ARTS CPA Review

(Academic Review and Training School, Inc.)

2F & 3F Crème Bldg., Abella St., Naga City
Tel No.: (054) 472-9104; E-mail: artscparev@yahoo.com.

COMPREHENSIVE PROBLEMS

PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

*CONTENTS OF THE HANDOUT: 1. SELECTED ASSET ACCOUNTS
2. ACCOUNTING FOR LIABILITIES AND STOCKHOLDERS’ EQUITY

A. BORROWING COST (PAS 23)

Problem 1 (adapted): The following transaction pertain to the general borrowings made
during 2014 by Victory Company in connection with the construction of the company’s new
warehouse:

Principal Borrowing Costs

8% bank loan P2,400,000 P192,000
6% short-term note 1,600,000 96,000
8% long-term note 2,000,000 160,000

The construction started on January 1, 2014 and the warehouse was completed on
December 31, 2014. Expenditures on the warehouse were as follows:

January 1 P 400,000 September 30 P1,000,000

March 31 1,000,000 December 31 400,000
June 30 1,200,000

A. How much is the capitalizable borrowing cost of Victory Company?

B. Compute the cost of the new warehouse.

Problem 2 (adapted): Moses Company borrowed P4, 000, 000 on a 10% note payable to
finance a new warehouse which the entity is constructing for its own use. The only other
debt of Moses’ books is a P6, 000, 000.00, 12% mortgage payable on an office building. At
the end of the current year, average accumulated expenditures on the new warehouse
totaled P4, 750, 000. What amount should Moses capitalize as interest for the current year?
a. 400, 000 c. 490, 000
b. 475, 000 d. 522, 500

B. GOVERNMENT GRANT (PAS 20)

Problem 3 (adapted): On January 2, 2007, Brand Company received a grant of

P60,000,000 to compensate it for costs it incurred in plating trees over a period of five
years. Brand Company will incur such cost in this manner:

Year Costs
2007 P2,000,000
2008 P4,000,000
2009 P6,000,000
2010 P8,000,000
2011 P10,000,000

What amount of income should Brand Company recognize at the end of year 2010?

Problem 4 (adapted): On January 2, 2011, Dumont Company received a consolidated

grant of P240,000,000. Three-fourths of the grant is to be utilized to purchase a college
building for students from underdeveloped or developing countries. The balance of the grant
is for subsidizing the tuition costs of those students for four years from the date of the
grant. The expected college life of the building is 10 years and the company uses the
straight line method of depreciation. What amount of the grant is recognized as income for
the year ended December 31, 2011?
 C. WASTING ASSETS(PFRS 6)

Problem 5 (adapted): In January 1, 2011, HUFF MINING COMPANY purchased a mineral

mine for P36,000,000 with removal ore estimated by biological survey at P2,160,000 tons.
The property has an estimated value of P3,600,000 after the ore has been extracted. Huff
incurred P10,800,000 of development cost preparing the property for the extraction of ore.
During 2011, P270,000 tons were removed and P240,000 tons were sold. For the year
ended December 31, 2011, what amount of depletion should be included in cost of goods
sold?

Problem 6 (adapted): BATON CORPORATION acquires a coal mine at a cost of

P5,000,000. Intangible development costs total P1,200,000. After extraction has occurred,
Baton must restore the property (estimated fair value of the obligation is P600,000), after
which it can be sold for P1,700,000. Baton estimates that P50,000 tons of coal can be
extracted.
If P9,000 tons were extracted during the first year, which of the following would be included
in the journal entry to record depletion?

A. Debit to Accumulated Depletion for P918,000

B. Debit to Inventory for P918,000
C. Credit to Inventory for P900,000
D. Credit to Accumulated Depletion for P1,530,000

D. REVALUATION AND IMPAIRMENT OF ASSETS (PAS 36)

Problem 7 (adapted): On June 30, 2011, the statement of financial position of Louisiana
Company reported the following:

Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated on straight line basis
over a 10-year period. On December 31, 2011, the management decided to change the
basis of measuring the equipment from cost model to the revaluation model. The equipment
was revalued to its fair value of P4,550,000 with remaining useful life of 5 years. Ignoring
the income tax, what amount should Louisiana report as revaluation surplus on December
31, 2011?

Problem 8 (adapted): A division of Vixen Company has following non-current assets,

which are stated at their carrying amounts ate December 31, 2012:

Land and Buildings P320,000,000

Plant and machinery 110,000,000
Goodwill 70,000,000

The management of Vixen believes that the value in use of these assets may have become
impaired, because a major competitor has developed a superior version of the same
product. As a result, sales are expected to fall. The following additional information is
relevant: The land and buildings are carried at a valuation. The depreciated historical cost is
P265,000,000 at December 31, 2012. All other non-current assets are carried at historical
cost. The goodwill does not have a market value. It is estimated that the land and buildings
could be sold for P270,000,000 and the plant and machinery could be sold for P50,000,000,
net of direct selling costs. The value in use of the assets has been calculated at
P385,000,000. What is the impairment loss to be recognized by Vixen Company?

Problem 9 (adapted): Foster Company acquires 80% of the shares of Roster Ltd. on
January 2, 2010 for Pj1,600,000. At this date, the identifiable net asset of Roster Ltd. have
a fair value of P1,500,000. Roster Ltd. is the smallest group of assets that generate cash
inflows from continuing use that are largely independent of the cash flows from other
assets. Roster Ltd. is a cash-generating-unit. During the year 2010, the amount of
depreciation in relation to the identifiable assets of Roster Ltd. is P150,000. At December
31, 2010, Foster Company determines that the recoverable amount of roster Ltd. is
P1,000,000.

a. What is the total amount of impairment loss on Roster Ltd?

b. What amount of the impairment loss should be charged agjainst the goodwill of
foster Company?
c. What amount of the impairment loss should Foster Company recognize on the
identifiable assets of Foster Ltd.?

Problem 10 (adapted): Marcus Company operates an oil platform in the sea. Marcus
Company has provided the amount of P10,000,000 for the financial costs of the restoration
of the seabed, which is the present value of such costs. Marcus Company has received an
offer to buy the oil platform for P16,000,000 and the disposal costs would be P2,000,000.
The value in use of the oil platform is approximately P24,000,000 before the restoration
costs. The carrying value of the oil platform is P20,000,000.

What amount of impairment loss should Marcus Company recognize related to the oil
platform? None

E. R&D COST AND INTANGIBLE ASSET (PAS38)

Problem 11 (adapted): On December 31, 2011, Kate Conde Company exchanged

100,000 ordinary shares of P50 par value for the following assets:
* A trademark valued at P1,500,000.
* A building, including land, valued at P6,500,000 (20% of the value is for the land).
* A franchise right. No estimate of the value is available at the date of exchange.
The ordinary share of Kate Conde Company is selling at P90 at the date of exchange.
What amount should be recognized as measurement of the franchise on the date of
exchange?

Problem 12 (adapted): Rose Anne Company developed a new machine that reduces the
time required to insert the fortune into its fortune cookies. Because the process is
considered very valuable to the fortune cookie industry, Rose Anne Company patented the
machine. The following expenses were incurred in developing and patenting the machine:

Research and development laboratory expense 500,000

Metal used in the construction of the machine 160,000
Blueprint used to design the machine 60,000
Legal expenses to obtain patent 240,000

Wages paid for the employees’ work on the research and

development, and building of the machine (60% of the
time was spent on actually building the machine) 600,000
Expense of the drawing required by the patent office to
be submitted with the patent application 30,000
Fee paid to government patent office to process application 50,000

At year end, Rose Anne Company paid P350,000 in legal fees to successfully defend the
patent against the infringement suit by another entity. What total amount of the
expenditures should be capitalized as cost of patent?

Problem 13 (adapted): On January 1, 2011, RAM Company purchased MAR Company at

a cost that result in recognition of goodwill of P2,000,000. During the first quarter of 2011.
RAM spent an additional P800,000 on expenditures designed to develop and maintain
goodwill by training and hiring new employees. Due to these expenditures, on December
31, 2011, RAM estimated that the benefit period of goodwill was indefinite. In its December
31, 2011 statement of financial position, what amount should RAM report ass goodwill?

Problem 14 (adapted): On January1, 2010, Better Company bought a trademark for

P400,000, having a n estimated remaining useful life of 16 years . After16 years revenues
expected from this intangible will be zero. In January 2014, Better paid P60,000 for legal
fees in a successful defense of trademark. What amount of expenses should better company
recognize and charge against income during 2014?
Problem 15 (adapted): An intangible asset costs P300,000 on January 1,2011. On
January 1,2012 ,the asset was evaluated to determine if it was impaired. As on January
1,2012, the asst was expected to generate future cash flows of P25,000 per year (at the
end of year). The appropriate discount rate is 5%. What total amount should be charged
against income in 2012, assuming that the asset had a total useful life at 10 years from
date of acquisition?

Problem 16 (adapted): Sarrah Company is interested in computing the goodwill to be

recognized in the purchase of ABC Company in January 2012. The following information was
taken from the records of ABC.
Net income Net assets
2007 360,000 1,600,000
2008 388,000 1,800,000
2009 288,000 1,900,000
2010 380,000 2,000,000
2011 394,000 2,100,000
1,810,000 9,400,000

It is agreed that goodwill is measured by capitalizing excess earnings at 40% with normal
return on average net assets at 10%. What is the “purchase price” of ABC Company?

Problem 17 (adapted): Phar-Ti-Ra Company incurred research and development costs in

the current year as follows:
Equipment acquired for use in various R and 975,000
D projects
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately 250,000

What total research and development costs should be recognized as expense for the current
year?

F. OTHER RELATES ASSET ACCOUNTS

A. BIOLOGICAL ASSETS (PAS 40)

Problem 18 (adapted): Fortitude Company purchased cattle at an auction for P 200,000

on July 1, 2014. Cost of transporting the cattle back to the company’s farm was P 2,000 and
the company would have to incur cost similar transportation cost if it was to sell the cattle in
the auction, in addition an auctioneer’s fee of 2% of sales price.
What amount should the biological assets initially recognized?

Problem 19 (adapted): Creep Company purchased 100 beef cattle at an account for P
800,000 on July 1, 2014. Transportation costs if it had sold its cattle in the auction. In
addition there would be a 2% auctioneer’s fee on the market price of the cattle payable by
the seller. Creep Company also incurred P 4,000 veterinary expenses. On December 31,
2014, the fair value of the cattle in the most relevant market increases to P 880,000. On
May 2, 2015, Creep Company sold 18 cattle at the auction for P 160,000 and incurred
transportation charges of P 1,200. On June 15, 2015, the fair value of the remaining cattle
was P 662,560 but on the same day, 42 cattle were slaughtered with total cost of P 33,600.
The fair value of the carcasses on that day was P 386,400 and the estimated transportation
cost to sell the carcasses is P 3,600. No other selling costs are expected. On June 30, 2015,
the fair value of the remaining 40 cattle was P 358,400. The estimated transportation cost is
P 3,200.

Question 1: What amount should the biological asset should be initially recognized on July
1, 2014?
Question 2: What amount should the biological asset be reported on December 31, 2014?
Question 3: What amount of gain as a result in the change in value of the biological asset to
be reported in the statement of comprehensive income for the year ended December 31,
2014?
Question 4: What is the net proceeds from the sale of cattle on May 2, 2015?
Question 5: What is the fair value of the inventory (carcasses) on June 15, 2015?

B. NON-CURRENT ASSET HELD FOR SALE (PFRS 5)

Problem 20 (adapted): On June 1, 2012, Starlet Company approved a plan to dispose of

a business segment. It is expected that the sale will occur on April 30, 2013. On December
31, 2012, the carrying value of net assets of the segment was P4,000,000 and the net
recoverable amount was P3,600,000. During 2012, the company paid employees severance
and relocation costs of P200,000 as a direct result of the discontinuing operation. The
revenues and expenses of the discontinuing segment during 2012 were:
Revenues Expenses
January 1 to June 1 3,000,000 4,000,000
June 1 to December 31 1,400,000 1,800,000
Income tax rate is 35%.

How much will be reported as loss from ordinary activities of the discontinued segment
during 2012?

Problem 21 (adapted): Camper Company acquires a subsidiary with a view to selling it.
The subsidiary meets the criteria to be classified as held for sale. At the balance sheet date,
the subsidiary has not been sold and six months have passed since its acquisition. At the
balance sheet date, the carrying value of the subsidiary is P4,500,000; its estimated selling
price is P6,000,000 and estimated cost to sell is P1,200,000. At how much should the
subsidiary be valued at balance sheet date?

Problem 22 (adapted): On July 1, 2012, Blazer Company has a building with cost of
P4,000,000 and accumulated depreciation of P1,600,000. On the same date, Blazer
Company commits to a plan to sell the building by February 1, 2013. The building has a fair
value of P2,000,000 and it is estimated that the selling cost of the building will be P150,000.
As of July 1, 2012, the building has a remaining life of 15 years.

Question 1: What is the amount to be reported as the carrying value of the building-held
for sale as of December 31, 2012?
Question 2: What is the amount of loss to be recognized by Blazer Company in its income
statement as a result if reclassification?

C. DERIVATIVES

Problem 23 (adapted): On January 1, 2011, Pasa Company entered to a two year P 3 M

variable interest rate loans on the prevailing rate of 12%. In 2012, the interest rate is equal
to the prevailing interest rate at the beginning of the year. The principal loan is payable on
December 31, 2011 and the interest is payable on December 31 of each year. On January 1,
2011, Pasa Company entered into a “receive variable, pay fixed” interest swap agreement
with a speculator bank designated as cash flow hedge. The prevailing interest rate on
January 1, 2011 is 14% and the PV of 1 at 14% for 1 period is .877. What amount should
be reported as “interest rate swap receivable” on December 31, 2011?

Problem 24 (adapted): On June 30 of the current year, Clary company entered into a firm
commitment to purchase specialized equipment from Shigezaki Company for ¥80 Million on
August 21. The exchange rate n June 30 is ¥100 = $1. To reduce the exchange rate risk
that could increase the cost of the equipment in U.S. Dollars, Clary pays $12,000 for a call
option contract. This contract gives the option to purchase ¥80M at an exchange rate of
¥100 = $1 on August 31. On August 31, the exchange rate is ¥93 = $1.

What amount in U.S. Dollars did Clary company save by purchasing the call option?

Problem 25 (adapted): Welch Co. purchased a put option on Reese common shares on
January 7, 2014, for P2,150. The put option is for 3000 shares, and the strike price is P51.
The option expires on July 31, 2014. The following data are available with respect to the put
option:

Date Market Price of Reese Shares Time Value of Put Option

March 31, 2014 P48 per share P1,200
June 30, 2014 P50 per share 540
July 6, 2014 P46 per share 160

If the change in fair value was recognized on March 31, 2014 and then again on June 30,
2014, what amount of loss the company recognize on the re-measurement of the option on
June 30, 2014?
a. P 660 c. P3,540
b. P2,150 d. P6,660

G. CURRENT LIABILITIES

Problem 26 (adapted): Sample Company has the following selected accounts after
posting adjusting entries:

Accounts Payable $ 50,000

Notes Payable, 3-month 80,000
Accumulated Depreciation—Equipment 14,000
Payroll and Benefits Payable 22,000
Notes Payable, 5-year, 8% 30,000
Estimated Warranty Liability 34,000
Payroll Tax Expense 6,000
Interest Payable 3,000
Mortgage Payable(20,000 is payable every year) 200,000
Sales Tax Payable 16,000

Compute the amount of Current Liability.

Problem 27 (adapted): Toyo Company owns a car dealership that it uses for servicing
cars under warranty. In preparing its financial statements, the entity needs to ascertain the
provision for warranty that it would be required to recognized at the end of the year. The
entity experience with warranty claims is as follows 60% of all car sold in a year have zero
defect, 25% of all cars sold in a wear have normal defect, and 15% of all cars sold in a year
have significant defect. The cost of rectifying a “normal defect” in a car is P10,000. The cost
of rectifying a “significant defect” in a car is P30,000. The entity sold 500 cars during the
year. What is the “expected value” of the provision for warranty for the current year?

Problem 28 (adapted): Cob Department store sells gift certificates redeemable only when
merchandised is purchase. These gift certificates have an expiration date of two years after
issuance dare. Upon redemption or expiration, Cobb recognizes the unearned revenue as
realized. Information for the current year is as follow:

Unearned revenue, January 1, 2011 650,000

Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Expired gift certificates 100,000
Cost of gods sold 60%

On December 31, 2011, what amount should Cobb report as unearned revenue?

Problem 29 (adapted): Black Company requires advance payments with special orders for
machinery constructed to customer specifications. These advances are non refundable.
Information for the current year is as follows:

Advances from costumer – January 1 1,180,000

Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders canceled 500,000

In Black’s December 31 statement of financial posit, what amount should be reported as

current liability for advances from costumers?

Problem 30 (adapted): Kent Company, a division of National Realty Corporation

maintains escrow accounts and pays real states taxes for National’s mortgage costumers.
Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is
credited to the mortgagee’s account and use to reduce future escrow payments. Additional
information for 2011 follows:
Escrow accounts liability, January 1 700,000
Escrow payments received 1,580,000
Real estate taxes paid 1,720,000
Interest on escrow funds 50,000

What amount should Kent report as escrow accounts liability in its December 31, 2011
statement financial position?

H. LONG TERM LIABILITIES

Problem 31 (adapted): On June 30, 2002, Wayne, Inc., sold $600,000 (face value) of
bonds. The bonds are dated June 30, 2002, pay interest semiannually on December 31 and
June 30, and will mature on June 30, 2005. The following schedule was prepared by the
accountant for 2002.

Semi-Annual Interest to Interest Unamortized Bond

Interest Period be Paid Expense Amortization Amount Carrying Value
$30,000 $570,000
1 $24,000 $28,500 $4,500 25,500 574,500

Instructions
On the basis of the above information, answer the following questions. (Round your answer
to the nearest dollar or percent.)
1. What is the stated interest rate for this bond issue?
2. What is the market interest rate for this bond issue?
3. What was the selling price of the bonds as a percentage of the face value?
4. Prepare the journal entry to record the sale of the bond issue on June 30, 2002.
5. Prepare the journal entry to record the payment of interest and amortization on
December 31, 2002.

Problem 32 (adapted): On July 1 2011 Tara Company issued 4000 of its 8%, 1,000 face
value bonds payable for 3,504,000.The bond were issued to yield 10%.The bonds are dated
July 1, 2011 and mature on July 1 2021.Interest is payable semiannually on January 1 and
July 1. Using the effective interest method, what amount of the bond discount should be
amortized for the six months ended December 31 2011?

Problem 33 (adapted): On January 1 2011, West Company issued 9% bonds in the face
amount of P5000000, which mature on January 1 2021. The bonds were issued for
P4695000 to yield 10% Interest is payable annually on December 31. West uses the
interest method of amortizing bond discount. In the December 31 2011 statement of
financial position, what is the carrying amount of the bond payable?

Problem 34 (adapted): On January 1, 2011,Colt Company issued ten-year bonds with a

face amount of P5 000 000 and a stated interest rate of 8% payable annually on January
1.The bonds were price to yield 10%
PV of 1 for 10 periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods10% 6.145
What is the issue price of the bonds?

Problem 35 (adapted): Susan company issued 5,000 convertible bonds on Jan.1,2011,the

bond have a three years term and are issued at the 110 with a face value of P1,000 per
bond. Interest is payable annually in arrears at a nominal 6% interest rate.Each bond is
convertible at anytime up to maturity into 100 ordinary shares with par value of the
P5.When the bonds are issued,the prevailing market interest rate for similar debt
instrument without conversion option is 9%.The present value of 1 at 9% for 3 periods is
.77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53.What is
the equity component of the issuance of the convertible bonds on Jan.1,2011?

Problem 36 (adapted): On march .1,2011,case company issued P5,000,000 of 12%

nonconvertible bonds at 103.Which are due on Feb.28,2016.In addition, each of which
entitled the bondholder to purchase, for P50,on ordinary share of case company ,par
valueP25.On March.1,2011,the quoted market value of each warrant was P4.The market
value of the proceeds from the bond issue should be recognized as a increase in
shareholders’ equity?

I. ACCOUNTING FOR INCOME TAX (PAS 12)

Problem 37 (adapted): The following differences between financial and taxable income
were reported by Dider Corporation for the current year:

(a) Excess of tax depreciation over book depreciation .... $60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion
accounting for financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities .................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000

TAX RATE 30%

ACCOUNTING INCOME $900,000

Compute the taxable income for the current year.

Problem 38 (adapted): Bart, Inc., a newly organized corporation, uses the equity method
of accounting for its 30% investment in Rex Co.’s common stock. During 2003, Rex paid
dividends of $300,000 and reported earnings of $900,000. In addition,

• The dividends received from Rex are eligible for the 80% dividends received deductions.
• All the undistributed earnings of Rex will be distributed in future years.
• There are no other temporary differences.
• Bart’s 2003 income tax rate is 30%.
• The enacted income tax rate after 2003 is 25%.
In Bart’s December 31, 2003 balance sheet, the deferred income tax liability should be

J. ACCOUNTING FOR LEASES (PAS 17)

Problem 39 (adapted): Presented below are three different aircraft lease transactions that
occurred for Midwest Airways in 2002. All the leases start on January 1, 2002. In no case
does Midwest receive title to the aircraft during or at the end of the lease period; nor is
there a bargain purchase option.

Lessor
Unruh Insurance Maris Leasing Gregg Leasing
Type of property 747 Aircraft 727 Aircraft L-1011 Aircraft
Yearly rental $5,908,781 $4,954,021 $2,851,861
Lease term 15 years 15 years 20 years
Estimated economic life 25 years 25 years 25 years
Fair market value of
leased asset $55,000,000 $49,000,000 $32,000,000
Present value of lease
rental payments $50,000,000 $42,000,000 $28,000,000

Instructions
(a) Which of the above leases are operating leases and which are capital leases? Explain
your answer.
(b) How should the lease transaction with Unruh Insurance be recorded in 2002?
(c) How should the lease transaction with Maris Leasing be recorded in 2002?
Problem 40 (adapted): On January 1, 2003, Day Corp. entered into a ten-year lease
agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are
payable at the end of each year. Day knows that the lessor expects a 10% return on the
lease. Day has a 12% incremental borrowing rate. The equipment is expected to have an
estimated useful life of ten years. In addition, a third party has guaranteed to pay Ward a
residual value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at

12% for ten years is 5.6502
10% for ten years is 6.1446
The present value of $1 at
12% for ten years is .3220
10% for ten years is .3855
In Day’s October 31, 2003 balance sheet, the principal amount of the lease obligation was:

Problem 41 (adapted): On July 1, 2014, Radium Inc. leased a delivery truck from
Titanium Corp. under a 3-year operating lease. Total rent for the term of the lease will be
P360,000 payable as follows:
12 months at P5,000 per month P60,000
12 months at P7,500 per month 90,000
12 months at P17,500 per month 210,000
All payments were made when due. In Radium’s June 30, 2016 balance sheet, what amount
should be reported as accrued rent payable?

Problem 42 (adapted): As an inducement to enter a lease, Athena, a lessor, grants Zeus

Corp. a lessee, months of free rent under a 5-year operating lease. The lease is effective
July 1, 2014 and provides for a monthly rental of P20,000 to begin April 1, 2015.In Zeus
income statement for the year ended June 30, 2015. How much should be reported as rent
expense?

Problem 43 (adapted): On January 1, 2014, Peter Pan Company sold equipment with the
carrying amount of P1,000,000 and a remaining economic life of 10 years to Koko Drilling
for P1,500,000. Peter Pan immediately leased the equipment back under a 10-year finance
lease payment of P244,120 in December 2014.
In December 31, 2014 statement of financial position, how much should be the adjusted
unearned gain on equipment sale?

Problem 44 (adapted): The following information pertains to a sale and operating

leaseback of equipment by Germanium Co. on December 31, 2014:
Sale price P640,000
Carrying amount P500,000
Monthly lease payment P 24,457
Estimated remaining life 25 years
Lease term 2 years
Implicit rate 12%
Fair value P540,800
What amount of deferred gain on the sale should Germanium report at December 31, 2014?

Problem 45 (adapted): On June 30, 2014, Potassium Company sold an equipment with an
estimated economic life of 10 years and immediately leased it back for 8 years. The
equipment’s carrying amount was P450,000, the sales price was P430,000. What amount
should Potassium report as deferred loss on its June 30, 2014 statement of financial
position?

Problem 46 (adapted): Camia Company is in the business of leasing new sophisticated

equipment. As a lessor, Camia expects a 12% return on its net investment. All leases are
classified as a direct financing lease. At the end of the lease term, the equipment will revert
to Camia Company.
On January 1, 2011 an equipment is leased to another entity with the following information.
Cost of equipment to Camia 5, 500, 000
Residual value-unguaranteed 400, 000
Annual rental payable in advance 959, 500
Useful life and lease term 8 years
Implicit interest rate 12%
 First lease payment January 1, 2011

1. What is the unearned interest income on January 1, 2011?

2. What is the interest income for 2011?

K. ACCOUNTING FOR EMPLOYEE BENEFITS(IASR 19)

Problem 47 (adapted): You gathered the following information related to Jomalig

Company’s the defined benefit plan for the year ended December 31, 2013:
• Current service cost of providing benefits for the year to December 31, 2013: P54 million
• Average remaining working life of employees: 10 years
• Benefits paid to retired employees in the year: P55.8 million
• Contributions paid to the fund: P37.8 million
• Present value of obligation to provide benefits: P3,960 million at January 1, 2013, and
P4,500 million at December 31, 2013
• Fair value of plan assets: P3,780 million at January 1, 2013, and P4,320
million at December 31, 2013
• Net cumulative unrecognized gains at January 1, 2013: P453.6 million
• Past service cost: P207 million. All of these benefits have vested.

Discount rates and expected rates of return on plan assets:

1/1/13 1/1/14
Discount rate 5% 6%
Expected rate of return on plan assets 7% 8%

1. COMPUTE THE ACTUAL RETURN

2. COMPUTE THE NET INTEREST INCOME
3. COMPUTE THE BENEFIT EXPENSE

L. STOCKHOLDER’S EQUITY

Problem 48 (adapted): The following items were shown on the balance sheet of Herman
Corporation on December 31, 2002:

Stockholders’ Equity
Paid-In Capital
Capital Stock
Common stock, $5 par value, 240,000 shares
authorized; ______ shares issued and ______ outstanding ............ $1,000,000

Additional paid-in capital

In excess of par value ................................................................ 120,000
Total paid-in capital .............................................................. 1,120,000

Retained Earnings ............................................................................ 500,000

Total paid-in capital and retained earnings ................................... 1,620,000
Less: Treasury stock (10,000 shares) ................................................... (120,000)
Total stockholders' equity ........................................................... $1,500,000
Instructions
Complete the following statements and show your computations.
(a) The number of shares of common stock issued was _______________.
(b) The number of shares of common stock outstanding was ____________.
(c) The sales price of the common stock when issued was $____________.
(d) The cost per share of the treasury stock was $_______________.
(e) The average issue price of the common stock was $______________.
(f) Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the
Treasury Stock account would be $_______________.

Problem 49 (adapted): Blue Company has 2,000,000 shares of ordinary shares

outstanding on December 31, 2010. An additional 100,000 shares are issued on April 1,
2011, and 240,000 more on September1. On October 1, Blue issued P3, 000,000 of 9%
convertible bonds. Each P1, 000 bond is convertible into 40 shares of ordinary shares. At
the time of issue of the convertible bonds, the market rate of the bonds without the
conversion option is equal to its nominal rate. No bonds have been converted.
The number of shares to be used in computing basic earnings per share and diluted per
share on December 31, 2011 would be:

Problem 50 (adapted): On January 1, 2002, Yount Corporation had Retained Earnings of

$478,000. During the year, Yount had the following selected transactions:
1. Declared stock dividends of $30,000.
2. Declared cash dividends of $80,000.
3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value
common stock for 100,000 shares of $10 par value common stock.
4. Suffered a net loss of $50,000.
5. Corrected understatement of 2001 net income because of an inventory error of
$42,000.
Instructions
Compute the balance of retained earnings statement for the year.

Problem 51 (adapted): The accounts shown below appear in the December 31, 2014 trial
balance of
HALLOW CORPORATION:

Preference share authorized, P50 par P10,000,000

Unissued preference share 3,600,000
Ordinary share authorized, P20 par 4,000,000
Unissued ordinary share 2,000,000
Subscription receivable, preference share 380,000
Subscription receivable, ordinary share 360,000
Subscribed preference share 600,000
Subscribed ordinary share 440,000
Treasury share, preference share, at cost 1,360,000
Share premium 1,700,000
Accumulated profits and losses 2,000,000

All subscription receivables are due in year 2015

How much is the total shareholders’ equity of Hallow Corporation?

Problem 52 (adapted): Hallway Company issued 20,000 shares of its P10 par value
ordinary shares and 40,000 share of its P10 par value convertible preference share for a
total amount of P1,800,000. At this date, Hallway’s ordinary share was selling P20 per share
and the convertible preference share was selling for P30 per share. What amount of
proceeds should be allocated to the ordinary share?

Problem 53 (adapted): The following balances are shown in the shareholders equity of
Kalinga Company on January 1,2011.

Preference share capital, 100,000 share, P100 par P1,000,000

Ordinary share capital, 500,000 share, P10 par 5,000,000
Share premium – Preference 50,000
Share premium – Ordinary 200,000
Retained earnings 1,000,000

During 2011, the following transactions were completed retirement of 5,000 preference
shares at P11 per share. Purchase of 5,000 ordinary shares of treasury at P12 per share.

Share split ordinary share 2-for-1

Reissue of 2,000 shares of treasury at P8 per share
Net income for the year, P300,000

What is the total shareholders’ equity on December 31, 2011?

Problem 54 (adapted): The Accumulated Profits and Losses account of Gabby Company
shows the following postings:

Debit:
 Share dividends P500,000
Uninsured fire loss 175,000
Prior years error 214,000
Reserve for bond redemption 300,000

Credit:
Beginning balance 1,120,000
Net income for years 760,000
Excess of par value 250,000
Gain on sale of treasury shares 150,000

Ending balance P1,091,000

What is the correct balance of the Accumulated Profits account to be reported in the
company’s year-end financial system?

Problem 55 (adapted): Generic Corporation paid dividends of P200,000 and 300,000 at

the end of 2010 and 2011, respectively. The corporation has not paid any other dividends
since its organization on January 2, 2010. The outstanding shares are 20,000, 12%
preference shares, par P100 and 30,000 ordinary shares, par P100.

Question 1: If preference shares is non-cumulative and nonparticipating, how much would

be received in 2010 by the preference and ordinary shareholders, respectively?

Question 2: If preference shares were cumulative and nonparticipating, how much would
be the preference and ordinary shareholders, respectively, receive in 2011?

Problem 56 (adapted): On January 2, 2013, Mining Corporation declared a cash dividend

of P600,000 to shareholders to record on January 19, 2013 and payable on February 14,
2013. The following data pertain to 2012:

Net income for the year ended December 31, 2012 P190,000
Share premium, December 31, 2012 675,000
Accumulated profits, December 31, 2012 425,000

The P600,000 dividend includes a liquidating dividend of:

Problem 57 (adapted): The following information pertains to Martial Corporation:

● Dividends on its 1,000 shares of 6%, P10 par value cumulative preference shares have
not been declared or paid for 3 years.
● Treasury shares that cost P15,000 were reissued for P8,000.

What amount of accumulated profits should be appropriated as a result of these items?

Problem 58 (adapted): The shareholders’ equity of Diskette Corporation’s December 31,

2011 balance sheet consisted of the following account balances:

Ordinary shares, P50 par, 100,000

Authorized and outstanding P5,000,000
Share premium 3,000,000
Accumulated profits and losses (2,000,000)

On January 2, 2012, the company put into the effect a shareholders-approved quasi-
reorganization by reducing the par value of the stock to P25 and eliminating the deficit
against share premium. Immediately, after the quasi-reorganization, what amount should
the company report as share premium in its statement of financial position?

Problem 59 (adapted): Tarr Company’s shareholders’ equity on December 31, 2011

consisted of the following:

Preference share capital-12%, P50 par, 20,000 shares issued 1,000,000

Ordinary share capital, P25 par, 100,000 share issued 2,500,000
Share premium 200,000
Retained earnings 400,000
Retained earnings appropriated 100,000
Revaluation surplus 300,000

Dividends on preference share have not been paid since 2009. The preference share has a
liquidating value of P55 and a call price of P58. What is the book value per preference
share?

Problem 60 (adapted): Smart Company is an entity listed in a recognized stock

exchange. Below is an extract from its financial statement of comprehensive income for the
year ended December 31, 2010.
Profit before tax 5,800,000
Income tax expense 1,500,000
Profit after tax 4,300,000
In addition, the entity paid during the year an ordinary dividend of P400,000 and a
preference dividend of P500,000 on its redeemable preference share.
An entity had P1,000,000 of P5 par value ordinary share in issue throughout the year and
authorized share capital of 500,000 ordinary shares. What amount should be reported as
retained earnings per share for the year ended?

Problem 61 (adapted): Night Company had 500,000 Ordinary shares issued and
outstanding at December 31, 2013. During 2014, no additional ordinary shares were issued.
On January 1, 2014, night issued 400,000 nonconvertible preference shares. During 2014,
Night declared and paid 180,000 cash dividends on the ordinary shares and 150,000 on the
nonconvertible preference shares. Net income for the year ended Dec. 31, 2014 was
960,000. What should be the 2014 earnings per ordinary share of Night Company?

Problem 62 (adapted): Vios Company had 100,000 ordinary shares outstanding on

January 1, 2011. In addition, on January 1, 2011, the entity had issued 10,000 convertible
cumulative 5% preference shares with P100, par. The preference shares were converted on
September 1, 2011. Each preference shares were converted into six ordinary shares. The
preference dividends for the entire year were paid in full before the conversion. The entity
has no other potentially dilutive securities. Net income for 20011 was P2,000,000.What is
the amount of diluted earning per share?

Problem 63 (adapted): On January 1, 2011, G Company grants 5,000 shares to each

member of its sales department, conditional upon the employee’s remaining in the
company’s employ for three years, and the department selling more than 60,000 units of
product Zip over the three-year period. The company estimates that the fair value of the
option on January 1, 2011 is P30 per option. During 2012, G Company increases the sales
target to 80,000 units. By the end of 2013, the company has sold 70,000 units, and share
options are forfeited. And there were 10 members remaining in the sales department for the
three-year period. What amount of remuneration expense should the company recognize in
its December 31, 2013 profit or loss?

Problem 64 (adapted): On January 2, 2014, X Company grants 50 shares to 400

employees, conditional upon the employees’ remaining in the company’s employ during the
vesting period. The share will vest at the end of 2014 if the company’s earnings increased
by more than 15%; or at the end of 2015 if the earnings increased by an average of 12%
over the two-year period; or at the end of 2015 if the earnings increased by an average of
10% over the three-year period. The shares have fair value of P25 on January 2, 2014,
which is equal to the share price on the grant date. At the end of 2014, earnings had
increased by 13% and the company expects that earnings will continue to increase at a
similar rate in 2015 and expects to vest in 2015. At the end of 2015, earnings increased by
only 9% and therefore shares do not vest at the end of 2015. The company expects that
earnings will continue to increase at similar rate. At the end of 2016, earnings increased by
9%. What amount of remuneration expense should the company recognize in its December
31, 2016 profit or loss?

Problem 65 (adapted): On January 1, 2011, Morey Company granted Dean, its president,
20,000 share appreciation rights for past services. These rights are exercisable
immediately and expire on January 1, 2013. On exercise, Dean is entitled to receive cash
for the excess of the share market price on the exercise date over the market price on the
grant date. Dean did not exercise any of the rights during 2011. The market price of
Morey’s share was ₱30 on January 1, 2011 and ₱45 on December 31, 2011. As a result of
the share appreciation rights, what amount should be recognized as compensation expense
for 2011?

Problem 66 (adapted): On January 1, 2011 Module Company granted 100 share

appreciation rights to each of its 500 employees on condition that the employees remain in
its employ for the next three years. No employees left the entity during the three- year
vesting period. The employees exercised their share appreciation rights as follows:
December 31, 2013 100 employees
December 31, 2014 250 employees
December 31, 2015 150 employees
The fair value and intrinsic value of the share appreciation right are as follows:
Fair value Intrinsic value
December 31, 2011 15
December 31, 2012 18
December 31, 2013 20 15
December 31, 2014 21 20
December 31, 2015 25

The intrinsic value of the share appreciation right on the date of exercise is the amount
paid out to the employees. Determine the compensation expense for each year from
2011 to 2015 as a result of the share appreciation rights.

M. Supplementary topics

Problem 67 (adapted): Malampaya Company showed income before income tax of P

6,500,000 on December 31, 2009. The year- end verification of the transactions of the
company revealed the following errors:

P 1,000,000 worth of merchandise was purchased in 2009 and included in the ending
inventory. However, the purchase was recorded only in 2010.
A merchandise shipment valued at P 1,500,000 was properly recorded as purchase
at year- end. Since the merchandise was still at the port area, it was inadvertently
omitted from the inventory balance of December 31, 2009.
Advertising for December 2009, amounting to P 500,000, was recorded when
payment was made by the firm in January 2010.
Rental of P 300,000 on an equipment, applicable for six months, was received on
November 1, 2009. The entire amount was reported as income in 2009.
Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting
to P 200,000 was paid and recorded as expense on July 31, 2009. The entity did not
make any adjustment at the end of the year.

The corrected income before tax for 2009 should be:

Problem 68 (adapted): The electricity account of Velvet Company for the year ended June
30, 2015 was as the following:

Opening balances for the electricity accrual of July 1, 2014 P 30, 000
Payments made during the year:
08/01/14- for three months to July 31, 2014 60, 000
11/01/14- for three months to October 31, 2014 72, 000
02/01/15- for three months to January 31, 2015 90, 000
06/30/15- for three months to April 30, 2015 84, 000

What amount of electricity expense should Velvet Company report in its June 30, 2015
Statement of Comprehensive Income?

Problem 69 (adapted): For the year ended December 31, 2014 Light Incorporation
reported the following:

Net Income P 180, 000

Preferrence Share Dividend declared 30, 000
Ordinary Share Dividend declared 6, 000
Unrealized holding loss, net of tax 3, 000
 Retained Earnings 240, 000
Ordinary Share Capital 120, 000
Accumulated other Comprehensive Income
beginning balance, net of tax 15, 000

Whatwould Light report as its ending balance of Accumulated other Comprehensive

Income?

Problem 70 (adapted): On December 30, 2010, LUV U Company paid P1, 500,000 for
land. On December 31, 2011, the current cost of the land was P3, 200,000. In January
2012, the land was sold for P2, 250,000. Under current cost accounting, what is the
increase in shareholders’ equity in 2011?

Problem 71 (adapted): Rice Company accounts for inventory on FIFO basis. There were
8,000 units in inventory on
January 1, 2011.

Historical cost Units Units sold

Purchased
First quarter 410,000 7,000 7,500
Second quarter 350,000 8,500 7,300
Third quart 425,000 6,500 8,200
Fourth quarter 630,000 9,000 7,000

Rice estimates that the current cost per unit of inventory was P57 on January 1, 2011 and
P71 on December 31, 2011. In the statement of financial position restated to current cost,
what amount should be reported as December 31, 2011 inventory?

Problem 72 (adapted): Information with respect to cost of goods sold of Bar Company for
2011 is as follows:

Historical cost Units

Inventory, January 1 1,060,000 20,000

Purchases during the year 5,580,000 90,000
Goods available for sale 6,640,000 110,000
Inventory, December 31 (2,520,000) 40,000
Cost of goods sold 4,120,000 70,000

Bar estimates that the current cost per unit of inventory was P58 on January 1, 2011 and
P72 on December 31, 2011. In the income statement for 2011 restated to current cost,
what amount should be reported as cost of goods sold?

Problem 73 (adapted): The following assets appear on the statement of financial position
of Gardenia Company:
Cash in bank 2,000,000
Accounts receivable 4,000,000
Inventory 1,500,000
Financial asset at fair value 500,000
Patent 1,000,000
Advances to employees 200,000
Advances to suppliers 400,000
Prepaid expense 100,000
In preparing financial statements in a hyperinflationary economy, what total amount should
the entity classify as monetary asset?

Problem 74 (adapted): The following liabilities appear on the statement of financial

position of Sunflower Company:
Accounts payable 1,000,000
Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Unearned revenue 300,000
Advances from customer 1,200,000
Estimated warranty liability 200,000
Deferred tax liability 400,000

In preparing financial statements in a hyperinflationary economy, what total amount should

the entity classify as monetary liabilities?

Problem 75 (adapted): Dahlia Company was formed on January 1, 2005. Selected

balances from historical cost statement of financial statement on December 31, 2011 were:
Land (purchased on January 1, 2005) 2,400,000
Investment in long-term bonds (purchased on January 1, 2008) 1,200,000
Long term debt (issued on January 1,2005) 1,600,000
The general price index was 120 on January 1,2005, 150 on January 1,2008 and 300 on
December 31,2011.
What amount should be reported in a hyperinflationary statement of financial position?
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“SO TEACH US TO NUMBER OUR DAYS,THAT WE MAY APPLY OUR HEARTS UNTO
WISDOM….” PSALMS 90:12