Chapter 5- Property, Plant, and Equipment At the beginning of the current year, Windoor Company exchanged an old polishing

machine, which cost 1,200,000 and was 50% depreciated, for a used machine and paid a cash difference of 160,000. The fair value of the old polishing machine was determined to be 700,000. How much is the gain or loss from the exchange of the machines? a. 100,000 loss b. 100,000 gain c. 60,000 loss d. No gain and no loss Solution: Fair value of asset given Cash Payment Cost of new asset Fair Value of the asset given Less: Carrying amount [1,200,000 (1,200,000 x 50%)] Gain on exchange 700,000 160,000 860,000 700,000 600,000 100,000

Aspire Company commenced construction of a new building on March 20, 2010. The cost of 10,000,000 was funded existing borrowings. The construction was completed on September 20, 2010. Aspire Companys borrowings during 2010 comprised: Bank A - 5% 6,000,000 Bank B6% 9,000,000 Bank C- 7% 15,000,000 What is the amount of borrowing cost that should be capitalized in relation to the building? (Financial Accounting 1, 2010 edition, Valix, Page 979, Problem 21-15, revised by Mariztine B. Mirandilla) a. 1,890,000 b. 630,000 c. 315,000 d. 367,500 Solution: Principal 6,000,000 9,000,000 15,000,000 30,000,000 Borrowing Cost 300,000 540,000 1,050,000 1,890,000 10,000,000 6.3% 630,000 6/12 315,000

Bank A -5% Bank B- 6% Bank C- 7%

Cost Multiply by: Capitalization rate ( 1,890,000/30,000,000) Capitalizable Cost for 1 year Multiplied by: Months it was incurred Total Capitalizable Borrowing Cost

On January 1, 2010, The Mythbusters purchased new machinery for 5,000,00. The machinery has an estimated useful life of nine years and has a residual value of 500,000. The depreciation is computed by the sum of the years digits method. What is the accumulated depreciation of the machinery on December 31,2012? a. 562,500 b. 1,087,500 c. 482,500 d. 1,570,000 Solution: Cost of machinery Less: residual value Depreciable Cost 2010 December 31 2011 December 31 2012 December 31 5,000,000 500,000 4,500,000

4,500,000 x 15/120 4,500,000 x 14/120 4,500,000 x 13/120

562,500 525,000 482,500

Accumulated Depreciation 1,570,000 On January 1, 2005, Celtics Company purchased a new building at a cost of 10,500,000. Depreciation was computed on the straight line basis at 10% per year. On January 1, 2010, the Building was revalued at a fair value of 7,000,000. What is the revaluation surplus on December 31, 2010? (Practical Accounting 1, 2010 edition, Valix, Page 605, Problem 35-7, Question 3, revised by Mariztine B. Mirandilla) a. b. c. d. 1,400,000 1,750,000 350,000 700,000

Solution: Fair value Carrying amount (10,500,000 x 50%) Revaluation Surplus January 1, 2010 Revaluation Surplus January 1, 2010 7,000,000 5,250,000 1,750,000 1,750,000

Realization in 2010 (1,750,000/5) Revaluation Surplus December 31,2010

(350,000) 1,400,000

On January 1, 2006, Japsters Company purchased a machine for 3,250,000 and established an annual straight line depreciation rate of 10% with no residual value. During 2010, Japsters determined that the machine will not be economically useful in its production process after December 31, 2010. Japster estimated that the machine had no residual value at December 31, 2010, and would be sold in early 2011 at a cost of 20,000. In its income statement for the year ended December 31, 2010, what amount of impairment loss should Japster report for the machine? a. 1,605,000 b. 1,645,000 c. 1,625,000 d. 3,230,000 Solution: Cost January 1, 2006 Accumulated Depreciation 12/31/2010 (325,000 x 5) Carrying amount December 31, 2010 Estimated cost of sale Impairment loss Chapter 6- Intangible Assets 1. Icecool Company purchased a patent on January 1, 2005 for 5,275,000. The original useful life was estimated to be 20 years. However, in December 2010, Icecools controller received information proving conclusively that the product protected by the Icecool patent would be obsolete within four years. Accordingly, decided to write off the unamortized portion of the patent cost over five years beginning in 2010. What is the patent amortization for 2010? (Practical Accounting 1, 2010 edition, Valix, Page 643, Problem 37-7, revised by Mariztine B. Mirandilla) a. 3,956,250 b. 791,250 c. 1,318,750 d. 263,750 Solution: Cost January 1, 2005 Accumulated amortization December 31,2009 (5,275,000/20 x 5)

3,250,000 1,625,000 1,625,000 20,000 1,605,000

5,275,000 1,318,750

Carrying amount January 1, 2010 Amortization for 2010 (3,956,250/5)

3,956,250 791,250

2. The Reinie purchased another entity for 2,500,000 cash. A schedule of the fair value of entitys assets and liabilities as the purchase date follows: Cash Accounts Receivable Inventory Property, Plant and equipment Current Liabilities Note Payable- Bank Net assets at fair value 25,000 100,000 1,250,000 1,500,000 525,000 1,000,000

2,875,000 1,525,000 1,350,000

What is the goodwill arising from the acquisition? (Practical Accounting 1, 2010 edition, Valix, Page 647, Problem 37-13, revised by Mariztine B. Mirandilla) a. b. c. d. 1,150,000 2,500,000 1,350,000 No Goodwill

Solution: Acquisition cost Net Asset Acquired Goodwill

2,500,000 (1,350,000) 1,150,000

3. On January 1, 2007, Sunnie Company purchased a patent for a new consumer product for 700,000. At the time of purchase, the patent was valid for 15years. However, the patents useful life was estimated to be only 10 years due to competitive nature of the product. On December 31,2010, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during 2010 if amortization is recorded at the end of each year? (Practical Accounting 1, 2010 edition, Valix, Page 644, Problem 37-9, revised by Mariztine B. Mirandilla) a. 210,000 b. 700,000 c. 490,000

d. 560,000 Solution: Acquisition cost Amortization for 2007,2008 and 2009 (700,000/10 x 3) Carrying amount January 1,2010

700,000 (210,000) 490,000

4. Buko Company purchased Coconut Company for 4,000,000 cash. Coconut Company had total liabilities of 2,000,000. Buko Companys assessment of fair value it obtained when it purchased Coconut Company is as follows: Cash Inventory In-process research and development Assembled workforce 500,000 1,250,000 3,000,000 1,000,000

What is the goodwill arising from the acquisition?(Practical Accounting 1, 2010 edition, Valix, Page 648, Problem 37-15, revised by Mariztine B. Mirandilla

a. b. c. d.

2,000,000 4,750,000 2,750,000 1,250,000

Solution: Cash Inventory In-process research and development Total Assets Total Liabilities Net Assets Acquisition cost Net Asset Acquired Goodwill

500,000 1,250,000 3,000,000 4,750,000 2,000,000 2,750,000 4,000,000 (2,750,000) 1,250,000

5.

On December 31,2010, Mars Company purchased for 20 per share all 300,000 of Milky Way Companys outstanding ordinary shares. On this date. Milky Ways statement of financial

position showed net assets of 5,250,000. Additionally, the fair value of Milky ways identifiable assets on this date was 500,000 in excess of their carrying amount. In Star Companys December 31, 2010 consolidated statement of financial position, what amount should be reported as goodwill?(Practical Accounting 1, 2010 edition, Valix, Page 647, Problem 37-18, revised by Mariztine B. Mirandilla) a. b. c. d. 11,500,000 10,800,000 10,560,000 10,300,000

Solution: Acquisition Cost (300,000 x 20) Fair Value of net assets acquired Goodwill Carrying amount of net assets Excess fair value of identifiable assets Fair value of net assets

6,000,000 (5,750,000) 250,000 5,250,000 500,000 5,750,000

Chapter 7- Investments in Equity Securities and Debt Securities 1. Apple Company had the following activities during the current year: Acquired 2,000 shares of Sony Company for 5,000,000 Sold an investment in Acer Company for 6,250,000 when the carrying value was 5,500,000. Acquired a 2,000,000, 4 year certificate of deposit from a bank. During the year, interest of 500,000 was paid to Apple. Collected dividends of 200,000 on share investments.

In the statement of cash flows, what amount should be reported as net cash used in investing activities?(Practical Accounting 1, 2010 edition, Valix, Page 1144, Problem 63-1, revised by Mariztine B. Mirandilla) a. b. c. d. 1,050,000 1,250,000 250,000 750,000

Solution: Purchase of investment Sale of investment Acquisition of 4-year certificate of deposit Net Cash used in investing activities

( 5,000,000) 6,250,000 ( 2,000,000) (750,000)

2. On January 1, 2009, Zanji Company purchased a long-term investment 200,000 ordinary shares of Zorro Company for 50 a share. On December 31, 2009, the market price of Zorros share was 40, reflecting a temporary decline in market price. On December 28, 2010, Zanji sold 75,000 shares of Zorro Company for 35 a share. For the year ended December 31, 2010, what should be reported as loss on disposal of longterm investment?(Practical Accounting 1, 2010 edition, Valix, Page 377, Problem 22-2, revised by Mariztine B. Mirandilla) a. b. c. d. 375,000 1,125,000 7,375,000 3,000,000

Solution: Sale Price (75,000 x 35) Cost of investment sold (75,000 x 50) Loss on disposal of investment

2,625,000 (3,750,000) (1,125,000)

3. On January 1, 2010, Phineas Company bought 15% of Ferb Companys ordinary shates outstanding for 8,000,000. Phineas appropriately accounts for this investment by the cost method. The following data concerning Ferb are available for the years ended December 31, 2010 and 2011. 2010 2,000,000 None 2011 6,000,000 10,000,000

Net Income Cash Dividend Paid

In its income statement for the year ended December 31, 2011, how much should Phineas report as income from this investment?(Practical Accounting 1, 2010 edition, Valix, Page 389, Problem 23-2, revised by Mariztine B. Mirandilla) a. 3,600,000 b. 1,500,000 c. 1,350,000

d.

900,000

Solution: Dividend Income (15% x 10,000,000)

1,500,000

4. On July 1,2010, Perry Company purchased 20,000 shares of Maya Companys 100,000 outstanding ordinary shares for 200 per share. On December 15, 2010, Eagle paid 400,000 in dividends to its ordinary shareholders. Mayas net income for the year ended December 31, 2010 was 1,500,000, earned evenly throughout the year. In its 2010 income statement, what amount of income from the investment should Perry report?(Practical Accounting 1, 2010 edition, Valix, Page 393, Problem 23-7, revised by Mariztine B. Mirandilla) a. 2,000,000 b. 150,000 c. 1,350,000 d. 1,500,000 Solution: Interest acquired (20,000/100,000) Share in net income from July 1 to December 31, 2010 (1,500,000 x 6/12 x 20%)

20% 150,000

5. On January 1, 2010, Marie Company purchased 40% of outstanding ordinary shares of Lester Company paying 5,000,000 when the book value of the net assets of Lester equalled 10,250,000. The difference was attributed to equipment which had a book value of 1,700,000 and a fair value of 3,000,000 and to building with a book value 4,400,000 and a fair value of 5,600,000. The remaining useful life of the equipment and building was 4 years and 12 years respectively. During 2010, Lester reported net income of 2,650,000 and paid dividends of 1,300,000. What is the carrying amoung of the investment in Lester Company on December 31,2010?(Practical Accounting 1, 2010 edition, Valix, Page 407, Problem 23-22, revised by Mariztine B. Mirandilla) a. 900,000 b. 5,370,000 c. 1,350,000 d. 6,750,000 Solution: Acquisition Cost Net assets acquitted (40% x 10,250,000)

5,000,000 4,100,000

Excess of cost Attributable to equipment (40% x 1,300,000) Attributable to building (40% x 1,200,000)

900,000 520,000 480,000 900,000 5,000,000 1,060,000 (520,000) (130,000) (40,000) 5,370,000

Acquisition Cost Net Income (40% x 2,650,000) Cash dividend (40% x 1,300,000) Amortization of excess: Equipment (520,000/4) Building (480,000/12) Carrying amount of investment December 31, 2010

Chapter 8- Investment Property, Other Non-Current Financial Assets and Non-Current Assets Held for Sale 1. Paradise Companys accounting policy with respect to investment properties is to measure them at fair value at the end of each reporting period. One of its investment properties was measured at 5,000,000 on December 31, 2010. The property had been acquired on January 1, 2010 for a total of 4,500,000, made up of 3,250,000 paid to the vendor, 725,000 paid to the local authority as a property transfer tax and 525,000 paid to professional advisers. The useful life of the property is 40 years. What is the amount of gain to be recognized in profit or loss for the year ended December 31, 2010 in respect of the investment property?(Practical Accounting 1, 2010 edition, Valix, Page 442, Problem 25-7, revised by Mariztine B. Mirandilla) a. 500,000 b. 2,775,000 c. 300,000 d. 600,000 Solution: Fair Value

5,000,000

Acquisition Cost Gain from change in fair value

4,500,000 500,000

Mikka Company acquired a building on January 1, 2009 for 10,000,000. At the date, the building had a useful life of 50 years. On December 31, 2009, the fair value of the building was 11,000,000 and on December 31, 2010, the fair value is 11,200,000. The building was classified as an investment property and accounted for under the cost model. What amounts should be carried in the statement of financial position on December 31, 2010 and recognized in profit or loss for 2010? Carrying Amount 10,000,000 9,600,000 9,600,000 10,000,000 Profit or Loss 200,000 expense No gain/ loss 200,000 expense 300,000 gain

a. b. c. d.

Solution: Cost Accumulated depreciation (10,000,000/50 x 2) Carrying amount December 31, 2010 Depreciation Expense for 2010 (10,000,000/50)

10,000,000 400,000 9,600,000 200,000

2. Chain Company purchased a 960,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, 2010 follows: Cash surrender value, January 1 Cash surrender value, December 31 Annual advance premium paid January 1 95,000 125,000 60,000

During 2010, dividend of 6,000 was applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 2010?(Practical Accounting 1, 2010 edition, Valix, Page 448, Problem 26-9, revised by Mariztine B. Mirandilla) a. 60,000 b. 30,000 c. 24,000 d. 6,000 Solution: Premium paid

60,000

Less: Increase in cash surrender value (125,000-95,000) Life insurance expense

30,000 30,000

On January 1, 2010, Mandaue Company adopted a plan to accumulate 3,000,000 by January 1, 2015. Mandaue plans to make 5 equal annual deposits that will earn interest at 9% compounded annually. Mandaue made the first deposit on December 31, 2010. The future value of an ordinary annuity of 1 at 9% for 5 periods is 5.98, and future value of an annuity due of 1 at 9% for 5 periods is 6.52. What amount must be deposited annually at the compound interest to accumulate the desired amount of 3,000,000? a. 450,000.00 b. 460,122.70 c. 501,672.24 d. 766,871.17 Solution: Annual deposit (3,000,000/5.98) 501,672.24 3. Dayanara Company owns three properties which are classified as investment properties. Details of the properties are as follows: Initial Cost 3,500,000 3,750,000 2,600,000 Fair Value 12/31/2009 3,900,000 3,625,000 2,625,000 Fair Value 12/31/2010 3,800,000 3,950,000 2,850,000

Property 1 Property 2 Property 3

Each property was acquired in 2006 with a useful life of 25 years. The entitys accounting policy is to use the fair value model for investment properties. What is the gain or loss to be recognized for the year ended December 31,2010? a. 450,000 gain b. 450,000 loss c. 100,000 loss d. 550,000 gain Solution: Fair Value 12/31/2010 Property 1 3,800,000 Property 2 3,950,000 Property 3 2,850,000 Net gain from change in fair value Fair Value 12/31/2009 3,900,000 3,625,000 2,625,000 Gain (loss) (100,000) 325,000 225,000 450,000