FINANCIAL ACCOUNTING AND REPORTING

PROBLEM 1 – STATEMENT OF FINANCIAL POSITION

The following trial balance of an entity on December 31, 2018 has been adjusted except for income tax
expense.
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 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, 2019.

1. What amount should be reported as current assets on December 31, 2018?

a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000

2. What amount should be reported as current liabilities on December 31, 2018?

a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000

3. What is the net income for 2018?

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, 2018?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
 Page 2

SOLUTION - PROBLEM 1

Question 1 Answer A

Cash 6,000,000
Accounts receivable 14,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000

Question 2 Answer C

Net sales and other revenue 80,000,000

Cost of goods sold ( 48,000,000)
Expenses ( 12,000,000)
Income before tax 20,000,000
Tax expense (30% x 20,000,000) ( 6,000,000)
Net income 14,000,000

Tax expense 6,000,000

Payment during year (5,000,000)
Income tax payable 1,000,000

Accounts payable 8,200,000

Income tax payable 1,000,000
Redeemable preference 3,000,000
Total current liabilities 12,200,000

Accounts payable per book 9,000,000

Goods in transit FOB destination ( 500,000)
Goods held on consignment ( 300,000)
Adjusted accounts payable 8,200,000

Question 3 Answer B

Net income 14,000,000

Question 4 Answer D

Ordinary share capital 15,000,000

Share premium 4,000,000
Retained earnings 23,000,000
Total shareholders’ equity 42,000,000

Retained earnings – January 1 9,000,000

Net income 14,000,000
Total retained earnings 23,000,000
 Page 3

PROBLEM 2 – INVESTMENT IN ASSOCIATE

An entity acquired 40% of another entity’s shares on January 1, 2018 for P15,000,000. The investee’s
assets and liabilities at that date were as follows:

Carrying amount Fair value

Cash 1,000,000 1,000,000
Accounts receivable 4,000,000 4,000,000
Inventory – FIFO 8,000,000 9,000,000
Land 5,500,000 7,000,000
Plant and equipment – net 14,000,000 22,000,000
Liabilities 7,000,000 7,000,000

The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2018. The
entity sold the land in 2019 for P8,000,000 and reported a gain of P2,500,000.

The investee reported net income of P3,000,000 for 2018 and P5,000,000 for 2019. The investee paid
P1,000,000 cash dividend on December 31, 2018 and P2,000,000 on December 31, 2019.

1. What is the implied a goodwill arising from the acquisition?

a. 200,000
b. 600,000
c. 800,000
d. 400,000

2. What is the investment income for 2018?

a. 880,000
b. 480,000
c. 400,000
d. 580,000

3. What is the investment income for 2019?

a. 1,080,000
b. 2,280,000
c. 1,680,000
d. 2,880,000

4. What is the carrying amount of the investment in associate on December 31, 2019?
a. 15,360,000
b. 15,000,000
c. 16,560,000
d. 13,800,000
 Page 4

SOLUTION – PROBLEM 2

Question 1 Answer B

Cash 1,000,000
Accounts receivable 4,000,000
Inventory 8,000,000
Land 5,500,000
Plant and equipment 14,000,000
Liabilities ( 7,000,000)
Net assets at carrying amount 25,500,000

Acquisition cost 15,000,000

Net assets acquired (40% x 25,500,000) (10,200,000)
Excess of cost 4,800,000
Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%) ( 400,000)
Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) ( 3,200,000)
Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%) ( 600,000)
Implied goodwill 600,000
s

Question 2 Answer B

Share in net income for 2018 (40% x 3,000,000) 1,200,000

Amortization of excess – inventory ( 400,000)
Amortization of excess – plant and equipment (3,200,000 / 10 years) ( 320,000)
Investment income for 2018 480,000

Question 3 Answer A

Share in net income for 2019 (40% x 5,000,000) 2,000,000

Amortization of excess – plant and equipment ( 320,000)
Amortization of excess – land ( 600,000)
Investment income for 2019 1,080,000

Question 4 Answer A

Acquisition cost 15,000,000

Investment income 2018 480,000
Cash dividend for 2018 (40% x 1,000,000) ( 400,000)
Investment income for 2019 1,080,000
Cash dividend for 2019 (40% 2,000,000) ( 800,000)
Carrying amount – December 31, 2019 15,360,000

Page 5

PROBLEM 3 – BOND INVESTMENT AT FVOCI

An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2018 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, 2018, the bonds were quoted at 106.

1. What amount of interest income should be reported for 2018?

a. 400,000
b. 200,000
c. 364,560
d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2018?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2018?
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
2018?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
 Page 6

SOLUTION - PROBLEM 3

Date Interest received Interest income Amortization Carrying amount

Jan. 1, 2018 5,208,000

Jan. 30, 2018 200,000 182,280 17,720 5,190,280
Dec. 31, 2018 200,000 181,660 18,340 5,171,940

Question 1 Answer D

Interest January to June 182,280

Interest July to December 181,660
Interest income for 2018 363,940

Question 2 Answer A

Market value on December 31, 2018 (5,000,000 x 106) 5,300,000

Question 3 Answer C

Market value on December 31, 2018 5,300,000

Carrying amount December 31, 2018 (see table of amortization) 5,171,940
Unrealized gain - OCI 128,060

Question 4 Answer C

Market value on December 31, 2018 5,300,000

Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income 600,000
 Page 7

PROBLEM 4 - INCOME TAX

An entity had the following financial statement elements for which the December 31, 2018 carrying
amount is different from the December 31, 2018 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 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 2018 but
deductible for tax purposes when actually paid.

In January 2018, 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 2018 for tax purposes.

The pretax accounting income for 2018 is P15,000,000. The income tax rate is 30% and there are no
deferred taxes on January 1, 2018.

1. What amount should be reported as current tax expense for 2018?

a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

2. What amount should be reported as total tax expense for 2018?

a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2018?
a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000

4. What amount should be reported as deferred tax asset on December 31, 2018?
.
 a. 750,000
b. 600,000
c. 150,000
d. 0

Page 8

SOLUTION – PROBLEM 4

Question 1 Answer B

Accounting income 15,000,000

Future taxable amount:
Equipment
Computer software (1,500,000)
Future deductible amount: (2,000,000)
Accrued liability 500,000
Taxable income 12,000,000

Current tax expense (30% x 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 9

PROBLEM 5 - BENEFIT COST

An entity provided the following pension plan information:

Projected benefit obligation – January 1 3,500,000
Fair value of plan assets – January 1 2,800,000
Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%
1. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000

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

a. 200,000
b. 100,000
c. 300,000
d. 400,000

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

a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000

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

a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 4,050,000
1. What amount should be reported as accrued benefit cost on December 31?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d. 700,000

Page 10

SOLUTION - PROBLEM 5

Question 1 Answer A

Current service cost 1,750,000

Past service cost 425,000
Interest expense (10% x 3,500,000) 350,000
Interest income (10% x 2,800,000) ( 280,000)
Employee benefit expense 2,245,000

Question 2 Answer C

Actual return 180,000

Interest income 280,000
Remeasurement loss on plan assets 100,000
Actuarial loss on PBO 200,000
Net remeasurement loss 300,000

Question 3 Answer D

PBO – January 1 3,500,000

Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid ( 250,000)
PBO – December 31 5,975,000
Question 4 Answer B

FVPA – January 1 2,800,000

Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000)
FVPA – December 31 4,230,000

Question 5 Answer A

FVPA – December 31 4,230,000

PBO – December 31 (5,975,000)
Prepaid/accrued benefit cost – December 31 (1,745,000)

Page 11

PROBLEM 6 - 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, 2017, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2016

1. What is the gross investment in the lease?

a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000

2. What is the net investment in the lease?

 a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000

3. 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 2017?

a. 600,480
b. 492,480
c. 536,760
d. 521,280

5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000

Page 12

SOLUTION – PROBLEM 6

Question 1 Answer A

Gross rentals (900,000 x 8) 7,200,000

Residual value 600,000
Gross investment 7,800,000

Question 2 Answer B

PV of rentals (900,000 x 5.56) 5,004,000

PV of residual value (600,000 x .40) 240,000
Net investment 5,244,000

Question 3 Answer C

Gross investment 7,800,000

Not investment 5,244,000
Total financial revenue 2,556,000

Question 4 Answer D

Net investment – January 1, 2017 5,244,000

Advance payment on January 1, 2017 ( 900,000)
Balance – January 1, 2017 4,344,000

Interest income for 2017 (12% x 4,344,000) 521,280

Question 5 Answer D

Cost of equipment 3,500,000

PV of unguaranteed residual value ( 240,000)
Initial direct cost 200,000
Cost of goods sold 3,460,000

Sales, excluding present value of unguaranteed residual value 5,004,000

Cost of goods sold 3,460,000
Gross profit on sale 1,544,000

Page 13

PROBLEM 7 – STATEMENT OF CASH FLOWS

1. An entity provided the following increases (decreases) in the statement of financial position
accounts.
Cash and cash equivalents 120,000
Available for sale securities 300,000
Accounts receivable, net -
Inventory 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation -
Accounts payable ( 5,000)
Dividend payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
 Share capital, P10 par 100,000
Share premium 120,000
Retained earnings 290,000

 Net income for the current year was P790,000.

 Cash dividend of P500,000 was declared.
 Building costing P600,000 and with carrying amount of P350,000 was sold for P350,000.
 Equipment costing P110,000 was acquired through issuance of long-term debt.
 A long-term investment was sold for P135,000. There were no other transactions affecting
long-term investment.
 The shares were issued for cash.

1. What is the net cash provided by operating activities?

a. 1,160,000
b. 1,040,000
c. 920,000
d. 705,000

2. What is the net cash used in investing activities?

a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000

3. What is the net cash provided by financing activities?

a. 205,000
b. 150,000
c. 45,000
d. 20,000

Page 14

SOLUTION – PROBLEM 7

Question 1 Answer C

Net income 790,000

Increase in inventory ( 80,000)
Gain on sale of long-term investment ( 35,000)
Depreciation 250,000
Decrease in accounts payable ( 5,000)
Net cash provided – operating 920,000
Question 2 Answer A

Sale price of investment 135,000

Cost of investment sold – decrease in long-term investment (100,000)
Gain on sale of long-term investment 35,000

Net increase in accumulated depreciation -

Add accumulated depreciation on building sold (600,000 – 350,000) 250,000
Depreciation for the year 250,000

Net increase in plant assets 700,000

Add cost of building sold 600,000
Total acquisition during year 1,300,000
Equipment acquired by issuing long-term debt ( 110,000)
Cash payment for plant assets 1,190,000

Cash payment for plant assets (1,190,000)

Cash payment for available for sale securities ( 300,000)
Sale price of investment 135,000
Sale of building 350,000
Net cash used - investing (1,005,000)

Question 3 Answer A

Increase in share capital 100,000

Increase in share premium 120,000
Cash received from issue of shares 220,000
Proceeds from short-term debt 325,000
Dividend paid (340,000)
Net cash provided – financing 205,000

Dividend declared 500,000

Dividend payable (160,000)
Dividend paid 340,000

Proof

Net cash provided - operating 920,000

Net cash used – investing (1,005,000)
Net cash provided – financing 205,000
Increase in cash and cash equivalents 120,000
 Page 15

PROBLEM 8 – STATEMENT OF CASH FLOWS

An entity provided the following data:

December 31, 2018 December 31, 2019

Trade accounts receivable, net of allowance 840,000 780,000
Inventory 1,500,000 1,400,000
Accounts payable 950,000 980,000

 Total sales were P12,000,000 for 2019 and P11,000,000 for 2018. Cash sales were 20% of total
sales each year. Cost of goods sold was P8,400,000 for 2019.

 Variable expenses for 2019 amounted to P1,200,000 and varied in proportion to sales. Variable
expenses had been paid 50% in the year incurred and 50% the following year.

 Fixed expenses, including P350,000 depreciation and P50,000 bad debt expense, totaled
P1,000,000 each year. Eighty percent of fixed expenses involving cash were paid in the year
incurred and 20% the following year. Each year there was a P50,000 bad debt estimate and a
P50,000 writeoff.

1. What is the cash collected from customers during 2019?

a. 12,010,000
b. 12,060,000
c. 11,960,000
d. 11,890,000

2. What is the amount of purchases for 2019?

a. 9,800,000
b. 8,300,000
c. 8,500,000
d. 8,400,000

3. What is the cash disbursed for purchases during 2019?

a. 8,500,000
b. 8,270,000
c. 8,300,000
d. 8,200,000

4. What amount of cash was disbursed for variable expenses during 2019?
a. 1,150,000
b. 1,200,000
c. 1,100,000
d. 600,000

5. What amount of cash was disbursed for fixed expenses during 2019?
a. 500,000
b. 650,000
c. 600,000
d. 500,000
 Page 16

SOLUTION – PROBLEM 8

Question 1 Answer A

AR – December 31, 2017 840,000

Total sales – 2018 12,000,000
Total 12,840,000
AR – December 31, 2018 ( 780,000)
Bad debt writeoff ( 50,000)
Collections from customers – 2018 12,010,000 A

Question 2 Answer B

Inventory – December 31, 2017 1,500,000

Purchases 2018 (SQUEEZE) 8,300,000 B
Goods available for sale 9,800,000
Inventory – December 31, 2018 (1,400,000)
Cost of goods sold - 2018 8,400,000

Question 3 Answer B

Accounts payable – December 31, 2017 950,000

Purchases 2018 8,300,000
Total 9,250,000
Accounts payable – December 31, 2017 ( 980,000)
Cash disbursed for purchases 2018 8,270,000 B

Question 4 Answer A

Variable cost ratio (1,200,000 / 12,000,000) 10%

Variable expenses – 2017 (10% x 11,000,000) 1,100,000

Variable expenses 2017 paid in 2018 (50% x 1,100,000) 550,000

Variable expenses 2018 paid in 2018 (50% x 1,200,000) 600,000
Variable expenses paid in 2018 1,150,000 A

Question 5 Answer C

Fixed expenses each year 1,000,000

Depreciation ( 350,000)
Bad debt expense ( 50,000)
Cash disbursed for fixed expenses in 2018 600,000 C

END