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80102016 - 3
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.
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
4. What is the carrying amount of the investment in associate on December 31, 2017?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
Page 2
SOLUTION - PROBLEM 1
Question 1 Answer B
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Question 3 Answer C
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
Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000
* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the
entity. On the acquisition date, each share had a quoted price of P45 on a stock exchange. The
plant facility was carried on the sellers books at P1,600,000 for land and P5,400,000 for the
building at the exchange date. Current appraised values for the land and the building, respectively,
are P2,000,000 and P8,000,000. The building has an expected life of forty years with a P200,000
residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs
incurred were freight and unloading P100,000 and installation P300,000. The equipment has a
useful life of ten years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the
entitys various plant locations. These expenditures had an estimated useful life of fifteen years.
* 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.
SOLUTION PROBLEM 5
Question 1 Answer A
Quoted price of shares issued for land and building (200,000 x P45) 9,000,000
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
Question 3 Answer C
Question 4 Answer B
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:
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.
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
Question 2 Answer A
Question 3 Answer A
Question 4 Answer C
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
Page 8
SOLUTION - PROBLEM 4
Question 1 Answer A
Question 2 Answer C
Question 3 Answer D
Question 4 Answer B
Question 5 Answer A
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.
2016 34
2017 39
2018 42
2019 44
The service period is for two years beginning January 1, 2016. The fair value of the share options
cannot be measured reliably.
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
Cumulative Expense
2016 (200,000 x 4/2) 400,000 400,000
2017 (200,000 x 9) 1,800,000 1,400,000
2018 (200,000 x 3) 600,000
2,400,000
Question 4 Answer B
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.
2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a. 530,000
b. 500,000
c. 590,000
d. 560,000
SOLUTION - PROBLEM 6
Question 1 Answer C
Question 2 Answer A
Question 3 Answer C
2017 2016
Property, plant and equipment 2,190,000 1,440,000
Accumulated depreciation 450,000 270,000
Long-term investments 225,000 -
Prepaid expenses 351,000 315,000
Merchandise inventory 1,950,000 1,260,000
Accounts receivable, net of allowance 1,560,000 1,080,000
Cash 690,000 640,000
Share capital-ordinary 3,000,000 2,400,000
Retained earnings 906,000 688,000
Long-term note payable 1,275,000 1,095,000
Accounts payable 309,000 282,000
Dividend payable 201,000 -
Accrued expenses 825,000 -
2017 2016
Net credit sales 7,020,000 3,753,000
Cost of goods sold (3,915,000) (1,881,000)
Gross profit 3,105,000 1,872,000
Expenses, including income tax (2,586,000) (1,374,000)
Net income 519,000 498,000
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. 345,000
b. 165,000
c. 546,000
d. 510,000
2. What amount should be reported as net cash used in investing activities in 2017?
a. 750,000
b. 225,000
c. 975,000
d. 750,000
3. What amount should be reported as net cash provided by financing activities in 2017?
a. 600,000
b. 780,000
c. 750,000
d. 680,000
Page 14
SOLUTION PROBLEM 7
Question 1 Answer A
Question 2 Answer C
Question 3 Answer D
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:
2. What amount should be reported as allowance for doubtful accounts on December 31, 2016?
a. 1,380,000
b. 1,480,000
c. 2,420,000
d. 1,060,000
SOLUTION PROBLEM 8
Question 1 Answer B
Doubtful accounts expense 2013, 2014 and 2015 (5% x 23,500,000) 1,175,000
Accounts written off 2014 and 2015 ( 200,000)
Recovery of accounts written off 2014 and 2015 65,000
Allowance for doubtful accounts January 1, 2016 1,040,000
Question 2 Answer A
Question 3 Answer A
Question 4 Answer C
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.
a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000
a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000
5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
Page 18
SOLUTION PROBLEM 9
Question 1 Answer A
Question 2 Answer B
Question 3 Answer C
Question 4 Answer D
Question 5 Answer D
On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can
choose how the purchase is to be settled.
The choices are 50,000 shares with par value of P100 in one years time, or a cash payment equal to
the market value of 40,000 shares on December 31, 2016.
At grant date on January 1, 2016, the market price of each share is P120 and on the date of settlement
on December 31, 2016, the market price of each share is P150.
2. What is the equity component arising from the purchase of the building with share and cash
alternative?
a. 3,000,000
b. 3,200,000
c. 2,000,000
d. 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. 3,000,000
b. 1,500,000
c. 1,000,000
d. 2,500,000
Page 20
SOLUTION - PROBLEM 10
Question 1 Answer A
Question 2 Answer B
Question 3 Answer A
Question 4 Answer A
The following trial balance of an entity on December 31, 2016 has been adjusted except for income tax
expense.
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
126,000,000 126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The
tax rate is 30% on all types of revenue. Inventory and accounts payable included goods purchased
in transit, FOB destination, costing P500,000, and unsold goods held on consignment at year-end,
costing P300,000. The perpetual system is used. The preference share capital is redeemable
mandatorily on December 31, 2017.
4. What amount should be reported as total shareholders equity on December 31, 2016?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
Page 22
SOLUTION - PROBLEM 11
Question 1 Answer A
Cash 6,000,000
Accounts receivable 14,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000
Question 2 Answer C
Question 3 Answer B
Question 4 Answer D
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. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000
SOLUTION - PROBLEM 12
Question 1 Answer B
Question 2 Answer A
Question 3 Answer D
Question 4 Answer A
Question 5 Answer A
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:
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.
SOLUTION - PROBLEM 13
Question 1 Answer D
Question 2 Answer A
Sales 6,000,000
Gross profit 2,400,000
Cost of goods sold 3,600,000
Question 3 Answer B
2. What is the adjusted carrying amount of the investment on December 31, 2016?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 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
Question 1 Answer D
Question 2 Answer A
Question 3 Answer C
Question 4 Answer C
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 Land and dilapidated building 2,000,000
Feb. 28 Cost of removing building 40,000
Apr. 1 Legal fees 60,000
May 1 Fire insurance premium payment 54,000
May 1 Special tax assessment for streets 45,000
May 1 Partial payment of new building construction 1,500,000
Aug. 1 Final payment on building construction upon completion 1,500,000
Aug. 1 General expenses 300,000
Dec. 31 Asset writeup 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.
* 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.
a. 2,700,000
b. 2,720,000
c. 2,065,000
d. 2,765,000
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 1,000,000
Ordinary shares issued at fair value (10,000 x 170) 1,700,000
Initial cost of land 2,700,000
Examination of title 20,000
Special tax assessment 45,000
Total cost of land 2,765,000
Question 2 Answer B
30. Demsel Company provided the following data on December 31, 2016:
Checkbook balance 3,000,000
Bank statement balance 4,000,000
Check drawn on Demsels account, payable to supplier, dated and
recorded on December 31, 2016 but not mailed until January 15, 2017 300,000
Cash in sinking fund 1,500,000
Money market, 120 days due January 15, 2017 2,200,000
Investment in ordinary shares at FVPL 500,000
Deposit in bank closed by BSP 600,000
Investment in redeemable preference shares purchased on December 1, 2016
with redemption date on February 28, 2017 300,000
What amount should be reported as cash and cash equivalents on December 31, 2016?
a. 3,300,000
b. 3,600,000
c. 5,800,000
d. 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:
Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 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 entitys 500,000 outstanding shares on January 1, 2016
for P1,000,000. On December 31, 2016, the entity purchased additional 100,000 shares of the
entity for P3,000,000. There was no goodwill or excess fair value as a result of either acquisition.
The fair value of the 10% interest was P1,800,000 on December 31, 2016. The investee reported
earnings of P6,000,000 for 2016. What amount should be reported as investment in associate on
December 31, 2016?
a. 4,000,000
b. 4,800,000
c. 6,600,000
d. 5,800,000
33. Dianne Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new technology 2,000,000
Design of tools, jigs, molds and dies involving new technology 1,700,000
Modification of the formulation of a new process 1,000,000
Trouble shooting in connection with breakdowns during commercial Production 1,500,000
Seasonal and other periodic changes to existing product 1,300,000
What amount should Rosalie report as research and development expense?
a. 4,700,000
b. 3,700,000
c. 6,000,000
d. 5,000,000