P1 - Winding Up

C.C.P.A.R. C.C.P.A.R. Practical Accounting Accounting Problems 1_Preweek

Cebu CPAR Center Cebu City Contact Nos. 09062251746 , 09491612498, 032 2677665 Practical Accounting Problems 1 Preweek Basic Accounting 1. While preparing this year’s trial balance, Ronel Company’s accountant committed the following errors: omission of prepaid supplies account amounting to P4,000; overstatement of the inventory account by P2,400; understatement of the revenues account by P3,600; receivables totaling to P12,300 was included in the trial balance as P21,300; accounts payable totaling to P1,100 was included as P11,000; discount on bonds payable was included as a credit rather than as a debit, P1,500: Revenue expenditures of P3,500 was erroneously capitalized to furniture and fixtures (instead of repairs and maintenance expense). The difference between the debit and credit amounts in Ronel Company’s trial balance is? a. P400 c. P5,400 b. P1,900 d. P13,800 B (4) + 2.4 + 3.6 + 9 + (9.9) + (3) = (1.9) 2. Overture Co. collects magazine subscriptions from customers at the time subscriptions are sold. Subscription revenue is recognized over the term of the subscription. Overture Co. collected a total of P1,800,000 in subscription sales during 2008. The following adjusting entry was made to establish the unearned portion at that time: Subscription Subscriptio n revenue 340,000 Unearned subscriptio subscriptions ns 340,000

In 2009, Overture Co. collected a total of P1,650,000. After adjustments were made at the end of 2009, Overture Co. reported subscriptions revenue in its income statement at P980,000. Assuming that Overture Co. does not prepare reversing entries, the adjusting entry to be made on December 31, 2009 in relation to the subscript subscriptions ions collected would most likely to include a a. debit to unearned subscriptions revenue for P670,000 b. credit to unearned subscriptions revenue for P670,000 c. credit to unearned subscriptions revenue for P1,010,000 d. debit to unearned subscriptions revenue for P1,010,000 B 980 – 1,650 = 670 debit to revenue; credit to unearned PAS 1 Presentation of Financial Statements The next two items are based on the following: The following trial balance of Trey Co. at December 31, 20X5, has been adjusted except for income tax expense. Dr. Cr. Cash P 550,000 Accounts receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable P 120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation translatio n adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 _______ P5,530,000 P5,530,000 Additional information: • During 20X5, estimated tax payments of P300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 30%. • Included in accounts receivable is P500,000 due from a customer. Special terms granted to this customer require payment in equal semi- annual installments of P125,000 every April 1 and October 1. 3. In Trey's December 31, 20X5, balance sheet, what amount should be reported as total current assets? a. P1,950,000 c. P2,250,000 b. P2,200,000 d. P2,500,000 A 550 + 1,650 – 500 + 250 (add only currently due P125 x 2) = 1,950 4. In Trey's December 31, 20X5, balance sheet, what amount should be reported as total retained earnings? a. P1,029,000 c. P1,330,000 b. P1,200,000 d. P1,630,000 C 630 + 3,600 – 2,600 – 300 (income tax expense) = 1,330 1

C.C.P.A.R. C.C.P.A.R. Practical Accounting Accounting Problems 1_Preweek

5. A company buys ten shares of securities at P2,000 each on December 31, 2001. The securities are classified as available for sale. The fair value of the securities increases to P2,500 on December 31, 2002, and to P2,750 on December 31, 2003. On December 31, 2003, the company sells the securities. Assume no dividends are paid and that the company has a tax rate of 30%. What is the amount of the reclassification adjustment for other comprehensive income on December 31, 2003? a. P 7,500 c. P 5,250 b. P (7,500) d. P (5,250) D (10 x (2,750- 2,000)) x 70% 6. What amount of comprehensive income should Searles Corporation report on its statement of comprehensive income given the following net of tax figures that represent changes during a period? Minimum pension liability P (3,000) Unrealized gain on available-for-sal available-for-sale e securities 15,000 Reclassification Reclassif ication adjustment, for securities gain included in net income (2,500) Stock warrants outstandin outstanding g 4,000 Net income 77,000 a. P86,500 c. P89,500 b. P89,000 d. P90,500 A -3 + 15 – 2.5 + 77 7. The following costs were incurred by Griff Co., a manufacturer, during 2003: Accounting and legal fees P 25,000 Freight-in 175,000 Freight-out 160,000 Officers salaries 150,000 Insurance 85,000 Sales representat representatives ives salaries 215,000 What amount of these costs should be reported as general and administrative expenses for 2003? c. P635,000 A a. P260,000 b. P550,000 d. P810,000 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 8. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal group. The carrying amount of these assets immediat immediately ely before classification as held for sale was P20 million. Upon being classified as held for sale, the assets were revalued to P18 million. The entity feels that it would cost P1 million to sell the disposal group. What would be the carrying amount of the disposal group in the entity’s accounts after its classification as held for sale? (a) P20 million. (c) P17 million. (b) P18 million. (d) P19 million. Answer: (c) 9. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal group, and the carrying amount of these assets immediately before classification as held for sale was P20 million. Upon being classified as held for sale, the assets were revalued to P18 million. The entity feels that the fair value less cost to sell would be P17 million. How would the reduction in the value of the assets on classification as held for sale be treated in the financial statements? (a) The entity recognizes a loss of P2 million immediately before classification as held for sale and then recognizes an impairment loss of P1 million. (b) The entity recognizes an impairment loss of P3 million. (c) The entity recognizes an impairment loss of P2 million. (d) The entity recognizes a loss of P3 million immediately before classifying the disposal group as held for sale. Answer: (a) PAS 7 Statement of Cash Flows 10. Fender Co. reported a net income of P270,000 in 2008, its first year of operation. Selected information follows: Depreciation expense, P30,000; Loss on sale of equipment, P3,500; Gain on sale of treasury stock, P5,000; Amortization of discount on bond investment, P1,500; Unrealized loss on non-current equity securities, P7,000. At the end of 2008, accounts receivable amounted to P20,000, inventory P34,700 and accounts payable P18,000.

The net cash provided by operating activities in 2008 is a. P265,300 b. P338,700 A

c. P268,300 d. P267,300

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C.C.P.A.R. Practical Accounting Problems 1_Preweek

The next three items are based on the following information: Dice Corp.'s balance sheet accounts as of December 31, 1988 and 1987, and information relating to 1988 activities are presented below. December 31, Assets 1988 Cash P 230,000 P 100,000 Available-for-sale investments 300,000 -Accounts receivable - net 510,000 510,000 Inventory 680,000 600,000 Held-to-maturity investments 200,000 300,000 Plant assets 1,700,000 1,000,000 Accumulated depreciation (450,000) (450,000) Goodwill 90,000 100,000 Total assets P3,260,000 P2,160,000 Liabilities and Stockholders' Equity Accounts payable and accrued liabilities Short-term debt Common stock, P10 par Additional paid-in capital Retained earnings Total liabilities and stockholders' equity

P 825,000 325,000 800,000 370,000 940,000 P3,260,000

1987

P 720,000 -700,000 250,000 490,000 P2,160,000

Information relating to 1988 activities • Net income for 1988 was P690,000. • Cash dividends of P240,000 were declared and paid in 1988. • Equipment costing P400,000 and having a carrying amount of P150,000 was sold in 1988 for P150,000. • A long-term investment was sold in 1988 for P135,000. There were no other transactions affecting long-term investments in 1988. • 10,000 shares of common stock were issued in 1988 for P22 a share. • Short-term investments consist of treasury bills maturing on 6/30/89.

11. Net cash provided by Dice's 1988 operating activities was a. P690,000 c. P940,000 b. P915,000 d. P950,000 C 12. Net cash used in Dice's 1988 investing activities was: a. P1,115,000 c. P865,000 b. P895,000 d. P815,000 A 13. Net cash provided by Dice's 1988 financing activities was a. P305,000 c. P455,000 b. P440,000 d. P545,000 A PFRS 8 Operating Segments 14. An entity manufactures suits, clothing, bed linen, and various cotton and manmade fiber products. It has several segments, which are reported internally as Segments Sales Profit Segment assets Suits 40% 45% 50% Shirts 30% 35% 33% Bed linen 15% 10% 7% Blinds 8% 6% 5% Cloth 7% 4% 5% 100% 100% 100% The table represents the percentages of sales, profit, and segment assets that are attributable to the different segments. The entity wants to present bed linen and cloth as a single segment but is wondering whether the information can be aggregated. How will the segmental information be presented in the financial statements? (a) Bed linen and cloth, suits, and shirts, will all be shown as separate segments with blinds in the other category. (b) All of the segments should be presented separately. (c) Suits, shirts, and bed linen will be separate segments with blinds and cloth shown as a single segment. (d) Suits and cloth will be one segment with shirts, bed linen, and blinds shown as other separate segments. Answer: (a)

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PAS 10 Events After the Reporting Period 15. ABC Ltd. decided to operate a new amusement park that will cost P1 million to build in the year 2005. Its financial year-end is December 31, 2005. ABC Ltd. has applied for a letter of guarantee for P700,000. The letter of guarantee was issued on March 31, 2006. The audited financial statements have been authorized to be issued on April 18, 2006. The adjustment required to be made to the financial statement for the year ended December 31, 2005, should be a. Booking a P700,000 long-term payable. b. Disclosing P700,000 as a contingent liability in 2005 financial statement. c. Increasing the contingency reserve by P700,000. d. Do nothing. Answer: (d) 16. A new drug named “EEE” was introduced by Genius Inc. in the market on December 1, 2005. Genius Inc.’s financial year ends on December 31, 2005. It was the only company that was permitted to manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of investigations, authorities discovered that when this drug was simultaneously used with “BBB,” a drug used to regulate hypertension, the patient’s blood would clot and the patient suffered a stroke. A lawsuit for P100,000,000 has been filed against Genius Inc. The financial statements were authorized for issuance on April 30, 2006. Which of the following options is the appropriate accounting treatment for this post–balance sheet event under IAS 10? a. The entity should provide P100,000,000 because this is an “adjusting event” and the financial statements were authorized to be issued after the accident. b. The entity should disclose P100,000,000 as a contingent liability because it is an “adjusting event.” c. The entity should disclose P100,000,000 as a “contingent liability” because it is a present obligation with an improbable outflow. d. Assuming the probability of the lawsuit being decided against Genius Inc. is remote, the entity should disclose it in the footnotes, because it is a nonadjusting material event. Answer: (c) IAS 34 Interim Reporting 17. An entity operates in the travel industry and incurs costs unevenly through the financial year. Advertising costs of P2 million were incurred on March 1, 20X7, and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to be around P20 million for the year; of that sum, P3 million would relate to the period ending March 31, 20X7. What costs should be included in the entity’s quarterly financial report to March 31, 20X7? (a) Advertising costs P2 million; staff bonuses P5 million. (b) Advertising costs P0.5 million; staff bonuses P5 million. (c) Advertising costs P2 million; staff bonuses P3 million. (d) Advertising costs P0.5 million; staff bonuses P3 million. Answer: (c) 18. An entity prepares quarterly interim financial reports in accordance with IAS 34. The entity sells electrical goods, and normally 5% of customers claim on their warranty. The provision in the first quarter was calculated as 5% of sales to date, which was P10 million. However, in the second quarter, a design fault was found and warranty claims were expected to be 10% for the whole of the year. Sales in the second quarter were P15 million. What would be the provision charged in the second quarter’s interim financial statements? (a) P750,000 (b) P1.25 million. (c) P1.5 million. (d) P2 million. Answer: (d) [10% of (P10 + P15) – (5% of P10)], that is, P2 million The next two questions are based on the following information. An enterprise had the pre-closing trial balance at December 31 shown below:

Cash Accounts receivable Inventory Property, plant, and equipment Accumulated Depreciation Accounts payable Long-term debt Share capital Retained earnings – Jan. 1 Sales revenue Purchases Administrative expenses

80,000 100,000 230,000 600,000 60,000 200,000 1,000,000 2,000,000 500,000 750,000 530,000 200,000 4


Additional information: The long-term debt pays interest at a rate of 10% per annum, payable every 12 months. The debt was issued on July 1 of the current year and originally had 5 years to maturity. The assets classified as property, plant, and equipment have a 10-year estimated useful life and were 1 year old at the start of the current year. Straight-line depreciation is used. •

•

19. Assume that the enterprise reports cost of goods sold of 200,000 and interest expense of 10,000 for the current period. Also assume a 50% tax rate on corporate earnings. The final closing entry required to ensure that current earnings are incorporated into year-end retained earnings is a. Income summary 140,000 Retained earnings 140,000 b. Retained earnings 280,000 Income summary 280,000 c. Income summary 240,000 Retained earnings 240,000 d. Retained earnings 240,000 Income summary 240,000 A 20. The enterprise will report year-end total assets of a. 800,000 c. 950,000 b. 890,000 d. 1,010,000 B The next two questions are based on the following information: Erotomania Co. has committed the following errors in 2007: Depreciation expense for the building was overstated by P7,200 Ending inventory was understated by P15,000 Amortization of patents was understated by P6,800 Unearned rent revenue was understated by P8,500. The company recognized advances for rent as revenue at the time of receipt. The rent was earned in 2008. Cost of goods sold was overstated by P15,000. Major improvements on a delivery truck in the amount of P35,000 was charged to expense. The delivery truck has a remaining life of five years. The company has a policy of providing full depreciation in the year of acquisition and none in the year of disposal. • • • •

• •

21. What are the effects of these errors on the 2007 and 2008 profits? 2007 2008 a. P34,900 under P 6,500 over b. 49,900 under 13,500 over c. 34,900 under 13,500 over d. 49,900 over 13,500 over C 22. The compound adjusting entry in 2009 will most likely include a a. (Cr) Ret. Earnings, P34,900 c. (Dr) Ret. Earnings, P4,100 b. (Cr) Ret. Earnings, P21,400 d. (Cr) Cost of goods sold, P15,000 A PAS 29 Financial Reporting in Hyperinflationary Economies 23. Property was purchased on December 31, 20X5, for 20 million zlotis. The general price index in the country was 60.1 on that date. On December 31, 20X7, the general price index had risen to 240.4. If the entity operates in a hyperinflationary economy, what would be the carrying amount in the financial statements of the property after restatement? (a) 20 million zlotis (c) 80 million zlotis (b) 1,200.2 million zlotis (d) 4,808 million zlotis Answer: (c) 24. The following “equity” relates to an entity operating in a hyperinflationary economy: Before IAS 29 After restatement Share capital 100 170 Revaluation reserve 20 -Retained earnings 30 -150 270 What would be the balances on the revaluation reserve and retained earnings after the restatement for IAS 29? (a) Revaluation reserve 0, retained earnings 100. (b) Revaluation reserve 100, retained earnings 0. (c) Revaluation reserve 20, retained earnings 80. (d) Revaluation reserve 70, retained earnings 30. Answer: (a) 5


The next two questions are based on the following information: The following information pertains to Galileo Company:

Sales (all account) made evenly throughout 2005 Equipment purchased for cash on May 1, 2005 Purchases (all account) made evenly throughout 2005 Cash received evenly throughout 2005 from customers on account Cash dividends declared on September 1, 2005 and paid on October 1, 2005 Land acquired for cash on June 1, 2005 Depreciation expense for 2005 Ordinary shares issued for cash on March 1, 2005 Operating expenses paid evenly throughout 2005 Income tax expense paid evenly throughout 2005 Purchase of treasury shares for cash on Nov. 1, 2005 Sale of investment in ordinary shares on August 1, 2005 for cash (cost = P5,000; selling price = P8,000) Cash paid evenly throughout 2005 on accounts payable Monetary assets January 1, 2005 December 31, 2005 Monetary liabilities January 1, 2005 December 31, 2005

P

220,000 50,000 80,000 190,000 20,000 30,000 10,000 60,000 40,000 25,000 17,000 8,000 60,000 25,000 71,000 10,000 30,000

The following values of the CPI-U for 2005 are available: 1/1 2/1 3/1 4/1 5/1 6/1 7/1

100 102 104 106 108 110 112

8/1 9/1 10/1 11/1 12/1 12/31 Average for the year

114 116 118 120 122 124 112

25. The net monetary items as of December 31, 2005 would amount to a. 15,000 c. 51,704 b. 41,000 d. 20,000 B 71,000 – 30,000 26. The purchasing power gain (loss) for 2005 in end-of-year pesos is a. (10,704) c. 10,000 b. 10,704 d. ( 1,000) A 25,000 – 10,000 = 15,000 x 124/100 = 18,600 220,000 x 124/112 = 243,571 (50,000) x 124/108= (57,407) (80,000) x 124/112= (88,571) (20,000) x 124/116= (21,379) (30,000) x 124/110= (33,818) 60,000 x 124/104 = 71,538 (40,000) x 124/112= (44,286) (25,000) x 124/112= (27,679) (17,000) x 124/120 = (17,567) 8,000 x 124/114 = 8,702 51,704 41,000 – 51,704 = (10,704) Cash and cash equivalents The next two questions are based on the following information: You gathered the following November 30 bank reconciliation from the cash records of the Conrad Company in connection with your audit of the company’s financial statements for the year 2006: Balance per bank P 560,000 Deposits in transit 123,200 Outstanding checks (160,000) Balance per books P 523,200 6


Results for the month of December follow: Balance December 31 December deposits December note collected (not included in deposits) December bank service charge December NSF check, returned by the bank (recorded by bank as a charge)

Bank P692,000 400,000

Books P740,000 464,800

80,000 1,200

-

26,800

-

Based on the above and the result of your audit, answer the following: 27. The outstanding checks as of December 31, 2006 is a. 72,000 c. 88,000 b. 116,000 d. 108,000 C 28. The adjusted cash balance as of December 31, 2006 is a. 684,800 c. 844,000 b. 792,000 d. 765,000 B PAS 2 Inventories 29. At the end of its 2007 calendar year, San Miguel Foods, Inc. (SMFI) has finished goods inventory costing P90,000,000 with estimated selling price of P99,000,000 and estimated cost to sell of P4,950,000. SMFI also has inventories undergoing processing with total cost of P60,000,000 and with estimated cost of completion amounting to P2,000,000. The work in process, when completed, is expected to be sold at a price that parallels the current estimated selling price of the completed goods. Estimated selling cost is a percentage of the estimated selling price. The raw materials held totaling P34,000,000 have a replacement cost of P32,000,000. How much would be charged to expense as a result of write-down of inventories? a. 300,000 b. 1,500,000 c. 2,000,000 d. 0 D 30. A flash flood swept through Alexander Mahone’s warehouse on March 1. After the flood, Mahone’s accounting records showed the following: Inventory, January 1 P 35,000 Purchases, January 1 through March 1 200,000 Sales, January 1 through March 1 250,000 Inventory purchased in-transit as of March 1 10,000 Inventory sent out on consignment 20,000 Gross profit percentage on cost 40% What amount of inventory was lost in the flood? a. P55,000 c. P26,430 b. P56,430 d. P85,000 C 35 + 200 – 178,571= 56,430 – 20,000 – 10,000 = 26,430 31. On December 31, 200A, a typhoon damaged a warehouse of Aggressive Corporation. The entire company and many accounting records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be sold for scrap. Through the use of microfilmed records, the following data were gathered. Inventory, January 1, P450,000; Purchases, P2,160,000; Cash sales, P274,000; Cash received on collection of accounts receivable, P2,520,000; Accounts receivable-January 1; P210,000; Accounts written off P6,000; Allowance for bad debts - January 1, P10,500; Accounts receivable (net of required allowance), P342,000; Sales returns, P36,000; Sales discounts, P14,000; Purchase returns, P60,000; Purchase discounts, P12,000; Freight in, P21,600; Cost of goods out on consignment on December 30, 200A, P40,000; Salvage value of inventory, P9,000; Gross profit percentage on sales, 32%. Aggressive Company consistently measures doubtful accounts in percent of account receivables. How much is the value of inventory loss? a. 495,080 b. 535,080 c. 538,080 d. 544,080 A The next three questions are based on the following: Duncan Company is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers. An interim physical count was made on May 31, 2007. The following was obtained from the general ledger. Inventory, July 2006 Physical inventory, May 31, 2007 Sales for 11 months ended May 31, 2007 Sales for year ended June 30, 2007

875,000 950,000 8,400,000 9,600,000

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Purchases for 11 months ended May 31, 2007 (before adjustments) Purchases for year ended June 30, 2007 (before adjustments)

6,750,000 8,000,000

Additional Information: • Shipments received in May and included in the physical inventory but recorded as June purchases Shipments received in unsalable condition and • excluded from physical inventory. Credit memos had not received nor had chargebacks to vendors been recorded: Total at May 31, 2007 Total at June 30, 2007 (including the May unrecorded chargebacks) • Deposits made with vendor and charged to purchases in April 2007. Product was shipped in July 2007 • Deposits made with vendor and charged to purchases in May 2007. Product was shipped FOB destination on May 29, 2007 and was included in May 31, 2007 physical inventory as goods in transit. Through the carelessness of the receiving department, • a June shipment was damaged by rain. This shipment was later sold in June at its cost of

75,000

10,000 15,000 20,000

55,000

100,000

32. What is the gross profit rate for the eleven months ended May 31, 2007? a. 5.40% b. 20% c. 19.76% d. 20.50% B = 875 + 6,740 – 895 = 6,720; 8,400 – 6,720= 1,680 / 8,400= 20% 33. What is the Cost of goods sold during the month of June 2007 using the gross profit method? a. 980,000 b. 880,000 c. 860,000 d. 760,000 A = 9,600 – 100 = 9,500 x 80% = 7,600 +100 = 7,700 – 6,720 = 980 34. What is the June 30, 2007 inventory using the gross profit method? a. 1,240,000 b. 1,140,000 c. 895,000 d. 1,680,000 B = 875 + 7,965 – (6,720 + 980)= 1,141 [

IAS 41 Agriculture The next two questions are based on the following information: Hetfield has a herd of 15 3 year old cattle at January 1, 2008. Two animals were born during the year, one on April 1, 2008 and one on September 30, 2008. Three animals with ages of 3, 2.5 and 2 were purchased on July 1, 2008 for P5,000, P4,500 and P4,000, respectively. One animal was sold on March 1, 2008 for P4,500. Per-unit fair values less cost to sell are as follows.

3 year old animal at January 1, 2008 Newborn animal at April 1, 2008 3 year old animal at July 1, 2008 2.5 year old animal at July 1, 2008 2 year old animal at July 1, 2008 Newborn animal at October 1, 2008 Newborn animal at 31 December 2008 0.25 year old animal at December 31, 2008 0.5 year old animal at December 31, 2008 0.75 year old animal at December 31, 2008 2 year old animal at December 31, 2008 2.5 year old animal at December 31, 2008 3 year old animal at December 31, 2008 3.5 year old animal at December 31, 2008 4 year old animal at December 31, 2008

P

4,000 1,100 5,000 4,500 4,000 1,200 1,200 1,250 1,350 1,450 4,500 5,000 5,500 6,000 6,200

35. How much is the increase in fair value less estimated cost to sell due to price change? a. 22,800 c. 22,600 b. 26,500 d. 23,400 C (15–1sold) 3yr x (5,500 – 4,000); 1 3yr x (5,500 – 5,000); 1 new x (1,200 – 1,100); 1 new x (1,200 – 1,200); 1 2.5yr x (5,000 – 4,500); 1 2yr x (4,500 – 4,000)= 22,600 36. How much is the increase in fair value less estimated cost to sell due to physical change? a. 13,900 c. 13,100 b. 10,000 d. 13,700

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A (15–1sold) 3yr/4yr x (6,200 – 5,500); 1 3yr/3.5 x (6,000 – 5,500); 1 new/.75 x (1,450 – 1,200); 1 new/.25 x (1,250 – 1,200); 1 2.5/3yr x (5,500 – 5,000); 1 2/2.5yr x (5,000 – 4,500)+ 2 newly born 1,100 + 1,200 = 13,900 Loans and receivables The next two questions are based on the following: Buswang Beach Bank loaned Boracay Company P7,500,000 on January 1, 2004. The terms of the loan were payment in full on January 1, 2009 plus annual interest payment at 11%. The interest payment was made as scheduled on January 1, 2005. However, due to financial setbacks, Boracay was unable to make its 2006 interest payment. Buswang Beach considers the loan impaired and projects the cash flows from the loan as of December 31, 2006. Assume that the bank accrued the interest at December 31, 2005, but did not continue to accrue interest due to the impairment of the loan. The projected cash flow are: Date of cash flow

December 31, 2007 December 31, 2008 December 31, 2009 December 31, 2010

Amount projected as of December 31, 2006 500,000 1,000,000 2,000,000 4,000,000

37. How much is the loan impairment loss on December 31, 2006? a. 2,965,000 c. 5,360,000 b. 2,240,000 d. 2,140,000 A 38. What is the interest income to be reported by Buswang Beach on 2007? a. 589,600 c. 825,000 b. 534,600 d. 599,456 A Investments 39. Foyayeng Corp. began operations in 2008. An analysis of Foyayeng’s marketable securities portfolio acquired in 2008 shows the following totals at December 31, 2008 for trading and available-for-sale securities: FVPL AFS Aggregate cost P 54,000 P 65,000 Aggregate fair value 39,000 57,000

What amount should Foyayeng report in its 2008 income statement for unrealized holding loss? a. 23,000 b. 20,000 c. 8,000 d. 15,000 D 40. National Bank began business in February of 2007. During the year, National Bank purchased the three trading securities listed below. In its December 31, 2007 balance sheet, National Bank appropriately reported a P40,000 debit balance in its “Fair Value Adjustment- Trading Securities” account. There was no change during 2008 in the composition of National Bank’s portfolio of trading securities. Pertinent data are as follows: Security Cost Dec. 31, 2008 Market Value A P 1,200,000 P 1,260,000 B 900,000 950,000 C 1,600,000 1,620,000 What amount of gain on these securities should be included in National Bank’s income statement for the year ended December 31, 2008? a. 0 b. 40,000 c. 90,000 d. 130,000 C 41. Counting Crows acquired 1,000, P1,000, 5-year bonds from Omaha on September 30, 2009. The bonds are dated January 1, 2009 and mature in lump sum but pay interest on a semi-annual basis every July and December. The bonds carry interest at 12%; however, the effective rate on the bonds on January 1, 2009 is 16%. How much did Counting Crows pay for the bonds on September 30, 2009? a. 880,064 c. 885,067 b. 875,062 d. 865,798 A 42. The records of Touch Company as of December 31, 2008 show an investment on MM Company’s ordinary shares carried at fair market value in the amount of P4,560,000. Such shares do not give Touch Company a significant influence over the operating decisions of MM Company. The Notes of Touch Company on December 31, 2008 revealed that such investment was acquired early in 2008 at P5,060,000 and that no unrealized loss was recognized in the income statement for that period. The total par value of the shares is P5,000,0000. On December 31, 2009, the market value of the securities further declined to P4,400,000 and this time the decline was judged to be permanent. If on December 31, 2010, the market value of the securities were at 98% of

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the par value per share, how much would be shown as impairment recovery in the income statement of Touch Company for the year ended December 31, 2010? a. 0 c. 500,000 b. 160,000 d. 660,000 A PAS 28 Investment in Associate 43. An investor sells inventory for cash to a 25% associate. The inventory cost the investor P6 million and is sold to the associate for P10 million. None of the inventory has been sold at year-end. How much of the profit on the transaction would be reported in the group accounts? (a) P4 million. (c) P3 million. (b) P1 million. (d) Zero. Answer: (c) The next three questions are based on the following information: On January 1, 2006, Align Corporation acquired 30,000 ordinary shams for P2,700,000 which represents 30% interest in Parallel Company’s net assets. At the time of acquisition Parallel’s net assets are fairly revalued at P9,000,000. Prior to revaluation, the net assets had a carrying value of P8,000,000. The difference between the revalued amount and carrying amount is attributable, to the building which was credited to the revaluation surplus. The building has a remaining useful life of 10 years with no residual value. It is Parallel’s policy to depreciate all tangible depreciable assets using the straight-line method. At the end of 2006, Parallel Company reported a net profit of P1 500,000 and paid cash dividends of P600,000. At December 31, 2006, its shares are selling at P110 per share.

On July 1, 2007, Align Company sold 60% of its investment in Parallel at the prevailing market price of P115 per share. Parallel’s interim income statement ending June 30, 2007 showed a net profit of P900,000 and its annual income statement showed a net profit of P1,896,000. On December 31, 2007, a P1,000,000 cash dividend was declared sad paid by Parallel to all its shareholders. 44. Prior to the sale in 2007, what is the carrying value of Align’s Investment? a. 3,195,000 b. 3,209,400 c. 3,240,000 d. 3,254,400 A 2,700,000 + 450,000 share in income – 180,000 cash dividends – amortization of undervaluation of asset 30,000, (1,000,000 x 30% /10) = 2,940,000, balance as of December 31, 2006 + 270,000 share in income, 2007 – amortization of undervaluation 15,000 (30,000 x 6 mos./ 12 mos. )= 3,195,000 45. If immediately after the sale, the remaining shares are reclassified to investment in available-for-sale, what total amount of income from the investment should be included in the 2007 income statement? a. 506,760 b. 516,000 c. 528,000 d. 630,000 D Gain on sale 153,000; dividend 120,000; gain on reclassification 102,000; share in profit up to June 30 270,000; amort. Of undervaluation up to June 30 (15,000) 46. If at December 31, Parallel’s shares are selling at P120 per share, what is the amount of unrealized gain should be shown in the December 31, 2007 balance sheet of Align Company related to its investment in Parallel Company? a. 138,240 b. 144,000 c. 162,000 d. 236,240 C FMV 1.44 – cost June 30 3.195 x 40% = 162,000 PAS 40 Investment Property The next two questions are based on the following information: On January 1, 2000, PC Corporation acquired a building for P30,000,000 with an estimated useful life of 40 years Additional P500,000 was incurred by the company in connection with the acquisition and preparation as their main office. It is the company’s policy to depreciate this building using a sum-of-years’ digit. The salvage value of the building upon the expiration of its useful life was estimated at P750,400. On January 2005, a test of impairment was made on the building and it was determined that the building has a recoverable value of P19,650,400 with no change in the estimated salvage value. On January 1, 2007, PC acquired a new building as the new headquarter but immediately converted the old building as investment property. As of January 2007, the old building was revalued, and its fair market value was determined at P23,000,000. 47. What amount of gain on transfer should the company report in its equity as a result of the conversion? a. 1,734,520 b. 1,896,520 c. 2,125,520 d. 3,523,080 B 48. What amount of gain on the transfer should the company report in its income statement as a result of the conversion? a. 1,734,520 b. 1,896,520 c. 2,125,520 d. 3,523,080 D

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PAS 16 Property, Plant and Equipment The next two questions are based on the following: On December 31, 2008, the property, plant and equipment account of Pearl Company includes the details below. [

Plant assets acquired from XYZ Company Repairs made on building prior to occupancy Special tax assessment Construction of platform for machinery Remodeling of office space in building including new partitions and walls Purchase of new machinery

7,500,000 200,000 30,000 70,000 400,000 800,000

In exchange to plant assets of XYZ Company, Pearl Company issued 50,000 shares of its P100 par common stock. On the date of purchase, the common stock had a quoted price of P150 per share, and the following fair value. Land Building Machinery

500,000 4,000,000 1,500,000

49. The land should be reported at a. 530,000 b. 500,000

c. 625,000 d. 655,000

A= 500,000 + 30,000 = 530,000 A 50. The building should be reported at a. 4,400,000 b. 4,600,000 = 4,000,000 + 200,000 + 400,000 = 4,600,000 B 51. The machinery should be reported at a. 2,300,000 b. 2,675,000

c. 5,600,000 d. 5,400,000

c. 2,370,000 d. 2,745,000

C= 1,500,000 + 70,000 + 800,000= 2,370,000 C 52. Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the private jet is P15 million and can be depreciated either using a composite useful life or useful lives of its major components. It is expected to be used over a period of 7 years. The engine of the jet has a useful life of 5 years. The private jet’s tires are replaced every 2 years. The private jet will be depreciated using the straight-line method over (a) 7 years composite useful life. (b) 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet. (c) 2 years useful life based on conservatism (the lowest useful life of all the parts of the jet). (d) 5 years useful life based on a simple average of the useful lives of all major components of the jet. Answer: (b) PAS 23 Borrowing Costs 53. On January 1, 2006, Devin Company contracted for the construction of a building for P20,000,000 on a land that it had previously purchased. The building was completed at the end of December 2006 and the following payments were made to the contractor: Payment date January 1, 2006 March 31, 2006 September 30, 2006 December 31, 2006

P

Amount 2,000,000 6,000,000 10,000,000 2,000,000

The following represents the borrowing of Devin Company as of December 31,2006 10%, P7,000,000, 4-year note dated December 31, 2005 with simple interest payable annually, specifically related to the construction project. Interest income earned on the temporary investment of the proceeds P120,000. 12.5%, P10,000,000, 10-year note dated January 1, 2005 with interest payable annually 10%, P15,000,000, 10-year note dated January 1, 2002 with interest payable annually 

 

The amount of borrowing costs to be capitalized in relation to the building constructed is a. 920,000 b. 800,000

c. 876,667 d. 898,533

B= Ave Exp= 9M; General Borrowings= (1.25M + 1.5M = 2.75M/ 25M= 11% ) ={700,000 – 120,000+ (9M – 7M)x 11%}=800K 11


IAS 36 Impairment of Assets 54. An entity has a database that it purchased five years ago. At that date, the database had 15,000 customer addresses on it. Since the date of purchase, 1,000 addresses have been taken from the list and 2,000 addresses have been added to the list. It is anticipated that in two years’ time, a further 4,000 addresses will have been added to the list. In determining the value-in-use of the customer lists, how many addresses should be taken into account at the current date? (a) 15,000 (c) 20,000 (b) 16,000 (d) 21,000 Answer: (b) The next four questions are based on the following information: After a year of operations, an entity is calculating the value in use of one of its cash-generating unit at the beginning of 2009. Data is shown below. Year 2009 2010 2011 2012 2013

Future Cash Flows P 230 253 273 290 304

The appropriate discount rate was determined to be 15%. Projections of future cash flows should be extended up to 11 years. The long-term growth rates were determined as 3%, -2%, -6%, -15%, -25% and 67% from year 2014 up to year 2019. Round off present value factors up to the fifth decimal point and projected future cash flows up to the nearest whole number. 55. How much is the total undiscounted future cash flows? a. 2,749 b. 3,211

c. 2,891 d. 3,897

A 230 + 253 + 273 + 290 + 304 + (304 x 1.03) + (313 x .98) + (307 x .94) + (289 x .85) + (246 x .75) + (185 x .33) 56. How much is the value in use? a. 1,229 c. 1,360 b. 1,341 d. 1,245 C 57. Assuming that the historical cost of the cash-generating unit in the problem above is P3,000, inclusive of P1,000 allocated goodwill, and an accumulated depreciation of P167, how much is the impairment loss? a. 1,000 c. 1,473 b. 473 d. 1,233 C 1,360 – (3,000 – 167)= -1,473 58. Assuming that at the end of 2010, the entity estimates a revised recoverable amount of P1,910, how much is the reversal of impairment loss to be recognized in its year-end income statement? a. 231 c. 376 b. 229 d. 387 D (NO REVERSAL OF IL) Actual BV= 1,360 x 9/11= 1,113; SBE = (3,000-1,000)x9/12= 1,500; 1,500 – 1,113 = 387 Current/ Noncurrent Liabilities 59. XYZ Corporation is preparing its December 31, 200B balance sheet. The following items may be reported as either a current or long-term liability:

On December 31, 200B, XYZ declared a cash dividend of P5.00 per share to shareholders of record December 31. The dividend is payable on January 15, 200C. XYZ has issued 100,000 shares of ordinary shares, of which 10,000 shares are held in treasury. At December 31, bonds payable of P2,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of P200,000 every September 30, beginning September 30, 200C. At December 31, 200A, customer advances were P50,000. During 200B, XYZ collected P30,000 of customer advances, and advances of P25,000, were earned. From the above information, what amount should XYZ report as current liability in its December 31, 200A balance sheet? a. 505,000 b. 510,000 c. 565,000 d. 765,000 D 60. Amazon Inc. has been served a legal notice on December 15, 20X1, by the local environmental protection agency (EPA) to fit smoke detectors in its factory on or before June 30, 20X2 (before June 30 of the following year). The cost of fitting smoke detectors in its factory is estimated at P250,000. How should Amazon Inc. treat this in its financial statements for the year ended December 31, 20X1? (a) Recognize a provision for P250,000 in the financial statements for the year ended December 31, 20X1. (b) Recognize a provision for P125,000 in the financial statements for the year ended December 31, 20X1, because the other 50% of the estimated amount will be recognized next year in the financial statement for the year ended December 31, 20X2.

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(c) Because Amazon Inc. can avoid the future expenditure by changing the method of operations and thus there is no present obligation for the future expenditure, no provision is required at December 31, 20X1, but as there is a possible obligation, this warrants disclosure in footnotes to the financial statements for the year ended December 31, 20X1. (d) Ignore this for the purposes of the financial statements for the year ended December 31, 20X1, and neither disclose nor provide the estimated amount of P250,000. Answer: (c) The next two questions are based on the following information: On January 1, 2006, Tudor Company issued its 10%, 5-year convertible debt instrument with a face amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 90,000 ordinary shares with a par value of P100. When the debt instruments were issued, they were selling at 97 without conversion option. Tudor Company incurred P80,000 transaction costs on the issue of the debt instruments. 61. How much of the net proceeds represent the equity component? a. 297,600 c. 9,920,000 b. 9,622,400 d. 10,000,000 A 62. How much of the net proceeds represent the debt component? a. 297,600 c. 9,920,000 b. 9,622,400 d. 10,000,000 B 63. On January 1, 2006, Emilia Corporation issued its 5-year, 12% P5,000,000 face value convertible debt instrument for P4,800,000. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50 per share and can be converted anytime from January 2007 to maturity. At the time of issue, the market rate of interest for a similar instrument is 14%. Interest is payable every six months on January 1 and July 1. On July 1, 2007, the entire debt instrument was converted into equity instrument by the issuance of 80,000 ordinary shares of the enterprise. Transaction costs of P50,000 were incurred in relation to the issue of new shares. [

What amount should be credited to the share premium account as a result of the conversion? (Round off present value to three decimal places) a. None c. 831,349 b. 152,800 d. 881,549 C PAS 12 Accounting for Income Taxes 64. Profit before income tax shown in the income statement of LIE Co. amounted to P1,820,000. Deferred tax liability decreased by P40,000 during the year. Deferred tax asset at the beginning of the year amounted to P95,000 and at year-end it was P65,000. Income tax payable account has balances of P265,000 and P575,000 at Jan. 1 and Dec. 31 respectively. LIE Co. is subject to 35% tax rate. Payments for taxes during the year amounted to a. P670,000 c. P970,000 b. P680,000 d. P990,000 B 65. A subsidiary has sold goods costing P1.2 million to its parent for P1.4 million. All of the inventory is held by the parent at year-end. The subsidiary is 80% owned, and the parent and subsidiary operate in different tax jurisdictions. The parent pays taxation at 30%, and the subsidiary pays taxation at 30%. Calculate any deferred tax asset that arises on the sale of the inventory from the subsidiary entity to the parent. (a) P 60,000 (c) P 48,000 (b) P200,000 (d) P 80,000 Answer: (a) 66. An entity issued a convertible bond on January 1, 20X4, that matures in five years. The bond can be converted into ordinary shares at any time. The entity has calculated that the liability and equity components of the bond are P3 million for the liability component and P1 million for the equity component, giving a total amount of the bond of P4 million. The interest rate on the bond is 6%, and local tax legislation allows a tax deduction for the interest paid in cash. Calculate the deferred tax liability arising on the bond as at the year ending December 31, 20X4. The local tax rate is 30%. (a) P1.2 million. (c) P300,000 (b) P900,000 (d) P4 million. Answer: (c) (P4m – P3m) × 30% 67. An entity has revalued its property and has recognized the increase in the revaluation reserve in its financial statements. The carrying value of the property was P8 million, and the revalued amount was P10 million. Tax base of the property was P6 million. In the country, the tax rate applicable to profits is 35% and the tax

13


rate applicable to profits made on the sale of property is 30%. Where will the tax liability be recognized and at what amount? (a) In the income statement at P600,000. (b) In equity at P1.2 million. (c) In statement of recognized income and expense at P1.4 million. (d) In retained earnings at P700,000. Answer: (b) 68. The current liabilities of an entity include fines and penalties for environmental damage. The fines and penalties are stated at P10 million. The fines and penalties are not deductible for tax purposes. What is the tax base of the fines and penalties? (a) P10 million. (c) P13 million. (b) P3 million. (d) Zero. Answer: (a) PAS 17 Leases 69. Which is the correct accounting for a finance lease in the accounts of the lessee (assuming fair value is used)? (a) Dr Asset account Cr Liability account } with fair value Dr Income statement Cr Asset account } with depreciation of a sset Dr Income statement Cr Liability account } finance charge for period Dr Liability account Cr Cash } cash paid in period (b) Dr Liability account Cr Asset account } with fair value Dr Income statement Cr Asset account } with depreciation of a sset Dr Liability account Cr Income statement } finance charge for period Dr Liability account Cr Cash } cash paid in period (c) Dr Asset account Cr Liability account } with fair value Dr Asset account Cr Income statement } with depreciation of asset Dr Liability account Cr Income statement } finance charge for period Dr Liability account Cr Cash } cash paid in period (d) Dr Asset account Cr Liability account } with fair value Dr Income statement Cr Asset account } with depreciation of a sset Dr Liability account Cr Income statement } finance charge for period Dr Liability account Cr Cash } cash paid in period

Answer: (a) 70. Which is the correct accounting treatment for an operating lease payment in the accounts of the lessee? (a) Dr Cash Cr Operating lease rentals/income statement (b) Dr Operating lease rentals/income statement Cr Cash (c) Dr Asset account Cr Cash (d) Dr Cash Cr Asset account Answer: (b)

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71. On July 1, 2006, Gee, Inc. leased a delivery truck from Marr Corp. under a three-year operating lease. Total rent for the term of the lease will be P36,000, payable as follows: 12 months at P 500 = P 6,000 12 months at P 750 = 9,000 12 months at P1,750 = 21,000 All payments were made when due. In Marr's June 30, 2008 balance sheet, the accrued rent receivable should be reported as a. b.

P 0 P 9,000

c. d.

P12,000 P21,000

B 72. On July 1, 2008, South Co. entered into a ten year operating lease for a warehouse facility. The annual minimum lease payments are P100,000. In addition to the base rent, South pays a monthly allocation of the building's operating expenses, which is amounted to P20,000 for the year ended June 30, 2009. In the notes to South's June 30, 2009 financial statements, what amounts of subsequent years lease payments should be disclosed? a. P100,000 per annum for each of the next five years and P500,000 in the aggregate. b. P120,000 per annum for each of the next five years and P600,000 in the aggregate. c. P100,000 per annum for each of the next five years and P900,000 in the aggregate. d. P120,000 per annum for each of the next five years and P1,080,000 in the aggregate. e. P100,000 for the fiscal year ending 2010, P400,000 total future minimum lease payments for fiscal years ending June 30, 2011 to 2014, and P400,000 total future minimum lease payments for fiscal years ending June 30, 2015 to 2018. E 73. On January 1, 2008, Tax Boy leased a machinery to Tax Girl with the following details: Cost of asset leased P 3,169,865 Lease term 4 years Useful life of asset leased 5 years Implicit rate 10% Annual rent is payable at the end of each year. How much would be the annual lease payments which will give Tax Boy a fair rate of return on the net investment in the lease? a. 1,000,000 c. 836,202 b. 792,466 d. 600,814 A 74. East Company leased a new machine from north Company on May 1, 2008, under a lease with the following information: Lease term Annual rental payable at beginning of each lease year Useful life of machine Implicit interest rate Present value of an annuity of one in advance for ten Periods at 14% Present value of one for ten periods at 14%

10 years P40,000 12 years 14% 5.95 0.27

East has the option to purchase the machine on May 1,2018 by paying P50,000, which approximates the expected fair value of the machine on the option exercise date. On May 1, 2008, East should record a capitalized lease asset of a. P251,500 c. P224,500 b. P238,000 d. P198,000 B = 40,000 x5.95= 238,000 75. On January 1, 2008, Babson, Inc. leased two automobiles for executive use. The lease requires Babson to make five annual payments of P13,000 beginning January 1, 2008. At the end of the lease term, December 31, 2012, Babson guarantees the residual value of the automobiles will total P10,000. The lease qualifies as a capital lease. The interest rate implicit in the lease is 9% . Present value factors for the 9% rate implicit in the lease are as follows: For an annuity due with five payments 4.240 For an ordinary annuity with five payments 3.890 Present value of P1 for five periods 0.650 Babson's recorded capital lease liability immediately after the first required payment should be a. P48,620 c. P35,620 b. P44,070 d. P31,070 A = {(13,000 x 4.240) + (.650 x 10,000)} – 13,000 = 48,620

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76. In the long-term liabilities section of its balance sheet at December 31, 2008, Mene Co. reported a capital lease obligation of P75,000, net or current portion of P1,364. Payments of P9,000 were made on January 2, 2009 and 2010. Mene's incremental borrowing rate on the date of the lease was P11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31, 2009 balance sheet, what amount should Mene report as capital lease obligation, net of current portion? [

a. P66,000 b. P73,500

c. P73,636 d. P74,250

9,000 76,364 B = Dec. 31, 2004 Dec. 31, 2005 9,000 7,636.40 1,364 75,000 Dec. 31, 2006 9,000 7,500 1,500 73,500 77. On June 30, 2008, Lang Co. sold equipment with an estimated useful life of eleven years and immediately leased it back for ten years. The equipment's carrying amount was P450,000; the sale price was P430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was P465,000. In its June 30, 2008 balance sheet, what amount should Lang report as deferred loss? [

a. P35,000 b. P20,000

c. P15,000 d. P 0

D 78. On December 31, 2008, XYZ Company sold equipment with an estimated remaining useful life of 10 years. At the same time, XYZ leased back the equipment for 2 years. The leaseback is an operating lease. Sales price 7,500,000 Carrying amount 5,000,000 Fair value of equipment on date of sale 6,000,000 In its 2008 income statement, XYZ should report gain at a. 2,500,000 b. 1,500,000

c. 1,000,000 d. 1,750,000

C PAS 19/ PAS 26 Employee Benefits/ Accounting for Retirement Benefits Use the following information for the next eight questions: The following information relates to a defined benefit pension plan of the Ferdie Company for the year ending December 31, 2008: [

Projected benefit obligation, January 1 Projected benefit obligation, December 31 Fair value of plan assets, January 1 Expected return on plan assets Actual return on plan assets Amortization of deferred gain (based on the remaining service life of 10 years) Employer contributions Benefits paid to retirees Settlement rate Based on the information given above, answer the following:

P 4,600,000 4,729,000 5,035,000 450,000 495,000 32,500 425,000 390,000 10%

79. The current service cost for 2008 is a. P59,000 c. P519,000 b. P94,000 d. P390,000 A = PSI(B)AP= 4,600 + X SQUEEZE + (10% x 4,600) – 390 = 4,729 80. What is the 2008 net benefit expense? a. P36,500 b. P71,500 59 + 460 – 450 – 32.5 = 36.5 A A=

c. P496,000 d. P367,500

81. The fair value of plan assets on December 31, 2008 is a. P5,520,000 b. P5,565,000 B 5,035,000 + 495,000 + 425,000 – 390,000= 5,565,000 B

c. P5,597,000 d. P5,528,500

82. The unrecognized actuarial gain as of December 31, 2008 is a. P337,500 c. P841,000 b. P873,500 d. P797,500 C 828,500 (gross of corridor) – Amort. 32,500 + Excess of Actual over Expected Return 45,000 = 841,000 C

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83. The prepaid/accrued benefit cost on January 1, 2008 and December 31, 2008, respectively are Jan.1, 2008 Dec.31, 2008 a. P110,000 P498,500 b. P393,500 P 37,500 c. P350,000 P 38,500 d. P393,500 P 5,000 D Using the same information as used in the immediately preceding questions, however, assuming further that Ferdie Company opts to recognize any actuarial gain or loss in full, answer the following questions. 84. Ferdie Company should report 2008 benefit expense at a. P69,000 c. P96,000 b. P79,500 d. P37,500 A 85. Ferdie’s other comprehensive income in 2008 would include actuarial gain of a. 828,500 c. 73,500 b. 873,500 d. 45,000 D 86. The actuarial gain to be presented in equity as of December 31, 2008 is a. 828,500 c. 73,500 b. 873,500 d. 45,000 B 87. An entity operates a defined benefit pension plan and changes it on January 1, 20X4, to a defined contribution plan. The defined benefit plan still relates to past service but not to future service. The net pension liability after the plan amendment is $70 million, and the net pension liability before the amendment was $100 million. How should the entity account for this change? (a) The entity recognizes a gain of $30 million. (b) The entity does not recognize a gain. (c) The entity recognizes a gain of $30 million over the remaining service lives of the employees. (d) The entity recognizes the gain but applies the 10% corridor approach to it. Answer: (a) 88. An entity on December 31, 20X5, changes its defined benefit pension plan to a defined contribution plan. The entity agrees with the employees to pay them $9 million in total on the introduction of a defined contribution plan. The employees forfeit any pension entitlement for the defined benefit plan. The pension liability recognized in the balance sheet at December 31, 20X4, was $10 million. How should this curtailment be accounted for in the balance sheet at December 31, 20X5? (a) A settlement gain of $1 million should be shown. (b) The pension liability should be credited to reserves and a cash payment of $9 million should be shown in expense in the income statement. (c) The cash payment should go to reserves and the pension liability should be shown as a credit to the income statement. (d) A credit to reserves should be made of $1 million. Answer: (a) Stockholders’ Equity 89. In September 2006, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's P50 variable rate preferred stock at an exercise price of P80 per share. On March 20, 2008, none of the rights had been exercised, and West redeemed them by paying each stockholder P0.10 per right. As a result of this redemption, West stockholder's equity was reduced by a. 120 c. 12,000 b. 2,400 d. 36,000

C REMIND ABT. EQUITY SHARES WITH DETACHEABLE AND NON-DETACHABLE STOCK WARRANTS. 90. Selected information for Irvington Company is as follows: December 31 2007 2008 Preferred stock, 8%, par P100, nonconvertible, noncumulative P125,000 P125,000 Common stock 300,000 400,000 Retained earnings 75,000 185,000 Dividends paid on preferred stock for one year ended 10,000 10,000 Net income for year ended 60,000 120,000

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Irvington's return on common stockholder's equity, rounded to the nearest percentage point, for 2008 is a. 17% b. 19% c. 23% d. 25% C (120,000 – 10,000)/ [(300,000+400,000+75,000+185,000)/2] 91. Love Company’s shareholders’ equity account balances at December 31, 2007 were as follows: Ordinary share Share premium Accumulated Profits and Losses

P

800,000 1,600,000 1,845,000

The following 2008 transactions and other information relate to the shareholders’ equity accounts: •

•

•

•

• •

Love had 400,000 authorized shares of P5 par ordinary, of which 160,000 shares were issued and outstanding. On March 5, 2008, Love acquired 5,000 of its ordinary shares for P10 par share to hold as treasury share. On July 15, 2008, Love declared and distributed a property dividend of inventory. The inventory had a P75,000 carrying value and a P90,000 fair market value. On January 2, 2006, Love granted stock options to employees to purchase 20,000 shares of Love’s ordinary share at P18 per share, which was the market price on that date. The options may be exercised within a 3-year period beginning January 2, 2008. The measurement date is the same as the grant date. On October 1, 2008, employees exercised all 20,000 options when the market value of the share was P25 per share. Love issued new shares to settle the transaction. Love’s net income for 2008 was P240,000. Love intends to issue new stock options to key employees in 2009.

What is the total shareholders’ equity as of December 31, 2008? a. 4,720,000 c. 4,750,000 b. 4,735,000 d. 4,785,000 A beg. bal. 4,245 – 50 – 75 + 360 (P18 x 20,000) + 240 Note: no effect of options since at grant date there was no fair value of option given, furthermore, the option price is established at the fair value of share. BVPS and EPS 92. The stockholders' equity of Retro Company on December 31, 2008 includes the following: [

12% Preferred stock, 20,000 shares, P100 par value 14% Preferred stock, 10,000 shares, P300 par value Common stock, 50,000 shares, P100 par value Retained earnings Additional paid in capital

2,000,000 3,000,000 5,000,000 2,240,000 1,500,000

The 12% stock is cumulative and fully participating. The 14% stock is noncumulative and fully participating. Dividends have not yet been paid for 3 years. What is the book value per share of common stock? a. 132 b. 126

c. 100 d. 112

A 93. The stockholders' equity section of United Company appears below as of December 31, 2008: 8% cumulative preferred stock, P50 par value 100,000 shares, outstanding 90,000 shares P 4,500,000 Common stock, 1 par, authorized and issued 10,000,000 shares 10,000,000 Additional paid-in capital 20,500,000 Retained earnings, December 31, 2004 P 132,000,000 Net income 35,000,000 167,000,000 P 202,000,000 Net Income for 2008 reflects an income tax rate of 30%. Included in the net income figure is an expropriation loss of P8,000,000 before tax. The basic earnings per share should be a. 3.46 c. 4.63 b. 4.04 d. 4.96 A 35 – (4.5x8%) / 10 94. On December 31, 2005, Reload Company had 200,000 ordinary shares outstanding with a par value of P100 per share. In addition, the company had 40,000 shares of 10% convertible preference shares with a par value of P50 per share. The preference shares are convertible into 40,000 ordinary shares. On December 31, 2006, Reload Company reported an after tax income of P800,000 and paid P200,000 and P250,000 dividends to preference and ordinary, respectively. 18


What amounts of earnings per share Reload Company should report in its December 31, 2006 financial statements? a) Basic Earnings per Share (BEPS) of P3.00 only. b) Basic Earnings per Share of P4.00 only. c) Basic Earnings per Share of P3.00 & Diluted Earnings per Share (DEPS) of P3.33. d) Basic Earnings per share of P4.00 & Diluted Earnings per Share (DEPS) of P3.33. A BEPS = 800,000 – 200,000 = 600,000 / 200,000 = P3; DEPS = 800,000 / (200,000 + 40,000) = 3.33 95. Purity Company had 600,000 ordinary shares outstanding on January 1, 2009. During 2009, Purity issued rights to acquire one ordinary share at P10 in the ratio of one new share for every 4 shares outstanding. [

The market value of the ordinary share immediately prior to the rights issue is P35. The rights were exercised on October 1, 2009. The net income of Purity for the year is P8,550,000. Purity Company shall report basic earnings per share in its income statement at a. P11.40 c. P14.25 b. P12.00 d. P13.41 B 600,000 x (35/30); 700,000 x 9/12 + 750,000 x 3/12 = 712.5; 8.55/712.5= 12 96. Athena Company provided the following information for 2009 and 2010: Net income for 2009 Net income for 2010 Outstanding shares on December 31, 2009

18,000,000 60,000,000 200,000

[

A bonus issue was made on October 1, 2010 in the ratio of two additional ordinary shares for each ordinary share on December 31, 2009. [

Athena Company shall report basic earnings per share in its 2010 comparative income statement at 2010 2009 a. P100 P 30 b. P 30 P100 c. 100 P 90 d. P150 P 30 A 97. Information relating to the capital structure of the Maybug Corporation at December 31,2005 is as fallows: Ordinary shares Convertible preference, non-cumulative 8%, 4-year convertible bonds (liability component)

120,000 shares 18,000 shares P 1,934,400

The P2,000,000 face value bonds where issued on December 31, 2005 when the prevailing rate of interest was 9% without the conversion option. A stock option to purchase 20,000 shares at P15, average market price on December 31, 2006 is P20. The company paid dividends of P5 per share on its preference. The preference share is convertible into 40,000 shares of ordinary share. The 8% convertible bonds is convertible into 35,000 shares of ordinary. The net income for the year ended December 31, 2006 is P640,000. Income tax rate is 32%. What is the diluted earnings per share for the year 2006? a) 3.79 b) 3.88

c) 4.40 d) 4.58

A “Treasury stock method” = 20,000 x 15= 300,000 / 20 = 15,000; 20,000 – 15,000 = 5,000 incremental shares. Test for dilution: Inc. in NI Inc. in Sh. Incremental EPS Convertible bonds 118,385 / 35,000 3.38 Convertible Pref. shares 90,000 / 40,000 2.25 (Rank Second) Stock options 0 / 5,000 0 (Rank First) EPS BEPS 550,000 / 120,000 4.58 Warrants 550,000 / 125,000 4.40 Convertible bonds 640,000 / 165,000 3.88 Convertible PS 758,385 / 200,000 3.79 IFRS 2 Share-based Payments 98. An entity issues shares as consideration for the purchase of inventory. The shares were issued on January 1, 20X4. The inventory is eventually sold on December 31, 20X5. The value of the inventory on January 1, 20X4, was P3 million. This value was unchanged up to the date of sale. The sale proceeds were P5 million. The shares issued have a market value of P3.2 million. Which of the following statements correctly describes the accounting treatment of this share-based payment transaction? (a) Equity is increased by P3 million, inventory is increased by P3 million; the inventory value is expensed on sale on December 31, 20X5.

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(b) Equity is increased by P3.2 million, inventory is increased by P3.2 million; the inventory value is expensed on sale on December 31, 20X5. (c) Equity is increased by P3 million, inventory is increased by P3 million; the inventory value is expensed over the two years to December 31, 20X5. (d) Equity is increased by P3.2 million, inventory is increased by P3.2 million; the inventory value is expensed over the two years to December 31, 20X5. Answer: (a) 99. An entity issues fully paid shares to 200 employees on December 31, 20X4. Normally shares issued to employees vest over a two-year period, but these shares have been given as a bonus to the employees because of their exceptional performance during the year. The shares have a market value of P500,000 on December 31, 20X4, and an average fair value for the year of P600,000. What amount would be expensed in the income statement for the above share-based payment transaction? (a) P600,000 (c) P300,000 (b) P500,000 (d) P250,000 Answer: (b) 100. An entity grants 1,000 share options to each of its five directors on July 1, 20X4. The options vest on June 30, 20X8. The fair value of each option on July 1, 2004, is P5, and it is anticipated that all of the share options will vest on June 30, 20X8. What will be the accounting entry in the financial statements for the year ended June 30, 20X5? (a) Increase equity P25,000, increase in expense income statement P25,000. (b) Increase equity P5,000, increase in expense income statement P5,000. (c) Increase equity P6,250, increase in expense income statement P6,250. (d) Increase equity zero, increase in expense income statement zero. Answer: (c) 101. Entity A is an unlisted entity, and its shares are owned by two directors. The directors have decided to issue 100 share options to an employee in lieu of many years’ service. However, the fair value of the share options cannot be reliably measured as the entity operates in a highly specialized market where there are no comparable companies. The exercise price is P10 per share, and the options were granted on January 1, 20X4, when the value of the shares was also estimated at P10 per share. At the end of the financial year, December 31, 20X4, the value of the shares was estimated at P15 per share and the options vested on that date. What value should be placed on the share options issued to the employee for the year ended December 31, 20X4? (a) P1,000 (c) P 500 (b) P1,500 (d) P 250 Answer: (c) The next three questions are based on the following: Ashleigh, a public limited company, has granted share options to its employees with a fair value of P6 million. The options vest in three years’ time. The Monte-Carlo model was used to value the options, and these estimates had been made • Grant date (January 1, 20X4): estimate of employees leaving the entity during the vesting period—5% • January 1, 20X5: revision of estimate of employees leaving to 6% before vesting date • December 31, 20X6: actual employees leaving 5% 102. What would be the expense charged in the income statement in Year to December 31, 20X4? (a) P6 million. (c) P1.90 million. (b) P2 million. (d) P5.70 million. Answer: (c) (P6 million × 95% × 1/3) 103. Year to December 31, 20X5? (a) P1.90 million. (c) P2 million. (b) P1.88 million. (d) P3.78 million. Answer: (b) (P6 million × 94% × 2/3 – P1.90 million) 104. Year to December 31, 20X6? (a) P1.90 million. (c) P2 million. (b) P1.88 million. (d) P1.92 million. Answer: (d) (P6 million × 95% – P3.78 million) 105. An entity has granted share options to its employees. The total expense to the vesting date of December 31, 20X6, has been calculated as P8 million. The entity has decided to settle the award early, on December 31, 20X5. The expense charged in the income statement since the grant date of January 1, 20X3, had been year to December 31, 20X3, P2 million, and year to December 31, 20X4, P2.1 million. The expense that would have been charged in the year to December 31, 20X5, was P2.2 million. What would be the expense charged in the income statement for the year December 31, 20X5? (a) P2.2 million. (c) P3.9 million. (b) P8 million. (d) P2 million. Answer: (c)

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106. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of its 1,000 employees in January 20X4. The management feels that as of December 31, 20X4, 90% of the awards will vest on December 31, 20X6. The fair value of each share appreciation right on December 31, 20X4, is P10. What is the fair value of the liability to be recorded in the financial statements for the year ended December 31, 20X4? (a) P300,000 (c) P100,000 (b) P10 million (d) P90,000 Answer: (a) (100 × 1000 × 90% × P10 × 1/3) 107. Jay, a public limited company, has granted 20 share appreciation rights to each of its 500 employees on January 1, 20X4. The rights are due to vest on December 31, 20X7, with payment being made on December 31, 20X8. Assume that 80% of the awards vest. Share prices are P January 1 20X4 15 December 31, 20X4 18 December 31, 20X7 21 December 31, 20X8 19 What liability will be recorded on December 31, 20X7, for the share appreciation rights? (a) P 60,000 (c) P 48,000 (b) P210,000 (d) P150,000 Answer: (c) [20 × 500 × 80% × (P21 – P15)] 108. How should the settlement of the transaction be accounted for on December 31, 20X8? (a) Payment to employees of P32,000, no gain recorded. (b) Payment to employees of P16,000, gain of P32,000 is recorded. (c) Payment to employees of P48,000, no gain recorded. (d) Payment to employees of P32,000, gain of P16,000 is recorded. Answer: (d) [20 × 500 × 80% × (P19 – P15)] that is, P32,000 109. Doc, a public limited company, has purchased inventory of P100,000. The company has offered the supplier a choice of settlement alternatives. The alternatives are either receiving 1,000 shares of Doc six months after the purchase date (valued at P110,000 at the date of purchase) or receiving a cash payment equal to the fair value of 800 shares as of December 31, 20X4 (estimated value P90,000 at the date of purchase). What should be the accounting entry at the date of purchase of the inventory? (a) Inventory P90,000, liability P90,000. (b) Inventory P100,000, liability P100,000. (c) Inventory P100,000, liability P110,000, intangible asset P10,000. (d) Inventory P100,000, liability P90,000, equity P10,000. Answer: (d) 110. In the tax jurisdiction of Mack, a public limited company, a tax deduction is allowed for the intrinsic value of the share options issued to employees. The company issued options on January 1, 20X4, worth P15 million to employees. They vest in three years. The share options’ intrinsic value at December 31, 20X4, was P12 million. The tax rate in the jurisdiction is 30%. What is the tax effect of the above issue of share options at December 31, 20X4? (a) P1.5 million benefit to income statement. (b) P1.2 million benefit to income statement. (c) P1.5 million benefit recognized in equity. (d) P1.2 million benefit recognized in equity. Answer: (b) At December 31, 20X4, 30% of P12 million divided by three years = P1.2 million to income statement as the tax effect of the cumulative remuneration expense exceeds the tax benefit (P5 million @ 30% compared with P4 million @ 30%). 111. In the above problem, what would be the tax effect if the intrinsic value at December 31, 20X4, was P21 million? (a) P2.1 million tax benefit to income. (b) P2.1 million recognized in equity. (c) P1.5 million tax benefit to income, P0.6 million recognized in equity. (d) P1.5 million recognized in equity, P0.6 million tax benefit to income. Answer: (c) A portion of the tax benefit is recognized in equity as the tax benefit of P21 million × 1/3 × 30% (P2.1 million), exceeds the tax effect of the accumulated remuneration expense P15 million × 1/3 × 30% (P1.5 million). Cash to Accrual Basis 112. Insurance payments Prepaid insurance, Jan. 1 Prepaid insurance, Dec. 31 Accrued insurance payable decreased by

P150,000 65,000 85,000 35,000 21


How much is the insurance expense under accrual basis accounting? a. 205,000 c. 130,000 b. 65,000 d. 95,000 D 113. Unearned rent, Jan. 1 P170,000 Unearned rent, Dec. 31 85,000 Accrued rent income, Jan. 1 180,000 Accrued rent income, Dec. 31 200,000 Rental payments received 560,000 How much is the Rent income under the accrual basis accounting? a. 455,000 c. 665,000 b. 625,000 d. 645,000 C 114. Zamboanga Enterprises records all transactions on the cash basis. The company’s accountant prepared the following income statement at the end of the company’s first year of operations: Zamboanga Enterprises Income Statement For the Year Ended December 31, 2006 Sales Selling and administrative expenses: Salaries expense Rent expense Utilities expense Equipment Commission expense Insurance expense Interest expense Net Income

P2,016,000 P624,000 360,000 232,000 240,000 302,400 48,000 24,000

1,830,400 P 185,600

You have been asked to prepare an income statement on the accrual basis. The following information is given to you to assist in the preparation: Amounts due from customers at year-end were P224,000. Of this amount, P24,000 will probably not be collected. Salaries of P88,000 for December 2006 were paid on January 5, 2007. Zamboanga rents its building for P24,000 a month, payable quarterly in advance. The contract was signed on December 31, 2005. The bill for December’s utility costs of P21,600 was paid January 10, 2007. Equipment of P240,000 was purchased on January 1, 2006. The expected life is 5 years, no salvage value. Assume straight-line depreciation. Commissions of 15% of sales are paid on the same day cash is received from customers. A 1-year insurance policy was issued in company assets on July 1, 2006. Premiums are paid annually in advance. Zamboanga borrowed P400,000 for one year on May 1, 2006. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1,2006. •

• •

• •

• •

•

How much is the net income before income tax under the accrual basis of accounting? a. 526,000 c. 514,000 b. 286,000 d. 574,000 A Single-entry 115. Changes in the account balances for Symphony Co. during 2008 are shown below: Increase (Decrease) Cash P 1,850,000 Accounts receivable 1,650,000 Allowance for bad debts 450,000 Inventory (850,000) Investment in Mandrake Company (equity method) 450,000 Buildings and equipment (800,000) Accumulated depreciation (400,000) Accounts payable 700,000 Bonds payable (800,000) Discount on bonds payable (100,000) Capital stock 600,000 22


Additional paid-in capital Revaluation Surplus (on appraisal conducted during the year)

300,000 200,000

Dividends declared during 2008 were P500,000. No other transactions affected retained earnings during the year. Calculate the amount of net income to be reported in 2008. a. P1,850,000 b. P1,650,000 c. P1,950,000 d. P2,550,000 B - end -

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P1 - Winding Up

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