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Financial Accounting and Reporting Test Bank 80102016 - 3
Financial Accounting and Reporting Test Bank 80102016 - 3
On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During
2016, the investee reported net income of P4,000,000 and paid dividend of P1,000,000.
On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the
investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying
amount. The equipment had a remaining life of 5 years.
The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on December 31, 2017.
a. 400,000
b. 100,000
c. 500,000
d. 300,000
2. What is the implied goodwill arising from the acquisition on January 1, 2017?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0
a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000
4. What is the carrying amount of the investment in associate on December 31, 2017?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
SOLUTION - PROBLEM 1
Question 1 Answer B
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Question 3 Answer C
If the investment in associate is achieved in stages the old interest is remeasured at fair value through profit or loss.
Question 4 Answer A
Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000
* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each share had a
quoted price of P45 on a stock exchange. The plant facility was carried on the seller’s books at P1,600,000 for land and P5,400,000 for the building
at the exchange date. Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The building has an
expected life of forty years with a P200,000 residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred were freight and unloading P100,000 and
installation P300,000. The equipment has a useful life of ten years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the entity’s various plant locations. These expenditures had an
estimated useful life of fifteen years.
* A machine costing P200,000 on January 1, 2009 was scrapped on June 30, 2016. Straight line depreciation had been recorded on the basis of a 10-year
life with no residual value.
* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was P700,000 on January 1, 2013, and it was depreciated on the
straight line basis over an estimated useful life of eight years and a residual value of P50,000.
SOLUTION – PROBLEM 5
Question 1 Answer A
Quoted price of shares issued for land and building (200,000 x P45) 9,000,000
Land 2,000,000
Building 8,000,000
Total 10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current
appraised value.
Question 2 Answer D
Question 4 Answer B
An entity had the following financial statement elements for which the December 31, 2016 carrying amount is different from the December 31, 2016 tax
basis:
The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes.
The accrued liability is the estimated health care cost that was recognized as expense in 2016 but deductible for tax purposes when actually paid.
In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized
and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2016 for tax purposes.
The pretax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2016.
a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000
a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000
3. What amount should be reported as deferred tax liability on December 31, 2016?
a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000
4. What amount should be reported as deferred tax asset on December 31, 2016?
.
a. 750,000
b. 600,000
c. 150,000
d. 0
SOLUTION – PROBLEM 3
Question 1 Answer B
Question 2 Answer A
Question 4 Answer C
Page 7
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000
a. 200,000
b. 100,000
c. 300,000
d. 400,000
a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000
a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 4,050,000
5. What amount should be reported as accrued benefit cost on December 31, 2016?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d. 700,000
SOLUTION - PROBLEM 4
Question 1 Answer A
Question 2 Answer C
Question 3 Answer D
Question 4 Answer B
Question 5 Answer A
On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par for P30 per share. The employees exercised the options
on January 1, 2019.
2016 34
2017 39
2018 42
2019 44
The service period is for two years beginning January 1, 2016. The fair value of the share options cannot be measured reliably.
a. 400,000
b. 200,000
c. 300,000
d. 800,000
a. 1,800,000
b. 1,000,000
c. 1,400,000
d. 400,000
a.200,000
b. 600,000
c. 400,000
d. 0
4. What amount should be credited to share premium upon exercise of the share options on January 1, 2019?
a. 3,800,000
b. 4,400,000
c. 4,800,000
d. 0
SOLUTION - PROBLEM 5
Question 1 Answer A
Question 2 Answer C
Question 3 Answer B
2016 34 30 4
2017 39 30 9
Cumulative Expense
Question 4 Answer B
The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on preference shares are in arrears for two years.
The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.
Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the beginning and ending of 2016. The average market
price of the ordinary share was P30 per share and the market price on December 31, 2016 was P40 per share.
a. 6.02
b. 5.26
c. 5.72
d. 5.42
2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a. 530,000
b. 500,000
c. 590,000
d. 560,000
a. 5.52
b. 4.20
c. 4.07
d. 3.97
SOLUTION - PROBLEM 6
Question 1 Answer C
Question 2 Answer A
Question 3 Answer C
2017 2016
2017 2016
Accounts receivable and accounts payable relate to merchandise for sale in the normal course of business. The allowance for bad debts was the same at the
end of 2017 and 2016 and no receivables were charged against the allowance.
Accounts payable are recorded net of any discount and are always paid within the discount period.
The proceeds from the note payable were used to finance the acquisition of property, plant and equipment. Ordinary shares were sold to provide additional
working capital.
1. What amount should be reported as net cash provided by operating activities in 2017?
a. 345,000
b. 165,000
c. 546,000
d. 510,000
2. What amount should be reported as net cash used in investing activities in 2017?
a. 750,000
b. 225,000
c. 975,000
d. 750,000
3. What amount should be reported as net cash provided by financing activities in 2017?
a. 600,000
b. 780,000
c. 750,000
d. 680,000
SOLUTION – PROBLEM 7
Question 1 Answer A
Question 2 Answer C
Question 3 Answer D
An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful accounts based on 5% of annual credit sales. On
January 1, 2016, the entity changed the method of determining the allowance for doubtful accounts using an aging schedule.
In addition, the entity writes off all accounts receivable that are over 1 year old. The following information relates to the years ended December 31, 2013,
2014, 2015 and 2016:
a. 1,175,000
b. 1,040,000
c. 1,240,000
d. 975,000
2. What amount should be reported as allowance for doubtful accounts on December 31, 2016?
a. 1,380,000
b. 1,480,000
c. 2,420,000
d. 1,060,000
a. 550,000
b. 750,000
c. 450,000
d. 200,000
4. What is the net realizable value of accounts receivable on December 31,2016?
a. 6,900,000
b. 7,000,000
c. 5,520,000
d. 5,620,000
SOLUTION – PROBLEM 8
Question 1 Answer B
Doubtful accounts expense 2013, 2014 and 2015 (5% x 23,500,000) 1,175,000
Accounts written off 2014 and 2015 ( 200,000)
Recovery of accounts written off 2014 and 2015 65,000
Allowance for doubtful accounts – January 1, 2016 1,040,000
Question 2 Answer A
Question 3 Answer A
Question 4 Answer C
An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the
equipment will revert to the lessor.
a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000
a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000
a. 600,480
b. 492,480
c. 536,760
d. 521,280
5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
SOLUTION – PROBLEM 9
Question 1 Answer A
Question 2 Answer B
Question 3 Answer C
Question 4 Answer D
Question 5 Answer D
On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P100 in one year’s time, or a cash payment equal to the market value of 40,000 shares on December 31,
2016.
At grant date on January 1, 2016, the market price of each share is P120 and on the date of settlement on December 31, 2016, the market price of each
share is P150.
a. 8,000,000
b. 6,000,000
c. 7,000,000
d. 5,000,000
2. What is the equity component arising from the purchase of the building with share and cash alternative?
a. 3,000,000
b. 3,200,000
c. 2,000,000
d. 1,000,000
3. What is the interest expense to be recognized on December 31, 2016 if the seller has chosen the cash alternative?
a. 1,200,000
b. 2,700,000
c. 1,000,000
d. 0
4. What is the share premium on December 31, 2016 if the seller has chosen the share alternative?
a. 3,000,000
b. 1,500,000
c. 1,000,000
d. 2,500,000
SOLUTION - PROBLEM 10
Question 1 Answer A
Question 2 Answer B
Question 3 Answer A
Question 4 Answer A
The following trial balance of an entity on December 31, 2016 has been adjusted except for income tax expense.
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
126,000,000 126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all types of revenue. Inventory
and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end,
costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on December 31, 2017.
a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000
a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000
a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000
4. What amount should be reported as total shareholders’ equity on December 31, 2016?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
SOLUTION - PROBLEM 11
Question 1 Answer A
Cash 6,000,000
Accounts receivable 14,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000
Question 2 Answer C
Question 3 Answer B
Question 4 Answer D
a. 3,100,000
b. 2,300,000
c. 1,800,000
d. 2,900,000
2. What net amount should recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000
3. What net amount in OCI should be presented as “may not be recycled to profit or loss?
a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000
a. 2,900,000
b. 2,300,000
c. 3,100,000
d. 2,400,000
a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000
SOLUTION - PROBLEM 12
Question 1 Answer B
Question 2 Answer A
Question 3 Answer D
Question 4 Answer A
Question 5 Answer A
PROBLEM 13 - INVENTORY
An entity sells a new product. During a move to a new location, the inventory records for the product were misplaced. The bookkeeper has been able
to gather some data for the purchases and sales records. The July purchases are as follows:
On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units at P100 per unit. Roshe Company has always used
a perpetual FIFO inventory costing system. Gross profit on sales for July was P2,400,000.
a. 3,600,000
b. 1,670,000
c. 770,000
d. 950,000
a. 1,390,000
b. 2,400,000
c. 950,000
d. 760,000
a. 34,000
b. 26,000
c. 10,000
d. 9,000
SOLUTION - PROBLEM 13
Question 1 Answer D
Question 2 Answer A
Sales 6,000,000
Gross profit 2,400,000
Cost of goods sold 3,600,000
Question 3 Answer B
Page 27
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2016 with interest payable on June 30 and December 31. The bonds were purchased
for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash
flows and sell the bonds in the open market. On December 31, 2016, the bonds were quoted at 106.
a. 400,000
b. 200,000
c. 364,560
d. 363,940
2. What is the adjusted carrying amount of the investment on December 31, 2016?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2016?
a. 300,000
b. 125,440
c. 128,060
d. 92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for 2016?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
Page 28
SOLUTION - PROBLEM 13
1/1/16 5,208,000
6/30/16 200,000 182,280 17,720 5,190,280
12/31/16 200,000 181,660 18,340 5,171,940
Question 1 Answer D
Question 2 Answer A
Question 3 Answer C
Question 4 Answer C
An entity was incorporated on January 1, 2016 but was unable to begin manufacturing activities until August 1, 2016 because new factory facilities were
not completed until that date. The entity provided the following information during the year:
2016
Jan. 31 Land and dilapidated building 2,000,000
Feb. 28 Cost of removing building 40,000
Apr. 1 Legal fees 60,000
May 1 Fire insurance premium payment 54,000
May 1 Special tax assessment for streets 45,000
May 1 Partial payment of new building construction 1,500,000
Aug. 1 Final payment on building construction upon completion 1,500,000
Aug. 1 General expenses 300,000
Dec. 31 Asset writeup 750,000
* To acquire the land and building, the entity paid P1,000,000 cash and 10,000 ordinary shares of P100 par value share which are very actively traded
at P170.
* When the old building was removed, the entity paid P40,000, but also received P15,000 from the sale of salvaged material.
* The fire insurance premium covered premiums for a three-year term beginning May 1, 2016.
* General expenses covered the following for the period January 1, 2016 to August 1, 2016:
President's salary 200,000
Plant superintendent covering supervision of new building 100,000
* Because of the rising land costs, the president was sure that the land was worth at least P750,000 more than what it cost the company.
a. 2,700,000
b. 2,720,000
c. 2,065,000
d. 2,765,000
a. 3,140,000
b. 3,144,500
c. 3,119,500
d. 3,000,000
SOLUTION - PROBLEM 15
Question 1 Answer D
Cash 1,000,000
Ordinary shares issued at fair value (10,000 x 170) 1,700,000
Initial cost of land 2,700,000
Examination of title 20,000
Special tax assessment 45,000
Total cost of land 2,765,000
Question 2 Answer B
30. Demsel Company provided the following data on December 31, 2016:
What amount should be reported as “cash and cash equivalents” on December 31, 2016?
a. 3,300,000
b. 3,600,000
c. 5,800,000
d. 4,600,000
31. On January 1, 2016, Nicole Company purchased equity securities to be held as “available for sale”. On December 31, 2016, the cost and market
value were:
Cost Market
On July 1, 2017, the entity sold Security X for P2,500,000. What amount of gain on sale of AFS securities should be reported in the 2017 income
statement?
a. 500,000
b. 400,000
c. 100,000
d. 0
32. Carl Company purchased 10% of another entity’s 500,000 outstanding shares on January 1, 2016 for P1,000,000. On December 31, 2016, the entity
purchased additional 100,000 shares of the entity for P3,000,000. There was no goodwill or excess fair value as a result of either acquisition. The fair
value of the 10% interest was P1,800,000 on December 31, 2016. The investee reported earnings of P6,000,000 for 2016. What amount should be
reported as investment in associate on December 31, 2016?
a. 4,000,000
b. 4,800,000
c. 6,600,000
d. 5,800,000
33. Dianne Company incurred the following costs during the current year:
a. 4,700,000
b. 3,700,000
c. 6,000,000
d. 5,000,000
1. B 21. A 41. B 61. A
2. B 22. A 42. D 62. C
3. A 23. D 43. D 63. A
4. A 24. B 44. D 64. D
5. B 25. C 45. C 65. D
6. C 26. A 46. C 66. C
7. A 27. A 47. B 67. B
8. B 28. A 48. C 68. A
9. B 29. B 49. C 69. D
10. C 30. A 50. D 70. C
11. D 31. B 51. C 71. C
12. C 32. B 52. B 72. A
13. C 33. C 53. B 73. A
14. D 34. C 54. A 74. D
15. B 35. D 55. A 75. D
16. C 36. D 56. C 76. A
17. A 37. A 57. A 77. B
18. D 38. A 58. D 78. B
19. A 39. A 59. D 79. B
20. B 40. C 60. D 80. C