Problem 1

L Company experienced a 500,000 decline in the market value of its inventory at the end of the first quarter. L had
expected this decline to reverse in the second quarter, and in fact, the second quarter recovery exceeded the previous
decline by 100,000. What amount of gain or loss should be reported in the interim statements for the first and second
quarters?
First quarter Second quarter
a. 500,000 loss 500,000 gain
b. 500,000 loss 600,000 gain
c. 500,000 loss 100,000 gain
d. P0 P0

Answer A
First Quarter – Loss of 500,000
Second Quarter – Gain of 600,000, but gain is only up to the previously recorded loss of 500,000

Problem 2

A Company’s 6,000,000 net income for the quarter ended September 30, 2020, included the following after-tax items:
I. P 900,000 gain realized in May 2020 was allocated equally to the second, third and fourth quarters of 2020.
II. P 500,000 cumulative effect loss resulting from a change in inventory valuation method was recognized on August 31,
2020.
III. In addition, the entity paid 200,000 on February 1, 2020, for 2020 calendar-year real property tax. Of this amount,
50,000 was allocated to the third quarter of 2020.

What is the net income for the quarter ended September 30, 2020?
a. 5,700,000
b. 6,150,000
c. 6,200,000
d. 6,500,000

3rd Quarter (July-August-September)

Answer C
Third Quarter (July, August and September)
Unadjusted Net Income 6,000,000
I. (900,000 / 3) (300,000)
II. Included in Statement of RE, not in IS 500,000
III. Properly Included P0
Adjusted Net Income 6,200,000

Problem 3

J Company prepares quarterly interim financial reports. The entity sells electric goods, and normally 5% of customers
claim on their warranty. The provision in the first quarter was calculated as 5% of sales to date, which was 10,000,000.
However, in the second quarter, a design fault was found and warranty claims were expected to be 10% for the whole
year. Sales in the second quarter were 15,000,000. What would be the provision charged in the second quarter’s financial
statement?
a. 2,000,000
b. 1,250,000
c. 1,500,000
d. 750,000

Total Warranty Expense – First and Second Quarter (10M + 15M) x 10% 2,500,000
Warranty Expense Recognized in First Quarter (10M x 5%) (500,000)
Warranty Expense – Second Quarter 2,000,000
Problem 4

D Company, a calendar-year corporation, has the following income before tax provision and estimated effective annual
tax rates for the first three quarters of 2020:
Quarter Income before income tax Effective annual tax rate
First 6,000,000 40%
Second 7,000,000 40%
Third 4,000,000 45%

What is the income tax provision in the interim income statement for the third quarter?
a. 1,800,000
b. 2,450,000
c. 2,550,000
d. 7,650,000

Answer B
Cumulative Income Tax (17,000,000 x 45%) 7,650,000
Previously Reported Income Tax (13,000,000 x 40%) (5,200,000)
Income Tax Provision for Third Period 2,450,000