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Intermediate Accounting Set of Problems 2
Intermediate Accounting Set of Problems 2
Situation 1
Rusty Company purchased an investment property on January 1, 2018 at a cost of P4,000,000. The
property had a useful life of 20 years and on December 31, 2019 had a fair value of P4,800,000. On
December 31, 2019 the property was sold for net proceeds of P4,500,000. The entity used the cost
model to account for the investment property.
What is the gain to be recognized for 2019 regarding the disposal of the investment property?
A. 900,000
B. 500,000
C. 800,000
D. 700,000
Problem 2
remote location for P5,000,000. After initial recognition, the entity measured the investment property
using the cost model because the fair value cannot be measured reliably.
On December 31, 2019, management assessed the useful life of the building at 20 years from the date of
acquisition and presumed the residual value to be nil because the fair value cannot be determined
reliably.
At year-end, the entity declined an unsolicited offer to purchase the building for P6,500,000. This is a
onetime offer that is unlikely to be repeated in the foreseeable future.
Rhino Company, a real estate entity, had a building with a carrying amount of P20,000,000 on December
31, 2019. The building was used as offices of the entity’s administrative staff.
On December 31, 2019, the entity intended to rent out the building to independent third parties. The staff
will be moved to a new building purchased early in 2019.
On December 31, 2019, the entity also had land that was held for sale in the ordinary course of business.
The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December 31, 2019.
On such date, the entity decided to hold the land for capital appreciation. The accounting policy is to carry
all investment property at fair value.
1. On December 31, 2019, what amount should be recognized in revaluation surplus as a result of
transfer of the building to investment property?
A. 20,000,000
B. 35,000,000
C. 15,000,000 D. 0
2. On December 31, 2019, what amount should be recognized in profit or loss as a result of transfer
of theland to investment property?
A. 15,000,000
B. 10,000,000
C. 5,000,000D. 0
Problem 4
Chain Company has P5,000,000 life insurance policy on the president, of which Chain Company is the
beneficiary. The entity provided the following information regarding the policy for the year ended
December 31, 2019:
Cash surrender value, January 1 435,000
Cash surrender value, December 31 540,000
Annual advance premium paid January 1 200,000
During the current year, dividends of P30,000 were applied to increase the cash surrender value of the
policy.
Reference:
During the year, Storm Company purchased a new machine. A P120,000 down payment was made and
three monthly instalments of P360,000. The cash price would have been P1,160,000.
The entity paid no installation charges under the monthly payment plan but a P20,000 installation charge
would have been incurred with a cash purchase.
Problem 6
Down payment
Note payable in 3 equal annual instalments
20,000 shares of Grey Company at fair value
Prior to use, installation cost of P50,000 was incurred machine has a residual value of P100,000.
Answer: C
Cash price P 2,000,000
Installation cost 50,000
Total cost P 2,050,000
Reference:
Problem 7
Corner Company purchased a van with a list price of P3,000,000. The dealer granted a 15% reduction in
list price and an additional 10% cash discount on the net price if payment is made in 30 days.
Irrecoverable taxes amounted to P40,000 and the entity paid an extra P30,000 to have a special horn
installed.
Answer: C
Reference:
Problem 8
What is the total increase in the equipment account as a result of the transactions?
A. 4,900,000
B. 5,000,000
C. 5,100,000
D. 5,200,000
Answer: A
First
equipment:
Invoice price
Discount
taken – 5% P3,000,000
Freight and (150,000) 50,000
insurance 200,000
Installation
cost
Second 2,000,000 (200,000) P3,100,000
equipment:
Invoice price
Discount 1,800,000
taken – 10% P4,900,000
Total cost
Reference:
Problem 9
At the beginning of the current year, Hallmark Company exchanged an old packaging machine, which
cost P1,200,000 and was 50% depreciated, for a used machine and paid a cash difference of P160,000.
The fair value of the old packaging machine was determined to be P700,000.
Question 1 Answer: B
Fair value of asset given P700,000
Cash payment 160,00
Total cost 0 P860,000
Question 2 Answer: B
P700,000
Fair value of asset given
600,000
Installation cost
P100,000
Total cost
Reference:
Problem 10
The equipment was measured using the cost model and depreciated on a straight line basis over a
10year period. On December 31, 2014, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model.
The equipment was recorded at fair value of P4,550,000 with remaining useful life of 5 years.
Ignoring income tax, what amount should be reported as revaluation surplus on December 31, 2014?
A. 1,050,000
B. 1,300,000
C. 1,500,000
D. 2,000,000
Answer: B
Problem 11
On January 1, 2009, Boston Company purchased a new building at a cost of P6,000,000. Depreciation
was computed on the straight line basis at 4% per year. On January 1, 2014, the building was revalued at
fair value of P8,000,000.
Question 2 Answer: C
Fair value P8,000,000
Carrying amount 4,800,000
Revaluation surplus – January 1, 2014
Realization in 2014 P3,200,000
(3,200,000/20)
Revaluation surplus – December 31, 2014 160,000
P3,040,000
Reference:
Problem 12
Cynosure Company has an equipment with carrying amount of P1,600,000 on December 31, 2014 after
recording depreciation for 2014. The following information is available on December 31, 2014 relative to
the equipment:
Fair value of similar equipment 1,400,000
Discounted future cash flows 1,300,000
Undiscounted future cash flows 1,350,000
At what amount should the equipment be reported on December 31, 2014?
A. 1,600,000
B. 1,400,000
C. 1,300,000
D. 1,350,000
Answer: B
Problem 13
On January 1, 2011, Reed Company purchased a machine for P8,000,000 and established an annual
depreciation charge of P1,000,000 over an eight-year life. During 2014, after issuing the 2013 financial
statements, the entity concluded that the machine suffered permanent impairment of its operational
value, and P2,000,000 is a reasonable estimate of the amount expected to be recovered through use of
the machine for the period January , 2014 through December 31, 2018.
In the December 31, 2014 statement of financial position, what is the carrying amount of the machine?
A. 4,000,000
B. 1,000,000
C. 1,600,000 D. 0
Answer: C
Reference:
Problem 14
Gei Company determined that, due to obsolescence, equipment with an original cost of P9,000,000 and
accumulated depreciation on January 1, 2014, of P4,200,000 had suffered permanent impairment, and as
a result should have a carrying amount of only P3,000,000 as of the beginning of the year. In addition, the
remaining useful life of the equipment was reduced from 8 years to 3.
In the December 31, 2014 statement of financial position, what amount should be reported as
accumulated depreciation?
A. 1,000,000
B. 5,200,000
C. 6,000,000
D. 7,000,000
Answer: D
Cost P9,000,000
Accumulated depreciation – Jan. 1, 2014 4,200,000
Carrying amount – Jan. 1, 2014 P4,800,000
Expected recoverable amount 3,000,000
Impairment loss P1,800,000
Adjusted accumulated depreciation, Jan. 1, 2014 P6,000,000
(4,200,000 + 1,800,000)
Depreciation for 2014
(3,000,000/ 3) 1,000,000
Accumulated depreciation – Dec. 31, 2014 P7,000,000
Reference:
Problem 15
One of the cash generating units of sanmig Company is the production of liquor. On December 31, 2014,
the entity believed that the assets of the cash generating unit (CGU) are impaired based on an analysis of
economic indicators.
The assets and liabilities of the cash generating unit at carrying amount on December 31, 2014 are:
Cash 4,000,000
Account receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,00
0
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000
The entity determined that the value in use of the cash generating unit is P30,000,000.
The account receivable are considered collectible, except those considered doubtful.
Answer: B
Cash P4,000,000
Accounts receivable – net 5,000,000
Inventory 7,000,000
Property, plant and equipment – net 18,000,000
Goodwill 3,000,000
Carrying amount of cash generating unit P37,000,000
Value in use 30,000,000
Impairment loss P7,000,000
Impairment loss allocated to goodwill 3,000,000 Remaining
impairment loss P4,000,000
Problem 16
Liton Company buys and sells securities expecting to earn profits on short-term differences in price.
During 2014, Liton Company purchased the following trading securities:
Fair value
1. What is Liton’s net income after making any necessary trading security adjustments?
A. 900,000
B. 810,000
C. 762,000
D. 948,000
2. What would Liton’s net income be if the fair value of security B were P285,000?
A. 867,000
B. 900,000
C. 885,000
D. 933,000
Question 1 Answer: B
Fair value
Security Cost December 31, 2014
A P195,000 P225,000
B 300,000 162,000
C 660,000 678,000
P1,155,000 P1,065,000
Question 1 Answer: D
Net income before trading P900,000
security adjustment
Unrealized loss 33,000
(1,188,000 – 1,155,000)
Net income, as adjusted P933,000
Reference:
Problem 17
On January 1, 2014, Rambutan Corp, purchased debt securities for cash of P765,540 to be held as
financial assets at amortized cost. The securities have a face value of P 600,000, and they mature in 15
years. The securities carry fixed interest of 10% that is receivable semiannually, on June 30 and
December 31. The prevailing market interest rate on these debt securities is 7% compounded annually.
1. The carrying value of the debt securities on December 31, 2014, at amortized cost using the effective
interest rate method is
A. 771,840
B. 759,016
C. 765,540
D. 600,000
2. The interest income to be reported for 2014 using the effective interest rate method is
A. 66,524
B. 6,534
C. 60,000
D. 53,476
Question 1 Answer: B
Carrying value, Jan. 1, 2014 P765,540
Amortization of premium, Jan. 1 – June
30:
Nominal interest (600,000 x 10% x ½) (3,206)
Effective interest (765,540 x 7% x ½) 30,000 P762,334
Carrying value, June 30, 2014 (26,794)
Amortization of premium, July 1 – Dec.
31: 3,318
Nominal interest P759,016
Effective interest (762,334 x 7% x ½) 30,000
Carrying value at amortized cost, Dec. 31, (26,682)
2014
Question 2 Answer: D
Reference:
Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 302
Problem 18
CHICO Company purchased the following non-trading equity securities during 2014:
Security Cost Fair value
December 31,
2014
X P450,000 P500,000
Y 500,000 800,000
At initial recognition, Chico classified these securities as at fair value through other comprehensive
income. On July 28, 2015, Chico sold all the shares of Security Y for a total of P835,000. As of December
31, 2015, the shares of Security X had a fair value of P200,000 No other activity occurred during 2015
relation to the non-trading equity securities portfolio.
1. What amount should Chico Company report as realized gain in the 2015 income statement?
A. 35,000
B. 335,000
C. 300,000
D. 265,000
2. What is the cumulative unrealized gain (loss) to be reported in the statement of changes in equity for
2015?
A. 300,000
B. 150,000
C. (300,000)
D. (250,000) Question 1 Answer: A
Cash proceeds P835,000
Less: Carrying value of Security Y, Dec.31, 2014 800,000
Realized gain on sale P35,000
Question 2 Answer: D
Problem 19
Saxophone Company acquires a new manufacturing equipment on January 1, 2014, on instalment basis.
The deferred payment contract provides for a down payment of P300,000 and an 8-year note for
P3,104,160. The note is to be paid in 8 equal annual instalment payments of P388,020, including 10%
interest. The payments are to be made on December 31 of each year, beginning December 31, 2014.
The equipment has a cash price equivalent of P2,370,000. Saxophone’s financial year-end is December
31.
Question 1 Answer: C
Question 2 Answer: A
Cost of equipment (cash price equivalent) P2,370,000
Less: Down payment 300,000
Amount assigned to note payable P2,070,000
Face value of note 3,104,160
Discount on note payable, Jan. 1, 2014 P1,034,260
Reference:
Problem 20
A portion of the building site had been temporarily used by Accordian to operate a car park while the
building was being constructed. A total of P325,000 was earned by Accordian from this incidental activity.
1. What is the cost of the land?
A. 8,896,000
B. 8,048,000
C. 9,648,000
D. 10,448,000
Question 1 Answer: B
Question 2 Answer: C
Question 3 Answer: D
Purchased of land Land Land improvements P800,000 Building
Land survey
Fees for search of title for land P7,892,000
Building permit fee 104,000
Temporary quarters for 12,000
construction P70,000
crews
215,000
Cost to demolish old building
940,000
Excavation of basement
200,000
Special assessment for street
40,000
project 58,000,000
Cost of construction
Cost of paving parking lot 660,000
adjoining P1,460,000
building
Cost of shrubs, trees, and other P8,048,000 P59,425,000
landscaping
Totals
Reference:
Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 366
Problem 21
Sheng Company constructed a building for use by the administration section of the company. The
completion date was January 1, 2007, and the construction cost was P16,800,000. The company
expected to remain in the building for the next 20 years, at which time the building would probably have
no real salvage value and have to be demolished. It is expected that demolition costs will amount to
P300,000.
In June 2013, following a storm that wreaked vast destruction in the city, the roof of the administration
building was considered to be in porr shape so the company decided to replace it. On January 1, 2014, a
new roof was installed at a cost of P4,400,000. The new roof was of a different material to the old roof,
which was estimated to have cost only P2,800,000 in the original construction, although at the time of
construction it was thought that the roof would last for the 20 years that the company expected to use the
building. Because the company had spent the money replacing the roof, it thought that it would delay
construction of a new building, thereby extending the original life of the building from 20 years to 25
years.
1. If the roof were treated as a separate component of the building, the total depreciation expense
for 2014 would be
A. 750,000
B. 681,566
C. 606,667
D. 672,000
2. If the roof were not treated as a separate component of the building, the total depreciation
expense for 2014 would be A. 1,178,462
B. 861,944
C. 851,111
D. 750,000
Question 1 Answer: A
Roof P244,444
(4,400,000/ 18 years)
Rest of the building:
Cost 14,000,000
Less: Accumulated depreciation
(14,000,000 x 7/ 20) 4,900,000
Question 2 Answer: C
Total 15,320,000
Divide by revised remaining life 18
(25 - 7) yrs
Depreciation expense for 2014 P851,111
Reference:
Auditing Problems CPA Examination Reviewer 2014, G. Roque, p. 399
Problem 22
Eagle Company owns a tract of land that it purchased for P2,000,000. The land is held as a future plant
site and has a fair value of P2,800,000 on the date of exchange.
Hall Company also owns a tract of land held as a future plant site. Hall paid P3,600,00 for the land upon
purchase and the land has a fair value of P3,800,00 on the date of exchange.
On date of exchange, Eagle exchanged its land and paid P1,000,000 cash for the land owned by Hall.
The configuration of cash flows from land acquired is expected to be significantly different from the
configuration of cash flows of the land exchanged.
At what amount should Eagle record the land acquired in the exchange?
A. 2,800,000
B. 3,000,000
C. 3,200,000
D. 3,800,000
Answer: D
Reference:
Problem 23
Yola Company and Zaro Company are fuel distributors. To facilitate the delivery of oil to their customers,
Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil.
Yola paid Zaro P300,000 to compensate for a difference in the grade of oil. It is reliably determined that
the exchange lacks commercial substance.
On he date of the exchange, carrying amount and market value of the oil were:
Yola Company Zaro Company
Answer: B
Reference:
Problem 24
Galore Company ventured into construction of a condominium in Makati which is rated as the largest
state-of-the-art structure.
The board of directors decided that instead of selling the condominium, the entity would hold this property
for purposes of earning rentals by letting out space to business executive in the area.
The construction of the condominium was completed and the property was placed in service on January
1, 2018.
The cost of the construction was P50,000,000. The useful life of the condominium is 25 years and the
residual value is P5,000,000.
An independent valuation expert provided the following fair value at each subsequent year-end:
December 31, 2018 55,000,000
December 31, 2019 53,000,000
December 31, 2020 60,000,000
1. Under the cost model, what amount should be reported an annual depreciation of investment property?
A. 1,800,000
B. 2,000,000
C. 2,200,000 D. 0
2. Under the fair value model, what amount should be recognized as gain from change in fair value in
2020?
A. 5,000,000
B. 3,000,000
C. 7,000,000 D. 0
Question 1 Answer: A
Cost of the construction P50,000,000
Less: Residual value 5,000,000
Divide by useful life 25 years
Depreciation expense P1,800,000
Question 2 Answer: C
Reference:
Problem 25
Eragon Company and its subsidiaries own the following properties at year-end:
2. What total amount should be included in property, plant and equipment in the consolidated
statement of financial position?
A. 11,000,000
B. 13,000,000
C. 10,500,000
D. 8,500,000
Question 1 Answer: B
Investment property Property, plant and
equipment
Land held by Eragon for undetermined use P5,000,000
A vacant building owned by Eragon and to be
leased out under an operating lease 3,000,000
Reference:
Problem 26
Bona Company purchased an investment property on January 1, 2016 for P2,200,000. The property had
a useful life of 40 years and on December 31, 2018 had a fair value of P3,000,000.
On December 31, 2018 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 gain or loss to be recognized for the year ended December 31, 2018 regarding the disposal of
the property?
A. 865,000 gain
B. 810,000 gain
C. 100,000 loss
D. 700,000 gain
Answer: A
Cost – Jan. 1, 2016 P2,200,000
Accumulated depreciation
(2,200,000/ 40 x 3) (165,000)
Carrying amount – Dec. 31, 2019 P2,035,000
Problem 27
Dayara Company owned three investment properties with the following details:
Initial Fair value Fair value
Each property was acquired three years ago with a useful life of 25 years. The accounting policy is to use
the fair value model for investment property.
What is the gain or loss to be recognized for the year ended December 31, 2020?
A. 189,000 loss
B. 150,000 loss
C. 300,000 gain
D. 450,000 loss
Answer: B
Fair value Fair value
December 31, 2018 December 31, 2019 Gain (loss)
Property 1 3,200,000 3,500,000 P300,000
P(150,000)
Reference:
Problem 28
Problem 29
Alaminos Inc. completedthe construction of a building at the end of 2008 for a total cost of P100 million.
The building is estimated to be economically useful for 25 years. The building was constructed for the
purpose of earning rentals under operating leases. The tenants began occupying the building after its
completion. The company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building on an annual basis.
According to the expert the fair values of the building at the end of 2008, 2009, and 2010 were P105
million, P120 million and P118 million, respectively.
1. How much should be recognized in profit or loss in 2008 as a result of the completion of the building at
the end of 2008?
A. 20,000,000
B. 9,000,000
C. 5,000,000D. 0
3. How much shoud be recognized in profit or loss in 2009 as a result of the fair value changes?
A. 20,000,000
B. 19,200,000
C. 15,000,000 D. 0
4. How much should be recognized in profit or loss in 2010 as a result of the fair value changes?
A. 18,000,000
B. 3,000,000
C. 2,000,000D. 0
5. How much is the carrying amount of the shopping mall on December 31, 2010 if Alaminos used the
cost model?
A. 100,000,000
B. 118,000,000
C. 96,600,000
D. 92,000,000
Question 1 Answer: C
Question 2 Answer: D
Investment properties carried at fair value are not depreciated since fair value changes are
already recognized in profit or loss.
Question 3 Answer: C
Fair value - December 31, 2009 P120,000,000
Fair value - December 31, 2008 105,000,000
Unrealized gain on investment property P15,000,000
Question 4 Answer: C
Question 5 Answer: D
Cost P100,000,000
Less: Accumulated depreciation – December 31, 2010
(100,000,000 x 2/25) 8,000,000
Carrying amount – December 31, 2010 P92,000,000
Reference:
Problem 30
Candon, Inc. completed the construction of a building at the end of 2008 for a total cost of P20 million.
The building is estimated to be economically useful for 25 years. The building was constructed for the
purpose of earning rentals under operating leases. The tenants began occupying the building after its
completion. The company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building on an annual basis.
According to the expert the fair value of the building at the end of 2008, 2009, and 2010 were P22 million,
P24 million and P25 million, respectively.
The company’s business expanded in 2009. As a result, the company started to use the building in its
operations on January 1, 2010. Because of the change in use, the company reclassified the building from
investment property to property, plant and equipment.
How much is the carrying amount of the building on December 31, 2010?
A. 24,000,000
B. 23,040,000
C. 23,000,000
D. 21,120,000
Answer: C
Reference: