Problem 1 – 1 (Financial or Non-Financial Instruments)

Answer:
Question 1: B
Question 2: C

Financial instrumental – Assets:

Cash deposit in banks P 300,000
Trade accounts receivable 1,400,000
Investment in dept instruments 3,000,000
Investment in equity instruments 1,600,000
Total P6,300,000

Financial instrumentals – Liabilities:

Trade payables 650,000
Issued dept instrument 1,800,000
Total P2,450,000

Problem 1-2: (Financial Assets)

Answer:
Question 1: D
Question 2: B
Question 3: D

An account receivable that is not held for trading should be classified into the category of loans
and receivable, unless entity elects to designate it as either at fair value through profit or loss or
available for sale.

An investment in an equity instrument that has a quoted price and that is not held for trading
should be classified as an available for sale financial asset, unless the entity elects to designate it
as at fair value through profit or loss.

An investment is an equity instrument that is not held for trading and does not have a quoted price,
and whose fair value cannot be reliably measured, should be classified as an available for sale
financial asset.

A purchased dept security that is not quoted in an active market and that is not held for trading
should be classified into the category loans and receivable unless the entity designates it as either
at fair value through profit or loss or available for sale.

A purchased dept security that is quoted in an active market should be classified as available for
sale unless the entity elects to designate it as at fair value through profit or loss. Even though the
entity plans to hold the instrument until maturity, Smart Company cannot classify the security as
held to maturity because the company will consider selling the security of market interest rates fall
sufficiently.
A “strategic” investment in an equity instrument that is not quoted in an active market and for
which there is no intention to sell should be classified as available for sale unless Smart Company
designates it as at fair values through profit or loss.
An investment in a financial asset that is held for trading should be classified into the category of
financial asset at fair value through profit or loss.

Problem 1 – 3: (Offsetting of Financial asset & Financial Liabilities)

Answer:
Question 1: B
Question 2: C

PAS 32 requires a financial asset and financial liability to be offset with the net amount presented
as an asset or liability in the balance sheet when, and only when, these two conditions are met:
1. A right of offset – The Company currently has a legally enforceable right to set off the
recognized amounts. This means that the company or entity has an unconditional legal right,
supported by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount
due to another party by applying an amount due from that other party.

2. Intention to settle net or simultaneously – the entity intends either to settle on a net basis or to
realize the asset and the liability simultaneously.

When both conditions are met, not presentation reflects more appropriately the entity’s expected
future cash flow from setting the asset and liability. When either or both of the two conditions are
not met, financial assets and financial liabilities are presented separately.

Freeze Company can offset the P6,000,000 to be received and paid on June 30, 2008 because it
has a legal right and intention to settle that amount simultaneously. It cannot offset the payments
on January 15, March 31, October 31 and December 15 or the remaining payment on June 30
Therefore, Freeze Company should present assets of P5,000,000 and liabilities of P7,000,000.

Problem 1 – 4: (Current and Non-current Classification)

Answer: B

Current Non-current
Assets Assets
Cash P 175,000
Prepaid rent 136,000
Inventory 820,000
Sinking fund asset P 525,000
Trading securities 153,000
Investment subsidiary 1,020,000
Accounts receivable 366,000
Property, plant & equipment 1,200,000
Patents, net 150,000
Accumulated depreciation ( 400,000)
Land held for future business site __________ 900,000
Total P1,650,000 P3,395,000

Question 2:
 Answer: B

Current Non-current
Liabilities Liabilities
Wages payable P250,000
Bond payable P600,000
Dividends payable 140,000
Premium on bonds payable 48,000
Taxes payable 228,000
Accounts payable 248,000 ________
Total P866,000 P648,000

Accounts payables and some accruals for employees and other operating costs are part of the
working capital used in the entity’s normal operating cycle. These operating items are classified as
current liabilities even if they are due to be settled more than twelve months after the balance sheet
date. The same normal operating cycle applies to the classification on an entity’s assets and
liabilities. When the entity’s normal operating cycle is not clearly identified, its duration is
assumed to be twelve months.

Other liabilities are not settled as part of the normal operating cycle, but are due for settlement
within twelve months after the balance sheet or held primarily for the purpose of being traded such
as the following: bank overdraft, current portion of long-term financial liabilities, dividends
payable, income taxes payable and other trade payables. These liabilities are properly classified
as current.

Problem 1 – 5 : (Current Assets)

Answer: A

Cash P 330,000
Trading securities 150,000
Accounts receivable, net 480,000
Inventory 900,000
Prepaid insurance 30,000
Total current assets P1,890,000

Patent – is a non-current asset and falls under the category of Intangible assets.
Equipment and furniture – is a non current asset and falls under the category
of Property, Plant and Equipment.

Land (held for capital appreciation)is a non-current asset and falls under the category of Investment
Property.
Problem 1 – 6: (Total Liabilities)
Answer: A

Accounts payable P1,089,000

Unearned rent revenue 288,000
Estimated liability under warranties 258,000
Bonds payable 5,000,000
Discount on bonds payable (225,000)
Total liabilities P6,410,000

 Advances to employees – is shown as current asset.

 Cash surrender value of life insurance – is classified as long-term investment under the non
current asset section of the balance sheet.
 Trademark – is classified as intangible under the noncurrent section of the balance sheet.

Problem 1 – 7: (Current Liabilities)

Answer: A

Balance per books P2,000,000

Accounts payable 300,000
Bonds payable, due 2007 500,000
Discount on bonds payable (60,000)
Dividends payable 160,000
Bond issue costs (20,000)
Total current liabilities P2,880,000

 The notes payable is classified under the noncurrent liability section of the balance sheet.
 The unamortized bond issue cost is reported as a reduction to the bonds payable.

Problem 1-8: (Current Liabilities)

Answer: B
Accounts payable P 330,000
Unsecured notes, 9%, due July 1,2007 800,000
Accrued expenses 210,000
Bonds payable, 5%, due March 31,2007 6,000,000
Total current liabilities P7,340,000

When an entity presents current and non-current assets, and current and non-current liabilities, as
separate classification on the dace of its balance sheet, it shall not classify deferred tax assets
(liabilities) as current assets (liabilities) (PAS 1, paragraph 70).

Problem 1- 9: (Current Liabilities)

Answer: D
Balance per books P1,500,000
Purchase return (45,000)
 Advance from customer 75,000
Undelivered checks on December 31, 2006 400,000
Total current liabilities P1,930,000

Problem 1 – 10: (Current & Noncurrent Liabilities)

Answer: D

Current Long-tem
Cash dividend P2,375,000
Bonds payable 25,000,000 P75,000,000
Accrued interest on bonds
(P100,000,000 x 12% x 3/12) 3,000,000
Advances from customers
(P12,000,000+P30,000,000-P25,000,000) 17,000,000 _______________
Total P47,375,000 P75,000,0000

Share issued 1,000,000

Less: Treasury shares 50,000
Shares outstanding 950,000
x Dividend per share P2.50
Dividends declared but unpaid P2,375,000

Treasury shares area not entitled to receive dividends

Problem 1 – 11: (Total Assets)

Answer: B
Proceeds from issue of share capital P1,000,000
Net income 300,000
Dividends (225,000)
Total shareholders’ equity, December 31,2006 P1,075,000
Add: Liabilities, December 31,2006 597,000
Total assets, December 31,2006 P1,672,000

Problem 1-12: (Total Assets)

Answer: B

Balance per books P1,093,750

Treasury share (30,000)
Translation adjustments (10,500)
Total assets P1,053,250

 Treasury shares are reported as a component of shareholders equity.

 Translation adjustment is included in the reserve section of the shareholders equity.
Problem 1-13: (Shareholders Equity)
Answer: B
Assets, December 31,2005 P1,050,000
Less: Liabilities, December 31, 2005 680,000
Shareholders Equity, December 31, 2005 P 370,000
Proceeds from assurance of addition shares(5,000 x P39) 125,000
Payment of dividends ( 80,000)
Net income for 2006 110,000
Treasury share (2,000 x P30) ( 60,000)
Proceeds from reissue of treasury shares(1,000 x P39) 39,000
Shareholders’ equity, December 31,2006 P 504,000

Proceeds on the sale of a treasury share will increase shareholders’ equity regardless whether it
was sold more than or less than the cost of the treasury share.

Problem 1 – 14: (Shareholders’ Equity)

Answer: C

Ordinary shares capital P3,000,000

Ordinary shares subscribed 500,000
Share premium 4,000,000
Reserve for earthquake losses 750,000
Reserve for treasury share 250,000
Accumulated profits 1,000,000
Net realizable holding loss on available for sale securities (100,000)
Treasury shares (250,000)
Total shareholders’ equity P9,150,000

Subscription receivable that is collectible within one year from the balance sheet date is
preferably reported or classified as a current asset; but if it is collectible more than one year
from the balance sheet date, it is to be included in the shareholders’ equity as contra equity.

Problems 1 – 15: (Shareholders’ Equity)

Answer: C
Ordinary share capital P1,000,000
Preference share capital 450,000
Share Premium 250,000
Accumulated profits, December 31, 2006 550,000
Total shareholders’ equity P2,250,000

The amount of dividends both on ordinary and preference share as well as the amount of income
summary (credit) was already accounted for in the account. Accumulated profits, since the
amount provided are the ending balance of Accumulated profits.

Problem 1 – 16: (Current Assets & Retained Earning)

Answer: A
Cash P 550,000
Accounts receivable, net
(P1,650,000 – P250,000 noncurrent portion) 1,400,000
Total current assets P1,950,000

 The P320,000 prepaid income tax booked during 2008 was not included as part of current
assets because there were no differences between the amount booked and the tax
expense/due (P3,600,000 revenue less P2,600,000 expense multiplied by 32%), hence
prepaid taxes as of December 31, 2006 is PO.
 The P250,000 (P125,000 x 2 for April and October 2008) of accounts receivable is due in
2008, therefore, noncurrent.

Problem 1 – 17: (Current Assets & Non-current Liabilities)

Answer: C

Cash P 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on long term contracts 1,600,000
Total current assets P5,700,000

Problem 1 – 18: (Current Assets)

Answer: A

Cash (-P22,000 + P66,000) P 44,000

Accounts receivable, net 77,000
Inventory 127,000
Prepaid expenses 25,000
Total current assets P275,000
Problem 1 – 19 (Current Assets)
Answer: B

Cash in bank (P40,000 + P20,000) P42,000

Petty cash (P4,000 – P500) 3,500
Cash w/held from wages for employees income tax 2,000
General cash 52,000
Cash on hand and in banks P99,000
Accounts receivable (P80,000-(P5,000 x 50%) 77,000
Inventories (P120,000 – P 4,000) 118,000
Prepaid insurance (P25,000 – P 5,000) 20,000
Total current assets, December 31, 2006 P313,000

 If a company has two or more amounts with a single banks, an overdraft may be offset
against an account with a positive balance. However, if a company has 2 or more accounts
with different banks and there is a positive balance in an account and overdraft in another
account, the account with positive balance shall be shown as current asset and the account
with overdraft shall be shown as current liability.
 Cash set aside for the purchase of a plant site shall be classified as long term investments
Restricted cash should be reported as current only if it is to be applied to current purpose or
obligation.

Problem 1 – 20: (Current Assets & Current Liabilities)

Answer: A

CA CL
Balance per book P 370,350 P 155,050
a)Bad depts. ( 4,000)
b)Expired advertising included in inventory ( 45,000)
c)Unrecorded purchases 16,250
d)Non-current liabilities deducted/offset 5,900
against miscellaneous liabilities
e)Noncurrent-included
(76,200 – (6,250 x 4) ( 51,200)
f)Tax liabilities not recorded 18,250
TOTAL P 320,550 P 144,250

*Includes cash, accounts receivable inventories and prepaid insurance.

**Included miscellaneous liabilities, loan payable and accounts payable.

Problem 1- 21: (Current Assets & Current Liabilities)

Answer:
Question 1: A
Question 2: D

Current Non-current
Total per book P8,705,000 P7,840,000
Cash restricted for the purchase
of manufacturing equipment (1) (400,000) 400,000
investment in securities to give the
company significant ownership (2) (275,000) 275,000
Advance to president (3) (400,000) 400,000
Cash restricted for the redemption of
Preference shares (6) 1,900,000
Correct Current and Non-current assets P7,630,000 P10,815,000

 Includes cash, investment, accounts receivable, inventory and other current liabilities.
 Includes property, plant and equipment, and other non-current assets.

The investment property is classified as a non-current asset.

Answer:
Question 3: D
Question 4: A
Current Non-current
Balance per book P540,000 P3,275,000
Current portion of bonds payable 250,000 (250,000)
Bank loan 700,000 (700,000)
Correct balance P1,490,000 P2,325,000

 Includes accounts payable and other current liabilities.

Problem 1 - 22: (Current & Non-current Classifications)

Question 1:
Answer: D
Current assets:
Cash (P800,000 – P94,000 + P25,000) P 731,000
Trading securities 190,000
Accounts receivable (P600,000 – P30,000) 570,000
Inventories (P570,000 + P30,000) 600,000
Correct total current assets P 2,091,000
Question 2:
Answer: D
Investments:
Available for sale securities P 483,000
Cash surrender value 94,000
Sinking fund 90,000 P 667,000
Property, plant and equipment 960,000
Intangibles 320,000
Total non-current assets P 947,000

Question 3:
Answer: C
Accounts payable P750,000
Customer’s account with credit balance 40,000
Bank overdraft 25,000
Total current liabilities P815,000

Problem 1 – 23: (Current & Non-current Classifications)

Question 1:
Answer: A
Cash P 775,000
Accounts receivable P2,695,000
Less: Amount collection in 2008
(P150,000 x 4) 600,000 2,095,000
Inventory 2,085,000
Total current assets P4,955,000

Question 2:
Answer: A
Accounts payable & accrued liabilities P1,701,000
Income tax payable (P697,600 – P525,000) 172,600
Total current liabilities P1,873,600

Question 3:
Answer: C
Accumulated profits, January 1,2006 P3,450,000
Add: Net income after tax:
Net sales & Other revenues P13,360,000
Less: Costs & expenses 11,180,000
Net income P 2,180,000
Less: Income tax (P2,180,000 x 32%) 697,600 1,482,400
Accumulated profits. December 31, 2006 P4,932,400

Problem 1 – 24: (Current Assets)

Answer: D
Cash and cash equivalents P 209,000
Trading securities, at market 150,000
Accounts receivable (808,000 + 40,000) 848,000
Notes receivable (100,000 – 80,000) 20,000
Merchandise inventory 769,000
Prepaid expense 10,000
Total current assets P2,033,000

 Trading securities is measured at fair market value.

 Merchandise inventory is measured based on the new method (i.e., average).
The peso amount of the change from FIFO to average (815,000 – 796,000 = 19,000)
should be adjusted to the beginning balance of the accumulated profits.
 Notes receivable is reported net of the notes receivable discounted.
 Customers’ deposit should be presented and classified as a current liability.

Problem 1 -25: (Working Capital)

Answer: D
Cash (P400,000 – P200,000 + P10,000 – P50,000 + P120,000) P280,000
Accounts receivable (P2,000,000 + P200,000) 2,200,000
Inventory [500,000 + (P50,000 x 60%)] -530,000
Accounts payable (300,000)
Notes payable (200,000)
Loans payable (100,000)
Working capital P2,410,000
Problem 1 – 26: (Current & Non-current Classification)
Answer: B

Problem 1 – 27: (Dividends)

Answer: D
Determination of dividends in arrears:
Dividends on cumulative preference shares for years 2005 & 2006
(60,000 shares x P100 x 5% x 2 years) P600,000
Dividends paid in 2006 (200,000)
Dividends in arrears, December 31, 2006 P400,000

Dividends in arrears on cumulative preference shares are not liabilities until declared by the
board of directors. Therefore, only disclosure is required.

Problem 1 – 28: (Events after the Balance Sheet)

Answer: C
Reported net asset P3,500,000
Decrease in the value of inventory ( 80,000)
Recovery of doubtful accounts 130,000
Adjusted amount of net asset P3,550,000

The inventory (item 1) should be reduced by P80,000 in accordance with Philippine Accounting
Standards 10 and the amount of reduction should both in the income statement and balance
sheet of the enterprise. Item 2 is also adjusting post balance sheet event under PAS 10. The
allowance for doubtful account should be reduced by P130,000 resulting to an increase in the
value of net asset.

Problem 1 – 29: (Events after the Balance Sheet)

Answer: B
Reported amount of shareholder’s equity P2,600,000
Omission of inventory 300,000
Adjusted value of shareholders’ equity P2,900,000

A business combination after the balance sheet date is a non-adjusting event.

Answers:
2-19: A
Rent expense (480,000 x 1/2) 240,000
Legal and audit fees 340,000
Office staff salaries 400,000
Total General and Administrative expenses 980,000

2-20: A

Contribution to youth and educational programs 250,000

Contribution to health and human service organizations
(140,000 – 80,000) 60,000
Total charitable contributions expense 310,000

2-21: D

Net income per books 7,410,000

Add: Unrealized loss on available for sale 540,000
Adjustment to profit of prior year 750,000 1,290,000
Adjusted net income 8,700,000

2-22: A

A change in accounting estimate (for uncollectible) does not require retroactive adjustments, as a result,
accumulated profits beginning is not affected and not adjusted for the difference in the estimated bad
debts against the actual bad debts, because any time one is dealing with estimates, there will always be
difference between the estimates and the actual occurrence.

2-23: A
Jaguar would not report any cumulative effect because a change in estimates is not handled
retroactively. Jaguar would report bad debt expense of 120,000 in 2006.

2-24: A

PAS #13 states in part that a change in the pattern of consumption is a change in estimate, which does
not require retroactive adjustment; hence, there is no cumulative effect of change in accounting
estimate should be reported in prior years.

2-25: A

Accumulated depreciation as of date of change (10,560,000 x 3/8) 3,960,000

Add: Depreciation, Subsequent to date of change
Cost 10,560,000
Less: Accumulated Depreciation 3,960,000
Book value January 1, 2006 6,600,000
Less: Salvage Value 960,000
Depreciable book value 3,640,000
+Remaining new life:
New life 6 years
Less: Expired life 3 years
3 years 1,880,000
Total Accumulated Depreciation (4 years) 3,840,000

2-26: A

Change in the method of depreciation is a change in accounting estimate. The peso effect of the change
should be accounted currently and prospectively.

2-27: C

Book value as of date of change (3,000,000 x 3/6) 1,500,000

+Remaining new life:
New life 8 years
Less: Expired life 3 years 5 years
Depreciation 300,000

2-28: C

Life of the asset (1,500,000/60,000) 25 years

Less: Expected life of the asset (from 1/1/01 to 1/1/06) 5 years
Remaining life at the date of change 20 years

Original Cost 1,500,000

Less: Accumulated Depreciation at the date of change (60,000 x 5) 300,000
Book value of the asset as of 1/1/06 1,200,000

2-29: A

Change in the method of inventory costing is a change in accounting principle requiring retroactive
adjustment by adjusting the beginning balance of the accumulated profits and therefore, the income
statement shall not be affected by the peso effect of this change.

2-30: B

A change in the inventory cost flow is change in accounting principle requiring retroactive adjustment by
adjusting the beginning balance of the accumulated profits: an increase in the beginning inventory as a
result of the change would be an increase or credit to the accumulated profits.

2-31: C

A change from FIFO to average method of inventory costing requires retroactive adjustments since this
is a change in accounting principle. The amount to be adjusted to the accumulated profits is the
difference between the beginning balance of inventory under FIFO and weighted-average method
(1,420,000 less 1,540,000).

2-32: C

Change from the completed contract to percentage of completion method is a change in accounting
principle which requires retroactive adjustments. The peso effect of the change should be adjusted to
the beginning balance of the accumulated profits.

2-33: B

Net income – new method 1,620,000

Less: Tax (1,820,000 x 32%) 582,400
Net income after tax 1,237,600

Chapter 3

1. Answer: C
A segment is considered reportable when it meets any of the following criteria:
 As to revenue- 10% or more of the combined revenue of all industry segments.
 As to operating profit or loss- 10% or more of the higher of the combined
operating profits/losses of all industry segments.
 As to identifiable assets- 10% or more of the combines assets of all industry
segments.

Application of the above concept:

 A. As to revenue criterion- the minimum amount of revenue is 6,600,000
(10%*66,000,000).
B. As to operating profit- minimum profit is 1,200,000(10%*12,000,000).
C. As to identifiable assets- minimum asset is 14,000,000 (10%*140,000,000).

Based on the above application, segments A, B, C, D and E are considered reportable segments
since they meet the above criteria; while segment F did not meet any of the above criteria.

2. Answer: C
Majority of Revenue Test:
Segments Revenue from outsiders Revenue from within Total Revenue Column 2 over 4
A 18,000,000.00 + 2,000,000.00 = 20,000,000.00 90.00%
B 13,000,000.00 + 3,000,000.00 = 16,000,000.00 81.25%
C 5,000,000.00 + 7,000,000.00 = 12,000,000.00 41.67%
D 4,500,000.00 + 1,500,000.00 = 6,000,000.00 75.00%
E 5,400,000.00 + 3,600,000.00 = 9,000,000.00 60.00%
F 3,000,000.00 + -----0----- = 3,000,000.00 100.00%

Minimum Amount:
As to Revenue Criterion: 48,900,000 + 17,100,000 x 10% = 6 600 000.00
As to Operating Profit Criterion: 12,000,000 x 10% = 1,200,000.00
As to Identifiable Assets Criterion: 140,000,000 x 10% = 14,000,000.00

Since majority of its revenue was earned from internal sales or sales with other segments,
Segment C is not considered a reportable segment.

Even if the revenue were derived principally all from outside sales, segment F is not considered
a reportable segment because this amount of revenue is considered insignificant and it also fails
to meet any of the other 10% criteria such as the operating profit and identifiable asset.

3. Answer: B
Operating Profit Operating Loss
K 13,000,000
L 1,200,000
M 7,800,000
N (2,400,000)
O (600,000 )
P 600,000
Q __________ (1,800,000)
TOTAL 22,600,000 (4,800,000)

As to Operating Profit or Loss Criterion:

A segment is considered reportable or significant when its profit or loss is 10% or more
of the higher of the combined profits or losses of all industry segments. In this problem above,
the combined profits is 22,600,000 while the combined loss is 4,800,000. The minimum amount
of profit or loss is (2,260,000)10% x 23,600,000) for a segment to be reportable. Only segments
K, M, and N meet the above criterion.

4. Answer: D
Sales to unaffiliated customers 10,000,000
Inter-segment sales 2,000,000
 Total 12,000,000
Multiply by 10%
Minimum Revenue 1,200,000

Revenue of a segment does not include interest unless the segment is primarily of a financial in
nature.

5. Answer: B
Revenue 2,400,000
Traceable operating expenses (1,400,000)
Indirect Cost (1,440,000 x 2,400,000/9,600,000) ( 360,000)
Operating Profit 640,000

General and administrative expenses do not constitute expense of a segment.

6. Answer: B
Revenue of segment no. 1 (15,000,000 x 40%) 6,000,000
Traceable operating expenses- segment 1 (3,500,000)
Operating profit before common cost 2,500,000
Indirect cost- segment 1 (3,000,000 x 50%) 1,500,000
Operating profit – segment 1 1,000,000

Total revenue of all segments 15,000,000

Less: Total traceable cost of all segments 10,000,000
Operating profit before common costs- all segments 5,000,000

Ratio of segment 1 operating profit = 2,500,000 + 5,000,000

= 50%

7. Answer: D

Revenue of segment 6,000,000

Traceable cost – segment 1 (3,800,000)
Indirect cost – segment 1 (1,000,000 x 25%) ( 250,000)
Operating Profit – segment 1 1,950,000

Expense of a segment does not include interest unless the segment is primarily of a financial in
nature.

8. Answer: D

A major customer disclosure is required if a company derives 10% or more of its revenue from a
single customer or group of entities under common control. (50,000,000 x 10%)