FINANCIAL ACCOUNTING AND REPORTING TEST BANK 80102016 - 3 PROBLEM 1 – INVESTMENT IN ASSOCIATE
On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2016, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years. The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on December 31, 2017. 1. What amount of investment income should be recognized in 2016? a. b. c. d.
400,000 100,000 500,000 300,000
2. What is the implied goodwill arising from the acquisition on January 1, 2017? 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 2017? a. b. c. d.
2,000,000 2,500,000 2,300,000 1,800,000
4. What is the carrying amount of the investment in associate on December 31, 2017? a. b. c. d.
12,550,000 12,350,000 11,950,000 12,750,000
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SOLUTION - PROBLEM 1 Question 1 Answer B Dividend income (10% x 1,000,000)
100,000
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B Existing 10% interest remeasured at fair value New 15% interest Total cost – January 1, 2017 Net assets acquired (25% x 36,000,000) Excess of cost over carrying amount Excess attributable to equipment whose fair value is greater than carrying amount (25% x 4,000,000) Goodwill
3,500,000 8,500,000 12,000,000 ( 9,000,000) 3,000,000 ( 1,000,000) 2,000,000
Question 3 Answer C Share in net income (25% x 8,000,000) Amortization of excess attributable to equipment (1,000,000 / 5 years) Net investment income Fair value of 10% interest Historical cost Remeasurement gain Net investment income Total income in 2017
2,000,000 ( 200,000) 1,800,000 3,500,000 3,000,000 500,000 1,800,000 2,300,000
If the investment in associate is achieved in stages the old interest is remeasured at fair value through profit or loss.
Question 4 Answer A Total cost 1/1/2017 Net investment income Share in cash dividend (25% x 5,000,000) Carrying amount – 12/31/2017
12,000,000 1,800,000 ( 1,250,000) 12,550,000
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PROBLEM 2 – PROPERTY, PLANT AND EQUIPMENT January 1, 2016, an entity disclosed the following balances: Land Land improvements Buildings Machinery and equipment
4,000,000 1,300,000 20,000,000 8,000,000
During the current year, the following transactions occurred: * A tract of land was acquired for P2,000,000 cash as a building site. *
A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The plant facility was carried on the 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, 2009 was scrapped on June 30, 2016. Straight line depreciation had been recorded on the basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was P700,000 on January 1, 2013, and it was depreciated on the straight line basis over an estimated useful life of eight years and a residual value of P50,000. 1. What is the total cost of land on December 31, 2016? a. 7,800,000 b. 7,600,000 c. 8,000,000 d. 6,800,000 2. What is the total cost of land improvements on December 31, 2016? a. 1,200,000 b. 3,600,000 c. 1,300,000 d. 2,500,000 3. What is the total cost of buildings on December 31, 2016? a. 28,000,000 b. 25,400,000 c. 27,200,000 d. 27,000,000 4. What is total cost of machinery and equipment on December 31, 2016? a. 12,400,000 b. 11,500,000 c. 11,000,000 d. 11,700,000
Page 4 SOLUTION – PROBLEM 5
Question 1 Answer A Land – January 1 Land acquired for cash Land acquired by issuing shares (2/10 x 9,000,000) Land – December 31
4,000,000 2,000,000 1,800,000 7,800,000
Quoted price of shares issued for land and building (200,000 x P45)
9,000,000
Current appraized value : Land Building Total
2,000,000 8,000,000 10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to the land and building based on the current appraised value.
Question 2 Answer D Land improvements – January 1 Expenditures for parking lot, street and sidewalks Balance – December 31
1,300,000 1,200,000 2,500,000
Question 3 Answer C Buildings – January 1 Building acquired by issuing shares (8/10 x 9,000,000) Balance – December 31
20,000,000 7,200,000 27,200,000
Question 4 Answer B Machinery and equipment - January 1 Machinery and equipment purchased Freight and unloading Installation Machinery scrapped Machinery sold Machinery equipment – December 31
8,000,000 4,000,000 100,000 300,000 ( 200,000) ( 700,000) 11,500,000
Page 5 PROBLEM 3 - INCOME TAX An entity had the following financial statement elements for which the December 31, 2016 carrying amount is different from the December 31, 2016 tax basis:
Equipment Accrued liability – health care Computer software cost
Carrying amount
Tax basis
Difference
5,500,000 500,000 2,000,000
4,000,000 0 0
1,500,000 500,000 2,000,000
The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes. The accrued liability is the estimated health care cost that was recognized as expense in 2016 but deductible for tax purposes when actually paid. In January 2016, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2016 for tax purposes. The pretax accounting income for 2016 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2016. 1. What amount should be reported as current tax expense for 2016? a. b. c. d.
5,400,000 3,600,000 3,300,000 5,700,000
2. What amount should be reported as total tax expense for 2016? a. b. c. d.
4,500,000 4,950,000 4,050,000 3,900,000
3. What amount should be reported as deferred tax liability on December 31, 2016? a. 1,050,000 b. 1,200,000 c. 900,000 d. 150,000 4. What amount should be reported as deferred tax asset on December 31, 2016? .
a. 750,000 b. 600,000 c. 150,000 d. 0
Page 6 SOLUTION – PROBLEM 3 Question 1 Answer B Accounting income Future taxable amount: Equipment Computer software Future deductible amount: Accrued liability Taxable income Current tax expense (30% x 12,000,000)
15,000,000
(1,500,000) (2,000,000) 500,000 12,000,000 3,600,000
Question 2 Answer A Total tax expense (30% x 15,000,000)
4,500,000
Question 3 Answer A Deferred tax liability (30% x 3,500,000)
1,050,000
Question 4 Answer C Deferred tax asset (30% x 500,000)
150,000
Page 7 PROBLEM 4 - BENEFIT COST An entity provided the following pension plan information: Projected benefit obligation – January 1, 2016 Fair value of plan assets – January 1, 2016 Pension benefits paid during the year Current service cost for 2016 Past service cost for 2016 (vesting period 5 years) Actual return on plan assets Contribution to the plan Actuarial loss due to change in assumptions on projected benefit obligation Discount or settlement rate 1. What is the employee benefit expense for the current year? a. b. c. d.
2,245,000 1,905,000 2,525,000 1,750,000
2. What is the net remeasurement loss for the current year? a. b. c. d.
200,000 100,000 300,000 400,000
3. What is the projected benefit obligation on December 31, 2016? a. b. c. d.
5,550,000 5,075,000 5,775,000 5,975,000
4. What is the fair value of plan assets on December 31, 2016? a. b. c. d.
4,480,000 4,230,000 4,300,000 4,050,000
5. What amount should be reported as accrued benefit cost on December 31, 2016? a. 1,745,000 b. 1,750,000 c. 1,045,000 d. 700,000
3,500,000 2,800,000 250,000 1,750,000 425,000 180,000 1,500,000 200,000 10%
Page 8 SOLUTION - PROBLEM 4 Question 1 Answer A Current service cost Past service cost Interest expense (10% x 3,500,000) Interest income (10% x 2,800,000) Employee benefit expense
1,750,000 425,000 350,000 ( 280,000) 2,245,000
Question 2 Answer C Actual return Interest income Remeasurement loss on plan assets Actuarial loss on PBO Net remeasurement loss
180,000 280,000 100,000 200,000 300,000
Question 3 Answer D PBO – January 1 Current service cost Past service cost Interest expense Actuarial loss Benefits paid PBO – December 31
3,500,000 1,750,000 425,000 350,000 200,000 ( 250,000) 5,975,000
Question 4 Answer B FVPA – January 1 Actual return Contribution to the plan Benefits paid FVPA – December 31
2,800,000 180,000 1,500,000 ( 250,000) 4,230,000
Question 5 Answer A FVPA – December 31 PBO – December 31 Prepaid/accrued benefit cost – December 31
4,230,000 (5,975,000) (1,745,000)
Page 9 PROBLEM 5 - SHARE OPTIONS On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par for P30 per share. The employees exercised the options on January 1, 2019. Quoted market prices of shares are as follows. 2016 2017 2018 2019
34 39 42 44
The service period is for two years beginning January 1, 2016. The fair value of the share options cannot be measured reliably. 1. What is the compensation expense for 2016? a. b. c. d.
400,000 200,000 300,000 800,000
2. What is the compensation expense for 2017? a. 1,800,000 b. 1,000,000 c. 1,400,000 d. 400,000 3. What is the compensation expense for 2018? a. 200,000 b. 600,000 c. 400,000 d. 0 4. What amount should be credited to share premium upon exercise of the share options on January 1, 2019? a. 3,800,000 b. 4,400,000 c. 4,800,000 d. 0
Page 10 SOLUTION - PROBLEM 5 Question 1 Answer A Question 2 Answer C Question 3 Answer B
2016 2017
2016 2017 2018
(200,000 x 4/2) (200,000 x 9) (200,000 x 3)
Quoted price - 2018 Quoted price - 2017 Increase in market price in 2018
Quoted price
Option price
34 39
30 30
4 9
Cumulative
Expense
400,000 1,800,000
400,000 1,400,000 600,000 2,400,000
42 39 3
Question 4 Answer B Option price (200,000 x 30) Share options outstanding Total consideration Par value (200,000 x 20) Share premium
Intrinsic value
6,000,000 2,400,000 8,400,000 4,000,000 4,400,000
Page 11 PROBLEM 6 – EARNINGS PER SHARE An entity reported the following information on January 1, 2016: Ordinary share capital, P10 par, 800,000 shares Preference share capital, P50 par, 50,000 shares 12% Bonds payable
8,000,000 2,500,000 5,000,000
The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on preference shares are in arrears for two years. The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond. Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the beginning and ending of 2016. The average market price of the ordinary share was P30 per share and the market price on December 31, 2016 was P40 per share. May 1
Issued 60,000 ordinary shares at P25 per share.
July 1
Purchased 100,000 ordinary shares at P15 to be held as treasury.
Oct.
Converted bonds with face amount of P2,000,000.
1
Dec. 31
The net income for 2016 was P5,000,000. The tax rate is 30%.
1. What is the amount of basic earnings per share? a. b. c. d.
6.02 5.26 5.72 5.42
2. What is the total number of potentially dilutive ordinary shares at the beginning of year? a. b. c. d.
530,000 500,000 590,000 560,000
3. What is the amount of diluted earnings per share? a. b. c. d.
5.52 4.20 4.07 3.97
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SOLUTION - PROBLEM 6 Question 1 Answer C Net income Preference dividend (10% x 2,500,000) Net income - ordinary
5,000,000 ( 250,000) 4,750,000
January 1 (800,000 x 12/12) May 1 ( 60,000 x 8/12) July 1 (100,000 x 6/12) October 1 ( 2,000 x 80 x 3/12) Average shares outstanding
800,000 40,000 ( 50,000) 40,000 830,000
Basic EPS (4,750,000 / 830,000)
5.72
Question 2 Answer A Share options Treasury shares (1,800,000 / 30) Incremental ordinary shares from share options Ordinary shares from conversion of preference shares Ordinary shares from conversion of bonds payable (5,000 x 80) Potential ordinary shares
90,000 ( 60,000) 30,000 100,000 400,000 530,000
Question 3 Answer C Incremental EPS on Preference shares (250,000 / 100,000)
2.50
Interest on bonds not converted (3,000,000 x 12% x 70%) Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) Total interest expense
252,000 126,000 378,000
Incremental EPS on bonds (378,000 /400,000)
Basic EPS Share options Diluted EPS Bonds payable Diluted EPS Preference shares Diluted EPS Potential ordinary shares – bonds Reported in basic EPS Reported in diluted EPS
.94
Net income
Shares
EPS
4,750,000
830,000 30,000 860,000 360,000 1,220,000 100,000 1,320,000
5.72
4,750,000 378,000 5,128,000 250,000 5,378,000
5.52 4.20 4.07
400,000 (40,000) 360,000
Page 13 PROBLEM 7 – STATEMENT OF CASH FLOWS An entity presented the following comparative financial information:
Property, plant and equipment Accumulated depreciation Long-term investments Prepaid expenses Merchandise inventory Accounts receivable, net of allowance Cash Share capital-ordinary Retained earnings Long-term note payable Accounts payable Dividend payable Accrued expenses
2017
2016
2,190,000 450,000 225,000 351,000 1,950,000 1,560,000 690,000 3,000,000 906,000 1,275,000 309,000 201,000 825,000
1,440,000 270,000 315,000 1,260,000 1,080,000 640,000 2,400,000 688,000 1,095,000 282,000 -
2017 Net credit sales Cost of goods sold Gross profit Expenses, including income tax Net income
7,020,000 (3,915,000) 3,105,000 (2,586,000) 519,000
2016 3,753,000 (1,881,000) 1,872,000 (1,374,000) 498,000
Accounts receivable and accounts payable relate to merchandise for sale in the normal course of business. The allowance for bad debts was the same at the end of 2017 and 2016 and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. The proceeds from the note payable were used to finance the acquisition of property, plant and equipment. Ordinary shares were sold to provide additional working capital. 1. What amount should be reported as net cash provided by operating activities in 2017? a. b. c. d.
345,000 165,000 546,000 510,000
2. What amount should be reported as net cash used in investing activities in 2017? a. b. c. d.
750,000 225,000 975,000 750,000
3. What amount should be reported as net cash provided by financing activities in 2017? a. b. c. d.
600,000 780,000 750,000 680,000
Page 14 SOLUTION – PROBLEM 7 Question 1 Answer A Net income Depreciation (450,000 - 27,000) Increase in prepaid expenses Increase in inventory Increase in accounts receivable Increase in accounts payable Increase in accrued expenses Net cash provided - operating
519,000 180,000 ( 36,000) (690,000) (480,000) 27,000 825,000 345,000
Question 2 Answer C Increase in PPE Increase in long-term investments Net cash used - investing
(750,000) (225,000) (975,000)
Question 3 Answer D Dividend paid in 2017 Proceeds from share capital Proceeds from note payable Net cash provides - financing Retained earnings - 2016 Net income - 2017 Total Retained earnings - 2017 Dividend declared in 2017 Dividend payable – 2017 Dividend paid in 2017
(100,000) 600,000 180,000 680,000 688,000 519,000 1,207,000 ( 906,000) 301,000 ( 201,000) 100,000
Page 15 PROBLEM 8 – ACCOUNTS RECEIVABLE An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful accounts based on 5% of annual credit sales. On January 1, 2016, the entity changed the method of determining the allowance for doubtful accounts using an aging schedule. In addition, the entity writes off all accounts receivable that are over 1 year old. The following information relates to the years ended December 31, 2013, 2014, 2015 and 2016:
Credit sales Collections excluding recovery Accounts written off during year Recovery of accounts written off
2016
2015
2014
2013
15,000,000 11,700,000 200,000 90,000
9,500,000 8,200,000 120,000 40,000
8,000,000 6,700,000 80,000 25,000
6,000,000 4,500,000 None None
Days Account Outstanding
Amount
Probability of Collection
Less than 16 days Between 16 and 50 days Between 51 and 100 days Between 101 and 200 days Between 201 and 365 days Over 365 days – to be written off
3,000,000 1,500,000 1,200,000 800,000 400,000 100,000
98% 80% 75% 50% 20% 0%
1. What was the allowance for doubtful accounts on January 1, 2016? a. 1,175,000 b. 1,040,000 c. 1,240,000 d. 975,000
2. What amount should be reported as allowance for doubtful accounts on December 31, 2016? a. b. c. d.
1,380,000 1,480,000 2,420,000 1,060,000
3. What amount should be reported as doubtful accounts expense for 2016? a. b. c. d.
550,000 750,000 450,000 200,000
4. What is the net realizable value of accounts receivable on December 31,2016? a. b. c. d.
6,900,000 7,000,000 5,520,000 5,620,000
Page 16 SOLUTION – PROBLEM 8 Question 1 Answer B Doubtful accounts expense 2013, 2014 and 2015 (5% x 23,500,000) Accounts written off 2014 and 2015 Recovery of accounts written off 2014 and 2015 Allowance for doubtful accounts – January 1, 2016
1,175,000 ( 200,000) 65,000 1,040,000
Question 2 Answer A Less than 16 days Between 16 and 50 Between 51 and 100 Between 101 and 200 Between 201 and 365 Allowance for doubtful accounts – 12/31/2016
( 3,000,000 x 2%) (1,500,000 x 20%) (1,200,000 x 25%) ( 800,000 x 50%) ( 400,000 x 80%)
60,000 300,000 300,000 400,000 320,000 1,380,000
Question 3 Answer A Allowance – January 1, 2016 Recovery 2017 Doubtful accounts expense (SQUEEZE) Total Writeoffs (200,000 + 100,000) Allowance – December 31, 2016
1,040,000 90,000 550,000 1,680,000 ( 300,000) 1,380,000
Question 4 Answer C Accounts receivable – December 31, 2016 Allowance for doubtful accounts – December 31, 2016 Net realizable value
6,900,000 (1,380,000) 5,520,000
Page 17 PROBLEM 9 - SALES TYPE LEASE An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor. On January 1, 2016, an equipment is leased to a lessee with the following information: Cost of equipment to the entity Fair value of equipment Residual value – unguaranteed Initial direct cost Annual rental payable in advance Useful life and lease term Implicit interest rate PV of 1 at 12% for 8 periods PV of an ordinary annuity of 1 at 12% for 8 periods PV of an annuity due of 1 at 12% for 8 periods First lease payment
3,500,000 5,500,000 600,000 200,000 900,000 8 years 12% 0.40 4.97 5.56 January 1, 2016
1. What is the gross investment in the lease? a. b. c. d.
7,800,000 7,200,000 6,600,000 6,900,000
2. What is the net investment in the lease? a. b. c. d.
5,004,000 5,244,000 5,500,000 5,740,000
3. What is the total financial revenue? a. 2,196,000 b. 2,796,000 c. 2,556,000 d. 1,956,000 4. What amount should be recognized as interest income for 2016? a. b. c. d.
600,480 492,480 536,760 521,280
5. What amount of cost of goods sold should be recognized in recording the lease? a. b. c. d.
3,260,000 3,500,000 3,740,000 3,460,000
Page 18 SOLUTION – PROBLEM 9 Question 1 Answer A Gross rentals (900,000 x 8) Residual value Gross investment
7,200,000 600,000 7,800,000
Question 2 Answer B PV of rentals (900,000 x 5.56) PV of residual value (600,000 x .40) Net investment
5,004,000 240,000 5,244,000
Question 3 Answer C Gross investment Not investment Total financial revenue
7,800,000 5,244,000 2,556,000
Question 4 Answer D Net investment – 1/1/2016 Advance payment on 1/1/2016 Balance – January 1, 2016 Interest income for 2016 (12% x 4,344,000)
5,244,000 ( 900,000) 4,344,000 521,280
Question 5 Answer D Cost of equipment PV of unguaranteed residual value Initial direct cost Cost of goods sold Sales, excluding present value of unguaranteed residual value Cost of goods sold Gross profit on sale
3,500,000 ( 240,000) 200,000 3,460,000 5,004,000 3,460,000 1,544,000
Page 19 PROBLEM 10 – CASH AND SHARE ALTERNATIVE On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can choose how the purchase is to be settled. The choices are 50,000 shares with par value of P100 in one year’s time, or a cash payment equal to the market value of 40,000 shares on December 31, 2016. At grant date on January 1, 2016, the market price of each share is P120 and on the date of settlement on December 31, 2016, the market price of each share is P150. 1. What is the initial measurement of the building? a. b. c. d.
8,000,000 6,000,000 7,000,000 5,000,000
2. What is the equity component arising from the purchase of the building with share and cash alternative? a. b. c. d.
3,000,000 3,200,000 2,000,000 1,000,000
3. What is the interest expense to be recognized on December 31, 2016 if the seller has chosen the cash alternative? a. 1,200,000 b. 2,700,000 c. 1,000,000 d. 0
4. What is the share premium on December 31, 2016 if the seller has chosen the share alternative? a. b. c. d.
3,000,000 1,500,000 1,000,000 2,500,000
Page 20 SOLUTION - PROBLEM 10
Question 1 Answer A Cost of building equal to cash price
8,000,000
Question 2 Answer B Cash price of building Fair value of liability (40,000 shares x 120) Equity component
8,000,000 (4,800,000) 3,200,000
Question 3 Answer A Fair value of liability – 12/31/2016 (40,000 x 150) Fair value of liability – 1/1/2016 Interest expense
6,000,000 4,800,000 1,200,000
Question 4 Answer A Fair value of compound instrument equal to cash price of building Par value of shares (50,000 x 100) Share premium
8,000,000 5,000,000 3,000,000
Page 21 PROBLEM 11 – STATEMENT OF FINANCIAL POSITION The following trial balance of an entity on December 31, 2016 has been adjusted except for income tax expense. Cash Accounts receivable Inventory Property, plant and equipment Accounts payable Income tax payable Preference share capital Ordinary share capital Share premium Retained earnings – January 1 Net sales and other revenue Cost of goods sold Expenses Income tax expense
6,000,000 14,000,000 10,000,000 25,000,000 9,000,000 6,000,000 3,000,000 15,000,000 4,000,000 9,000,000 80,000,000 48,000,000 12,000,000 11,000,000 126,000,000
__________ 126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on December 31, 2017. 1. What amount should be reported as current assets on December 31, 2016? a. b. c. d.
29,200,000 29,700,000 29,500,000 30,000,000
2. What amount should be reported as current liabilities on December 31, 2016? a. 14,200,000 b. 17,200,000 c. 12,200,000 d. 9,200,000 3. What is the net income for 2016? a. 20,000,000 b. 14,000,000 c. 23,000,000 d. 9,000,000 4. What amount should be reported as total shareholders’ equity on December 31, 2016? a. b. c. d.
40,000,000 37,000,000 45,000,000 42,000,000
Page 22 SOLUTION - PROBLEM 11 Question 1 Answer A Cash Accounts receivable Inventory (10,000,000 - 500,000 - 300,000) Total current assets
6,000,000 14,000,000 9,200,000 29,200,000
Question 2 Answer C Net sales and other revenue Cost of goods sold Expenses Income before tax Tax expense (30% x 20,000,000) Net income
80,000,000 ( 48,000,000) ( 12,000,000) 20,000,000 ( 6,000,000) 14,000,000
Tax expense Payment during year Income tax payable
6,000,000 (5,000,000) 1,000,000
Accounts payable Income tax payable Redeemable preference Total current liabilities
8,200,000 1,000,000 3,000,000 12,200,000
Accounts payable per book Goods in transit FOB destination Goods held on consignment Adjusted accounts payable
9,000,000 ( 500,000) ( 300,000) 8,200,000
Question 3 Answer B Net income
14,000,000
Question 4 Answer D Ordinary share capital Share premium Retained earnings Total shareholders’ equity
15,000,000 4,000,000 23,000,000 42,000,000
Retained earnings – January 1 Net income Total retained earnings
9,000,000 14,000,000 23,000,000
Page 23 PROBLEM 12 – STATEMENT OF COMPREHENSIVE INCOME An entity reported the following data for the current year: Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Gain from expropriation of land Income tax Income from discontinued operations Unrealized gain on equity investment at FVOCI Unrealized loss on futures contract designated as a cash flow hedge Increase in projected benefit obligation due to actuarial assumptions Foreign translation adjustment – debit Revaluation surplus
9,500,000 4,000,000 1,000,000 1,200,000 700,000 500,000 800,000 600,000 900,000 400,000 300,000 100,000 2,500,000
1. What amount should be reported as income from continuing operations? a. b. c. d.
3,100,000 2,300,000 1,800,000 2,900,000
2. What net amount should recognized in other comprehensive income for the year? a. 2,600,000 b. 3,100,000 c. 3,400,000 d. 800,000 3. What net amount in OCI should be presented as “may not be recycled to profit or loss? a. b. c. d.
3,400,000 2,700,000 3,700,000 3,100,000
4. What amount should be reported as net income? a. b. c. d.
2,900,000 2,300,000 3,100,000 2,400,000
5. What amount should be reported as comprehensive income? a. 5,500,000 b. 2,900,000 c. 2,600,000 d. 6,100,000
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SOLUTION - PROBLEM 12 Question 1 Answer B Net sales Cost of goods sold Gross income Gain from expropriation of land Total income Selling expenses Administrative expenses Interest expense Income before tax Tax expense Income from continuing operations
Question 2
9,500,000 (4,000,000) 5,500,000 500,000 6,000,000 1,000,000 1,200,000 700,000
2,900,000 3,100,000 ( 800,000) 2,300,000
Answer A
Unrealized gain on equity investment at FVOCI Unrealized loss – cash flow hedge Actuarial loss – increase in PBO Translation adjustment – debit Revaluation surplus Net gain - OCI
900,000 ( 400,000) ( 300,000) ( 100,000) 2,500,000 2,600,000
Question 3 Answer D Unrealized gain on equity investment at FVOCI Actuarial loss on PBO Revaluation surplus Net amount of OCI not reclassified to profit or loss
900,000 ( 300,000) 2,500,000 3,100,000
Question 4 Answer A Income from continuing operations Income from discontinued operations Net income
2,300,000 600,000 2,900,000
Question 5 Answer A Net income Net gain – OCI Comprehensive income
2,900,000 2,600,000 5,500,000
Page 25 PROBLEM 13 - INVENTORY An entity sells a new product. During a move to a new location, the inventory records for the product were misplaced. The bookkeeper has been able to gather some data for the purchases and sales records. The July purchases are as follows:
July 5 10 15 25
Units
Unit cost
Total cost
10,000 12,000 15,000 14,000
65 70 60 55
650,000 840,000 900,000 770,000
On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units at P100 per unit. Roshe Company has always used a perpetual FIFO inventory costing system. Gross profit on sales for July was P2,400,000. 1. What was the cost of the inventory on July 31? a. 3,600,000 b. 1,670,000 c. 770,000 d. 950,000
2. What was the cost of inventory on July 1? a. 1,390,000 b. 2,400,000 c. 950,000 d. 760,000
3. What is the number of units available on July 1? a. 34,000 b. 26,000 c. 10,000 d. 9,000
Page 26 SOLUTION - PROBLEM 13
Question 1 Answer D July 15 ( 3,000 x 60) 25 (14,000 x 55) Inventory – July 31
180,000 770,000 950,000
Question 2 Answer A Sales Gross profit Cost of goods sold Inventory – July 1 (SQUEEZE) Purchases for July Goods available for sale Inventory – July 31 Cost of goods sold
6,000,000 2,400,000 3,600,000 1,390,000 3,160,000 4,550,000 ( 950,000) 3,600,000
Question 3 Answer B July 1 inventory (SQUEEZE) July purchases Total units available July 31 inventory Units sold in July
26,000 51,000 77,000 (17,000) 60,000
Page 27 PROBLEM 14 – BOND INVESTMENT AT FVOCI An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2016 with interest payable on June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open market. On December 31, 2016, the bonds were quoted at 106. 1. What amount of interest income should be reported for 2016? a. b. c. d.
400,000 200,000 364,560 363,940
2. What is the adjusted carrying amount of the investment on December 31, 2016? a. b. c. d.
5,300,000 5,171,940 5,174,560 5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2016? a. 300,000 b. 125,440 c. 128,060 d. 92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for 2016? a. 400,000 b. 492,000 c. 600,000 d. 200,000
Page 28 SOLUTION - PROBLEM 13 Date
Interest received
1/1/16 6/30/16 12/31/16
Interest income
200,000 200,000
Amortization
182,280 181,660
17,720 18,340
Carrying amount 5,208,000 5,190,280 5,171,940
Question 1 Answer D Interest January to June Interest July to December Interest income for 2016
182,280 181,660 363,940
Question 2 Answer A Market value on December 31, 2016 (5,000,000 x 106)
5,300,000
Question 3 Answer C Market value on December 31, 2016 Carrying amount December 31, 2016 (see table of amortization) Unrealized gain - OCI
5,300,000 5,171,940 128,060
Question 4 Answer C Market value on December 31, 2016 Acquisition cost, excluding transaction cost Gain from change in fair value Interest income (8% x 5,000,000) Total income
5,300,000 5,100,000 200,000 400,000 600,000
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29
PROBLEM 15 – LAND AND BUILDING An entity was incorporated on January 1, 2016 but was unable to begin manufacturing activities until August 1, 2016 because new factory facilities were not completed until that date. The entity provided the following information during the year: 2016 Jan. 31 Feb. 28 Apr. 1 May 1 May 1 May 1 Aug. 1 Aug. 1 Dec. 31
Land and dilapidated building Cost of removing building Legal fees Fire insurance premium payment Special tax assessment for streets Partial payment of new building construction Final payment on building construction upon completion General expenses Asset writeup
2,000,000 40,000 60,000 54,000 45,000 1,500,000 1,500,000 300,000 750,000
*
To acquire the land and building, the entity paid P1,000,000 cash and 10,000 ordinary shares of P100 par value share which are very actively traded at P170.
*
When the old building was removed, the entity paid P40,000, but also received P15,000 from the sale of salvaged material.
*
Legal fees covered the following: Cost of organization Examination of title covering purchase of land Legal work in connection with the building construction
25,000 20,000 15,000
*
The fire insurance premium covered premiums for a three-year term beginning May 1, 2016.
*
General expenses covered the following for the period January 1, 2016 to August 1, 2016: President's salary 200,000 Plant superintendent covering supervision of new building 100,000
*
Because of the rising land costs, the president was sure that the land was worth at least P750,000 more than what it cost the company.
1. What is the total cost of the land? a. 2,700,000 b. 2,720,000 c. 2,065,000 d. 2,765,000 2. What is the total cost of the building? a. 3,140,000 b. 3,144,500 c. 3,119,500 d. 3,000,000
Page
30
SOLUTION - PROBLEM 15 Question 1 Answer D Cash Ordinary shares issued at fair value (10,000 x 170) Initial cost of land Examination of title Special tax assessment Total cost of land
1,000,000 1,700,000 2,700,000 20,000 45,000 2,765,000
Question 2 Answer B Cost of removing old building Sale of salvaged material Legal work in connection with building construction Fire insurance (54,000 / 3 x 3/12) Plant superintendent Partial payment on construction Final payment on construction upon completion Total cost of building
40,000 ( 15,000) 15,000 4,500 100,000 1,500,000 1,500,000 3,144,500
Page 11 30. Demsel Company provided the following data on December 31, 2016: Checkbook balance Bank statement balance Check drawn on Demsel’s account, payable to supplier, dated and recorded on December 31, 2016 but not mailed until January 15, 2017 Cash in sinking fund Money market, 120 days due January 15, 2017 Investment in ordinary shares at FVPL Deposit in bank closed by BSP Investment in redeemable preference shares purchased on December 1, 2016 with redemption date on February 28, 2017
3,000,000 4,000,000 300,000 1,500,000 2,200,000 500,000 600,000 300,000
What amount should be reported as “cash and cash equivalents” on December 31, 2016? a. b. c. d.
3,300,000 3,600,000 5,800,000 4,600,000
31. On January 1, 2016, Nicole Company purchased equity securities to be held as “available for sale”. On December 31, 2016, the cost and market value were:
Security X Security Y Security Z
Cost
Market
2,000,000 3,000,000 5,000,000
2,400,000 3,500,000 4,900,000
On July 1, 2017, the entity sold Security X for P2,500,000. What amount of gain on sale of AFS securities should be reported in the 2017 income statement? a. 500,000 b. 400,000 c. 100,000 d. 0 32. Carl Company purchased 10% of another entity’s 500,000 outstanding shares on January 1, 2016 for P1,000,000. On December 31, 2016, the entity purchased additional 100,000 shares of the entity for P3,000,000. There was no goodwill or excess fair value as a result of either acquisition. The fair value of the 10% interest was P1,800,000 on December 31, 2016. The investee reported earnings of P6,000,000 for 2016. What amount should be reported as investment in associate on December 31, 2016? a. b. c. d.
4,000,000 4,800,000 6,600,000 5,800,000
33. Dianne Company incurred the following costs during the current year: Laboratory research aimed at discovery of new technology Design of tools, jigs, molds and dies involving new technology Modification of the formulation of a new process Trouble shooting in connection with breakdowns during commercial Production Seasonal and other periodic changes to existing product
2,000,000 1,700,000 1,000,000 1,500,000 1,300,000
What amount should Rosalie report as research and development expense? a. b. c. d.
4,700,000 3,700,000 6,000,000 5,000,000
