preweek review

Problem

1. At December 31, 2017, the following data was available for a building owned by NU
Company:
Building cost 800,000
Accumulated amortization — building 600,000
Estimated residual value at end of useful life 50,000
Estimated remaining useful life 10 years
A small room was built on the back of the building at a cost of 50,000. The room was
completed on
June 30, 2018 and was used as office space commencing July 2, 2018. What is the effect
of this expenditure on income before taxes for 2018?
a. Income will decrease by 2,632
b. Income will decrease by 5,000
c. Income will decrease by 5,263
d. Income will decrease by 50,000

2. A company records items on the cash basis throughout the year and converts to an accrual
basis for year-end reporting. Its cash-basis net income for the year is $70,000. The
company has gathered the following comparative balance sheet information:

Beginning of year End of year

Accounts payable $3,000 $1,000
Unearned revenue 300 500
Wages payable 300 400
Prepaid rent 1,200 1,500
Accounts receivable 1,400 600

What amount should the company report as its accrual-based net income for the current
year?
a. $68,800
b. $70,200
c. $71,200
d. $73,200

3. Angel Company provided the following information for the current year:
Projected benefit obligation, January 1 5,600,000
Fair value of plan assets, January 1 5,000,000
Current service cost 1,110,000
Actual return on plan assets 450,000
Actuarial gain during the year 150,000
Employer contribution 425,000
Benefits paid to retirees 390,000
Settlement rate 10%
 What is the total defined benefit cost?
a. 1,120,000
b. 1,100,000
c. 1,170,000
d. 1,070,000

4. Kaila Co. incurred the following research and development project costs at the beginning of
the current year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current project 400,000
Equipment has a five-year life and is depreciated using the straight-line method. What
amount should Kaila record as depreciation for research and development projects at
December 31?
a. $0
b. $ 20,000
c. $ 60,000
d. $ 140,000

5. Jerome Corp. issued 20,000 shares of $5 par common stock at $10 per share. On
December 31, year 1, Jerome’s retained earnings were $300,000. In March year 2, Jerome
reacquired 5,000 shares of its common stock at $20 per share. In June year 2, Jerome sold
1,000 of these shares to its corporate officers for $25 per share. Jerome uses the cost
method to record treasury stock. Net income for the year ended December 31, year 2, was
$60,000. At December 31, year 2, what amount should Jerome report as retained
earnings?
a. $360,000
b. $365,000
c. $375,000
d. $380,000

6. JP Company provided the following information pertaining to the pension plan for the
current year:
Projected benefit obligation on January 1 7,200,000
Assumed discount rate 10%
Current service cost 1,800,000
Pension benefits paid 1,500,000

If no change in actuarial estimate occurred in the current year, what is the projected
obligation on December 31?
a. 6,420,000
b. 7,500,000
c. 7,920,000
d. 8,220,000
 7. At December 31, year 1, Ivan Corp. had 20,000 shares of $1 par value treasury stock that
had been acquired in year 1 at $12 per share. In May year 2, Ivan issued 15,000 of these
treasury shares at $10 per share. The cost method is used to record treasury stock
transactions. Ivan is located in a state where laws relating to acquisition of treasury stock
restrict the availability of retained earnings for declaration of dividends. At December 31,
year 2, what amount should Ivan show in notes to financial statements as a restriction of
retained earnings as a result of its treasury stock transactions?
a. $ 5,000
b. $10,000
c. $60,000
d. $90,000

8. Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in
which consumers claim that one of Martin’s best selling drugs caused severe health
problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million
in damages. Martin is suing another company for false advertising and false claims against
Martin. It is probable that Martin will win the suit and be awarded $5 million in damages.
What amount should Martin report on its financial statements as a result of these two
lawsuits?
a. $0
b. $ 5 million income
c. $15 million expense
d. $20 million expense

9. Jerome Company, a wholesaler, budgeted the following sales for the indicated months:
June July August
Sales on account 5,580,000 5,720,000 5,960,000
Cash sales 360,000 400,000 520,000
Total sales 5,940,000 6,120,000 6,480,000

All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories
at the beginning of each month are at 30% of that month's projected cost of goods sold.

Merchandise purchases for July are anticipated to be

a. 4,896,000.
b. 6,228,000.
c. 5,110,000.
d. 5,190,000.

10. On July 1, year 1, Trisha Corp., a closely held corporation, issued 6% bonds with a maturity
value of $60,000, together with 1,000 shares of its $5 par value common stock, for a
combined cash amount of $110,000. The market value of Trisha’s stock cannot be
ascertained. If the bonds were issued separately, they would have sold for $40,000 on an
8% yield to maturity basis. What amount should Trisha report for additional paid-in capital
on the issuance of the stock?
a. $75,000
 b. $65,000
c. $55,000
d. $45,000

11. Young & Jamison's modified cash-basis financial statements indicate cash paid for
operating expenses of 150,000, end-of-year prepaid expenses of 15,000, and accrued
liabilities of 25,000. At the beginning of the year, Young & Jamison had prepaid expenses
of 10,000, while accrued liabilities were 5,000. If cash paid for operating expenses is
converted to accrual-basis operating expenses, what would be the amount of operating
expenses?
a. 125,000
b. 135,000
c. 165,000
d. 175,000

12. Tris Co. is calculating earnings per share amounts for inclusion in the Tris's annual report to
shareholders. Tris has obtained the following information from the controller's office as well
as shareholder services:
Net income from January 1 to December 31 125,000
Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000
In addition, Tris has issued 10,000 incentive stock options with an exercise price of 30 to
its employees and a year-end market price of 25 per share. What amount is Tris's diluted
earnings per share for the year ended December 31?
a. 4.63
b. 4.85
c. 7.35
d. 7.94

13. Joshtin Company reported sales revenue of P4,600,000 in the income statement for 2018.
Additional information for the current year is as follows:
January 1 December 31
Accounts Receivable 1,000,000 1,300,000
Allowance for doubtful accounts 60,000 110,000
Advances from customers 200,000 300,000

The entity wrote off uncollectible accounts totaling P50,000 during the current year. Under
cash basis, what amount should be reported as sales revenue for the current year?
a. 4,900,000 c. 4,350,000
b. 4,250,000 d. 4,400,000

14. HIJ Ltd., a publicly traded company, has five operating segments all producing different
products with the following results:
Segments Total OperatingProfits TotalAssets TotalLiabilities
 Revenues (Losses)
Q $ 50 $4 $ 100 $150

R 50 3 75 100

S 160 10 350 175

T 270 25 500 275

U 40 2 125 60

Total $570 $44 $1,150 $760

Based on the quantitative thresholds, which segment(s) would be reported separately?

a) T only.
b) S and T only.
c) S, T and U only.
d) Q, R and U only.

15. The following information was extracted from the records of Ivan Company on December
31,2018:

Carrying amount Tax base

Accounts Receivable 1,500,000 1,750,000
Motor Vehicle 1,650,000 1,250,000
Provisions for warranty 120,000 0
Deposit received in advance 150,000 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The
deposits are taxable when received and warranty cost are deductible only when written off
as uncollectible. The tax rate is 30%. Ivan Company should report a deferred tax liability on
December 31, 2018 at

a. 120,000
b. 156,000
c. 81,000
d. 36,000

16. On January 1, 2018, an SME acquired, free of charge, a herd of 100 cattle by way of
government grant when the fair value of the jerd was P1,000,000. On average the
remaining life of the cattle is expected to be 10 years. The grant does not impose future
performance conditions on the entity. What amount of income from the government grant
should be recognized in 2018?
a. 1,000,000
b. 500,000
 c. 100,000
d. 0

17. On December 31, 2018 Kelly Company is experiencing extreme financial pressure and is in
default in meeting interest payment on its long term note of P6, 000,000 due on December
31, 2018. The interest rate is 12% payable every December 31.
In an agreement with the creditor, Kelly obtained the following changes in the terms of note:
a. The accrued interest on December 31, 2018 is forgiven.
b. The principal is reduced by 500,000.
c. The new interest rate is 8%.
d. The new date of maturity is December 31, 2022.
The present value of 1 at12% for four periods is 0.6355 and the present value of an
ordinary annuity of 1 at 12% for four periods is 3.0373.
How much is the gain or loss on extinguishment?
a. 2,504,750 c. 1,888,338
b. 1,168,338 d. 0

18. On January 1, year 1, Peabody Co. purchased an investment for $400,000 that
represented 30% of Newman Corp.’s outstanding voting stock. For year 1, Newman
reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value
of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option
for this investment. What amount should Peabody recognize in net income for year 1
attributable to the investment?
a. $ 6,000
b. $ 10,000
c. $ 16,000
d. $ 18,000

19. On January 1, year 1, Trisha Corp. granted an employee an option to purchase 3,000
shares of Trisha’s $5 par value common stock at $20 per share. The option became
exercisable on December 31, year 2, after the employee completed two years of service.
The option was exercised on January 10, year 3. The market prices of Trisha’s stock and
stock options were as follows:
Date Market price of stock Market price of similar stock option January 1, year 1 $30 $8
December 31, year 2 50 9 January 10, year 3 45 11 For year 1, Trisha should recognize
compensation expense of
a. $45,000
b. $30,000
c. $15,000
d. $12,000

20. Angel Co. installed new assembly line production equipment at a cost of 185,000. Angel
had to rearrange the assembly line and remove a wall to install the equipment. The
rearrangement cost 12,000 and the wall removal cost 3,000. The rearrangement did not
increase the life of the assembly line but it did make it more efficient. What amount of these
costs should be capitalized by Angel?
 a. 185,000
b. 188,000
c. 197,000
d. 200,000

21. Jerome Company purchased an investment property on January 1, 2015, for 2,200,000.
The property has a useful life of 40 years and on December 31, 2017 had a fair value of
3,000,000. On January 1, 2018, the property was sold for 2,900,000. Jerome uses the
cost model to account for the investmentproperty.

What is the gain or loss to be recognized for the year ended December 31, 2018 from the
disposal of the property?
a. 865,000 gain c. 100,000 loss
b. 810,000 gain d. 700,000 gain

22. On December 1, 2018, TRST sold 100 locks for laptop computers at 50 each with a 90-day
unconditional right of return. Since this is a new product for TRST, it has no past history
regarding
estimated returns. Which of the following is true regarding TRST’s December 31, 2018
financial
statement?
a. Sales of 5,000 should only be recognized in 2019 when the return privilege expires.
b. Sales of 5,000 should be recognized in 2018 as long as there is a reserve for returns.
c. Sales of 5,000 should be recognized in 2018, with future costs accrued as an estimated
liability.
d. Sales should only be recognized as the related cash is collected.

23. Angel Co. offers a three-year warranty on its products. Angel previously estimated warranty
costs to be 2% of sales. Due to a technological advance in production at the beginning of
year 3, Angel now believes 1% of sales to be a better estimate of warranty costs. Warranty
costs of $80,000 and $96,000 were reported in year 1 and year 2, respectively. Sales for
year 3 were $5,000,000. What amount should be presented in Angel’s year 3 financial
statements as warranty expense?
a. $ 50,000
b. $ 88,000
c. $100,000
d. $138,000

24. On June 1 of the current year, a company entered into a real estate lease agreement for a
new building. The lease is an operating lease and is fully executed on that day. According
to the terms of the lease, payments of $28,900 per month are scheduled to begin on
October 1 of the current year and to continue each month thereafter for 56 months. The
lease term spans five years. The company has a calendar year end. What amount is the
company’s lease expense for the current calendar year?
a. $ 86,700
b. $ 161,838
 c. $ 188,813
d. $ 202,300

25. Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The
following
information is available:
Mortgage repayment $20,000
Available-for-sale securities purchased 10,000 increase
Bonds payable—issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease

What amount should Paper report as net cash provided by operating activities in its
statement of cash
flows for the year?
a.$0
b.$10,000
c.$20,000
d.$30,000

26. In 2018, WGT Company reported warranty expense of 50,000. In its balance sheet for the
year, it reported an increase in warranty liability of 5,000. How much cash was paid for
warranty work during the year, and where would the amount be reported on the cash flow
statement?
a) 45,000 in the operating section
b) 55,000 in the operating section
c) 45,000 in the investing section
d) 55,000 in the investing section

27. Tris Company provided the following information for 2018:

January 1 December 31
Fair value of plan assets 2,600,000 3,000,000
Projected benefit obligation 2,000,000 2,100,000
Prepaid/accrued benefit cost-surplus 600,000 900,000
Asset ceiling 200,000 300,000
Effect of asset ceiling 400,000 600,000
Current service cost 100,000
Contribution to the plan 350,000
Benefits paid 150,000
Discount rate 10%

What is the employee benefit expense for 2018?

a. 200,000
b. 100,000
c. 80,000
d. 40,000
 What is the net remeasurement loss in 2018?
a. 110,000
b. 220,000
c. 270,000
d. 170,000

28. On January 1, 2017, Kristine Company Issued its 10%, 6-yr convertible debt instrument
with a face amount of P3,000,000 for P3,500,000. Interest is payable every December 31
of each year. The debt instrument is convertible into 30,000 ordinary shares with a par
value of P100. The debt instrument is convertible into equity from the time of issue until
maturity. When the debt instruments were issued, the prevailing market rate of interest for
similar debt without conversion option is 8%.
On December 31, 2018, Kristine company converted all the debt instruments by issuing
30,000 ordinary shares.

What amount should be credited to the share premium account as a result of the
conversion?
a. None
b. 198,176
c. 239,052
d. 421,276

29. On January 1 of the current year, Catherine Co. paid $900,000 to purchase two-year, 8%,
$1,000,000 face value bonds that were issued by another publicly traded corporation.
Catherine plans to sell the bonds in the first quarter of the following year. The fair value of
the bonds at the end of the current year was $1,020,000. At what amount should Catherine
report the bonds in its balance sheet at the end of the current year?
a. $ 900,000
b. $ 950,000
c. $ 1,000,000
d. $ 1,020,000

30. In Year 2, Joshtin, Inc. reported taxable income of 400,000 and pretax financial statement
income of 300,000. The difference resulted from 60,000 of nondeductible premiums on
Joshtin's officers' life insurance and 40,000 of rental income received in advance. Rental
income is taxable when received. Joshtin's effective tax rate is 30%. In its Year 2 income
statement, what amount should Joshtin report as income tax expense-current portion?
a. 90,000
b. 102,000
c. 108,000
d. 120,000

31. A company issued 500,000, 12% (interest payable annually on May 1), 5-year bonds. At
year end,
the company had the following account balances:
 Bonds payable 500,000 Cr
Discount on bonds 9,500 Dr
Interest payable 10,000 Cr
Conversion rights on convertible bonds 36,000 Cr
Interest expense 10,300 Dr
What amount of proceeds from the bond issue would be shown under the financing
activities section
of the year-end cash flow statement?
a. 490,200
b. 526,200
c. 526,500
d. 545,800

32. At the end of year 1, Lane Co. held trading securities that cost $86,000 and which had a
year-end market
value of $92,000. During year 2, all of these securities were sold for $104,500. At the end
of year 2,
Lane had acquired additional trading securities that cost $73,000 and which had a year-end
market value
of $71,000. What is the impact of these stock activities on Lane's year 2 income statement?

a. Loss of $2,000.
b. Gain of $10,500.
c. Gain of $16,500.
d. Gain of $18,500.

33. Kristine Co. requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable. Information for year 2 is as
follows:
Customer advances—balance 12/31/Y1 $118,000 Advances received with orders in year 2
184,000 Advances applied to orders shipped in year 2 164,000 Advances applicable to
orders cancelled in year 2 50,000 In Kristine’s December 31, year 2 balance sheet, what
amount should be reported as a current liability for advances from customer?
a. $0
b. $ 88,000
c. $138,000
d. $148,000

34. On December 1, year 1, Catherine Corp. declared a property dividend of marketable

securities to be distributed on December 31, year 1, to stockholders of record on December
15, year 1. On December 1, year 1, the trading securities had a carrying amount of $60,000
and a fair value of $78,000. What is the effect of this property dividend on Catherine’s year
1 retained earnings, after all nominal accounts are closed?
a. $0.
b. $18,000 increase.
c. $60,000 decrease.
 d. $78,000 decrease.

35. On January 2, year 1, Kaila Corp. granted Jerome, its president, 20,000 stock appreciation
rights for past services. Those rights are exercisable immediately and expire on January 1,
year 4. On exercise, Jerome is entitled to receive cash for the excess of the stock’s market
price on the exercise date over the market price on the grant date. Jerome did not exercise
any of the rights during year 1. The market price of Kaila’s stock was $30 on January 2,
year 1, and $45 on December 31, year 1. As a result of the stock appreciation rights, Kaila
should recognize compensation expense for year 1 of
a. $0
b. $100,000
c. $300,000
d. $600,000

36. On January 1, 2014, Catherine Company purchased an equipment for P8, 000,000. The
equipment is depreciated using straight line method based on a useful life of 8 years with
no residual value. On January 1, 2017, after 3 years, the equipment was revalued at a
replacement cost of 12,000,000 with no change in residual value. On June 30, 2017, the
equipment was sold for 10,000,000. What is the effect of the June 30, 2017 transaction to
the retained earnings?
a. 2, 500,000 increase c. 5,000,000 increase
b. 3,250,000 increase d. 5,750,000 increase

37. Trisha Co., a calendar-year corporation, reported income before income tax expense of
10,000 and income tax expense of 1,500 in its interim income statement for the first
quarter of the year. Trisha had income before income tax expense of 20,000 for the
second quarter and an estimated effective annual rate of 25%. What amount should Trisha
report as income tax expense in its interim income statement for the second quarter?
a. 3,500
b. 5,000
c. 6,000
d. 7,500

38. During year 1, Jerome Co. issued 5,000 shares of $100 par convertible preferred stock for
$110 per share. One share of preferred stock can be converted into three shares of
Jerome’s $25 par common stock at the option of the preferred shareholder. On December
31, year 3, when the market value of the common stock was $40 per share, all of the
preferred stock was converted. What amount should Jerome credit to Common Stock and
to Additional Paid-in Capital—Common Stock as a result of the conversion?
Common stock Additional paid-in capital
a. $375,000 $175,000
b. $375,000 $225,000
c. $500,000 $ 50,000
d. $600,000 $0

39. Angel Company provided the following data:

 January 1-FVPA 8,750,000
-Market-related value of the pension fund 7,150,000
During the year-Pension benefit paid 600,000
-Contribution made to the fund 700,000
- Actual return on plan assets 950,000

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

a. 8,200,000
b. 9,800,000
c. 7,250,000
d. 8,850,000

40. Kelly Company provided the following information for the 2018:
Total Assets at December 31 4,500,000
Share Capital at December 31 2,000,000
Share Premium at December 31 200,000
Treasury Stock (at cost) 300,000

The debt-to-equity ratio is 25% at December 3, 2018. What is the retained earnings
unappropriated on December 31, 2018?
a. 1, 400,000 c. 2,300,000
b. 1, 100,000 d. 1,700,000

41. ABC Inc. applies the revaluation model to account for its Machinery and Equipment. On
January 1, Year 1, its Machinery and Equipment had a net book value of $180,000. An
impairment test revealed that the fair value of these assets on that date was $120,000.
There was a $35,000 credit balance in the company’s Revaluation Surplus – Machinery
and Equipment account on that date.
The required journal entry to adjust ABC’s Machinery and Equipment to fair value would
include a
a) debit to Retained Earnings of $60,000.
b) debit to Depreciation Expense of $25,000.
c) debit to Revaluation Surplus – Machinery and Equipment of $60,000.
d) debit to Revaluation Surplus – Machinery and Equipment of $35,000.

42. JP Company provided the following plan information for the current year:
January 1 Projected benefit obligation 3,500,000
Accumulated benefit obligation 2,800,000
During the year Pension benefits paid to retired
employees 250,000
December 31 Projected benefit obligation 4,200,000
Accumulated benefit obligation 3,100,000
Discount or settlement rate 10%
There is no change in actuarial assumptions during the year. What is the current service
cost for the current year?
a. 600,000
 b. 950,000
c. 250,000
d. 270,000

43.
A company decided to sell an unprofitable division of its business. The company can sell
the entire operation for $800,000, and the buyer will assume all assets and liabilities of the
operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are
as follows:
Buildings $5,000,000
Accumulated
depreciation 3,000,000
Mortgage on buildings 1,100,000
Inventory 500,000
Accounts payable 600,000
Accounts receivable 200,000
What is the after-tax net loss on the disposal of the division?
a. $ 140,000
b. $ 200,000
c. $ 1,540,000
d. $ 2,200,000
(R/11, FAR, #16, 9866)

44.
Scotia Bank granted a loan to a borrower on January 1, 2018. The interest rate on the loan
is 10% payable annually starting December 31, 2018. The loan matures in five years on
December 31, 2022.
Principal amount 4,000,000
Direct origination cost 61,500
Origination fee received from borrower 350,000
The effective rate on the loan after considering the direct origination cost and origination
fee received is 12%.

What is the interest income for 2018?

a. 400,000
b. 558,000
c. 529,380
d. 445,380
45. Kelly Corp. operates several factories that manufacture medical equipment. The factories
have a historical cost of $200 million. Near the end of the company’s fiscal year, a change
in business climate related to a competitor’s innovative products indicated to Kelly’s
management that the $170 million carrying amount of the assets of one of Kelly’s factories
may not be recoverable. Management identified cash flows from this factory and estimated
that the undiscounted future cash flows over the remaining useful life of the factory would
be $150 million. The fair value of the factory’s assets is reliably estimated to be $135
million. The change in business climate requires investigation of possible impairment.
Which of the following amounts is the impairment loss?
a. $15 million
b. $20 million
c. $35 million
d. $65 million

46. On January 1, year 1, Joshtin Co. purchased a patent for $714,000. The patent is being
amortized over its remaining legal life of fifteen years expiring on January 1, year 16.
During year 4, Joshtin determined that the economic benefits of the patent would not last
longer than ten years from the date of acquisition. What amount should be reported in the
balance sheet for the patent, net of accumulated amortization, at December 31, year 4?
a. $428,400
b. $489,600
c. $504,000
d. $523,600

47.
A company’s activities for year 2 included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of
amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on available-for-sale securities 2,000

The company has a 30% effective income tax rate. What is the company’s net income for
year 2?
a. $1,267,700
b. $1,273,300
c. $1,314,600
d. $1,316,000

48. A machine that was acquired at a cost of 40,000 on January 1, 2017 was sold for 28,000
on
 December 31, 2018. It was being amortized using the double-declining balance method
and had an
estimated useful life of 20 years and a residual value of 10,000. What was the gain or loss
on
disposal that should have been recorded on December 31, 2018?
a. 12,000 loss
b. 4,400 loss
c. 0
d. 3,700 gain

49. Angel Company leased equipment for its entire 10 year economic life, agreeing to pay
P1,000,000 at the start of the lease term on January 1, 2018 and P1,000,000 annually on
each January 1 for the next nine years. The present value factors using the implicit rate in
the lease which is 10% for an annuity due with ten payments: 6.76 and for an ordinary
annuity with ten payments: 6.15. Angel properly recorded the finance lease and
depreciated the asset using the straight line method. What is the current portion of the
lease liability on December 31, 2018?
a. P324,000 c. P424,000
b. P466,400 d. P516,040

50. On December 29, 2017, Joshtin Limited received a 6,000 shipment of merchandise
inventory. The
merchandise was correctly included in the December 31, 2017 ending inventory, but was
not recorded
as a 2017 purchase. The invoice for the merchandise was received and processed on
January 10, 2018,
and the merchandise was incorrectly included in the 2018 purchases. Joshtin uses a
periodic inventory
system and has a December 31 year end. Which of the following statements about the
errors is
correct?
a. The December 31, 2018 retained earnings was understated by 6,000.
b. The net income for 2018 was understated by 6,000.
c. The net income for 2017 was understated by 6,000.
d. The December 31, 2017 retained earnings was understated by 6,000.

51. At December 31, 2018, Tina’s stockholders’ equity was P8,000,000, while total assets was
P1,500,000 larger than total assets at the beginning of the year. Total liabilities on
December 31, 2018 and January 1, 2018 were P3,800,000 and P3,000,000 respectively. If
dividend declaration during 2018 exceeded the proceeds from the issuance of share capital
by P1,000,000, how much is the net income or loss for 2018?
a. (300,000)
b. (1,300,000)
c. 900,000
d. 1,700,000
52. On January 2 of the current year, LTTI Co. entered into a three-year, non-cancelable
contract to buy up to 1 million units of a product each year at .10 per unit with a minimum
annual guarantee purchase of 200,000 units. At year end, LTTI had only purchased 80,000
units and decided to cancel sales of the product. What amount should LTTI report as a loss
related to the purchase commitment as of December 31 of the current year?
a. 0
b. 8,000
c. 12,000
d. 52,000

53. JP company is committed to sell its book division on September 1, 2018. The carrying
amount of the division was 4,000,000 adn fair value less cost to sell of 3,500,000. The
division reported operating loss of 200,000 for the year ended December 31, 2018.
Ignoring taxes, what amount should be reported as loss from discontinued operation in
2018?
a. 500,000
b. 200,000
c. 700,000
d. 0
preweek review
Answer Section

PROBLEM

1. ANS:
A
50,000 / 9.5 × 6/12 = 2,632

PTS: 1

2. ANS:

(c) In cash-basis accounting, the effects of transactions and other events on the assets
and liabilities of a business enterprise are recognized and reported only when cash is
received or paid; while in accrual accounting, these effects are recognized and reported in
the time periods to which they relate. Cash-basis accounting does not attempt to match
revenues and the expenses associated with those revenues. If liabilities have a net
decrease, then cash is assumed to have been used, and cash net income would be lower
than accrual. The same logic holds true for the asset side. If current assets increase, cash
was consumed, so cash net income is less than accrual. A short-cut method is to journalize
the net change of each account, and plug the difference to cash, as follows:

Accounts payable 2,000

Prepaid Rent 300
Unearned revenue 200
Wages payable 100
Accounts receivable 800
Cash 1,200

Overall, net cash decreased by $1,200, so Cash Net Income is $1,200 less than Accrual
Net Income; Accrual Net Income was $71,200. (Chapter 10-1-2, CSO: 1.5.1)

PTS: 1

3. ANS:
ANS: D
Current service cost 1,110,000
Interest expense (10% x 5,600,000) 560,000
Interest income (10% x 5,000,000) (500,000)
Employee benefit expense 1,170,000
Actual return 450,000
Interest income 500,000
Remeasurement loss on plan assets (50,000)
Actual gain 150,000
 Net remeasurement gain 100,000
Employee benefit expense 1,170,000
Net remeasurement gain (100,000)
Defined benefit cost 1,070,000

PTS: 1

4. ANS:
(b) Materials, equipment, facilities, or intangibles that are acquired for a current R&D
project and have no alternative future use in other R&D projects should be expensed in the
period in which acquired. If alternative future uses are expected, whether in other R&D
activities or in normal operations, these items should be recorded as assets and the cost
should be amortized over their useful lives by periodic charges to R&D expense. If, at any
point, these assets are no longer deemed to have alternative future uses, the remaining
unamortized cost is charged to R&D expense for the period. Depreciation expense would
be $20,000 ($100,000 / 5 years).

PTS: 1

5. ANS:
(a) Under the cost method, when treasury stock is acquired, treasury stock is debited and
cash is credited for the cost.
Treasury stock 100,000 Cash 100,000 When the treasury stock is resold at an amount
above cost, cash is debited for the proceeds, treasury stock is credited at cost, and the
difference is credited to additional paid-in capital—treasury stock.
Cash 25,000 Treasury stock 20,000 APIC—TS 5,000 Neither of these two transactions
affect retained earnings. Therefore, 12/31/Y2 retained earnings consists of the 12/31/Y1
balance ($300,000) plus year 2 net income ($60,000), or $360,000.

PTS: 1

6. ANS:
ANS: D
PBO- January 1 7,200,000
Service cost 1,800,000
Interest cost (10% x 7,200,000) 720,000
Benefits paid (1,500,000)
PBO – December 31 8,220,000
The PBO is increased by current service cost and interest cost and decreased by benefits
paid. Of course, if there is a change in actuarial assumptions, any increase in PBO is
added and any decrease in PBO is deducted.

PTS: 1

7. ANS:
 (c) The entry that Rama made on acquisition of treasury stock was as follows using the
cost method:
Treasury stock (20,000 × $12) 240,000 Cash 240,000 When some of the shares are later
reissued, the entry is
Cash (15,000 × $10) 150,000 Retained earnings 30,000 Treasury stock (15,000 × $12)
180,000 It is assumed there was no balance in APIC—Treasury stock prior to this entry. If
the problem had stated there was a credit balance, APIC—Treasury stock would be debited
before retained earnings to the extent a credit balance existed in APIC—Treasury stock.
When retained earnings are legally restricted the restriction must be disclosed. In this case,
the net treasury stock account balance is $60,000 ($240,000 –
$180,000), and this is the amount of retained earnings that must be disclosed as legally
restricted.

PTS: 1

8. ANS:
A

PTS: 1

9. ANS:
d COGS: July = 6,120,000 ÷ 1.2 = 5,100,000
Aug. = 6,480,000 ÷ 1.2 = 5,400,000
July's purchase = ( 5,100,000 × .7) + ( 5,400,000 × .3) =
5,190,000.

PTS: 1

10. ANS:
(b) When stock is issued in combination with other securities (lump sum sales), the
proceeds can be allocated by the proportional method or by the incremental method. If
the FV of each class of securities is determinable, the proceeds should be allocated to
each class of securities based on their relative FV. In the instances where the FV of all
classes of securities is not determinable, the incremental method should be used. The
market value of the securities is used as a basis for those classes that are known, and the
remainder of the lump sum is allocated to the class for which the market value is not
known. In this problem, the FV of the stock is unknown. As such, the incremental method
must be used as follows:
Lump sum receipt $110,000 FV of bonds 40,000 Balance allocated to common stock
$70,000 As the par value of the common stock is $5,000 (1,000 shares × $5), $65,000
($70,000 - $5,000) should be reported as additional paid-in capital on the issuance of the
stock.

PTS: 1

11. ANS:
 Solution:
Choice "c" is correct. During the year, prepaid expenses increased 5,000 from 10,000 to
15,000. Prepaid expenses represent assets where no benefit has been received yet. In
accrual accounting, they are not officially expenses until there is associated benefit.
Therefore, the 5,000 needs to be subtracted from 150,000. Also during the year, accrued
liabilities increased from 5,000 to 25,000. This represents benefit received but no cash
paid out yet. The expense of 20,000 (representing the increase) should be booked now
(which creates the liability), and when cash payment is made, the liability will be removed.
Given the starting point of 150,000, subtracting 5,000 and adding 20,000 will bring
accrued expenses to 165,000.

PTS: 1

12. ANS:
Solution:
Choice "d" is correct. Ian's diluted earnings per share will be equal to its basic earnings per
share because the stock options are out of the money. Out of the money stock options are
antidilutive because the exercise price exceeds the market price of the stock. Ian's basic
and diluted earnings per share is calculated as follows:
Income Basic (and Diluted) EPS Available to Common Shareholders
Weighted-Average Number of Common Shares
Basic (and Diluted) EPS 125,000 7.94
15,750 *
=
==
The weighted-average number of common shares outstanding is:
Total Shares Period Outstanding Weighted-Average
15,000 3/12 3,750
12,500 2/12 2,083
17,000 7/12 9,917
Total 15,750

PTS: 1

13. ANS:

Ans: C
Sales revenue-cash basis 4,350,000 (SQUEEZE)
Add: Accounts receivable-end 1,300,000
Write off 50,000
Advances-beg 200,000 1,550,000
Total 5,900,000
Accounts Receivable-beg 1,000,000
Add: Advances-end 300,000 1,300,000
Sales revenue-accrual basis 4,600,000
 PTS: 1

14. ANS:
Answer: c.
An operating segment must satisfy only one of the following quantitative thresholds to be
considered a reportable segment.
(a) Its reported revenue, including both sales to external customers and
intersegment sales or transfers, is 10 percent or more of the combined revenue,internally
and externally, of all operating segments;
(b) The absolute amount of its reported profit or loss is 10 percent or more of the greater, in
absolute amount, of:
(i) the combined reported profit of all operating segments that did not report a
loss; or
(ii) the combined reported loss of all operating segments that did report a loss;
and
(c) Its assets are 10 percent or more of the combined assets of all operating
segments. S and T have revenues greater than 10% of combined revenues.
U has assets greater than 10% of combined assets.
Liabilities have no impact on quantitative thresholds.
Therefore, S, T and U should report separately.

PTS: 1

15. ANS:
A

C. A of motor vehicle 1,650,000

Tax base 1,250,000
Future taxable amount 400,000

Deffered tax liability (30% x 400,000) 120,000

Accounts receivable:
Tax base 1,750,000
Carrying amount 1,500,000 250,000
Provision for warranty:
Carrying amount 120,000
Tax base 0 120,000
Deposits received in advence:
Carrying amount 150,000
Tax base 0 150,000
Tax deductible amount 520,000

Deffered Tax Asset (30% x 520,000) 156,000

PTS: 1
16. ANS:
A
Income from goverment grant 1,000,000

Under PFRS for SMEs, a grant that does not impose specified future performance
conditions is recognized in income when the grant is receivable.

PTS: 1

17. ANS:
Answer: c
Solution 5,500,000 x 0.6355 = 3,495,250
(5,500,000 x 8%) = 440,000x 3.0373= 1,336,412
PV of restructured liability 4,831,662
CA OF LIAB 6,000,000
ACC INT 720,000
CA OF LIAB 6,720,000
VIU (4,831,000)

GAIN 1,888,338
=======

PTS: 1

18. ANS:
C

PTS: 1

19. ANS:
(d) Employee compensation expense as the result of a stock option plan is calculated as
the fair value of the equity instrument at the date of grant times the number of option
shares.
3,000 shares × $8 fair value of option = $24,000
The total compensation expense must be recognized over the requisite service period for
which the option plan represents compensation. If not otherwise specified, the required
service period (two years) is assumed to be the period benefited. Therefore, year 1
compensation expense is $12,000 ($24,000 ÷ 2). Note that compensation expense is not
affected by changes in the market value of the stock after the measurement date.

PTS: 1

20. ANS:
Solution:
 Choice "d" is correct. The amount capitalized should include the cost ( 185,000), the
rearrangement cost (installation charge) of 12,000, and the wall removal cost (which is
considered an improvement/betterment designed to increase usefulness) of 3,000 (
185,000 + 12,000 + 3,000 = 200,000).

PTS: 1

21. ANS:
A

S.P. 2,900,000
B.V. 2,035,000
Gain 865,000

PTS: 1

22. ANS:
A

PTS: 1

23. ANS:
(a) A change in estimated warranty costs due to technological advances in production
qualifies as a change in accounting estimate. Changes in estimate are treated
prospectively; there is no retroactive restatement, and the new estimate is used in current
and future years. Therefore, in year 3, Oak should use the new estimate of 1% and report
warranty expense of $50,000 ($5,000,000 × 1%).

PTS: 1

24. ANS:
(c) Under operating leases, lessees recognize rent as expense over the lease term in a
systematic and rational. The lease term is five years, or 60 months. Total lease payments
are $1,618,400 ($28,900 × 56 months). This expense is allocated on a straight line basis
over the 60-month term. Seven months expense should be recognized, or $188,813
($26,973.33 × 7).

PTS: 1

25. ANS:
ANSWER:
Choice "a" is correct. The operating activities section includes cash flows from working
capital (current
assets and current liabilities) and other income statement items. Under the indirect method,
net income is
 adjusted for non-cash items and increases/decrease in working capital items to arrive at net
cash from
operating activities. Increases in current assets and decreases in current liabilities are uses
of cash,
while decreases in current assets and increases in current liabilities increase cash.
Net income $70,000
Less: Increase in inventory (40,000)
Less: Decrease in AP (30,000)
Net cash provided by operating activities $0

PTS: 1

26. ANS:
A

PTS: 1

27. ANS:

Question 1 ANS: C
Current service cost 100,000
Interest expense (10% x 2,000,000) 200,000
Interest income (10% x 2,600,000) (260,000)
Interest expense on effect of asset
ceiling (10% x 400,000) 40,000
Employee benefit expense 80,000

Question 2 ANS: D
Actual return 200,000
Interest income(10% x 2,600,000) (260,000)
Remeasurement loss on plan assets (60,000)
Actual gain-decrease in PBO 50,000
Remeasurement loss on effect of asset ceiling (160,000)
Net remeasurement gain (170,000)
Change in the effect of asset ceiling (600,000-400,000) 200,000
Interest expense on effect of asset ceiling (10% x 400,000) (40,000)
Remeasurement loss on effect of asset ceiling 160,000

PTS: 1

28. ANS:
D
Carrying value of debt as of December 31, 2009 P3,198,176
Less: par value of ordinary shares (30,000 x 100) 3,000,000
Credit to share premium on conversion date P 198,176
Transfer of the equity component 223,100
 Total credit to share premium on conversion P 421,276

PTS: 1

29. ANS:

(d) Trading securities are debt and equity securities that are bought and held
principally for the purpose of selling them in the near term to generate profits on short-term
differences in price. They are reported at fair value. Unrealized holding gains and losses
are included in current earnings for trading securities. Barton should report the investment
at the fair value of $1,020,000.

PTS: 1

30. ANS:
Solution:
Choice "d" is correct. Income tax expense-current portion only accounts for the taxable
income multiplied by the tax rate. For Ajax, that is 400,000 x 30% = 120,000.
Choice "a" is incorrect. This choice incorrectly calculates income tax expense based on
pretax income (from the financial statements).
Choice "b" is incorrect. This is the overall income tax expense if the nondeductible
premiums were temporary differences and the rental income was permanent.
Choice "c" is incorrect. This equals overall income tax expense (included income tax
expense-deferred).
41 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. 2010 AICPA
Newly Released Questions – Financial

PTS: 1

31. ANS:
B
300 of the discount has been amortized, thus the starting value of the discount was 9,800.
Proceeds from the bond = 500,000 + 36,000 – 9,800 = 526,200

PTS: 1

32. ANS:
ANSWER:
Choice "b" is correct. Because these are trading securities, the year 2 income statement
will be affected
by both the realized gain from the securities sold and the unrealized loss on the securities
acquired in
year 2:
 Realized gain on securities sold = Sales price – Carrying value = $104,500 - 92,000 =
$12,500
Unrealized loss in securities acquired = Year-end market value – Cost = $71,000 – 73,000
= (2,000)
Total income statement impact = Realized gain (loss) + Unrealized gain (loss) = $12,500 +
(2,000) =
$10,500 gain

PTS: 1

33. ANS:
(b) To determine the 12/31/Y2 balance of the liability for customer advances, the solutions
approach is to set up a T-account for the liability.
When advances are received ($184,000), cash is debited and the liability account is
credited. When advances are applied to orders shipped ($164,000), the liability account is
debited and sales is credited. When an order is cancelled ($50,000), the liability account is
debited and a revenue account is credited, since the advance payments are nonrefundable.
Thus, the customer advances balance on 12/31/Y2 is $88,000.

PTS: 1

34. ANS:
(c) A transfer of a nonmonetary asset to a stockholder or to another entity in a
nonreciprocal transfer should be recorded at the fair market value of the asset transferred,
and a gain or loss should be recognized on the disposition of the asset. At the date of
declaration, Nilo records
Trading securities 18,000 Gain on disposition of securities 18,000 Retained earnings
(dividends) 78,000 Property dividends payable 78,000 At the date of distribution, Nilo
records
Property dividends payable 78,000 Trading securities 78,000 After all nominal accounts are
closed, the effect on retained earnings from the above entries would be $60,000 ($78,000
debit to retained earnings less $18,000 credit to retained earnings when the “gain on
disposition” account is closed out).

PTS: 1

35. ANS:
 (c) The 20,000 stock appreciation rights (SAR) each entitle the holder to receive cash equal
to the excess of the market price of the stock on the exercise date over the market price on
the grant date ($30). Since these SAR are payment for past services and are exercisable
immediately, there is no required service period. Therefore, the expense computed at
12/31/Y1 does not have to be allocated to more than one period. At 12/31/Y1,
compensation expense is measured based on the excess of the 12/31/Y1 market price
($45) over the predetermined price ($30), resulting in compensation expense of $300,000
[20,000 ($45 – $30)]. Note that if Dean were required to work three years before the SAR
could be exercised, the expense would be allocated over the three years of required
service ($300,000 × 1/3 = $100,000).

PTS: 1

36. ANS:

4. Answer: c

Solution:
Cost 8,000,000
AD 8,000,000 x 3/8 = (300,000) 5,000,000

Replacement cost 12,000,000

12,000,000 x 3/8 = (4,500,000) 7,500,000
Revaluation Surplus 2,500,000

Depreciation
7,500,000/5 x 6/12 =750,000
RS(TRANS TO RE) 2,500,000
GAIN ON SALE410,000,000 – 6,750,000 = 3,250,000
5,750,000
DEPR (750,000)
NET 5,000,000
========

PTS: 1

37. ANS:
Solution:
Choice "c" is correct. In order to calculate income tax expense on an interim statement, the
appropriate methodology is to multiply year to date income by the effective tax rate and
subtract from that the income tax expense recorded in the previous quarter. The total
income for both quarters is 30,000 and the effective tax rate estimated as of the second
quarter is 25%. Total tax expense is then estimated as 7,500 for both quarters, and with
1,500 already booked in the first quarter, that will leave 6,000 for the second quarter.

PTS: 1
38. ANS:
(a) All 5,000 shares of convertible preferred stock were converted to common stock at a
rate of 3 shares of common for every share of preferred. Therefore, 15,000 shares of
common stock were issued (5,000 × 3). The common stock account is credited for the par
value of these shares (15,000 × $25 = $375,000). APIC - CS ($550,000 – $375,000 =
$175,000) is credited for the difference between the carrying amount of the preferred stock
(5,000 × $110 = $550,000) and the par value of the common stock. The journal entry is
Preferred stock 500,000 APIC-PS 50,000 Common stock 375,000 APIC-CS 175,000 Note
that the $40 market value of the common stock is ignored. The book value method must be
used for conversion of preferred stock, so no gains or losses can be recognized.

PTS: 1

39. ANS:
ANS: B
FVPA- January 1 8,750,000
Contribution to the fund 700,000
Actual return on plan asset 950,000
Total 10,400,000
Benefits paid (600,000)
FVPA- December 31 9,800,000
The FVPA is increased by contribution to the fund and actual return on plan assets, and
decreased by benefits paid.

PTS: 1

40. ANS:
Answer: a
Solution: 4,500,000/125% = 3,600,000
(2,000,000)
(200,000)
300,000
Total Retained Earnings 1,700,000
R/E Appropriated for T/S (300,000)
1,400,000
========

PTS: 1

41. ANS:
Answer: d.
The correct journal entry when recording an asset impairment under the Revaluation model
would include a reduction of the Revaluation Surplus account (up to its original balance)
with any remaining impairment being charged to an impairment loss account on the
Statement of Comprehensive Income.
 PTS: 1

42. ANS:
ANS: A
PBO- January 1 3,500,000
Current service cost-squeezed 600,000
Interest expense (10% x 3,500,000) 350,000
Total 4,450,000
Benefits paid (250,000)
PBO – December 31 4,200,000
The current service cost is squeezed by simply working back from the ending PBO

PTS: 1

43. ANS:

(a) The results of discontinued operations are reported separately from continuing
operations. Discontinued operations refers to the operations of a component of an entity
that has been disposed of or is still operating, but is subject of a formal plan for disposal. A
component of an entity is defined as a segment, reporting unit, or asset group whose
operations and cash flows are clearly distinguished from the rest of the entity, operationally
as well as for financial reporting purposes. The after-tax net loss on the disposal of the
division is: (1 – .30) × 200,000 = $140,000 (Chapter 11-2-3, CSO: 3.7.0)

The entry to record the sale is as follows:

Cash 800,000
Accounts payable 600,000
Mortgage payable 1,100,000
Loss on disposal 200,000
Building, net 2,000,000
Inventory 500,000
Accounts Receivable 200,000

PTS: 1

44. ANS:
D

PTS: 1

45. ANS:
C

PTS: 1
46. ANS:
(b) This situation is a change in accounting estimate and should be accounted for currently
and prospectively. From 1/1/Y1 to 12/31/Y3, patent amortization was recorded using a
fifteen-year life. Yearly amortization was $47,600 ($714,000 ÷ 15), accumulated
amortization at 12/31/Y3 was $142,800 ($47,600 × 3), and the book value of the patent at
12/31/Y3 was $571,200 ($714,000 – $142,800). Beginning in year 4, this book value must
be amortized over its remaining useful life of 7 years (10 years - 3 years). Therefore, year 4
amortization is $81,600 ($571,200 ÷ 7) and the 12/31/Y4 book value is $489,600 ($571,200
– $81,600).

PTS: 1

47. ANS:

(c) The $2,000 unrealized holding gain for AFS is included in other comprehensive
income, not the income statement. The prior period adjustment is reported as an
adjustment to the beginning balance of retained earnings, net of their income tax effect, not
in the income statement. All other items listed would in included in the computation of net
income, as follows (Chapter 11-2-5, CSO: 1.3.2):

Sales $ 3,600,000
Less Sales Returns (34,000)
Cost of sale $1,200,000
Selling and administrative expenses 500,000 (1,700,000)
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business
segment 4,000
$
Income before income taxes 1,878,000
Income taxes (563,400)
Income from continuing operations after taxes $ 1,314,600

PTS: 1

48. ANS:
B
28,000 – [ 40,000 – ( 40,000 × 10%) – ( 36,000 × 10%)] = 4,400 loss

PTS: 1

49. ANS:
C

PTS: 1
50. ANS:
B

PTS: 1

51. ANS:
D

PTS: 1

52. ANS:
Solution:
Choice "d" is correct. The contract overall has a minimum total guarantee of 600,000 units,
and only 80,000 units will be purchased. At .10 per unit, the company is responsible for
520,000 units at .10 per unit. The loss as a result will be 52,000 (520,000 x 0.10).
Choice "a" is incorrect. Because the contract is non-cancelable and there is a minimum
guarantee, there will be a loss resulting from not honoring that guarantee.
Choice "b" is incorrect. This represents the amount actually purchased.
Choice "c" is incorrect. This only accounts for the current year, and fails to account for the
remaining two years when no purchases will be made.
20 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. 2010 AICPA
Newly Released Questions – Financial

PTS: 1

53. ANS:
C
Operating loss 200,000
Impairment loss 500,000
Loss from discontinued operation 700,000

PTS: 1