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RFINANCIAL ACCOUNTING PROBLEMS

Problem I (Current assets)


An entity provided the following trial balance on June 30, 2015:
Cash overdraf ( 200,000) Property, plant and equipment, net 1,900,000
Accounts receivable, net 700,000 Accounts payable and accrued expenses 640,000
Inventory 1,200,000 Share capital 3,000,000
Prepaid expenses 200,000 Share premium 500,000
Land held for resale 2,000,000 Retained earnings 1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash
overdraf of P200,000. The checks were mailed on July 9. Land held for resale was sold for cash on
July 15. The financial statements were issued on July 31. On June 30, 2015, what total amount
should be reported as current assets?
a. 4,500,000
b. 4,100,000
c. 4,300,000
d. 2,500,000

Problem 2 (Total assets)


An entity was incorporated on January 1, 2015 with proceeds from the issuance of P7,500,000 in
shares and borrowed funds of P1,100,000. During the first year of operations, revenue from sales
and consulting amounted to P820,000, and operating costs and expenses totaled P640,000. On
December 15, the entity declared a P30,000 cash dividend, payable to shareholders on January 15,
2016. No additional activities affected owners’ equity in 2015. The liabilities increased to
P1,200,000 by December 31, 2015. What amount should be reported as total assets on December
31, 2015?
a. 8,850,000
b. 8,820,000
c. 7,870,000
d. 8,750,000

Problem 3 (Current liabilities)


An entity had the following liabilities on December 31, 2015:
Accounts payable 55,000
Unsecured notes, 8% due 7/1/2016 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred tax liability 25,000
Senior bonds, 7%, due 3/31/2016 1,000,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the
entity. The legal counsel expects the suit to be settled in 2016 and has estimated that the entity will
be liable for damages in the range of P450,000 to P750,000. The deferred tax liability is expected to
reverse in 2016. What amount should be reported on December 31, 2015 for current liabilities?
a. 515,000
b. 940,000
c. 1,490,000
d. 1,515,000
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Problem 4 (Net income)


An entity reported net income of P7,410,000 for the current year. The auditor raised questions about
the following amounts that had been included in net income:
Unrealized loss on equity investments at fair value through other comprehensive
income ( 540,000 )
Gain on early retirement of bonds payable 2,200,000
Adjustment of profit of prior year for error in depreciation, net of tax effect ( 750,000 )
Loss from fire ( 1,400,000 )
Gain from change in fair value attributable to the credit risk of financial liability
designated at fair value through profit or loss 500,000
What amount should be reported as adjusted net income?
a. 6,500,000
b. 7,200,000
c. 8,200,000
d. 8,700,000

Problem 5 (Retained earnings)


An entity provided the following information on December 31, 2015:
Total reported income since incorporation 1,700,000
Total cash dividends paid ( 800,000)
Unrealized holding loss on trading investment ( 120,000)
Total share dividends distributed ( 200,000)
Prior period adjustment recorded January 1, 2015 - credit 75,000
What amount should be reported as retained earnings on December 31, 2015?
a. 655,000
b. 700,000
c. 580,000
d. 775,000

Problem 6 (Cash computation)

An entity reported the checkbook balance on December 31, 2015 at P8,000,000. In addition, the
entity held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2016 in payment of a sale,
not included in December 31 check book balance 1,000,000
Check payable to the entity, deposited December 15 and included in
December 31 checkbook balance, but returned by bank on
December 30 stamped “NSF”. The check was redeposited on
January 2, 2016 and cleared on January 5, 2016 3,000,000
Check drawn on the entity’s account, dated and recorded on
December 31, 2015 but not mailed until January 15, 2016 2,500,000
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
What is the correct amount of “cash” on December 31, 2015?
a. 7,500,000
b. 9,300,000
c. 8,300,000
d. 9,800,000
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Problem 7 (Impairment of accounts receivable)

An entity reported the following accounts receivable on December 31, 2015:


Customer A 1,000,000
Customer B 1,500,000
Customer C 2,000,000
Customer D 2,500,000
All other accounts receivable not individually significant 3,500,000
The entity determined that Customer A receivable is totally impaired and Customer B receivable is
impaired by P700,000. The other receivables from Customers C and D are not considered impaired.
The entity determined that a composite rate of 10% is appropriate to measure impairment on the
remaining accounts receivable. What is the total impairment loss of accounts receivable for 2015?
a. 2,500,000
b. 2,050,000
c. 1,050,000
d. 2,750,000

Problem 8 (Current net receivables)

An entity reported current receivables on December 31, 2015 which consisted of the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts 20,000
Claim against shipper for goods lost in transit in November 2015 30,000
Selling price of unsold goods sent by the entity on consignment at 130% of
cost and not included in the ending inventory 260,000
Security deposit on lease of warehouse used for storing inventories 300,000
What is the correct total of current net receivables on December 31, 2015?
a. 1,500,000
b. 1,200,000
c. 1,240,000
d. 940,000

Problem 9 (Measurement of notes receivables)

On December 31, 2015, an entity received two P2,000,000 notes receivable from customers. On
both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and
payable at maturity. The first note, made under customary trade terms, is due in nine months and the
second note is due in five years. The market interest rate for similar notes on December 31, 2015
was 8%. The PV of 1 at 8% due in nine months is .944, and the PV of 1 at 8% due in 5 years is .68.
On December 31, 2015, what total carrying amount should be reported for the two notes receivable?
a. 3,248,000
b. 3,494,400
c. 3,360,000
d. 3,564,000
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Problem 10 (Measurement of loan receivable)

A bank granted a 10-year loan to a borrower in the amount of P1,500,000 with stated interest rate
of 6%. Payments are due monthly and are computed to be P16,650. The bank incurred P40,000 of
direct loan origination cost and f,000 of indirect loan origination cost. In addition, the bank
charged the borrower a 4-point nonrefundable loan origination fee. What is the carrying amount
of the loan receivable to be reported initially by the bank?
a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000

Problem 11 (Cost of inventory)

An entity reported inventory on December 31, 2015 at P6,000,000 based on a physical count at
cost and before any necessary year-end adjustments relating to the following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2015. These goods had a cost of P125,000 and were picked up by the carrier on
January 7, 2016.
 Goods shipped FOB shipping point on December 28, 2015 from a vendor to the entity were
received on January 4, 2016. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2015?
a. 5,875,000
b. 6,000,000
c. 6,175,000
d. 6,300,000

Problem 12 (Computation of accounts payable)

An entity reported accounts payable on December 31, 2015 at P4,500,000 before any necessary
year-end adjustments relating to the following transactions:
 On December 27, 2015, the entity wrote and recorded checks to creditors totaling P2,000,000
causing an overdraf of P500,000 in the entity’s bank account on December 31, 2015. The
checks were mailed on January 10, 2016.

 On December 28, 2015, the entity purchased and received goods for P750,000, terms 2/10,
n/30. The entity recorded purchases and accounts payable at net amount. The invoice was
recorded and paid January 3, 2016.

 Goods shipped FOB destination on December 20, 2015 from a vendor to the entity were
received January 2, 2016, The invoice cost was P325,000.
On December 31, 2015, what amount should be reported as accounts payable?
a. 7,575,000
b. 7,250,000
c. 7,235,000
d. 7,553,500
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Problem 13 (Retail inventory method)
On December 31, 2015, an entity provided the following information:
Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markup 210,000
Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the approximate
lower of average cost or NRV retail method, what is the inventory on December 31, 2015?
a. 1,050,000
b. 1,400,000
c. 994,000
d. 980,000

Problem 14 (Gross profit method)

An entity budgeted the following sales.


June July August
Sales on account 1,800,000 1,840,000 1,900,000
Cash sales 180,000 200,000 260,000
All merchandise is marked up to sell at invoice cost plus 20%. Merchandise inventory at the
beginning of each month is 30% of that month's projected cost of goods sold. What is the amount
of anticipated purchases for July?
a. 1,632,000
b. 2,076,000
c. 1,700,000
d. 1,730,000

Problem 15 (Biological assets)

An entity provided the following information about assets in forest plantation:


Freestanding trees 5,000,000
Land under trees 900,000
Roads in forest 500,000
Animals related to recreational activities 2,000,000
Rubber trees and grape vines 1,500,000
What total amount should be reported as biological assets?
a. 5,000,000
b. 8,500,000
c. 6,500,000
d. 9,900,000

Problem 16 (Machinery)

On September 1, 2015, an entity purchased a new machine on a deferred payment basis. A down
payment of P200,000 was made and 4 annual installments of P600,000 each are to be made beginning
on September 1, 2016. The cash equivalent price of the machine was P2,300,000. Due to an employee
strike, the entity could not install the machine immediately and thus incurred P30,000 of storage cost.
Cost of installation excluding the storage cost amounted to P80,000. What is the total cost of the
machine?
a. 2,300,000
b. 2,380,000
c. 2,410,000
d. 2,600,000

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Problem 17 (Borrowing cost)

During 2015, an entity constructed an asset costing P10,000,000. The weighted average
accumulated expenditures on the asset during the year totaled P6,000,000. To help pay for
construction, P4,400,000 was borrowed at 10% on January 1, 2015, and funds not needed for
construction were temporarily invested in short-term securities, yielding P90,000 in interest
revenue. Other than the construction funds borrowed, the only other debt outstanding during the
year was a P5,000,000, 10-year, 9% note payable dated January 1, 2012. What is the amount of
interest that should be capitalized during 2015?
a. 600,000
b. 300,000
c. 494,000
d. 944,000

Problem 18 (Depletion)

In 2015, an entity purchased property with natural resources for P28,000,000. The property had a
residual value of P5,000,000. However, the entity is required to restore the property to the original
condition at a discounted amount of P2,000,000. In 2015, the entity spent P1,000,000 in
development cost and P3,000,000 in building. In 2016, an amount of P4,000,000 was spent for
additional development on the mine. Production began in 2016 and the tons extracted totaled
3,000,000 in 2016 and 2,500,000 in 2017. The remaining tons totaled 7,000,000 and 3,500,000,
respectively on December 31, 2016 and December 31, 2017. What amount of depletion should
recognized in 2017?
a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000

Problem 19 (Revaluation)

On June 30, 2015, an entity reported the following information:


Equipment at cost 30,000,000
Accumulated depreciation 10,500,000
The equipment was measured using the cost model and depreciated on a straight line basis over
10-year period. On December 31, 2015, the management decided to change the basis of
measuring the equipment from the cost model to the revaluation model. The equipment was
revalued to the fair value of P27,000,000 with remaining useful life of 5 years. The income tax rate
is 30%. What amount should be reported as revaluation surplus on December 31, 2015?
a. 7,500,000
b. 5,250,000
c. 6,300,000
d. 9,000,000
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Problem 20 (Computer software)

During the current year, an entity incurred the following costs to develop and produce a routine,
low-risk computer software product:
Completion of detailed program design or working model 1,300,000
Cost incurred for coding and testing to establish technological feasibility 1,000,000
Other coding costs after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product master 2,500,000
Packaging product 900,000
What amount should be capitalized initially as software cost?
a. 5,400,000
b. 3,700,000
c. 5,900,000
d. 6,900,000

Problem 21 (Start up costs)

An entity, a major winery, begins construction of a new facility in Mindanao. The following costs
are incurred in conjunction with the start-up activities of the new facility:
Production equipment 8,150,000
Travel costs of salaried employees 400,000
License fees 140,000
Training of local employees for production and maintenance operations 1,200,000
Advertising costs 850,000
What amount of start up costs should be expensed?
a. 9,750,000
b. 1,600,000
c. 1,390,000
d. 0

Problem 22 (Intangible assets)

On January 1, 2013, an entity purchased patent at a cost of P1,920,000 at which date the
remaining legal life was 16 years. On January 1, 2015, the useful life of the patent was determined
to be only 8 years from the date of acquisition. On January 1, 2015, the entity paid P800,000, of
which three-fourths was for a trademark, and one-fourth was for the other entity’s agreement not
to compete for a 5-year period in the line of business covered by the trademark. The entity
considered the life of the trademark indefinite. Moreover, the entity agreed to pay P50,000 to the
other entity as consulting fee each year for 5 years payable every January 1. What is the
amortization of intangible assets for 2015?
a. 320,000
b. 280,000
c. 250,000
d. 370,000

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Problem 23 (Goodwill)

On December 31, 2015, an entity purchased for P40,000,000 cash all of the outstanding ordinary
shares of another entity when the subsidiary’s statement of financial position showed net assets of
P32,000,000. The subsidiary’s assets and liabilities had fair value different from the carrying
amount as follows:
Carrying amount Fair value
Property, plant and equipment, net 50,000,000 57,500,000
Other assets 5,000,000 0
Long-term debt 30,000,000 28,000,000
What amount should be reported as goodwill in the December 31, 2015 consolidated statement of
financial position of the acquirer and its wholly-owned subsidiary?
a. 3,500,000
b. 2,500,000
c. 7,500,000
d. 8,000,000

Problem 24 (Financial asset at fair value through other comprehensive income)

On January 1, 2015, an entity purchased nontrading equity securities which are irrevocably
designated at fair value through other comprehensive income:
Purchase price Transaction cost Market – 12/31/2015
Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 2,400,000
Security C 4,000,000 400,000 4,700,000
On July 1, 2016, the entity sold Security C for P5,200,000. What amount should be credited to
retained earnings as a result of the sale of the investment in 2016?
a. 800,000
b. 500,000
c. 300,000
d. 0

Problem 25 (Interest on loans)

An entity frequently borrowed from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate with interest payable at maturity. The entity repaid each
loan on scheduled maturity date.
Date of loan Amount Maturity date Term of loan
November 1, 2014 500,000 October 31, 2015 1 year
February 1, 2015 1,500,000 July 31, 2015 6 months
May 1, 2015 800,000 January 31, 2016 9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2015. If no correction is made, by what amount would interest expense
be understated for 2015?
a. 54,000
b. 62,000
c. 64,000
d. 72,000

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Problem 26 (Compensated absences)

An entity has 35 employees who work 8-hour days and are paid hourly. On January 1, 2013, the
entity began a program of granting the employees 10 days of paid vacation each year. Vacation days
earned in 2013 may first be taken on January 1, 2014.
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2013 25.80 10 0
2014 27.00 10 8
2015 28.50 10 10
The entity has chosen to accrue the liability for compensated absences at the current rate of pay in
effect when the compensated time is earned. What is the accrued liability for compensated absences
on December 31, 2015?
a. 94,920
b. 90,720
c. 79,800
d. 95,760

Problem 27 (Finance lease - lessee)

An entity leased equipment for the entire nine-year useful life, agreeing to pay P1,000,000 at the
start of the lease term on January 1, 2015, and P1,000,000 annually on each January 1 for the next
eight years. The present value on January 1, 2015 of the nine lease payments over the lease term
using the rate implicit in the lease which the lessor knows to be 10% was P6,330,000. The January
1, 2015 present value of the lease payments using the incremental borrowing rate of 12% was
P5,970,000. The entity made a timely second lease payment. What amount should be reported as
finance lease liability on December 31, 2016?
a. 5,330,000
b. 4,863,000
c. 4,970,000
d. 4,467,000

Problem 28 (Finance lease - lessor)

An entity leased equipment to an unrelated party on July 1, 2015 for an eight-year period expiring
June 30, 2023. Equal payments under the lease are P600,000 and are due on July 1 of each year. The
first payment was made on July 1, 2015. The implicit rate of interest contemplated is 10%. The cash
selling price of the equipment is P3,500,000 and the carrying amount is P2,800,000. The lease is
appropriately recorded as a sales type lease. What total amount of income should be recorded for
the year ended December 31, 2015?
a. 700,000
b. 525,000
c. 990,000
d. 845,000

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Problem 29 (Sale and leaseback)

On January 1, 2015, an entity sold a machine for P5,000,000. The fair value of the machine was
P6,500,000 on the date of sale. The machine had a carrying amount of P7,000,000 and remaining
life of 15 years. The entity immediately leased back the machine for 5 years at an annual rental that
was determined to be sufficiently lower than the market rent. What total amount of loss should be
recognized immediately in 2015?
a. 400,000
b. 800,000
c. 500,000
d. 0

Problem 30 (Employee benefit – IFRS 19R)

An entity provided the following information for the current year:


Current service cost 500,000
Interest on projected benefit obligation 600,000
Interest income on plan assets 350,000
Loss on plan settlement 250,000
Past service cost during the year 300,000
Actual return on plan assets 850,000
Actuarial loss during the year 200,000
Contribution to the plan 1,500,000
What is the employee benefit expense for the current year?
a. 1,300,000
b. 1,050,000
c. 1,500,000
d. 1,100,000

Problem 31 (Actual return on plan assets)

An entity provided the following data related to the pension plan.


December 31, 2015 December 31, 2016
Defined benefit obligation 8,400,000 11,100,000
Plan assets at fair value 9,000,000 9,900,000
Net actuarial loss 1,440,000 1,500,000
Discount rate 10% 9%
Expected rate of return 8% 7%
The contribution was P1,260,000 in 2016 and benefits paid totaled P1,125,000. What was the actual
return on plan assets in 2016?
a. 900,000
b. 765,000
c. 600,000
d. 465,000

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Problem 32 (Vacation pay expense)

An entity grants all employees two weeks of paid vacation for each full year of employment.
Unused vacation time can be accumulated and carried forward to succeeding years and will be paid
at the salaries in effect when vacations are taken or when employment is terminated. There was no
employee turnover in 2015. Additional information relating to the year ended December 31, 2015 is
as follows:
Liability for accumulated vacations on January 1, 2015 350,000
Pre-2015 accrued vacations taken from January 1, 2015 to September 30, 2015
(the authorized period for vacations) 200,000
Vacations earned for work in 2015 adjusted to current rate 300,000
The entity granted a 10% salary increase to all employees on October 1, 2015, the annual salary
increase date. What amount should be reported as vacation pay expense for 2015?
a. 450,000
b. 335,000
c. 315,000
d. 300,000

Problem 33 (Termination benefits IFRS 19R)

An entity is committed to close a factory in 10 months and shall terminate the employment of all the
remaining employees of the factory. Under the termination plan, an employee leaving before
closure of factory shall receive on termination date a cash payment of P20,000. However, an
employee that renders service until closure of the factory shall receive P60,000. There are 120
employees at the factory. The entity expects 20 employees to leave before closure and 100
employees to render service until closure. What amount should be recognized as termination
benefit?
a. 2,400,000
b. 6,400,000
c. 2,000,000
d. 4,000,000

Problem 34 (Income tax)

An entity reported P9,000,000 income before provision for income tax. The following data are
provided for the current year:
Rent received in advance 1,600,000
Income from exempt municipal bonds 2,000,000
Depreciation deduction for income tax purposes in excess of depreciation
reported for financial reporting purposes 1,000,000
Tax payment during the current year 500,000
Income tax rate 30%
What amount of current income tax liability should be reported at year-end?
a. 1,780,000
b. 2,280,000
c. 2,580,000
d. 2,880,000

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Problem 35 (Bonds payable)

An entity has outstanding a 7%, ten-year P100,000 facevalue bond. The bonds was originally sold
to yield 6% annual interest. The entity uses the effective interest method to amortize bond premium
and does not elect the fair value option for reporting financial liabilities. On June 30, 2015, the
carrying amount of the outstanding bond was P105,000. What amount of unamortized premium on
bond should be reported on June 30, 2016?
a. 1,050
b. 3,950
c. 4,300
d. 4,500

Problem 36 (Share-based compensation)

On January 1, 2015, an entity granted to employees 10,000 share options. On January 1, 2016, the
entity granted to employees an additional 20,000 share options.
Date Fair value of share
January 1, 2015 20
December 31, 2015 22
January 1, 2016 25
December 31, 2016 30
The shares vest at the end of a four-year period. There are no forfeitures. What amount should be
recorded as compensation expense for 2016?
a. 175,000
b. 205,000
c. 225,000
d. 500,000

Problem 37 (Retained earnings)

An entity provided the following data for the year ended December 31, 2015:
Retained earnings unappropriated, January 1 200,000
Overdepreciation of 2014 due to prior period error 100,000
Net income for 2015 1,300,000
R Retained earnings appropriated for treasury shares (original balance is P500,000
but reduced by P200,000 by reason of reissuance of the treasury shares) 300,000
Retained earnings appropriated for contingencies (beginning balance P700,000.
but increased by current appropriation of P100,000) 800,000
Cash dividends paid to shareholders 500,000
Change in accounting policy from FIFO to average – credit adjustment 150,000
What is the balance of unappropriated retained earnings on December 31, 2015?
a. 1,150,000
b. 1,350,000
c. 1,950,000
d. 1,750,000

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Problem 38 (Diluted earnings per share)

An entity reported the following capital structure:


2015 2016
Outstanding shares:
Ordinary shares 110,000 110,000
Convertible preference shares 10,000 10,000
During 2015, the entity paid preference dividends of P3 per share. The preference shares are
convertible into 20,000 ordinary shares. Net income for 2015 was P850,000. The income tax rate is
30%. What amount should be reported as diluted earnings per share for 2015?
a. 6.31
b. 6.54
c. 7.08
d. 7.45

Problem 39 (Cash basis)

An entity had the following beginning and ending balances in prepaid expenses and accrued
liabilities for the current year:
Prepaid expenses Accrued liabilities
Beginning balance 5,000 8,000
Ending balance 10,000 20,000
Debits to operating expenses totaled P100,000. What amount was paid for operating expenses
during the current year?
a. 83,000
b. 93,000
c. 107,000
d. 117,000

Problem 40 (Current cost)

An entity disclosed supplemental information on the effects of changing prices. The entity
computed the increase in current cost of inventory as follows:
Increase in current cost (nominal peso) 1,500,000
Increase in current cost (constant peso) 1,200,000
What amount should be disclosed as the inflation component of the increase in current cost?
a. 2,700,000
b. 1,500,000
c. 1,200,000
d. 300,000

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Problem 41 (Accrual basis)

An entity acquired rights to a patent under a licensing agreement that required an advance royalty
payment when the agreement was signed. The entity remitted royalties earned and due under the
agreement on October 31 each year. Additionally, on the same date, the entity paid, in advance,
estimated royalties for the next year. The entity adjusted prepaid royalties at year-end. The entity
provided the following information for the year ended December 31, 2015:
January 1 Prepaid royalties 650,000
October 31 Royalty payment charged to royalty expense 1,100,000
December 31 Year-end credit adjustment to expense 250,000
On December 31, 2015, what amount should be reported as prepaid royalties?
a. 250,000
b. 400,000
c. 850,000
d. 900,000

Problem 42 (Accrual basis)

An entity had a balance of P820,000 in the professional fees expense account on December 31,
2015, before considering year-end adjustments relating to the following:
 Consultants were hired for a special project at a total fee not to exceed P650,000. The entity had
recorded P550,000 of this fee based on billings for work performed in 2015.
 The attorney’s letter requested by the auditors dated January 31, 2016, indicated that legal fees
of P60,000 were billed on January 15, 2016 for work performed in November 2015, and
unbilled fees for December 2015 were P70,000.
What amount should be reported for professional fees expense for 2015?
a. 1,050,000
b. 950,000
c. 880,000
d. 820,000

Problem 43 (Disclosures)

An entity reported the following information in the year-end financial statements:


Capital expenditures 1,000,000
Finance lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Interest payments 220,000
What total amount should be reported as supplemental disclosures in the statement of cash flows
prepared using the indirect method?
a. 545,000
b. 745,000
c. 1,125,000
d. 1,870,000

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Problem 44 (Operating activities)

An entity reported net income of P3,000,000 for the current year. Changes occurred in certain
accounts as follows:
Equipment 250,000 increase
Accumulated depreciation 400,000 increase
Note payable 300,000 increase
During the year, the entity sold equipment costing P250,000 with accumulated depreciation of
P150,000 for a gain of P50,000. In December of the current year, the entity purchased equipment
costing P500,000 with P200,000 cash and a 12% note payable of P300,000. What amount should
be reported as net cash provided by operating activities?
a. 3,400,000
b. 3,500,000
c. 3,550,000
d. 3,600,000

Problem 45 (Operating activities)

An entity reported net income of P5,000,000 for the current year. Depreciation expense was
P1,900,000. The following working capital accounts changed:
Accounts receivable 1,100,000 increase
Nontrading equity investment 1,600,000 increase
Inventory 730,000 increase
Nontrade note payable 1,500,000 increase
Accounts payable 1,220,000 increase

Under the indirect method, what net amount of adjustments is required to reconcile net income to
net cash provided by operating activities?
a. 4,950,000
b. 1,050,000
c. 1,290,000
d. 310,000
Page 16

SOLUTIONS
Problem 1 Answer A
Cash (600,000 -200,000 overdraf) 400,000
Accounts receivable 700,000
Inventory 1,200,000
Prepaid expenses 200,000
Land held for resale 2,000,000
Total current assets 4,500,000

Problem 2 Answer A
Liabilities 1,200,000
Share capital 7,500,000
Retained earnings 150,000
Total liabilities and equity 8,850,000
Revenue from sales and consulting 820,000
Operating costs and expenses ( 640,000)
Net income 180,000
Dividend declared ( 30,000)
Retained earnings 150,000

Problem 3 Answer C
Accounts payable 55,000
Unsecured notes 400,000
Accrued expenses 35,000
Serial bonds 1,000,000
Total current liabilities 1,490,000
The contingent liability is only disclosed.
Under IFRS, the deferred tax liability is noncurrent regardless of the reversal period.

Problem 4 Answer C
Net income per book 7,410,000
Unrealized loss- other comprehensive income erroneously deducted 540,000
Prior period error erroneously deducted 750,000
Gain on credit risk – other comprehensive income erroneously added ( 500,000)
Adjusted net income 8,200,000
The gain on early retirement of bonds payable and the loss from fire are properly included in net
income.

Problem 5 Answer D
Total reported income 1,700,000
Total cash dividends paid ( 800,000)
Total share dividends distributed ( 200,000)
Prior period adjustment – credit 75,000
Retained earnings – December 31, 2015 775,000
The unrealized holding loss on trading investment is ignored because it is already included in the
reported income since incorporation.

Page 17

Problem 6 Answer C
Checkbook balance 8,000,000
NSF check (3,000,000)
Undelivered check drawn 2,500,000
Coins and currencies 800,000
Total cash 8,300,000
The check payable to the entity is properly not included because it is postdated January 2, 2016.
Technically, the three-month money market instruments are cash equivalents but not cash.

Problem 7 Answer A
Customer A 1,000,000
Customer B 700,000
Total other receivables 800,000
Total impairment loss 2,500,000
Customer C 2,000,000
Customer D 2,500,000
Other accounts receivable 3,500,000
Total other receivables for collective assessment of impairment 8,000,000
Under IFRS significant accounts receivable not impaired should be combined with other accounts
receivable not individually significant for collective assessment of impairment.

Problem 8 Answer D
Trade accounts receivable 930,000
Allowance for uncollectible accounts ( 20,000)
Claim against shipper 30,000
Total current net receivables 940,000
The selling price of unsold goods on consignment should be excluded from accounts receivable but
the cost should be included in inventory.
The security deposit is classified as noncurrent.
Problem 9 Answer D
Long-term note receivable – second note 2,000,000
Interest on note (2,000,000 x 3% x 5 years) 300,000
Total maturity 2,300,000
Multiply by PV factor .68
Present value of note receivable 1,564,000
Short-term note receivable – first note 2,000,000
Total carrying amount of notes receivable 3,564,000
The long-term note receivable should be discounted even if is interest-bearing because the interest
rate is unreasonably low compared to the market rate.
The short-term note receivable is reported at face amount because the discount is usually not
material.

Page 18

Problem 10 Answer B
Face amount 1,500,000
Direct origination cost 40,000
Origination fee charged against borrower (4% x 1,500,000) ( 60,000)
Initial carrying amount 1,480,000
The direct origination cost is a deferred charge and the origination fee received from the borrower
is unearned income and the two should be included in the measurement of loan receivable.
The indirect origination cost is an outright expense.

Problem 11 Answer D
Physical count 6,000,000
Good in transit purchased FOB shipping point 300,000
Total inventory 6,300,000

The goods billed to a customer are properly included in inventory because the term is FOB shipping
point and the goods are delivered January 7, 2016.

Problem 12 Answer C
Accounts payable per book 4,500,000
Reversal of undelivered checks 2,000,000
Goods purchased, received and recognized at net amount (750,000 x 98%) 735,000
Accounts payable to be reported 7,235,000
The undelivered checks should be restored to the cash balance and accounts payable.
The goods purchased and received on January 2, 2016 should be excluded from accounts payable
because the term is FOB destination.
Problem 13 Answer D
Cost Retail
Inventory – January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markup ________ 210,000
Goods available for sale 4,900,000 7,000,000
Conservative cost ratio (4,900,000 / 7,000,000) 70%
Sales (5,500,000)
Markdown ( 100,000)
Ending inventory at retail 1,400,000
At cost (70% x 1,400,000) 980,000
The lower of average cost or NRV retail method is the same as the conservative or conventional
method. Thus, the markdown is ignored in computing the cost ratio.

Page 19

Problem 14 Answer D
Cost of goods sold:
June (1,980,000 / 120%) 1,650,000
July (2, 040,000 / 120%) 1,700,000
August (2,160,000 / 120%) 1,800,000
Inventory – July 1 (30% x 1,700,000) 510,000
Purchases (SQUEEZE) 1,730,000
Goods available for sale 2,240,000
Inventory – July 31 (30% x 1,800,000) ( 540,000)
Cost of goods sold - July 1,700,000
The amount of purchases for July is computed by working back from the cost of goods sold.

Problem 15 Answer A
Freestanding trees 5,000,000
The land under trees and roads in forest should be included in property, plant and equipment.
Under IFRS, animals related to recreational activities as in game parks, and bearer plants, such as
rubber trees and grape vines should be accounted for as property, plant and equipment.

Problem 16 Answer B
Cash equivalent price 2,300,000
Installation cost 80,000
Total cost of machine 2,380,000
The storage cost is an outright expense.

Problem 17 Answer C
Average expenditures 6,000,000
Specific borrowing (4,400,000)
General borrowing 1,600,000

Interest on specific borrowing (4,400,000 x 10%) 440,000


Interest income on temporary investment of specific borrowing ( 90,000)
Interest on general borrowing (1,600,000 x 9%) 144,000
Total capitalized interest 494,000

Page 20

Problem 18 Answer D
Purchase price 28,000,000
Development cost – 2015 1,000,000
Development cost – 2016 4,000,000
Estimated restoration cost 2,000,000
Total cost 35,000,000
Residual value ( 5,000,000)
Depletable amount 30,000,000

Production in 2016 3,000,000


Remaining estimate – December 31, 2016 7,000,000
Total estimate – January 1, 2016 10,000,000

Rate per unit (30,000,000 / 10,000,000) 3.00


Depletion for 2016 (3,000,000 x 3) 9,000,000

Production in 2017 2,500,000


Remaining estimate – December 31, 2017 3,500,000
Total estimate – January 1, 2017 6,000,000

Depletable amount 30,000,000


Depletion 2016 ( 9,000,000)
Remaining depletable amount 21,000,000
New rate (21,000,000 / 6,000,000) 3.50

Depletion 2017 (2,500,000 x 3.50) 8,750,000

Problem 19 Answer C
Accumulated depreciation – 6/30/2015 10,500,000
Depreciation from July 1 to December 31, 2015 (30,000,000 / 10 x 6/12) 1,500,000
Accumulated depreciation – 12/31/2015 12,000,000

Cost 30,000,000
Accumulated depreciation ( 12,000,000)
Carrying amount 18,000,000
Fair value 27,000,000
Revaluation surplus 9,000,000
Deferred tax liability (30% x 9,000,000) ( 2,700,000)
Net revaluation surplus 6,300,000

Problem 20 Answer C
Other coding cost afer establishment of technological feasibility 2,400,000
Other testing costs afer establishment of technological feasibility 2,000,000
Costs of producing product masters 1,500,000
Total capitalized cost of computer sofware 5,900,000

The completion of detailed program design and the cost incurred to establish technological
feasibility should be expensed immediately.

The duplication of computer sofware and packaging product should be charged to inventory.

Page 21
Problem 21 Answer B
Travel costs of employees 400,000
Training of local employees 1,200,000
Total start up costs to be expensed 1,600,000
The production equipment should be capitalized.
The license fees and advertising costs should be expensed but not within the purview of start up
costs.

Problem 22 Answer A
Patent - January 1, 2013 1,920,000
Amortization for 2013 and 2014 (1,920,000 / 16 x 2) ( 240,000)
Carrying amount – January 1, 2015 1,680,000
Purchase price 800,000
Trademark (3/4 x 800,000) ( 600,000)
Noncompetition agreement 200,000
Patent (1,680,000 / 6 years remaining) 280,000
Noncompetition agreement (200,000 / 5 years) 40,000
Total amortization for 2015 320,000
The patent has a remaining life of 6 years because the revised life is 8 years from the date of
acquisition and two years already expired.
The trademark is not amortized because the life is indefinite.
The annual consulting fee is an outright expense.

Problem 23 Answer A
Net assets per book 32,000,000
Fair value of property, plant and equipment greater 7,500,000
Fair value of other assets zero ( 5,000,000)
Fair value of long-term debt lower 2,000,000
Net assets at fair value 36,500,000
Acquisition cost 40,000,000
Goodwill 3,500,000
The net assets should be recognized at fair value in a business combination.

Problem 24 Answer A
Purchase price of security C 4,000,000
Transaction cost 400,000
Total cost 4,400,000
If the equity investment is measured at fair value through other comprehensive income (FVOCI),
the transaction cost is capitalized
Market value of security C 12/31/2015 4,700,000
Historical cost 4,400,000
Unrealized gain – OCI 12/31/20015 300,000

Journal entry on July 1, 2016


Cash 5,200,000
Unrealized gain – OCI 300,000
Financial asset – FVOCI 4,700,000
Retained earnings 800,000

Under the final version of IFRS 9, any change in fair value of an equity investment measured at
FVOCI is permanently excluded from profit or loss under all circumstances but may transferred to
equity or retained earnings.

Page 22

Problem 25 Answer A

January 1, 2015 to October 31, 2015 (500,000 x 12% x 10/12) 50,000


February 1, 2015 to July 31, 2015 (1,500,000 x 12% x 6/12) 90,000
May 1, 2015 to December 31, 2015 (800,000 x 12% x 8/12) 64,000
Correct interest expense 204,000
Recorded interest expense 150,000
Interest expense understated 54,000

Problem 26 Answer A

Total vacation days – 2013, 2014 and 2015 30


Total vacation days used (8 + 10) 18
Unused vacation days 12

From 2014 2
From 2015 10
Total unused vacation days - FIFO 12

2014 (35 employees x 8 hours x 2 x P27) 15,120


2015 (35 x 8 x 10 x P28.50) 79,800
Accrued liability – 12/31/2015 94,920

Problem 27 Answer B

Date Payment 10% interest Principal Present value


1/1/2015 6,330,000
1/1/2015 1,000,000 - 1,000,000 5,330,000
1/1/2016 1,000,000 533,000 467,000 4,863,000
The relevant present value is the amount computed using the 10% implicit rate.
The first payment on January 1, 2015 is applied all to principal

Problem 28 Answer D

Present value – 7/1/2015 (cash price) 3,500,000


Payment on 7/1/2015 – all applicable to principal ( 600,000)
Present value – 7/1/2015 2,900,000

Interest income from July 1, 2015 to June 30, 2016 (10% x 2,900,000) 290,000

Cash price 3,500,000


Carrying amount 2,800,000
Gain on sale 700,000
Interest income 7/1/2015 to 12/31/2015 (290,000 x 6/12) 145,000
Total income 845,000

Page 23

Problem 29 Answer B

Fair value of machine 6,500,000


Carrying amount 7,000,000
Impairment loss ( 500,000)

Sale price 5,000,000


Fair value 6,500,000
Deferred loss ( 1,500,000)

Impairment loss 500,000


Amortization of deferred loss (1,500,000 / 5 years) 300,000
Total loss to be recognized in 2015 800,000
If the leaseback is an operating lease and the sale price is below fair value of the asset
compensated by below market rent:

a. The difference between the sale price and the fair value is a deferred loss to be amortized over
the lease term.

b. If the fair value is below the carrying amount, the carrying amount is written down to fair value
and the writedown is recognized immediately as an impairment loss.

Problem 30 Answer A

Current service cost 500,000


Interest on projected benefit obligation 600,000
Interest income on plan assets ( 350,000)
Loss on plan settlement 250,000
Past service cost during the year 300,000
Total employee benefit expense 1,300,000

Problem 31 Answer B

Plan assets at fair value – 12/21/2015 9,000,000


Contribution to plan 2016 1,260,000
Actual return on plan assets (SQUEEZE) 765,000
Total 11,025,000
Benefits paid in 2016 ( 1,125,000)
Plan assets at fair value – 12/31/2016 9,900,000

The actual return or plan assets is “squeezed” by working back from ending plan assets at fair
value.

Problem 32 Answer C

Accumulated vacations – 1/1/2015 350,000


Vacation taken in 2015 200,000
Liability balance – 1/1/2015 150,000

Vacations earned in 2015 300,000


Adjustment of accumulated vacations – 1/1/2015 (10% x 150,000) 15,000
Total vacation pay expense 315,000

Page 24

Problem 33 Answer A

Termination benefit (120 employee x P20,000) 2,400,000

Total payment until closure 60,000


Termination benefit ( 20,000)
Additional benefit considered as short-term benefit 40,000

Short-term benefit (100 employees x 40,000) 4,000,000


Under IFRS, the additional amount paid to employees who render service until closure is no longer
a termination benefit but short-term benefit.

Problem 34 Answer A

Financial income 9,000,000


Rent received in advance 1,600,000
Tax exempt income ( 2,000,000)
Tax depreciation in excess of financial depreciation (1,000,000)
Taxable income 7,600,000

Current tax expense (30% x 7,600,000) 2,280,000


Tax payment during the year ( 500,000)
Current tax liability 1,780,000

Problem 35 Answer C

Interest paid (7% x 100,000) 7,000


Interest expense (6% x 105,000) 6,300
Premium amortization 700

Carrying amount – 6/30/2015 105,000


Face amount 100,000
Premium on bonds payable – 6/30/2015 5,000
Amortization 7/1/2015 to 6/30/2016 ( 700)
Unamortized premium – 6/30/2016 4,300

Problem 36 Answer A

Share options on January 1, 2015 (10,000 x 20) 200,000


Share options on January 1, 2016 (20,000 x 25) 500,000

The share options are measured at fair value on the date of grant and allocated over the vesting
period.

Share options on January 1, 2015 (200,000 /4 years) 50,000


Share options on January 1, 2016 (500,000 / 4 years) 125,000
Total compensation expense for 2016 175,000

Page 25

Problem 37 Answer B

Retained earnings – January 1 200,000


Prior period error – overdepreciation 100,000
Net income 1,300,000
Retained earnings appropriated for treasury shares reverted to unappropriated 200,000
balance
Increase in retained earnings appropriated for contengencies ( 100,000)
Cash dividends paid ( 500,000)
Change in accounting policy - credit 150,000
Retained earnings unappropriated - December 31 1,350,000

Problem 38 Answer B

Ordinary shares outstanding 110,000


Potential ordinary shares from convertible preference shares 20,000
Total ordinary shares 130,000

Diluted EPS (850,000 net income / 130,000) 6.54

Problem 39 Answer B

Operating expenses 100,000


Beginning prepaid expenses ( 5,000)
Ending prepaid expenses 10,000
Beginning accrued liabilities 8,000
Ending accrued liabilities ( 20,000)
Operating expenses paid 93,000

Problem 40 Answer D

Increase in current cost – nominal 1,500,000


Increase in current cost – constant 1,200,000
Increase in current cost due to inflation 300,000

Problem 41 Answer D

Prepaid royalties – January 1 650,000


Increase in prepaid royalties credited to expense 250,000
Prepaid royalties – December 31 900,000

Page 26

Problem 42 Answer B
Professional fees expense per book 820,000
Accrued legal fees – November 60,000
Accrued legal fees – December 70,000
Adjusted professional fees expense 950,000

The entity already recorded P550,000 out of total consultants’ fee of P650,000. The balance of
P100,000 is not recognized because no work has been performed as yet.

Problem 43 Answer A

IFRS requires the following disclosures when preparing the statement of cash flows:

Income taxes paid 325,000


Interest payments 220,000
Total 545,000

Problem 44 Answer B

Increase in accumulated depreciation 400,000


Add : Accumulated depreciation of equipment sold 150,000
Depreciation for the year 550,000

Net income 3,000,000


Depreciation for the year 550,000
Gain on sale of equipment ( 50,000)
Net cash flows - operating 3,500,000

Problem 45 Answer C

Depreciation 1,900,000
Increase in accounts receivable (1,100,000)
Increase in inventory ( 730,000)
Increase in accounts payable 1,220,000
Net adjustment to net income as an addition 1,290,000
The increase in nontrading equity investment is an investing activity.
The increase in nontrade note payable is a financing activity.
Page 27

SITUATION PROBLEM I – BANK RECONCILIATION

An entity had the following bank reconciliation on June 30, 2015:


Balance per bank statement, June 30 3,000,000
Deposit transit 400,000
Total 3,400,000
Outstanding checks ( 900,000)
Balance per book, June 30 2,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for the depositor entity) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000
All reconciling items on June 30 cleared through the bank in July. The deposit in transit
amounted to P1,000,000 and the outstanding checks totaled P600,000 on July 31.
1. What is the amount of cash in bank that should be reported on July 31, 2015?
a. 5,000,000
b. 5,400,000
c. 4,550,000
d. 4,900,000

2. What is the cash balance per ledger on July 31, 2015?


a. 5,350,000
b. 5,550,000
c. 4,500,000
d. 5,400,000

3. What is the amount of cash receipts for book for the month of July?
a. 9,800,000
b. 8,600,000
c. 9,400,000
d. 9,600,000

4. What is the amount of cash disbursements per book for the month of July?
a. 7,300,000
b. 6,700,000
c. 6,850,000
d. 6,550,000
Page 28

SOLUTION – SITUATION PROBLEM I

Question 1 Answer B

Balance per bank – June 30 3,000,000


July bank deposits 9,000,000
July bank disbursements ( 7,000,000)
Balance per bank – July 31 5,000,000
July deposits in transit 1,000,000
July outstanding checks ( 600,000)
Adjusted bank balance 5,400,000

Question 2 Answer A

Balance per ledger – July 31 (SQUEEZE) 5,350,000


Note collected by bank in July 200,000
NSF check in July ( 140,000)
Service charge in July ( 10,000)
Adjusted book balance 5,400,000

The balance per book on July 31 is “squeezed” by working back from the adjusted balance.

Question 3 Answer C

Deposits per bank statement for July 9,000,000


Note collected by bank in July ( 200,000)
Deposit in transit – June 30 ( 400,000)
Deposit in transit – July 31 1,000,000
Cash receipts per book for July 9,400,000

Question 4 Answer D

Disbursements per bank statement for July 7,000,000


NSF check in July ( 140,000)
Service charge in July ( 10,000)
Outstanding checks – June 30 ( 900,000)
Outstanding checks – July 31 600,000
Cash disbursements per book for July 6,550,000
Page 29

SITUATION PROBLEM 2 – ACCOUNTS RECEIVABLE

From inception of operations, an entity provided for uncollectible accounts expense under the
allowance method and provisions were made monthly at 2% of credit sales. No year-end
adjustments to the allowance account were made. The balance in the allowance for doubtful
accounts was P1,000,000 on January 1, 2015. During 2015, credit sales totaled P20,000,000, interim
provisions for doubtful accounts were made at 2% of credit sales, P200,000 of bad debts were
written off, and recoveries of accounts previously written off amounted to P50,000. An aging of
accounts receivable was made for the first time on December 31, 2015 as follows:
Classification Balance Uncolletible
November – December 6,000,000 10%
July – October 2,000,000 20%
January – June 1,500,000 30%
Prior to January 1, 2015 500,000 50%

Based on the review of collectibility of the account balances in the “prior to January 1 2015” aging
category, additional accounts totaling P100,000 are to be written off on December 31, 2015.
Effective December 31, 2015, the entity adopted the aging method for estimating the allowance for
doubtful accounts.

1. What is the required allowance for doubtful accounts on December 31, 2015?
a. 1,650,000
b. 1,950,000
c. 1,700,000
d. 1,450,000

2. What amount should be reported as doubtful accounts expense in the income statement for
2015?
a. 1,200,000
b. 1,650,000
c. 900,000
d. 950,000

3. What is the year-end adjustment to the allowance for doubtful accounts on December 31,
2015?
a. 900,000 debit
b. 900,000 credit
c. 500,000 debit
d. 500,000 credit

4. What is the net realizable value of accounts receivable on December 31, 2015?
a. 9,900,000
b. 8,250,000
c. 8,350,000
d. 8,200,000
Page 30

SOLUTION – SITUATION PROBLEM 2

Question 1 Answer A

6,000,000 x 10% 600,000


2,000,000 x 20% 400,000
1,500,000 x 30% 450,000
500,000 – 100,000 x 50% 200,000
Required allowance – December 31, 2015 1,650,000

Question 2 Answer C

Allowance for doubtful accounts – January 1 1,000,000


Recoveries of accounts written off 50,000
Doubtful accounts expense (SQUEEZE) 900,000
Total 1,950,000
Accounts written off (200,000 + 100,000) ( 300,000)
Allowance for doubtful accounts – December 31 1,650,000

The doubtful accounts expense is squeezed by working back from the ending allowance for
doubtful accounts.

Question 3 Answer D

Correct doubtful accounts expense 900,000


Recorded doubtful accounts expense (2%) x 20,000,000 sales) 400,000
Increase in allowance - credit 500,000

Question 4 Answer B

November – December 6,000,000


July – October 2,000,000
January – June 1,500,000
Prior January 1, 2015 (500,000 – 100,000) 400,000
Accounts receivable – December 31, 2015 9,900,000
Allowance for doubtful accounts ( 1,650,000)
Net realizable value 8,250,000
Page 31

SITUATION PROBLEM 3 – GROSS PROFIT METHOD

On December 31, 2015, a fire damaged the warehouse and factory of an entity completely
destroying the goods in process inventory. There was no damage to the raw materials, finished
goods and factory supplies The physical inventory revealed the following.
January 1 December 31
Raw materials 1,700,000 2,000,000
Goods in process 4,300,000 0
Finished goods 6,000.000 4,500,000
Factory supplies 500,000 400,000
The gross profit margin historically approximated 30% of sales. The sales for the year amounted to
P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year amounted
to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
1. What is the cost of raw materials used?
a. 5,700,000
b. 3,700,000
c. 3,800,000
d. 3,600,000

2. What is the total manufacturing cost?


a. 13,000,000
b. 11,800,000
c. 11,700,000
d. 11,600,000

3. What is the cost of goods sold?


a. 12,000,000
b. 16,000,000
c. 13,000,000
d. 14,000,000

4. What is the cost of goods in process inventory destroyed by fire?


a. 3,500,000
b. 3,800,000
c. 2,500,000
d. 1,500,000
Page 32

SOLUTION – SITUATION PROBLEM 3

Question 1 Answer B

Raw materials – January 1 1,700,000


Purchases 4,000,000
Raw materials available for use 5,700,000
Raw materials – December 31 ( 2,000,000)
Raw materials used 3,700,000

Question 2 Answer C

Raw materials used 3,700,000


Direct labor 5,000,000
Manufacturing overhead (60% x 5,000,000) 3,000,000
Total manufacturing cost 11,700,000

The change in the factory supplies is no longer considered because it is already part of the
manufacturing overhead applied.

Question 3 Answer D

Cost of goods sold (70% x 20,000,000) 14,000,000

The cost ratio is 70% because the gross profit rate is 30% on sales.

Question 4 Answer A

Total manufacturing cost 11,700,000


Goods in process – January 1 4,300,000
Total goods in process 16,000,000
Goods in process – December 31 (SQUEEZE) ( 3,500,000)
Cost of goods manufactured 12,500,000
Finished goods – January 1 6,000,000
Goods available for sale 18,500,000
Finished goods – December 31 ( 4,500,000)
Cost of goods sold 14,000,000

The cost of ending goods in process is computed by working back from the cost of goods sold.
Page 33

SITUATION PROBLEM 4 – INVESTMENT IN ASSOCIATE

On January 1, 2015, an entity acquired a 10% interest in an investee for P3,000,000. The
investment was accounted for under the cost method. During 2015, the investee reported net
income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2016, 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 2016 and paid
dividend of P5,000,000 on December 31, 2016.

1. What amount of investment income should be recognized in 2015?


a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the goodwill arising from the acquisition on January 1, 2016?


a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

3. What total amount of income should be recognized by the investor in 2016?


a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2015?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
Page 34

SOLUTION – SITUATION PROBLEM 4

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 3,500,000


New 15% interest 8,500,000
Total cost – January 1, 2016 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying amount
(25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C

Share in net income (25% x 8,000,000) 2,000,000


Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 1,800,000

Fair value of 10% interest 3,500,000


Historical cost 3,000,000
Remeasurement gain 500,000
Net investment income 1,800,000
Total income in 2016 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 1/1/2016 12,000,000


Net investment income 1,800,000
Share in cash dividend (25% x 5,000,000) ( 1,250,000)
Carrying amount – 12/31/2016 12,550,000

Page 35
SITUATION PROBLEM 5 – PROPERTY, PLANT AND EQUIPMENT

January 1, 2015, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 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 seller’s 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
entity’s 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, 2008 was scrapped on June 30, 2015. 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, 2015. Original cost of the machine sold was P700,000 on
January 1, 2012, 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, 2015?


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, 2015?


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, 2015?


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, 2015?


a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000

Page 36

SOLUTION – SITUATION PROBLEM 5

Question 1 Answer A

Land – January 1 4,000,000


Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 7,800,000

Quoted price of shares issued for land and building (200,000 x P45) 9,000,000

Current appraized value :


Land 2,000,000
Building 8,000,000
Total 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 1,300,000


Expenditures for parking lot, street and sidewalks 1,200,000
Balance – December 31 2,500,000

Question 3 Answer C

Buildings – January 1 20,000,000


Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 27,200,000

Question 4 Answer B

Machinery and equipment - January 1 8,000,000


Machinery and equipment purchased 4,000,000
Freight and unloading 100,000
Installation 300,000
Machinery scrapped ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000

END