SOLUTIONS

Problem 1 Answer A
Cash (600,000 -200,000 overdraft) 400,000
Accounts receivable 700,000
Inventory 1,200,000
Prepaid expenses 200,000
Land held for resale 2,000,000
Total current assets 4,500,000

Problem 2 Answer A
Liabilities 1,200,000
Share capital 7,500,000
Retained earnings 150,000
Total liabilities and equity 8,850,000
Revenue from sales and consulting 820,000
Operating costs and expenses ( 640,000)
Net income 180,000
Dividend declared ( 30,000)
Retained earnings 150,000

Problem 3 Answer C
Accounts payable 55,000
Unsecured notes 400,000
Accrued expenses 35,000
Serial bonds 1,000,000
Total current liabilities 1,490,000
The contingent liability is only disclosed.
Under IFRS, the deferred tax liability is noncurrent regardless of the reversal period.

Problem 4 Answer C
Net income per book 7,410,000
Unrealized loss- other comprehensive income erroneously deducted 540,000
Prior period error erroneously deducted 750,000
Gain on credit risk – other comprehensive income erroneously added ( 500,000)
Adjusted net income 8,200,000
The gain on early retirement of bonds payable and the loss from fire are properly included in net
income.

Problem 5 Answer D
Total reported income 1,700,000
Total cash dividends paid ( 800,000)
Total share dividends distributed ( 200,000)
Prior period adjustment – credit 75,000
Retained earnings – December 31, 2015 775,000
The unrealized holding loss on trading investment is ignored because it is already included in the
reported income since incorporation.

Problem 6 Answer C
Checkbook balance 8,000,000
NSF check (3,000,000)
Undelivered check drawn 2,500,000
Coins and currencies 800,000
Total cash 8,300,000
The check payable to the entity is properly not included because it is postdated January 2, 2016.
Technically, the three-month money market instruments are cash equivalents but not cash.

Problem 7 Answer A
Customer A 1,000,000
Customer B 700,000
Total other receivables 800,000
Total impairment loss 2,500,000
Customer C 2,000,000
Customer D 2,500,000
Other accounts receivable 3,500,000
Total other receivables for collective assessment of impairment 8,000,000
Under IFRS significant accounts receivable not impaired should be combined with other
accounts receivable not individually significant for collective assessment of impairment.

Problem 8 Answer D
Trade accounts receivable 930,000
Allowance for uncollectible accounts ( 20,000)
Claim against shipper 30,000
Total current net receivables 940,000
The selling price of unsold goods on consignment should be excluded from accounts receivable
but the cost should be included in inventory.
The security deposit is classified as noncurrent.

Problem 9 Answer D
Long-term note receivable – second note 2,000,000
Interest on note (2,000,000 x 3% x 5 years) 300,000
Total maturity 2,300,000
Multiply by PV factor .68
Present value of note receivable 1,564,000
Short-term note receivable – first note 2,000,000
Total carrying amount of notes receivable 3,564,000
The long-term note receivable should be discounted even if is interest-bearing because the
interest rate is unreasonably low compared to the market rate.
The short-term note receivable is reported at face amount because the discount is usually not
material.

Problem 10 Answer B
Face amount 1,500,000
Direct origination cost 40,000
Origination fee charged against borrower (4% x 1,500,000) ( 60,000)
Initial carrying amount 1,480,000
The direct origination cost is a deferred charge and the origination fee received from the
borrower is unearned income and the two should be included in the measurement of loan
receivable.
The indirect origination cost is an outright expense.

Problem 11 Answer D
Physical count 6,000,000
Good in transit purchased FOB shipping point 300,000
Total inventory 6,300,000

The goods billed to a customer are properly included in inventory because the term is FOB
shipping point and the goods are delivered January 7, 2016.

Problem 12 Answer C
Accounts payable per book 4,500,000
Reversal of undelivered checks 2,000,000
Goods purchased, received and recognized at net amount (750,000 x 98%) 735,000
Accounts payable to be reported 7,235,000
The undelivered checks should be restored to the cash balance and accounts payable.
The goods purchased and received on January 2, 2016 should be excluded from accounts payable
because the term is FOB destination.

Problem 13 Answer D
Cost Retail
Inventory – January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markup ________ 210,000
Goods available for sale 4,900,000 7,000,000
Conservative cost ratio (4,900,000 / 7,000,000) 70%
Sales (5,500,000)
Markdown ( 100,000)
Ending inventory at retail 1,400,000
At cost (70% x 1,400,000) 980,000
The lower of average cost or NRV retail method is the same as the conservative or conventional
method. Thus, the markdown is ignored in computing the cost ratio.

Page 19

Problem 14 Answer D
Cost of goods sold:
June (1,980,000 / 120%) 1,650,000
July (2, 040,000 / 120%) 1,700,000
August (2,160,000 / 120%) 1,800,000
Inventory – July 1 (30% x 1,700,000) 510,000
Purchases (SQUEEZE) 1,730,000
Goods available for sale 2,240,000
Inventory – July 31 (30% x 1,800,000) ( 540,000)
Cost of goods sold - July 1,700,000
The amount of purchases for July is computed by working back from the cost of goods sold.

Problem 15 Answer A
Freestanding trees 5,000,000
The land under trees and roads in forest should be included in property, plant and equipment.
Under IFRS, animals related to recreational activities as in game parks, and bearer plants, such
as rubber trees and grape vines should be accounted for as property, plant and equipment.
Problem 16 Answer B
Cash equivalent price 2,300,000
Installation cost 80,000
Total cost of machine 2,380,000

The storage cost is an outright expense.

Problem 17 Answer C
Average expenditures 6,000,000
Specific borrowing (4,400,000)
General borrowing 1,600,000

Interest on specific borrowing (4,400,000 x 10%) 440,000

Interest income on temporary investment of specific borrowing ( 90,000)
Interest on general borrowing (1,600,000 x 9%) 144,000
Total capitalized interest 494,000

Problem 18 Answer D
Purchase price 28,000,000
Development cost – 2015 1,000,000
Development cost – 2016 4,000,000
Estimated restoration cost 2,000,000
Total cost 35,000,000
Residual value ( 5,000,000)
Depletable amount 30,000,000

Production in 2016 3,000,000

Remaining estimate – December 31, 2016 7,000,000
Total estimate – January 1, 2016 10,000,000

Rate per unit (30,000,000 / 10,000,000) 3.00

Depletion for 2016 (3,000,000 x 3) 9,000,000

Production in 2017 2,500,000

Remaining estimate – December 31, 2017 3,500,000
Total estimate – January 1, 2017 6,000,000

Depletable amount 30,000,000

Depletion 2016 ( 9,000,000)
Remaining depletable amount 21,000,000

New rate (21,000,000 / 6,000,000) 3.50

Depletion 2017 (2,500,000 x 3.50) 8,750,000

Problem 19 Answer C
Accumulated depreciation – 6/30/2015 10,500,000
Depreciation from July 1 to December 31, 2015 (30,000,000 / 10 x 6/12) 1,500,000
Accumulated depreciation – 12/31/2015 12,000,000

Cost 30,000,000
Accumulated depreciation ( 12,000,000)
Carrying amount 18,000,000
Fair value 27,000,000
Revaluation surplus 9,000,000
Deferred tax liability (30% x 9,000,000) ( 2,700,000)
Net revaluation surplus 6,300,000

Problem 20 Answer C
Other coding cost after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters 1,500,000
Total capitalized cost of computer software 5,900,000

The completion of detailed program design and the cost incurred to establish technological
feasibility should be expensed immediately.

The duplication of computer software and packaging product should be charged to inventory.

Problem 21 Answer B
Travel costs of employees 400,000
Training of local employees 1,200,000
Total start up costs to be expensed 1,600,000
The production equipment should be capitalized.
The license fees and advertising costs should be expensed but not within the purview of start up
costs.

Problem 22 Answer A
Patent - January 1, 2013 1,920,000
Amortization for 2013 and 2014 (1,920,000 / 16 x 2) ( 240,000)
Carrying amount – January 1, 2015 1,680,000
Purchase price 800,000
Trademark (3/4 x 800,000) ( 600,000)
Noncompetition agreement 200,000
Patent (1,680,000 / 6 years remaining) 280,000
Noncompetition agreement (200,000 / 5 years) 40,000
Total amortization for 2015 320,000
The patent has a remaining life of 6 years because the revised life is 8 years from the date of
acquisition and two years already expired.
The trademark is not amortized because the life is indefinite.
The annual consulting fee is an outright expense.

Problem 23 Answer A
Net assets per book 32,000,000
Fair value of property, plant and equipment greater 7,500,000
Fair value of other assets zero ( 5,000,000)
Fair value of long-term debt lower 2,000,000
Net assets at fair value 36,500,000
Acquisition cost 40,000,000
Goodwill 3,500,000
The net assets should be recognized at fair value in a business combination.

Problem 24 Answer A
Purchase price of security C 4,000,000
Transaction cost 400,000
Total cost 4,400,000
If the equity investment is measured at fair value through other comprehensive income (FVOCI),
the transaction cost is capitalized
Market value of security C 12/31/2015 4,700,000
Historical cost 4,400,000
Unrealized gain – OCI 12/31/20015 300,000

Journal entry on July 1, 2016

Cash 5,200,000
Unrealized gain – OCI 300,000
Financial asset – FVOCI 4,700,000
Retained earnings 800,000
Under the final version of IFRS 9, any change in fair value of an equity investment measured at
FVOCI is permanently excluded from profit or loss under all circumstances but may transferred
to equity or retained earnings.

Problem 25 Answer A

January 1, 2015 to October 31, 2015 (500,000 x 12% x 10/12) 50,000

February 1, 2015 to July 31, 2015 (1,500,000 x 12% x 6/12) 90,000
May 1, 2015 to December 31, 2015 (800,000 x 12% x 8/12) 64,000
Correct interest expense 204,000
Recorded interest expense 150,000
Interest expense understated 54,000

Problem 26 Answer A

Total vacation days – 2013, 2014 and 2015 30

Total vacation days used (8 + 10) 18
Unused vacation days 12

From 2014 2
From 2015 10
Total unused vacation days - FIFO 12

2014 (35 employees x 8 hours x 2 x P27) 15,120

2015 (35 x 8 x 10 x P28.50) 79,800
Accrued liability – 12/31/2015 94,920

Problem 27 Answer B

Date Payment 10% interest Principal Present value

1/1/2015 6,330,000
1/1/2015 1,000,000 - 1,000,000 5,330,000
1/1/2016 1,000,000 533,000 467,000 4,863,000
The relevant present value is the amount computed using the 10% implicit rate.
The first payment on January 1, 2015 is applied all to principal

Problem 28 Answer D

Present value – 7/1/2015 (cash price) 3,500,000

Payment on 7/1/2015 – all applicable to principal ( 600,000)
Present value – 7/1/2015 2,900,000

Interest income from July 1, 2015 to June 30, 2016 (10% x 2,900,000) 290,000

Cash price 3,500,000

Carrying amount 2,800,000
Gain on sale 700,000
Interest income 7/1/2015 to 12/31/2015 (290,000 x 6/12) 145,000
Total income 845,000

Problem 29 Answer B

Fair value of machine 6,500,000

Carrying amount 7,000,000
Impairment loss ( 500,000)
Sale price 5,000,000
Fair value 6,500,000
Deferred loss ( 1,500,000)

Impairment loss 500,000

Amortization of deferred loss (1,500,000 / 5 years) 300,000
Total loss to be recognized in 2015 800,000

If the leaseback is an operating lease and the sale price is below fair value of the asset
compensated by below market rent:

a. The difference between the sale price and the fair value is a deferred loss to be amortized
over the lease term.
b. If the fair value is below the carrying amount, the carrying amount is written down to fair
value and the writedown is recognized immediately as an impairment loss.

Problem 30 Answer A

Current service cost 500,000

Interest on projected benefit obligation 600,000
Interest income on plan assets ( 350,000)
Loss on plan settlement 250,000
Past service cost during the year 300,000
Total employee benefit expense 1,300,000

Problem 31 Answer B

Plan assets at fair value – 12/21/2015 9,000,000

Contribution to plan 2016 1,260,000
Actual return on plan assets (SQUEEZE) 765,000
Total 11,025,000
Benefits paid in 2016 ( 1,125,000)
Plan assets at fair value – 12/31/2016 9,900,000

The actual return or plan assets is “squeezed” by working back from ending plan assets at fair
value.

Problem 32 Answer C

Accumulated vacations – 1/1/2015 350,000

Vacation taken in 2015 200,000
Liability balance – 1/1/2015 150,000

Vacations earned in 2015 300,000

Adjustment of accumulated vacations – 1/1/2015 (10% x 150,000) 15,000
Total vacation pay expense 315,000

Problem 33 Answer A

Termination benefit (120 employee x P20,000) 2,400,000

Total payment until closure 60,000

Termination benefit ( 20,000)
Additional benefit considered as short-term benefit 40,000

Short-term benefit (100 employees x 40,000) 4,000,000

Under IFRS, the additional amount paid to employees who render service until closure is no
longer a termination benefit but short-term benefit.

Problem 34 Answer A

Financial income 9,000,000

Rent received in advance 1,600,000
Tax exempt income ( 2,000,000)
Tax depreciation in excess of financial depreciation (1,000,000)
Taxable income 7,600,000

Current tax expense (30% x 7,600,000) 2,280,000

Tax payment during the year ( 500,000)
Current tax liability 1,780,000

Problem 35 Answer C

Interest paid (7% x 100,000) 7,000

Interest expense (6% x 105,000) 6,300
Premium amortization 700

Carrying amount – 6/30/2015 105,000

Face amount 100,000
Premium on bonds payable – 6/30/2015 5,000
Amortization 7/1/2015 to 6/30/2016 ( 700)
Unamortized premium – 6/30/2016 4,300

Problem 36 Answer A

Share options on January 1, 2015 (10,000 x 20) 200,000

Share options on January 1, 2016 (20,000 x 25) 500,000
The share options are measured at fair value on the date of grant and allocated over the vesting
period.

Share options on January 1, 2015 (200,000 /4 years) 50,000

Share options on January 1, 2016 (500,000 / 4 years) 125,000
Total compensation expense for 2016 175,000

Problem 37 Answer B

Retained earnings – January 1 200,000

Prior period error – overdepreciation 100,000
Net income 1,300,000
Retained earnings appropriated for treasury shares reverted to unappropriated balance 200,000
Increase in retained earnings appropriated for contengencies ( 100,000)
Cash dividends paid ( 500,000)
Change in accounting policy - credit 150,000
Retained earnings unappropriated - December 31 1,350,000

Problem 38 Answer B

Ordinary shares outstanding 110,000

Potential ordinary shares from convertible preference shares 20,000
Total ordinary shares 130,000

Diluted EPS (850,000 net income / 130,000) 6.54

Problem 39 Answer B

Operating expenses 100,000

Beginning prepaid expenses ( 5,000)
Ending prepaid expenses 10,000
Beginning accrued liabilities 8,000
Ending accrued liabilities ( 20,000)
Operating expenses paid 93,000

Problem 40 Answer D

Increase in current cost – nominal 1,500,000

Increase in current cost – constant 1,200,000
Increase in current cost due to inflation 300,000

Problem 41 Answer D

Prepaid royalties – January 1 650,000

Increase in prepaid royalties credited to expense 250,000
Prepaid royalties – December 31 900,000
Problem 42 Answer B

Professional fees expense per book 820,000

Accrued legal fees – November 60,000
Accrued legal fees – December 70,000
Adjusted professional fees expense 950,000
The entity already recorded P550,000 out of total consultants’ fee of P650,000. The balance of
P100,000 is not recognized because no work has been performed as yet.

Problem 43 Answer A

IFRS requires the following disclosures when preparing the statement of cash flows:

Income taxes paid 325,000

Interest payments 220,000
Total 545,000

Problem 44 Answer B

Increase in accumulated depreciation 400,000

Add : Accumulated depreciation of equipment sold 150,000
Depreciation for the year 550,000

Net income 3,000,000

Depreciation for the year 550,000
Gain on sale of equipment ( 50,000)
Net cash flows - operating 3,500,000

Problem 45 Answer C

Depreciation 1,900,000
Increase in accounts receivable (1,100,000)
Increase in inventory ( 730,000)
Increase in accounts payable 1,220,000
Net adjustment to net income as an addition 1,290,000
The increase in nontrading equity investment is an investing activity.
The increase in nontrade note payable is a financing activity.
 Page 27

SITUATION PROBLEM I – BANK RECONCILIATION

An entity had the following bank reconciliation on June 30, 2015:

Balance per bank statement, June 30 3,000,000
Deposit transit 400,000
Total 3,400,000
Outstanding checks ( 900,000)
Balance per book, June 30 2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for the depositor entity) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30 cleared through the bank in July. The deposit in transit
amounted to P1,000,000 and the outstanding checks totaled P600,000 on July 31.
1. What is the amount of cash in bank that should be reported on July 31, 2015?
a. 5,000,000
b. 5,400,000
c. 4,550,000
d. 4,900,000

2. What is the cash balance per ledger on July 31, 2015?

a. 5,350,000
b. 5,550,000
c. 4,500,000
d. 5,400,000

3. What is the amount of cash receipts for book for the month of July?
 a. 9,800,000
b. 8,600,000
c. 9,400,000
d. 9,600,000

4. What is the amount of cash disbursements per book for the month of July?
a. 7,300,000
b. 6,700,000
c. 6,850,000
d. 6,550,000

Page 28

SOLUTION – SITUATION PROBLEM I

Question 1 Answer B

Balance per bank – June 30 3,000,000

July bank deposits 9,000,000
July bank disbursements ( 7,000,000)
Balance per bank – July 31 5,000,000
July deposits in transit 1,000,000
July outstanding checks ( 600,000)
Adjusted bank balance 5,400,000
Question 2 Answer A

Balance per ledger – July 31 (SQUEEZE) 5,350,000

Note collected by bank in July 200,000
NSF check in July ( 140,000)
Service charge in July ( 10,000)
Adjusted book balance 5,400,000

The balance per book on July 31 is “squeezed” by working back from the adjusted balance.

Question 3 Answer C

Deposits per bank statement for July 9,000,000

Note collected by bank in July ( 200,000)
Deposit in transit – June 30 ( 400,000)
Deposit in transit – July 31 1,000,000
Cash receipts per book for July 9,400,000

Question 4 Answer D

Disbursements per bank statement for July 7,000,000

NSF check in July ( 140,000)
Service charge in July ( 10,000)
Outstanding checks – June 30 ( 900,000)
Outstanding checks – July 31 600,000
Cash disbursements per book for July 6,550,000
 Page 29

SITUATION PROBLEM 2 – ACCOUNTS RECEIVABLE

From inception of operations, an entity provided for uncollectible accounts expense under the
allowance method and provisions were made monthly at 2% of credit sales. No year-end
adjustments to the allowance account were made. The balance in the allowance for doubtful
accounts was P1,000,000 on January 1, 2015. During 2015, credit sales totaled P20,000,000,
interim provisions for doubtful accounts were made at 2% of credit sales, P200,000 of bad debts
were written off, and recoveries of accounts previously written off amounted to P50,000. An
aging of accounts receivable was made for the first time on December 31, 2015 as follows:
Classification Balance Uncolletible
November – December 6,000,000 10%
July – October 2,000,000 20%
January – June 1,500,000 30%
Prior to January 1, 2015 500,000 50%
Based on the review of collectibility of the account balances in the “prior to January 1 2015”
aging category, additional accounts totaling P100,000 are to be written off on December 31,
2015. Effective December 31, 2015, the entity adopted the aging method for estimating the
allowance for doubtful accounts.

1. What is the required allowance for doubtful accounts on December 31, 2015?
a. 1,650,000
b. 1,950,000
c. 1,700,000
d. 1,450,000

2. What amount should be reported as doubtful accounts expense in the income statement for
2015?
a. 1,200,000
b. 1,650,000
c. 900,000
d. 950,000

3. What is the year-end adjustment to the allowance for doubtful accounts on December 31,
2015?
a. 900,000 debit
b. 900,000 credit
c. 500,000 debit
d. 500,000 credit
4. What is the net realizable value of accounts receivable on December 31, 2015?
a. 9,900,000
b. 8,250,000
c. 8,350,000
d. 8,200,000

Page 30

SOLUTION – SITUATION PROBLEM 2

Question 1 Answer A

6,000,000 x 10% 600,000

2,000,000 x 20% 400,000
1,500,000 x 30% 450,000
500,000 – 100,000 x 50% 200,000
Required allowance – December 31, 2015 1,650,000

Question 2 Answer C

Allowance for doubtful accounts – January 1 1,000,000

Recoveries of accounts written off 50,000
Doubtful accounts expense (SQUEEZE) 900,000
Total 1,950,000
Accounts written off (200,000 + 100,000) ( 300,000)
Allowance for doubtful accounts – December 31 1,650,000
The doubtful accounts expense is squeezed by working back from the ending allowance for
doubtful accounts.

Question 3 Answer D

Correct doubtful accounts expense 900,000

Recorded doubtful accounts expense (2%) x 20,000,000 sales) 400,000
Increase in allowance - credit 500,000

Question 4 Answer B

November – December 6,000,000

July – October 2,000,000
January – June 1,500,000
Prior January 1, 2015 (500,000 – 100,000) 400,000
Accounts receivable – December 31, 2015 9,900,000
Allowance for doubtful accounts ( 1,650,000)
Net realizable value 8,250,000

Page 31

SITUATION PROBLEM 3 – GROSS PROFIT METHOD

On December 31, 2015, a fire damaged the warehouse and factory of an entity completely
destroying the goods in process inventory. There was no damage to the raw materials, finished
goods and factory supplies The physical inventory revealed the following.
January 1 December 31
Raw materials 1,700,000 2,000,000
Goods in process 4,300,000 0
Finished goods 6,000.000 4,500,000
Factory supplies 500,000 400,000
The gross profit margin historically approximated 30% of sales. The sales for the year amounted
to P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year
amounted to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
1. What is the cost of raw materials used?
a. 5,700,000
b. 3,700,000
c. 3,800,000
d. 3,600,000

2. What is the total manufacturing cost?

a. 13,000,000
b. 11,800,000
c. 11,700,000
d. 11,600,000

3. What is the cost of goods sold?

a. 12,000,000
b. 16,000,000
c. 13,000,000
d. 14,000,000

4. What is the cost of goods in process inventory destroyed by fire?

a. 3,500,000
b. 3,800,000
c. 2,500,000
d. 1,500,000
 Page 32

SOLUTION – SITUATION PROBLEM 3

Question 1 Answer B

Raw materials – January 1 1,700,000

Purchases 4,000,000
Raw materials available for use 5,700,000
Raw materials – December 31 ( 2,000,000)
Raw materials used 3,700,000

Question 2 Answer C

Raw materials used 3,700,000

Direct labor 5,000,000
Manufacturing overhead (60% x 5,000,000) 3,000,000
Total manufacturing cost 11,700,000

The change in the factory supplies is no longer considered because it is already part of the
manufacturing overhead applied.

Question 3 Answer D

Cost of goods sold (70% x 20,000,000) 14,000,000

The cost ratio is 70% because the gross profit rate is 30% on sales.
Question 4 Answer A

Total manufacturing cost 11,700,000

Goods in process – January 1 4,300,000
Total goods in process 16,000,000
Goods in process – December 31 (SQUEEZE) ( 3,500,000)
Cost of goods manufactured 12,500,000
Finished goods – January 1 6,000,000
Goods available for sale 18,500,000
Finished goods – December 31 ( 4,500,000)
Cost of goods sold 14,000,000

The cost of ending goods in process is computed by working back from the cost of goods sold.

Page 33

SITUATION PROBLEM 4 – INVESTMENT IN ASSOCIATE

On January 1, 2015, an entity acquired a 10% interest in an investee for P3,000,000. The
investment was accounted for under the cost method. During 2015, the investee reported net
income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2016, 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 2016 and paid
dividend of P5,000,000 on December 31, 2016.
1. What amount of investment income should be recognized in 2015?
a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the goodwill arising from the acquisition on January 1, 2016?

a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

3. What total amount of income should be recognized by the investor in 2016?

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, 2015?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
 Page 34

SOLUTION – SITUATION PROBLEM 4

Question 1 Answer B

Dividend income (10% x 1,000,000) 100,000

Under cost method, the investment income is based on dividend declared or paid.

Question 2 Answer B

Existing 10% interest remeasured at fair value 3,500,000

New 15% interest 8,500,000
Total cost – January 1, 2016 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying
amount (25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 1,800,000

Fair value of 10% interest 3,500,000

Historical cost 3,000,000
Remeasurement gain 500,000
Net investment income 1,800,000
Total income in 2016 2,300,000

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

Total cost 1/1/2016 12,000,000

Net investment income 1,800,000
Share in cash dividend (25% x 5,000,000) ( 1,250,000)
Carrying amount – 12/31/2016 12,550,000

Page 35
SITUATION PROBLEM 5 – PROPERTY, PLANT AND EQUIPMENT

January 1, 2015, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000

During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* 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.

* Research and development costs were P1,100,000 for the year.

* A machine costing P200,000 on January 1, 2008 was scrapped on June 30, 2015.
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, 2015. Original cost of the machine sold
was P700,000 on January 1, 2012, and it was depreciated on the straight line basis over an
estimated useful life of eight years and a residual value of P50,000.

1. What is the total cost of land on December 31, 2015?

a. 7,800,000
b. 7,600,000
c. 8,000,000
d. 6,800,000

2. What is the total cost of land improvements on December 31, 2015?

a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000

3. What is the total cost of buildings on December 31, 2015?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000

4. What is total cost of machinery and equipment on December 31, 2015?

a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000

Page 36

SOLUTION – SITUATION PROBLEM 5

Question 1 Answer A
Land – January 1 4,000,000
Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 7,800,000

Quoted price of shares issued for land and building (200,000 x P45) 9,000,000

Current appraized value :

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

Land improvements – January 1 1,300,000

Expenditures for parking lot, street and sidewalks 1,200,000
Balance – December 31 2,500,000

Question 3 Answer C

Buildings – January 1 20,000,000

Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 27,200,000

Question 4 Answer B

Machinery and equipment - January 1 8,000,000

Machinery and equipment purchased 4,000,000
Freight and unloading 100,000
Installation 300,000
Machinery scrapped ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000