings
per share.
d. be antidilutive.
11. In applying the treasury stock method to determine the dilutive effect of stock
options and warrants, the proceeds assumed to be received upon exercise of the
options and warrants
a. are used to calculate the number of common shares repurchased

at the average market price, when computing diluted earnings
per share.
b. are added, net of tax, to the numerator of the calculation for diluted
earnings per share.
c. are disregarded in the computation of earnings per share if the exercise
price of the options and warrants is less than the ending market price of
common stock.
d. none of these.
12. When applying the treasury stock method for diluted earnings per share, the
market price of the common stock used for the repurchase is the
a. price at the end of the year.

b. average market price.
c. price at the beginning of the year.
d. none of these.
13. Antidilutive securities
a. should be included in the computation of diluted earnings per share but

not basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause
basic earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the
average market price of common stock.
d. should be ignored in all earnings per share calculations.
14. Assume there are two dilutive convertible securities. The one that should be
used first to recalculate earnings per share is the security with the
a. greater earnings adjustment.

b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.
15. The if-converted method of computing earnings per share data assumes
conversion of convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance,

if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).
STATEMENT OF CASH FLOWS – Problems
PROBLEM 1-2:
Lange Co. provided the following information on selected transactions during 2016:
Purchase of land by issuing bonds 250,000
Proceeds from issuing bonds 500,000
Purchases of inventory 950,000
Purchases of treasury stock 150,000
Loans made to affiliated corporations 350,000
Dividends paid to preferred stockholders 100,000
Proceeds from issuing preferred stock 400,000
Proceeds from sale of equipment 50,000
PROBLEM 1:
The net cash provided (used) by investing activities during 2016 is
a. 50,000.
b. (300,000).
c. (550,000).
d. (1,250,000).
SOLUTION:
Proceeds from the sale of equipment 50,000
(300,000)
PROBLEM 2:
The net cash provided by financing activities during 2016 is
a. 550,000.
b. 650,000.
c. 800,000.
d. 900,000.
SOLUTION:
Purchases of treasury stock (150,000)
Dividends paid to preferred stockholders (100,000)
Proceeds from issuing preferred stock 400,000
650,000
PROBLEM 3:
The following information on selected cash transactions for 2016 has been provided
by Simpson Company:
Proceeds from sale of land 160,000
Proceeds from long-term borrowings 400,000
Purchases of plant assets 144,000
Purchases of inventories 680,000
Proceeds from sale of Simpson common stock 240,000
What is the cash provided (used) by investing activities for the year ended
December 31, 2016, as a result of the above information?
a. 16,000
b. 256,000.
c. 160,000.
d. 800,000.
SOLUTION:
Proceeds from sale of land 160,000
Purchases of plant assets (144,000)
16,000
PROBLEM 4:
Selected information from Adison Company's 2016 accounting records is as follows:
Proceeds from issuance of common stock 400,000
Proceeds from issuance of bonds 1,200,000
Cash dividends on common stock paid 160,000
Cash dividends on preferred stock paid 60,000
Sale of stock to officers and employees not included above 100,000
Adison's statement of cash flows for the year ended December 31, 2016,
would show net cash provided (used) by financing activities of
a. 60,000.
b. (220,000).
c. 160,000.
d. 1,360,000.
SOLUTION:
Proceeds from issuance of common stock 400,000
Proceeds from issuance of bonds 1,200,000
Cash dividends on common stock paid (160,000)
Cash dividends on preferred stock paid (60,000)
Sale of stock to officers and employees not included above

100,000
1,360,000
PROBLEM 5:
During 2017, Ogden Inc. had the following activities related to its financial
operations:
Carrying value of convertible preferred stock in Ogden,
converted into common shares of Ogden 360,000
Payment in 2017 of cash dividend declared in 2016 to
preferred shareholders 186,000
Payment for the early retirement of long-term bonds payable
(carrying amount 2,220,000) 2,250,000
Proceeds from the sale of treasury stock (on books at cost of 258,000)
300,000
The amount of net cash used in financing activities to appear in Ogden's

statement of cash flows for 2017 should be
a. 1,590,000.
b. 1,776,000.
c. 2,136,000.
d. 2,148,000.
SOLUTION:
Proceeds from the sale of treasury stock 300,000
Payment in 2017 of cash dividend declared in 2016 to
preferred shareholders (186,000)
114,000
Payment for the early retirement of long-term bonds payable

2,250,000
2,136,000
PROBLEM 6:
During 2017, equipment was sold for 156,000. The equipment cost 252,000 and had
a book value of 144,000. Accumulated Depreciation—Equipment was 687,000 at
12/31/16 and 735,000 at 12/31/17. Depreciation expense for 2017 was
a. 60,000.
b. 96,000.
c. 156,000.
d. 192,000.
SOLUTION:
Accumulated Depreciation—Equipment 12/31/17 735,000
12/31/16 687,000
48,000
Cost – Book value (252,000 – 144,000) 108,000
156,000
PROBLEM 7:
Richman Corporation had net income for 2016 of 3,000,000. Additional

information is as follows:
Depreciation of plant assets 1,200,000
Amortization of intangibles 240,000
Increase in accounts receivable 420,000
Increase in accounts payable 540,000
Richman's net cash provided by operating activities for 2016 was
a. 4,560,000.
b. 4,440,000.
c. 4,320,000.
d. 1,680,000.
SOLUTION:
Net Income 3,000,000
Depreciation of plant assets 1,200,000
Amortization of intangibles (240,000)
Increase in accounts receivable 420,000
Increase in accounts payable 540,000
4,560,000
PROBLEM 8:
Net cash flow from operating activities for 2016 for Fordham Corporation was
300,000. The following items are reported on the financial statements for 2016:
Cash dividends paid on common stock 20,000
Depreciation and amortization 12,000
Increase in accounts receivables 24,000
Based on the information above, Fordham’s net income for 2016 was
a. 312,000.
b. 296,000.
c. 264,000.
d. 256,000.
SOLUTION: X + 12,000 – 24,000 = 300,000; X = 312,000.
PROBLEM 9:
During 2016, Hogan Company earned net income of 384,000 which included
depreciation expense of 78,000. In addition, the company experienced the following
changes in the account balances listed below:
Increases Decreases
Accounts payable 45,000 Accounts receivable 12,000
Inventory 36,000 Accrued liabilities 24,000
Prepaid insurance 33,000
Based upon this information what amount will be shown for net cash provided
by operating activities for 2016?
a. 492,000
b. 465,000
c. 285,000
d. 267,000
SOLUTION:
Net Income 384,000
Depreciation expense 78,000
Accounts payable 45,000
Accounts receivable 12,000
Inventory (36,000)
Accrued liabilities (24,000)
Prepaid insurance 33,000
492,000
PROBLEM 10:
Robley Company reported net income of 340,000 for the year ended 12/31/16.
Included in the computation of net income were: depreciation expense, 60,000;
amortization of a patent, 32,000; income from an investment in common stock of
Brett Inc., accounted for under the equity method, 48,000; and amortization of a
bond discount, 12,000. Robley also paid an 80,000 dividend during the year. The net
cash provided by operating activities would be reported at:
a. 396,000.
b. 316,000.
c. 284,000.
d. 204,000.
SOLUTION: 340,000 + 60,000 + 32,000 – 48,000 + 12,000 = 396,000.

PROBLEM 11-12:
Weimers Company provided the following information on selected transactions

during 2016:
Dividends paid to preferred stockholders 150,000
Proceeds from issuing preferred stock 1,050,000
Purchases of inventories 1,200,000
Purchase of land by issuing bonds 300,000
PROBLEM 11: The net cash provided (used) by investing activities during
2016 is
a. (600,000).
b. (300,000).
c. 150,000.
d. 450,000.
SOLUTION:
Loans made to affiliated corporations (750,000)
300,000
PROBLEM 12: The net cash provided (used) by financing activities during
2016 is
a. (1,650,000).
b. 450,000.
c. 750,000.
d. 1,200,000.
SOLUTION:
Dividends paid to preferred stockholders (150,000)
Proceeds from issuing preferred stock 1,050,000
1,200,000
PROBLEM 13:
The net cash provided by operating activities in Otto Company's statement of cash
flows for 2016 was 115,000. For 2016, depreciation on plant assets was 45,000,
amortization of patent was 8,000, and cash dividends paid on common stock was
54,000. Based only on the information given above, Otto’s net income for 2016 was
a. 115,000.
b. 62,000.
c. 8,000.
d. 116,000.
SOLUTION: 115,000 – 45,000 – 8,000 = 62,000.
PROBLEM 14:
Snow Incorporated, had net income for 2016 of 5,000,000. Additional information is
as follows:
Amortization of patents 45,000
Depreciation on plant assets 1,650,000
Long-term debt:
Bond premium amortization 65,000
Interest paid 900,000

Provision for doubtful accounts:
Current receivables 80,000
Long-term nontrade receivables 30,000
What should be the net cash provided by operating activities in the statement
of cash flows for the year ended December 31, 2016, based solely on the
above information?
a. 6,820,000.
b. 6,870,000.
c. 6,740,000.
d. 6,840,000.
SOLUTION:
Amortization of patents 45,000
Depreciation on plant assets 1,650,000
Bond premium amortization (65,000)
Current receivables 80,000
Long-term nontrade receivables 30,000
6,740,000
PROBLEM 15:
The net income for the year ended December 31, 2016, for Unger Company was
1,200,000. Additional information is as follows:
Depreciation on plant assets 600,000
Amortization of leasehold improvements 340,000
Provision for doubtful accounts on short-term receivables 120,000
Provision for doubtful accounts on long-term receivables 100,000
Interest paid on short-term borrowings 80,000
Interest paid on long-term borrowings 60,000
Based solely on the information given above, what should be the net cash
provided by operating activities in the statement of cash flows for the year
ended December 31, 2016?
a. 2,260,000.
b. 2,360,000.
c. 2,340,000.
d. 2,500,000.
SOLUTION:
Depreciation on plant assets
600,000
Amortization of leasehold improvements 340,000
Provision for doubtful accounts on short-term receivables120,000
Provision for doubtful accounts on long-term receivables100,000
2,360,000
STATEMENT OF CASH FLOWS - Theories

1. It is an objective of the statement of cash flows to
a. disclose changes during the period in all asset and all equity accounts.
b. disclose the change in working capital during the period.
c. provide information about the operating, investing, and financing
activities of an entity during a period.
d. none of these.
2. The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of an entity during

a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of an entity during a
period.
d. about the entity's ability to meet its obligations, its ability to pay
dividends, and its needs for external financing.
3. Of the following questions, which one would not be answered by the statement of
cash flows?
a. Where did the cash come from during the period?

b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during
the period?
d. What was the change in the cash balance during the period?
4. The first step in the preparation of the statement of cash flows requires the use of
information included in which comparative financial statements?
a. Statements of cash flows

b. Balance sheets
c. Income statements
d. Statements of retained earnings
5. When preparing a statement of cash flows (indirect method), an increase in
ending inventory over beginning inventory will result in an adjustment to reported
net earnings because
a. cash was increased while cost of goods sold was decreased.

b. cost of goods sold on an accrual basis is lower than on a cash
basis.
c. acquisition of inventory is an investment activity.
d. inventory purchased during the period was less than inventory sold
resulting in a net cash increase.
6. A company borrows 10,000 and signs a 90-day nontrade note payable. In

preparing a statement of cash flows (indirect method), this event would be reflected
as a(n)
a. addition adjustment to net income in the cash flows from operating

activities section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.
7. To arrive at net cash provided by operating activities, it is necessary to report

revenues and expenses on a cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in

a separate cash flow journal.
b. estimating the percentage of income statement transactions that were
originally reported on a cash basis and projecting this amount to the entire
array of income statement transactions.
c. eliminating the effects of income statement transactions that did
not result in a corresponding increase or decrease in cash.
d. eliminating all transactions that have no current or future effect on cash,
such as depreciation, from the net income computation.
8. An increase in inventory balance would be reported in a statement of cash flows

using the indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating
activities.
b. deduction from net income in arriving at net cash flow from
operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
9. A statement of cash flows typically would not disclose the effects of
a. capital stock issued at an amount greater than par value.

b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.
10. When preparing a statement of cash flows (indirect method), which of the
following is not an adjustment to reconcile net income to net cash provided by
operating activities?
a. A change in interest payable

b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
11. Declaration of a cash dividend on common stock affects cash flows from
operating activities under the direct and indirect methods as follows:
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
12. In a statement of cash flows, the cash flows from investing activities section
should report
a. the issuance of common stock in exchange for a factory building.

b. stock dividends received.
c. a major repair to machinery charged to accumulated depreciation.
d. the assignment of accounts receivable.
13. Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing
activities on a statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
14. Which of the following would be classified as a financing activity on a statement

of cash flows?
a. Declaration and distribution of a stock dividend

b. Deposit to a bond sinking fund
c. Sale of a loan receivable
d. Payment of interest to a creditor
15. The amortization of bond premium on long-term debt should be presented in a

statement of cash flows (using the indirect method for operating activities) as a(n)
a. addition to net income.

b. deduction from net income.
c. investing activity.
d. financing activity.
CASH AND CASH EQUIVALENTS - Problems

PROBLEM 1: The statement of financial position of Kwarta Company shows cash of
330,820. The following items were found to comprise this total amount:
Checking account in Metrobank (outstanding checks

as of year-end totaled 15,200) 105,200.00
Savings account is Far East bank 30,800.00
Petty cash fund (including expense receipts for 250) 1,500.00
Cash on hand (undeposited sales receipts) 4,200.00
Sinking fund cash 35,000.00
Cash in foreign bank (in equivalent pesos) 65,000.00
Customers' check on hand
Traveler's Check 14,000.00
Manager's Check 23,120.00
Short term treasury bills 52,000.00
What is the correct amount of cash?

a. 243,570 c. 234,700
b. 240,987 d. 256,798
SOLUTION:
Checking account in Metrobank 105,200
Savings account in Far East Bank 30,800
Petty cash fund (1,500-250) 1,250
Cash on hand (Undeposited sales receipts) 4,200
Cash in foreign bank (In equivalent pesos) 65,000
Customer’s check on hand:
Traveler’s check 14,000
Manager’s check 23,120
TOTAL AMOUNT OF CASH 243,570
Alternative Computation:
Reported Total 330,820
Less:
Sinking fund cash (35,000)
Short term treasury bills (52,000)
Unreplenished petty cash expenses (250)
CORRECT CASH BALANCE 243,570
PROBLEM 2: Kuton Company’s checkbook balance at December 31, 2016 was

180,000. In addition, Kuton held the following items in its safe on that date:
 Check payable to Kuton dated January 2, 2017 in payment of a sale made

in December 2016, included in December 31 checkbook balance- 65,000.
 Check payable to Kuton deposited December 15, but returned by the bank
DAIF- 20,000.
 Check drawn on Kuton’s account, payable to a vendor, dated and recorded
on December 30 but not yet mailed to payee as of December 31, 2016-
15,000.
What is the correct cash balance of the company?
a. 112,000 c. 110,000
b. 115,000 d. 95,000
SOLUTION:
Reported checkbook balance 180,000
Adjustments:
Customer’s post dated check included in the balance

(65,000)
Customer’s check returned by bank marked DAIF

(20,000)
Company check recorder but not yet mailed

15,000
CASH REPORTED ON DECEMBER 31, 2016 BALANCE SHEET

110,000
PROBLEM 3: Green Company’s general ledger showed a balance of 2,205,600 in

its cash account on December 31, 2016. Included in this balance are the following
items:
20,000.0
DAIF checks returned by bank 0
750,000.
Savings account 00
1,200.0
IOUs 0
Postage stamps 600.0
0
10,000.0
Bank draft 0
30,000.0
Cash on hand 0
500,000.
Cash sinking fund 00
Customer's checks dated January 5,400.0
2017 0
4,000.0
Travel advances 0
8,000.0
Traveler's Checks 0
What is the correct balance of cash?

a. 1, 798,000 c. 1,674,400
b. 1,670,600 d. 1,478,900
SOLUTION:
Balance per general ledger 2,205,600
Non-cash items:
Customer’s NSF checks (20,000)
IOUs (1,200)
Postage stamps (600)
Cash in sinking fund (500,000)
Customer’s postdated checks (5,400)
Travel advances (4,000)
CORRECT CASH BALANCE: 1,674,400
PROBLEM 4: Jennifer Incorporated established a petty cash fund of 5,000 for

incidental expenses on June 1, 2016. At the end of the month, the count of cash on
hand indicated that 670.40 remained in the fund. A review of the petty cash
vouchers disclosed the following expenses had been incurred during the month:
341.6
Office supplies 0
1,321.4
Transportation 0
780.0
Postage 0
837.6
Miscellaneous 0
1,000.0
Representation 0
(a) What is the amount of cash shortage?

a. 45 c. 50
b. 48 d. 49
(b) Prepare the adjusting entry for the end of the month.
SOLUTION:
(a)Petty cash fund 5,000.00

Amount of cash on hand 670.40
Total petty cash vouchers
Office supplies 341.60
Postage 780.00
Representation 1,000.00
Transportation 1,321.40
Miscellaneous 837.60 4,280.60 4,951.00
Shortage in the petty cash fund 49.00
(b)Office supplies expense 341.60

Postage 780.00
Representation 1,000.00
Transportation 1,321.40
Miscellaneous 837.60
Cash short and over 49.00
Petty cash fund 4,329.60
PROBLEM 5: In your cash count of the petty cash fund of Canyon Company as of
July 4, 2016, you found the following composition of its petty cash fund:
Bills and coins counted 2,450.00

Approved and signed petty cash vouchers
Dated June 2016 3,300.00
Dated July 1-4, 2016 800.00
IOU from Joe Santos, an employee 1,400.00
A check drawn by Juvy Victoria, an employee, dated July
15, 2016 2,000.00
The petty cash fund has an imprest balance of 10,000. The company’s reporting
period ends on June 30.
(a) What is the correct balance of the petty cash fund?
a. 3,250 c. 2,550
b. 3,000 d. 3,750
(b) How much is the cash shortage or overage?
a. 45 c. 50
b. 55 d. 60
(c) Prepare the adjusting entry for June 2016
SOLUTION:
(a)Bills and coins 2,450

PCV’s dated July 2016 (undisbursed as of June 30) 800
ADJUSTED BALANCE OF PETTY CASH FUND 3,250
(b)Per count
Bills and coins 2,450
PCVs dated June 3,300
PCVs dated July 800
IOUs 1,400
PDC drawn by Juvy Victoria 2,000
TOTAL: 9,950
Petty cash fund, per ledger 10,000
CASH SHORTAGE 50
(c) Miscellaneous expenses 3,300
Receivable from employees (IOS + PDC) 3,400
Cash short or over 50
Petty cash fund 6,750
PROBLEM 6: You are attempting to determine an apparent cash shortage that you
believe resulted from an employee’s theft. You have assembled the following
information for the month of March:
Cash balance per books, March 1 115,963.70

Cash receipts for March per books 246,475.00
Cash disbursements for March per
books 334,709.10
Cash balance per bank statement,
March 31 15,341.40
Deposit in transit, March 31 9,000.00
Outstanding checks, March 31 2,703.80
Bank service charge for March 92.00
What is the amount of cash shortage?

a. 5,500 c. 6,000
b. 5,600 d. 6,100
SOLUTION:
Balance per bank statement
380,750
Deposit in transit
52,000
Outstanding checks (67,500-9,000)
(58,500)
Erroneous credit by bank (4,000)
Check of Silver Lining charged by bank to Silver Co.’s account
12,000
CORRECT CASH BALANCE 382,250
Cash balance per books, March 1 115,963.70

Cash receipts during March 246,475.00
Cash disbursements during March
(334,709.10)
Bank service charge for March (92.00)
Cash balance per books at March 31 27,637.60
Cash balance per books at March 31
Cash balance per bank statement 15,341.40
Deposit in transit 9,000
Outstanding checks (2,703.80)
Cash balance reflected per bank 21,637.60
Suspected cash shortage (undeposited collections) 6,000
PROBLEM 7: In reconciling the book and bank balance of the cash account of
Perlas Corporation, you discover the following for the month of December 2016:
400,000.0
Balance per bank statement 0
387,000.0
Balance per books 0
100,000.0
Receipts not yet deposited 0
Bank service charge 1,000.00
Customer's check returned by bank
marked DAIF 22,000.00
A paid check for 40,000 was recorded in the cash book as 4,000.
Assuming no other errors were noted, what is the amount of the outstanding
checks at December 31, 2016?
a. 172,000 c. 175,000
b. 170,000 d. 180,000
SOLUTION:
Balance per bank statement
400,000
Add receipts of 12/31/16 not yet deposited
100,000
Balance per bank statement before outstanding checks
500,000
Balance per books 387,000
Bank service charge for December (1,000)
Paid check for 40,000 recorder as 4,000 (36,000)
Customer’s check returned by bank marked as DAIF(22,000)
(328,000)
Outstanding checks at December 31, 2016
172,000
Proof: Balance per bankBalance per books

Reported balances 400,000 387,000
Receipts not yet deposited 100,000
December bank service charge (1,000)
Paid check for 40,000 recorded as 4,000 (36,000)
Customer’s check returned by the bank (22,000)
Outstanding check at December 31 (172,000) _______
Correct cash balance 328,000 328,000
PROBLEM 8-12: Shown below is the bank reconciliation for Marikina Company for
November 2016:
Balance per bank, Nov. 30, 2016 150,000

Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks 28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2016 136,000
The bank statement for December 2016 contains the following data:
Total deposits 110,000
Total charges, including an NSF check of 8,000
and a service charge of 400 96,000
All outstanding checks on November 30, 2016, including the bank credit,
were cleared in the bank on December 2016. There were outstanding checks
of 30,000 and deposits in transit of 38,000 on December 31, 2016.
Questions:
Based on the above and the result of your audit, answer the following:
PROBLEM 8: How much is the cash balance per bank on December 31, 2016?
a. 154,000 c.150,000
b. 164,000 d. 172,400
SOLUTION:
Balance per bank, Nov. 30, 2016 150,000
Add: Total deposits per bank statement 110,000
Total 260,000
Less: Total charges per bank statement (96,000)
Balance per bank, Dec. 31, 2016 164,000
PROBLEM 9: How much is the December receipts per books?

a. 124,000 c. 96,000
b.110,000 d.148,000
SOLUTION:
Total deposits per bank statement 110,000
Less: deposits in transit, Nov. 30 (24,000)
December receipts cleared through the bank 86,000
Add: deposits in transit, Dec. 31 38,000
December receipts per books 124,000

PROBLEM 10: How much is the December disbursements per books?
a. 96,000 c. 79,600
b. 89,600 d. 98,000
SOLUTION:
Total charges per bank statement P96,000
Less: Outstanding checks, Nov. 30 28,000
Correction of erroneous bank credit 10,000
December NSF check 8,000
December bank service charge 400
(46,400)
December disbursements cleared through the bank

49,600
Add: Outstanding checks, Dec. 31 30,000
December disbursements per books 79,600
PROBLEM 11: How much is the cash balance per books on December 31, 2016?
a. 150,000 c. 170,400
b. 180,400 d. 162,000
SOLUTION:
Balance per books, Nov. 30, 2016 136,000
Add: December receipts per books 124,000
Total 260,000
Less: December disbursements per books 79,600
Balance per books, Dec. 31, 2016 180,400

PROBLEM 12: The adjusted cash in bank balance as of December 31, 2016 is
a. 141,600 c. P162,000
b. 172,000 d. P196,000
SOLUTION:
Balance per bank statement, 12/31/16 164,000
Deposits in transit 38,000
Outstanding checks (30,000)
Adjusted bank balance, 12/31/16 172,000
Balance per books, 12/31/16 180,400
NSF check (8,000)
Bank service charges (400)
Adjusted book balance, 12/31/16 172,000
PROBLEM 13: Angelic Corporation had the following account balances at

December 31, 2016:
Cash on hand and in banks 975,000
Cash restricted for additions to plant
(expected to be disbursed in 2018) 600,000
Bank certificates of deposit
(due January 16, 2017) 250,000
In the current assets section of Angelic’s December 31,2016 statement

of financial position, what is the total amount that should be reported
under the caption “cash and cash equivalents”?
a. 975,000 c. 1,225,000
b. 1,575,000 d. 1,825,000
SOLUTION:
Cash on hand and in banks 975,000
Bank certificate of deposit 250,000
TOTAL CASH AND CASH EQUIVALENTS 1,225,000
PROBLEM 14: In preparing its bank reconciliation at December 31, 2016, Smiley
Company has the following available data:
Balance per bank statement, December 31, 2016

38,075
Deposit in transit, December 31, 2016 5,200
Outstanding checks, December 31, 2016 6,750
Amount erroneously credited by bank to Smiley’s account,
December 28, 2016

400
Bank service charges for December 75
How much is Smiley’s adjusted cask in bank balance at December 31, 2016?
a. 36,050 c. 36,125
b. 36,450 d. 36,525
SOLUTION:
Balance per bank 38,075
Deposit in transit 5,200
Erroneous credit by bank (400)
Adjusted balance 36,125
PROBLEM 15: As of June 30, 2016, the bank statement of Marine Trading had an
ending balance of 373,612. The following date were assembled in the course of
reconciling the bank balance:
 The bank erroneously credited Marine Trading for 2,150 on June

19.
 During the month, the bank charged NSF checks amounting to
2,340 of which 800 had been redeposited on the 24 th of June.
 Collection for June 30 totaling 10,330 was deposited the
following month.
 Checks outstanding as of June 30 were 30,205
 Notes collected by the bank for Marine Trading were 8,150 and
the corresponding bank charges were 50.
What is the adjusted bank balance on June 30, 2016?
a. 351,587 c. 358, 147

b. 353,927 d. 359,687
SOLUTION:
Balance per bank 373,612
Bank error (2,150)
Collection for June deposited the following month 10,330
CORRECT BANK BALANCE 351,587
CASH AND CASH EQUIVALENTS – THEORIES

1. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds

b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
2. Which of the following is considered cash?
a. Certificates of deposit (CDs)

b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
3. Travel advances should be reported as

a. supplies.
b. cash because they represent the equivalent of money.
c. investments.
d. none of these.
4. Which of the following items should not be included in the Cash caption on the
balance sheet?
a. Coins and currency in the cash register

b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
5. A cash equivalent is a short-term, highly liquid investment that is readily

convertible into known amounts of cash and
a. is acceptable as a means to pay current liabilities.

b. has a current market value that is greater than its original cost
c. bears an interest rate that is at least equal to the prime rate of interest at
the date of liquidation.
d. is so near its maturity that it presents insignificant risk of
changes in interest rates.
6. Bank overdrafts, if material, should be

a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.
7. Deposits held as compensating balances
a. usually do not earn interest.

b. if legally restricted and held against short-term credit may be included as
cash.
c. if legally restricted and held against long-term credit may be included
among current assets.
d. none of these.
8. The category "trade receivables" includes
a. advances to officers and employees.

b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
9. Which of the following is not true?

a. The imprest petty cash system in effect adheres to the rule of
disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease
the size of the fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.
10. A Cash Over and Short account
a. is not generally accepted.

b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.
11. The journal entries for a bank reconciliation
a. are taken from the "balance per bank" section only.

b. may include a debit to Office Expense for bank service charges.
c. may include a credit to Accounts Receivable for an NSF check.
d. may include a debit to Accounts Payable for an NSF check.
12. When preparing a bank reconciliation, bank credits are
a. added to the bank statement balance.

b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.
13. As contemplated in accounting, cash includes

a. Money only
b. Money and any negotiable instrument
c. Any negotiable instrument
d. Money and any negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate credit
14. Which is false concerning measurement of cash and cash equivalents?

a. Cash is measured at face value
b. Cash in foreign currency is measured at the current exchange rate
c. If a bank or financial institution holding the funds of the company is in
bankruptcy or financial difficulty, cash should be written down to estimated
realizable value
d. Cash equivalents should be measured at maturity value, meaning
face value plus interest
15. A compensating balance
a. Must be included in cash and cash equivalent
b. Which is legally restricted and related to a long-term loan is classified as a
current asset
c. Which is legally restricted and related to a short-term loan is
classified separately as a current asset
d. Which is not legally restricted as to withdrawal is classified separately as
current asset
ACCOUNTS RECEIVABLE – Problems

(Initial Measurement and Bad Debts)
PROBLEM 1:
Jay Company provided the following data relating to accounts receivable for the
current year:
Accounts receivable, January 1 650,000
Credit sales 2,700,000
Sales returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31
per aging 110,000

What amount should be reported as net realizable value of accounts
receivable on December 31?
a. 1,200,000 c. 1,085,000
b. 1,125,000 d. 925,000
SOLUTION:
Accounts Receivable, January 1 650,000
Credit Sales 2,700,000
TOTAL 3,350,000
Less: Collections from customers 2,150,000
Accounts written off 40,000
Sales returns 75,000 2,265,000
Accounts receivable, December 31 1,085,000
PROBLEM 2:
On December 31, 2016, Miami Company reported that the current receivables
consisted of the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost
in transit in November 30,000
Selling price of unsold goods sent by Miami
on consignment at 130% of cost and
not included in Miami’s inventory 260,000
Security deposit on lease of warehouse
used in storing some inventories 300,000
On December 31, 2016, what total amount should be reported as trade and other
receivables under current assets?
a. 940,000 c. 1,240,000
b. 1,200,000 d. 1,500,000
SOLUTION:
Trade accounts receivable 930,000
Allowance for uncollectible accounts (20,000)
Claim receivable 30,000
TOTAL TRADE AND OTHER RECEIVABLES 940,000
PROBLEM 3:
Mill’s Company allowance for doubtful accounts was 1,000,000 at the end of 2016
and 900,000 at the end of 2015. For the year ended December 31, 2016, the entity
reported doubtful accounts expense of 160,000 in the income statement
What amount was debited to the appropriate account to write off uncollectible
accounts in 2016?
a. 60,000 c. 160,000
b. 100,000 d. 260,000
SOLUTION:
Allowance for doubtful accounts, December 31, 2015

900,000
Doubtful accounts expense 160,000
TOTAL
1,060,000
Accounts written off (SQUEEZE)

(60,000)**
ALLOWANCE FOR DOUBTFUL ACCOUNTS, December 31, 2016

1,000,000
PROBLEM 4:
At the close of its first year of operations, December 31, 2016, Linn Company had
accounts receivable of 540,000, after deducting the related allowance for doubtful
accounts. During 2016, the company had charges to bad debt expense of 90,000
and wrote off, as uncollectible, accounts receivable of 40,000. What should the
company report on its balance sheet at December 31, 2016, as accounts receivable
before the allowance for doubtful accounts?
a. 670,000
b. 590,000
c. 490,000
d. 440,000
SOLUTION:
540,000 + (90,000 – 40,000) = 590,000
PROBLEM 5:
Before year-end adjusting entries, Bass Company's account balances at December
31, 2016, for accounts receivable and the related allowance for uncollectible
accounts were 600,000 and 45,000, respectively. An aging of accounts receivable
indicated that 62,500 of the December 31 receivables are expected to be
uncollectible. The net realizable value of accounts receivable after adjustment is
a. 582,500.
b. 537,500.
c. 492,500.
d. 555,000.
SOLUTION: 600,000 – 62,500 = 537,500.
PROBLEM 6:
During the year, Jantz Company made an entry to write off a 4,000 uncollectible
account. Before this entry was made, the balance in accounts receivable was
50,000 and the balance in the allowance account was 4,500. The net realizable
value of accounts receivable after the write-off entry was
a. 50,000.
b. 49,500.
c. 41,500.
d. 45,500.
SOLUTION: (50,000 – 4,000) – (4,500 – 4,000) = 45,500.
PROBLEM 7:
The following information is available for Reagan Company:
Allowance for doubtful accounts at December 31, 2015 8,000
Credit sales during 2016 400,000
Accounts receivable deemed worthless and written off during 2016 9,000
As a result of a review and aging of accounts receivable in early January

2017, however, it has been determined that an allowance for doubtful
accounts of 5,500 is needed at December 31, 2016. What amount should
Reagan record as "bad debt expense" for the year ended December 31,
2016?
a. 4,500
b. 5,500
c. 6,500
d. 13,500
SOLUTION: 8,000 – 9,000 + X = 5,500; X = 6,500
PROBLEM 8-9:
A trial balance before adjustments included the following:
Debit Credit
Sales 425,000
Sales returns and allowance 14,000
Allowance for doubtful accounts 760
PROBLEM 8: If the estimate of uncollectible is made by taking 2% of net

sales, the amount of the adjustment is
a. 6,700.
b. 8,220.
c. 8,500.
d. 9,740.
SOLUTION: (425,000 – 14,000) × .02 = 8,220.
PROBLEM 9: If the estimate of uncollectible is made by taking 10% of gross

account receivables, the amount of the adjustment is
a. 3,540.
b. 4,300.
c. 4,224.
d. 5,060.
SOLUTION: (43,000 × .10) – 760 = 3,540.
PROBLEM 10:
Simpson Company has the following account balances at year-end:
Allowance for doubtful accounts 3,600
Sales discounts 2,400
Simpson should report accounts receivable at a net amount of
a. 54,000.
b. 56,400.
c. 57,600.
d. 60,000.
SOLUTION: 60,000 – 3,600 = 56,400.
PROBLEM 11:
Holtzman Corporation had a 1/1/16 balance in the Allowance for Doubtful Accounts
of 10,000. During 2016, it wrote off 7,200 of accounts and collected 2,100 on
accounts previously written off. The balance in Accounts Receivable was 200,000 at
1/1 and 240,000 at 12/31. At 12/31/16, Holtzman estimates that 5% of accounts
receivable will prove to be uncollectible. What is Bad Debt Expense for 2016?
a. 2,000.
b. 7,100.
c. 9,200.
d. 12,000.
SOLUTION: (24,000 × .05) – [10,000 – (7,200 – 2,100)] = 7,100.
PROBLEM 12:
Rusch Corporation had a 1/1/16 balance in the Allowance for Doubtful Accounts of
12,000. During 2016, it wrote off 8,640 of accounts and collected 2,520 on accounts
previously written off. The balance in Accounts Receivable was 240,000 at 1/1 and
288,000 at 12/31. At 12/31/16, Rusch estimates that 5% of accounts receivable will
prove to be uncollectible. What should Rusch report as its Allowance for Doubtful
Accounts at 12/31/16?
a. 5,760.
b. 5,880.
c. 8,280.
d. 14,400.
SOLUTION: 288,000 × .05 = 14,400.
PROBLEM 13:
Sandler Company has the following account balances at year-end:
Sales discounts 3,200
Sandler should report accounts receivable at a net amount of
a. 72,000.
b. 75,200.
c. 76,800.
d. 80,000.
SOLUTION: 80,000 – 4,800 = 75,200.
PROBLEM 14:
Delgado Corporation had a 1/1/16 balance in the Allowance for Doubtful Accounts of
20,000. During 2016, it wrote off14,400 of accounts and collected 4,200 on
accounts previously written off. The balance in Accounts Receivable was 400,000 at
1/1 and 480,000 at 12/31. At 12/31/16, Delgado estimates that 5% of accounts
receivable will prove to be uncollectible. What is Bad Debt Expense for 2016?
a. 4,000.
b. 14,200.
c. 18,400.
d. 24,000.
SOLUTION: 480,000 × .05 – [20,000 – (14,400 – 4,200)] = 14,200
PROBLEM 15:
Manchester Company provided the following accounts abstracted from the
unadjusted trial balance at year-end:
Debit Credit
Accounts receivable 5,000,000
Net credit sales 20,000,000
The entity estimated that 3% of the gross accounts receivable will become
uncollectible.
What amount should be recognized as doubtful accounts expense for the current
year?
a. 110,000 c. 190,000
b. 150,000 d. 600,000
SOLUTION:
Required allowance for doubtful accounts at year end
(5,000,000 x 3%) 150,000
Add: Debit balance in allowance account before
adjustment 40,000
DOUBTFUL ACCOUNTS EXPENSE 190,000
ACCOUNTS RECEIVABLES – Theories

(Initial Measurement and Bad Debts)
1. The category "trade receivables" includes
a. advances to officers and employees.

b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
2. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers

b. Receivables from subsidiaries
c. Dividends receivable
d. None of these
3. What is the preferable presentation of accounts receivable from officers,

employees, or affiliated companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current
assets.
4. When a customer purchases merchandise inventory from a business organization,

she may be given a discount which is designed to induce prompt payment. Such a
discount is called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
5. Trade discounts are
a. not recorded in the accounts; rather they are a means of computing a

price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased.
d. all of the above.
6. If a company employs the gross method of recording accounts receivable from

customers, then sales discounts taken should be reported as
a. a deduction from sales in the income statement.

b. an item of "other expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable
value of accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income
statement.
7. Assuming that the ideal measure of short-term receivables in the balance sheet is
the discounted value of the cash to be received in the future, failure to follow this
practice usually does not make the balance sheet misleading because
a. most short-term receivables are not interest-bearing.

b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
8. Which of the following methods of determining bad debt expense does not
properly match expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance

method.
b. Charging bad debts with an amount derived from a percentage of
accounts receivable under the allowance method.
c. Charging bad debts with an amount derived from aging accounts
receivable under the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
9. Which of the following methods of determining annual bad debt expense best
achieves the matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off
10. Which of the following is a generally accepted method of determining the

amount of the adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance

b. A percentage of sales not adjusted for the balance in the
allowance
c. A percentage of accounts receivable not adjusted for the balance in the
allowance
d. An amount derived from aging accounts receivable and not adjusted for
the balance in the allowance
11. The advantage of relating a company's bad debt expense to its outstanding
accounts receivable is that this approach
a. gives a reasonably correct statement of receivables in the

balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
12. At the beginning of 2015, Finney Company received a three-year zero-interest-

bearing 1,000 trade note. The market rate for equivalent notes was 8% at that time.
Finney reported this note as a 1,000 trade note receivable on its 2015 year-end
statement of financial position and 1,000 as sales revenue for 2015. What effect did
this accounting for the note have on Finney's net earnings for 2015, 2016, 2017,
and its retained earnings at the end of 2017, respectively?
a. Overstate, overstate, understate, zero

b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these
13. Which of the following is true when accounts receivable are factored without
recourse?
a. The transaction may be accounted for either as a secured borrowing or as

a sale, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the
factor by the owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any
credit losses in collecting the receivables.
d. The financing cost (interest expense) should be recognized ratably over
the collection period of the receivables.
14. Which of the following statements is incorrect regarding the classification of
accounts and notes receivable?
a. Segregation of the different types of receivables is required if they are

material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of
present value in notes receivable transactions is an asset or
liability respectively.
d. Valuation accounts should be appropriately offset against the proper
receivable accounts.
15. Of the following conditions, which is the only one that is not required if the
transfer of receivables with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify

those receivables that are uncollectible.
b. The transferor surrenders control of the future economic benefits of the
receivables.
c. The transferee cannot require the transferor to repurchase the
receivables.
d. The transferor's obligation under the recourse provisions can be
reasonably estimated.
NOTES RECEIVABLE – Problems

PROBLEM 1:
Pink Company has an 8% note receivable dated June 30, 2016, in the original
amount of 600,000. Payments of 200,000 in principal plus accrued interest are due
annually on July 1, 2017, 2018, 2019.
In its June 30, 2017 statement of financial position, what amount should Pink
Company report as a current asset for interest on the note receivable?
a. 0 c. 32,000
b. 16,000 d. 48,000
SOLUTION:
Original principal 600,000
Less: principal payment July 2014 200,000
Balance as of 7/1/14 400,000
*Interest rate 8%
Accrued Interest 32,000
PROBLEM 2:
On May 1, 2016, Pager Corp. bought a parcel of land for 300,000. After seven
months, Pager sold this land to triple-A rated company for 450,000, under the
following terms: 25% at closing and a first mortgage note (at the market rate of
interest) for the balance. The first payment on the note, plus accrued interest is due
December 1, 2017. Pager reported this sale on the installment basis in its 2016 tax
return.
How much gain should Pager report from the sale of this land in its 2015 profit or
loss?
a. 0 c. 112,500
b. 37,500 d. 150,000
SOLUTION:
Selling price 450,000
Carrying value 300,000
Gain 150,000
PROBLEM 4-6:
On January 2, 2016, Play Company sold equipment with a carrying amount of
480,000 in exchange for a 600,000 non-interest bearing note due January 2, 2019.
There was no established exchange price for the equipment. The prevailing rate of
interest for a note of this type at January 2, 2016 was 10%. The present value of 1
at 10% for three periods is 0.7513.
PROBLEM 4: How much should Play Company report as interest income in

its 2016 profit or loss?
a. 45,078 c. 54,544
b. 49,586 d. 60,000
SOLUTION:
PV of note (600,000 x .7513) 450,780
*Effective interest rate 10%
Interest income 45,078
PROBLEM 5: How much should Play Company report as gain or loss on sale
of equipment in it 2016 profit or loss?
a. 29,220 loss c. 120,000 gain

b. 29,220 gain d. 270,000 gain
SOLUTION:
Selling price (PV of note) (600,000 x .7513) 450,780

Carrying value of the asset sold 480,000
Loss on sale (29,280)
PROBLEM 6: What is the carrying value of the note receivable as of

December 31, 2016 statement of financial position?
a. 450,780 c. 545,444
b. 495,858 d. 600,000
SOLUTION:
Fair value of note 1/2/16 (600,000 x .7513) 450,780
Interest income for 2016 (450,780*10%) 45,078
Amortized cost of the note receivable as of 12/31/15

495,858
PROBLEM 7-8:
Maxim Company sold its inventory for 300,000 to Maxwell on January 2, 106 and
received a one-year note bearing an interest rate of 12% for the full amount. On
December 31, 2016, Maxim determined based on Maxwell’s recent financial crisis
and the amount due on January 2, 2017 will not be collected and that only 210,000
of the principal will be collected with some delay until the end of 2018.
PROBLEM 7: What is the carrying value of the notes receivable on

Maxim’s 2016 statement of financial position?
a. 167,412 c. 210,000
b. 187,500 d. 300,000
SOLUTION:
Future of note after two years 210,000
*PV of 12% after two years .7972
PRESENT VALUE OF NOTE 167,412

PROBLEM 8: What is the amount of impairment loss (bad debts)
Maxim Company must recognize on its receivable as of December 31, 2016?
a. 0 c. 126,000
b. 90,000 d. 168,588
SOLUTION:
Carrying Value of Note:
Principal 300,000
Accrued Interest (300,000*12%) 36,000

336,000
Present Value of note receivable 167,412
Impairment Loss (bad debt) 168,588
PROBLEM 9-10:
On July 1, 2016, Lee Company sold goods in exchange for 2,000,000, 8-month, non-
interest-bearing note receivable. At the time of the sale, the market rate of interest
was 12%. The entity discounted the note at 10% on September 1, 2016?
PROBLEM 9: What is the cash received from discounting?

a. 1,940,000 c. 1,900,000
b. 1,938,000 d. 1,880,000
SOLUTION:
Principal – Maturity Value 2,000,000
Less: Discount (2,000,000 x 10% x 6/12) 100,000
Net proceeds 1,900,000
PROBLEM 10: What is the loss on note receivable discounting?

a. 100,000 c. 25,000
b. 75,000 d. 0
SOLUTION:
Net proceeds 1,900,000
Carrying amount of note receivable (2,000,000)

Loss on note receivable discounting (100,000)
PROBLEM 11-12:
Apex Company accepted from a customer 1,000,000 face amount, 6-month, 8%
note dated April 15, 2016. On the same date, the entity discounted the note without
recourse at a 10% discount rate.
PROBLEM 11: What amount of cash was received from the

discounting?
a. 1,040,000 c. 988,000
b. 990,000 d. 972,000
SOLUTION:
Principal 1,000,000
Add: Interest (1,000,000 x 8% x 6/12) 40,000
Maturity Value 1,040,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
Net proceeds 988,000
PROBLEM 12: What is the loss on note receivable discounting?

a. 50,000 c. 52,000
b. 40,000 d. 12,000
SOLUTION:
Net proceeds 988,000
Carrying amount of note receivable – equal to principal

(1,000,000)
Loss on note receivable discounting

(12,000)
PROBLEM 13-14:
Frame Company has an 8% note receivable dated June 30, 2016, in the original
amount of 1,500,000. Payments of 500,000 in principal plus accrued interest are
due annually on July 1, 2017, 2018 and 2019.
PROBLEM 13: What is the balance of note receivable on July 1,
2017?
a. 1,500,000 c. 500,000
b. 1,000,000 d. 0
SOLUTION:
Note receivable, June 30, 2016 1,500,000
Payment on July 1, 2017 (500,000)
Note receivable, July 1, 2017 1,000,000
PROBLEM 14: In the June 30, 2018 statement of financial position,

what amount should be reported as a current asset for the interest on the
note receivable?
a. 120,000 c. 80,000
b. 40,000 d. 0
SOLUTION:
Accrued interest receivable 6/30/18 (1,000,000 x 8%)

80,000
PROBLEM 15:
On June 30, 2016, Green Company accepted a customer’s 2,500,000 non-interest-
bearing one-year note in a sale transaction. The product sold normally sells for
2,300,000.
What amount should be reported as interest revenue for the year ended December
31, 2016?
a. 200,000 c. 250,000
b. 100,000 d. 0
SOLUTION:
Note receivable – non-interest 2,500,000
Cash price 2,300,000
Implied interest revenue for one year 200,000
Interest revenue from July 1 to December 31, 2016
(200,000 x 6/12) 100,000

NOTES RECEIVABLE - Theories
1. Which of the following statements is incorrect regarding the classification of
accounts and notes receivable?
a. Segregation of the different types of receivables is required if they are

material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of
present value in notes receivable transactions is an asset or
liability respectively.
d. Valuation accounts should be appropriately offset against the proper
receivable accounts.
2. A note receivable is recorded at its:
a. Fair Market Value
b. Present Value
c. Face Value
d. Maturity Value
3. The entry to record the dishonor of a note includes a debit to:
a. Bad Debts Expense
b. Accounts Receivable
c. Allowance for Doubtful Accounts
d. Loss on Accounts Receivable
4. What is imputed interest?
a. Interest based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the bank prime interest rate
5. Accounting for the interest in a non-interest bearing note receivable is an

example of what aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance
6. On July 1 of the current year, an entity received a one-year note receivable

bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. When the note receivable was
recorded on July 1, which of the following was debited?
I. Interest receivable
II. Unearned discount on note receivable
a. I only
b. Both I and II
c. Neither I and II
d. II only
7. On August 15, an entity sold goods for which it received a note bearing the
market interest rate on that date. The four-month note was dated July 15. Note
principal, together with all interest, is due November 15. When the note was
recorded on August 15, which of the following accounts increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

entire amount of the interest are due in one year. The interest receivable account
would show a balance on
a. July 1 but not December 31
b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31

9. Subsequent to initial recognition, a loan receivable shall be measured at
a. Cost
b. Amortized cost using the straight line method
c. Amortized cost using the effective interest method
d. Fair Value
10. In calculating the carrying amount of loan receivable, the lender adds to the
principal
I. Direct origination cost
II. Indirect origination cost
III. Origination fee charged to borrower
a. I only
b. I and II only
c. I and III only
d. I, II and III
entire amount of the interest are due on June 30 of next year. On December 31 of
the current year, the entity should report in the statement of financial position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of
next year
d. Interest receivable for the interest accruing in the current year
12. On October 1 of the current year, an entity received a one-year note receivable
entire amount of the interest are due on September 30 of next year. The interest
receivable on December 31 of the current year would consist of an amount
representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income

d. The excess on October 1 of the present value of the note receivable over
its face amount
13. An entity uses the installment sales method to recognize revenue. Customers
pay the installment notes in 24 equal monthly amounts which include 12% interest.
What is the installment notes receivable balance six months after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted

at 12%.
d. Less than the present value of the remaining monthly payments

discounted at 12%
14. On July 1 of the current year, an entity obtained a two0year 8% note receivable
for services rendered. At that time, the market rate of interest was 110%. The face
amount of the note and the entire amount of interest are due on the date of
maturity. Interest receivable are due on the date of maturity. Interest receivable on
December 31 of the current year is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note
15. An entity uses the installment sales method to recognize revenue. Customers
pay the installment notes in 24 equal monthly amounts which include 12% interest.
What is the installment notes receivable balance six months after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted

at 12%
d. Less than the present value of the remaining monthly payments

discounted at 12%
RECEIVABLE FINANCING AND IMPAIRMENT –
Problems
PROBLEM 1:
Camia Company sold accounts receivable without recourse for 5,300,000. The entity
received 5,000,000 cash immediately from the factor. The remaining 300,000 will be
received once the factor verifies that none of the accounts receivable is in dispute.
The accounts receivable had a face amount of 6,000,000. The entity had previously
established an allowance for bad debts of 250,000 in connection with such
accounts.
What amount of loss on factoring should be recognized?
a. 700,000 c. 750,000
b. 450,000 d. 300,000
SOLUTION:
Sale price 5,300,000
Carrying amount of accounts receivable (6,000,000-250,000)

5,750,000
Loss on factoring (450,000)
PROBLEM 2:
Mazda Company sold 5,800,000 in accounts receivable for cash of 5,000,000. The
factor withheld 10% of the cash proceeds to allow for possible customer returns and
other adjustments. An allowance for bad debts of 600,00 had previously been
established by the entity in relation to these accounts.
What is the loss on factoring that should be recognized?
a. 200,000 c. 500,000
b. 700,000 d. 800,000
SOLUTION:
Sale price 5,000,000
Carrying amount of accounts receivable
(5,800,000-600,000) 5,200,000

PROBLEM 3-4:
Daisy Company sold accounts receivable without recourse with face amount of
6,000,000. The factor charged 15% commission on all accounts receivable factored
and withheld 10% of the accounts factored as protection against customer returns
and other adjustments.
The entity had previously established an allowance for doubtful accounts of 200,000
for these accounts. By year-end, the entity had collected the factor’s holdback there
being no customer returns and other adjustments.
PROBLEM 3: What amount of cash was initially received from factoring?

a. 4,500,000 c. 5,100,000
b. 5,400,000 d. 6,000,000
SOLUTION:
Accounts Receivable 6,000,000
Factor’s Holdback (10% x 6,000,000) (600,000)
Commission (15% x 6,000,000) (900,000)
Cash received 4,500,000
PROBLEM 4: What is loss on factoring?

a. 700,000 c. 200,000
b. 900,000 d. 0
SOLUTION:
Accounts receivable factored 6,000,000
Commission (900,000)
Net sale price 5,100,000
Carrying amount of AR (6,000,000-200,000) 5,800,000

PROBLEM 5:
Crater Company factored without recourse 2,000,000 of accounts receivable with a
bank. The finance charge is 3% and 5% was retained to cover sales discounts, sales
returns, and sales allowances.
What amount of cash was received on the sale of accounts receivable?
a. 1,940,000 c. 1,840,000
b. 1,900,000 d. 2,000,000
SOLUTION:
Accounts receivable factored 2,000,000
Finance charge (3% x 2,000,000) (60,000)
Factor’s holdback (5% x 2,000,000) (100,000)
Cash received from factoring 1,840,000
Loss on factoring – equal to finance fee (60,000)
PROBLEM 6:
Earth Company factored 4,000,000 of accounts receivable without guarantee for a
finance charge of 5%. The finance entity retained an amount equal to 10% of the
accounts receivable for possible adjustments.
What amount should be recorded as gain or loss on the transfer of accounts

receivable?
a. 200,000 loss c. 600,000 loss

b. 200,000 gain d. 600,000 gain
SOLUTION:
Loss on factoring – equal to finance fee (5% x 4,000,000) (200,000)
PROBLEM 7-8:
Cynthia Company factored 750,000 of accounts receivable at year-end. Control was
surrendered. The factor accepted the accounts receivable subject to recourse for
non-payment. The factor assessed a fee of 2% and retained a holdback equal to 4%
of the accounts receivable.
In addition, the factor charged 12% interest computed on a weighted-average time
to maturity of 51 days. The fair value of the recourse obligation is 15,000.
PROBLEM 7: What is the amount of cash initially received from the

factoring?
a. 692,425 c. 722,425
b. 720,000 d. 705,000
SOLUTION:
Factor’s holdback (4% x 750,000) (30,000)
Factoring fee (2% x 750,000) (15,000)
Interest (750,000 x 12% x 51/365) (12,575)
Cash initially received from factoring 692,425
PROBLEM 8: Assuming all accounts receivable are collected, what is the

cost of factoring the accounts receivable?
a. 12,575 c. 27,575
b. 15,000 d. 42,575
SOLUTION:
Factoring fee 15,000
Interest 12,575
Total cost of factoring 27,575
PROBLEM 9-11:
On December 31, 2016, Oregon Bank recorded an investment of 5,000,000 in a loan
granted to a client. The loan has a 10% effective interest rate payable annually
every December 31. The principal is due in full at maturity on December 311, 2019.
Unfortunately, the borrower is experiencing significant financial difficulty and will

have difficult time making full payment.
The bank projected that the entire principal will be paid at maturity and 4% interest
or 200,000 will be paid annually on December 31 of the next three years. There is
no accrued interest on December 31, 2016.
The present value of 1 at 10% for three periods is 0.75, and the present value of an
ordinary annuity of 1 at 10% for three periods is 2.49.
PROBLEM 9: What is the loan impairment loss for 2016?

a. 752,000 c. 250,000
b. 600,000 d. 748,000
SOLUTION:
PV of principal (5,000,000 x .75) 3,750,000
PV of interest (200,000 x 2.49) 498,000
Total present value 4,248,000
Carrying amount 5,000,000
IMPAIRMENT LOSS 752,000
PROBLEM 10: What is the interest income for 2017?

a. 200,000 c. 224,800
b. 424,800 d. 500,000
SOLUTION:
Interest income for 2017 (10% x 4,248,000) 424,800
Interest received (4% x 5,000,000) 200,000
Amortization of allowance for loan impairment 224,800
PROBLEM 11: What is the carrying amount of the loan receivable on

December 31, 2017?
a. 5,000,000 c. 4,472,800
b. 3,750,000 d. 4,672,800
SOLUTION:
Loan receivable 12/31/17 5,000,000
Allowance for loan impairment (752,000-224,800) (527,200)
Carrying amount 12/31/17 4,472,800

PROBLEM 12-14:
Kalibo Bank loaned 5,000,000 to Caticlan Company on January 1, 2014. The terms
of the loan require principal payments of 1,000,000 each year for 5 years plus
interest at 8%.
The first principal and interest payment is due on January 1, 2015. Caticlan
Company made the required payments during 2015 and 2016.
However, during 2016, Caticlan Company began to experience financial difficulties,

requiring Kalibo Bank to reassess the collectibity of the loan.
On December 31, 2016, Kalibo Bank has determined that the remaining principal
payment will be collected but the collection of the interest is unlikely. Kalibo Bank
did not accrue the interest on December 31, 2016.
The present value of 1 at 8% is as follows:
For one period 0.926
For two periods 0.857
For three periods 0.794
PROBLEM 12: What is the loan impairment loss on December 31,

2016?
a. 423,000 c. 222,000
b. 217,000 d. 0
SOLUTION:
January 1, 2017 collection (1,000,000 x 1.000)

1,000,000
January 1, 2018 collection (1,000,000 x .926)

926,000
January 1, 2019 collection (1,000,000 x .857)

857,000
TOTAL PRESENT VALUE OF LOAN

2,783,000
Loan receivable 3,000,000
Present value of loan 2,783,000

Impairment loss 217,000
PROBLEM 13: What is the interest income for 2017?

a. 126,160 c. 240,000
b. 142,640 d. 0
SOLUTION:
Loan receivable 3,000,000
Collection on January 1, 2017 (1,000,000)
Allowance for loan impairment (217,000)
Interest Income (1,783,000 x 8%) 142,640
PROBLEM 14: What is the carrying amount of the loan receivable on

December 31, 2017?
a. 2,000,000 c. 1,640,360
b. 1,925,640 d. 1,783,000
SOLUTION:
Allowance for loan impairment 12/31/16
(217,000-142,640) (74,360)
PROBLEM 15:
Diane Company sold loans with a 2,200 fair value and a carrying amount of 2,000.
The entity obtained an option to purchase similar loans and assumed a recourse
obligation to repurchase loans. The entity also agreed to provide a floating rate of
interest to the transferee.
Fair Values
Cash proceeds 2,100

Interest rate swap 140
Call option 80
Recourse obligation (120)
What is the gain (loss) on the sale?
a. 320 c. (100)
b. 200 d. 120
SOLUTION:
Cash proceeds 2,100
Interest rate swap 140
Call option 80
Recourse obligation (120)
Net proceeds – sale price equal to fair value 2,200
Carrying amount (2,000)
Gain on sale 200
RECEIVABLE FINANCING and IMPAIRMENT –

Theories
1. Which of the following is true when accounts receivable are factored without
recourse?
a. The transaction may be accounted for either as a secured borrowing or as
a sale, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the
factor by the owner of the receivables.
c. The factor assumes the risk of collectability and absorbs any
credit losses in collecting the receivables.
d. The financing cost (interest expense) should be recognized ratably over
the collection period of the receivables.
2. If accounts receivable are pledged against borrowing, the amount of accounts

receivable pledged shall be
a. Excluded from total receivables with disclosure
b. Excluded from total receivables without disclosure
c. Included in the total receivables with disclosure
d. Included in the total receivables without disclosure
3. It is financing arrangement that is usually done on a “without recourse,
notification basis”
a. Pledge
b. Assignment
c. Factoring
d. Discounting
4. When accounts receivable are factored

a. Accounts receivable shall be credited
b. Payable to factor is credited
c. A contingent liability is ordinarily created
d. The factoring is accounted for as a borrowing
5. It is predetermined amount withheld by a factor as a protection against customer

returns, allowances and other special adjustments.
a. Equity in assigned accounts
b. Service charge
c. Factor’s holdback
d. Loss on factoring
6. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements
7. Which of the following is a method to generate cash from accounts receivable?

I. Assignment
II. Factoring
a. I only
b. II only
c. Both I and II
d. Neither 1 nor II
8. The practice of realizing cash from trade receivables prior to maturity date is
widespread. A term which is not associated with this practice is
a. Hypothecation
b. Factoring
c. Defalcation
d. Pledging
9. When the accounts receivable of an entity are sold outright to a bank which
normally buys accounts receivable, the accounts receivable have been
a. Pledged
b. Assigned
c. Factored
d. Collateralized
10. Which of the following is used to account for probable sales discounts sales
returns and sales allowances?
a. Due from factor
b. Recourse liability
c. Both due from factor and recourse liability
d. Neither due from factor nor recourse liability
11. Which of the following is not an objective in accounting for transfer of financial
asset?
a. To derecognize asset when control is gained
b. To derecognize liability when extinguished
c. To recognize liability when incurred
d. To derecognize asset when control is given up
12. If financial assets are exchanged for cash and other consideration but the
transfer does not meet the criteria for a sale, the transferor and the transferee
should account for the transaction as
a. Secured borrowing
b. Pledge of collateral
c. Both secured borrowing and pledge of collateral
d. Neither secured borrowing nor pledge of collateral
13. After being held for 40 days, a 120-day 12% interest-bearing note receivable
was discounted at a bank at 15%. What is the formula for the proceeds received
from the bank?
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount at 15%
14. A 90-day 15% interest-bearing note receivable is sold to a bank without

recourse after being held for 60 days. The proceeds are calculated using a 12%
interest rate. The amount credited to note receivable at the date of the discounting
transaction would be
a. The same as the cash proceeds
b. Less than the face value of the note
c. The face value of the note
d. The maturity value of the note
15. A 90-day 15% interest-bearing note receivable is sold to a bank with recourse
after being held for 30 days. The proceeds are calculated using a 12% interest rate.
The note receivable has been
a. Discounted
b. Discounted and pledged
c. Discounted and assigned
d. Factored

Share Based Payments - Problems: Problem 1

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SHARE BASED PAYMENTS – Problems

Fair Value of share options (10,000 x 5 x 50) 2,500,000

Compensation expense for 2016 (2,500,000/4) 625,000

What amount of compensation expense should be reported in 2016?

Fair Value of share options (100,000 x 8) 800,000

On January 1, 2016, Greece Company granted an employee an option to buy 20,000

What amount should be recognized as compensation expense for 2016?

SOLUTION: 240,000/2 = 120,000

What amount should be expensed for this share-based payment transaction?

Fair Value of share options, December 31, 2016 500,000

PROBLEM 5: What is the compensation expense for 2018?

Total compensation 8,000,000

Compensation in 2016 (2,000,000)

COMPENSATION IN 2018 3,900,000

PROBLEM 6: What is the compensation expense for 2018 if the share

Cash payment 7,500,000

Compensation in 2016 (2,000,000)

Compensation in 2017 (2,100,000)

COMPENSATION IN 2018 3,400,000

Ivy Company, an unlisted entity, decided to issue 1,000 share options to an

(1,000 x 50) 50,000

Market Value of share, December 31, 2016 150

Option price 100

Intrinsic Value of the share option 50

What is the accrued liability on December 31, 2016?

Total compensation (100 x 1,000 x 10 x 90%) 900,000

Accrued compensation, December 31, 2016 (900,000/3) 300,000

The compensation is recognized as expense over the vesting period from

On January 1, 2016, Kristen Company established a share appreciation rights plan

January 1, 2016 25 per share

December 31, 2016 28 per share

December 31, 2017 35 per share

December 31, 2018 30 per share

PROBLEM 9: What amount of compensation expense should be

Fair Value, December 31, 2016 (28-20) 8

Compensation expense for 2016 (60,000 x 8) 480,000

Fair Value, December 31, 2017 (35-20) 15

Accrued compensation (60,000 x 15) 900,000

Compensation expense in 2016 (480,000)

Compensation expense in 2017 420,000

PROBLEM 11: What amount should be recognized as accrued liability

Fair Value, December 31, 2018 (30-20) 10

Accrued compensation 12/31/18 (60,000 x 15) 600,000

Accrued compensation in 2017 (900,000)

Gain on reversal of SARs (300,000)

Accrued compensation 12/31/18 600,000

Payment for exercise of SARs (20,000 x 10) (200,000)

Adjusted accrued liability 400,000

As a result of the share appreciation rights, what amount should be recognized as

Market price, December 31, 2016 45

Predetermined price on January 1, 2016 30

Fair Value of share appreciation right 15

Compensation for 2016 (20,000 x 15) 300,000

The total compensation is recognized as expense entirely in 2016 because

Fair value of share appreciation rights (28-20) 8

Accrued compensation 12/31/16 (30,000 x 8 = 240,000/3 x 2)

PROBLEM 14: What is the compensation expense for 2018?

Total compensation 5,000,000

Compensation in 2016 (1,000,000)

Compensation in 2017 (1,200,000)

Compensation in 2018 2,800,000

Cash payment 4,500,000

Compensation in 2016 (1,000,000)