ACC 106

Notes Receivable (12 items)

Non-Interest Bearing Note (Initial and Subsequent Measurement)

Pangasinan Company is a dealer in equipment. On December 31,2014, the entity sold an equipment in exchange for a noninterest bearing
note requiring five annual payments of P500,000. The first payment was made on December 31,2015. The market interest for similar notes
was 8%. The PV of 1 at 8% for 5 periods is .68, and the PV of an ordinary annuity of 1 at 8% for 5 periods is 3.99.

i
. On December 31,2014, what is the carrying amount of the note receivable?
A. 1,495,000 C. 1,995,000
B. 1,700,000 D. 2,500,000

ii
. What interest income should be reported for 2015?
A. 101,000 C 159,600
B. 119,600 D. 505,000

iii
. What is the carrying amount of the note receivable on December 31, 2015?
A. 1,495,000 C. 2,000,000
B. 1,654,600 D. 2,154,600

Interest Bearing Note (Initial and Subsequent Measurement)

Megabank granted an 8%, 3-year P6,000,000 loan to Global Company on January 1, 2014. The interest on the loan is payable every
December 31. Megabank incurred P520,600 of direct origination cost but an origination fee of P200,000 was charged against Global
Company. The effective rate on the loan as a result of the origination fee and cost is now 6%.
iv
. What is the carrying value of the loan on January 1, 2014 in Megabank's accounting books?
a. P5,800,000 c. P6,320,600
b. P6,000,000 d. P6,520,600
v
. What is the carrying value of the loan on December 31, 2015 in Megabank's accounting books?
a. P6,000,000 c. P6,219,836
b. P6,113,026 d. P6,320,600

Installment Note Receivable

vi
. On December 31, 2014, Chang Company sold a machine in the ordinary course of business to Door Company in exchange for a noninterest
bearing note requiring ten annual payments of P100,000. Door made the first payment on December 31, 2014. The market interest rate for
similar notes at date of issuance was 8%. Information on present value factors is:
Period 9 10
Present value of 1 at 8% .50 .46
Present value of ordinary annuity of 1 at 8% 6.25 6.71
On December 31, 2014, what is the carrying amount of the note receivable?
A. 450,000 C. 625,000
B. 460,000 D. 671,000

7. A higher interest rate results to

a. increased amount of present value.
b. decreased amount of present value.
c. same amount of present value.
d. Answer cannot be determined due to insufficient data

8. On July 1 of the current year, an entity obtained a two-year 8% note receivable for services rendered. At that time, the market rate of
interest was 10%. The face amount of the note and the entire amount of interest are due on the date of maturity. Interest receivable on
December 31 of the current year is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

9. On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the
note receivable and the entire amount of the interest are due on September 30 of next year. The interest receivable on December 31 of the
current year would consist of an amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its face amount

10. The receivable that is usually evidenced by a formal instrument of credit is a(n)
a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.

11. A shorter period results to

a. increased amount of present value.
b. decreased amount of present value.
c. same amount of present value.
d. shorter accountant.

12. An entity received a seven-year zero interest-bearing note on February 1, 2019 in exchange for property sold. There was no established
exchange price for the property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February
1, 2019, 6% on December 31, 2019, 8% on February 1, 2020, and 9% on December 31, 2020. What interest rate should be used to calculate
the interest revenue from the transaction for the years ended December 31, 2019 and 2020, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 9%
d. 6% and 9%

Receivables Additional Concepts (9 items)

Expected Credit Losses

1. An entity determines that the credit risk on a loan receivable has not increased significantly since initial recognition. The entity should
recognize loss allowance equal to
a. the 12-month expected credit losses on the instrument.
b. the lifetime expected credit losses on the instrument.
c. sum of a and b
d. none; credit losses should be recognized only when there is objective evidence of a loss event.

2. According to PFRS 9, it refers to the expected credit losses that result from all possible default events over the expected life of a financial
instrument.
a. 12-month expected credit losses
b. Lifetime expected credit losses
c. Loss allowance
d. Absolute loss

3. Interest income is computed on the net carrying amount (i.e., gross carrying amount less loss allowance) of an instrument that is under
which stage of the ‘three-bucket’ approach of PFRS 9’s expected credit loss model?
a. Stage 1
b. Stage 2
c. Stage 3
d. Stage 4

4. After impairment testing, interest income on a credit-impaired note receivable is computed by

a. multiplying the present value of the note by the current market rate at year-end.
b. multiplying the present value of the note by the rate used in impairment testing.
c. multiplying the face value of the note by the rate used in impairment testing.
d. no interest income will be recognized because the note is already impaired.

Impairment of Notes Receivables

On January 1, 20x1, ABC Bank extended a ₱900,000 loan to XYZ, Inc. Principal is due on December 31, 20x5 but 12% interest is due annually
every December 31.
On December 31, 20x3, XYZ, Inc. was delinquent and it was ascertained that the loan is impaired. ABC Bank assessed that interests accruing
on the loan will not be collected; however, the principal is expected to be received in three equal annual installments starting on December
31, 20x4. Accrued interest receivable on December 31, 20x3 amounted to ₱100,000. The current market rate on December 31, 20x3 is 14%.

5. How much is the balance of allowance for impairment loss on December 31, 20x3 immediately after impairment testing? vii
a. 279,460
b. 303,510
c. 203,510
d. 179,460

6. How much is the interest income in 20x5?viii

a. 86,465
b. 64,810
c. 60,841
d. 0

Fact pattern for the next three questions:

ABC Co. factored ₱100,000 accounts receivable to XYZ Financing Corp. on a without recourse basis on January 1, 20x1. XYZ charged a 4%
service fee and retained a 10% holdback to cover expected sales returns. In addition, XYZ charged 12% interest computed on a weighted
average time to maturity of the receivables of 73 days over 365 days.

7. How much is the cost of factoring assuming all of the receivables were collected? ix
a. 6,400
b. 2,400
c. 16,400
d. 12,400

8. Use the ‘fact pattern’ above except that ABC Co. factored the receivables on a with recourse basis. ABC Co. determines that the recourse
obligation has a fair value of ₱3,000. How much is the loss on sale of receivables recognized on January 1, 20x1 assuming the factoring
was made on a casual basis?x
a. 3,000
b. 9,400
c. 19,400
d. 6,400

9. On October 1, 20x1, ABC Co. discounted a one-year, ₱600,000, 12% note, received from a customer on January 1, 20x1, with a bank at
14% on a without recourse basis. How much is the loss on discounting? xi
a. 4,960
b. 5,250
c. 4,690
d. 5,520

Inventories (12 ITEMS)

Initial Measurement

1. xii. Brilliant Company has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices 5,000,000
Trade discounts on purchases already deducted from vendors' invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
What is the total cost of purchases?
A. 5,700,000 C 6,500,000
B. 6,100,000 D. 6,700,000
Inventoriable Items
2. xiii. Lunar Company included the following items under inventory:
Materials 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store, including 50% profit on cost 750,000
Finished goods in hands of consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit, shipped FOB shipping point,
excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000
What is the correct amount of inventory?
A. 5,375,000 C. 5,500,000
B. 5,250,000 D. 5,540,000

Inventoriable Items / Adjustments to Inventory

3. xiv. Fair Company reported inventory on hand on December 31,2014 valued at a cost of P950,000. The following items were not included
in this inventory amount:
Item: Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes freight charge of P1,500.
Item 2: Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of the sales
price.
Item 3: Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500 which includes P1,000 freight charge to
deliver the goods. Goods are in transit. The entity's selling price is 140%o of cost.
Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost, P2,500.
Item 5: Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P2,000.
What is the adjusted cost of the inventory on December 31,2014?
A. 1,040,000 C. 1,043,000
B. 1,042,000 D. 1,073,500

Moving Average Inventory

4. xv. Celine Company provided the following data relating to an inventory item.
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000
Under the perpetual system, what is the moving average unit cost on January 31?
A. 165 C. 181
B. 167 D. 225

FIFO Inventory Method

5. xvi. Jayson Company used the perpetual system. The following information has been extracted from the records about one product:
Units Unit cost Total cost
Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
A. 315,000 C. 330,750
B. 329,360 D. 433,876
Weighted Average Inventory Method

6. xvii
. Lane Company provided the following inventory card during February:
Purchase Units Balance
Price Units Used Units
Jan. 10 100 20,000 20,000
31 10,000 10,000
Feb. 8 110 30,000 40,000
9 Returns from factory (Jan. 10 lot) (1,000) 41,000
28 11,000 30,000
Using the weighted average method, what is the cost of inventory on February 28?
A. 3,120,000 C. 3,180,000
B. 3,150,000 D. 3,300,000

Inventory – Subsequent Measurement LCNRV

7. xviii
. On December 31,2014, Julie Company reported ending inventory at P3,000,000, and the allowance for inventory writedown before any
adjustment at P150,000. Relevant information on December 31,2014 follows:
Product 1 Product 2 Product 2 Product 3
Historical cost 800,000 1,000,000 700,000 500,000
Replacement cost 900,000 1,200,000 1,000,000 600,000
Sales price 1,200,000 1,300,000 1,250,000 1,000,000
Net realizable value 550,000 1,100,000 950,000 350,000
Normal profit 250,000 150,000 300,000 300,000
What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000 C. 250,000
B. 200,000 D. 400,000

Net Method vs. Gross Method

8. xix. On August 1 of the current year, Stella Company recorded purchases of inventory of P800,000 and P 1,000,000 under credit terms of
2/15, net 30. The payment due on the P800,000 purchase was remitted on August 16. The payment due on the P1,000,000 purchase
was remitted on August 31. Under the net method and the gross method, these purchases should be included at what respective
amounts in the determination of cost of goods available for sale?

A. B. C. D.
Net method 1,784,000 1,764,000 1,764,000 1,800,000
Gross method 1,764,000 1,800,000 1,784,000 1,764,000

Shipping Terms
9. xx. Marker Company has the following information pertaining to its merchandise inventory as of December 31, 2014:
Inventory on hand (including merchandise received
on consignment of P20,000) P200,000
Inventory purchased with a buyback agreement 100,000
Merchandise in transit, FOB, shipping point,
including P5,000 freight cost 155,000
Merchandise in transit, Free alongside, including
delivery cost alongside the vessel of P6,000
but excluding the cost of shipment of P3,000 250,000
Merchandise in transit, CIF (including insurance costs
and freight of P8,000) 175,000
What amount should Marker Company report as value of its inventory in its 2014 statement of
financial position?
a. P749,000 c. P763,000
b. P757,000 d. P857,000

Cost Allocation

10. xxi
. On March 1, 2014, Good Company purchased a tract of land for P18,000,000. Good incurred additional cost of P4,500,000
during the remainder of year 2014 in preparing the land for sale. The land was subdivided into residential lots as follows:
Lot Class Number of Lots Sales Price per Lot
A 100 P240,000
B 100 160,000
C 200 100,000
Using the relative sales value method, how much should be allocated to Class A lot?
 a. P7,200,000 c. P 9,000,000
b. P8,640,000 d. P10,800,000

11. In a periodic system, the beginning inventory is

A. Net purchases minus ending inventory
B. Net purchases minus cost of goods sold
C. Total goods available for sale minus net purchases
D. Total goods available for sale minus cost of goods sold

12. Which of the following is a characteristic of a perpetual inventory system?

A. Inventory records are not kept for every item.
B. Cost of goods sold is recorded with each sale.
C. Inventory purchases are debited to a purchases account.
D. Cost of goods sold is determined as the amount of purchases less the change in inventory.

Inventory Estimation (8 items)

Gross Profit Method Estimated Cost of Inventory – Gross Profit Rate based on cost

1. xxii
. Barber Company prepares monthly income statements. A physical inventory is taken only at
year - end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50%. The
following information relates to the month of June:
Accounts receivable, June 1 P102,000
Accounts receivable, June 30 153,000
Collection of accounts receivable during June 255,000
Inventory, June 1 183,600
Purchases of inventory during June 163,200
How much is the estimated cost of June 30, inventory?
a. P122,400 c. P193,800
b. P142,800 d. P224,400

Gross Profit Method - Inventory Loss Gross Profit based on sales

2. xxiii. On September 30, 2014, a flood at Dolphin Company's warehouse caused severe damage to its entire inventory. Based on recent
history, Dolphin had a gross profit of 25% of net sales. The following data were gathered for the nine months ended September 30:
Inventory, January 1, P520,000; Purchases, P4,120,000; Purchase returns, P60,000; Sales, P5,600,000 and Sales discounts, P400,000.
A physical inventory disclosed usable damaged items which Dolphin estimates can be sold to a jobber for P70,000. The company uses
the gross profit method.
How much is the estimated cost of inventory loss on September 30, 2014?
a. P310,000 c. P380,000
b. P320,000 d. P450,000

Inventory Loss – Manufacturing Entity

3. xxiv. On December 24, 2014, a fire destroyed totally the raw materials bodega of Weary Manufacturing Co. There were no purchases of raw
materials from the time of the fire until December 31, 2014.
Inventories Jan. 1,2014 Dec. 31. 2014
Raw materials P180,000 ?
Factory supplies 12,000 P 10,000
Goods in process 370,000 420,000
Finished goods 440,000 450,000
The accounting records show the following data:
Sales P2,400,000
Purchases of raw materials 800,000
Purchases of factory supplies 60,000
Freight in for raw materials 30,000
Direct labor - 440,000
Manufacturing overhead, 75% of direct labor; gross profit rate, 35% of sales.
What is the cost of the raw materials destroyed by the fire?
a. P130,000 c. P160,000
b. P150,000 d. P222,000

Retail Method- Average

4. xxv. Sultan Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to the inventory
computation at June 30, 2014 are as follows:
COST RETAIL
Inventory, January 1 P 820,000 Pl,262,800
 Net purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net markdowns 320,000
Sales 4,350,000
Sales returns 300,000
Employee discount 100,000
Sales discount 80,000
Normal shrinkage 50,000
What is the estimated cost of June 30, 2014 inventory using the average approach?
a. P466,000 c. P616,000
b. P496,000 d. P800,000

Retail Method - FIFO

5. xxvi. The Bony Department Store uses a calendar year and the FIFO retail inventory method (assuming stable prices). Information relating
to the computation of the inventory at December 31 is as follows:
RETAIL
Inventory, January 1 P 320,000 P 800,000
Sales 5,800,000
Purchases 2,100,000 6,000,000
Freight-in 70,000
Net markups 400,000
Net markdowns 200,000
What is the ending inventory at cost at December 31 using the FIFO retail inventory method?
a. P420,000 c.P440,000
b. P430,000 d. P460,000

Retail Method - conventional

6. xxvii. Presented below is information related to Carnation, Incorporated:
Cost Retail
Inventory, January 1, 2014 250,000 P 390,000
Purchases 914,500 1,460,000
Purchase returns 60,000 80,000
Purchase discounts 18,000 -0-
Gross sales (after employee discounts) -0- 1,260,000
Sales returns -0- 97,500
Markups -0- ' 120,000
Markup cancellations -0- 40,000
Markdowns -0- 45,000
Markdown cancellations -0- 20,000
Freight-in 79,000 -0-
Employee discounts granted -0- 8,000
Loss from breakage -0- 2,500
Assuming that Carnation, Inc. uses the conventional retail inventory method, how much would be the cost of its ending inventory at
December 31, 2014?
a. P365,085 c. P410,760
b. P391,200 d. P420,280

7. Retail Method – Silent

xxviii
. Wishful's inventory shows the following information at December 31, 2014:
Inventory, beginning:
Cost P 560,000
Retail 1,400,000
Purchases:
Cost 4,960,000
Retail 10,320,000
Freight-in 150,000
Mark-up 1,000,000
Mark-up cancellation 120,000
Mark-down 500,000
Mark-down cancellation 100,000
Sales 10,000,000
Estimated normal shrinkage 2.5% of Sales
Wishful uses the retail inventory method of valuing its inventory. How much is the estimated cost of inventory in 2014?
a. P460,000 c. P990,000
b. P877,500 d. P1,072,500
8. Which would not require an estimate of inventory?
A. Inventory destroyed by typhoon
B. Interim financial statements are prepared
C. Proof of the reasonable accuracy of the physical count
D. Determination of the ending inventory to be reported in the statement of financial position at year-end

Investments (12 items)

1. Which of the following cannot be considered a financial asset?

a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instruments with another entity under conditions that are potentially unfavorable
d. An equity instrument of another entity

2. A financial liability
a. Must be classified as noncurrent liability.
b. Is a contractual obligation to deliver cash or another financial asset to another entity.
c. Is a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favorable to the entity.
d. Is a contractual obligation to deliver cash or any asset to another entity.

3. What is the principle for recognition of a financial asset?

a. A financial asset is recognized when it is probable that future economic benefits will flow to the entity.
b. A financial asset is recognized when the entity obtains control of the instrument.
c. A financial asset is recognized when the entity obtains the risks and rewards of ownership of the financial asset.
d. A financial asset is recognized when the entity becomes a party to the contractual provisions of the instrument.

4. How does the standard distinguish between the measurement methods to be used?
a. By reviewing the business model and the risks and rewards of the transaction.
b. By reviewing the business model and the contractual cash flow characteristics of the instrument.
c. By reviewing the realizability and the contractual cash flow characteristics of the instrument.
d. By reviewing the realizability of the instrument and risks and rewards of ownership.

5. A debt investment shall be measured subsequently at amortized cost

a. By irrevocable election
b. When the debt investment is managed and evaluated on a document risk-management strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of principal and interest.

6. The irrevocable election to present subsequent changes in fair value in other comprehensive income is applicable only to
a. Investment in equity instrument that is not held for trading.
b. Investment in equity instrument that is held for trading.
c. Financial asset measured at amortized cost.
d. Financial asset measured at fair value.

7. A debt investment shall be measured at fair value through other comprehensive income
a. When the debt investment is held for trading.
b. When the debt investment is not held for trading.
c. By irrevocable designation
d. When the business model is to collect contractual cash flows that are solely payments of principal and interest and also to sell the
financial asset

FA FVTPL / Trading Securities

8. xxix. Lagoon Company purchased the following securities during 2014:
Market value
Classification Cost December 31,2014
Security A Trading 900,000 1,000,000
Security B Trading 1,000,000 1,600,000
On July 31, 2015, the entity sold all of the shares of Security B for P1,100,000. On December 31, 2015, the shares of Security A had a market
value of P600,000. No other activity occurred during 2015 in relation to the trading security portfolio. What total loss on the trading securities
should be reported in the income statement for 2015?
A. 100,000 C. 500,000
 B. 400,000 D. 900,000
Use the following information for the next three questions:
On Jan. 1, 20x1, Three Co. purchased 10,000 shares of AM, Inc. for ₱1,000,000. Three Co. paid broker’s commission of ₱15,000 on the
acquisition. Three Co. made an irrevocable choice to subsequently measure the shares at fair value through other comprehensive income. The
quoted prices per share on Dec. 31, 20x1 and Dec. 31, 20x2 were ₱90 and ₱108, respectively. On Jan. 3, 20x3, Three Co. sold all the shares
at ₱105 per share. Three Co. paid broker’s commission of ₱16,000 on the sale.

9. How much is the unrealized gain (loss) recognized in Three Co.’s 20x1 profit or loss? xxx
a. 115,000 b. (115,000) c. (85,000) d. 0

10. How much is the unrealized gain (loss) recognized in Three Co.’s 20x2 other comprehensive income? xxxi
a. 180,000 b. 65,000 c. (115,000) d. 0

11. How much is the cumulative gain (loss) transferred to retained earnings on Jan. 3, 20x3? xxxii
a. 19,000 b. 34,000 c. (19,000) d. (34,000)

Investments in Debt Securities (13 items)

Initial Measurement – Discount

1. xxxiii.On January 1, 2014, Dean Company purchased ten-year bonds with a face value of P1,000,000 and a stated interest rate of 8% per
year payable semiannually July 1 and January 1. The bonds were acquired to yield 10%. Present value factors are as follows:
Present value of 1 for 10 periods at 10% .386
Present value of 1 for 20 periods at 5% .377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462
What is the purchase price of the bonds?
A. 875,380 C. 1,100,000
B. 1,000,000 D. 1,124,620

Issued at a premium
2. xxxiv. On January 1,2014, Venus Company purchased 10% bonds with face value of P5,000,000 plus transaction cost of P101,500 with a
yield rate of 8%. The bonds mature on December 31,2018 and pay interest annually on December 31. The carrying amount of the investment
on December 31,2014 using the effective interest method is P5,333,620. What is the initial acquisition cost of the bond investment?
A. 5,198,500 C. 5,398,500
B. 5,300,000 D. 5,401,500

Issued at a premium, in between interest dates

3. xxxv. On October 1, 2014, Danica Company purchased P2,000,000 face value 12% bonds for 98 plus accrued interest and brokerage fee.
Interest is paid semiannually on January 1 and July 1. Brokerage fee for this transaction was P50,000. At what amount should this acquisition
of bonds be recorded?
A. 1,960,000C. 2,020,000
B. 2,010,000D. 2,070,000

Interest revenue
4. xxxvi
.On July 1, 2014, Pell Company purchased Green Company ten-year, 8% bonds with a face amount of P5,000,000 for P4,200,000. The
bonds mature on June 30, 2024 and pay interest semiannually on June 30 and December 31. Using the interest method, the entity
recorded bond discount amortization of P18,000 for the six months ended December 31, 2014. What amount should be reported as
interest income for 2014?
A. 168,000 C. 200,000
B. 182,000 D. 218,000

Carrying amount
5. xxxvii
. On July 1, 2014, Rumor Company purchased 5,000 of the P1,000 face amount, 8% bonds for P4,614,000 to yield 10% per annum.
The bonds, which mature on July 1, 2019, pay interest semiannually on January 1 and July 1. The interest method of amortization is
used. What is the carrying amount of the bond investment on December 31, 2014?
A. 4,583,300 C. 4,675,400
B. 4,644,700 D. 4,969,300

Carrying amount
6. xxxviii
. On January 1, 2014, Purl 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, 2019 and pay interest annually on
 December 31. The interest method of amortization is used. What is the carrying amount of the investment on December 31, 2015?
A. 4,562,000 C. 4,662,000
B. 4,618,200 D. 4,680,020

Serial bonds Acquisition cost

7xxxix. On January 1, 2014, Excellent Company purchased serial bonds with face amount of P5,000,000 and stated interest at 12%. The stated
interest is payable annually on December 31. The bonds are acquired to have an effective yield at 10%. The bonds mature at annual
installment of PI,250,000 every December 31.
Present value of 1 at 10% for one period 0.9091
Present value of 1 at 10% for two periods 0.8264
Present value of 1 at 10% for three periods 0.7513
Present value of 1 at 10% for four periods 0.6830
What is the market price of the serial bonds on acquisition date?
A. 5,000,000C. 5,207,430
B. 5,090,960D. 5,545,460

Sale of Bonds
8. xl. Hawk Company purchased 8,000, P1,000 face amount, 9% bonds to yield 10%. The carrying amount of the bonds on January 1, 2014
was P7,800,000. The bonds mature on June 30, 2017 and pay interest semiannually on June 30 and December 31. The entity sold
4,000 bonds on March 1, 2014 for P3,920,000 after the interest has been received. What amount should be recognized as gain on sale
of bonds?
A. 0 C. 20,000
B. 15,000 D. 25,000

Debt Investment – FA FVOCI with recycling

Use the following information for the next five questions:
On January 1, 20x1, NFCPAR, Inc. acquired 10%, ₱1,000,000 bonds for ₱827,135. The bonds mature on December 31, 20x3 and pay annual
interest every December 31. NFCPAR, Inc. incurred transaction costs of ₱80,000 on the acquisition. The effective interest rate adjusted for the
effect of the transaction costs is 14%.

The bonds are to be held under a “hold to collect and sell” business model. Information on fair values is as follows:
December 31, 20x1…………………………….98
December 31, 20x2……………………………102
December 31, 20x3……………………………100

9. How much is the carrying amount of the investment on December 31, 20x1? xli
a. 935,134 b. 1,002,000 c. 980,000 d. 965,443

10. How much is the unrealized gain (loss) recognized in other comprehensive income in 20x1? xlii
a. 45,866 b. (45,866) c. (37,899) d. 0

11. How much is the interest income recognized in 20x2?xliii

a. 126,999 b. 130,779 c. 135,088 d. 144,388

12. How much is the unrealized gain (loss) recognized in other comprehensive income on December 31, 20x2? xliv
a. 9,221 b. 40,000 c. (7,219) d. 0

13. Disregard the previous questions. Assume the bonds were sold for ₱900,000 on July 1, 20x2. How much is the total gain (loss) on the
sale, including any reclassification adjustment to profit or loss?xlv
a. (50,000) b. 50,000 c. (95,389) d. (99,523)

Investments in Associates (10 items)

Dividend Income
1. xlvi. Green Company owned 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative nonvoting preference
shares of Gold Company. In the current year, Gold Company declared dividend of P1,000,000 on ordinary share capital and P600,000 on
preference share capital. What amount of dividend revenue should be reported for the current year?
A. 0 C. 600,000
B. 300,000 D. 900,000

Investment Income
2. xlvii
. On July 1, 2014, Denver Company purchased 30,000 shares of Eagle Company's 100,000 outstanding ordinary shares for P200 per
share. On December 15, 2014, the investee paid P400,000 in dividends to the ordinary shareholders. The investee's net income for the
year ended December 31, 2014 was P1,200,000, earned evenly throughout the year. What amount of income from the investment
should be reported in 2014?
A. 60,000 C. 180,000
B. 120,000 D. 360,000

Net income, amortization of excess cost

3. xlviii
. Breezy Company purchased 35% of an associate on January 1, 2014 for PI 1,200,000 when the carrying amount of net assets was
P32,400,000. On that day, the market value of the net assets equaled their carrying amount with the following exceptions:
Carrying amount Market
Equipment 7,000,000 5,600,000
Building 1,600,000 2,600,000
The equipment has a remaining useful life of 5 years, and the building has a remaining useful life of 10 years. The associate reported
net income of P3,200,000 and cash dividends of P1,000,000 for the current year. What is the investment income for the current year?
A. 987,000 C. 1,183,000
B. 1,120,000D. 1,260,000

Carrying Amount - Net income, dividend, amortization of excess cost

4. xlix. On January 1, 2014, Flair Company purchased 30% interest in an investee for P2,500,000. On this date, the investee's shareholders'
equity was P5,000,000. The carrying amounts of the investee's identifiable net assets approximated their fair values, except for land
whose fair value exceeded its carrying amount by P2,000,000. The investee reported net income of P1,000,000 for the current year and
paid no dividend. On December 31, 2014, what amount should be reported as investment in associate?
A. 2,200,000 C. 2,760,000
B. 2,700,000 D. 2,800,000

Carrying Amount - Net income, dividend, amortization of excess cost

5. l. On January 1, 2014, Courteous Company purchased 30% of the outstanding ordinary shares of an investee for P5,160,000. At the date
of acquisition, the investee's net assets had a carrying amount of P11,800,000. Depreciable assets with an average remaining life of 4
years have a current fair value that is P2,600,000 in excess of carrying amount. The remaining difference cannot be attributed to any
identifiable tangible or intangible asset. At the end of 2014, the investee reported net income of P3,600,000 and paid cash dividends of
P400,000. What amount should be reported as investment in associate on December 31, 2014?
A. 4,715,000 C. 5,925,000
B. 5,883,000 D. 6,120,000

6. Which of the following statements best describes the term "significant influence"?
A. The mutual sharing in the risks and benefits of a combined entity
B. The contractually agreed sharing of control over an economic entity
C. The holding of a significant proportion of the share capital in another entity
D. The power to participate in the financial and operating policy decisions of an entity

7. Which of the following statements is true concerning significant influence?

I. If an investor holds, directly or indirectly, less than 20% of the voting power of the investee, it is presumed that the investor does
not have significant influence, unless such influence can be clearly demonstrated.
II. If an investor holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed that the investor does
have significant influence, unless it can be clearly demonstrated that this is not the case.
III. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.
A. II only C. I and II only
B. Ill only D. I, II and III

8. When an investor purchases sufficient ordinary shares to gain significant influence over the investee, what is the proper accounting
treatment of any excess of cost over carrying amount of net assets acquired?
A. The excess remains in the investment account until it is sold.
B. The excess is immediately expensed in the period in which the investment is made.
C. The excess is charged to retained earnings at the time the investor resells the investment.
D. The excess is amortized over the time period that is reasonable in the light of the underlying cause of the excess.

9. When an investor purchases sufficient ordinary shares to gain significant influence over the investee, what is the proper accounting
treatment of any excess of cost over carrying amount of net assets acquired?
A. The excess remains in the investment account until it is sold.
B. The excess is immediately expensed in the period in which the investment is made.
C. The excess is charged to retained earnings at the time the investor resells the investment.
 D. The excess is amortized over the time period that is reasonable in the light of the underlying cause of the excess.

10. When an investor uses the equity method to account for investment in ordinary shares, the investment account will be increased when the
investor recognizes
A. A cash dividend received from the investee.
B. A proportionate interest in the net income of the investee.
C. Periodic amortization of the goodwill related to the purchase.
D. Depreciation related to the excess of market value over carrying amount of the investee's depreciable assets at the date of
purchase by the investor.

11. Which of the following statements is incorrect concerning the equity method?
A. The investment in associate is initially recorded at cost.
B. Dividends received from the associate are accounted for as income..
C. The investor's share of the profit or loss of the investee is recognized in the investor's profit or loss.
D. The investment in associate is increased or decreased by the investor's share of the profit or loss of the investee after the date of
acquisition.
i
.Answer is (C).
Present value of note receivable (500,000 x 3.99) 1,995,000

ii
.Answer is (C).
Interest income for 2015 (8% x 1,995,000) 159,600

iii
.Answer is (B).
Note receivable - 12/31/2015 (2,500,000 - 500,000) 2,000,000
Unearned interest income - 12/31/2015
(2,500,000 - 1,995,000 = 505,000 - 159,600) (345,400)
Carrying amount -12/31/2015 1,654,600

iv
.
Loan P6,000,000
Origination fee ( 200,000)
Origination cost 520,600
Carrying value of loan P6,320,600

v
.

Jan. 1, 2014 6,320,000

Dec. 31, 2014 480,000 - 379,236 = 100,764 6,219,836
Dec. 31, 2015 480,000 - 373,190 = 106,809 .6,113,026
Dec. 31, 2016 480,000 - 366,974 = 113,026 6,000,000

vi
.Answer is (C).
The note receivable is shown at present value on December 31, 2014.
Face value - remaining nine payments (100,000 x 9) 900,000
Present value (100,000 x 6.25) 625,000
Unearned interest income 275,000

Journal entry
Cash 100,000
Note receivable 900,000
Sales 725,000
Unearned interest income 275,000

First payment on December 31,2014 100,000

Present value of remaining payments 625,000
Total sales revenue 725,000

vii
D
Solution:
Estimated future cash flows (900K ÷ 3 equal annual installments) 300,000

Multiplied by: PV of ordinary annuity at 12%, n= 3 2.4018

Present value of estimated future cash flows 720,540

Present value of estimated future cash flows 720,540

Carrying amount before impairment (900K + 100K) (1,000,000)

Impairment loss (279,460)

 Allowance
Dec. 31, 20x3

Impairment loss 279,460

Interest receivable 100,000
Allowance for impairment 179,460

viii

C
Solution:
Date Collections Interest income Amortization Present value

12/31/x3 720,540

12/31/x4 300,000 86,465 213,535 507,005

12/31/x5 300,000 60,841 239,159 267,845

12/31/x6 300,000 32,141 267,859 (13)

ix

A
Solution:
Service charge (100,000 x 4%) 4,000

Interest charge (100,000 x 12% x 73/365) 2,400

Cost of factoring 6,400

B
Solution:
Jan. 1, 20x1 Cash (see previous solution) 83,600
Factor’s holdback 10,000
Loss on factoring (squeeze) 9,400
Account receivable 100,000
Liability on recourse obligation 3,000

xi
D
Solution:
Maturity value = 600,000 + (600,000 x 12%)
Maturity value = 672,000

Discount period = full term – expired term

Discount period = 12 months – 9 months (Jan. 1 to Oct. 1)
Discount period = 3 months

Discount = Maturity value x Discount rate x Discount period

Discount = 672,000 x 14% x 3/12
Discount = 23,520

Net proceeds = Maturity value - Discount

Net proceeds = 672,000 – 23,520
Net proceeds = 648,480

Interest income = accrued interest as of date of discounting

Interest income = 600,000 x 12% x 9/12
Interest income = 54,000
 Oct. 1, Cash on hand (equal to net proceeds) 648,480
20x1 Loss on discounting (squeeze) 5,520
Note receivable 600,000
Interest income 54,000

xii
.Answer is (D).
Cost of purchases 5,000,000
Import duties 400,000
Freight and insurance 1,000,000
Other handling costs 100,000
Brokerage commission 200,000
Total cost of purchases 6,700,000

xiii
.Answer is (C).
Materials 1,400,000
Goods in process 650,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store (750,000/150%) 500,000
Finished goods in the hands of consignees (400,000 x 60%) 240,000
Finished goods in transit 250,000
Finished goods out on approval 100,000
Materials in transit (330,000 + 30,000) 360,000
Correct inventory 5,500,000

xiv
.Answer is (B).
Inventory per book 950,000
Item 3 (18,500-1,000/140%) 12,500
Item 4 (50,000 + 2,500) 52,500
Item 5 (35,000 /140% = 25,000 + 2,000) 27,000
Adjusted inventory 1,042,000

xv
.Answer is (B).
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale (7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sale return 1,000 225 225,000
Balance 4,000 225 900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase return (2,000) 150 ( 300,000)
Balance 18,000 167 3,000,000
Observe that the moving average unit cost changes every time there is a new purchase or a purchase return. The moving
average unit cost is not affected by a sale or a sale return.

xvi
.Answer is (C).
From March 5 purchase (4,500 units x 73.50) 330,750
Whether periodic or perpetual system, the FIFO inventory is the same.

xvii
.Answer is (C).
 Units Unit cost Total cost
January 10 20,000 100 2,000,000
February 8 30,000 110 3,300,000
50,000 5,300,000
Weighted average unit cost (5,300,000/50,000) 106
Cost of inventory (30,000 x 106) 3,180,000

xviii
.Answer is (C).
Cost NRV LCNRV
Product 1 800,000 550,000 550,000
Product 2 1,000,000 1,100,000 1,000,000
Product 3 700,000 950,000 700,000
Product 4 500,000 350,000 350,000
2,600,000
Note that under LCNRV, replacement cost and normal profit are not taken into consideration.
Total cost 3,000,000
LCNRV 2,600,000
Required allowance for inventory writedown 400,000
Allowance before adjustment (150,000)
Increase in allowance 250,000
Loss inventory writedown 250,000
Allowance for inventory writedown 250,000

xix
.Answer is (C).
Net method
Purchases (800,000 + 1,000,000) 1,800,000
Purchase discount taken (2% x 800,000) (16,000)
Purchase discount not taken (2% x 1,000,000) (20,000)
Net amount 1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of whether taken or not taken.
Gross method
Purchases 1,800,000
Purchase discount taken (16,000)
Net purchases 1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase discount taken is deducted from purchases in
determining cost of goods available for sale.

xx
.
Inventory on hand (P200,000 - P20,000) P180,000
Merchandise in transit, FOB, shipping point 155,000
Merchandise in transit, Free Alongside:
(P250,000 - P6,000 + P3,000) 247,000
Merchandise in transit, CIF 175,000
Correct value of inventory P757,000
xxi
.
Lot Number Sales Relative Sales
Class of Lots Price Value Ratio Allocation
A 100 x 240,000 = P24,000,000 24/60 = P9,000,000
B 100 x 160,000 = 16,000,000 16/60 = 6,000,000
C 200 x 100,000 = 20,000,000 20/60 = 7,500,000
Total P60.000.000 P22.500.000*

* Total cost includes the additional cost of P4,500,000.

As a general rule, allocation is based on the market value ratio.

xxii
.
Inventory, June 1 P183,600
Purchases 163,200
Total goods available for sale P346,800
Less: Estimated cost of sales (P306,000* + 150%) 204,000
 Estimated inventory, June 30 P142.800

Accounts receivable, June 30 P153,000

Add: Collections 255,000
Total P408,000
Less: Receivable, June 1 102,000
Sales P306.000*
♦ The gross profit method is used to estimate ending inventory when a physical count is not possible or feasible. It can also
be used to evaluate the reasonableness in a given inventory amount.

♦ The gross profit method is generally not acceptable for either tax or annual financial reporting purposes and is not in
conformity with PAS (Phil. Accounting Standards). The main purpose is for interim/internal reporting.

♦ The gross profit method rests on the assumption that the gross profit percentage is relatively stable. Cost of sale is
determined by applying the gross margin (profit) ratio to sales amount and deducting this from the sales to determine the
cost ratio on sales. The cost ratio shall be multiplied by the amount of net sales.
xxiii
.
Inventory, January 1 P 520,000
Add: Net Purchases:
Purchases P4,120,000
Purchase returns ( 60,000) 4.060.000
Total Goods Availableior Sale 4,580,000
Less: Estimated Cost of Sales (P5,600,000 x 75%) 4,200,000
Estimated inventory, September 30, 2014 P 380,000
Less: Net realizable value of damaged inventory 70,000
Inventory loss P 310.000

In estimating the value of ending inventory, sales discounts and sales allowances are not deducted from sales because there
were no physical inflows of inventory.
xxiv
.
Cost of Goods Sold (P2,400,000 x 65%) Pl,560,000
Finished Goods, end 450,000
Finished Goods, beginning (440,000)
Cost of Goods Manufactured Pl,570,000
Goods In Process, end 420,000
Goods In Process, beginning (370,000)
Factory Cost Pl,620,000
Less: Conversion Cost
Direct Labor P440,000
Overhead (P440,000 x 75%) 330.000 770,000
Direct Materials Used P 850,000
Less: Raw Materials Available for Used
Raw Materials, beginning P180,000
Raw Materials Purchased 800,000
Freight on Raw Materials 30,000 1,010,000
Estimated Raw Materials, end P 160,000

Factory Supplies are appropriately classified as part of factory overhead and should not be separately accounted for.

xxv
.
COST RETAIL
Inventory, beginning P 820,000 P1,262,800
Net purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net markdowns ( 320.000)
Total goods available P3.100.000 P5,000,000 = 62%
Sales P4,350,000
Sales returns ( 300,000)
Employee discounts 100,000
Normal shrinkage 50.000 4.200.000
Inventory, June 30 at Retail P 800,000
x cost ratio 62%
Estimated inventory at Cost, June 30, 2014 P 496.000

Under the average method, it assumes that ending inventory consists of total goods available for sale. The cost-to-retail ratio is
computed by dividing the cost of goods available for sale by the retail value of these goods adjusted for both net markups and net
markdowns.
xxvi
.
Beginning inventory, January 1 P 800,000
Add: Net Purchases
Purchases P6,000,000
Markups 400,000
Markdowns ( 200.000) 6,200,000
Total Goods Available for Sale at Selling Price P7,000,000
Sales 5,800,000
Estimated Inventory, end at Selling Price P1,200,000
Inventory end, at cost (Pl,200,000 x 35%) P 420.000

Cost Retail Ratio

Inventory, beginning P 320,000 * P 800,000 = 40%
Net purchases 2,170,000 - 6,200,000 = 35%
When the retail inventory method is used and the estimated retail inventory end is lower than retail net purchases it means
that the estimated retail inventory was from the retail net purchases. So to convert the retail inventory end to cost is to use the
net purchases ratio multiplied by the estimated retail inventory end.

However, when estimated retail inventory end exceeds the retail net purchases, it means that no amount of retail net
purchases was sold and part of the retail inventory beginning are still included in the estimated retail inventory end, therefore
it is necessary to determine a separate ratio of net purchases and inventory beginning. The net purchases include both net
mark-ups and net markdowns.
xxvii
.
Cost Retail
Inventory, January 1, 2014 P250,000 P 390,000
Purchases 914,500 1,460,000
Purchase returns ( 60,000) (80,000)
Purchase discounts ( 18,000)
Markups 120,000
Markup cancellations ( 40,000)
Markdowns ( 45,000)
Markdown cancellations 20,000
Freight in 79.000
Total Goods available for Sale P1.165.500 Pl,825,000
Less: Sales 1,260,000
Sales returns ( 97,500)
Employee discounts 8,000
Loss from breakage 2.500 1,173,000
Estimated inventory, 12/31/14
at Selling price P 652,000
x Cost Ratio 63%*
lnventory,12/31/14 using conventional method P 410.760
Total Goods Available for Sale at Cost P1,165,500
+ Total Goods Available for Sale at Retail/Selling Price
excluding net markdowns:
Total goods available at retail P1,825,000
Add: Net markdowns
Markdowns P45,000
Markdown cancellation 20,000 . 25,000 1,850,000
Cost ratio using conventional 63%*
The conventional or conservative approach is similar to the approximate lower of average cost or market.
* If the conventional or conservative or approximate lower of average cost or market method is used, the ratio of cost to retail is
determined by dividing the total cost of goods available for sale (TGAS) by the total retail price of the goods available for sale
(excluding net markdowns).
xxviii
.
Cost Retail
Inventory, beginning P 560,000 P 1,400,000
Purchases 4,960,000 10,320,000
Freight-in 150,000
Net mark-up (P1,000,000 - P120,000) - 880,000
Net mark-down (P500,000 - P100,000) ( 400,000)
Total Goods Available for Sale P5,670,000 P12,200,000
Less: Sales 10,000,000
Shrinkage (2.5% x P10,000,000) 250,000 10,250,000
Inventory End at Selling Price P1.950.000
Inventory P 560,000
Add: Total purchases
 Purchases P4,960,000
Add: Freight in 150,000 5,110,000

Total goods available for sale at cost P5,670,000

-r Total goods available for sale at retail/selling price
excluding net markdowns (P12,200,000 + P400,000) 12,600,000
Conventional cost ratio 45%

Inventory at Cost (P1,950,000 x 45%) P 877.500

When the problem does not specify the method to be used, then it should be the average cost using a lower of cost or market
approach. Under this method, net markdowns are not deducted in the total goods available for sale at selling price for purposes of
determining cost ratio.

xxix
.Answer is (D).
Sales price of Security B 1,100,000
Carrying amount of Security B – 12/31/2014 1,600,000
Loss on sale of trading securities (500,000

Market value of Security A - 12/31/2015 600,000

Market value of Security A – 12/31/2014 1,000,000
Unrealized loss on TS in 2015 (400,000)
Total loss (500,000 + 400,000) (900,000)

xxx

D
Changes in fair values are recognized in OCI, thus the 115,000 loss will be presented in OCI not P and L

xxxi

A
(108 – 90) x 10,000 = 180,000

xxxii
A [(10,000 x 105) - 16,000] – (1,000,000 + 15,000) = 19,000 gain
xxxiii
.Answer is (A).
Semiannual nominal interest (1,000,000 x 4%) 40,000
Semiannual effective interest (1,000,000 x 5%) 50,000
Difference 10,000
Multiply by present value of annuity of 1 for 20 periods at 5% 12.462
Discount 124,620
The amount of P124,620 is a discount because the effective rate is higher than nominal rate.
Face value 1,000,000
Discount 124,620
Purchase price 875,380
Another approach
PV of principal (1,000,000 x.377) 377,000
PV of semiannual interest payments (40,000x12.462) 498,480
Total present value 875,480
There is a difference of P100 because of rounding of present value factor.

xxxiv
.Answer is (D).
Carrying amount - December 31, 2014 5,333,620
Add: Nominal interest (5,000,000 x 10%) 500,000
Total 5,833,620
Divide by (100 + 8%) 108%
Total acquisition cost 5,401,500

xxxv
.Answer is (B).
Purchase price (2,000,000 x 98) 1,960,000
 Brokerage fee 50,000
Total acquisition cost 2,010,000
The accrued interest of P60,000 (2,000,000 x 12% x 3/12) from July 1 to October 1,2014 is not part of the cost of investment.
Although, this amount is part of the payment for the bond investment. Any transaction cost is part of the cost of financial asset
measured at amortized cost.

xxxvi
.Answer is (D).
Interest received from July 1 to Dec. 31, 2014 (5,000,000 x 8% x 6/12) 200,000
Bond discount amortization for six months 18,000
Interest income for 2014 218,000

xxxvii
.Answer is (B).
Acquisition cost – 7/1/2014 4,614,000
Discount amortization from July 1 to Dec. 31, 2014:
Interest accrued (5,000,000 x 8% x 6/12) 200,000
Interest income (4,614,000 x 10% x 6/12) 230,700 30,700
Carrying amount – 12/31/2014 4,644,700

xxxviii
.Answer is (D).
Carrying amount - January 1, 2014 4,562,000
Amortization of discount for 2014
Interest income (4,562,000 x 10%) 456,200
Interest received (5,000,000 x 8%) 400,000 56,200
Carrying amount- December 31, 2014 4,618,200
Amortization of discount for 2015
Interest income (4,618,200 x 10%) 461,820
Interest received (5,000,000 x 8%) 400,000 61,820
Carrying amount - December 31, 2015 4,680,020

xxxix
.Answer is (C).
12/31/2014 (1,250,000 + 600,000) x .9092) 1,681,835
12/31/2015 (1,250,000 + 450,000) x .8264) 1,404,880
12/312015 (1,250,000 + 300,000) x .7513) 1,164,515
12/31/2017 (1,250,000 + 150,000) x .6830) 956,200
Total 5,207,430

xl
.Answer is (B).
Carrying amount, 1/1/2014 7,800,000
Amortization from 1/1/2014:
Interest income (7,800,000 x 10% x 2/12) 130,000
Interest received (8,000,000 x 9% x 2/13) 120,000 10,000
Carrying amount – 3/1/2014 7,810,000

Sale price 3,920,000

Carrying amount of bonds sold (7,810,000 x ½) 3,905,000
Gain on sale 15,000

xli

C – (1M x 98%) = 980,000

xlii

A (980,000 fair value - 934,134 amortized cost*) = 45,866 gain

*Amortization table:
 Date Interest received Interest income Amortization Present value

1/1/x1 907,135

12/31/x1 100,000 126,999 26,999 934,134

12/31/x2 100,000 130,779 30,779 964,913

12/31/x3 100,000 135,088 35,088 1,000,000

xliii
B – see amortization table above

xliv

A
Fair value - 12/31/x2 1,020,000

Amortized cost - 12/31/x2 964,913

Cumulative balance of gain - 12/31/x2 55,087

Cumulative balance of gain - 12/31/x1 45,866

Unrealized gain - OCI in 20x2 9,221

xlv
D

Solution:
Date Interest received Interest income Amortization Present value

1/1/x1 907,135

12/31/x1 100,000 126,999 26,999 934,134

7/1/x2 50,000 65,389 15,389 949,523

 (900,000 sale price – 50,000 accrued interest) – 949,523 amortized cost = (99,523) loss

Supporting journal entries:

7/1/x2
Interest receivable 50,000
Investment in bonds - FVOCI 15,389
Interest income 65,389
to record accrued interest as of date of sale

Unrealized loss – OCI 145,389*

Investment in bonds – FVOCI 145,389
to recognize the fair value change as of date of sale

*Net sale price - 7/1/x2 (900K – 50K receivable) 850,000

Amortized cost - 7/1/x2 949,523

Cumulative balance of loss - 7/1/x2 (99,523)

Cumulative bal. of gain - 12/31/x1 (see previous solutions) 45,866

Unrealized loss - OCI in 20x2 (145,389)

Cash 900,000
Investment in bonds – FVOCI 850,000
Interest receivable 50,000
to record the sale

Loss on sale – P/L 99,523

Unrealized loss – OCI 99,523*
to record the reclassification adjustment of the cumulative loss to profit or loss

xlvi
.Answer is (C). (100% x 600,000) 600,000

Only the dividend on preference share capital is recognized as dividend revenue. The equity method is not applicable
to investment in preference shares regardless of the interest.

xlvii
.Answer is (C).

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

Share in net income from July 1 to December 31, 2014
(1,200,000 x 6 / 12 x 30%) 180,000

xlviii
.Answer is (C).

Acquisition cost 11,200,000

Net assets acquired (35% x 32,400,000) 11,340,000
Excess of carrying amount over cost (140,000)
Equipment - carrying amount higher than market value
(1,400,000 x 35%) (490,000)
Building - market value higher than carrying amount
(1,000,000 x 35%) 350,000
(140,000)
Share in net income (35% x 3,200,000) 1,120,000
Amortization of excess:
Overdcprcciation of equipment (490,000/5) 98,000
Underdepreciation of building (350,000/10) (35,000)
Investment income 1,183,000
The amortization of the equipment is added because the equipment is overvalued. The amortization of the building is
deducted because the building is undervalued.

xlix
.Answer is (D).
 Acquisition cost 2,500,000
Less: Carrying amount of net assets acquired (30% x 5,000,000) 1,500,000
Excess of cost over carrying amount 1,000,000
Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000
Goodwill - not amortized 400,000

Acquisition cost, January 1 2,500,000

Add: Share in net income (30% x 1,000,000) 300,000
Carrying amount of investment 2,800,000
The excess of cost attributable to the land is not amortized because the land is nondepreciable.

l
.Answer is (C).

Acquisition cost 5,160,000

Net assets acquired (30% x 11,800,000) 3,540,000
Excess of cost 1,620,000
Attributable to depreciable assets (30% x 2,600,000) 780,000
Attributable to goodwill 840,000

Acquisition cost 5,160,000

Share in net income (30% x 3,600,000) 1,080,000
Share in dividends (30% x 400,000) (120,000)
Amortization (780,000/4) (195,000)
Investment balance – 12/31 5,925,000