FINANCIAL ACCOUNTING AND REPORTING TEST BANK 80102016 - 3

PROBLEM 1 INVESTMENT IN ASSOCIATE

On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During
2016, the investee reported net income of P4,000,000 and paid dividend of P1,000,000.
On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the
investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying
amount. The equipment had a remaining life of 5 years.
The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on December 31, 2017.
1.

What amount of investment income should be recognized in 2016?

a.
b.
c.
d.

2.

What is the implied goodwill arising from the acquisition on January 1, 2017?
a.
b.
c.
d.

3.

3,000,000
2,000,000
2,500,000
0

What total amount of income should be recognized by the investor in 2017?

a.
b.
c.
d.

4.

400,000
100,000
500,000
300,000

2,000,000
2,500,000
2,300,000
1,800,000

What is the carrying amount of the investment in associate on December 31, 2017?
a.
b.
c.
d.

12,550,000
12,350,000
11,950,000
12,750,000

SOLUTION - PROBLEM 1
Question 1 Answer B
Dividend income (10% x 1,000,000)

100,000

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

Question 2 Answer B
Existing 10% interest remeasured at fair value
New 15% interest
Total cost January 1, 2017
Net assets acquired (25% x 36,000,000)
Excess of cost over carrying amount
Excess attributable to equipment whose fair value is greater than carrying amount

3,500,000
8,500,000
12,000,000
( 9,000,000)
3,000,000
(25% x 4,000,000)

Goodwill

( 1,000,000)
2,000,000

Question 3 Answer C
Share in net income (25% x 8,000,000)
Amortization of excess attributable to equipment (1,000,000 / 5 years)
Net investment income
Fair value of 10% interest
Historical cost
Remeasurement gain
Net investment income
Total income in 2017

2,000,000
( 200,000)
1,800,000
3,500,000
3,000,000
500,000
1,800,000
2,300,000

If the investment in associate is achieved in stages the old interest is remeasured at fair value through profit or loss.

Question 4 Answer A
Total cost 1/1/2017
Net investment income
Share in cash dividend (25% x 5,000,000)
Carrying amount 12/31/2017

PROBLEM 2 PROPERTY, PLANT AND EQUIPMENT

12,000,000
1,800,000
( 1,250,000)
12,550,000

January 1, 2016, an entity disclosed the following balances:

Land
Land improvements
Buildings
Machinery and equipment

4,000,000
1,300,000
20,000,000
8,000,000

During the current year, the following transactions occurred:

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

A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each share had a
quoted price of P45 on a stock exchange. The plant facility was carried on the sellers books at P1,600,000 for land and P5,400,000 for the building
at the exchange date. Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The building has an
expected life of forty years with a P200,000 residual value.

Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred were freight and unloading P100,000 and
installation P300,000. The equipment has a useful life of ten years with no residual value.

* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the entitys various plant locations. These expenditures had an
estimated useful life of fifteen years.
*

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

* A machine costing P200,000 on January 1, 2009 was scrapped on June 30, 2016. Straight line depreciation had been recorded on the basis of a 10-year
life with no residual value.
* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was P700,000 on January 1, 2013, and it was depreciated on the
straight line basis over an estimated useful life of eight years and a residual value of P50,000.
1. What is the total cost of land on December 31, 2016?
a.
7,800,000
b.
7,600,000
c.
8,000,000
d.
6,800,000
2. What is the total cost of land improvements on December 31, 2016?
a.
1,200,000
b.
3,600,000
c.
1,300,000
d.
2,500,000
3. What is the total cost of buildings on December 31, 2016?
a.
28,000,000
b.
25,400,000
c.
27,200,000
d.
27,000,000
4. What is total cost of machinery and equipment on December 31, 2016?
a.
12,400,000
b.
11,500,000
c.
11,000,000
d.
11,700,000

SOLUTION PROBLEM 5
Question 1 Answer A
Land January 1
Land acquired for cash
Land acquired by issuing shares (2/10 x 9,000,000)
Land December 31

4,000,000
2,000,000
1,800,000
7,800,000

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

9,000,000

Current appraized value :

Land
Building
Total

2,000,000
8,000,000
10,000,000

The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current
appraised value.

Question 2 Answer D
Land improvements January 1
Expenditures for parking lot, street and sidewalks
Balance December 31

1,300,000
1,200,000
2,500,000

Question 3 Answer C
Buildings January 1
Building acquired by issuing shares (8/10 x 9,000,000)
Balance December 31

Question 4 Answer B

20,000,000
7,200,000
27,200,000

Machinery and equipment - January 1

Machinery and equipment purchased
Freight and unloading
Installation
Machinery scrapped
Machinery sold
Machinery equipment December 31

8,000,000
4,000,000
100,000
300,000
( 200,000)
( 700,000)
11,500,000

PROBLEM 3 - INCOME TAX

An entity had the following financial statement elements for which the December 31, 2016 carrying amount is different from the December 31, 2016 tax
basis:
Carrying amount
Equipment
Accrued liability health care
Computer software cost

Tax basis

5,500,000
500,000
2,000,000

0
0

Difference

4,000,000
1,500,000
500,000
2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes.
The accrued liability is the estimated health care cost that was recognized as expense in 2016 but deductible for tax purposes when actually paid.
In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized
and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2016 for tax purposes.
The pretax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2016.
1.

What amount should be reported as current tax expense for 2016?

a.
b.
c.
d.

5,400,000
3,600,000
3,300,000
5,700,000

2. What amount should be reported as total tax expense for 2016?

a.
b.
c.
d.
3.

4,500,000
4,950,000
4,050,000
3,900,000

What amount should be reported as deferred tax liability on December 31, 2016?
a.
b.
c.
d.

1,050,000
1,200,000
900,000
150,000

4. What amount should be reported as deferred tax asset on December 31, 2016?
.
a.
750,000
b.
600,000
c.
150,000
d.
0
SOLUTION PROBLEM 3
Question 1 Answer B
Accounting income
Future taxable amount:
Equipment
Computer software
Future deductible amount:
Accrued liability
Taxable income
Current tax expense (30% x 12,000,000)

15,000,000
(1,500,000)
(2,000,000)
500,000
12,000,000
3,600,000

Question 2 Answer A
Total tax expense (30% x 15,000,000)

4,500,000

Question 3 Answer A
Deferred tax liability (30% x 3,500,000)

1,050,000

Question 4 Answer C
Deferred tax asset (30% x 500,000)

150,000

Page 7
PROBLEM 4 - BENEFIT COST
An entity provided the following pension plan information:
Projected benefit obligation January 1, 2016
Fair value of plan assets January 1, 2016
Pension benefits paid during the year
Current service cost for 2016
Past service cost for 2016 (vesting period 5 years)
Actual return on plan assets
Contribution to the plan
Actuarial loss due to change in assumptions on projected benefit obligation
Discount or settlement rate

3,500,000
2,800,000
250,000
1,750,000
425,000
180,000
1,500,000
200,000
10%

1. What is the employee benefit expense for the current year?

a.
b.
c.
d.

2,245,000
1,905,000
2,525,000
1,750,000

2. What is the net remeasurement loss for the current year?

a.
b.
c.
d.

200,000
100,000
300,000
400,000

3. What is the projected benefit obligation on December 31, 2016?

a.
b.
c.
d.

5,550,000
5,075,000
5,775,000
5,975,000

4. What is the fair value of plan assets on December 31, 2016?

a.
b.
c.
d.
5.

4,480,000
4,230,000
4,300,000
4,050,000

What amount should be reported as accrued benefit cost on December 31, 2016?
a.
b.
c.
d.

1,745,000
1,750,000
1,045,000
700,000

SOLUTION - PROBLEM 4
Question 1 Answer A
Current service cost
Past service cost
Interest expense (10% x 3,500,000)
Interest income (10% x 2,800,000)
Employee benefit expense

1,750,000
425,000
350,000
( 280,000)
2,245,000

Question 2 Answer C
Actual return
Interest income
Remeasurement loss on plan assets
Actuarial loss on PBO
Net remeasurement loss

180,000
280,000
100,000
200,000
300,000

Question 3 Answer D
PBO January 1
Current service cost
Past service cost
Interest expense
Actuarial loss
Benefits paid
PBO December 31

3,500,000
1,750,000
425,000
350,000
200,000
( 250,000)
5,975,000

Question 4 Answer B
FVPA January 1
Actual return
Contribution to the plan
Benefits paid
FVPA December 31

2,800,000
180,000
1,500,000
( 250,000)
4,230,000

Question 5 Answer A
FVPA December 31
PBO December 31
Prepaid/accrued benefit cost December 31

4,230,000
(5,975,000)
(1,745,000)

PROBLEM 5 - SHARE OPTIONS

On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par for P30 per share. The employees exercised the options
on January 1, 2019.
Quoted market prices of shares are as follows.
2016
2017
2018
2019

34
39
42
44

The service period is for two years beginning January 1, 2016. The fair value of the share options cannot be measured reliably.
1.What is the compensation expense for 2016?
a.
b.
c.
d.

400,000
200,000
300,000
800,000

2.What is the compensation expense for 2017?

a.
b.
c.
d.

1,800,000
1,000,000
1,400,000
400,000

3.What is the compensation expense for 2018?

a.200,000
b. 600,000
c. 400,000
d.
0
4. What amount should be credited to share premium upon exercise of the share options on January 1, 2019?
a.
b.
c.
d.

3,800,000
4,400,000
4,800,000
0

SOLUTION - PROBLEM 5
Question 1 Answer A
Question 2 Answer C
Question 3 Answer B
Quoted price
2016
2017

2016
2017
2018

34
39

(200,000 x 4/2)
(200,000 x 9)
(200,000 x 3)

Quoted price - 2018

42

Option price

Intrinsic value

30
30

4
9

Cumulative

Expense

400,000
1,800,000

400,000
1,400,000
600,000
2,400,000

Quoted price - 2017

Increase in market price in 2018

39
3

Question 4 Answer B
Option price (200,000 x 30)
Share options outstanding
Total consideration
Par value (200,000 x 20)
Share premium

6,000,000
2,400,000
8,400,000
4,000,000
4,400,000

PROBLEM 6 EARNINGS PER SHARE

An entity reported the following information on January 1, 2016:

Ordinary share capital, P10 par, 800,000 shares

Preference share capital, P50 par, 50,000 shares
12% Bonds payable

8,000,000
2,500,000
5,000,000

The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on preference shares are in arrears for two years.
The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.
Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the beginning and ending of 2016. The average market
price of the ordinary share was P30 per share and the market price on December 31, 2016 was P40 per share.
May 1
July 1
Oct. 1
Dec. 31

Issued 60,000 ordinary shares at P25 per share.

Purchased 100,000 ordinary shares at P15 to be held as treasury.
Converted bonds with face amount of P2,000,000.
The net income for 2016 was P5,000,000. The tax rate is 30%.

1. What is the amount of basic earnings per share?

a.
b.
c.
d.

6.02
5.26
5.72
5.42

2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a.
b.
c.
d.

530,000
500,000
590,000
560,000

3. What is the amount of diluted earnings per share?

a.
b.
c.
d.

5.52
4.20
4.07
3.97

SOLUTION - PROBLEM 6
Question 1 Answer C
Net income
Preference dividend (10% x 2,500,000)
Net income - ordinary
January 1
(800,000 x 12/12)
May
1
( 60,000 x 8/12)
July
1
(100,000 x 6/12)
October 1
( 2,000 x 80 x 3/12)
Average shares outstanding
Basic EPS (4,750,000 / 830,000)

5,000,000
( 250,000)
4,750,000
800,000
40,000
( 50,000)
40,000
830,000
5.72

Question 2 Answer A
Share options
Treasury shares (1,800,000 / 30)
Incremental ordinary shares from share options
Ordinary shares from conversion of preference shares
Ordinary shares from conversion of bonds payable (5,000 x 80)
Potential ordinary shares

90,000
( 60,000)
30,000
100,000
400,000
530,000

Question 3 Answer C
Incremental EPS on Preference shares (250,000 / 100,000)
Interest on bonds not converted (3,000,000 x 12% x 70%)
Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%)
Total interest expense
Incremental EPS on bonds (378,000 /400,000)

2.50
252,000
126,000
378,000
.94

Basic EPS
Share options
Diluted EPS
Bonds payable
Diluted EPS
Preference shares
Diluted EPS

Net income

Shares

EPS

4,750,000

830,000
30,000
860,000
360,000
1,220,000
100,000
1,320,000

5.72

4,750,000
378,000
5,128,000
250,000
5,378,000

Potential ordinary shares bonds

Reported in basic EPS
Reported in diluted EPS

5.52
4.20
4.07
400,000
(40,000)
360,000

PROBLEM 7 STATEMENT OF CASH FLOWS

An entity presented the following comparative financial information:
2017
Property, plant and equipment
Accumulated depreciation
Long-term investments
Prepaid expenses
Merchandise inventory
Accounts receivable, net of allowance
Cash
Share capital-ordinary
Retained earnings
Long-term note payable
Accounts payable
Dividend payable
Accrued expenses

2,190,000
450,000
225,000
351,000
1,950,000
1,560,000
690,000
3,000,000
906,000
1,275,000
309,000
201,000
825,000
2017

Net credit sales

Cost of goods sold
Gross profit
Expenses, including income tax
Net income

7,020,000
(3,915,000)
3,105,000
(2,586,000)
519,000

2016
1,440,000
270,000
315,000
1,260,000
1,080,000
640,000
2,400,000
688,000
1,095,000
282,000
2016
3,753,000
(1,881,000)
1,872,000
(1,374,000)
498,000

Accounts receivable and accounts payable relate to merchandise for sale in the normal course of business. The allowance for bad debts was the same at the
end of 2017 and 2016 and no receivables were charged against the allowance.
Accounts payable are recorded net of any discount and are always paid within the discount period.
The proceeds from the note payable were used to finance the acquisition of property, plant and equipment. Ordinary shares were sold to provide additional
working capital.
1. What amount should be reported as net cash provided by operating activities in 2017?
a.
b.
c.
d.

345,000
165,000
546,000
510,000

2. What amount should be reported as net cash used in investing activities in 2017?
a.
b.
c.
d.

750,000
225,000
975,000
750,000

3. What amount should be reported as net cash provided by financing activities in 2017?
a.
b.
c.
d.

600,000
780,000
750,000
680,000

SOLUTION PROBLEM 7
Question 1 Answer A
Net income
Depreciation (450,000 - 27,000)
Increase in prepaid expenses
Increase in inventory
Increase in accounts receivable
Increase in accounts payable
Increase in accrued expenses
Net cash provided - operating

519,000
180,000
( 36,000)
(690,000)
(480,000)
27,000
825,000
345,000

Question 2 Answer C
Increase in PPE
Increase in long-term investments
Net cash used - investing

(750,000)
(225,000)
(975,000)

Question 3 Answer D
Dividend paid in 2017
Proceeds from share capital
Proceeds from note payable
Net cash provides - financing

(100,000)
600,000
180,000
680,000

Retained earnings - 2016

Net income - 2017
Total
Retained earnings - 2017
Dividend declared in 2017
Dividend payable 2017
Dividend paid in 2017

688,000
519,000
1,207,000
( 906,000)
301,000
( 201,000)
100,000

PROBLEM 8 ACCOUNTS RECEIVABLE

An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful accounts based on 5% of annual credit sales. On
January 1, 2016, the entity changed the method of determining the allowance for doubtful accounts using an aging schedule.
In addition, the entity writes off all accounts receivable that are over 1 year old. The following information relates to the years ended December 31, 2013,
2014, 2015 and 2016:

Credit sales
Collections excluding recovery
Accounts written off during year
Recovery of accounts written off

2016

2015

2014

2013

15,000,000
11,700,000
200,000
90,000

9,500,000
8,200,000
120,000
40,000

8,000,000
6,700,000
80,000
25,000

6,000,000
4,500,000
None
None

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

Between 16 and 50 days
Between 51 and 100 days
Between 101 and 200 days
Between 201 and 365 days
Over 365 days to be written off

3,000,000
1,500,000
1,200,000
800,000
400,000
100,000

98%
80%
75%
50%
20%
0%

1. What was the allowance for doubtful accounts on January 1, 2016?

a.
b.
c.
d.

1,175,000
1,040,000
1,240,000
975,000

2. What amount should be reported as allowance for doubtful accounts on December 31, 2016?
a.
b.
c.
d.

1,380,000
1,480,000
2,420,000
1,060,000

3. What amount should be reported as doubtful accounts expense for 2016?

a.
b.
c.
d.

550,000
750,000
450,000
200,000

4. What is the net realizable value of accounts receivable on December 31,2016?

a.
b.
c.
d.

6,900,000
7,000,000
5,520,000
5,620,000

SOLUTION PROBLEM 8
Question 1 Answer B
Doubtful accounts expense 2013, 2014 and 2015 (5% x 23,500,000)
Accounts written off 2014 and 2015
Recovery of accounts written off 2014 and 2015
Allowance for doubtful accounts January 1, 2016

1,175,000
( 200,000)
65,000
1,040,000

Question 2 Answer A
Less than 16 days
Between 16 and 50
Between 51 and 100
Between 101 and 200
Between 201 and 365
Allowance for doubtful accounts 12/31/2016
Question 3 Answer A

( 3,000,000 x 2%)
(1,500,000 x 20%)
(1,200,000 x 25%)
( 800,000 x 50%)
( 400,000 x 80%)

60,000
300,000
300,000
400,000
320,000
1,380,000

Allowance January 1, 2016

Recovery 2017
Doubtful accounts expense (SQUEEZE)
Total
Writeoffs (200,000 + 100,000)
Allowance December 31, 2016

1,040,000
90,000
550,000
1,680,000
( 300,000)
1,380,000

Question 4 Answer C
Accounts receivable December 31, 2016
Allowance for doubtful accounts December 31, 2016
Net realizable value

6,900,000
(1,380,000)
5,520,000

PROBLEM 9 - SALES TYPE LEASE

An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the
equipment will revert to the lessor.
On January 1, 2016, an equipment is leased to a lessee with the following information:
Cost of equipment to the entity
Fair value of equipment
Residual value unguaranteed
Initial direct cost
Annual rental payable in advance
Useful life and lease term
Implicit interest rate
PV of 1 at 12% for 8 periods
PV of an ordinary annuity of 1 at 12% for 8 periods
PV of an annuity due of 1 at 12% for 8 periods
First lease payment
1.

What is the gross investment in the lease?

a.
b.
c.
d.

2.

7,800,000
7,200,000
6,600,000
6,900,000

What is the net investment in the lease?

a.
b.
c.
d.

3.

3,500,000
5,500,000
600,000
200,000
900,000
8 years
12%
0.40
4.97
5.56
January 1, 2016

5,004,000
5,244,000
5,500,000
5,740,000

What is the total financial revenue?

a.
2,196,000
b.
2,796,000
c.
2,556,000
d.
1,956,000

4. What amount should be recognized as interest income for 2016?

a.
b.
c.
d.

600,480
492,480
536,760
521,280

5. What amount of cost of goods sold should be recognized in recording the lease?
a.
b.
c.
d.

3,260,000
3,500,000
3,740,000
3,460,000

SOLUTION PROBLEM 9
Question 1 Answer A
Gross rentals (900,000 x 8)
Residual value
Gross investment

7,200,000
600,000
7,800,000

Question 2 Answer B
PV of rentals (900,000 x 5.56)
PV of residual value (600,000 x .40)
Net investment

5,004,000
240,000
5,244,000

Question 3 Answer C
Gross investment
Not investment
Total financial revenue

7,800,000
5,244,000
2,556,000

Question 4 Answer D
Net investment 1/1/2016
Advance payment on 1/1/2016
Balance January 1, 2016

5,244,000
( 900,000)
4,344,000

Interest income for 2016 (12% x 4,344,000)

521,280

Question 5 Answer D
Cost of equipment
PV of unguaranteed residual value
Initial direct cost
Cost of goods sold

3,500,000
( 240,000)
200,000
3,460,000

Sales, excluding present value of unguaranteed residual value

Cost of goods sold
Gross profit on sale

5,004,000
3,460,000
1,544,000

PROBLEM 10 CASH AND SHARE ALTERNATIVE

On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P100 in one years time, or a cash payment equal to the market value of 40,000 shares on December 31,
2016.
At grant date on January 1, 2016, the market price of each share is P120 and on the date of settlement on December 31, 2016, the market price of each
share is P150.
1. What is the initial measurement of the building?
a.
b.
c.
d.
2.

8,000,000
6,000,000
7,000,000
5,000,000

What is the equity component arising from the purchase of the building with share and cash alternative?
a
b
c
d

3,000,000
3,200,000
2,000,000
1,000,000

3. What is the interest expense to be recognized on December 31, 2016 if the seller has chosen the cash alternative?
a
b
c
d

1,200,000
2,700,000
1,000,000
0

4. What is the share premium on December 31, 2016 if the seller has chosen the share alternative?
a
b
c
d

3,000,000
1,500,000
1,000,000
2,500,000

SOLUTION - PROBLEM 10
Question 1 Answer A
Cost of building equal to cash price

8,000,000

Question 2 Answer B
Cash price of building
Fair value of liability (40,000 shares x 120)
Equity component

8,000,000
(4,800,000)
3,200,000

Question 3 Answer A
Fair value of liability 12/31/2016 (40,000 x 150)
Fair value of liability 1/1/2016
Interest expense

6,000,000
4,800,000
1,200,000

Question 4 Answer A
Fair value of compound instrument equal to cash price of building
Par value of shares (50,000 x 100)
Share premium

8,000,000
5,000,000
3,000,000

PROBLEM 11 STATEMENT OF FINANCIAL POSITION

The following trial balance of an entity on December 31, 2016 has been adjusted except for income tax expense.
Cash
Accounts receivable

6,000,000
14,000,000

Inventory
Property, plant and equipment
Accounts payable
Income tax payable
Preference share capital
Ordinary share capital
Share premium
Retained earnings January 1
Net sales and other revenue
Cost of goods sold
Expenses
Income tax expense

10,000,000
25,000,000
9,000,000
6,000,000
3,000,000
15,000,000
4,000,000
9,000,000
80,000,000
48,000,000
12,000,000
11,000,000
126,000,000

__________
126,000,000

During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all types of revenue. Inventory
and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end,
costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on December 31, 2017.
1. What amount should be reported as current assets on December 31, 2016?
a.
b.
c.
d.

29,200,000
29,700,000
29,500,000
30,000,000

2. What amount should be reported as current liabilities on December 31, 2016?

a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000
3. What is the net income for 2016?
a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000
4. What amount should be reported as total shareholders equity on December 31, 2016?
a.
b.
c.
d.

40,000,000
37,000,000
45,000,000
42,000,000

SOLUTION - PROBLEM 11
Question 1 Answer A
Cash
Accounts receivable
Inventory (10,000,000 - 500,000 - 300,000)
Total current assets

6,000,000
14,000,000
9,200,000
29,200,000

Question 2 Answer C
Net sales and other revenue
Cost of goods sold
Expenses
Income before tax
Tax expense (30% x 20,000,000)
Net income
Tax expense
Payment during year
Income tax payable
Accounts payable
Income tax payable
Redeemable preference
Total current liabilities
Accounts payable per book
Goods in transit FOB destination
Goods held on consignment
Adjusted accounts payable

80,000,000
( 48,000,000)
( 12,000,000)
20,000,000
( 6,000,000)
14,000,000
6,000,000
(5,000,000)
1,000,000
8,200,000
1,000,000
3,000,000
12,200,000
9,000,000
( 500,000)
( 300,000)
8,200,000

Question 3 Answer B
Net income

14,000,000

Question 4 Answer D
Ordinary share capital
Share premium
Retained earnings
Total shareholders equity

15,000,000
4,000,000
23,000,000
42,000,000

Retained earnings January 1

Net income
Total retained earnings

9,000,000
14,000,000
23,000,000

PROBLEM 12 STATEMENT OF COMPREHENSIVE INCOME

An entity reported the following data for the current year:
Net sales
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Gain from expropriation of land
Income tax
Income from discontinued operations
Unrealized gain on equity investment at FVOCI
Unrealized loss on futures contract designated as a cash flow hedge
Increase in projected benefit obligation due to actuarial assumptions
Foreign translation adjustment debit
Revaluation surplus

9,500,000
4,000,000
1,000,000
1,200,000
700,000
500,000
800,000
600,000
900,000
400,000
300,000
100,000
2,500,000

1. What amount should be reported as income from continuing operations?

a.
b.
c.
d.

3,100,000
2,300,000
1,800,000
2,900,000

2. What net amount should recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d.
800,000
3. What net amount in OCI should be presented as may not be recycled to profit or loss?
a.
b.
c.
d.

3,400,000
2,700,000
3,700,000
3,100,000

4. What amount should be reported as net income?

a.
b.
c.
d.

2,900,000
2,300,000
3,100,000
2,400,000

5. What amount should be reported as comprehensive income?

a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000
SOLUTION - PROBLEM 12
Question 1 Answer B
Net sales
Cost of goods sold
Gross income
Gain from expropriation of land
Total income
Selling expenses
Administrative expenses
Interest expense
Income before tax
Tax expense
Income from continuing operations

9,500,000
(4,000,000)
5,500,000
500,000
6,000,000
1,000,000
1,200,000
700,000

2,900,000
3,100,000
( 800,000)
2,300,000

Question 2 Answer A
Unrealized gain on equity investment at FVOCI
Unrealized loss cash flow hedge
Actuarial loss increase in PBO
Translation adjustment debit
Revaluation surplus
Net gain - OCI

900,000
( 400,000)
( 300,000)
( 100,000)
2,500,000
2,600,000

Question 3 Answer D
Unrealized gain on equity investment at FVOCI
Actuarial loss on PBO
Revaluation surplus
Net amount of OCI not reclassified to profit or loss

900,000
( 300,000)
2,500,000
3,100,000

Question 4 Answer A
Income from continuing operations
Income from discontinued operations
Net income

2,300,000
600,000
2,900,000

Question 5 Answer A
Net income
Net gain OCI
Comprehensive income

2,900,000
2,600,000
5,500,000

PROBLEM 13 - INVENTORY
An entity sells a new product. During a move to a new location, the inventory records for the product were misplaced. The bookkeeper has been able
to gather some data for the purchases and sales records. The July purchases are as follows:

July

5
10
15
25

Units

Unit cost

Total cost

10,000
12,000
15,000
14,000

65
70
60
55

650,000
840,000
900,000
770,000

On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units at P100 per unit. Roshe Company has always used
a perpetual FIFO inventory costing system. Gross profit on sales for July was P2,400,000.
1. What was the cost of the inventory on July 31?
a. 3,600,000
b. 1,670,000
c. 770,000
d. 950,000
2. What was the cost of inventory on July 1?
a.
b.
c.
d.

1,390,000
2,400,000
950,000
760,000
3.

What is the number of units available on July 1?

a.
b.
c.
d.

34,000
26,000
10,000
9,000

SOLUTION - PROBLEM 13
Question 1 Answer D
July 15 ( 3,000 x 60)
25 (14,000 x 55)
Inventory July 31

180,000
770,000
950,000

Question 2 Answer A
Sales
Gross profit
Cost of goods sold

6,000,000
2,400,000
3,600,000

Inventory July 1 (SQUEEZE)

Purchases for July
Goods available for sale
Inventory July 31
Cost of goods sold

1,390,000
3,160,000
4,550,000
( 950,000)
3,600,000

Question 3 Answer B
July 1 inventory (SQUEEZE)
July purchases
Total units available
July 31 inventory
Units sold in July

26,000
51,000
77,000
(17,000)
60,000

Page 27
PROBLEM 14 BOND INVESTMENT AT FVOCI
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2016 with interest payable on June 30 and December 31. The bonds were purchased
for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash
flows and sell the bonds in the open market. On December 31, 2016, the bonds were quoted at 106.
1. What amount of interest income should be reported for 2016?
a.
b.
c.
d.

400,000
200,000
364,560
363,940

2. What is the adjusted carrying amount of the investment on December 31, 2016?
a.
b.
c.
d.

5,300,000
5,171,940
5,174,560
5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2016?
a. 300,000
b. 125,440
c. 128,060
d.
92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for 2016?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
Page 28
SOLUTION - PROBLEM 13
Date

Interest received

1/1/16
6/30/16
12/31/16

Interest income

200,000
200,000

Amortization

182,280
181,660

Carrying amount

17,720
18,340

5,208,000
5,190,280
5,171,940

Question 1 Answer D
Interest January to June
Interest July to December
Interest income for 2016

182,280
181,660
363,940

Question 2 Answer A
Market value on December 31, 2016 (5,000,000 x 106)

5,300,000

Question 3 Answer C
Market value on December 31, 2016
Carrying amount December 31, 2016 (see table of amortization)
Unrealized gain - OCI

5,300,000
5,171,940
128,060

Question 4 Answer C
Market value on December 31, 2016
Acquisition cost, excluding transaction cost
Gain from change in fair value
Interest income (8% x 5,000,000)
Total income

5,300,000
5,100,000
200,000
400,000
600,000

PROBLEM 15 LAND AND BUILDING

An entity was incorporated on January 1, 2016 but was unable to begin manufacturing activities until August 1, 2016 because new factory facilities were
not completed until that date. The entity provided the following information during the year:
2016
Jan. 31
Feb. 28
Apr. 1
May 1
May 1
May 1
Aug. 1
Aug. 1
Dec. 31

Land and dilapidated building

Cost of removing building
Legal fees
Fire insurance premium payment
Special tax assessment for streets
Partial payment of new building construction
Final payment on building construction upon completion
General expenses
Asset writeup

2,000,000
40,000
60,000
54,000
45,000
1,500,000
1,500,000
300,000
750,000

To acquire the land and building, the entity paid P1,000,000 cash and 10,000 ordinary shares of P100 par value share which are very actively traded
at P170.

When the old building was removed, the entity paid P40,000, but also received P15,000 from the sale of salvaged material.

Legal fees covered the following:

Cost of organization
Examination of title covering purchase of land
Legal work in connection with the building construction

25,000
20,000
15,000

The fire insurance premium covered premiums for a three-year term beginning May 1, 2016.

General expenses covered the following for the period January 1, 2016 to August 1, 2016:
President's salary
Plant superintendent covering supervision of new building

200,000
100,000

Because of the rising land costs, the president was sure that the land was worth at least P750,000 more than what it cost the company.

1. What is the total cost of the land?

a. 2,700,000
b. 2,720,000
c. 2,065,000
d. 2,765,000
2. What is the total cost of the building?
a. 3,140,000
b. 3,144,500
c. 3,119,500
d. 3,000,000
SOLUTION - PROBLEM 15
Question 1 Answer D
Cash
Ordinary shares issued at fair value (10,000 x 170)
Initial cost of land
Examination of title
Special tax assessment
Total cost of land

1,000,000
1,700,000
2,700,000
20,000
45,000
2,765,000

Question 2 Answer B
Cost of removing old building
Sale of salvaged material
Legal work in connection with building construction
Fire insurance (54,000 / 3 x 3/12)
Plant superintendent
Partial payment on construction
Final payment on construction upon completion
Total cost of building

30. Demsel Company provided the following data on December 31, 2016:
Checkbook balance
Bank statement balance
Check drawn on Demsels account, payable to supplier, dated and
recorded on December 31, 2016 but not mailed until January 15, 2017
Cash in sinking fund
Money market, 120 days due January 15, 2017
Investment in ordinary shares at FVPL
Deposit in bank closed by BSP
Investment in redeemable preference shares purchased on December 1, 2016
with redemption date on February 28, 2017

3,000,000
4,000,000
300,000
1,500,000
2,200,000
500,000
600,000
300,000

What amount should be reported as cash and cash equivalents on December 31, 2016?
a.
b.
c.

3,300,000
3,600,000
5,800,000

40,000
15,000)
15,000
4,500
100,000
1,500,000
1,500,000
3,144,500

d.
31.

4,600,000

On January 1, 2016, Nicole Company purchased equity securities to be held as available for sale. On December 31, 2016, the cost and market
value were:

Security X
Security Y
Security Z

Cost

Market

2,000,000
3,000,000
5,000,000

2,400,000
3,500,000
4,900,000

On July 1, 2017, the entity sold Security X for P2,500,000. What amount of gain on sale of AFS securities should be reported in the 2017 income
statement?
a.
b.
c.
d.
32.

500,000
400,000
100,000
0

Carl Company purchased 10% of another entitys 500,000 outstanding shares on January 1, 2016 for P1,000,000. On December 31, 2016, the entity
purchased additional 100,000 shares of the entity for P3,000,000. There was no goodwill or excess fair value as a result of either acquisition. The fair
value of the 10% interest was P1,800,000 on December 31, 2016. The investee reported earnings of P6,000,000 for 2016. What amount should be
reported as investment in associate on December 31, 2016?
a.
4,000,000
b.
4,800,000
c.
6,600,000
d. 5,800,000

33. Dianne Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new technology
Design of tools, jigs, molds and dies involving new technology
Modification of the formulation of a new process
Trouble shooting in connection with breakdowns during commercial Production
Seasonal and other periodic changes to existing product
What amount should Rosalie report as research and development expense?
a.
b.
c.
d.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

4,700,000
3,700,000
6,000,000
5,000,000

B
B
A
A
B
C
A
B
B
C
D
C
C
D
B
C
A
D
A
B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
A
D
B
C
A
A
A
B
A
B
B
C
C
D
D
A
A
A
C

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.

B
D
D
D
C
C
B
C
C
D
C
B
B
A
A
C
A
D
D
D

61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.

A
C
A
D
D
C
B
A
D
C
C
A
A
D
D
A
B
B
B
C

2,000,000
1,700,000
1,000,000
1,500,000
1,300,000