Pre-Test

#1. On the night of September 30, 2021, a fire destroyed most of the merchandise inventory of Nayeon
Company. All goods were completely destroyed ZAP for partial damaged goods that normally sell for
P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that normally
sell for P60,000.

Inventory, January 1 660,000

Net purchases, January 1 through September 30 4,240,000
Net sales, January 1 through September 30 5,600,000

Total 2020 2019 2018

Net sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of goods sold 6,750,000 3,840,000 2,200,000 710,000
Gross Income 2,250,000 1,160,000 800,000 290,000

What is the estimated amount of fire loss on September 30, 2021?

630,000

Solution:
Average gross profit rate (2,250,000/9,000,000) 25%
Cost ratio (100%-25%) 75%

Inventory- Jan 1 660,000

Net Purchases 4,240,000
Goods Available for Sale 4,900,000
Cost of Goods Sold (5.600,000 * 75%) (4,200,000)
Inventory- Sept 30 700,000
Less: Undamaged goods (60,000 * 75%) 45,000
Realizable value of damaged goods 25,000 70,000
Fire Loss 630,000

#2. Jeongyeon Company used the conservative retail inventory method. The following information
relating to the inventory was gathered at year-end:

Cost Retail
Inventory, Beg. 530,000 900,000
Purchases 6,080,000 8,700,000
Purchase discounts 85,000
Freight in 105,000
Markups 600,000
Markdowns 800,000
Sales 8,600,000
Sales discounts 100,000

What is the estimated cost of ending inventory?

520,000
Pre-Test

Solution:
Cost Retail
Beginning Inventory 530,000 900,000
Purchases 6,080,000 8,700,000
Purchase discounts (85,000)
Freight in 105,000
Markups 600,000
GAS – Conservative 6,630,000 10,200,000
Conservative cost ratio
(6,630,000/10,200,000= 65%)
Markdowns (800,000)
GAS- Average 6,630,000 9,400,000
Sales (8,600,000)
Ending Inventory at retail 800,000
Ending inventory at cost (800,000*65%) 520,000

#3. Momo Company provide the following assets in a forest plantation:

Freestanding trees 5,100,000

Land under trees 600,000
Roads in forests 300,000
Animals related to recreational activities 1,000,000
Bearer plants – rubber trees and grape vines 1,500,000

What total amount of the assets should be classified as biological assets?

5,100,000

Solution:
*ONLY the FREESTANDING TREES should be classified as biological assets.
*the land under trees and roads in forests should be included in PPE
*under IFRS, the animals related to recreational activities and the bearer plants are accounted for as PPE

#4. At the end of the year, Sana Company held several investments with the intent of selling them in the
near term. The investments consisted of P1,000,000 8% five-year bonds purchased for P920,000 and
equity securities purchased for P350,000. At year-end, the bonds were selling on the open market for
P1,050,000 and the equity securities had a market value of P500,000.

What amount should be reported as trading securities at year-end?

1,550,000

Solution:
Bond investment 1,050,000
Equity investment 500,000
Total market value 1,550,000

*Trading investments are measured at fair value through profit or loss (FVPL).
Pre-Test

#5. On January 1, 2021, Jihyo Company purchased as a long-term investment unlisted 100,000 ordinary
shares of Mill Company for P40 a share. On December 28, 2021, Jihyo Company sold 80,000 shares of
Sana Company for P50 a share.

For the year ended December 31, 2021, what amount should be reported as gain on disposal of long-
term investment?
800,000

Solution:
Sale price (80,000*50) 4,000,000
Cost of investment sold (80,000*40) 3,200,000
Gain on disposal of investment 800,000

#6. On July 1, 2021, Mina Company purchased 30,000 shares of Eagle Company’s 100,000 outstanding
ordinary shares for P200 per share. On December 15, 2021, the investee paid P400,000 in dividends to
the ordinary shareholders.

The investee’s net income for the year ended December 31, 2021 was P1,200,000, earned evenly
throughout the year.

What amount of income from the investment should be reported in 2015?

180,000

Solution:
Interest acquired (30,000/100,000) 30%

Share in net income from July 1 to December 31, 2021

(1,200,000*6/12*30%) 180,000

#7. On January 1, 2021, Dahyun Company purchased as a long-term investment P5,000,000 face value of
Shaw Company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest. The bonds
mature on January 1, 2026 and pay interest annually on December 31. The interest method of
amortization is used.

What is the interest income for 2022?

461,820

Solution:
Carrying amount – January 1, 2021 4,562,000
Amortization of discount for 2021
Interest income (4,562,000*10%) 456,200
Interest received (5,000,000*8%) 400,000 56,200
Carrying amount- December 31, 2021 4,618,200
Multiply: Interest rate 10%
Interest Income for 2022 461,820
Pre-Test

#8. On January 1, 2021, Chaeng Company purchased bonds with face amount of P2,000,000. The bonds
are dated January 1, 2021 and mature on January 1, 2025.

The interest on the bonds is 10% payable semiannually every June 30 and December 31. The prevailing
market rate of interest on the bonds is 12%.

The present value of 1 at 6% for 8 periods is .63, and the present value of an ordinary annuity of 1 at 6%
for 8 periods is 6.21.
What is the present value of the bonds on January 1, 2021?

1,881,000

Solution:
The term of the bonds is 4 years and the interest is payable semiannually. Therefore, there are 8 interest
periods.

Semiannual interest payment (2,000,000*10%*6/12) 100,000

PV of principal (2,000,000* .63) 1,260,000

PV of semiannual interest payments
(100,000*6.21) 621,000
Present value or market price of bonds 1,881,000

#9. On January 1, 2021, Tzuyu Company purchased bonds with face amount of P5,000,000 for
P5,400,000. The stated interest rate is 8% payable annually every December 31. The bonds are acquired
to yield an effective rate of 6%.

The entity has elected the fair value option for the bond investment. On December 31, 2021, the bonds
had a fair value of P5,600,000.

What total income should be reported for 2021?

600,000

Solution:
Gain from change in fair value (5,600,000-5,400,000) 200,000
Interest income (5,000,000*8%) 400,000
Total income 600,000

#10. TWICE Company purchased an investment property on January 1, 2021 for P2,200,000. The
property had a useful life of 40 years and on December 31, 2023 had a fair value of P3,000,000.

On December 31, 2023, the property was sold for net proceeds of P2,900,000. The entity used the cost
model to account for the investment property.

What is the carrying amount of the investment property on December 31, 2023?
2,035,000
Pre-Test

Solution:
Cost- January 1, 2021 2,200,000
Accum. Depreciation (2,200,000/40*3yrs) 165,000
Carrying amount- December 31, 2023 2,035,000

#11. On January 1, 2021, BTS Company invested P1,000,000 in 5-year certificate of deposit at 8%
interest.

The market interest rate at maturity is 10%. The entity does not elect the fair value option in reporting
financial asset.

Future amount of 1 at 8% for 5 periods 1.469

Future amount of 1 at 10% for 5 periods 1.611
Future amount of an ordinary annuity of 1 at 8% for 5 periods 5.867
Future amount of an ordinary annuity of 1 at 10% for 5 periods 6.105

What is the maturity value of the certificate of deposit?

1,469,000

Solution:
Investment in certificate of deposit 1,000,000
Multiply: future amount of 1 at 8% for 5 periods 1.469
Maturity value 1,469,000

#12. CAE Grill operates a chain of seafood restaurants. On January 1, 2021, the entity determined that it
will need to purchase 100,000 kilos of tuna fish on February 1, 2022.

Because of the volatile fluctuation in the price of tuna fish, on January 1, 2021, the entity negotiated a
forward contract with a reputable financial institution to purchase 100,000 kilos of tuna fish on February
1, 2022 at a price of P8,000,000 or P80 per kilo. This forward contract was designated as a cash flow
hedge.

On December 31, 2021 and February 1, 2022, the market price of tuna fish per kilo is P75. The market
rate of interest is 6% and the present value of 1 at 6% is .943 for one period.

What amount should be recognized as derivative asset or liability on December 31, 2021?
500,000 liability

Solution:
Journal entry on December 31, 2021
Unrealized loss- OCI 500,000
Forward contract payable (100,000*P5) 500,000

*P80-P75= P5
*The forward contract payable is derivative liability.
Pre-Test

#13. UM Company purchased an office building and the land on which it is located for P7,500,000 cash
and assumed an existing P2,500,000 mortgage. For realty tax purposes, the property is assessed at
P9,600,000, 60% of which is allocated to the building.

At what amount should the building be recorded?

6,000,000

Solution:
Purchase price 7,500,000
Mortgage assumed 2,500,000
Total cost of land and building 10,000,000

Allocated cost of building (10,000,000*60%) 6,000,000

#14. DIMUNYU Company exchanged a car from inventory for a computer to be used as a long-term
asset. The following information relates to this exchange:

Carrying amount of the car 600,000

List selling price of the car 900,000
Fair value of the computer 860,000
Cash difference paid by DIMUNYU 100,000

What amount of gain should be recognized on the exchange?

160,000

Solution:
Fair value of computer 860,000
Less: Cash paid by Caine 100,000
Fair value of car- asset given 760,000
Less: Carrying amount of car 600,000
Gain on exchange 160,000

#15. At the beginning of the current year, TIRED Company received a grant of P6,000,000 from the
British government to compensate for massive losses incurred because of a recent tsunami. The grant
was made for the purpose of giving immediate financial support to the entity. It will take the entity two
years to reconstruct the assets destroyed by the tsunami.

What amount of grant income should be recognized in the current year?

6,000,000

Solution:
PAS 20, “a government grant that becomes receivable as compensation for expenses already incurred or
for the purpose of giving financial support to the entity with no related future costs is recognized as
income of the period in which it becomes receivable or when received.”
Pre-Test

#16. MAMA LENI Company purchased a P4,000,000 tract of land for a factory site. The entity razed an
old building on the property to make room for the construction of new building and sold the materials
salvaged from the demolition. The entity incurred additional costs and realized salvage proceeds as
follows:

Demolition of old building 200,000

Legal fees for purchase contract and recording ownership 150,000
Title guarantee insurance 50,000
Proceeds from sale of salvaged materials 20,000

What is carrying amount of the land?

4,200,000

Solution:
Purchase price 4,000,000
Legal fees for purchase contract 150,000
Title guarantee insurance 50,000
Carrying amount of land 4,200,000

#17. INDAY SARA Company installed a new equipment at the production facility and incurred the
following costs:

Cost of equipment per supplier’s invoice 2,500,000

Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of equipment 700,000
Interest charges paid to supplier for deferred credit 200,000
Estimated dismantling cost to be incurred as required by contract 300,000
Operating losses before commercial production 400,000

What total amount should be capitalized as cost of the equipment?

4,300,000

Solution:
Cost of equipment 2,500,000
Initial delivery and handling cost 200,000
Cost of site preparation 600,000
Consultants used for advice 700,000
Estimated dismantling cost 300,000
Total cost 4,300,000
Pre-Test

#18. MARCOS Company borrowed P20,000,000 at 10% partly for general purposes and partly to finance
the construction of a building on January 1, 2021. The loan shall be repaid commencing the month
following completion of the building totaled P12,000,000 on December 31, 2021. The entity earned
interest of P200,000 for the year on the unexpended portion of the loan.

What amount of interest is capitalized on December 31, 2021?

600,000

Solution:
The average expenditures amount to P12,000,000/2 equals P6,000,000. The interest is P6,000,000*10%
equals P600,000.

*The investment income of P200,000 is IGNORED because the construction is financed by general
borrowing.

#19. RASTAMAN Company used the composite method of depreciation based on a composite rate of
25%. At the beginning of 2021, the total cost of equipment was P5,000,000 with a total residual value of
P600,000. The accumulated depreciation was P3,000,000 at that time. In January 2021, the entity
purchased an equipment for P2,500,000 with no residual value. At the end of 2021, the entity sold an
equipment with an original cost of P1,000,000 and a residual value of P200,000 for P350,000. This asset
was acquired on January 1, 2019.

What is the depreciation for 2021?

1,625,000

Solution:
Total cost- January 1, 2021 5,000,000
Cost of new asset acquired 2,500,000
Cost of asset sold (1,000,000)
Remaining cost- December 31, 2021 6,500,000

Depreciation for 2021 (6,500,000*25%) 1,625,000

#20, PH Company paid P5,000,000 to purchase the following intangible assets with fair value as
indicated:

Internet domain name 1,500,000

Order backlog 1,200,000
In-process research and development 2,400,000
Operating Permit 900,000

In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the local
community.

What amount should be recognized as cost of the in-process research and development?
2,000,000
Pre-Test

Solution:
*An in-process research and development project acquired separately is recognized as an asset at cost,
even if a component is research.

*Subsequent expenditure on that project is accounted for as any other research and development
expenditure which may be expensed or capitalized depending on the criteria for the recognition of an
intangible asset.

*The cost of the advertising should be expensed immediately.